Document ID: SEC-2010-0878-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-06-17T04:00Z

[Federal Register: June 17, 2010 (Volume 75, Number 116)]
[Notices]               
[Page 34496-34498]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn10-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62288; File No. SR-FINRA-2010-028]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change, as 
Modified by Amendment No. 1, To Adopt NASD Rule 3210 (Short Sale 
Delivery Requirements) as FINRA Rule 4320 in the Consolidated FINRA 
Rulebook

June 11, 2010.
    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 21, 2010, 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 by FINRA. On June 11, 
2010, FINRA filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was a partial amendment that makes minor 
clarifications, provides additional detail and makes technical edits 
to the purpose section of the proposed rule change.
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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 NASD Rule 3210 (Short Sale Delivery 
Requirements), with minor changes, as FINRA Rule 4320 in the 
consolidated FINRA rulebook.
    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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\4\

[[Page 34497]]

FINRA is proposing to adopt NASD Rule 3210 (Short Sale Delivery 
Requirements), with minor changes, as FINRA Rule 4320 in the 
Consolidated FINRA Rulebook.
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    \4\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members, unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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    On April 4, 2006, the SEC approved NASD Rule 3210, which applies 
short sale delivery requirements to those equity securities not 
otherwise covered by the close-out requirements of Regulation SHO. The 
Regulation SHO close-out requirements apply only to the equity 
securities of ``reporting'' issuers (i.e., issuers that are registered 
pursuant to Section 12 of the Act \5\ or that are required to file 
reports pursuant to Section 15(d) of the Act \6\).
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    \5\ 15 U.S.C. 78l.
    \6\ 15 U.S.C. 78o(d).
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    NASD Rule 3210, among other things, requires participants of 
registered clearing agencies to take action on failures to deliver that 
exist for 13 consecutive settlement days in certain non-reporting 
securities. In addition, if the fail to deliver position is not closed 
out in the requisite time period, a participant of a registered 
clearing agency or any broker-dealer for which it clears transactions 
is prohibited from effecting further short sales in the particular 
specified security without borrowing, or entering into a bona fide 
arrangement to borrow, the security until the fail to deliver position 
is closed out. Pursuant to NASD Rule 3210, FINRA publishes a daily 
``Threshold Security List.'' \7\ The rule became effective on July 3, 
2006. In adopting NASD Rule 3210, FINRA believed that the rule 
represented an important step in reducing long-term fails to deliver in 
this sector of the marketplace.
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    \7\ For purposes of Rule 3210, a non-reporting threshold 
security is any equity security that is not a reporting security 
and, for five consecutive settlement days, has: (1) Aggregate fails 
to deliver at a registered clearing agency of 10,000 shares or more; 
and (2) a reported last sale during normal market hours (9:30 a.m. 
to 4 p.m., Eastern Time (ET)) for the security on that settlement 
day that would value the aggregate fail to deliver position at 
$50,000 or more.
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    In July 2009, the SEC adopted the substance of temporary Rule 204T 
\8\ under Regulation SHO as a permanent rule, Rule 204 of Regulation 
SHO.\9\ This rule is intended to further the goal of reducing fails to 
deliver and addressing potentially abusive ``naked'' short selling in 
all equity securities by requiring the delivery of securities by 
settlement date or, in connection with a short sale, the immediate 
purchase or borrow of such securities to close out the fail to deliver 
position by no later than the beginning of regular trading hours on the 
following settlement day.\10\ Notwithstanding the SEC's adoption of 
this new rule, proposed FINRA Rule 4320 continues to be necessary to 
provide regulatory coverage for fails to deliver in non-reporting over-
the-counter equity securities that pre-exist the SEC's implementation 
of temporary Rule 204T in September 2008.\11\
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    \8\ See Securities Exchange Act Release No. 58785 (Oct. 14, 
2008), 73 FR 61678 (Oct. 17, 2008).
    \9\ See Securities Exchange Act Release No. 60388 (July 27, 
2009), 74 FR 38266 (July 31, 2009).
    \10\ Rule 204 of Regulation SHO further provides that fails to 
deliver resulting from long sales or certain bona fide market making 
activity must be closed out by no later than the beginning of 
regular trading hours on the third settlement day after settlement 
date (i.e., T+6).
    \11\ Likewise, the SEC is retaining Rule 203(b)(3) of Regulation 
SHO in order to cover pre-existing temporary Rule 204T fails in 
threshold securities as defined in Rule 203(c)(6) of Regulation SHO.
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    Therefore, FINRA is proposing to adopt NASD Rule 3210 as FINRA Rule 
4320 with minor changes to delete language that provided allowances for 
``grandfathered'' securities during the initial implementation period 
of NASD Rule 3210 and that, therefore, is no longer relevant. The 
proposed rule change also clarifies, consistent with Regulation SHO, 
the borrowing requirements for clearing agency participants, including 
broker-dealers for which they clear transactions, that sell short non-
reporting threshold securities for which a fail to deliver position has 
not been closed out in the requisite time. Specifically, if a fail to 
deliver position is not closed out in accordance with Rule 4320(a), the 
clearing agency participant and any broker-dealer for which it clears, 
including market makers otherwise entitled to rely on the Rule 
203(b)(2)(iii) exception of Regulation SHO, would not be able to short 
sell the non-reporting threshold security either for itself or for the 
account of another, unless it has previously arranged to borrow or 
borrowed the security, until the participant closes out the fail to 
deliver position by purchasing securities of like kind and quantity and 
that purchase has cleared and settled at a registered clearing agency. 
In addition, the rule change makes certain technical amendments to the 
rule, including changing references to ``NASD'' to ``FINRA.''
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. The implementation date will be no more 
than 180 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,\12\ 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 rules as 
part of the Consolidated FINRA Rulebook continues to be necessary to 
provide regulatory coverage for fails to deliver in non-reporting over-
the-counter equity securities and will continue to help reduce long-
term fails to deliver in this sector of the marketplace.
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    \12\ 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

    Within 35 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 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:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or

[[Page 34498]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-028 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-2010-028. 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 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 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-2010-028 
and should be submitted on or before July 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-14609 Filed 6-16-10; 8:45 am]
BILLING CODE 8010-01-P