Document ID: SEC-2010-1274-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-08-18T04:00Z

[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51124-51126]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-162]                         

[[Page 51124]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62711; File No. SR-FINRA-2010-041]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to FINRA Rule 2360 To 
Extend the Time To Submit a Contrary Exercise Advice and the Time for a 
Final Exercise Decision in the Event of a Modified Close of Trading

August 12, 2010.
    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 4, 2010, 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 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 the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 2360 (Options) to:
    (1) Extend the time by which members must submit Contrary Exercise 
Advice (``CEA'') notices;
    (2) amend the time for a final exercise decision in the event of a 
modified close of trading; and
    (3) make certain changes to reorganize the rule text to clarify the 
rule requirements.
    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, on the 
Commission's Web site at http://www.sec.gov, 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
    The purpose of the proposed rule change is to amend FINRA Rule 
2360(b)(23)(A) to: (1) Extend the time by which members must submit 
Contrary Exercise Advice (``CEA'') \4\ notices; (2) amend the time for 
a final exercise decision in the event of a modified close of trading; 
and (3) make certain changes to reorganize the rule text to clarify the 
rule requirements.
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    \4\ Contrary Exercise Advices also are referred to as Expiring 
Exercise Declarations (``EED'') in The Options Clearing 
Corporation's rules.
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    FINRA Rule 2360(b)(23)(A) contains special procedures that apply to 
the exercise of standardized options on the last business day before 
expiration. An option holder with an expiring standardized option may 
(1) take no action and allow automatic exercise determinations to be 
made in accordance with the Options Clearing Corporation's (``OCC's'') 
exercise-by-exception (``Ex-by-Ex'') procedures,\5\ or (2) submit a CEA 
as specified below. A CEA is a communication to (i) not exercise an 
option that would be automatically exercised under OCC's Ex-by-Ex 
procedure, or (ii) exercise an option that would not be automatically 
exercised under OCC's Ex-by-Ex procedure.
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    \5\ Under the Ex-by-Ex procedures an option will be 
automatically exercised if the option contract is in-the-money by a 
requisite amount.
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    FINRA proposes to relocate and revise the provisions from the 
current subparagraph (ii) regarding the deadline for option holders' to 
inform members of exercise decisions and the deadline for members to 
submit CEAs indicating such decision into two separate subsections to 
improve readability. In new subsection (iii), FINRA provides (as 
currently provided in current subsection (ii)) that option holders have 
until 5:30 p.m. Eastern Time (``ET'') on the business day immediately 
prior to the expiration date to make a final exercise decision to 
exercise or not exercise an expiring option. In addition, FINRA 
clarifies that members may not accept exercise instructions for 
customer or non-customer accounts after 5:30 p.m. ET. This is not a new 
requirement but meant to highlight that this provision is still in 
effect.
    The balance of current subparagraph (ii) regarding the deadline for 
members to submit CEAs indicating the option holders' exercise decision 
is relocated to the end of new subparagraph (iv) after the explanation 
of the contents of CEAs. FINRA believes this improves the readability 
of the rule. In addition, FINRA proposes to extend the deadline for 
members to submit CEAs in certain instances. Currently, members have 
until 6:30 p.m. ET to submit a CEA for customer accounts. In addition, 
members have until 6:30 p.m. ET to submit a CEA for non-customer 
accounts if the member employs an electronic submission procedure with 
time stamp for the submission of exercise instructions by option 
holders. FINRA proposes to extend these deadlines by one hour, from 
6:30 p.m. ET to 7:30 p.m. ET. FINRA believes that granting members 
additional time to submit CEAs is necessary to address concerns raised 
by members that the existing deadline has raised issues regarding 
timely back-office processing. FINRA notes that the Ex-by-Ex threshold 
has changed from $0.75 for customers (and $0.25 for broker-dealers) to 
$0.01 for all accounts. This decrease in the Ex-by-Ex threshold coupled 
with the increase in options trading volume in recent years has lead to 
a larger number of CEAs and increased the burden on firms to process 
and submit instructions timely. The proposed additional one hour will 
address this concern by further enabling firms to more timely manage, 
process and submit CEAs.
    FINRA does not propose to extend the CEA submission cut-off time 
for non-customer accounts of members that do not use electronic time 
stamps to record the submission of exercise instructions from option 
holders. Such CEAs must be manually submitted by the member by 5:30 
p.m. ET.
    FINRA also proposes two amendments to subparagraph (vii), re-
numbered as subparagraph (viii), regarding the deadlines in the event a 
modified close of trading is announced. First, FINRA proposes to amend 
the deadline for option holders to make a final exercise decision for 
an expiring standardized option from 1 hour and 28 minutes following 
the modified time

[[Page 51125]]

announced for the close of trading to 1 hour and 30 minutes following 
the modified closing time. The proposed rule change is consistent with 
the rules of the options exchanges, which were modified to correspond 
to the two-minute difference in trading time created by the change in 
the close of trading time from 4:02 p.m. to 4 p.m. ET.\6\ Consistent 
with this modification, FINRA also proposes that members that do not 
employ an electronic submission procedure for exercise instructions 
would be required to submit a CEA within 1 hour and 30 minutes after 
the modified close of trading for its non-customer accounts rather than 
1 hour and 28 minutes.
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    \6\ See Securities Exchange Act Release Nos. 53519 (March 20, 
2006), 71 FR 15229 (March 27, 2006) (SR-AMEX-2006-26); 53249 
(February 7, 2006), 71 FR 8035 (February 15, 2006) (SR-PCX-2005-
138); 53407 (March 3, 2006), 71 FR 12764 (March 13, 2006) (SR-PHLX-
2006-12); 53439 (March 7, 2006), 71 FR 13643 (March 16, 2006) (SR-
ISE-2006-11); and 53438 (March 7, 2006), 71 FR 13641 (March 16, 
2006) (SR-CBOE-2006-19).
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    Second, FINRA proposes to modify re-numbered subparagraph (viii), 
which allows a member up to 2 hours and 28 minutes to submit a CEA in 
the event of a modified close of trading, by removing such provision 
and allowing a member to submit a CEA in such circumstances up to 7:30 
p.m. ET. FINRA believes making uniform the submission deadlines on both 
regular and modified close expiration days provides for consistent 
regulation and prevents the possibility for error when determining what 
the CEA submission deadline is on any modified close expiration day. 
The initiative to address members' concern regarding the cut-off time 
for CEAs is industry-wide, and FINRA proposes these amendments to 
maintain consistency with the rules of the options exchanges.\7\
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    \7\ See Securities Exchange Act Release No. 61710 (March 15, 
2010), 75 FR 13636 (March 22, 2010) (Order Approving SR-ISE-2010-
02). FINRA anticipates that the other options exchanges will propose 
similar rule changes.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. If the implementation date of the proposed rule change 
is more than 5 business days prior to the date of the next expiration 
Friday, i.e., the third Friday of the month (``Expiration Friday''),\8\ 
FINRA will implement the proposed rule change so as to be effective for 
that Expiration Friday. If the implementation date of the proposed rule 
change is 5 business days or less prior to the date of the next 
Expiration Friday, FINRA will implement the rule change so as to be 
effective for the following Expiration Friday. FINRA will announce the 
implementation date of the proposed rule change in a Regulatory Notice.
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    \8\ For example, Expiration Friday for August 2010 options will 
be August 20, 2010, Expiration Friday for September options will be 
September 17, 2010.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities as set forth in Section 
15A(b)(6) of the Act \10\ by providing members an additional hour 
within which to complete the necessary processing of CEAs, will thereby 
decrease members' burden of processing an increasing number of CEAs and 
enable them to more easily manage and process these instructions. In 
addition, the proposed rule change is being made to maintain 
consistency with the rules of the options exchanges.\11\
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ See note 7.
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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 Regarding 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 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) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
FINRA has satisfied this requirement.
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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-2010-041 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-2010-041. 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

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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-2010-041 and should be submitted 
on or before September 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Florence E. Harmon,
Deputy Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-20473 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P