Document ID: SEC-2014-0745-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-05-06T04:00Z

[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25937-25940]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10293]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72057; File No. SR-FINRA-2014-021]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed 
Securities)

April 30, 2014.
    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 April 17, 2014, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 11892 to add new provisions to 
address multi-day clearly erroneous events, transactions occurring 
during trading halts, and to make non-substantive clarifications to the 
rule.
    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
    FINRA is proposing amendments to Rule 11892 (the ``Rule'') to add 
new paragraphs (c) and (d) to provide FINRA authority to: (1) Declare 
as null and void transactions effected on one or more trading days that 
were based on the same fundamentally incorrect or grossly 
misinterpreted issuance information, and (2) in the event of a 
disruption or malfunction in the operation of the electronic 
communication and trading facilities of a self-regulatory organization 
or responsible single plan processor in connection with transmittal or 
receipt of a regulatory halt, suspension or pause (i.e., a ``trading 
halt''), declare as null and void any transactions that occur after the 
primary listing market for a security declares a trading halt with 
respect to such security.\3\ FINRA also is proposing to make non-
substantive clarifications to the text of the Rule.
---------------------------------------------------------------------------

    \3\ In the event a trading halt is declared, prematurely lifted 
in error, and then re-instituted, under proposed paragraph (d), any 
transactions that occurred before the official, final end of the 
trading halt according to the primary listing market also would be 
declared as null and void.
---------------------------------------------------------------------------

    FINRA also proposes a change to certain cross-references in the 
Rule, due to the addition of paragraphs (c) and (d). Specifically, 
FINRA proposes to update cross-references in existing Rule 11892.03 in 
order to make clear that the provisions of Supplementary Material .03 
do not alter the application of other provisions of Rule 11892, 
including new paragraphs (c) and (d).
Background
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to FINRA Rule 11892 to provide for uniform treatment of clearly 
erroneous reviews: (1) In multi-stock events involving twenty or more 
securities; and (2) in the event transactions occur that result in the 
issuance of an individual stock trading pause by the primary listing 
market and subsequent transactions that occur before the trading pause 
is in effect.\4\ FINRA also adopted additional changes to Rule 11892 
that reduced FINRA's ability to deviate from the objective standards 
set forth in the Rule \5\ and, in 2013, adopted a provision designed to 
address the operation of the Plan to Address Extraordinary Market 
Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the 
``Limit Up-Limit Down Plan'' or the ``Plan'').\6\ Most recently, FINRA 
removed the specific provisions related to individual stock trading 
pauses and extended until April 8, 2014 the pilot program applicable to 
certain provisions of Rule 11892.\7\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 62885 (September 10, 
2010), 75 FR 56641 (September 16, 2010) (Order Approving File No. 
SR-FINRA-2010-032).
    \5\ Supra note 4.
    \6\ See Securities Exchange Act Release No. 68808 (February 1, 
2013), 78 FR 9083 (February 7, 2013) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2013-012); See also Securities 
Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 
2012).
    \7\ See Securities Exchange Act Release No. 70516 (September 26, 
2013), 78 FR 60952 (October 2, 2013) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2013-041).
---------------------------------------------------------------------------

    As proposed, new paragraphs Rule 11892(c) and (d) would be subject 
to the existing clearly erroneous pilot period, which recently was 
amended to coincide with the pilot period for the Limit Up-Limit Down 
Plan, including any extensions to the pilot period for the Plan.\8\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 71781 (March 24, 
2014), 79 FR 17615 (March 28, 2014) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2014-013).
---------------------------------------------------------------------------

Multi-Day Clearly Erroneous Executions Based on Fundamentally Incorrect 
or Grossly Misinterpreted Issuance Information
    FINRA proposes to adopt a new paragraph (c) to Rule 11892 (Multi-
day Events), which would provide that a series of transactions in a 
particular security on one or more trading days may be viewed as one 
event if all such transactions were effected based on the same 
fundamentally incorrect or grossly misinterpreted issuance information 
(e.g., with respect to a stock split or corporate dividend) resulting 
in a severe valuation error for all such transactions (the ``Event'').
    As proposed, a FINRA officer, acting on his or her own motion, 
would be required to take action to declare all transactions in a 
security that occurred during the Event null and void not later than 
the start of trading on the day following the last transaction in the 
Event. If trading in the security is halted before the valuation error 
is corrected, the FINRA officer would be required to take action to 
declare all transactions in that security that occurred during the 
Event null and void prior to the resumption of trading. FINRA proposes 
to make clear that no action can be taken pursuant to proposed 
paragraph (c) with respect to any transactions that

[[Page 25938]]

have reached the settlement date for the security or that result from 
an initial public offering (``IPO'') of a security. FINRA believes that 
declaring a trade null and void after the settlement date would be 
complex to administer and unfair to the affected parties. FINRA also 
believes that excluding IPOs from the proposed rule will ensure that 
transactions in a new security for which there is no benchmark 
information are not called into question as it is the IPO process 
itself including the extensive public disclosure associated with IPOs, 
that is intended to drive price formation.
    Further, FINRA proposes that, to the extent transactions related to 
an Event involve one or more other self-regulatory organizations, FINRA 
promptly will coordinate with such other self-regulatory organizations 
to ensure consistent treatment of the transactions related to the 
Event, if practicable. FINRA also proposes to state in the Rule that 
any action taken in connection with paragraph (c) will be taken without 
regard to the numerical guidelines set forth in paragraph (b)(1) of 
Rule 11892. In particular, FINRA believes that there could be scenarios 
where there are erroneous transactions related to an Event that would 
not meet the applicable numerical guidelines but that are, upon review, 
clearly erroneous. An example of a scenario that proposed new paragraph 
(c) is intended to address is a corporate action, such as a stock 
split, that results in the dissemination of fundamentally incorrect or 
grossly misinterpreted issuance information and leads to transactions 
at a price that is close to the price at which the security was 
previously trading. Even if such trading is consistent with prior 
trading activity for the security, and thus would not meet the 
applicable numerical guidelines, the proposal would provide FINRA with 
the authority to declare as null and void such transactions if they 
were effected based on the same fundamentally incorrect or grossly 
misinterpreted issuance information and there was a severe valuation 
error as a result (i.e., although the security should be trading at a 
price further away from its previous price range, due to fundamentally 
incorrect or grossly misinterpreted issuance information with respect 
to the corporate action, the security continues to trade at a price 
that does not meet the applicable numerical guidelines).
    FINRA also proposes to provide that each member involved in a 
transaction subject to proposed paragraph (c) shall be notified as soon 
as practicable of a determination to declare such transaction null and 
void, and the party aggrieved by such action may appeal in accordance 
with Rule 11894.
    In particular, FINRA believes it is necessary to have authority to 
declare as null and void transactions that occur in an event similar to 
an event involving an exchange offer (``Exchange Offer'') made by U.S. 
Bancorp on the New York Stock Exchange (``NYSE'') in 2010 in which 
there were a series of executions based on incorrect or grossly 
misinterpreted issuance information and, as a result, the securities 
traded at severely dislocated prices (the ``U.S. Bancorp Event''). At 
the time, the NYSE filed an emergency rule filing in order to respond 
to that event.\9\ With the filing, the NYSE interpreted its clearly 
erroneous rule as permitting the NYSE to nullify all trades occurring 
after the Exchange Offer at severely dislocated prices.\10\ FINRA 
believes it is important to have in place a provision to declare trades 
null and void if an event like the U.S. Bancorp Event occurs again in 
the future. The U.S. Bancorp Event is described in further detail below 
and is intended to be illustrative of the manner in which FINRA 
proposes to utilize proposed paragraph (c), if necessary.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 62609 (July 30, 
2010), 75 FR 47327 (August 5, 2010) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NYSE-2010-55).
    \10\ Supra note 9.
---------------------------------------------------------------------------

    In May 2010, U.S. Bancorp commenced an offer to exchange up to 
1,250,000 Depositary Shares, each representing a 1/100 interest in a 
share of Series A Non-Cumulative Perpetual Preferred Stock, $100,000 
liquidation preference per share (the ``Depositary Shares'') for any 
and all of the 1,250,000 outstanding 6.189% Fixed-to-Floating Rate 
Normal ITS issued by U.S. Bancorp Capital IX, each with a liquidation 
amount of $1,000 (the ``Normal ITS''). The Depositary Shares were 
approved for listing on the NYSE under the symbol USB PRA. On June 11, 
2010, the NYSE opened the shares on a quote, but trading did not 
commence until June 16, 2010 at prices in the range of $79.00 per 
share. There were additional executions on the NYSE in that price range 
on June 17, 2010 and June 18, 2010. On June 18th, the NYSE learned that 
the prices at which trades had executed were not consistent with the 
value of the security, which was closer to $800 per share. Upon 
learning of the pricing disparity, the NYSE immediately halted trading 
in the Depositary Shares on all markets and alerted U.S. Bancorp and 
other exchanges that traded the Depositary Shares of the pricing 
discrepancy.
    To address the situation, the NYSE filed a proposal to interpret 
its existing clearly erroneous rule such that trading in the Depository 
Shares from June 16th to June 18th constituted a single event because 
that trading was based on incorrect or grossly misinterpreted issuance 
information that resulted in severe price dislocation.\11\ Because the 
Depository Shares were halted before the price of the Depository Shares 
ceased to be dislocated, and remained halted, the NYSE was able to 
review trading in the Depository Shares and declare as null and void 
all trading related to the U.S. Bancorp Event before the security 
resumed trading. FINRA believes it is appropriate to include in Rule 
11892 the authority to address such an event should a similar situation 
arise in the future.
---------------------------------------------------------------------------

    \11\ Supra note 9.
---------------------------------------------------------------------------

Transactions Occurring After a Trading Halt Has Been Declared
    FINRA proposes to add new paragraph (d) to Rule 11892 (Transactions 
Occurring During Trading Halts) to make clear that, in the event of any 
disruption or malfunction in the operation of the electronic 
communications and trading facilities of a self-regulatory organization 
or responsible single plan processor in connection with the transmittal 
or receipt of a trading halt, a FINRA officer, acting on his or her own 
motion, shall declare as null and void any transaction that occurs 
after the primary listing market for a security declares a trading halt 
and before such trading halt with respect to such security has 
officially ended according to the primary listing market.
    In addition, proposed paragraph (d) will make clear that, in the 
event a trading halt is declared, then prematurely lifted in error and 
then re-instituted, FINRA will declare as null and void all 
transactions that occur before the official, final end of the trading 
halt according to the primary listing market. Any action taken in 
connection with paragraph (d) must be taken in a timely fashion, 
generally within thirty minutes of the detection of the erroneous 
transaction and in no circumstances later than the start of normal 
market hours \12\ on the trading day following the date of the 
execution(s) under review. FINRA also proposes to specify that any 
action taken in connection with proposed paragraph (d) will be taken 
without regard to the numerical guidelines set forth in paragraph 
(b)(1) of Rule 11892. FINRA believes it is appropriate to declare 
transactions pursuant to

[[Page 25939]]

proposed paragraph (d) as null and void without regard to the numerical 
guidelines because, in the situations covered by paragraph (d), the 
subject transactions were prohibited from occurring during a trading 
halt and, thus, declaring them null and void does not put the parties 
in any different position than they should have been. FINRA also 
believes that the certainty provided by this provision is critical in 
situations involving trading halts. FINRA proposes that each member 
involved in a transaction subject to proposed paragraph (d) shall be 
notified by FINRA as soon as practicable of a determination to declare 
a transaction(s) as null and void, and the party aggrieved by such 
action may appeal the action in accordance with Rule 11894.
---------------------------------------------------------------------------

    \12\ Normal market hours are from 9:30 a.m. E.T. to 4:00 p.m. 
E.T.
---------------------------------------------------------------------------

    FINRA rules provide authority to halt over-the-counter trading in 
an exchange-listed security in certain cases, including when the 
primary listing market issues a trading halt in the security.\13\ 
However, in certain circumstances, due to a technical issue related to 
the transmission or receipt of the electronic message instituting such 
trading halt or due to other extraordinary circumstances, members may 
execute transactions over the counter following the declaration of such 
a trading halt. Similarly, although rare, there have been extraordinary 
circumstances in which a trading halt is declared, then prematurely 
lifted in error, and then re-instituted. FINRA believes it is 
appropriate to provide for certainty that, in such extraordinary 
circumstances, any transactions occurring after a trading halt has been 
declared will be deemed null and void. In the event that a trading halt 
is declared as of a future time (i.e., if the primary listing exchange 
declares a trading halt as of a specific, future time in order to 
ensure coordination amongst market participants), FINRA would nullify 
only those transactions occurring after the time the trading halt was 
supposed to be in place until the official end of the trading halt 
according to the primary listing market. FINRA believes that such 
authority is appropriate because, when relied upon, FINRA will be 
nullifying trades that should not have occurred in the first instance 
and because a trading halt declared by the primary listing market is 
indicative of an issue with respect to the applicable security or a 
larger set of securities. Finally, FINRA is making non-substantive 
amendments to the rule to simplify and clarify the text.
---------------------------------------------------------------------------

    \13\ See FINRA Rules 6120 and 6121.
---------------------------------------------------------------------------

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ 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, remove impediments to and perfect the mechanism of 
a free and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that it is appropriate to adopt a provision granting 
FINRA authority to declare as null and void trades that occur if an 
event similar to the U.S. Bancorp Event occurs again. FINRA believes 
that this provision will allow FINRA to act in the event of such a 
severe valuation error, that such action would promote just and 
equitable principles of trade; and that the proposal is, therefore, 
consistent with the Act. Similarly, FINRA believes that adding a 
provision: (1) Allowing FINRA to nullify transactions that occur when a 
trading halt is declared, then prematurely lifted in error and then 
reinstituted, and (2) providing that, in the event of any disruption or 
malfunction in the operation of the electronic communications and 
trading facilities of a self-regulatory organization or responsible 
single plan processor in connection with the transmittal or receipt of 
a trading halt, FINRA will nullify trades occurring after a trading 
halt has been declared by the primary listing market for the security--
will help to avoid confusion amongst market participants, which is 
consistent with the protection of investors and the public interest and 
therefore is consistent with the Act.
    FINRA further believes that the proposal is appropriate and 
consistent with the Act because, when relied upon, FINRA will be 
nullifying trades that should not have occurred in the first instance. 
FINRA also believes that the proposal is appropriate because a trading 
halt declared by the primary listing market is indicative of an issue 
with respect to the applicable security or a larger set of securities.
    FINRA believes that the proposal to update cross-references in 
existing Supplementary Material .03 of Rule 11892 to include new 
paragraphs (c) and (d) is consistent with the Act because, as is the 
case with respect to the current Rule, this change makes clear that the 
provisions of Supplementary Material .03 do not alter the application 
of other provisions of Rule 11892. Finally, FINRA believes that the 
proposed non-substantive clarifications are consistent with the Act in 
that they provide the market with clarity as to the intended operation 
of the Rule.
    FINRA believes that other self-regulatory organizations also are 
filing similar proposals to add provisions similar to the provisions 
being proposed by FINRA in this filing. Therefore, the proposal 
promotes just and equitable principles of trade in that it promotes 
transparency and uniformity across the self-regulatory organizations 
concerning treatment of transactions as clearly erroneous. The proposed 
rule change also helps ensure consistent results in handling erroneous 
trades across the U.S. markets, thus furthering fair and orderly 
markets, the protection of investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change implicates any 
competitive issues. To the contrary, as noted above, FINRA believes 
that other self-regulatory organizations also are filing similar 
proposals and, thus, that the proposal will help to ensure consistency 
across markets.

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

    FINRA has not solicited, and does not intend to solicit, comments 
on this proposed rule change. FINRA has not received any written 
comments from members or other interested parties.

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

    Within 45 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 or disapprove 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

[[Page 25940]]

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-2014-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-021. 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 the filing also will be available 
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-2014-021 and should be 
submitted on or before May 27, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10293 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P