Document ID: SEC-2008-1065-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-07-31T04:00Z

[Federal Register: July 31, 2008 (Volume 73, Number 148)]
[Notices]               
[Page 44791-44793]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy08-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58226; File No. SR-FINRA-2008-037]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to NASD Rule 11890 (Clearly 
Erroneous Transactions)

July 25, 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 July 8, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA designated the 
proposed rule change as ``non-controversial'' under Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 5 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 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 Rule 11890 (Clearly Erroneous 
Transactions) to: (1) Extend the time limit that FINRA has to take 
action on a transaction under the rule; and (2) clarify the 
circumstances under which FINRA initiates a review of a transaction. 
The text of the proposed rule change is available at FINRA, the 
Commission's Public Reference Room, and http://www.finra.org.

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
    NASD Rule 11890 provides that, in the event of a disruption or 
malfunction in the use or operation of any quotation, communication, or 
trade reporting system owned or operated by FINRA, or under 
extraordinary market conditions, officers of FINRA can review an over-
the-counter (``OTC'') transaction arising out of or reported through 
any such quotation, communication, or trade reporting system, and may 
declare the transaction null and void or modify the terms if any such 
officer determines that the transaction is clearly erroneous or such 
action is necessary for the maintenance of a fair and orderly market or 
the protection of investors and the public interest. Rule 11890 
requires a FINRA officer acting pursuant to the rule to cancel or 
adjust an erroneous transaction to do so ``within thirty (30) minutes 
of detection of the transaction,'' except in the case of extraordinary 
circumstances, in which case the FINRA officer has until 3 p.m., 
Eastern Time (ET), on the next trading day after the date of the 
transaction at issue.

[[Page 44792]]

    FINRA is proposing to amend Rule 11890 to replace the language that 
FINRA must, except in extraordinary circumstances, take action under 
the subsection within thirty (30) minutes of detection of an erroneous 
transaction, with language that FINRA shall act as soon as possible 
after becoming aware of the transaction, but in all cases by 3 p.m., 
Eastern Time (ET) on the next trading day after the date of the 
transaction at issue. Although FINRA believes that determinations under 
the rule should always be made in a timely manner, FINRA has found that 
most transactions reviewed under Rule 11890 involve coordination 
between multiple market centers and the time required to gather and 
evaluate the information necessary to make an informed determination is 
often in excess of 30 minutes. Accordingly, FINRA does not believe that 
the rule's strict 30-minute time limit is in the best interests of the 
marketplace or investors.\5\
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    \5\ The Commission recently approved amendments to the clearly 
erroneous rule of The NASDAQ Stock Market LLC (``Nasdaq'') (Nasdaq 
Rule 11890). As part of those amendments, Nasdaq deleted the 
requirement that a Nasdaq officer must make a determination 
regarding whether a transaction was ``clearly erroneous'' under the 
rule within 30 minutes of detection. See Securities Exchange Act 
Release No. 57826 (May 15, 2008), 73 FR 29802 (May 22, 2008) 
(``Release 34-57826'') (SR-NASDAQ-2007-001).
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    Also as a practical matter, because FINRA, as the regulator of the 
OTC market, does not operate a listed market, it generally does not 
``detect'' erroneous transactions, particularly those involving listed 
securities executed OTC. Rather, in most cases, other market centers 
notify FINRA staff of the potential for such transactions, and FINRA 
staff coordinates its review with such market center(s). Similarly, for 
potentially erroneous transactions involving only OTC trades, the 
information typically comes from other sources, such as market 
participants, and FINRA does not ``detect'' potentially erroneous 
transactions. Accordingly, FINRA proposes to amend Rule 11890 to more 
accurately reflect the operation of the rule by deleting the 
``detection'' language from the text of the rule.
    Lastly, FINRA is proposing certain technical, non-substantive 
changes to the text of Rule 11890. Given that many clearly erroneous 
transactions are caused by trader errors and not disruptions or 
malfunctions of FINRA systems, the proposed rule change amends the rule 
text to reflect the manner in which FINRA applies it to a clearly 
erroneous authority. Additionally, FINRA is proposing to amend the text 
of Rule 11890(a) to replace the word ``approved'' with the word 
``authorized'' to reflect that, technically, not all FINRA system rules 
are ``approved'' by the Commission, but, for example, a system's rules 
may take effect upon filing with the Commission (e.g., for immediate 
effectiveness pursuant to Section 19(b)(3)(A) of the Act).
    As noted above, FINRA has filed the proposed rule change for 
immediate effectiveness. FINRA proposes to make the rule change 
operative on 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,\6\ 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 better 
reflects the application of Rule 11890 and provides additional time to 
resolve clearly erroneous transactions.
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    \6\ 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 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 after the date of filing, or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest, the proposed rule change has become effective pursuant 
to Section 19(b)(3)(A) of the Act \7\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\8\ As required under Rule 19b-4(f)(6)(iii),\9\ FINRA 
provided 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, prior to the filing of the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
    \9\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to the 30th day after the date of 
filing.\10\ However, Rule 19b-4(f)(6)(iii) \11\ permits the Commission 
to designate a shorter time if such action is consistent with the 
protection of investors and the public interest. FINRA requested that 
the Commission waive the 30-day operative delay and make the proposed 
rule change effective and operative upon filing because the proposed 
rule change clarifies the current application of Rule 11890 and better 
reflects the time necessary to address potentially clearly erroneous 
transactions. The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. In particular, the Commission does not believe that the rule 
change presents any novel issues and notes that it recently approved 
revisions to Nasdaq's clearly erroneous transactions rule that, among 
other things, revised the time frame for a Nasdaq officer to make a 
determination regarding whether a transaction is ``clearly erroneous'' 
under the Nasdaq rule.\12\ Accordingly, the Commission designates the 
proposed rule change operative upon filing with the Commission.\13\
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    \10\ See id.
    \11\ Id.
    \12\ See Release 34-57826, supra note 5.
    \13\ For purposes only of waiving the 30-day operative delay, 
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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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

[[Page 44793]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-037 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2008-037. 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-2008-037 and should be 
submitted on or before August 21, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Florence E. Harmon,
Acting Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-17501 Filed 7-30-08; 8:45 am]

BILLING CODE 8010-01-P