Document ID: SEC-2013-2218-0001
Agency: sec
Document Type: Notice
Title: Exemption Orders: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-12-26T05:00Z

[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78422-78423]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30764]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71143]

Order Granting Application by Financial Industry Regulatory 
Authority, Inc. for Exemption Pursuant to Section 36(a) of the Exchange 
Act From the Rule Filing Requirements of Section 19(b) of the Exchange 
Act With Respect to Certain Rules Incorporated by Reference

December 19, 2013.
    The Financial Industry Regulatory Authority, Inc. (``FINRA'') has 
filed with the Securities and Exchange Commission (``Commission'') an 
application for an exemption under Section 36(a)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ from the rule filing 
requirements of Section 19(b) of the Exchange Act \2\ with respect to 
certain rules of other self-regulatory organizations (``SROs'') that 
FINRA seeks to incorporate by reference. Section 36 of the Exchange Act 
authorizes the Commission to conditionally or unconditionally exempt 
any person, security, or transaction, or any class thereof, from any 
provision of the Exchange Act or rule thereunder, if necessary or 
appropriate in the public interest and consistent with the protection 
of investors.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78mm(a)(1).
    \2\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    FINRA Rule 2360 (Options) and FINRA Rule 2359 (Position and 
Exercise Limits; Liquidations) incorporate by reference comparable 
position and exercise limit rules of the options exchanges. 
Specifically: (i) FINRA Rule 2360(b)(3)(B) incorporates position limits 
for index options established by the exchange on which the option 
trades; (ii) FINRA Rule 2360(b)(2) incorporates position and exercise 
limits for FLEX Equity Options (as defined in FINRA Rule 2360(a)(16)) 
established by the exchange on which such FLEX Equity Options are 
traded; and (iii) FINRA Rule 2359 incorporates position and exercise 
limits for index warrants established by the exchange on which the 
index warrant is listed.\3\ Thus, FINRA members comply with these FINRA 
rules by complying with the relevant, incorporated exchange rule.\4\
---------------------------------------------------------------------------

    \3\ See FINRA Rules 2359 and 2360; see also Letter from Robert 
L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy, 
Secretary, Commission, dated October 10, 2013 (``FINRA Exemptive 
Request''), at 1 n.1.
    \4\ FINRA has not previously sought an exemption from the 
Commission pursuant to Section 36(a)(1) of the Exchange Act from the 
rule filing requirements of Section 19(b) of the Exchange Act with 
respect to these incorporations by reference.
---------------------------------------------------------------------------

    In addition, if its request for an exemption is granted, FINRA 
intends to propose further amendments to FINRA Rule 2360, pursuant to 
Section 19(b)(1) of the Exchange Act, to incorporate by reference other 
rules of the options exchanges regarding position limits. Specifically, 
with respect to standardized equity options, FINRA intends to propose 
that FINRA Rule 2360(b)(3) be amended so that the FINRA position limit 
will be the highest position limit established by an exchange on which 
the option trades.\5\ With respect to conventional equity options,\6\ 
FINRA intends to propose that FINRA Rule 2360(b)(3) be amended so that 
the position limit tiers for such options reflect the same tier 
structure used in exchange rules for standardized equity options and, 
for each tier, incorporate for conventional equity options the same 
position limit that exchange rules establish for standardized equity 
options in the equivalent tier.\7\ In addition, FINRA

[[Page 78423]]

Rule 2360(b)(4) sets forth exercise limits by referring to the position 
limits in FINRA Rule 2360(b)(3).\8\ Accordingly, FINRA's anticipated 
proposed rule change also would correspondingly raise exercise 
limits.\9\
---------------------------------------------------------------------------

    \5\ See FINRA Exemptive Request, supra note 3, at 1 n.2. Based 
on the standardized equity option position limits currently imposed 
by the option exchanges, this incorporation by reference would have 
the immediate effect of eliminating FINRA's position limit for 
standardized options on Standard and Poor's Depository Receipts 
Trust (``SPY'') and increasing FINRA's position limit for 
standardized options on the iShares MSCI Emerging Markets Index Fund 
(``EEM'') to 500,000 contracts.
    \6\ The term ``conventional option'' means any option contract 
not issued, or subject to issuance, by the Options Clearing 
Corporation. See FINRA Rule 2360(a)(9).
    \7\ See FINRA Exemptive Request, supra note 3, at 1 n.2. This 
aspect of FINRA's intended proposal would not change position limits 
for conventional equity options, as FINRA's rule currently imposes 
conventional equity option position limits that are the same as the 
tiered limits for standardized equity options set forth in FINRA 
Rule 2360(b)(3)(A)(ii) through (v) for which the underlying security 
qualifies or would be able to qualify. See FINRA Rule 
2360(b)(3)(A)(viii). Currently, FINRA Rule 2360(b)(3)(A)(viii) cross 
references FINRA Rule 2360(b)(3)(A)(ii) through (v) instead of 
reproducing the language of those paragraphs setting forth the 
position limit tiers. This aspect of FINRA's intended proposal would 
amend FINRA's conventional equity option position limit rule to 
replace that cross reference with the actual language setting forth 
the position limit tiers.
    \8\ See FINRA Exemptive Request, supra note 3, at 1 n.2.
    \9\ Id.
---------------------------------------------------------------------------

    FINRA has requested, pursuant to Rule 0-12 under the Exchange 
Act,\10\ that the Commission grant it an exemption from the rule filing 
requirements of Section 19(b) of the Exchange Act for changes to FINRA 
Rule 2359 and FINRA Rule 2360, as amended by FINRA's intended proposal, 
that are effected solely by virtue of a change to the corresponding 
cross-referenced rules of the options exchanges. Specifically, FINRA 
requests that it be permitted to incorporate by reference changes made 
to each such options exchange rule without the need for FINRA to file 
separately the same proposed rule changes pursuant to Section 19(b) of 
the Exchange Act.\11\ By virtue of these incorporations by reference, 
the requirements applicable to FINRA members will change when the 
applicable incorporated exchanges' rules change, without the need for 
FINRA to file separately the proposed rule changes pursuant to Section 
19(b) of the Exchange Act.\12\ FINRA represents that the rules it seeks 
to incorporate by reference into FINRA Rules 2359 and 2360 are 
categories of exchange rules (rather than individual rules within a 
category) that are not trading rules.\13\ FINRA has agreed to provide 
written notice to its members whenever an exchange proposes a change to 
its relevant, cross-referenced rule (or series of rules).\14\
---------------------------------------------------------------------------

    \10\ 17 CFR 240.0-12.
    \11\ See FINRA Exemptive Request, supra note 3, at 2.
    \12\ Id.
    \13\ Id.
    \14\ Id. at 3. FINRA states that it will provide such notice on 
its Web site where it posts its own proposed rule change filings as 
required by Rule 19b-4(l). In addition, FINRA states that the Web 
site posting will include a link to the location on the exchange's 
Web site where the proposed rule change is posted. Id. at 3 n.8.
---------------------------------------------------------------------------

    FINRA believes this exemption is necessary and appropriate to 
maintain the consistency between FINRA rules and the relevant 
provisions of the exchanges' rules at all times, thus helping to ensure 
identical regulation of members of FINRA that are also members of one 
or more exchanges with respect to the incorporated provisions, as well 
as helping to ensure that FINRA-only members are subject to consistent 
regulation as members that are members of exchanges.\15\ Without such 
an exemption, such members could be subject to two different 
standards.\16\
---------------------------------------------------------------------------

    \15\ Id. at 2-3.
    \16\ Id. at 3.
---------------------------------------------------------------------------

    The Commission has issued exemptions to other exchanges similar to 
FINRA's request.\17\ In granting one such exemption in 2010, the 
Commission repeated a prior, 2004 Commission statement that it would 
consider similar future exemption requests from other SROs, provided 
that:
---------------------------------------------------------------------------

    \17\ For example, on behalf of their respective options markets, 
BATS Exchange, Inc., NASDAQ OMX BX, Inc., and The NASDAQ Stock 
Market LLC incorporate, among other things, the position limit rules 
of other exchanges. See, e.g., Securities Exchange Act Release No. 
61534 (February 18, 2010), 75 FR 8760 (February 25, 2010) (order 
granting BATS Exchange, Inc. exemptive request relating to rules 
incorporated by reference by the BATS Exchange Options Market rules) 
(``BATS Options Market Order''); Securities Exchange Act Release No. 
67256 (June 26, 2012), 77 FR 39277, 39286 (July 2, 2012) (order 
approving SR-BX-2012-030 and granting exemptive request relating to 
rules incorporated by reference by the BX Options rules); Securities 
Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521, 14539-
40 (March 18, 2008) (order approving SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080, and granting exemptive request relating to rules 
incorporated by reference by The NASDAQ Options Market).
---------------------------------------------------------------------------

     An SRO wishing to incorporate rules of another SRO by 
reference has submitted a written request for an order exempting it 
from the requirement in Section 19(b) of the Exchange Act to file 
proposed rule changes relating to the rules incorporated by reference, 
has identified the applicable originating SRO(s), together with the 
rules it wants to incorporate by reference, and otherwise has complied 
with the procedural requirements set forth in the Commission's release 
governing procedures for requesting exemptive orders pursuant to Rule 
0-12 under the Exchange Act; \18\
---------------------------------------------------------------------------

    \18\ See 17 CFR 240.0-12 and Securities Exchange Act Release No. 
39624 (February 5, 1998), 63 FR 8101 (February 18, 1998) (Commission 
Procedures for Filing Applications for Orders for Exemptive Relief 
Pursuant to Section 36 of the Exchange Act; Final Rule).
---------------------------------------------------------------------------

     An incorporating SRO has requested incorporation of 
categories of rules (rather than individual rules within a category) 
that are not trading rules (e.g., the SRO has requested incorporation 
of rules such as margin, suitability, or arbitration); and
     The incorporating SRO has reasonable procedures in place 
to provide written notice to its members each time a change is proposed 
to the incorporated rules of another SRO.\19\
---------------------------------------------------------------------------

    \19\ See BATS Options Market Order, supra note 17 (citing 
Securities Exchange Act Release No. 49260 (February 17, 2004), 69 FR 
8500 (February 24, 2004) (order granting exemptive request relating 
to rules incorporated by reference by several SROs) (``2004 
Order'')).
---------------------------------------------------------------------------

    The Commission believes that FINRA has satisfied each of these 
conditions. The Commission also believes that granting FINRA an 
exemption from the rule filing requirements under Section 19(b) of the 
Exchange Act will promote efficient use of Commission and FINRA 
resources by avoiding duplicative rule filings based on simultaneous 
changes to identical rule text sought by more than one SRO.\20\ The 
Commission therefore finds it appropriate in the public interest and 
consistent with the protection of investors to exempt FINRA from the 
rule filing requirements under Section 19(b) of the Exchange Act with 
respect to the above-described rules it has incorporated, and intends 
to incorporate, by reference. This exemption is conditioned upon FINRA 
promptly providing written notice to its members whenever an exchange 
changes a rule that FINRA has incorporated by reference.
---------------------------------------------------------------------------

    \20\ See BATS Options Market Order, supra note 17, 75 FR at 
8761; see also 2004 Order, supra note 19, 69 FR at 8502.
---------------------------------------------------------------------------

    Accordingly, it is ordered, pursuant to Section 36 of the Exchange 
Act,\21\ that FINRA is exempt from the rule filing requirements of 
Section 19(b) of the Exchange Act solely with respect to changes to the 
rules identified in its request that incorporate by reference certain 
rules of the options exchanges,\22\ provided that FINRA promptly 
provides written notice to its members whenever an exchange proposes to 
change a rule that FINRA has incorporated by reference.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78mm.
    \22\ See supra notes 3 through 9, and accompanying text.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(76).
---------------------------------------------------------------------------

Kevin M. O'Neill,
 Deputy Secretary.
[FR Doc. 2013-30764 Filed 12-24-13; 8:45 am]
BILLING CODE 8011-01-P