
[Federal Register: August 26, 2010 (Volume 75, Number 165)]
[Notices]               
[Page 52574-52576]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au10-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62748; File No. SR-FINRA-2010-043]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To 
Reinstitute Short Exempt Marking for Trade Reporting and OATS

August 20, 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 August 6, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA's trade reporting and Order Audit 
Trail System (``OATS'') rules, including changes relating to recent 
amendments to SEC Regulation SHO.
    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.

[[Page 52575]]

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 February 26, 2010, the SEC adopted amendments to SEC Regulation 
SHO.\3\ These amendments, among other things, implement a short sale 
circuit breaker for NMS stocks \4\ triggered by a 10% or more decrease 
in the price of the security from such security's closing price as 
determined by the listing market for that security at the end of 
regular trading hours on the prior trading day. Once the circuit 
breaker is triggered, Regulation SHO, as amended, is designed to 
generally prohibit the execution or display of short sale orders of a 
covered security at a price that is less than or equal to the current 
national best bid for the remainder of the day and the following day 
(``short sale price test restriction''). In addition to the short sale 
price test restriction, the amendments to Regulation SHO reinstitute a 
short sale exempt marking category by providing that a broker-dealer 
may mark certain qualifying sell orders ``short exempt.'' \5\
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    \3\ See Securities Exchange Act Release No. 61595 (February 26, 
2010), 75 FR 11232 (March 10, 2010).
    \4\ NMS stock means any NMS security other than an option. Rule 
600(b)(46) of SEC Regulation NMS defines ``NMS security'' as any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options. See 17 CFR 
242.600(b)(46).
    \5\ The amendments to SEC Regulation SHO became effective on May 
10, 2010 with a compliance date of November 10, 2010. See supra note 
3.
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    Paragraphs (c) and (d) of Rule 201 of SEC Regulation SHO set forth 
the provisions pursuant to which an order may be marked ``short 
exempt'' once the circuit breaker has been triggered pursuant to 
paragraph (b)(3). These provisions include:
     Broker-dealer policies and procedures provision.
     Seller's delay in delivery.
     Odd lot transactions.
     Domestic arbitrage.
     International arbitrage.
     Over-allotments and lay-off sales.
     Riskless principal transactions.
     Transactions on a volume-weighted average price basis (or 
``VWAP'').\6\
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    \6\ SEC staff has confirmed that members may use the existing 
``.W'' modifier in connection with the VWAP exception of Rule 
201(d)(7) of Regulation SHO. The use of the .W modifier would be in 
addition to the requirement to report the trade as short exempt.
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    In light of the reinstitution of the ``short exempt'' marking 
category, FINRA is proposing to amend its trade reporting rules 
applicable to over-the-counter trades in NMS stocks to reintroduce the 
short sale exempt category.\7\ Specifically, FINRA is proposing that, 
for short sales in all NMS stocks as defined in Rule 600(b)(47) of SEC 
Regulation NMS, members must indicate on trade reports submitted to 
FINRA if a transaction is ``short sale exempt'' (i.e., if it is a short 
sale transaction in a ``covered security'' that may be marked ``short 
exempt'' pursuant to SEC Regulation SHO).\8\
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    \7\ See FINRA Rules 6182 (Trade Reporting of Short Sales), 6282 
(Alternative Display Facility), 6380A (FINRA/Nasdaq TRF), 6380B 
(FINRA/NYSE TRF), 7230A (FINRA/Nasdaq TRF), and 7230B (FINRA/NYSE 
TRF).
    \8\ FINRA previously required trade reports to indicate if a 
transaction was marked ``short exempt''; however, these requirements 
were eliminated following the repeal of SEC Rule 10a-1. See 
Securities Exchange Act Release No. 56279 (August 17, 2007), 72 FR 
48713 (August 24, 2007) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASD-2007-047).
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    Similarly, FINRA is proposing to amend its OATS rules to provide 
that, when an order is received or originated, members must record the 
designation of an order as a short sale exempt order if the order may 
be marked ``short exempt'' pursuant to SEC Regulation SHO.\9\ FINRA 
also is proposing to require that members include the price on all 
route reports and a short exempt identifier, if applicable.\10\
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    \9\ See FINRA Rule 7440(b)(9).
    \10\ Whenever a member transmits an order to another member, 
ECN, non-member or national securities exchange for handling or 
execution, the routing member is responsible for recording and 
reporting a route report to OATS. Under the proposal, route reports 
would be required to include the price at which the order was 
routed, which may be different from the price received from the 
customer, and whether the routed order is short exempt. The short 
exempt identifier is important for purposes of route reports because 
certain short sale orders will be eligible to be marked exempt 
solely as a result of the timing and price of the routed order (See 
Rule 201(c) of SEC Regulation SHO).
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    FINRA is proposing certain additional amendments to its trade 
reporting rules, including those applicable to OTC Equity Securities, 
as defined in Rule 6420 (i.e., non-NMS stocks) to clarify certain 
existing reporting requirements.\11\ First, FINRA is proposing to 
clarify that the short sale indicator (and short sale exempt indicator, 
for NMS stocks) is required on reports of a ``cross,'' as well as 
reports of a ``sell.''
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    \11\ See FINRA Rules 6282, 6380A, 6380B, 6622, 7230A, 7230B and 
7330.
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    Second, FINRA is proposing to codify the existing requirement that 
the information listed in the rule must be provided for each trade that 
is reported to FINRA. Today, trade report information can be provided 
in a single report, if the reporting member submits trade information 
for both sides of the trade, or it can be provided in a combination of 
reports, if the reporting member and contra side each submits its own 
trade information (as described more fully below). For each trade 
reported to FINRA, members must indicate, among other things, whether 
the seller (either the reporting member or contra side, irrespective of 
whether the contra side is a member) is selling short or short exempt.
    Unless the contra side will have an opportunity to provide its own 
trade information (i.e., unless the contra side is a member using the 
trade comparison functionality of the facility),\12\ the reporting 
member is responsible for providing complete and accurate information 
for both sides of the trade, including information from the contra side 
perspective such as sell short and sell short exempt, as applicable. 
Thus, the reporting member is responsible for satisfying any applicable 
contra side information requirements where: (1) The trade is with a 
customer or non-member, (2) the trade is with a member and is ``locked 
in'' pursuant to a give up agreement, or (3) the trade is reported as 
``tape only'' (i.e., for public dissemination purposes without 
clearing) or ``non-tape, non-clearing.'' This reporting requirement is 
in effect today; however, the proposed rule change would make it an 
express requirement in the rule. If the contra side is a member and 
will have an opportunity to provide its own trade information, then the 
reporting member is responsible only for providing

[[Page 52576]]

information from the reporting side perspective (and the contra side 
will provide information from the contra side perspective).
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    \12\ The trade comparison functionality allows the contra party 
to accept or decline the trade information submitted by the 
reporting party and may only be used by a contra party that is a 
member. FINRA notes that the Alternative Display Facility, FINRA/
Nasdaq TRF and ORF offer trade comparison functionality; the FINRA/
NYSE TRF does not offer such functionality. Accordingly, reporting 
members are responsible for accurately and completely providing all 
information required under the rule for the contra side when 
reporting to the FINRA/NYSE TRF.
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    The implementation date will be November 10, 2010.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest. FINRA believes that adopting the proposed rule change 
will aid in FINRA's surveillance for member compliance, including with 
SEC Regulation SHO.
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    \13\ 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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

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-2010-043 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-2010-043. 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-2010-043 
and should be submitted on or before September 16, 2010.

    For the Commission, by the Division of Trading and Markets, 
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. 2010-21201 Filed 8-25-10; 8:45 am]
BILLING CODE 8011-01-P

