Document ID: SEC-2013-0907-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-05-15T04:00Z

[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Notices]
[Pages 28687-28688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11508]

[[Page 28687]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69543; File No. SR-FINRA-2013-021]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to an Extension of the Implementation 
Date for FINRA Rule 5270 (Front Running of Block Transactions)

May 9, 2013.
    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 May 2, 2013, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to establish September 3, 2013, as the 
implementation date of FINRA Rule 5270 (Front Running of Block 
Transactions) that the Commission approved on September 4, 2012.\4\ The 
proposed rule change adopted NASD Interpretive Material (``IM'') 2110-3 
(Front Running Policy) as FINRA Rule 5270 with certain changes, 
including broadening the rule's scope and providing further clarity 
into trading activity that FINRA believes is inconsistent with just and 
equitable principles.
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    \4\ See Securities Exchange Act Release No. 67774 (September 4, 
2012), 77 FR 55519 (September 10, 2012) (Order Approving SR-FINRA-
2012-025) (``Approval Order'').
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    The proposed rule change does not make any changes to the text of 
FINRA rules.

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
    FINRA is filing the proposed rule change to establish September 3, 
2013, as the implementation date for FINRA Rule 5270 regarding front 
running.
    On September 4, 2012, the SEC approved SR-FINRA-2012-025, which 
adopted NASD IM-2110-3 as FINRA Rule 5270 in the Consolidated FINRA 
Rulebook \5\ with certain changes, including broadening the rule's 
scope and providing further clarity into trading activity that FINRA 
believes is inconsistent with just and equitable principles.\6\ On 
December 3, 2012, FINRA published Regulatory Notice 12-52 announcing 
that the Commission approved the proposed rule change and announcing an 
implementation date of June 1, 2013.
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    \5\ 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. 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).
    \6\ See Approval Order, supra note 4.
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    Since the publication of the Notice, many firms and industry groups 
have requested that the implementation date for Rule 5270 be delayed to 
allow firms sufficient time to make necessary systems updates and 
changes. Firms have noted that, because of the expansion of the rule to 
include a wider range of securities and other related financial 
instruments,\7\ existing vendor systems and internally-developed 
controls cannot easily be revised to include the expanded securities 
and instruments covered by the rule. Firms are also reconsidering, and 
in some cases adjusting, the scope of existing information barriers to 
account for the broader scope of the rule as well as implementing 
education and training programs. Although FINRA has stated, and firms 
recognize, that the underlying conduct addressed in Rule 5270 is 
largely covered by existing FINRA rules, FINRA understands the need for 
firms to adjust their training, education, and internal surveillance 
programs in an effort to successfully comply with the expansion of Rule 
5270. As a result of these discussions, and the comment letter 
discussed in Item 5 below,\8\ FINRA is seeking to delay the 
implementation of Rule 5270 until September 3, 2013, to give firms 
sufficient time to make necessary changes to their programs and systems 
to enable them to review their trading activity for compliance with the 
rule.\9\ FINRA stresses, however, that much of the trading activity 
prohibited by Rule 5270 may already violate other existing FINRA rules.
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    \7\ FINRA Rule 5270(c) defines a ``related financial 
instrument'' as ``any option, derivative, security-based swap, or 
other financial instrument overlying a security, the value of which 
is materially related to, or otherwise acts as a substitute for, 
such security, as well as any contract that is the functional 
economic equivalent of a position in such security.''
    \8\ The Commission notes that Item 5 is discussed in the filing, 
not this Notice.
    \9\ FINRA does not anticipate providing further extensions 
beyond September 3, 2013.
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    FINRA has filed the proposed rule change for immediate 
effectiveness.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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 extending the implementation date 
will ensure that firms have sufficient time to make the necessary 
changes to their systems to be able to effectively surveil their 
trading activity in the securities and financial instruments that are 
subject to the rule. Extending the implementation date by three months 
will also ensure firms have sufficient time to complete the assessment 
of their existing information barriers and any needed training or 
education. FINRA notes that members are already under an existing 
obligation to prevent the front running of customer orders under other 
FINRA rules and that these rules will continue to apply to members' 
trading

[[Page 28688]]

activity notwithstanding the extension of the implementation date for 
Rule 5270.
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    \10\ 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. Because the proposed rule 
change does not amend FINRA rules and merely extends the implementation 
date for Rule 5270, FINRA does not believe the proposed rule change 
imposes any unnecessary or inappropriate burden on competition.

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

    The Securities Industry and Financial Markets Association 
(``SIFMA'') submitted a written request to FINRA for a three-month 
extension of the implementation date for Rule 5270.\11\ A copy of the 
SIFMA Letter is attached as Exhibit 2.\12\
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    \11\ See Letter from Sean Davy, Managing Director, Corporate 
Credit Markets Division, SIFMA, to Brant K. Brown, Associate General 
Counsel, Office of General Counsel, FINRA (April 22, 2013) (``SIFMA 
Letter'').
    \12\ The Commission notes that Exhibit 2 is attached to the 
filing, not this Notice.
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    In its letter, SIFMA represents that, since Rule 5270 was approved, 
its members ``have been actively working to update their policies and 
are expanding and implementing robust education and training 
programs.'' \13\ SIFMA states that, notwithstanding these efforts, 
because ``existing vendor [surveillance] systems and internally-
developed controls cannot easily be revised to the new, expanded 
product set'' covered by Rule 5270, firms may not be able to implement 
the needed systems changes by June 1, 2013.\14\ In particular, the 
expansion of firms' surveillance and supervision systems to include 
other product areas, in particular fixed income securities and OTC 
products, may not be completed by June 1, 2013.\15\ SIFMA also 
represents that the implementation of certain provisions of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, particularly 
those under Title VII, are affecting many of the same systems 
implicated by Rule 5270.\16\ As a result of these factors, SIFMA 
requested that FINRA extend the implementation date of Rule 5270 by 
three months. SIFMA acknowledges, however, that ``during this period 
member firms are, and would continue to be, under an existing 
obligation to prevent the frontrunning of customer orders'' and that 
``much of the trading activity prohibited by new Rule 5270 may already 
violate existing FINRA Rules.'' \17\
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    \13\ Id. at 1.
    \14\ Id.
    \15\ Id.
    \16\ Id. at 2.
    \17\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-021 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.

All submissions should refer to File Number SR-FINRA-2013-021. This 
file number should be included on the subject line if email 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, 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-2013-021, and should 
be submitted on or before June 5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11508 Filed 5-14-13; 8:45 am]
BILLING CODE 8011-01-P