Document ID: SEC-2009-0515-0001
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 Codify the Extended Hours Trading Risk Disclosure Obligation as New FINRA Rule 2265
Posted Date: 2009-04-14T04:00Z

[Federal Register: April 14, 2009 (Volume 74, Number 70)]
[Notices]               
[Page 17243-17245]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14ap09-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59717; File No. SR-FINRA-2009-021]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Codify the Extended Hours Trading Risk 
Disclosure Obligation as New FINRA Rule 2265

April 7, 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 March 27, 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 [sic], which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as ``constituting a stated policy, practice, 
or interpretation with respect to the meaning, administration, or 
enforcement of an existing rule'' under Section 19(b)(3)(A)(i) of the 
Act \3\ and Rule 19b-4(f)(1) 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\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt new FINRA Rule 2265 (Extended Hours 
Trading Risk Disclosure) to codify the existing obligation to disclose 
to customers the risks of extended hours trading. 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
    On January 10, 2000, FINRA, then NASD, filed with the SEC a Notice 
to Members reminding members of their obligation under just and 
equitable principles of trade \5\ and the advertising rule \6\ to 
disclose to all customers the material risks of extended hours trading 
(i.e., trading outside regular trading

[[Page 17244]]

hours of 9:30 a.m. to 4 p.m. Eastern Standard Time).\7\ In its filing 
with the Commission, FINRA noted that, while the growth of extended 
hours trading provides customers with greater opportunities to trade 
securities and manage their portfolios, it also involves material risks 
that are specific to extended hours trading.
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    \5\ Rule 2010 (Standards of Commercial Honor and Principles of 
Trade).
    \6\ NASD Rule 2210 (Communications with the Public).
    \7\ See Securities Exchange Act Release No. 42363 (January 28, 
2000), 65 FR 5715 (February 4, 2000) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Relating to a Notice to 
Members on Extended Hours Trading) (SR-NASD 00-01) (``NTM 00-07'').
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    NTM 00-07 provided a model extended hours risk disclosure statement 
for retail and institutional customers that addressed six primary 
trading risks: (1) Lower liquidity; (2) higher volatility; (3) changing 
prices; (4) unlinked markets; (5) an exaggerated effect from news 
announcements; and (6) wider spreads. This disclosure statement defined 
certain essential terminology (e.g., ``liquidity,'' ``volatility,'' and 
``spread'') and explained the risks that are present during extended 
hours trading, specifically:
     Risk of Lower Liquidity. Liquidity refers to the ability 
of market participants to buy and sell securities. Generally, the more 
orders that are available in a market, the greater the liquidity. 
Liquidity is important because with greater liquidity it is easier for 
investors to buy or sell securities, and as a result, investors are 
more likely to pay or receive a competitive price for securities 
purchased or sold. There may be lower liquidity in extended hours 
trading as compared to regular market hours. As a result, your order 
may only be partially executed, or not at all.
     Risk of Higher Volatility. Volatility refers to the 
changes in price that securities undergo when trading. Generally, the 
higher the volatility of a security, the greater its price swings. 
There may be greater volatility in extended hours trading than in 
regular market hours. As a result, your order may only be partially 
executed, or not at all, or you may receive an inferior price in 
extended hours trading than you would during regular market hours.
     Risk of Changing Prices. The prices of securities traded 
in extended hours trading may not reflect the prices either at the end 
of regular market hours, or upon the opening the next morning. As a 
result, you may receive an inferior price in extended hours trading 
than you would during regular market hours.
     Risk of Unlinked Markets. Depending on the extended hours 
trading system or the time of day, the prices displayed on a particular 
extended hours trading system may not reflect the prices in other 
concurrently operating extended hours trading systems dealing in the 
same securities. Accordingly, you may receive an inferior price in one 
extended hours trading system than you would in another extended hours 
trading system.
     Risk of News Announcements. Normally, issuers make news 
announcements that may affect the price of their securities after 
regular market hours. Similarly, important financial information is 
frequently announced outside of regular market hours. In extended hours 
trading, these announcements may occur during trading, and if combined 
with lower liquidity and higher volatility, may cause an exaggerated 
and unsustainable effect on the price of a security.
     Risk of Wider Spreads. The spread refers to the difference 
in price between what you can buy a security for and what you can sell 
it for. Lower liquidity and higher volatility in extended hours trading 
may result in wider than normal spreads for a particular security.
    In addition, FINRA notes that certain regulatory protections are 
not in effect after the end of ``regular trading hours'' on any trading 
day. For example, the SEC's Regulation NMS's ``trade-through'' rules do 
not apply to executions after 4 p.m. EST.\8\
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    \8\ A trade-through occurs when one trading center executes an 
order at a price that is inferior to the price of a protected 
quotation. See 17 CFR 242.600(77).
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    FINRA is proposing to transfer this existing disclosure obligation 
into new FINRA Rule 2265 (Extended Hours Trading Risk Disclosure) for 
administrative and ease of reference purposes. As is currently the 
case, members would retain a measure of flexibility in the wording of 
the risk disclosure (so long as, at a minimum, the above six areas are 
addressed). In addition to the above specific disclosures, members must 
include any additional disclosures as are relevant and appropriate to 
the member's business consistent with their obligations under just and 
equitable principles of trade.
    As noted in Item 2 of this filing, FINRA has filed the proposed 
rule change for immediate effectiveness. The effective date and the 
implementation date will be the date of filing, March 27, 2009.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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    FINRA continues to believe that members that permit customers to 
engage in extended hours trading have an obligation to disclose to such 
customers the risks specific to extended hours trading. Similarly, 
members that advertise the opportunities and benefits of extended hours 
trading must also disclose the material risks. FINRA believes that this 
disclosure requirement is an important element in protecting investors 
and informing investors of the risks specific to extended hours 
trading.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and paragraph (f)(1) of Rule 19b-4 
thereunder.\11\ 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(x).
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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-2009-021 on the subject line.

[[Page 17245]]

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-2009-021. 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-2009-021 and should be 
submitted on or before May 5, 2009.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8420 Filed 4-13-09; 8:45 am]

BILLING CODE 8010-01-P