
[Federal Register: July 26, 2010 (Volume 75, Number 142)]
[Notices]               
[Page 43588-43589]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jy10-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62533; File No. SR-FINRA-2010-028]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving 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

July 20, 2010.
    On May 21, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``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 adopt NASD Rule 3210 as FINRA Rule 4320 in the 
consolidated FINRA rulebook. On June 11, 2010, FINRA filed Amendment 
No. 1 to the proposed rule change.\3\ The proposed rule change, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on June 17, 2010.\4\ The Commission received no comments on 
the proposal. 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\ Amendment No. 1 was a partial amendment that made minor 
clarifications, provided additional detail and made technical edits 
to the purpose section of the proposed rule change.
    \4\ See Securities Exchange Act Release No. 62288 (Jun. 11, 
2010), 75 FR 34496 (Jun. 17, 2010).
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I. Description of the Proposed Rule Change

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\5\

[[Page 43589]]

FINRA has proposed 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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    \5\ FINRA stated that 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''). FINRA 
also stated that 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 \6\ or that are required to file 
reports pursuant to Section 15(d) of the Act \7\).
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    \6\ 15 U.S.C. 78l.
    \7\ 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.'' \8\ 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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    \8\ FINRA stated that, 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 
\9\ under Regulation SHO as a permanent rule, Rule 204 of Regulation 
SHO.\10\ 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 that, subject to certain limited 
exceptions, if a registered clearing agency participant has a fail to 
deliver position resulting from a short sale at a registered clearing 
agency it must immediately purchase or borrow securities to close out a 
fail to deliver position by no later than the beginning of regular 
trading hours on the settlement day following settlement date.\11\
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    \9\ See Securities Exchange Act Release No. 58785 (Oct. 14, 
2008), 73 FR 61678 (Oct. 17, 2008).
    \10\ See Securities Exchange Act Release No. 60388 (July 27, 
2009), 74 FR 38266 (July 31, 2009).
    \11\ 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).
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    Notwithstanding the SEC's adoption of this new rule, FINRA believes 
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.\12\
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    \12\ 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 has proposed 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 proposed rule change makes certain technical 
amendments to the rule, including changing references to ``NASD'' to 
``FINRA.''
    FINRA has represented that it 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.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act, and the rules and regulations thereunder that 
are applicable to a national securities association.\13\ In particular, 
the Commission believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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 believes that the proposed rule change to 
adopt NASD Rule 3210 as FINRA Rule 4320 in 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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    \13\ In approving the 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).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-FINRA-2010-028), as 
modified by Amendment No. 1, be and hereby is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18168 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P

