Document ID: SEC-2010-1399-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority
Posted Date: 2010-09-14T04:00Z

[Federal Register: September 14, 2010 (Volume 75, Number 177)]
[Notices]               
[Page 55842-55846]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se10-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62842; File No. SR-FINRA-2010-030]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority; Order Granting Approval of a Proposed Rule Change To Adopt 
FINRA Rule 11000 Series (Uniform Practice Code) in the Consolidated 
FINRA Rulebook

September 3, 2010.

I. Introduction

    On June 14, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FINRA-2010-030 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on July 
12, 2010.\2\ The Commission received no comment letters. For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 62454 (July 6, 2010), 75 
FR 39715 (July 12, 2010).
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II. Description

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''), FINRA will adopt the NASD Rule 11000 
Series (Uniform Practice Code [``UPC'']) into the Consolidated FINRA 
Rulebook, subject to certain amendments described below.\3\ The UPC was 
originally adopted on January 20, 1941, and became effective on August 
1, 1941. The UPC prescribes the manner in which over-the-counter 
securities transactions other than those cleared through a registered 
clearing agency are compared, cleared, and settled between member 
firms.
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    \3\ The current FINRA rulebook consists of (1) FINRA Rules, (2) 
NASD Rules, and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see FINRA's Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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    As a general matter, the UPC does not apply to:
    a. Transactions in securities between members that are compared, 
cleared, or settled through the facilities of a registered clearing 
agency;
    b. Transactions in securities exempted under Section 3(a)(12) of 
the Act or in municipal securities as defined in Section 3(a)(29) of 
the Act;
    c. Transactions in redeemable securities issued by companies 
registered under the Investment Company Act of 1940; or
    d. Transactions in Direct Participation Program securities.
    The UPC is designed to make uniform, where practicable, custom, 
practice, usage, and trading technique in the investment banking and 
securities business, particularly with respect to operational and 
settlement issues. This can include such matters as trade terms, 
deliveries, payments, dividends, rights, interest, stamp taxes, claims,

[[Page 55843]]

assignments, powers of substitution, due-bills, transfer fees, and 
marking to the market. The UPC, among other things, was created so that 
the transaction of day-to-day business by members may be simplified and 
facilitated.

1. UPC Rules Generally

    FINRA will transfer a significant portion of the NASD Rule 11000 
Series into the Consolidated FINRA Rulebook with the minor changes 
detailed below.\4\ Specifically, FINRA will update certain terminology 
in the UPC. For example, NASD Rule 11120 defines the term ``written 
notice'' as used in the UPC to include a notice delivered by hand, 
letter, teletype, telegraph, TWX, facsimile transmission, or other 
comparable media. FINRA will delete the references to teletype, 
telegraph, and TWX and will include notice delivered by electronic 
mail. In addition, FINRA will update cross-references throughout the 
rules and will make other minor changes primarily to reflect the new 
conventions of the Consolidated FINRA Rulebook.
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    \4\ NASD Rules 11890 (Clearly Erroneous Transactions), IM-11890-
1 (Refusal to Abide by Rulings), and IM-11890-2 (Review by Panels of 
the UPC Committee) were adopted, with significant changes, into the 
Consolidated FINRA Rulebook as the FINRA Rule 11890 Series (Clearly 
Erroneous Transactions) pursuant to a separate rule filing and are 
not being addressed as part of this rule filing. Securities Exchange 
Act Release No. 61080 (Dec. 1, 2009), 74 FR 64117 (Dec. 7, 2009) 
(SR-FINRA-2009-068).
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2. Proposed FINRA Rules 11111 (Refusal to Abide by Rulings of the 
Committee) and 11112 (Review by Panels of the UPC Committee)

    FINRA will adopt two new provisions that are largely based on 
former NASD IM-11890-1 (Refusal to Abide by Rulings) and NASD IM-11890-
2 (Review by Panels of the UPC Committee).\5\ The provisions of former 
NASD IM-11890-1 will be incorporated into and merged with current NASD 
IM-11110 (Refusal to Abide by Rulings of the Committee) and adopted as 
proposed new FINRA Rule 11111 as the two provisions are largely 
identical. Former NASD IM-11890-1 provided that a refusal by a member 
to take action necessary to effectuate a final decision of a FINRA 
officer or the UPC Committee under NASD Rule 11890 (Clearly Erroneous 
Transactions) would be considered conduct inconsistent with just and 
equitable principles of trade. Current NASD IM-11110 provides that a 
refusal by a member to abide by an official ruling of the UPC 
Committee, acting within its appropriate sphere, shall be considered 
conduct inconsistent with just and equitable principles of trade. As 
approved, the new FINRA Rule 11111 will merge the two provisions and 
provide that a refusal by a member to take action necessary to 
effectuate a final decision of a FINRA officer or the UPC Committee 
under the UPC Code (FINRA Rule 11000 Series) or other FINRA rules that 
permit review of FINRA decisions by the UPC Committee will be 
considered conduct inconsistent with just and equitable principles of 
trade.
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    \5\ Id.
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    The provisions of former NASD IM-11890-2, which applied only to 
rulings under NASD Rule 11890, will be adopted as proposed new FINRA 
Rule 11112 (Review by Panels of the UPC Committee) and will be 
generally applicable to all rulings by the UPC Committee. The new FINRA 
Rule 11112 will provide that a decision of the UPC Committee may be 
rendered by a panel of the Committee, which shall consist of three or 
more members of the UPC Committee, provided no more than 50 percent of 
the members of any panel are directly engaged in market making activity 
or employed by a firm whose revenues from market making activity exceed 
ten percent of its total revenues.

3. Proposed FINRA Rules 11810 (Buying-In) and 11810.03 (Sample Buy-In 
Forms)

    As approved by this filing, the current NASD Rule 11810 (Buying-In) 
will be adopted as FINRA Rule 11810 (Buy-In Procedures and 
Requirements) in the Consolidated FINRA Rulebook with certain 
clarifications and changes. Incorporated NYSE Rules 282 (Buy-in 
Procedures) and related Supplementary Material paragraphs .10-.80 be 
deleted. The changes are intended to harmonize the differences between 
the NYSE rule and the NASD rule and to update certain procedures and 
time frames. FINRA will also adopt NASD IM-11810, which contains the 
sample buy-in forms, into the Consolidated FINRA Rulebook as 
accompanying Supplementary Material .03 to FINRA Rule 11810 with minor 
changes to replace references to NASD with FINRA.
    As approved, FINRA Rule 11810 will continue to set forth the 
required steps that members must follow to effect the ``buy-in'' of 
securities including the procedures to be followed in issuing a ``buy-
in'' notice, the contents of such notice, the expectations of the 
receiving party to respond to such notice, and the time frames in which 
a ``buy-in'' may be issued, retransmitted, and effected.
    FINRA will also make certain minor clarifications and add the 
following more substantive provisions to proposed FINRA Rule 11810, 
which are currently contained in NYSE Rule 282 either with or without 
modifications, as specified:
    a. Include in paragraph (a) a statement clarifying that the rule 
does not apply to, among other things, securities contracts that are 
subject to the requirements of a national securities exchange or a 
registered clearing agency.
    b. Amend certain time frames for action specified in the proposed 
rule:
    i. Clarify the time frames within which members must take action to 
effect the ``buy-in'' of securities as required therein. Specifically, 
the NASD rule requires that a member act within the specified local 
time at the member's location whereas the NYSE rule requires action to 
be taken based on Eastern Time (ET). To promote operational consistency 
among members, the proposal would amend the required time frame for 
action to be ET.
    ii. Amend the current time frames specified by the NASD and NYSE 
rules for the acknowledgement of a ``buy-in'' notice and the 
notification of an execution of the buy-in from 5 p.m. to 6 p.m. ET. 
FINRA understands that the 5 p.m. time may be operationally difficult 
for members to achieve in some cases and the 6 p.m. ET time frame would 
be more operationally feasible.
    iii. Add Supplementary Material .01 (Early Closure of Markets) to 
clarify that in the event of an announced early closure of the market 
upon which the security subject to the ``buy-in'' notice is traded, 
members may take the action required by the rule not earlier than one 
hour prior to the announced early closure of such market.
    c. Add new paragraph (b)(4) to specify that (1) the buyer must 
maintain as part of its records, confirmation of receipt of the notice 
by the seller and (2) if the seller does not accept the notice of 
``buy-in,'' it must reject it by response to the buyer no later than 6 
p.m. ET on the same date that it receives such notice, and in the 
absence of doing so, the seller will have been deemed by the buyer to 
have accepted such notice. The provision would clarify that the seller, 
in such case, would have the right to request proof of the fail 
obligation from the buyer, which the buyer must deliver to the seller 
prior to the effective date of the ``buy-in.'' However, in no event 
would a buyer be entitled to a ``buy-in'' that exceeds the liability of 
a seller under an unsettled securities contract because of the failure 
of the seller to reject a ``buy-in'' notice as provided in the rule, 
and a buyer may not execute a ``buy-in'' notice to such extent the 
buyer fails to deliver the proof of fail

[[Page 55844]]

obligation in accordance with the requirements of the rule. 
Requirements (1) and (2) described above are contained in the current 
NYSE rule in a similar form except FINRA will change the time to 6 p.m. 
ET. FINRA is also adding new provisions regarding ``passive 
acceptance'' of the ``buy-in'' by the seller as described above, 
subject to certain safeguards for the benefit of the seller such as 
requiring the buyer to provide the proof of fail obligation and 
``buying-in'' the seller only for the securities contract amount in 
accordance with the proposed rule.
    d. Add new paragraph (b)(5) to specify that the receiving party 
shall immediately retransmit a notice of ``buy-in'' to other parties 
from which the securities may be due in the form of a retransmitted 
``buy-in'' notice. Consistent with new paragraph (b)(4) described 
above, the provision would clarify that each party receiving a 
retransmitted ``buy-in'' notice will be required to maintain 
confirmation of receipt of the notice as part of its books and records 
and either reject a retransmitted ``buy-in'' notice that it has 
received by 6 p.m. ET on the date such notice is received or be deemed 
to have accepted the notice (``passive acceptance''). The safeguards 
described above in proposed paragraph (b)(4) would also apply to 
sellers receiving a retransmitted notice.
    e. Add new paragraph (b)(6), which is contained in the NYSE rule, 
to clarify that when a notice of ``buy-in'' or a retransmitted notice 
thereof is given for less than the full amount of securities due, it 
shall not be for less than one trading unit.
    f. Amend paragraph (d) as follows:
    i. Retitle proposed paragraph (d) from the current rule title 
``Seller's Failure to Deliver After Receipt of Notice'' to ``Procedures 
for Closing of Contracts'' to better align the title with the content 
of that paragraph.
    ii. Amend the time frames, as discussed generally above, to 
generally require the party receiving the ``buy-in'' notice to deliver 
the securities to the party issuing the notice by 3 p.m. ET on the 
effective date of the ``buy-in'' notice.
    iii. Add language to clarify that if the buyer/issuing party prior 
to executing the ``buy-in'' is notified by the seller/delivering party 
that some or all of the securities are in the seller's physical 
possession and will be delivered to the issuing party then the order to 
``buy-in'' shall not be executed with respect to such securities, and 
the member that initiated the original order to ``buy-in'' shall accept 
and pay for such securities. However, if such securities are not 
promptly delivered, the seller that represented that it would make such 
delivery shall be liable for any resulting damages.
    iv. Add language contained in the NYSE rule to clarify the 
operation of the rule when a retransmitted buy-in notice is sent to the 
defaulting party but is not received by such party prior to the 
delivery of shares or the execution of the ``buy-in.'' In such case, 
the sender of the buy-in notice may unless otherwise agreed promptly 
reestablish by a new sale the contract subject to the notice of ``buy-
in.''
    g. Amend paragraph (h) as follows:
    i. Amend the time frame, as discussed above, for notice to be made 
to the party for whose account the securities were bought to 6 p.m. ET 
on the date of execution of the ``buy-in.''
    ii. Add new language, not contained in either legacy rule, to 
clarify that the confirmation of the executed ``buy-in'' provided for 
by the rule shall be forwarded to the party entitled to the 
confirmation by no later than 9:30 a.m. ET on the following business 
day after the execution of the ``buy-in.''
    iii. Add a provision contained in the NYSE rule that requires that 
a statement of any resulting money differences from the execution of 
the ``buy-in'' be provided immediately and that such money differences 
shall be paid by no later than 3 p.m. ET on the business day after the 
settlement date of the executed ``buy-in.''
    h. Amend paragraph (i) to clarify, as provided in the NYSE rule, 
that notification of all close-outs as provided by the paragraph shall 
be sent immediately to the member being closed-out pursuant to the 
confirmation provisions of the Rule 11200 Series at least thirty 
minutes before such ``close-out.''
    i. Add Supplementary Material .02 to clarify, as provided in the 
NYSE rule, that where securities have been delivered by the seller 
after the ``buy-in'' order has been placed but not executed, such 
securities may be returned to the seller if the ``buy-in'' was executed 
in accordance with the rule before it could reasonably be cancelled by 
the initiating party.

4. Proposed FINRA Rule 11820 (Selling-Out)

    Current NASD Rule 11820 (Selling-Out) will be adopted as FINRA Rule 
11820 (Selling-Out) into the Consolidated FINRA Rulebook, subject to 
minor changes. There is no comparable NYSE rule. NASD Rule 11820 
generally requires the party executing the ``sell-out'' to notify the 
buyer on the day of execution no later than the close of business local 
time where the buyer maintains his office of the quantity sold and the 
price received. FINRA will conform the time frames in this new rule to 
the time frames in the new FINRA Rule 11810 (Buy-In Procedures and 
Requirements). Specifically, this new rule will replace the requirement 
to provide notice ``no later than the close of business local time, 
where the buyer maintains his office'' with the requirement that such 
notice must be provided no later than ``6 p.m. ET.'' FINRA believes 
this change provides clarity and uniformity to the industry. In 
addition, the rule will amend certain references in the proposed rule 
from ``should'' to ``shall.'' Specifically, in paragraph (b), 
notification by the party executing a ``sell-out'' shall be in written 
or electronic form, and a formal confirmation of such sale shall be 
forwarded as promptly as possible after execution of the ``sell-out.''

5. Proposed FINRA Rule 11860 (COD Orders)

    FINRA will adopt NASD Rule 11860 (Acceptance and Settlement of COD 
Orders) as FINRA Rule 11860 (COD Orders) into the Consolidated FINRA 
Rulebook subject to minor changes and to delete NASD Rule 3370 
(Purchases) and Incorporated NYSE Rule 387 (COD Orders) and its 
Supplementary Material paragraphs .10-.60, NYSE Rule 387 
Interpretations /01-/18, Rule 430 (Partial Delivery of Securities to 
Customers on C.O.D. Purchases), and NYSE Rule 430 Interpretation /01.
    NASD Rule 11860 and NYSE Rule 387 provide generally that no member 
can accept an order from a customer pursuant to an arrangement whereby 
payment for the securities purchased or delivery of the securities sold 
is to be made to or by an agent of the customer unless certain 
specified procedures are followed. NASD Rule 3370 and NYSE Rule 430 
both generally provide that no member or associated person may accept a 
customer's purchase order for securities unless it has first 
ascertained that the customer placing the order or its agent has agreed 
to receive the securities against payment in an amount equal to the 
execution price even though such purchase may represent only a part of 
a larger order. NYSE Rule 430 has an exception for obligations of the 
U.S. government.
    As approved, FINRA Rule 11860 will continue the requirement in NYSE 
Rule 430 and NASD Rule 3370 that members prior to accepting a purchase 
order for a security ascertain that the customer or its agent will 
receive against payment securities in an amount equal to any execution 
confirmed to the customer

[[Page 55845]]

even if such execution may represent a partial fill of the order. FINRA 
will eliminate the exemption for transactions in U.S. government 
obligations as provided by Rule 430. Further, the rule as being adopted 
will continue to require the use of either a Clearing Agency or a 
Qualified Vendor for the electronic confirmation and affirmation of all 
depository eligible transactions. FINRA is clarifying that the new rule 
will, similar to NYSE Rule 387, apply to (1) transactions of foreign 
customers and broker-dealers that settle in the U.S. and (2) eligible 
sinking funds and/or dividend reinvestment transactions. The new rule 
will add a new requirement that is contained in NYSE Rule 387 that 
requires a ``Qualified Vendor'' to provide FINRA with copies of its 
required submissions to the SEC staff.

6. Proposed FINRA Rules 11870 (Customer Account Transfer Contracts) and 
11870.03 (Sample Transfer Instruction Forms)

    FINRA is adopting NASD Rule 11870 as FINRA Rule 11870 (Customer 
Account Transfer Contracts) into the Consolidated FINRA Rulebook with 
the following changes. There is no comparable NYSE Incorporated 
Rule.\6\ FINRA is also adopting NASD IM-11870, which contains the 
Sample Transfer Instruction Forms, into the Consolidated FINRA Rulebook 
with minor changes to replace references to NASD with FINRA.
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    \6\ Previously, NYSE Rule 412 (Customer Account Transfer 
Contracts) and its related interpretations similarly regulated the 
transfer of customer accounts. FINRA eliminated NYSE Rule 412 and 
its interpretations from the Transitional Rulebook as part of a rule 
change to reduce regulatory duplication for Dual Members during the 
period before completion of the Consolidated FINRA Rulebook. The 
NYSE subsequently amended its version of NYSE Rule 412 to state that 
NYSE members and member organizations shall comply with NASD Rule 
11870, concerning the transfer of customer accounts between members, 
and any amendments thereto, as if such rule were part of the NYSE's 
rules. Securities Exchange Act Release No. 58533 (Sept. 12, 2008), 
73 FR 54652 (Sept. 22, 2008) (Approval Order; SR-FINRA-2008-036).
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    Generally, NASD Rule 11870 provides that when a brokerage customer 
wishes to transfer his or her account to another member and gives 
written notice of that fact to the receiving member, both members must 
expedite and coordinate the transfer. The new FINRA Rule 11870 would 
continue to set forth the required steps that members must follow to 
effect the transfer of customers' accounts, including the initial 
request to transfer an account, the time frame in which a transfer 
request must be acted upon, the validation of such transfer request, 
and the documentation required to effect the transfer. FINRA will add 
to proposed FINRA Rule 11870 minor clarifications as well as the 
following more substantive, which were interpretations to the prior 
version of NYSE Rule 412: \7\
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    \7\ Id.
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    a. Add a new provision regarding the procedures for the transfer of 
book-entry mutual fund shares that clarifies the obligations of the 
parties when transferring a customer's positions in such securities. 
FINRA will add this provision to paragraph (f)(9) of proposed FINRA 
Rule 11870.
    b. Add a definition of the term ``participant in a registered 
clearing agency'' for purposes of the rule to mean a member that is 
eligible to use the agency's automated customer securities account 
transfer capabilities.
    c. Add Supplementary Material .01 to clarify that members must 
establish written procedures to effect and supervise the transfer of 
customer account assets pursuant to the requirements of the proposed 
rule.
    d. Add Supplementary Material .02 to require members to inform 
customers with respect to retirement plan securities that the choice of 
the method of disposition of such assets may result in liability for 
the payment of taxes and penalties.
    e. Amend the time frames in the new rule for notice and completion 
of close-outs of fail contracts resulting from the not completing a 
transfer of a customer's account to conform to the time frames for all 
close-outs as specified in proposed FINRA Rule 11810 (Buy-In Procedures 
and Requirements). Specifically, the new rule will require the 
receiving member to provide notice to the carrying member not later 
than 12 noon ET two business days preceding the execution of the 
proposed close-out (as opposed to 12 noon ``his'' time). In addition, 
the rule will require that every notice of close-out state that the 
securities may be closed out ``unless delivery is effected at or before 
a certain specified time, which may not be prior to 3 p.m. ET,'' as 
opposed to ``the local time in the community where the carrying member 
maintains his office.'' The new rule will also replace the requirement 
that the party executing the ``close-out'' notify the seller as to the 
quantity purchased and the price paid not later than ``the close of 
business, local time, where the seller maintains his office,'' with the 
requirement to provide such notice not later than ``6 p.m. ET on the 
date of the execution of such `close-out'.''
    f. Amend certain references in the new rule from ``should'' to 
``shall.'' Specifically, (1) In paragraph (f) that the obligation that 
fail contracts established pursuant to the rule shall be clearly marked 
or captioned as such and that a receiving member shall reject delivery 
of a security that cannot be deemed a safekeeping position against a 
fail contract; (2) in paragraph (h) that notification shall be in 
written or electronic form and that confirmation of purchase along with 
a billing or payment shall be forwarded as promptly as possible; (3) in 
paragraph (i) that notification shall be in written or electronic form; 
and (4) in paragraph (m) that when both members are participants in a 
registered clearing agency, the securities account asset transfer 
procedures shall be accomplished in accordance with the rule and the 
rules of the registered clearing agency.
    g. Eliminate paragraph (n)(3) which requires that a copy of each 
customer account transfer instruction issued on an ``ex-clearing 
house'' basis be sent to the local District Office of NASD having 
jurisdiction over the carrying member. FINRA believes that a majority 
of customer account transfers now occur between members of a clearing 
agency and that the volume of transactions that occur ``ex-clearing'' 
has significantly decreased.
    FINRA will announce the implementation date of the rule change in a 
Regulatory Notice to be published no later than ninety days following 
the date of the approval of this rule change. The implementation date 
will be no later than 365 days following the date of the approval of 
this rule change.

III. Discussion

    Section 15A(b)(6) of the Act requires, among other things, that 
FINRA rules must be designed to promote just and equitable principles 
of trade and, in general, to protect investors and the public 
interest.\8\ The rule change amends FINRA's rules so as to adopt a 
majority of the UPC Rules into the new Consolidated FINRA Rulebook 
without significant changes in order to update and to reflect the new 
conventions of the Consolidated FINRA Rulebook. The rule change also 
updates certain other UPC Rules to reflect current industry practices. 
As one part of a larger undertaking to consolidate the rules of the 
NASD and NYSE, FINRA's new rules will apply to all registered broker-
dealers, which should further promote the just and equitable principles 
of trade and, in general, better protect investors and the public 
interest.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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    Accordingly, for the reasons stated above the Commission believes 
that the rule change is consistent with FINRA's

[[Page 55846]]

obligation under Section 15A of the Exchange Act, as amended, and the 
rules and regulations thereunder.\9\
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    \9\ In approving this proposal, 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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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 15A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FINRA-2010-030) be and 
hereby is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22783 Filed 9-13-10; 8:45 am]
BILLING CODE 8010-01-P