Document ID: SEC-2012-0880-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-06-06T04:00Z

[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33537-33539]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13642]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67085; File No. SR-FINRA-2012-026]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Handling of Stop and Stop Limit Orders

May 31, 2012.
    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 24, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. 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.
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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's rules relating to the handling 
of stop and stop limit orders.
    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
    FINRA Rule 6140(h) addresses the handling of stop orders in NMS 
stocks.\3\ Specifically, the Rule provides that a member may, but is 
not obligated to, accept a stop order in a designated security.\4\ The 
Rule further provides that a stop order becomes a market order (or a 
stop limit order becomes a limit order) when a transaction takes place 
at or above the stop price (in the case of a buy stop order) or at or 
below the stop price (in the case of a sell stop order).\5\
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    \3\ The requirements in Rule 6140(h) were initially adopted by 
NASD (and the national securities exchanges) in 1975. See Notice to 
Members 75-42 (June 10, 1975) (Rules Governing Reporting of 
Transactions to Consolidated Tape).
    \4\ Rule 6140(a) defines a ``designated security'' as any NMS 
stock as defined in Rule 600(b)(47) of SEC Regulation NMS.
    \5\ Stop buy orders generally are entered by investors with 
short positions to limit losses should the stock price increase. 
Stop sell orders generally are entered in a stock whose price has 
increased substantially in order to protect the investor's profits 
should the stock price decline.
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    Although Rule 6140(h) provides that a stop order is triggered by a 
transaction, FINRA understands that certain firms and their customers 
prefer alternative triggers for activating a stop or stop limit order. 
For example, some members have noted that using quotations may be 
preferable because, for some securities, quotations serve as a better 
indicator of the current price than transactions. Thinly traded 
securities (e.g., certain exchange-traded funds) have limited trading 
during the trading day, although quotations may be continuously updated 
and would serve as the better indicator of the current market price for 
these securities. As such, investors in these securities may prefer 
that their stop order be monitored against quotations instead of 
waiting for trades. Conversely, some members have indicated that 
customers could be disadvantaged by the triggering of a stop order on a 
quotation because doing so may result in an execution at a price that 
the stock had never traded at that day--an outcome that may be 
considered undesirable for an investor placing a stop order.\6\
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    \6\ Other concerns with using quotations include that quotations 
may be more vulnerable to abuse because they can be manipulated to 
trigger stops and then withdrawn/changed. However, other members 
note that using transactions also could result in the improper 
triggering of a customer's stop order due to trades at prices 
outside of the current market--whether intentional or erroneous 
trades.

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[[Page 33538]]

    FINRA believes that, given the various risks and benefits of each 
triggering event, members and their customers should be permitted to 
consider these factors and determine which order type (and trigger) is 
appropriate. In this regard, FINRA previously proposed amendments to 
the Rule 6140(h) to delete the requirement that transactions at the 
stop price serve as the only triggering event for stop orders, thereby 
providing members and customers with the flexibility to tailor their 
order types. However, this proposal was not approved by the Commission 
based on concerns that the proposed rule did not promote the ability of 
investors to understand the key attributes of the order and make an 
informed choice as to whether to use a particular type of order.\7\
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    \7\ See Securities Exchange Act Release No. 63885 (February 10, 
2011), 76 FR 9062 (February 16, 2011) (Order Disapproving File No. 
SR-FINRA-2010-055).
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    In light of the Commission's concerns, FINRA is proposing Rule 
5350(a), which would retain the current transaction-based trigger for 
activating stop and stop limit orders and provide all investors placing 
a ``stop order'' or a ``stop limit order'' with certainty that their 
order will only be activated by a transaction at the stop price. At the 
same time, proposed Supplementary Material .01 to the rule would permit 
members to offer an alternative trigger to activate an order as a 
market or limit order, so long as such alternative order type is not 
labeled as a ``stop order'' or a ``stop limit order'' and is clearly 
distinguishable from a stop or stop limit order (e.g., an alternative 
order type that triggers using a quotation at the stop price may be 
labeled a ``stop quotation order'').\8\ In cases where the member 
offers an alternative order type that activates as a market or limit 
order using an event other than a transaction at the stop price, the 
member must disclose to the customer, in paper or electronic form, 
prior to the time the customer places the order (e.g., at account 
opening), a description of the order type including the triggering 
event.\9\
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    \8\ The proposed rule would not apply to ``not held'' orders. 
See proposed Rule 5350(b). Generally, a ``not held'' order is an un-
priced, discretionary order voluntarily categorized as such by the 
customer. As such, because the customer has given the member price 
and time discretion, the proposed requirements would not apply to a 
``not held'' stop or stop limit order.
    \9\ A member that permits customers to engage in securities 
transactions online also must post the required disclosures on the 
member's Web site in a clear and conspicuous manner.
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    FINRA believes that, by requiring that alternative-trigger order 
types be labeled something other than a ``stop'' or ``stop limit'' 
order and be clearly distinguishable from a stop or stop limit order, 
members and customers will share a uniform understanding as to what 
will serve as the triggering event for ``stop orders.'' To complement 
this approach, proposed Supplementary Material .02 to Rule 5350 also 
would require that, to the extent a member routes a customer stop or 
stop limit order to another broker-dealer or exchange for handling or 
execution, the member must take reasonable steps to ensure that the 
order is handled or executed by the other broker-dealer or exchange in 
accordance with Rule 5350(a). Similarly, a member that routes to 
another broker-dealer or exchange other order types using an 
alternative trigger in accordance with Supplementary Material .01 must 
take reasonable steps to ensure that the order is handled or executed 
by the other broker-dealer or exchange in accordance with the terms of 
the order as communicated to the customer placing the order.
    Finally, the stop order definition is being relocated from Rule 
6140(h) to new Rule 5350 to ensure that the existing and proposed stop 
order provisions apply uniformly to both OTC Equity Securities \10\ and 
NMS stocks.
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    \10\ FINRA Rule 6420(e) defines ``OTC Equity Security'' as any 
equity security that is not an ``NMS stock'' as that term is defined 
in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that 
the term ``OTC Equity Security'' shall not include any Restricted 
Equity Security.
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    FINRA will announce the implementation date of the proposed rule 
change no later than 60 days following Commission approval. The 
implementation date will be no more than 150 days following Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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 adopting the proposed rule change 
will provide customers with certainty as to how their stop orders will 
be treated, while also providing members with the flexibility to 
determine whether offering additional order types with alternative 
triggers are appropriate for their business and customer base, without 
compromising investor protection.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change advances the 
protection of investors and the public interest in that it would 
further a more uniform definition of ``stop order'' and ``stop limit 
order'' for all equity securities, thereby providing investors with 
certainty as to the handling of such orders by their broker-dealers. In 
addition, FINRA believes that the proposed changes will promote just 
and equitable principles of trade by providing customers and members 
with the flexibility to select and offer other triggering events for 
alternative order types in accordance with their investment objectives 
and business models, while requiring members to disclose a description 
of the order type, including the triggering event, prior to the time 
the customer places the order.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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:

[[Page 33539]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-026 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-2012-026. This 
file number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2012-026, and should 
be submitted on or before June 27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13642 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P