Document ID: SEC-2007-1481-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-10-26T04:00Z

[Federal Register: October 26, 2007 (Volume 72, Number 207)]
[Notices]               
[Page 60919-60922]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc07-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56682; File No. SR-FINRA-2007-013]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to NASD Rule 3210 in Light 
of Amendments to the SEC Regulation SHO Delivery Requirements

October 22, 2007.
    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 September 12, 2007, 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, II 
and III below, which Items have been prepared substantially 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 NASD Rule 3210 (Short Sale Delivery 
Requirements) in light of the amendments to Rule 203 of Regulation SHO 
under the Act.\4\
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    \4\ See Securities Exchange Act Release No. 56212 (August 7, 
2007), 72 FR 45543 (August 14, 2007).
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    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *

3210. Short Sale Delivery Requirements

    (a) If a participant of a registered clearing agency has a fail to 
deliver position at a registered clearing agency in a non-reporting 
threshold security for 13 consecutive settlement days, the participant 
shall immediately thereafter close out the fail to deliver position by 
purchasing securities of like kind and quantity.
    (1) Provided, however, a participant of a registered clearing 
agency that has a fail to deliver position at a registered clearing 
agency in a non-reporting threshold security on October 15, 2007, and 
which, prior to October 15, 2007, had been previously grandfathered 
from the close-out requirement in paragraph (a) (i.e., because the 
participant of a registered clearing agency had the fail to deliver 
position at a registered clearing agency on the settlement day 
preceding the day that the security became a non-reporting threshold 
security), shall close out that fail to deliver position within thirty-
five settlement days of October 15, 2007 by purchasing securities of 
like kind and quantity. The requirements in paragraph (b) shall apply 
to all such fails to deliver that are not closed out in conformance 
with this paragraph (a)(1).
    (2) Provided, however, if a participant of a registered clearing 
agency has a fail to deliver position at a registered clearing agency 
for thirty-five consecutive settlement days in a non-reporting 
threshold security that was sold pursuant to SEC Rule 144, the 
participant shall immediately thereafter close out the fail to deliver 
position in the security by purchasing securities of like kind and 
quantity. The requirements in paragraph (b) shall apply to all such 
fails to deliver that are not closed out in conformance with this 
paragraph (a)(2).
    [(b) The provisions of this rule shall not apply to the amount of 
the fail to deliver position that the participant of a registered 
clearing agency had at a registered clearing agency on the settlement 
day immediately preceding the day that the security became a non-
reporting threshold security; provided, however, that if the fail to 
deliver position at the clearing agency is subsequently reduced below 
the fail to deliver position on the settlement day immediately 
preceding the day that the security became a non-reporting threshold 
security, then the fail to deliver position excepted by this paragraph 
(b) shall be the lesser amount.]
    (b)[(c)] If a participant of a registered clearing agency has a 
fail to deliver position at a registered clearing agency in a non-
reporting threshold security for 13 consecutive settlement days (or 35 
consecutive settlement days if entitled to rely on paragraphs (a)(1) or 
(a)(2) of this rule), the participant and any broker or dealer for 
which it clears transactions, including any market maker that would 
otherwise be entitled to rely on the exception provided in paragraph 
(b)(2)(iii) of SEC Rule 203 of Regulation SHO, may not accept a short 
sale order in the non-reporting threshold security from another person, 
or effect a short sale in the non-reporting threshold security for its 
own account, without borrowing the security or entering into a bona-
fide arrangement to borrow the security, until the participant closes 
out the fail to deliver position by purchasing securities of like kind 
and quantity.
    (c)[(d)] If a participant of a registered clearing agency 
reasonably allocates a portion of a fail to deliver position to another 
registered broker or dealer for which it clears trades or for which it 
is responsible for settlement, based on such broker or dealer's short 
position, then the provisions of this rule relating to such fail to 
deliver position shall apply to the portion of such registered broker 
or dealer that was allocated the fail to deliver position, and not to 
the participant.
    (d)[(e)] A participant of a registered clearing agency shall not be 
deemed to have fulfilled the requirements of this rule where the 
participant enters into an arrangement with another person to purchase 
securities as required by this rule, and the participant knows or has 
reason to know that the other person will not deliver securities in 
settlement of the purchase.

[[Page 60920]]

    (e)[(f)] For the purposes of this rule, the following terms shall 
have the meanings below:
    (1) The term ``market maker'' has the same meaning as in section 
3(a)(38) of the Exchange Act.
    (2) The term ``non-reporting threshold security'' means any equity 
security of an issuer that is not registered pursuant to section 12 of 
the Exchange Act and for which the issuer is not required to file 
reports pursuant to section 15(d) of the Exchange Act:
    (A) For which there is an aggregate fail to deliver position for 
five consecutive settlement days at a registered clearing agency of 
10,000 shares or more and for which on each settlement day during the 
five consecutive settlement day period, the reported last sale during 
normal market hours for the security on that settlement day that would 
value the aggregate fail to deliver position at $50,000 or more, 
provided that if there is no reported last sale on a particular 
settlement day, then the price used to value the position on such 
settlement day would be the previously reported last sale; and
    (B) Is included on a list published by NASD.
    A Security shall cease to be a non-reporting threshold security if 
the aggregate fail to deliver position at a registered clearing agency 
does not meet or exceed either of the threshold tests specified in 
paragraph (e)[(f)](2)(A) of this rule for five consecutive settlement 
days.
    (3) The term ``participant'' means a participant as defined in 
section 3(a)(24) of the Exchange Act, that is an NASD member.
    (4) The term ``registered clearing agency'' means a clearing 
agency, as defined in section 3(a)(23)(A) of the Exchange Act, that is 
registered with the Commission pursuant to section 17A of the Exchange 
Act.
    (5) The term ``settlement day'' means any business day on which 
deliveries of securities and payments of money may be made through the 
facilities of a registered clearing agency.
    (f)[(g)] Pursuant to the Rule 9600 Series, the staff, for good 
cause shown after taking into consideration all relevant factors, may 
grant an exemption from the provisions of this rule, either 
unconditionally or on specified terms and conditions, to any 
transaction or class of transactions, or to any security or class of 
securities, or to any person or class of persons, if such exemption is 
consistent with the protection of investors and the public interest.
* * * * *

9610. Application

    (a) Where to File
    A member seeking exemptive relief as permitted under Rules 1021, 
1050, 1070, 2210, 2315, 2320, 2340, 2520, 2710, 2720, 2790, 2810, 2850, 
2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 
3230, 5150, 6958, 8211, 8213, 11870, or 11900, or Municipal Securities 
Rulemaking Board Rule G-37 shall file a written application with the 
appropriate department or staff of NASD and provide a copy of the 
application to the Office of General Counsel of NASD.
    (b) through (c) No change.
* * * * *

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 August 7, 2007, the SEC adopted certain amendments to Regulation 
SHO under the Act.\5\ The SEC amended, among other things, the close-
out requirement contained in Rule 203 of Regulation SHO to eliminate 
the ``grandfather'' \6\ provision and extend the close-out requirement 
from 13 to 35 consecutive settlement days for fails to deliver 
resulting from sales of threshold securities pursuant to Rule 144 of 
the Securities Act of 1933.\7\ The amendments to the close-out 
requirement in Rule 203 of Regulation SHO became effective on October 
15, 2007.
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    \5\ See id.
    \6\ The ``grandfather'' provision excluded from the Regulation 
SHO close-out requirement fail to deliver positions that were 
established prior to the security becoming a threshold security or 
prior to the Regulation SHO effective date. Specifically, the 
grandfather provision applied to two situations: (1) Fail to deliver 
positions occurring before the January 3, 2005 Regulation SHO 
effective date; and (2) fail to deliver positions that were 
established on or after January 3, 2005, but prior to the security 
appearing on the Regulation SHO threshold securities list. See 
Securities Exchange Act Release No. 54154 (July 14, 2006), 71 FR 
41710 (July 21, 2006). See also SEC Division of Market Regulation: 
Key Points About Regulation SHO, dated April 11, 2005.
    \7\ The SEC also adopted amendments to update the market decline 
limitation in Rule 200(e)(3) of Regulation SHO.
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    The purpose of this proposed rule change is to make conforming 
changes to NASD Rule 3210 to reflect the amendments to Rule 203 of 
Regulation SHO by eliminating the grandfather provision from Rule 3210 
and extending the close-out requirement for fails to deliver resulting 
from sales of non-reporting threshold securities pursuant to SEC Rule 
144.
Proposed Amendments to NASD Rule 3210
    NASD Rule 3210 (Short Sale Delivery Requirements) applies delivery 
requirements to non-reporting threshold securities that are 
substantially similar to the Regulation SHO delivery requirements, 
which apply only to reporting securities.\8\ In the original rule 
change (SR-NASD-2004-044) proposing Rule 3210, FINRA indicated that it 
intended to apply and interpret the requirements of Rule 3210 
consistent with the SEC's application and interpretation of Regulation 
SHO, and to the extent there were subsequent amendments to Regulation 
SHO, FINRA would consider amending its requirements accordingly.
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    \8\ The term ``reporting security'' means any equity security of 
an issuer that is registered under Section 12 of the Act or that is 
required to file reports under Section 15(d) of the Act.
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    Given the SEC's recent amendments to the Regulation SHO close-out 
requirement, FINRA is proposing to amend Rule 3210 to make conforming 
amendments to its mandatory close-out requirement to eliminate the 
grandfathering provision and extend the close-out requirement for SEC 
Rule 144 restricted securities. Specifically, consistent with the SEC's 
amendments to Rule 203(b)(3)(i) of Regulation SHO, FINRA is proposing 
(1) to require that any previously grandfathered fail to deliver 
position in a non-reporting security that is on the Rule 3210 threshold 
list on the October 15, 2007 operative date of the proposed rule change 
be closed out within 35 settlement days of such date; (2) that if the 
fail to deliver position has persisted for 35 consecutive settlement 
days from the October 15, 2007 operative date of the proposed rule 
change, the proposal would prohibit a participant and any broker-dealer 
for which it clears transactions, including market makers, from 
accepting any short sale orders or effecting further short sales in the 
particular non-reporting threshold security without borrowing, or 
entering

[[Page 60921]]

into a bona-fide arrangement to borrow, the security until the 
participant closes out the entire fail to deliver position by 
purchasing securities of like kind and quantity; and (3) that if a 
security becomes a non-reporting threshold security after the October 
15, 2007 operative date of the proposed rule change, any fails to 
deliver in that security that occurred prior to the security becoming a 
non-reporting threshold security would become subject to Rule 3210's 
mandatory 13 settlement day close-out requirement, similar to any other 
fail to deliver position in a non-reporting threshold security.
    Likewise, in light of the SEC's recent amendments to provide 
additional time to close-out fails to deliver resulting from sales of 
threshold securities pursuant to SEC Rule 144, FINRA is proposing to 
amend Rule 3210 to make conforming amendments to its close-out 
requirement. Specifically, consistent with the SEC's amendments to Rule 
203 of Regulation SHO, FINRA is proposing to amend Rule 3210 to extend 
the close-out requirement from 13 to 35 consecutive settlement days for 
fails to deliver resulting from sales of non-reporting threshold 
securities pursuant to SEC Rule 144. Also consistent with the SEC's 
amendments to the Regulation SHO close-out requirement, FINRA is 
proposing to apply the pre-borrow requirement in amended Rule 3210(b) 
to these fails to deliver. Therefore, if the fail to deliver position 
persists for 35 consecutive settlement days, a participant of a 
registered clearing agency and any broker-dealer for which it clears 
transactions, including market makers, would be prohibited from 
effecting further short sales in the particular non-reporting threshold 
security without borrowing, or entering into a bona-fide arrangement to 
borrow, the security until the participant closes out the entire fail 
to deliver position by purchasing securities of like kind and quantity.
    FINRA believes that making conforming changes to Rule 3210 to 
maintain consistency with the Regulation SHO delivery requirements is 
appropriate. Further, as noted in the proposing and adopting releases 
relating to the amendments to Rule 203 of Regulation SHO, the SEC 
indicated that, if the proposed amendments to Regulation SHO were 
adopted, the SEC anticipated that Rule 3210 would be similarly 
amended.\9\
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    \9\ See Securities Exchange Act Release No. 54891 (December 7, 
2006), 71 FR 75068 (December 13, 2006). See also Securities Exchange 
Act Release No. 56212 (August 7, 2007), 72 FR 45543 (August 14, 
2007).
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    Lastly, as part of the rule change (SR-NASD-2004-044) proposing 
Rule 3210, the SEC approved paragraph (g) of Rule 3210, which permits 
FINRA to grant exemptive relief from the Rule 3210 short sale delivery 
requirements pursuant to the Rule 9600 Series. As part of another rule 
change, FINRA inadvertently deleted the reference to Rule 3210 in the 
list of rules in Rule 9610(a) for which exemptive relief may be 
available.\10\ Accordingly, as part of this rule filing, FINRA proposes 
to amend Rule 9610(a) to re-insert the reference to Rule 3210.
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    \10\ See File SR-NASD-2005-087.
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Implementation
    As noted above, FINRA has filed the proposed rule change for 
immediate effectiveness. FINRA proposes to make the proposed rule 
change operative on October 15, 2007, to coincide with the operative 
date of the amendments to Rule 203 of Regulation SHO.
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 the proposed rule change is 
necessary and appropriate to conform to the amendments to Rule 203 of 
Regulation SHO and to maintain consistent delivery requirements across 
securities.
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    \11\ 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 foregoing 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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    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.

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-2007-013 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2007-013. 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

[[Page 60922]]

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-2007-013 and 
should be submitted on or before November 16, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-21166 Filed 10-25-07; 8:45 am]

BILLING CODE 8011-01-P