Document ID: SEC-2010-1013-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-07-07T04:00Z

[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39069-39070]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16411]

[[Page 39069]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62416; File No. SR-FINRA-2010-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
FINRA Rule 6121 (Trading Halts Due to Extraordinary Market Volatility)

June 30, 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 30, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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 6121 (Trading Halts Due to 
Extraordinary Market Volatility) to add securities to the pilot rule.
    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 proposes to amend FINRA Rule 6121.01 to add securities 
included in the Russell 1000[supreg] Index (``Russell 1000'') and 
specified Exchange Traded Products (``ETP'') to the pilot rule. For 
purposes of this filing, ETPs include Exchange Traded Funds 
(``ETF''),\3\ Exchange Traded Vehicles (``ETV''),\4\ and Exchange 
Traded Notes (``ETN'').\5\
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    \3\ An ETF is an open-ended registered investment company under 
the Investment Company Act of 1940 that has received certain 
exemptive relief from the SEC to allow secondary market trading in 
the ETF shares. ETFs are generally index-based products, in that 
each ETF holds a portfolio of securities that is intended to provide 
investment results that, before fees and expenses, generally 
correspond to the price and yield performance of the underlying 
benchmark index.
    \4\ An ETV tracks the underlying performance of an asset or 
index, allowing investors exposure to underlying assets such as 
futures contracts, commodities, and currency without actually 
trading futures or taking physical delivery of the underlying asset. 
An ETV is traded intraday like an ETF. An ETV is an open-ended trust 
or partnership unit that is registered under the Securities Act of 
1933.
    \5\ An ETN is a senior unsecured debt obligation designed to 
track the total return of an underlying index, benchmark or 
strategy, minus investor fees. ETNs are registered under the 
Securities Act of 1933 and are redeemable to the issuer.
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    FINRA Rule 6121.01 was approved by the Commission on June 10, 2010 
on a pilot basis set to end on December 10, 2010.\6\ As FINRA noted in 
its filing to adopt FINRA Rule 6121.01, during the pilot period, FINRA 
would continue to assess whether additional securities need to be added 
and whether the parameters of the rule would need to be modified to 
accommodate trading characteristics of different securities.
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    \6\ See Securities Exchange Act Release No. 62251 (June 10, 
2010), 75 FR 34183 (June 16, 2010) (Order Approving File No. SR-
FINRA-2010-025) (``Original Notice'') [sic].
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    Currently, the pilot list of securities is all securities included 
in the S&P 500[supreg] Index (``S&P 500''). As noted in comment letters 
in response to the Original Notice, concerns were raised that including 
only securities in the S&P 500 in the pilot rule was too narrow. In 
particular, commenters noted that securities that experienced 
volatility on May 6, 2010, including ETFs, should be included in the 
pilot. FINRA agrees with the commenters that the pilot list of 
securities should be expanded.
    In consultation with other self-regulatory organizations 
(``SROs''), FINRA proposes to add the securities included in the 
Russell 1000 and specified ETPs to the pilot beginning in July 2010, 
subject to Commission approval. FINRA believes that adding these 
securities would begin to address concerns that the scope of the pilot 
may be too narrow, while at the same time recognizing that during the 
pilot period, FINRA and the markets will continue to review whether and 
when to add additional securities to the pilot and whether the 
parameters of the rule should be adjusted for different securities.
    In particular, FINRA proposes to add securities included in the 
Russell 1000 because FINRA believes that the securities included in 
that index have similar trading characteristics to securities included 
in the S&P 500 (many of which are the same securities).
    In addition, FINRA, in consultation with other SROs, proposes to 
add to the pilot a selected list of ETPs. FINRA believes that the 
proposed list of ETPs is appropriate because it identifies those ETPs 
that have component securities that largely track the securities 
included in the S&P 500 and Russell 1000. Accordingly, if an S&P 500 or 
Russell 1000 security experiences a trading pause, any resulting price 
volatility in a related ETP also would be subject to a trading pause 
trigger.
    As proposed, the list includes broad-based ETPs, which FINRA 
recognizes has raised some debate. In particular, concerns have been 
raised about whether halting an index-based ETP may impact an index-
based option or future. However, FINRA believes that including broad-
based ETPs is appropriate so that ETP investors are protected should 
the component securities experience such volatility that trading in the 
broad-based ETP is impacted, as it was on May 6, 2010. Because this is 
a pilot rule, FINRA and the other SROs can continue to assess whether 
it is appropriate to have a trading pause in broad-based ETPs when 
there is not a similar trading pause in related index-based options or 
futures. As noted above, during the pilot, FINRA will continue to re-
assess whether specific ETPs should be added or removed from the pilot 
list.
    To effect this change, FINRA proposes to amend Supplementary 
Material .01 to FINRA Rule 6121 to provide that the pilot applies to 
all securities in the S&P 500, the Russell 1000, as well as a pilot 
list of ETPs. The pilot list of ETPs is identified in Exhibit 3.
    FINRA has requested that the Commission approve the proposed rule 
change on an accelerated basis so that these securities become subject 
to the pilot as soon as possible.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ 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

[[Page 39070]]

proposed rule change meets these requirements in that it promotes 
uniformity across markets concerning which securities are included in 
the trading pause pilot.
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    \7\ 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.\8\
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    \8\ The Commission notes that FINRA has requested accelerated 
approval of the filing.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning all aspects of the foregoing, including whether 
the proposed rule change is consistent with the Act.
    The Commission notes that ETF trades constituted a substantial 
majority of the trades that were cancelled on May 6, and the proposed 
amendments would bring certain ETFs within the scope of the trading 
pause pilot for the first time. The Commission solicits comment 
regarding the inclusion of ETFs within the trading pause pilot. The 
Commission requests comment in particular on the implications of 
including in the trading pause pilot ETFs on broad-based indices that 
also underlie options and futures products. What are the potential 
benefits and risks of including those ETFs in the pilot under 
circumstances where other products based on the same index may not be 
subject to any trading pause, or may be subject to a different type of 
trading pause? Are existing mechanisms available in the markets for 
those other products sufficient to address any cross-market linkage 
concerns? What are the potential effects on price discovery and trading 
behavior in the different markets?
    Similarly, the Commission solicits comments on the potential 
benefits and risks of excluding such ETFs from the pilot, particularly 
under circumstances where the securities underlying the ETF are 
included in the pilot. If there are trading pauses for the component 
securities of an index but not for an ETF based on that index, what 
consequences might that have for the ETF or for other products based on 
that index? If there are trading pauses in an ETF but not in the stocks 
that underlie that ETF, what consequences might that have for the 
underlying stocks or other products? What are the potential effects on 
price discovery for the ETF, the underlying stocks and other products?
    Are there other market-based characteristics or metrics that should 
be considered for purposes of determining which ETFs should be included 
in the trading pause pilot, or for re-calibrating particular features 
of the trading pause?
    In addition, the Commission solicits comments regarding the 
operation of the trading pause pilot to date with respect to stocks in 
the S&P 500.
    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-2010-033 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2010-033. 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-
033 and should be submitted on or before July 19, 2010.\9\
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    \9\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.

    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. 2010-16411 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P