Document ID: SEC-2009-0775-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend NASD IM-2110-2 (Trading Ahead of Customer Limit Order) To Clarify the Scope of the Minimum Price Improvement Obligations
Posted Date: 2009-06-10T04:00Z

[Federal Register Volume 74, Number 110 (Wednesday, June 10, 2009)]
[Notices]
[Pages 27579-27580]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13568]

[[Page 27579]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60034; File No. SR-FINRA-2009-037]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Amend NASD IM-2110-2 (Trading Ahead of Customer 
Limit Order) To Clarify the Scope of the Minimum Price Improvement 
Obligations

June 3, 2009.
    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 May 29, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 NASD IM-2110-2 (Trading Ahead of 
Customer Limit Order) to clarify the scope of the minimum price 
improvement obligations.
    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
    In 1994, the SEC approved Interpretive Material (IM) 2110-2 
(Trading Ahead of Customer Limit Order), which generally prohibits a 
member from trading for its own account in a security at a price that 
is equal to or better than an unexecuted customer limit order in that 
security, unless the member immediately, in the event it trades ahead, 
executes the customer limit order at the price at which it traded for 
its own account or better.\4\
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    \4\ See Securities Exchange Act Release No. 34279 (June 29, 
1994), 59 FR 34883 (July 7, 1994) (order approving File No. SR-NASD-
93-58).
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    IM-2110-2 also prescribes a minimum level of ``price improvement'' 
necessary for a member to execute an order on a proprietary basis when 
holding an unexecuted limit order. In other words, IM-2110-2 sets forth 
price-improvement standards that impose a minimum amount by which a 
firm must trade, in addition to the price of the customer buy limit 
order (or less than the price of a customer sell order), to not trigger 
the protections under the rule. This requirement is intended to prevent 
a practice of firms trading ahead of their customers' limit orders by 
trivial amounts and, thereby, circumventing the rule.
    The language in IM-2110-2 provides the minimum amount of price 
improvement necessary for a member to execute an incoming order on a 
proprietary basis when holding an unexecuted limit order in that same 
security. Recently, a firm inquired about the scope of the application 
of the rule due to the term ``incoming;'' specifically, whether the 
minimum price improvement standards apply only when a member is trading 
proprietarily in response to an ``incoming'' order. FINRA advised the 
firm that such a narrow application of IM-2110-2 is inconsistent with 
the fundamental intent of the rule and the purpose of the prescribed 
minimum price improvement requirements. FINRA has never distinguished 
the application of the minimum price improvement requirements based on 
what circumstances prompted the proprietary trade. Therefore, FINRA is 
amending IM-2110-2 to delete the word ``incoming'' to make clear that 
the minimum price improvement requirements apply to any proprietary 
trading by a member in a security for which the member holds an 
unexecuted customer limit order, whether or not in response to an 
incoming order, unless a specific exception applies.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date of the proposed rule change will be 
30 days after the date of filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\5\ which requires, among 
other things, that FINRA rules 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 makes 
clear the application of the minimum price improvement standards under 
IM-2110-2, which provide an important safeguard for investors by 
ensuring that firms do not circumvent the protections provided by the 
Rule by trading ahead of customer limit orders by economically 
insignificant amounts.
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    \5\ 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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \6\ and Rule 19b-
4(f)(6) thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. FINRA has met this requirement.

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[[Page 27580]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2009-037 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-2009-037. 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 available publicly. All 
submissions should refer to File Number SR-FINRA-2009-037 and should be 
submitted on or before July 1, 2009.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13568 Filed 6-9-09; 8:45 am]
BILLING CODE 8010-01-P