Document ID: SEC-2009-1729-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-12-08T05:00Z

[Federal Register: December 8, 2009 (Volume 74, Number 234)]
[Notices]               
[Page 64774-64776]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08de09-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61083; File No. SR-FINRA-2009-084]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 5330 (Adjustment of Orders) in the Consolidated FINRA 
Rulebook

December 1, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 24, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt NASD Rule 3220 (Adjustment of Open 
Orders) as a FINRA rule in the consolidated FINRA rulebook with several 
changes and to renumber NASD Rule 3220 as FINRA Rule 5330 in the 
consolidated FINRA rulebook.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD 
Rule 3220 (Adjustment of Open Orders) into the Consolidated FINRA 
Rulebook with several changes, which are described below.
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    \3\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members, unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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    NASD Rule 3220 sets forth the requirements a member has regarding 
an open order held by the member when the order involves a security 
that is subject to a dividend, payment, or distribution.\4\ Paragraph 
(a) of the rule sets forth how members are to adjust the terms of open 
orders, depending upon whether the dividend, payment, or distribution 
is in cash, stock, combined cash and stock, or determined by the 
stockholder. Under the rule, members are required to adjust open orders 
as follows:
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    \4\ For purposes of the rule, an ``open order'' is an order to 
buy or an open stop order to sell. These include, for example, 
``good 'til cancelled,'' ``limit,'' and ``stop limit'' orders that 
remain in effect for a definite or indefinite period of time until 
executed, cancelled, or expired. See NASD Rule 3220(d).
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     In the case of a cash dividend or distribution, the price 
of the open order is reduced by the dollar amount of the dividend or 
distribution and rounded down to the next lowest minimum quotation 
variation.
     In the case of a stock dividend or split, the price of the 
open order is reduced by rounding the dollar value of the dividend 
distribution or split to the next higher minimum quotation variation 
and subtracting that amount from the price of the order. The size of 
the order is increased by multiplying the size of the original order by 
the numerator of the ratio of the dividend or split, dividing the 
result by the denominator of the ratio of the dividend or split and 
then rounding the result to the next lower round lot.
     In the case of a dividend payable in either cash or 
securities at the option of the stockholder, the price of the open 
order is reduced by the dollar value of the cash or securities, 
whichever is greater, as determined by the formulas described above.
    If the value of a distribution cannot be determined, paragraph (b) 
of the rule prohibits members from executing or permitting the 
execution of open orders without first reconfirming the order with the 
customer. Paragraph (c) requires members to cancel all open orders if a 
security is the subject of a reverse split. The rule also includes a 
list of order types to which it does not apply and a provision 
addressing the conversion of securities from fractional pricing to 
decimal pricing.
    The proposed rule change includes substantive changes, as well as 
multiple wording and organizational changes, that conform much of the 
FINRA rule to the analogous Nasdaq and NYSE-Arca rules.\5\ The proposed 
rule change also updates certain provisions of the rule that refer to 
trading in fractional amounts (as opposed to decimals).
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    \5\ See Nasdaq Rule 4761; NYSE-Arca Rule 7.39. Although the NYSE 
has a rule regarding the adjustment of orders (NYSE Rule 118), the 
Transitional Rulebook does not include the provision. Consequently, 
NASD Rule 3220 is the only FINRA rule addressing the adjustment of 
orders.
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    First, the proposed rule change provides that, after adjusting an 
open order in the case of a stock dividend or

[[Page 64775]]

split, the order should be rounded down to the next lowest share, 
rather than the next lowest round lot. Although NYSE Rule 118 requires 
rounding down to the next lowest round lot, both Nasdaq Rule 4761 and 
NYSE-Arca Rule 7.39 require that, after being adjusted, orders be 
rounded down to the next lowest share. FINRA believes that rounding to 
the next lowest share, rather than the next lowest round lot, will 
result in an adjustment that more accurately reflects the customer's 
initial intent when placing the order.\6\
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    \6\ FINRA notes that, when Nasdaq amended its open order 
adjustment rule in 2002, Nasdaq stated that it believed that 
rounding adjusted orders to the next lowest share ``will result in 
more accurate representation of buying and selling interest.'' See 
Securities Exchange Act Release No. 45968 (May 20, 2002), 67 FR 
36946 (May 28, 2002). Like NASD Rule 3220, NYSE Rule 118 requires 
that, after adjustment, orders be rounded down to the next lowest 
round lot. The proposed rule will continue to exclude any order 
``governed by the rules of a national securities exchange.'' 
Consequently, an order subject to the rules of the NYSE will 
continue to be rounded as required under NYSE rules. Moreover, if a 
customer wants to avoid the potential of having an order rounded 
down in a manner that results in an odd lot, the customer could 
include any such instructions at the time it gives the member the 
order.
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    Second, the proposed rule change clarifies the treatment of open 
orders involving securities that are subject to a combined cash and 
stock dividend/split. Unlike Nasdaq Rule 4761 and NYSE-Arca Rule 7.39, 
NASD Rule 3220 does not directly address the adjustment requirements if 
a security is subject to a combined cash and stock dividend/split. The 
proposed rule change makes the provision consistent with the analogous 
Nasdaq and NYSE-Arca rules by specifying that, in these circumstances, 
members should calculate the cash portion of the adjustment using the 
existing formula in subparagraph (1) of the rule and should calculate 
the stock portion of the adjustment using the existing formula in 
subparagraph (2) of the rule.
    Third, the proposed rule change applies the provision regarding 
reverse splits to all orders (both buy and sell) rather than just 
``open orders,'' as that term is defined in the rule.\7\ Thus, the 
proposed rule broadens the obligation of members to cancel orders 
involving securities subject to a reverse split and requires that all 
such orders be cancelled.
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    \7\ This proposed change will conform the FINRA rule to the 
analogous provisions in the NYSE, Nasdaq, and NYSE-Arca rules. See 
Nasdaq Rule 4761(c)(6); NYSE-Arca Rule 7.39(b)(5); NYSE Rule 118.21.
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    In addition to the conforming changes described above, FINRA is 
proposing one additional substantive change to the rule. NASD Rule 3220 
provides that some pending customer orders (e.g., open sell orders and 
open stop orders to buy) are not adjusted if there is a stock split in 
the security, notwithstanding that a stock split could have a 
significant impact on the price of the security. This could be 
detrimental to a customer with a pending order in the security, as the 
order may become inconsistent with the customer's original intent and/
or unexecutable. Therefore, the proposed rule change requires members 
to notify customers who have pending orders that are not otherwise 
required to be adjusted under the rule of any stock splits in the 
security.
    Finally, the proposed rule change updates the language in the rule 
regarding trading in fractional amounts and deletes the portion of the 
rule addressing the conversion from fractional pricing to decimal 
pricing.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
bring more uniformity to the treatment of open orders and will enhance 
customer protection with respect to pending orders involving securities 
that are the subject of a stock split or reverse split.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-084 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
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    \9\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

All submissions should refer to File Number SR-FINRA-2009-084. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, \9\ all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of the 
filing also will be available

[[Page 64776]]

for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2009-084 and should be 
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submitted on or before December 29, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29130 Filed 12-7-09; 8:45 am]

BILLING CODE 8011-01-P