Document ID: SEC-2008-0335-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-03-05T05:00Z

[Federal Register: March 5, 2008 (Volume 73, Number 44)]
[Notices]               
[Page 11963-11964]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05mr08-112]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57388; File No. SR-FINRA-2007-039]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change and 
Amendment No. 1 Thereto To Establish an Exemption for Certain 
Regulation NMS-Compliant Intermarket Sweep Orders From the Requirements 
in IM-2110-2 (Trading Ahead of Customer Limit Order) and Rule 2111 
(Trading Ahead of Customer Market Orders)

February 27, 2008.
    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 December 21, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared substantially 
by FINRA. On February 11, 2008, FINRA filed Amendment No. 1 to make 
certain clarifying changes to the description of the purpose of the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Interpretive Material (IM) 2110-2 
(Trading Ahead of Customer Limit Order) and NASD Rule 2111 (Trading 
Ahead of Customer Market Orders) to establish an exemption for certain 
proprietary trades that are a result of intermarket sweep orders 
(``ISOs''). The text of the proposed rule change is available at http:/
/www.finra.org, the principal offices of FINRA, and 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
    IM-2110-2 (also referred to as the ``Manning Rule'') generally 
prohibits a member from trading for its own account in an exchange-
listed security at a price that is equal to or better than an 
unexecuted customer limit order in that security, unless the member 
immediately thereafter executes the customer limit order at the price 
at which it traded for its own account or better.\3\ The legal 
underpinnings for the Manning Rule are a member's basic fiduciary 
obligations and the requirement that a member must, in the conduct of 
its business, ``observe high standards of commercial honor and just and 
equitable principles of trade.'' \4\ The same principles on which the 
Manning Rule is based apply to the treatment of customer market orders 
pursuant to Rule 2111, which generally prohibits a member that accepts 
and holds a customer market order from trading for its own account at 
prices that would satisfy the customer market order, unless the firm 
immediately thereafter executes the customer market order. The NYSE has 
similar customer order protections in NYSE Rule 92 (Limitations on 
Members' Trading Because of Customers' Orders), which generally 
prohibits members or member organizations from entering proprietary 
orders ahead of, or along with, customer orders that are executable at 
the same price as the proprietary order.\5\
---------------------------------------------------------------------------

    \3\ The SEC approved changes to IM-2110-2 that, among other 
things, expand the scope to OTC equity securities. See Securities 
Exchange Act Release No. 55351 (February 26, 2007), 72 FR 9810 
(March 5, 2007) (SR-NASD-2005-146). See also NASD Notice to Members 
07-19 (April 2007). See also Securities Exchange Act Release Nos. 
57133 (January 11, 2008), 73 FR 3500 (January 18, 2008) (SR-FINRA-
2007-038); 56822 (November 20, 2007), 72 FR 67326 (November 28, 
2007) (SR-FINRA-2007-023); 56297 (August 21, 2007), 72 FR 49337 
(August 28, 2007) (SR-NASD-2007-041); 56103 (July 19, 2007), 72 FR 
40918 (July 25, 2007) (SR-NASD-2007-039).
    \4\ See NASD Rule 2110.
    \5\ NYSE Rule 92 applies to customer orders and does not 
distinguish between customer limit orders and customer market 
orders.
---------------------------------------------------------------------------

    On July 5, 2007, the SEC approved amendments to NYSE Rule 92 that, 
among other things, added an exemption relating to ISOs.\6\ 
Specifically, as amended, NYSE Rule 92 provides that when routing ISOs, 
the member organization is required to yield its principal executions 
to those open customer orders that are required to be protected by NYSE 
Rule 92 and capable of accepting the fill.\7\ In addition, if a firm 
executes an ISO to facilitate a customer order at a price that is 
inferior to one or more protected quotations, that customer must 
consent to not receiving the better price obtained by the ISO(s) or the 
firm must yield its principal execution to that customer.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Release No. 56017 (July 5, 2007), 72 
FR 38110 (July 12, 2007) (SR-NYSE-2007-21).
    \7\ Pursuant to NYSE Rule 92, customer orders that are required 
to be protected are those open customer orders that are known to the 
member organization before the entry of the ISO. See NYSE 
Information Memo 07-68 (July 6, 2007).
---------------------------------------------------------------------------

    FINRA is proposing to establish a similar exemption from the 
requirements in IM-2110-2 and Rule 2111 for certain Regulation NMS-
compliant ISOs. Specifically, FINRA is proposing to amend IM-2110-2 and 
Rule 2111 to provide an exemption relating to trading for a member's 
own account that is the result of an ISO routed in compliance with 
Rules

[[Page 11964]]

600(b)(30)(ii) \8\ and 611(b)(6) \9\ of Regulation NMS where the 
customer order is received after the member routed the ISO. 
Additionally, the proposed amendments to IM-2110-2 and Rule 2111 would 
provide an exemption relating to trading for a member's own account 
that is the result of an ISO where the member executes the ISO to 
facilitate a customer order and that customer has consented to not 
receiving the better prices obtained by the ISO.
---------------------------------------------------------------------------

    \8\ The term ``intermarket sweep order'' is defined in Rule 
600(b)(30) of Regulation NMS as a limit order for an NMS stock that 
meets the following requirements: (i) When routed to a trading 
center, the limit order is identified as an intermarket sweep order; 
and (ii) simultaneously with the routing of the limit order 
identified as an intermarket sweep order, one or more additional 
limit orders, as necessary, are routed to execute against the full 
displayed size of any protected bid, in the case of a limit order to 
sell, or the full displayed size of any protected offer, in the case 
of a limit order to buy, for the NMS stock with a price that is 
superior to the limit price of the limit order identified as an 
intermarket sweep order. These additional routed orders also must be 
marked as intermarket sweep orders. See 17 CFR 242.600(b)(30).
    \9\ Rule 611(b)(6) of Regulation NMS provides an exception for a 
trade-through transaction effected by a trading center that 
simultaneously routes an ISO to execute against the full displayed 
size of any protected quotation in the NMS stock that was traded 
through. See 17 CFR 242.611(b)(6).
---------------------------------------------------------------------------

    FINRA believes the proposed rule change appropriately balances 
important limit and market order protection requirements while 
facilitating member compliance with Rule 611 of Regulation NMS, and 
will more closely align IM-2110-2 and Rule 2111 with NYSE Rule 92. 
FINRA understands that the turnaround time from when an ISO is sent out 
and the response time to the sender is extremely short. Given this 
short time period, FINRA believes that the proposed exemption is 
appropriate. FINRA also believes that the proposed rule change will 
facilitate and clarify the ISO process for members. The proposed rule 
change will be effective upon the Commission's approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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 
facilitate members' compliance with their ISO routing obligations under 
Rule 611 of Regulation NMS and provide an exemption from IM-2110-2 and 
Rule 2111, substantially consistent with the changes in SR-NYSE-2007-
21.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ See Securities Exchange Release No. 56017 (July 5, 2007), 
72 FR 38110 (July 12, 2007).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will impose 
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 Nasdaq 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.

FINRA has requested accelerated approval of this proposed rule change 
prior to the 30th day after the date of publication of the notice of 
the filing thereof. The Commission is considering granting accelerated 
approval of the proposed rule change at the end of a 15-day comment 
period.

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-2007-039 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2007-039. 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 inspection 
and copying 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-2007-039 and should be 
submitted on or before March 20, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4173 Filed 3-4-08; 8:45 am]

BILLING CODE 8011-01-P