Document ID: SEC-2010-0960-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-06-29T04:00Z

[Federal Register: June 29, 2010 (Volume 75, Number 124)]
[Notices]               
[Page 37488-37494]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn10-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62359; File No. SR-FINRA-2009-054]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by 
Amendment No. 1, To Establish in the Market for OTC Equity Securities 
Certain Regulatory Protections Derived From Certain Rules Adopted by 
the Commission in the Market for Listed Securities

June 22, 2010.

I. Introduction

    On August 7, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to establish certain regulatory protections for 
the market for OTC Equity Securities \3\ that are similar to those 
established for national market system securities by Regulation NMS.\4\ 
The proposed rule change was published for comment in the Federal 
Register on August 26, 2009.\5\ The Commission received 12 comments on 
the Initial Notice.\6\ On

[[Page 37489]]

March 1, 2010, FINRA filed Amendment No. 1 to the proposed rule change. 
The proposed rule change, as amended, was published for comment in the 
Federal Register on March 16, 2010.\7\ The Commission received two 
comment letters in response to the Amended Notice.\8\ This order 
approves the proposed rule change, as modified by Amendment No. 1
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See FINRA Rule 6420(d) (defining OTC Equity Security as 
``any non-exchange-listed security and certain exchange-listed 
securities that do not otherwise qualify for real-time trade 
reporting''). Pursuant to Securities Exchange Act Release No. 61979 
(April 23, 2010), 75 FR 23316 (May 3, 2010), effective June 28, 
2010, the term OTC Equity Security will be defined in FINRA Rule 
6420(c) as ``any equity security that is not an `NMS stock' as that 
term is defined in Rule 600(b)(47) of Regulation NMS; provided, 
however, that the term ``OTC Equity Security'' shall not include any 
Restricted Equity Security.''
    \4\ 17 CFR 242.600 et seq.
    \5\ See Securities Exchange Act Release No. 60515 (August 17, 
2009), 74 FR 43207 (``Initial Notice'').
    \6\ See Submission via SEC WebForm from anonymous, dated 
September 1, 2009; Letter to Nancy M. Morris, Commission, from Janet 
M. Kissane, Senior Vice President--Legal and Corporate Secretary, 
NYSE Euronext, dated September 23, 2009 (``ArcaEdge Letter''); 
Letter to Elizabeth M. Murphy, Secretary, Commission, from Leonard 
J. Amoruso, General Counsel, Knight Capital Group, Inc., and Michael 
T. Corrao, Chief Compliance Officer, Knight Equity Markets, L.P., 
dated September 16, 2009 (``Knight Letter''); Letter to Elizabeth M. 
Murphy, Secretary, Commission, from William Assatly, Senior Vice 
President--Trading, Mercator Associates, dated September 16, 2009 
(``Mercator Letter''); Letter from Daniel Kanter, President, and 
Craig Carlino, Chief Compliance Officer, Monroe Securities, Inc., 
dated September 16, 2009 (``Monroe Letter''); Letter to Elizabeth M. 
Murphy, Secretary, Commission, from R. Cromwell Coulson, Chief 
Executive Officer, Pink OTC Markets, Inc., dated September 23, 2009 
(``Pink OTC Letter''); Letter to Elizabeth M. Murphy, Secretary, 
Commission, from R. Cromwell Coulson, Chief Executive Officer, Pink 
OTC Markets, Inc., dated January 6, 2010 (``Pink OTC 2 Letter''); 
Letter to Elizabeth M. Murphy, Secretary, Commission, from Ann L. 
Vlcek, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association, dated October 13, 2009 
(``SIFMA Letter''); Letter to Elizabeth M. Murphy, Secretary, 
Commission, from Kimberly Unger, Executive Director, The Securities 
Traders Association of New York, Inc., dated September 14, 2009 
(``STANY Letter''); Letter to Elizabeth M. Murphy, Secretary, 
Commission, from Kimberly Unger, Executive Director, The Securities 
Traders Association of New York, Inc., dated September 16, 2009 
(``STANY 2 Letter''); Letter to Florence H. Harmon, Deputy 
Secretary, Commission, from Elaine M. Kaven, Chief Compliance 
Officer, StockCross Financial Services, Inc., dated September 16, 
2009 (``StockCross Letter''); Letter to Elizabeth M. Murphy, 
Secretary, Commission, from Christopher Nagy, Managing Director 
Order Strategy, Co-Head of Government Relations, TD Ameritrade, 
Inc., dated October 5, 2009 (``TD Ameritrade Letter'').
    \7\ See Securities Exchange Act Release No. 61677 (March 9, 
2010), 75 FR 12584 (``Amended Notice'').
    \8\ See Letter from Daniel Kanter, President and Craig Carlino, 
Chief Compliance Officer, Monroe Securities, dated April 6, 2010 
(``Monroe 2 Letter''); Letter to Elizabeth M. Murphy, Commission, 
from R. Cromwell Coulson, Chief Executive Officer, Pink OTC Markets 
Inc., dated April 9, 2010 (``Pink OTC 3 Letter'').
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II. Description of the Proposed Rule Change

    With this proposed rule change, FINRA proposes to establish certain 
regulatory protections for the market for OTC Equity Securities that 
are similar to those established for national market system securities 
by Regulation NMS. First, FINRA proposes to adopt Rule 6434 (Minimum 
Pricing Increment for OTC Equity Securities) to impose restrictions on 
the display of quotes and orders for OTC Equity Securities in sub-penny 
increments similar to those in Rule 612 of Regulation NMS.\9\ Rule 6434 
would prohibit members from displaying, ranking, or accepting from any 
person a bid or offer, order, or indication of interest in an OTC 
Equity Security in an increment smaller than $0.01 if the bid or offer, 
order, or indication of interest is priced $1.00 or greater per share. 
As initially filed, FINRA proposed to prohibit members from displaying, 
ranking, or accepting a bid or offer, order, or an indication of 
interest in an OTC Equity Security in an increment smaller than: (1) 
$0.0001, if the bid or offer, order, or indication of interest were 
priced between $0.01 and $1.00 per share; and (2) $0.000001, if the bid 
or offer, order, or indication of interest were priced less than $0.01 
per share.\10\ As discussed below, FINRA subsequently amended the 
proposal to prohibit members from displaying, ranking, or accepting 
from any person a bid or offer, order, or indication of interest in an 
OTC Equity Security in an increment smaller than $0.0001 for bids, 
offers, orders, and indications of interest priced below $1.00 per 
share. If an order or indication of interest is priced less than 
$0.0001 per share, a member may rank or accept, but not display, that 
order or indication of interest in an increment of $0.000001 or 
greater.
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    \9\ 17 CFR 242.612.
    \10\ See Initial Notice, 74 FR at 43207.
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    Second, FINRA proposes to adopt Rule 6437 (Prohibition from Locking 
or Crossing Quotation in OTC Equity Securities) to require that members 
implement policies and procedures that reasonably avoid the display of, 
or engaging in a pattern or practice of displaying, locking, or 
crossing quotations in any OTC Equity Security within the same inter-
dealer quotation system. This is similar to Rule 610(d) of Regulation 
NMS.\11\
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    \11\ 17 CFR 242.610(d).
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    Third, FINRA is proposing a new regulatory approach to fees for 
accessing quotations in OTC Equity Securities. FINRA is deleting its 
Rule 6540(c), which provides that an alternative trading system 
(``ATS'') or electronic communications network (``ECN'') must reflect 
non-subscriber access or post-transaction fees in the ATS's or ECN's 
posted quote in the OTC Bulletin Board montage. In addition, FINRA 
proposes to allow market makers--as well as ATSs and ECNs--to charge 
access fees. As a result, market makers, ATSs, and ECNs may charge 
access fees that are not displayed in the quotation. Simultaneously, 
however, FINRA proposes to adopt new Rule 6450 (Restrictions on Access 
Fees) that would establish a cap on non-subscriber access and post-
transaction fees in all OTC Equity Securities, similar to Rule 610(c) 
of Regulation NMS.\12\ Rule 6450 would provide that, if the price of 
the published quotation were $1.00 or more, the fee or fees cannot 
exceed or accumulate to more than $0.003 per share. As initially filed, 
if the price of the published quotation were less than $1.00, the fee 
could not exceed 0.3% of the published quotation price per share. As 
discussed below, FINRA subsequently amended this portion of the 
proposal to provide that, if the price of the published quotation were 
less than $1.00 per share, fees cannot exceed or accumulate to more 
than the lesser of 0.3% of the quotation price per share, or 30% of the 
minimum pricing increment under Rule 6434.
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    \12\ 17 CFR 242.610(c).
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    Fourth, FINRA proposes to adopt Rule 6460 (Display of Customer 
Limit Orders), similar to Rule 604 of Regulation NMS.\13\ Under Rule 
6460, a market maker displaying a priced quotation in an inter-dealer 
quotation system would be required to immediately display a customer 
limit orders that it receives that (1) improves the price of the bid or 
offer displayed by the market maker; or (2) improves the size of its 
bid or offer by more than a de minimis amount, where it is priced equal 
to the best bid or offer in the inter-dealer quotation system where the 
market maker is quoting. Similar to Rule 604 of Regulation NMS, Rule 
6460 excepts any customer limit order that (1) is executed upon receipt 
of the order; (2) is placed by a customer who expressly requests that 
the order not be displayed; (3) is an odd-lot order; (4) is a block 
size order, unless a customer placing such order requests that the 
order be displayed; (5) is delivered immediately upon receipt to a 
national securities exchange or to an electronic communications network 
that widely disseminates such order and complies with the Rule's 
provisions relating to such electronic communications network; (6) is 
delivered immediately upon receipt to another OTC market maker that 
complies with the proposed limit order display requirements with 
respect to that order; or (7) is an all-or-none order. In Amendment No. 
1, FINRA proposed to add an exception for customer limit orders that 
are priced less than $0.0001 per share, consistent with the revision to 
proposed Rule 6434 that allows a member to rank or accept, but not 
display, an order or indication of interest in an increment as small as 
$0.000001, if the order or indication of interest is priced less than 
$0.0001 per share.
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    \13\ 17 CFR 242.604.

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[[Page 37490]]

    FINRA also proposed to make conforming changes to certain of its 
other rules to reflect the establishment of these new rules.

III. Summary of Comments

    The Commission received 12 comments regarding the Initial Notice 
\14\ and two comment letters regarding the Amended Notice. These 
comment letters are summarized below. Contemporaneously with filing 
Partial Amendment No. 1, FINRA submitted a response to the comments on 
the Initial Notice.
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    \14\ See supra note 6.
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    Minimum Quoting Increments. One commenter supported this aspect of 
the proposal, stating that it would improve depth and liquidity in the 
marketplace by mitigating potential harms associated with sub-penny 
quoting, including ``stepping ahead'' of publicly displayed orders.\15\ 
Other commenters stated that sub-penny quoting may produce flickering 
quotes \16\ or result in increased quote traffic without providing any 
discernable benefit to investors.\17\
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    \15\ See TD Ameritrade Letter at 2.
    \16\ See Pink OTC Letter at 8; STANY Letter at 2.
    \17\ See STANY Letter at 2.
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    Other commenters disagreed with the proposal as it relates to 
minimum quoting increments. While one commenter supported restrictions 
on sub-penny pricing in theory, it stated that the minimum quoting 
increments for shares priced below $1.00 per share were not 
``meaningful'' increments.\18\ Another commenter argued that certain 
stocks priced above $1.00 per share have benefited from the ability to 
trade in sub-penny increments, and that prohibiting sub-penny quoting 
could thus negatively impact the integrity of the OTC equity 
market.\19\ Two commenters stated that securities traded in sub-penny 
increments ``have traded efficiently for decades,'' \20\ one of which 
added that FINRA had offered no empirical data to support its 
proposal.\21\
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    \18\ See Pink OTC Letter at 8.
    \19\ See SIFMA Letter at 2.
    \20\ Mercator Letter at 1; see also Knight Letter at 2.
    \21\ See Knight Letter at 2.
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    One commenter stated that the proposed minimum increments were 
still small, and would not prevent stepping ahead of customer orders or 
flickering quotes.\22\ Another commenter noted that the initially 
proposed price increment of $0.000001 for stocks priced below $0.01 per 
share would create 10,000 price points below $0.01, which could lead to 
``significant operational and market quality issues,'' especially since 
most securities in the OTC equity markets trade at prices less than 
$0.01.\23\ Another commenter proposed that the minimum price increment 
for securities priced between $0.10 and $1.00 per share should be 
$0.001, and that the minimum price increment for securities priced 
below $0.01 per share should be $0.0001.\24\
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    \22\ See ArcaEdge Letter at 2.
    \23\ See Knight Letter at 2.
    \24\ See ArcaEdge Letter at 2.
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    Locked and Crossed Markets. Three commenters supported this aspect 
of the proposal.\25\ One commenter stated that the proposal would lead 
to a more fair and orderly market, as it would enhance the usefulness 
of quotation information and decrease investor confusion.\26\ Three 
commenters noted, however, that investors would be better served if the 
proposal were extended across all inter-dealer quotation systems, and 
not just within separate inter-dealer quotation systems.\27\ One of 
these commenters stated that the duty to avoid locked and crossed 
markets should be co-extensive with the duty of best execution.\28\
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    \25\ See ArcaEdge Letter at 2; TD Ameritrade Letter at 2; STANY 
Letter at 2.
    \26\ See TD Ameritrade Letter at 2.
    \27\ See Pink OTC Letter at 6; STANY Letter at 2; TD Ameritrade 
Letter at 2.
    \28\ See Pink OTC Letter at 7.
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    Two commenters stated that FINRA's proposal was unlikely to 
actually prevent locked or crossed markets,\29\ because market 
participants already make reasonable efforts to avoid locked or crossed 
markets,\30\ and market participants most likely lock or cross the 
market to avoid paying access fees.\31\ One commenter supported FINRA's 
efforts to reduce locked and crossed markets, but stated that this 
proposal did not provide any data to support a conclusion that locked 
and crossed markets are occurring with sufficient frequency to impact 
market quality.\32\ Another commenter stated that the number of locked 
and crossed markets would increase if Rule 6450 were adopted and if the 
requirement to display access fees in the quote were eliminated.\33\
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    \29\ See Mercator Letter at 1; StockCross Letter at 2.
    \30\ See Mercator Letter at 1.
    \31\ See Mercator Letter at 2; see also StockCross Letter at 2.
    \32\ See Knight Letter at 3.
    \33\ See SIFMA Letter at 3.
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    Some commenters believed that the adoption of Rule 6450 would 
increase the incidence of locked and crossed markets resulting from 
``access-fee'' trading.\34\ One commenter noted that, since the 
proposed rule does not prohibit locking/crossing across inter-dealer 
quotation systems, market participants can lock or cross across 
markets, while receiving ``an instant, virtually riskless profit'' of 
the access fee.\35\
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    \34\ See Knight Letter at 3; StockCross Letter at 2.
    \35\ Knight Letter at 3.
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    Limit Order Display. Three commenters endorsed proposed FINRA Rule 
6460.\36\ One of these commenters stated that investors ``gain enormous 
benefits of added transparency when market centers are required to 
display limit orders that are better than that market center's current 
best bid or offer.'' \37\ Another commenter stated that the proposal 
would foster increased quote competition and ultimately narrow spreads, 
promote greater depth and liquidity, and minimize investor transaction 
costs.\38\
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    \36\ See ArcaEdge Letter at 4; Knight Letter at 5; TD Ameritrade 
Letter at 2.
    \37\ TD Ameritrade Letter at 2.
    \38\ See ArcaEdge Letter at 4.
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    A few commenters believed that a limit order display rule, without 
more, could harm investors.\39\ One of these commenters stated that the 
proposed rule would likely be detrimental to retail and institutional 
investors looking to take sizeable positions in thinly traded stocks, 
as the displaying of a sizeable customer order will affect the way 
competing markets will react to the market.\40\ One commenter noted 
that a limit order display rule could weaken the pricing leverage of a 
customer, as the displaying of an order ``may well scare away bids or 
offers, since in thinly traded markets, many bids and offers are at 
risk quotes by market makers which are risking their own capital.'' 
\41\ Another commenter stated that this proposal infringed upon the 
``experience and judgment of markets participants'' and the ``nature of 
any free market enterprise.'' \42\
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    \39\ See Mercator Letter at 1; STANY Letter at 2.
    \40\ See Mercator Letter at 1.
    \41\ Monroe Securities Letter at 1.
    \42\ StockCross Letter at 1.
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    One commenter believed that the proposed rule would act as a 
disincentive for broker-dealers to display quotations in an inter-
dealer quotation system, because broker-dealers are free to withdraw 
from publishing a quotation in an OTC Equity Security at any time.\43\ 
This commenter thus asserted that proposed Rule 6460 should be amended 
to require a broker-dealer that receives a customer limit order in an 
OTC Equity Security to execute the order, display the order in an 
inter-dealer quotation system or alternative trading system that makes 
its quotes publicly available, or transmit

[[Page 37491]]

the order to another broker-dealer who will display the order.\44\
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    \43\ See Pink OTC 2 Letter at 3-4.
    \44\ See id. at 4. The commenter acknowledged that its suggested 
change, however, would necessitate modifications to Rule 15c2-11 
under the Act. See id.
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    A few commenters suggested alternatives to the proposed limit order 
display rule.\45\ One of these commenters suggested permitting a 
broker-dealer to post part of a limit order, because small orders are 
more likely to be executed than large orders.\46\ The other commenter 
stated that, while market makers should be required to display only the 
price of an order, they should have discretion over display of the size 
of the order.\47\ Specifically, this commenter believed that a broker 
should have discretion with at least 50% of the aggregate order size, 
and should not be required to display size that is more than ten times 
the tier size with respect to any order or aggregate of orders at that 
price level.\48\
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    \45\ See Pink OTC Letter at 11-12; STANY Letter at 2.
    \46\ See STANY Letter at 2.
    \47\ See Pink OTC Letter at 11.
    \48\ See id.
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    Some commenters took issue with the proposed exceptions.\49\ One 
commenter noted that, at a minimum, the proposed definition of ``block-
size'' should be clarified, given the lack of liquidity of OTC Equity 
Securities.\50\ Two commenters indicated that the current minimum quote 
size is a better standard for the required display size,\51\ and one 
commenter suggested that limit orders of less than the minimum 
quotation size for OTC Equity Securities should not be required to be 
displayed.\52\
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    \49\ See Knight Letter at 5-6; Pink OTC Letter at 12; SIFMA 
Letter at 4.
    \50\ See SIFMA Letter at 4.
    \51\ See Knight Letter at 5-6; SIFMA Letter at 4.
    \52\ See Pink OTC Letter at 12.
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    One commenter also proposed that Rule 6460 be amended to require 
the display of customer limit orders in OTC debt securities.\53\
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    \53\ See Pink OTC 2 Letter at 5.
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    Access Fees. Some commenters voiced their opposition to access fees 
in general.\54\ One commenter stated that such fees are especially 
harmful to the OTC market, which is characterized by relatively 
infrequent trading and less natural liquidity.\55\ That commenter also 
noted that market makers have operated successfully without charging 
access fees.\56\
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    \54\ See Mercator Letter at 2; STANY Letter at 2.
    \55\ See Mercator Letter at 2.
    \56\ See id.
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    Other commenters opposed the aspect of the proposal that would 
result in undisplayed access fees.\57\ One commenter stated that FINRA 
should be required to demonstrate that the benefits of introducing 
``hidden'' access fees exceed the ``recognized harm hidden access fees 
cause to investor confidence and market quality.'' \58\ Other 
commenters stated that the current rule offers greater 
transparency,\59\ and that the proposal is ``in effect a license for 
all market participants to charge access fees and keep those fees 
hidden from the public quote.'' \60\ Another commenter noted that 
access fees in OTC equity markets constitute a significant component of 
the price of a security, and that removing the requirement to display 
access fees would ``distort considerably the true market value of the 
security.'' \61\ One commenter stated that this proposal would force 
market participants to pass fees on to the customer or pay the fees 
themselves when interacting with a displayed quotation.\62\ Yet another 
commenter stated that the proposal would result in an unlevel playing 
field in the OTCBB market, if only electronic communications networks 
or alternative trading systems could utilize undisplayed access 
fees.\63\
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    \57\ See Knight Letter at 4; Pink OTC Letter at 4.
    \58\ Pink OTC Letter at 5.
    \59\ See SIFMA Letter at 3.
    \60\ STANY Letter at 2.
    \61\ Knight Letter at 4.
    \62\ See StockCross Letter at 2.
    \63\ See SIFMA Letter at 3.
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    Some commenters stated that the proposal would result in fee-driven 
gaming or the increased incidence of locked and crossed markets.\64\ 
One such commenter noted that access fees in OTC equity markets 
constitute a ``significant component'' of the transaction and market 
price for a security, and that allowing the non-display of access fees 
would create ``a new natural hunting ground for rebate trading'' and 
large volumes that otherwise would not occur.\65\ Market participants 
would take advantage of ``inter-venue access fee quote arbitrage,'' 
with the result being fee disputes and locked markets.\66\ Another 
commenter stated that market participants have little incentive to lock 
or cross markets where non-displayed access fees are not permitted, and 
that markets without non-displayed access fees have lower compliance 
costs.\67\ Another commenter stated that eliminating the requirement to 
display non-subscriber access fees would also reduce displayed 
liquidity and encourage ``undisplayed sub-penny price jumping.'' \68\
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    \64\ See Knight Letter at 4; Pink OTC Letter at 5; STANY Letter 
at 2.
    \65\ Knight Letter at 4-5.
    \66\ Id. at 5.
    \67\ See Pink OTC Letter at 5.
    \68\ SIFMA Letter at 3.
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    Two commenters supported the proposed access fee cap.\69\ One 
commenter stated that, by imposing a uniform limitation of fees, this 
proposal would contribute to an ``accurate evaluation of the actual 
quotations displayed in the public markets.'' \70\ The other commenter 
stated that this requirement would foster a competitive market by 
``leveling the playing field amongst all market participants,'' as the 
current rule has ``artificially supported a dealer-driven market.'' 
\71\ That commenter also noted that uniform access fees would prevent 
access fee gaming.\72\
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    \69\ See ArcaEdge Letter at 3; TD Ameritrade Letter at 2.
    \70\ TD Ameritrade Letter at 2.
    \71\ ArcaEdge Letter at 3.
    \72\ See id. at 4.
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    Two commenters stated that the proposed fee cap should be revised 
to 30% of the minimum quoting increment,\73\ as access fees greater 
than the quote increment are not, by definition, de minimis.\74\ One 
commenter also stated that FINRA should consider rules requiring 
broker-dealers to charge equal access or post transaction fees to all 
non-subscribers.\75\
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    \73\ See ArcaEdge Letter at 4; Pink OTC Letter at 10.
    \74\ See Pink OTC Letter 9.
    \75\ See ArcaEdge Letter at 4.
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IV. Amendment No. 1

    In response to comments, FINRA filed Amendment No. 1 that proposed 
two substantive changes to its initial filing. First, FINRA proposed to 
amend Rule 6434 (Minimum Pricing Increment for OTC Equity Securities) 
to change the minimum quoting increment for orders and indications of 
interest priced under $1.00 per share. Initially, FINRA proposed to 
permit increments as small as $0.0001 for orders and indications of 
interest that were priced below $1.00 and equal to or greater than 
$0.01 per share, and quoting increments of $0.000001 for orders and 
indications of interest priced below $0.01 per share. As amended, FINRA 
proposed to permit quoting increments of $0.0001 for orders and 
indications of interest priced under $1.00 and equal to or greater than 
$0.0001 per share. FINRA also proposed a limited exception for orders 
and indications of interest priced less than $0.0001 per share. Under 
this exception, members would be permitted to rank or accept (but not 
display) orders and indications of interest in an increment of 
$0.000001 or greater for orders and indications of interest that are 
priced

[[Page 37492]]

under $0.0001 per share. FINRA stated that this exception recognized 
the fact that some OTC Equity Securities trade at prices less than 
$0.0001, and that restricting quoting in those securities to increments 
of $0.0001 would effectively eliminate trading in those securities.\76\ 
FINRA also noted that most systems could not display pricing increments 
smaller than four decimal places, and that requiring securities priced 
under $1.00 and equal to or greater than $0.0001 per share to be quoted 
in increments of $0.0001 would promote uniformity in the OTC equity 
market at this price level.\77\
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    \76\ See Amended Notice, 75 FR at 12586.
    \77\ See id.
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    Second, FINRA proposed to amend Rule 6450 (Restrictions on Access 
Fees) to revise the access fee cap on quotations priced below $1.00 per 
share. As revised, the cap would be the lesser of 0.3% of the per-share 
quotation price, or 30% of the minimum permissible quotation increment. 
FINRA stated that this revised method of calculating access fees for 
securities priced under $1.00 would ``ensure that the access fee is 
always less than the relevant quotation increment.'' \78\
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    \78\ Id. at 12585.
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    Finally, FINRA proposed to amend Rule 6460 (Display of Customer 
Limit Orders) to add an exception to the display requirement for 
customer limit orders priced less than $0.0001 per share, to correspond 
with the revision to proposed Rule 6434 permitting members to rank or 
accept, but not display, orders and indications of interest priced 
below $0.0001 per share in an increment as small as $0.000001.

V. Summary of Comments on Amendment No. 1

    Two comments were submitted in response to the Amended Notice. One 
commenter reiterated its opposition to the application of the proposed 
limit order display rule, and requested that the definition of ``block 
size'' for OTC securities be defined as an order that is ``of at least 
10,000 shares or * * * has a market value of at least $100,000.'' \79\ 
This commenter stated that the current rule is designed for penny 
stocks only, and that the proposed definition would give larger orders 
in non-penny stocks the benefit of the block-size exemption.\80\
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    \79\ Monroe 2 Letter at 1.
    \80\ See id.
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    The second commenter reiterated its concerns with both the proposed 
limit order display requirement and the proposed rule against locked 
and crossed markets.\81\ This commenter noted that the proposed limit 
order display rule would not require the publication of a customer 
limit order if the broker-dealer handling the order were not a market 
maker, as defined under FINRA's rules.\82\ In addition, the commenter 
stated that the proposed rule would not apply to market makers that do 
not publish a quotation in an inter-dealer quotation system for the 
security that is the subject of the customer limit order.\83\ The 
commenter stated that the rule would discourage broker-dealers from 
making publicly displayed markets in OTC Equity Securities.\84\
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    \81\ See Pink OTC 3 Letter at 1.
    \82\ See id. at 3.
    \83\ See id. at 2.
    \84\ See id. at 3.
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    The commenter also criticized FINRA's amended proposal regarding 
locked and crossed markets.\85\ According to the commenter, FINRA 
stated in its amended proposal that it would be unreasonable to require 
broker-dealers to avoid locked and crossed markets across inter-dealer 
quotation systems because there is not a mandated quotation mechanism 
for OTC Equity Securities.\86\ The commenter pointed out that it itself 
``currently disseminates a widely accessible, consolidated national 
best bid and offer for OTC Equity Securities'' quoted in inter-dealer 
quotation systems.\87\ The commenter stated that these data should be 
used by broker-dealers in avoiding locking and crossing markets across 
multiple inter-dealer quotation systems, and that FINRA should have 
purchased this market data from the commenter.
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    \85\ See id. at 4.
    \86\ See Pink OTC 3 Letter at 4.
    \87\ Id. at 5.
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    Finally, the commenter stated that, unlike in the market for NMS 
securities, no business model in the market for OTC Equity Securities 
depends on the receipt of access fees among broker-dealers.\88\ As an 
alternative to the proposed rule, the commenter suggested that FINRA 
allow ECNs to trade on a riskless principal basis with non-subscriber 
broker-dealers.\89\
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    \88\ See id. at 8.
    \89\ See id.
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VI. FINRA's Response to Comments on Amendment No. 1

    In response to comments on the proposed limit order display rule, 
FINRA reiterated its view that the appropriate trigger for an 
obligation to display a customer limit order is when an OTC market 
maker already is displaying a priced quotation for the security in an 
inter-dealer quotation system (unless an exception applies).\90\ FINRA 
similarly reiterated its view that, once triggered, the limit order 
display requirement should apply to the full size of a customer limit 
order.\91\ FINRA noted that its approach was consistent with the 
Commission's determination when it first proposed a limit order display 
rule that the presumption should be to display ``unless such orders are 
of block size, the customer requests that its order not be displayed, 
or one of the exceptions to the rule applies.'' \92\
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    \90\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
dated June 22, 2010 from Racquel L. Russell, Assistant General 
Counsel, Regulatory Policy and Oversight (``FINRA Response 
Letter'').
    \91\ See id.
    \92\ See id. at 3 (citing Securities Exchange Act Release No. 
36310 (September 29, 1995) 60 FR 52792 (October 10, 1995)).
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    FINRA also responded to the issue of whether the prohibition on 
locked and crossed markets should apply across inter-dealer quotation 
systems. FINRA stated that, at this time, the prohibition on locked and 
crossed markets should apply only within (and thus not across) inter-
dealer quotation systems ``due to the lack of an SRO-sponsored widely 
accessible, consolidated national best bid and offer for OTC equity 
securities.'' \93\
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    \93\ Id. at 3-4.
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    FINRA also reiterated its position that the proposed cap on access 
fees is the fairest and most appropriate resolution of the access fee 
issue, and that proposed Rule 6450 ``permits a landscape where market 
forces can drive the adoption of various business models in the OTC 
market.'' \94\
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    \94\ Id. at 4.
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VII. Discussion and Findings

    After careful consideration of the amended proposal, the comments 
received, and FINRA's responses thereto, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association.\95\ In particular, the Commission finds that 
the proposal is consistent with Section 15A(b)(6) of the Act,\96\ 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; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions

[[Page 37493]]

in securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest. The Commission does not 
believe that any comments have been raised that should preclude 
approval of the proposal.
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    \95\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \96\ 15 U.S.C. 78o-3(b)(6).
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    With this proposal, FINRA seeks to introduce into the market for 
OTC Equity Securities--over which it has supervisory responsibilities 
\97\--certain regulatory protections that were introduced by the 
Commission into the market for exchange-listed securities by Regulation 
NMS. The Commission adopted Regulation NMS in 2005 to ``modernize and 
strengthen the national market system for equity securities.'' \98\ 
Among the elements of Regulation NMS were: (1) A rule establishing a 
uniform quoting increment of no less than one penny for quotations in 
NMS stocks equal to or greater than $1.00 per share, to promote greater 
price transparency and consistency; (2) a cap on fees for accessing 
protected quotations, to ensure the ``fairness and accuracy of 
displayed quotations by establishing an outer limit on the cost of 
accessing such quotations;'' \99\ and (3) a rule requiring the 
exchanges and FINRA to require their members reasonably to avoid 
locking or crossing protected quotations. Under the same authority used 
to establish Regulation NMS, the Commission had previously established 
a rule that generally requires display of customer limit orders.\100\ 
Many of the same concerns expressed by the Commission in adopting 
Regulation NMS and the Limit Order Display Rule for exchange-listed 
securities also apply to the market in OTC Equity Securities. The rules 
proposed here by FINRA appear reasonably designed to address these 
concerns, and follow closely the regulatory approach set forth in the 
Commission's rules. Therefore, the Commission believes that FINRA's 
proposal is consistent with the Act.
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    \97\ See Section 15A(b)(11) of the Act, 15 U.S.C. 78o-3(b)(11) 
(rules of a national securities association must ``include 
provisions governing the form and content of quotations relating to 
securities sold otherwise than on a national securities exchange'').
    \98\ Securities Exchange Act Release 51808 70 FR 37496, 37496 
(June 29, 2005) (``Reg NMS Adopting Release'').
    \99\ Reg NMS Adopting Release, id., 70 FR at 37502.
    \100\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996) (adopting Rule 11Ac1-4 
under the Act, which requires the display of customer limit orders 
priced better than a specialist's or OTC market maker's quote) 
(``Limit Order Display Release'').
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    With respect to the proposal to restrict sub-penny quoting, the 
Commission agrees with FINRA that the same concerns that were 
articulated in the context of Regulation NMS also exist for OTC Equity 
Securities. Such concerns include ``stepping ahead'' of standing limit 
orders by an economically insignificant amount, which reduces 
incentives to display limit orders and provide liquidity to the 
markets, and the increased incidence of ``flickering quotes'' and the 
resulting regulatory compliance and capacity burdens.\101\
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    \101\ See Reg NMS Adopting Release, supra note 98, 70 FR at 
37553.
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    Like Rule 612 of Regulation NMS,\102\ proposed FINRA Rule 6434 
requires that the minimum increment for bids, offers, orders, and 
indications of interest priced $1.00 or more per share is one penny. 
Furthermore, like Rule 612, proposed FINRA Rule 6434 requires that the 
minimum increment for bids, offers, orders, and indications of interest 
priced between $1.00 and $0.0001 per share is one hundredth of a penny. 
Unlike Rule 612, however, proposed FINRA Rule 6434 contains an 
additional provision for bids, offers, orders, and indications of 
interest priced below $0.0001 per share. Under this provision, a member 
may rank or accept (but not display) an order or indication of interest 
in an increment as small as $0.000001.\103\ FINRA stated that this 
exception recognizes the fact that some OTC Equity Securities trade at 
prices less than $0.0001, and that restricting quoting in those 
securities to increments of $0.0001 would effectively eliminate trading 
in those securities.\104\
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    \102\ 17 CFR 242.612.
    \103\ In the FINRA Response Letter, FINRA noted that a member's 
customer order protection obligations under IM-2110-2 (Trading Ahead 
of Customer Limit Order) continue to apply. See FINRA Response 
Letter, supra note 90 at 2.
    \104\ See Amended Notice, 75 FR at 12586.
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    The Commission believes that proposed Rule 6434 is consistent with 
the Act because it adopts pricing increments similar to those set forth 
in Rule 612. Although the proposed rule differs from Rule 612 in that 
it permits acceptance of orders and indications of interest priced 
below $0.0001 per share in finer increments, the Commission believes 
that this is a reasonable accommodation given that certain OTC Equity 
Securities currently trade at very low prices.
    With respect to FINRA's proposal regarding locking or crossing 
quotations, the Commission agrees with FINRA that many of the same 
concerns that were articulated in the context of Regulation NMS--
namely, that locked and crossed markets may confuse investors and 
create market inefficiencies \105\--also exist for OTC Equity 
Securities. In response to commenters inquiring why FINRA did not 
extend this rule across inter-dealer quotation systems, FINRA stated 
that it is not practicable to extend locking and crossing restrictions 
across inter-dealer markets due to the lack of a widely accessible, 
consolidated national best bid and offer for OTC Equity Securities. The 
Commission believes that FINRA's proposal is consistent with the Act 
and is a reasonable first step to address problems caused by locked and 
crossed markets, while recognizing the market data limitations for OTC 
Equity Securities.
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    \105\ See Reg NMS Adopting Release, supra note 98, 70 FR at 
37547.
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    The Commission also finds that FINRA's proposal regarding access 
fees is consistent with the Act, for the same reasons that the 
Commission adopted its own rules regarding access fees. In the Reg NMS 
Adopting Release, the Commission noted that a flat access fee was the 
``fairest and most appropriate solution to what has been a longstanding 
and contentious issue.'' \106\ The Commission noted that this fee would 
apply equally to ECNs, market makers, and other trading centers.\107\ 
The Commission also noted that, for quotations to be fair and useful, 
``there must be some limit on the extent to which the true price can 
vary from the displayed price,'' and concluded that the cap on access 
fees ``harmoniz[ed] quotation practices and preclude[ed] the distortive 
effects of exorbitant fees.'' \108\ The Commission agrees with FINRA 
that the same considerations apply here. In capping the fees that may 
be charged to access a quotation in an OTC Equity Security, and in 
drafting the rule to apply to ATSs, ECNs, and market makers, the 
proposed rule is reasonably designed to promote transparency and fair 
competition in the market for OTC Equity Securities.
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    \106\ Reg NMS Adopting Release, supra note 98, 70 FR at 37545.
    \107\ See id.
    \108\ Id.
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    As noted above, a number of commenters argued that this access fee 
provision applicable to sub-penny quotations, as originally proposed, 
could lead to certain gaming activity. In response to these comments, 
FINRA proposed in Amendment No. 1 to modify the cap on access fees for 
sub-penny quotations. Specifically, the access fee cap would be the 
lesser of 0.3% of the published quotation price on a per-share basis, 
or 30% of the minimum allowable increment. The Commission believes that 
the amended

[[Page 37494]]

proposal is reasonably designed to minimize access fee gaming, as it 
prevents the access fee from exceeding the minimum quoting increment.
    Finally, the Commission finds that FINRA's proposal to adopt a 
limit order display rule is consistent with the Act. With certain 
exceptions, the proposal requires a market maker displaying a priced 
quote in an inter-dealer quotation system to immediately display a 
customer limit order that it receives that (1) improves the price of 
the bid or offer displayed by the market maker, or (2) improves the 
size of its bid or offer by more than a de minimis amount where it is 
priced equal to the best bid or offer in the inter-dealer quotation 
system where the market maker is quoting. The Commission believes that 
extending limit order display requirements to OTC Equity Securities is 
reasonably designed to increase transparency in the market for OTC 
Equity Securities. As it has previously stated, the Commission believes 
that limit orders are a valuable component of price discovery, and that 
uniformly requiring display of such orders will encourage tighter, 
deeper, and more efficient markets.\109\ Commenters generally supported 
the proposed limit order display requirement, although some commenters 
requested certain clarifications and modifications. In response to 
comments, FINRA noted in Amendment No. 1 that its proposed limit order 
display rule would not require display of customer orders that would 
result in a violation of the minimum quotation size tiers prescribed in 
FINRA Rule 6450 (Minimum Quotation Size Requirements For OTC Equity 
Securities).\110\ FINRA also proposed a new exception for limit orders 
priced less than $0.0001 per share, consistent with the changes made to 
proposed FINRA Rule 6434 prohibiting the display of a bid or offer, 
order, or indication of interest in any OTC Equity Security priced less 
than $0.0001 per share.\111\
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    \109\ See Limit Order Display Release, supra note 100, 61 FR at 
48294. Rule 11Ac1-4, which was adopted prior to the approval of The 
Nasdaq Stock Market as a national securities exchange, applied 
generally to exchange specialists and Nasdaq market makers. Rule 
11Ac1-4 was subsequently redesignated as Rule 604 under Regulation 
NMS. See NMS Adopting Release, supra note 98.
    \110\ See Amended Notice, supra note 7.
    \111\ See id.
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    One commenter expressed concern that the proposed limit order 
display rule would apply only to OTC market-makers, rather than to all 
broker-dealers displaying a priced quotation in an inter-dealer 
quotation system or ECN, which could lead to a reduction in quotation 
activity in OTC Equity Securities. The Commission notes that FINRA's 
limit order display proposal acknowledges the role that market makers 
traditionally have played in providing price discovery and liquidity to 
the OTC Equity Securities market.
    Further, in response to commenters' concerns that market makers be 
permitted greater discretion to display only a portion of a customer 
limit order, FINRA noted that, where the member believes that a 
customer would be best served by not displaying the full size of a 
limit order, the member is free to obtain the customer's consent to 
refrain from displaying such customer's order, as permitted by a 
proposed exception to the limit order display requirement. As it has 
previously stated, the Commission believes that the presumption of 
limit order display is the proper approach.\112\ The Commission further 
believes that FINRA's limit order display proposal marks a positive 
step in efforts to improve the transparency of OTC Equity Securities 
and the handling of customer limit orders in this market sector.
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    \112\ See Limit Order Display Release, supra note 100, 61 FR at 
48301 (stating ``[t]he Commission believes that the rule 
appropriately establishes a presumption that limit orders should be 
displayed, unless such orders are of block size, the customer 
requests that its order not be displayed, or one of the exceptions 
to the rule applies. The exception allowing a customer to request 
that its limit order not be displayed gives the customer ultimate 
control in determining whether to trust the display of the limit 
order to the discretion of a market professional, or to display the 
order either in full, or in part, to other potential market 
interest.'').
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VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2009-054), as modified by 
Amendment No. 1 thereto, be, and hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\113\
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    \113\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15707 Filed 6-28-10; 8:45 am]
BILLING CODE 8010-01-P