Document ID: SEC-2007-0818-0001
Agency: sec
Document Type: Notice
Title: Securities Exchange Act: Error correction transactions; Rule 611 exemption
Posted Date: 2007-06-14T04:00Z

[Federal Register: June 14, 2007 (Volume 72, Number 114)]
[Notices]               
[Page 32926-32927]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn07-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55884]

 
Order Exempting Certain Error Correction Transactions From Rule 
611 of Regulation NMS Under the Securities Exchange Act of 1934

June 8, 2007.

I. Introduction

    Pursuant to Rule 611(d) \1\ of Regulation NMS \2\ under the 
Securities Exchange Act of 1934 (``Exchange Act''), the Securities and 
Exchange Commission (``Commission''), by order, may exempt from the 
provisions of Rule 611 of Regulation NMS (``Rule 611'' or ``Rule''), 
either unconditionally or on specified terms and conditions, any 
person, security, transaction, quotation, or order, or any class or 
classes of persons, securities, quotations, or orders, if the 
Commission determines that such exemption is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors.\3\ As discussed below, the Commission is exempting from Rule 
611(a) certain transactions to correct bona fide errors in the 
execution of customer orders, subject to specified conditions discussed 
below. The exemption is designed to promote efficiency and the best 
execution of investor orders by allowing trading centers to correct 
bona fide errors in a manner consistent with their customers' orders, 
without the trading centers incurring additional costs to meet the 
requirements of Rule 611(a).
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    \1\ 17 CFR 242.611(d).
    \2\ 17 CFR 242.600 et seq.
    \3\ See also 15 U.S.C. 78mm(a)(1) (providing general authority 
for the Commission to grant exemptions from provisions of the 
Exchange Act and rules thereunder).
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II. Background

    The Commission adopted Regulation NMS in June 2005.\4\ Rule 611 
addresses intermarket trade-throughs of displayed quotations in NMS 
stocks. Rule 611(a)(1) requires a trading center to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to prevent trade-throughs on that trading center of 
protected quotations in NMS stocks that do not fall within an exception 
set forth in the Rule. Rule 611(b)(6) provides an exception for a 
trade-through transaction effected by a trading center that 
simultaneously routes an intermarket sweep order (``ISO'') to execute 
against the full displayed size of any protected quotation in the NMS 
stock that was traded through. Rule 611(b)(5) provides an exception for 
a trade-through transaction that is an execution of an ISO. Finally, 
Rule 611(c) requires that the trading center, broker, or dealer 
responsible for the routing of an ISO take reasonable steps to 
establish that such order meets the definition of an ISO in Rule 
600(b)(30).\5\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
    \5\ 17 CFR 242.600(b)(30).
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    The Trading Committee of the Securities Industry and Financial 
Markets Association (``SIFMA'') has requested that the Commission 
exempt certain error correction transactions from Rule 611(a).\6\ 
According to the SIFMA Exemption Request, error correction transactions 
are the mechanism through which broker-dealers remedy the execution of 
customer orders that have been placed in error or mishandled due to an 
error involving any term of an order, including, for example, price, 
number of shares, identification of the security, or execution of a 
transaction on the wrong side of the market.\7\ In addition, the SIFMA 
Exemption Request noted that, given the high level of automation in 
today's marketplace, errors often result from delays, outages, or other 
failures of communications systems used in the delivery or execution of 
an order. Broker-dealers typically remedy such bona fide errors by 
entering a subsequent trade on behalf of the customer on the correct 
terms of the original order. In the interim, however, the market prices 
for a security may have moved, and the subsequent error correction 
transaction may be effected at a price that is no longer within the 
national best protected bid and offer.\8\
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    \6\ Letter to Nancy M. Morris, Secretary, Commission, from Jerry 
O'Connell, Chairman, SIFMA Trading Committee, dated May 1, 2007 
(``SIFMA Exemption Request'').
    \7\ Id. at 2.
    \8\ Id.
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    According to the SIFMA Exemption Request, broker-dealers seeking to 
execute error corrections, if required to comply with Rule 611, would 
need to satisfy all better-priced protected quotations prior to 
effecting the error correction transaction.\9\ Although some error 
correction transactions that are ``underwater'' within the meaning of 
the stopped order exception in Rule

[[Page 32927]]

611(b)(9) could qualify for such exception, the SIFMA Exemption Request 
states that there are many instances in which bona fide errors need to 
be remedied, but may not meet the definition of an underwater trade. 
The inability of broker-dealers to correct all bona fide errors in a 
manner consistent with a customer's original order without incurring 
additional expense would impede the effective correction of trading 
errors. As a result, SIFMA believes that all bona fide error correction 
transactions, including those not underwater, merit a specific 
exemption from Rule 611.\10\
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    \9\ Id.
    \10\ Id.
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    The SIFMA Exemption Request states that the benefits of the 
requested exemption would far outweigh any disadvantages.\11\ The 
exemption would facilitate the ability of broker-dealers to provide 
fair remediation to customers who otherwise would suffer economic 
consequences as a result of inadvertent mistakes or system failures. 
Also, the SIFMA Exemption Requests asserts that the number of bona fide 
error correction transactions is likely to be small in comparison to 
the total number of trades executed in NMS stocks, so that the number 
of exempted trade-throughs would not unduly detract from the objectives 
of Rule 611.\12\
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    \11\ Id. at 5.
    \12\ Id. at 5.
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III. Discussion

    The Commission has decided to exempt trading centers from the 
requirement in Rule 611(a) to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent trade-
throughs when the transaction that constituted the trade-through meets 
the following terms and conditions (``Error Correction Transaction''):
    (1) The trading center effects the transaction solely to correct a 
``bona fide error,'' \13\ which is defined as: (i) The inaccurate 
conveyance or execution of any term of an order including, but not 
limited to, price, number of shares or other unit of trading; 
identification of the security; identification of the account for which 
securities are purchased or sold; lost or otherwise misplaced order 
tickets; short sales that were instead sold long or vice versa; or the 
execution of an order on the wrong side of a market; (ii) the 
unauthorized or unintended purchase, sale, or allocation of securities, 
or the failure to follow specific client instructions; (iii) the 
incorrect entry of data into relevant systems, including reliance on 
incorrect cash positions, withdrawals, or securities positions 
reflected in an account; or (iv) a delay, outage, or failure of a 
communication system used to transmit market data prices or to 
facilitate the delivery or execution of an order.\14\
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    \13\ The exemption solely addresses the status of a transaction 
under Rule 611. It presumes that the trading center has complied 
with all requirements applicable to error transactions, including 
SRO rules.
    \14\ Absent a bona fide error as defined above, the exemption 
does not apply to a broker-dealer's mere failure to execute a not-
held order in accordance with a customer's expectations.
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    (2) The bona fide error is evidenced by objective facts and 
circumstances, and the trading center maintains documentation of such 
facts and circumstances;
    (3) The trading center records the transaction in its error 
account;
    (4) The trading center establishes, maintains, and enforces written 
policies and procedures that are reasonably designed to address the 
occurrence of errors and, in the event of an error, the use and terms 
of a transaction to correct the error in compliance with this 
exemption; and
    (5) The trading center regularly surveils to ascertain the 
effectiveness of its policies and procedures to address errors and 
transactions to correct errors and takes prompt action to remedy 
deficiencies in such policies and procedures.
    The exemption applies only to the Error Correction Transaction 
itself. It does not, for example, apply to any subsequent trades 
effected by a trading center to eliminate a proprietary position 
connected with the Error Correction Transaction.
    The Commission believes that an exemption for Error Correction 
Transactions is appropriate to promote efficiency and the best 
execution of investor orders.\15\ The exemption will allow trading 
centers to execute Error Correction Transactions at the appropriate 
prices to correct bona fide errors without a requirement to prevent 
trade-throughs of the current protected quotations or to qualify for 
one of the exceptions in Rule 611(b). It thereby will minimize the 
expense incurred by trading centers to remedy certain errors in a 
manner consistent with their customers' orders.
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    \15\ See Exchange Act Section 11A(a)(1)(C)(i) and (iv) (assuring 
efficient execution of securities transactions and the 
practicability of executing investors' orders in the best market are 
two of the primary objectives for the national market system).
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    In addition, the terms of the exemption are designed to minimize 
the potential for abuse, such as claiming its applicability to 
transactions other than those to correct bona fide errors. For example, 
a bona fide error must be evidenced by objective facts and 
circumstances, and the trading center must document such facts and 
circumstances. A trading center must record the Error Correction 
Transaction in an error account and implement policies and procedures 
that reasonably address errors and the use of Error Correction 
Transactions. A trading center's use of the exemption therefore should 
be readily reviewable by the applicable regulatory authorities.
    Finally, Error Correction Transactions should represent a very 
small percentage of the total number of trades in NMS stocks. The 
exemption therefore should not significantly detract from the policy 
objectives of Rule 611.
    For the foregoing reasons, the Commission finds that granting the 
foregoing exemption is necessary and appropriate in the public 
interest, and is consistent with the protection of investors.

IV. Conclusion

    It is hereby ordered, pursuant to Rule 611(d) of Regulation NMS, 
that trading centers shall be exempt from the requirement in Rule 
611(a) to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs when 
the transaction that constituted the trade-through qualifies as an 
Error Correction Transaction, as defined above.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(82).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-11439 Filed 6-13-07; 8:45 am]

BILLING CODE 8010-01-P