Document ID: SEC-2009-0707-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to FINRA Rule 2360 (Options) Regarding Position Limits for Options on Exchange-Traded Funds and Registration Qualifications With Respect to Options Discretionary Accounts
Posted Date: 2009-05-28T04:00Z

[Federal Register: May 28, 2009 (Volume 74, Number 101)]
[Notices]               
[Page 25584-25586]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28my09-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59946; File No. SR-FINRA-2009-032]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to FINRA Rule 2360 
(Options) Regarding Position Limits for Options on Exchange-Traded 
Funds and Registration Qualifications With Respect to Options 
Discretionary Accounts

May 20, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 11, 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 FINRA Rule 2360 (Options) to (1) 
establish higher position limits for options on selected exchange-
traded funds, (2) clarify the application of position limits to 
conventional options on exchange-traded funds, and (3) clarify the 
appropriate registration qualifications for accepting and reviewing the 
acceptance of options discretionary accounts.
    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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change would add Supplementary Material to FINRA 
Rule 2360 (Options) to (1) establish higher position limits for options 
on selected exchange-traded funds (``ETFs'') and (2) clarify the 
application of position limits to conventional options on ETFs. In 
addition, the proposed rule change would amend FINRA Rule 2360(b)(18) 
to clarify the appropriate registration qualifications for accepting 
and reviewing the acceptance of options discretionary accounts.

[[Page 25585]]

    Options on ETFs. FINRA Rule 2360(b)(3) subjects standardized and 
conventional options \4\ to one of five different position limits with 
the maximum limit of 250,000 contracts. FINRA's position limits are 
consistent with those of the Options Exchanges.\5\ The Options 
Exchanges, however, have Supplementary Material that designates higher 
position limits for options on selected ETFs. The position limit for 
options on The DIAMONDS Trust (DIA) and the Standard and Poor's 
Depositary Receipts Trust (SPY) is 300,000 contracts. The position 
limit for options on The iShares Russell 2000 Index Fund (IWM) is 
500,000 contracts, and the position limit for options on The 
PowerShares QQQ Trust (QQQQ) is 900,000 contracts. FINRA proposes, in 
accordance with Rule 2360(b)(3)(A)(vi), to establish the same position 
limits on such options to ensure consistency with rules of the Options 
Exchanges.
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    \4\ A ``conventional option'' is an option contract not issued, 
or subject to issuance by, The Options Clearing Corporation. See 
FINRA Rule 2360(a)(9). Currently, position limits for standardized 
and conventional options are the same with respect to the same 
underlying security.
    \5\ See Rule 4.11 of the CBOE; Rule 412 of the ISE; Rule 1001 of 
NASDAQ OMX PHLX; Rule 904 of NYSE AMEX; Rule 6.8 of NYSE Arca; and 
Chapter III Section 7 of the BOX (collectively referred to as the 
``Options Exchanges''). The Commission notes that the NASDAQ Options 
Market (``NOM'') also is an options exchange that has position limit 
rules that are consistent with the Options Exchanges. See Chapter 
III, Section 7 of the NOM rules.
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    In addition, FINRA proposes to clarify that the position limits for 
conventional options on ETFs should be the same as position limits for 
other equity securities. Thus, if an ETF underlying a conventional 
option also underlies a standardized option, then the position limit on 
the conventional ETF option shall be the same as the position limit for 
the standardized ETF option.\6\ However, if an ETF underlying a 
conventional option does not also underlie a standardized option, then 
the position limit for the conventional ETF option shall be the basic 
limit of 25,000 contracts.\7\ In order for such a conventional ETF 
option to qualify for a position limit greater than 25,000 contracts, a 
member must apply for an increased position limit in accordance with 
FINRA Rule 2360(b)(3)(A)(viii)b by first demonstrating to FINRA's 
Market Regulation Department that the underlying ETF security meets the 
standards for such higher options position limit and the initial 
listing standards for standardized options trading.
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    \6\ Since 1999, FINRA has maintained position limit parity 
between conventional and standardized options on the same security. 
See Securities Exchange Act Release No. 40932 (January 11, 1999), 64 
FR 2930, 2931 (January 19, 1999). Prior to 1999, position limits on 
conventional options were three times greater than the limits for 
standardized options. See Securities Exchange Act Release No. 40087 
(June 12, 1998), 63 FR 33746 (June 19, 1998).
    \7\ See FINRA Rule 2360(b)(3)(A)(viii)a.1. Conventional options 
are generally subject to a position limit equal to the greater of 
(i) the basic limit of 25,000 contracts or (ii) any standardized 
option position limit as set forth in Rule 2360(b)(3)(A)(ii) through 
(v) (i.e., 50,000 to 250,000 contracts) for which the underlying 
security qualifies.
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    Options Discretionary Accounts. On November 12, 2008, the SEC 
approved SR-FINRA-2008-032 (the ``Options Transfer Filing''), which 
adopted NASD Rules 2840 through 2853 regarding Trading in Index 
Warrants, Currency Index Warrants and Currency Warrants, 2860 
(Options), and 2865 (Security Futures) as FINRA Rules in the 
consolidated FINRA rulebook.\8\ The Options Transfer Filing renumbered 
NASD Rules 2840 through 2853 as FINRA Rules 2350 through 2359, NASD 
Rule 2860 as FINRA Rule 2360 and NASD Rule 2865 as FINRA Rule 2370 in 
the consolidated FINRA rulebook. The FINRA rules became effective on 
February 17, 2009.\9\
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    \8\ See Securities Exchange Act Release No. 58932 (November 12, 
2008), 73 FR 69696 (November 19, 2008) (Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval to a 
Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-
FINRA 2008-032).
    \9\ See Regulatory Notice 08-78 (December 2008) (SEC Approves 
New Consolidated FINRA Rules).
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    In response to a comment letter to the Options Transfer Filing,\10\ 
FINRA proposed in Amendment No. 1, consistent with the rules of the 
Chicago Board Options Exchange (``CBOE''), to amend FINRA Rule 
2360(b)(18) to permit greater flexibility and allow a Limited 
Principal-General Securities Sales Supervisor (``LP-GSSS'') (Series 9/
10) in addition to a Registered Options Principal (``ROP'') (Series 4) 
to accept an options discretionary account.\11\ Also, consistent with 
the CBOE provision, FINRA retained the requirement that the review of 
the acceptance of a discretionary options account may only be performed 
by a ROP (Series 4).\12\ FINRA proposes to amend FINRA Rule 
2360(b)(18)(A)(i)b and (b)(18)(A)(ii) to ensure that the rule text more 
clearly reflects the policy approved in the Options Transfer Filing 
that either a ROP (Series 4) or a LP-GSSS (Series 9/10) may accept an 
options discretionary account, but that the review of the acceptance 
must be performed by a ROP (Series 4).
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    \10\ See Letter from Melissa MacGregor, Vice President and 
Assistant General Counsel, Securities Industry and Financial Markets 
Association, to Florence E. Harmon, Acting Secretary, SEC, dated 
September 4, 2008.
    \11\ See CBOE Rule 9.2.01 specifying that Options Principals are 
qualified by passing either the Series 4 or the Series 9/10 and CBOE 
Rule 9.2.02 specifying that the review of the acceptance of a 
discretionary account must be performed by a Series 4 qualified 
individual.
    \12\ FINRA would leave unchanged the requirement that ``frequent 
supervisory review by a ROP who is not exercising the discretionary 
authority'' should be performed by a ROP (Series 4) as stated in 
Amendment No. 1 to the Options Transfer Filing.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, such that FINRA can implement the proposed rule 
change immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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 regarding 
options on ETFs will promote consistent regulation by harmonizing 
FINRA's position limits for options on ETFs with those of the Options 
Exchanges and clarifying the applicable position limits for 
conventional options on ETFs. In addition, FINRA believes that the 
proposed rule change regarding options discretionary accounts will 
clarify the appropriate registration qualifications that are required 
to approve and review the approval of such accounts.
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    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement of 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 Regarding the 
Proposed Rule Changes Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days after the date of this filing, or such shorter time as the

[[Page 25586]]

Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\16\ 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. FINRA has requested that the 
Commission waive the 30-day operative delay. The Commission notes that 
FINRA's proposal is substantially similar to the rules of the Options 
Exchanges and does not raise any new substantive issues.\18\ The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because such waiver will allow FINRA to harmonize its rules with the 
rules of the Options Exchanges without undue delay. The Commission 
hereby grants FINRA's request and designates the proposal operative 
upon filing.\19\
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    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission 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 satisfied this notice requirement.
    \17\ Id.
    \18\ See supra note 5 and 11.
    \19\ For the 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 such 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 proposal 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 No. SR-FINRA-2009-032 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 No. SR-FINRA-2009-032. 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 changes 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 No. SR-FINRA-2009-032 and should be 
submitted on or before June 18, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-12311 Filed 5-27-09; 8:45 am]

BILLING CODE 8010-01-P