Document ID: SEC-2010-0944-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-06-28T04:00Z

[Federal Register: June 28, 2010 (Volume 75, Number 123)]
[Notices]               
[Page 36756-36759]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn10-141]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62341; File No. SR-FINRA-2010-032]

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

June 21, 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 June 17, 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, 
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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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).
    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 modifications to its Rule 11892, entitled 
Clearly Erroneous Transactions in Exchange-Listed Securities (``the 
Rule''). First, FINRA proposes replacing existing paragraph (b)(2) of 
the Rule, entitled ``Alternative Reference Prices'' with a new 
paragraph, entitled ``Multi-Stock Events Involving Twenty or More 
Securities.'' Second, FINRA is replacing existing paragraph (b)(4) of 
the Rule, entitled ``Numerical Guidelines Applicable to Volatile Market 
Opens'' with a new paragraph, entitled ``Individual Stock Trading 
Pauses.'' Third, FINRA is combining paragraphs (a)(1) and (a)(2) into 
one paragraph to provide that paragraph (b) governs the review of all 
transactions reported to a FINRA trade reporting system, whether or not 
there are similarly situated transactions in the security on a national 
securities exchange. Finally, FINRA proposes modifications to 
paragraphs (b)(1) and (b)(3) of the Rule consistent with the proposed 
changes to paragraphs (b)(2) and (b)(4). The provisions of this 
proposed rule change shall be in effect during a pilot period set to 
end on December 10, 2010. If the pilot is not extended or approved as 
permanent by December 10, 2010, the prior version of this Rule shall be 
in effect.
    FINRA is proposing the rule changes described herein in 
consultation with other self-regulatory organizations (``SROs'') and 
Commission staff to provide for uniform treatment: (1) Of clearly 
erroneous execution reviews 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 for transactions otherwise than on an 
exchange. FINRA also has proposed additional changes to the Rule that 
reduce the ability of FINRA to deviate from the objective standards set 
forth in the Rule. The proposed changes are described in further detail 
below.
Revised Paragraph (b)(2) Related to Multi-Stock Events Involving Twenty 
or More Securities
    FINRA proposes to eliminate the text of existing paragraph (b)(2), 
which provides flexibility to FINRA to use different Numerical 
Guidelines or Reference Prices in various ``Unusual Circumstances.'' 
FINRA proposes to replace the text of this paragraph with new language 
that would apply to Multi-Stock Events involving twenty or more 
securities whose executions occurred within a period of five minutes or 
less. The revised paragraph would provide that during Multi-Stock 
Events involving twenty or more securities the number of affected 
transactions may be such that immediate finality is necessary to 
maintain a fair and orderly market and to protect investors and the 
public interest. Accordingly, as set forth in paragraph (a)(2), in such 
circumstances, decisions made by FINRA in consultation with the markets 
could not be appealed. Further, as proposed, in connection with reviews 
of Multi-Stock Events involving twenty or more securities, FINRA may 
use a Reference Price other than consolidated last sale in its review 
of potentially clearly erroneous executions. With the exception of 
those securities under review that are subject to an individual stock 
trading pause as described in proposed paragraph (b)(4), and to ensure 
consistent application across market centers when proposed paragraph 
(b)(2) is invoked, FINRA will promptly coordinate with the other market 
centers to determine the appropriate review period, which may be 
greater than the period of five minutes or less that triggered 
application of proposed paragraph (b)(2), as well as select one or more 
specific points in time prior to the transactions in question and use 
transaction prices at or immediately prior to the one or more specific 
points in time selected as the Reference Price. FINRA will nullify as 
clearly erroneous all transactions that are at prices equal to or 
greater than 30% away from the Reference Price in each affected 
security during the review period selected by FINRA and the markets 
consistent with the proposed paragraph (b)(2).
    Because FINRA and the market centers are adopting a different 
threshold and standards to handle large-scale market events, which 
would

[[Page 36757]]

include events occurring during times of high volatility at the 
beginning of regular trading hours, FINRA proposes deletion of 
paragraph (b)(4) (``Numerical Guidelines Applicable to Volatile Market 
Opens'') of the existing rule. FINRA believes that this provision is no 
longer necessary, and if maintained, could result in extremely high 
Numerical Guidelines (up to 90%) in certain circumstances.
Revised Paragraph (b)(4) Related to Individual Stock Trading Pauses
    Several SROs recently amended their rules so that they may, from 
time to time, issue a trading pause for an individual security if the 
price of such security moves 10% or more from a sale in a preceding 
five-minute period. In this regard, the SEC recently approved a 
proposed rule change by FINRA to halt trading in an individual stock 
when the primary listing market for such stock issues a trading pause 
in any security under its rules.\3\ As described above, FINRA is 
proposing to eliminate existing paragraph (b)(4) (``Numerical 
Guidelines Applicable to Volatile Market Opens''). FINRA proposes 
adopting a provision, numbered as paragraph (b)(4) following such 
elimination, which will provide for uniform treatment of clearly 
erroneous execution reviews 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 for transactions otherwise than on an 
exchange. The proposed rule change is necessary to provide greater 
certainty of the clearly erroneous Reference Price for transactions 
that trigger a trading pause (the ``Trigger Trade'') and subsequent 
transactions occurring between the time of the Trigger Trade and the 
time the trading pause message is received by FINRA from the single 
plan processor responsible for consolidation and dissemination of 
information for the security and put into effect by FINRA for 
transactions otherwise than on an exchange, especially under highly 
volatile and active market conditions.
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    \3\ See Securities Exchange Act Release No. 62251 (June 10, 
2010), 75 FR 34183 (June 16, 2010) (Order Approving File No. SR-
FINRA-2010-025).
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    FINRA proposes to use the price that triggered a trading pause in 
an individual stock (the ``Trading Pause Trigger Price'') as the 
Reference Price for clearly erroneous execution reviews of a Trigger 
Trade and transactions that occur immediately after a Trigger Trade but 
before a trading halt is in effect for transactions otherwise than on 
an exchange. As proposed, the phrase ``Trading Pause Trigger Price'' 
shall mean the price that triggered a trading pause on a primary 
listing market. 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. FINRA will rely on the primary listing 
market that issued an individual stock trading pause to determine and 
communicate the Trading Pause Trigger Price for such stock. FINRA 
proposes to make clear in the text that the proposed standards in 
paragraph (b)(4) apply regardless of whether the security at issue is 
part of a Multi-Stock Event involving five or more securities as 
described in proposed paragraphs (b)(1) and (b)(2).
    As proposed, the Numerical Guidelines set forth in paragraph (b)(1) 
of the Rule, other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent 
transactions. FINRA proposes to review all transactions that trigger a 
trading pause and subsequent transactions occurring before the trading 
pause is in effect for transactions otherwise than on an exchange. 
Where a trading pause was triggered by a price decline (rise), FINRA 
shall deem as clearly erroneous all such transactions that occurred at 
a price lower (higher) than the Trading Pause Trigger Price. Because 
the proposed rules for trading pauses would only apply within Regular 
Trading Hours, an execution would be reviewed and nullified as clearly 
erroneous as follows:

------------------------------------------------------------------------
                                          Numerical guidelines (subject
                                            transaction's % difference
       Reference price or product         from the trading pause trigger
                                                      price)
------------------------------------------------------------------------
Greater than $0.00 up to and including   10
 $25.00.
Greater than $25.00 up to and including  5
 $50.00.
Greater than $50.00....................  3
Leveraged ETF/ETN securities...........  Regular Trading Hours Numerical
                                          Guidelines multiplied by the
                                          leverage multiplier (i.e. 2x).
------------------------------------------------------------------------

    Trades occurring after a trading halt is in effect may be deemed in 
violation of FINRA Rule 5260 (Prohibition on Transactions, Publication 
of Quotations, or Publication of Indications of Interest During Trading 
Halts) and will be deemed clearly erroneous.
    FINRA reminds members that they must have policies and procedures 
in place that are reasonably designed to ensure that, among other 
things, members promptly cease effecting transactions during a halt as 
required by FINRA Rule 5260.
Additional Conforming Revisions to Paragraphs (b)(1) and (b)(3)
    Based on proposed paragraph (b)(2), FINRA has proposed certain 
conforming changes to paragraphs (b)(1) and (b)(3) of the existing 
Rule, as described below.
    Under current FINRA Rule 11892, a transaction may be found to be 
clearly erroneous only if the price of the transaction to buy (sell) 
that is the subject of the complaint is greater than (less than) the 
Reference Price by an amount that equals or exceeds the Numerical 
Guidelines set forth in paragraph (b)(1) of the Rule. The ``Reference 
Price'' is currently defined as the consolidated last sale immediately 
prior to the execution(s) under review except for in Unusual 
Circumstances as described in paragraph (b)(2) of the Rule. FINRA 
proposes modifying paragraph (b)(1) consistent with the changes 
described above such that FINRA shall use the consolidated last sale 
immediately prior to the execution(s) under review as the Reference 
Price except for: (A) Multi-Stock Events involving twenty or more 
securities, as described in proposed paragraph (b)(2); (B) transactions 
not involving a Multi-Stock Event as described in proposed paragraph 
(b)(2)

[[Page 36758]]

that trigger a trading pause and subsequent transactions, as described 
in proposed paragraph (b)(4), in which case the Reference Price shall 
be determined in accordance with that paragraph (b)(4); and (C) in 
other circumstances, such as, for example, relevant news impacting a 
security or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest. FINRA 
also proposes modifying paragraph (b)(1) to reduce uncertainty as to 
the applicability of the Numerical Guidelines, by requiring a finding 
that an execution was clearly erroneous if such execution exceeds the 
Numerical Guidelines, subject only to the Additional Factors included 
in paragraph (b)(3). Moreover, FINRA proposes revising the existing 
description for Multi-Stock Events that is contained on the Numerical 
Guidelines chart to make clear that different Numerical Guidelines 
apply for Multi-Stock Events involving five or more, but less than 
twenty, securities whose executions occurred within a period of five 
minutes or less. In addition, FINRA proposes adding to the Numerical 
Guidelines chart a row that contains the Numerical Guidelines (30%) for 
Multi-Stock Events involving twenty or more securities whose executions 
occurred within a period of five minutes or less.
    FINRA proposes clarifying paragraph (b)(3) to make clear that the 
additional factors set forth in that paragraph are not intended to 
provide any discretion to a FINRA official to deviate from the 
guidelines that apply to Multi-Stock Events or to transactions in 
securities subject to individual stock trading pauses. FINRA also is 
combining paragraphs (a)(1) and (a)(2) into one paragraph to provide 
that paragraph (b) governs the review of all transactions reported to a 
FINRA trade reporting system, whether or not there are similarly 
situated transactions in the security on a national securities 
exchange. Existing paragraph (a)(3) of the Rule will be renumbered as 
(a)(2).
    Consistent with the exchanges, FINRA is proposing that the 
provisions of this proposed rule change shall be in effect during a 
pilot period set to end on December 10, 2010. If the pilot is not 
extended or approved as permanent by December 10, 2010, the prior 
version of this Rule shall be in effect.
    FINRA has requested that the Commission approve the proposed rule 
change on an accelerated basis, so that it may become operative as soon 
as possible based on the fact that the proposed trading pause rules 
adopted by FINRA and several national securities exchanges have now 
become fully operative subject to the initial pilot program.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\4\ 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 is 
consistent with the clearly erroneous rules of other SROs and will 
promote the goal of transparency and uniformity across markets 
concerning reviews of potentially clearly erroneous executions in 
various contexts, including reviews in the context of a Multi-Stock 
Event involving twenty or more securities and reviews resulting from a 
Trigger Trade and any executions occurring immediately after a Trigger 
Trade but before a trading halt is in effect for transactions otherwise 
than on an exchange. Further, FINRA believes that the proposed changes 
enhance the objectivity of decisions made by FINRA with respect to 
clearly erroneous executions.
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    \4\ 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.

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

    Within 35 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 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 
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-2010-032 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-2010-032. 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-2010-
032 and should be submitted on or before July 19, 2010.

[[Page 36759]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15549 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P