Document ID: SEC-2012-0688-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-05-03T04:00Z

[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Notices]
[Pages 26340-26343]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10642]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66872; File No. SR-FINRA-2012-001]

 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendments No. 1 and 2, To Amend FINRA Rule 4560 (Short-Interest 
Reporting)

April 27, 2012.

I. Introduction

    On January 10, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

[[Page 26341]]

thereunder,\2\ a proposed rule change to amend FINRA Rule 4560. On 
January 20, 2012, FINRA filed Amendment No. 1 to the proposed rule 
change (``Amendment No. 1'').\3\ The proposed rule change, as modified 
by Amendment No. 1, was published for comment in the Federal Register 
on January 30, 2012.\4\ The Commission received one comment letter, 
from the Securities Industry and Financial Markets Association 
(``SIFMA''), on the proposal.\5\ On April 23, 2012, FINRA responded to 
the comments in the SIFMA Letter \6\ and filed Amendment No. 2 to the 
proposed rule change (``Amendment No. 2'' and collectively with 
Amendment No. 1, the ``Amendments'').\7\ The Commission is publishing 
this notice and order to solicit comments on Amendment No. 2 and to 
approve the proposed rule change, as modified by the Amendments, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was a partial amendment that clarified the 
reference to a defined term in SEC Regulation SHO in the rule text 
and purpose section of the proposed rule change.
    \4\ See Securities Exchange Act Release No. 66220 (January 24, 
2012), 77 FR 4599 (January 30, 2012).
    \5\ See letter from Melissa MacGregor, Managing Director and 
Associate General Counsel, SIFMA, to Elizabeth M. Murphy, Secretary, 
Commission, dated February 23, 2012 (``SIFMA Letter'').
    \6\ See letter from Racquel L. Russell, Assistant General 
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated 
April 23, 2012 (``Response Letter'').
    \7\ Amendment No. 2 was a partial amendment that deleted the 
proposed requirement concerning the adjustment of corporate actions 
for short interest reporting purposes. The text of the proposed rule 
change and FINRA's Response Letter are available on FINRA's Web site 
at http://www.finra.org, at the principal offices of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.
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II. Description of the Proposal

    FINRA has proposed to amend FINRA Rule 4560. FINRA Rule 4560 (the 
``Rule'') requires each FINRA member to maintain a record of total 
short positions in all customer and proprietary firm accounts in all 
equity securities (other than Restricted Equity Securities as defined 
in Rule 6420) and regularly report such information to FINRA in the 
manner prescribed by FINRA. The Rule generally provides that the short 
positions to be recorded and reported are those resulting from ``short 
sales'' as that term is defined in Rule 200(a) of Regulation SHO.\8\ 
FINRA has proposed to amend the Rule to clarify members' recording and 
reporting obligations and to delete several exceptions to the Rule.
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    \8\ Rule 200 of SEC Regulation SHO provides that ``short sale'' 
means ``any sale of a security which the seller does not own or any 
sale which is consummated by the delivery of a security borrowed by, 
or for the account of, the seller.'' See Rule 200(a) of SEC 
Regulation SHO, 17 CFR 242.200. SEC Rule 200 further provides, among 
other things, that a person is deemed to own a security if: (a) The 
person or his agent has title to it; or (b) The person has 
purchased, or has entered into an unconditional contract, binding on 
both parties thereto, to purchase it, but has not yet received it; 
or (c) The person owns a security convertible into or exchangeable 
for it and has tendered such security for conversion or exchange; or 
(d) The person has an option to purchase or acquire it and has 
exercised such option; or (e) The person has rights or warrants to 
subscribe to it and has exercised such rights or warrants; or (f) 
The person holds a security futures contract to purchase it and has 
received notice that the position will be physically settled and is 
irrevocably bound to receive the underlying security. See Rule 
200(b) of SEC Regulation SHO.
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    First, FINRA has proposed to codify interpretive guidance 
previously issued by the Intermarket Surveillance Group (ISG) that 
instructed members to report ``gross'' short positions existing in each 
proprietary and customer account (rather than net positions across 
accounts).\9\ Thus, the proposed rule change provides that members must 
report all gross short positions existing in each firm or customer 
account, including the account of a broker-dealer, that resulted from a 
``short sale'' as that term is defined in Rule 200(a) of Regulation 
SHO, as well as where the sale transaction that caused the short 
position was marked ``long,'' consistent with SEC Regulation SHO, due 
to the firm's or the customer's net long position at the time of the 
transaction (e.g., aggregation units).
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    \9\ See Intermarket Surveillance Group, Consolidated Reporting 
of Short Interest Positions, ISG Regulatory Memorandum 95-01 (March 
6, 1995).
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    Second, FINRA has proposed to clarify that members' short interest 
reports must reflect only those short positions that have settled or 
reached settlement date by the close of the reporting settlement date 
designated by FINRA. Therefore, short positions resulting from short 
sales that were effected but have not reached settlement date by the 
given designated reporting settlement date, should not be included in a 
member's short interest report for that reporting cycle. Of course, 
short interest positions resulting from short sales that reached the 
expected settlement date, but failed to settle (i.e., ``fails''), must 
be included.
    Third, FINRA has proposed to clarify that members must reflect 
company-related actions in their short-interest reports adjusted as of 
the ex-date of the corporate action (and if no ex-date is declared by a 
self-regulatory organization (``SRO''), then the payment date).\10\ 
Therefore, for the purposes of short interest reporting, members must 
reflect corporate actions (e.g., a reverse or forward split) that 
impact the total number of shares in the short position in their short 
interest report for a reporting cycle if the ex-date of the corporate 
action occurs by the reporting settlement date designated by FINRA for 
such cycle (even if payment of the distribution is not received until 
after the designated reporting settlement date).
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    \10\ The ex-date is the date on or after which a security is 
traded without a specific dividend or distribution. The ex-date also 
is the date that DTCC uses to determine who is entitled to the 
distribution. The payable date is the date that the dividend is sent 
to the record owner of the security. See e.g., Regulatory Notice 00-
54 (August 2000).
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    Finally, consistent with discussions with the ISG, FINRA has 
proposed amendments to delete certain existing exceptions to the 
Rule.\11\ The Rule provides five exceptions, including an exception for 
stabilizing activity, domestic arbitrage and international arbitrage. 
FINRA, in cooperation with the ISG Short Interest Working Group (``ISG 
Working Group''), determined that the transactions addressed in these 
three exceptions result in the type of short positions that would be of 
interest to regulators and the public, and therefore, determined that 
these exceptions no longer are appropriate.\12\
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    \11\ FINRA has worked closely with other SRO members of the ISG, 
a group that includes representatives of every U.S. SRO, to address 
problems that reach across marketplaces. Each ISG member adopted 
consistent short-interest reporting rules to enhance surveillance 
capabilities, augment market transparency, enable investors to make 
more informed decisions, and provide greater disclosure for 
regulatory purposes.
    \12\ FINRA and the ISG Working Group determined that the 
remaining two exceptions continue to be appropriate. Specifically, 
the exception for sales for an account in which the person has an 
interest, owns the security and intends to deliver it as soon as is 
possible (which FINRA is retaining) is intended to address 
circumstances where there may be a brief delay in delivery but the 
sale is a long sale, i.e., exercise of a right, option, or warrant. 
In addition, the over-allotment exception (which FINRA also is 
retaining) addresses the narrow circumstance where the underwriter 
has not received shares and results in a short position for a very 
brief duration.
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    FINRA has stated that it believes that the proposed amendments will 
remove confusion regarding the operation of the Rule and help 
facilitate the availability to the public and regulators of accurate 
and complete short interest information.
    FINRA has represented that it will announce the effective date of 
the proposed rule change in a Regulatory Notice to be published no 
later than 120 days following Commission approval. FINRA has also 
represented that the effective date will be no more than 365 days 
following Commission approval.

[[Page 26342]]

III. Summary of Comments and FINRA's Response

    In the SIFMA Letter, the commenter generally supports the proposal 
but raised concerns with one aspect of the proposal. In the SIFMA 
Letter, the commenter also recommends other changes to the existing 
short interest reporting requirements. First, the commenter supports 
(1) the reporting of short positions based on gross short positions in 
all customer and proprietary accounts, (2) the deletion of certain 
existing exceptions to short interest reporting for stabilizing 
activity, domestic arbitrage and international arbitrage, and (3) the 
reporting of short positions that have settled or reached settlement 
date by the close of the reporting settlement date designated by FINRA. 
The commenter, however, opposes the proposed requirement that short 
interest reports reflect corporate actions adjusted as of the ex-date 
of the corporate action (and if no ex-date is declared by an SRO, then 
the payment date of a corporate action). The commenter argues that such 
requirement is inconsistent with other proposed requirements, is 
inconsistent with how firms maintain their stock records and how firms' 
systems capture short interest position information, and would require 
extensive programming at significant cost.
    In the Response Letter, FINRA stated that it would amend the 
proposed rule change to delete the adjustment of corporate actions 
aspect of the proposal to provide FINRA additional time to gather 
further information on the issue and formulate a regulatory approach. 
FINRA also stated that it would separately amend Rule 4560 at a future 
date to propose a uniform requirement regarding the adjustment of 
corporate actions for short interest reporting purposes.
    Additionally, in the SIFMA Letter, the commenter recommends changes 
to the existing short interest reporting requirements, including 
narrowing the exception from the reporting requirements for ``owned'' 
securities. FINRA declined to amend the proposal to make the requested 
changes suggested by SIFMA. In the Response Letter, FINRA stated that 
the additional comments raised by SIFMA relate to existing requirements 
of the Rule and not the current proposal. FINRA noted that SIFMA's 
recommendations are not germane to the consideration of the merits of 
the proposal or relevant to whether the proposal is consistent with the 
Exchange Act.

IV. Discussion and Commission's Findings

    After careful review of the proposed rule change, the comments 
received and FINRA's Response Letter and the Amendments, the Commission 
finds that the proposed rule change, as modified by the Amendments, is 
consistent with the requirements of the Act, and the rules and 
regulations thereunder that are applicable to a national securities 
association.\13\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to 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. More 
specifically, the Commission believes that the proposed rule change to 
amend FINRA Rule 4560 will promote consistency and accuracy in the 
calculation and reporting of short interest positions by members. The 
Commission believes that FINRA has adequately responded to the concerns 
the SIFMA Letter. In response to SIFMA's comments concerning the 
adjustment of corporate actions for short interest reporting purposes, 
FINRA amended its proposal to delete this aspect of the proposal in 
order to allow additional time to gather further information. In 
addition, FINRA has suitably explained its reasons for declining to 
amend the proposed rule change by making the additional changes 
recommended by SIFMA.
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    \13\ In approving the proposed rule change, 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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V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act \14\ for approving the proposed rule change, as modified by the 
Amendments, prior to the 30th day after publication of Amendment No. 2 
in the Federal Register. In response to certain concerns raised by 
SIFMA, FINRA proposed in Amendment No. 2 to delete the proposed 
requirement that short interest reports reflect corporate actions 
adjusted as of the ex-date of the corporate action (and if no ex-date 
is declared by a self-regulatory organization, then the payment date of 
a corporate action). FINRA proposed Amendment No. 2 to allow FINRA 
additional time to gather further information on the issue of 
adjustment of corporate actions for short interest reporting purposes. 
Accordingly, the Commission finds that good cause exists to approve the 
proposal, as modified by the Amendments, on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 2 
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-2012-001 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-2012-001. 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 
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 available publicly. All 
submissions should refer to File Number SR-FINRA-2012-001 and

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should be submitted on or before May 24, 2012.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-FINRA-2012-001), as 
modified by the Amendments, be and hereby is approved on an accelerated 
basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-10642 Filed 5-2-12; 8:45 am]
BILLING CODE 8011-01-P