Document ID: SEC-2011-1227-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-08-17T04:00Z

[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51097-51099]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20902]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65101; File No. SR-FINRA-2011-039]

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

August 11, 2011.
    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 August 10, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 amend FINRA Rule 11892 (Clearly Erroneous 
Transactions in Exchange-Listed Securities) so that the rule will 
continue to operate in the same manner as it did prior to the expansion 
of the trading pause pilot.
    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.

[[Page 51098]]

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 modifications to FINRA Rule 11892 in light of 
the recent expansion of the trading pause pilot \4\ by FINRA and the 
other SROs to cover additional securities.\5\ As described in more 
detail below, the primary listing markets have filed rule changes to 
amend their clearly erroneous rules to revert back to the non-trading 
pause clearly erroneous framework for Phase III securities and FINRA is 
proposing changes to align its clearly erroneous process with the 
exchanges.\6\
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    \4\ In consultation with other self-regulatory organizations 
(``SROs'') and the Commission, FINRA implemented a trading pause 
pilot, which was approved by the Commission on June 10, 2010, as 
part of a concerted effort to strengthen the markets after the 
severe market disruption that occurred on May 6, 2010. See 
Securities Exchange Act Release No. 62252 [sic] (June 10, 2010), 75 
FR 34186 [sic] (June 16, 2010). (``trading pause pilot'').
    \5\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (Order Approving File No. SR-
FINRA-2011-023) (``Phase III'').
    \6\ See e.g., SR-NASDAQ-2011-116 (August 8, 2011).
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    Effective August 8, 2011, the scope of the trading pause pilot was 
extended beyond the securities included in the S&P 500[reg] Index, the 
Russell 1000[reg] Index and the pilot list of Exchange Traded Products 
(``Phase I & II securities'') to all other NMS stocks (``Phase III 
securities''). In addition to widening the scope of the securities 
included in the trading pause pilot, the Phase III amendments apply a 
significantly higher percentage price move to trigger a trading pause 
for Phase III securities than is applicable to the Phase I & II 
securities. Specifically, while a ten percent price move within a five-
minute period continues to apply to the Phase I & II securities, the 
Phase III securities are subject to a thirty percent price move where 
the security had a closing price the previous trading day of $1.00 or 
more, and a fifty percent price move where the security had a closing 
price the previous trading day of less than $1.00.\7\
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    \7\ If no prior day closing price is available, the last sale 
reported to the consolidated tape on the previous trading day is 
used.
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    Rule 11892(b)(4) (Individual Stock Trading Pauses) provides that 
clearly erroneous reviews of securities subject to the trading pause 
pilot use the ``trading pause trigger price'' \8\ as the reference 
price rather than using the consolidated last sale, which generally is 
applicable to clearly erroneous reviews of non-trading pause pilot 
securities. Because the trading pause trigger price percentages for the 
Phase III securities are substantially greater than the ten percent 
threshold applicable to the Phase I & II securities, applying paragraph 
(b)(4)'s requirement to use the trading pause trigger price for Phase 
III securities would overly limit the SROs' abilities to deem certain 
trades in Phase III securities clearly erroneous.
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    \8\ Pursuant to Rule 11892, the phrase ``trading pause trigger 
price'' means the price that triggered a trading pause on a primary 
listing market under its rules. The trading pause trigger price 
reflects a price calculated by the primary listing market over a 
rolling five minute period and may differ from the execution price 
of a transaction that triggered a trading pause. See Rule 
11892(b)(4).
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    For example, assume a Phase III security is trading at $100.00 
during a five-minute period before a $130.00 trade triggers a trading 
pause. Under the regular clearly erroneous review framework of FINRA 
Rule 11892 (1) [sic] through (3), a clearly erroneous review of a 
trigger trade or latency trade \9\ would apply a clearly erroneous 
price of $103.00 (at and beyond which trades may be broken).\10\ 
However, under the framework set forth in paragraph (b)(4), the clearly 
erroneous price would jump to $133.90--making it impossible to deem the 
$130.00 trade clearly erroneous. This result occurs under paragraph 
(b)(4) because the trigger trade of $130.00, rather than the 
consolidated last sale of $100.00, must be used as the reference price 
to determine the price at which trades are eligible to be deemed 
clearly erroneous. Because of the lower trigger trade threshold for 
Phase I & II securities, the paragraph (b)(4) framework continues to be 
reasonable for these securities but is less workable and reasonable for 
Phase III securities given the greater percentages that apply.
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    \9\ A ``latency trade'' is a trade that occurs subsequent to a 
trigger trade but prior to the trading pause taking effect.
    \10\ FINRA Rule 11892 (b)(1) provides a numerical guideline of 
3% for clearly erroneous calculations where the reference price is 
greater than $50.00.
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    As a result, FINRA, along with the other SROs, is amending Rule 
11892 to revert back to the regular clearly erroneous calculation 
standards of paragraphs (1) through (3) for the Phase III securities, 
which generally re-establishes the consolidated last sale as the 
reference price and provides further flexibility in making clearly 
erroneous determinations in those securities.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the Commission waive the 
requirement that the proposed rule change not become operative for 30 
days after the date of the filing so that it may become operative 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule meets these requirements in 
that it promotes transparency and uniformity across markets concerning 
decisions to break clearly erroneous trades, yet also ensures fair 
application of the process so that similarly situated members are 
provided the same treatment under the rule. FINRA notes that the 
changes proposed herein will in no way interfere with the operation of 
the trading pause pilot, as amended, and notes that the proposed rule 
change is consistent with the clearly erroneous rules of other SROs.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant

[[Page 51099]]

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 \12\ and Rule 19b-4(f)(6)(iii) thereunder.\13\ FINRA has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because such waiver 
will allow FINRA to align its clearly erroneous rules, with respect to 
Phase III securities, to those of the exchanges. Accordingly, the 
Commission waives the 30-day operative delay requirement and designates 
the proposed rule change as operative upon filing with the 
Commission.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission is waiving the five day written notice 
requirement in this case. Therefore, the Commission notes that FINRA 
has satisfied this requirement.
    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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.

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-2011-039 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-2011-039. 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, 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 a.m. and 3 p.m. Copies of such 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 publicly 
available. All submissions should refer to File Number SR-FINRA-2011-
039 and should be submitted on or before September 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20902 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P