
[Federal Register: October 8, 2010 (Volume 75, Number 195)]
[Notices]               
[Page 62439-62441]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08oc10-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63032; File No. SR-FINRA-2010-043]

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

October 4, 2010.

I. Introduction

    On August 6, 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 amend FINRA's trade reporting 
and Order Audit Trail System (``OATS'') rules, including changes 
relating to recent amendments to SEC Regulation SHO. The proposed rule 
change was published for comment in the Federal Register on August 26, 
2010.\3\ The Commission received two comment letters on the 
proposal,\4\ and a letter from FINRA responding to the comments.\5\ 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62748 (Aug. 20, 
2010), 75 FR 52574 (Aug. 26, 2010).
    \4\ See Letter from Mike Wiesenberg, dated September 8, 2010 
(``Wiesenberg Letter''); Letter from Manisha Kimmel, Executive 
Director, Financial Information Forum, to Elizabeth M. Murphy, 
Secretary, Commission, dated September 17, 2010 (``FIF Letter'').
    \5\ See Letter from Brant K. Brown, Associate General Counsel, 
FINRA to Elizabeth M. Murphy, Secretary, Commission, dated September 
28, 2010 (``FINRA Response Letter'').
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II. Description of the Proposed Rule Change

    On February 26, 2010, the SEC adopted amendments to SEC Regulation 
SHO.\6\ These amendments, among other

[[Page 62440]]

things, implement a short sale circuit breaker for NMS stocks \7\ 
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.'' 
\8\
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    \6\ See Securities Exchange Act Release No. 61595 (February 26, 
2010), 75 FR 11232 (March 10, 2010).
    \7\ 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).
    \8\ The Commission amended Rule 200(g) of Regulation SHO to add 
a ``short exempt'' marking requirement. The amendments to SEC 
Regulation SHO became effective on May 10, 2010 with a compliance 
date of November 10, 2010. See supra note 6.
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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; and
     Transactions on a volume-weighted average price basis (or 
``VWAP'').\9\
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    \9\ 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 has proposed to amend its trade reporting rules 
applicable to over-the-counter trades in NMS stocks to reintroduce the 
short sale exempt category.\10\ Specifically, FINRA has proposed 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).\11\
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    \10\ 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).
    \11\ 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 has proposed 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.\12\ FINRA 
also has proposed to require that members include the price on all 
route reports and a short exempt identifier, if applicable.\13\
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    \12\ See FINRA Rule 7440(b)(9).
    \13\ 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 has proposed 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.\14\ First, FINRA has proposed 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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    \14\ See FINRA Rules 6282, 6380A, 6380B, 6622, 7230A, 7230B and 
7330.
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    Second, FINRA has proposed 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 submit their own 
trade information (as described more fully below), which will be 
codified in the rule upon implementation of the proposed changes. 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, upon implementation of the proposed changes, 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),\15\ 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, upon implementation of the proposed 
changes, 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 information from the reporting side perspective (and 
the contra side will provide information from the contra side 
perspective).
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    \15\ 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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    FINRA has stated that the implementation date will be November 10, 
2010.

III. Comment Letters

    The Commission received two comment letters in response to the 
proposed rule change.\16\ The Commission also received FINRA's response 
to comments.\17\ The comment letters, as well as FINRA's response, are 
discussed below.
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    \16\ See Wiesenberg Letter and FIF Letter.
    \17\ See FINRA Response Letter. See also supra note 5.
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    The FIF Letter raises a number of concerns regarding the proposal.

[[Page 62441]]

Specifically, the FIF Letter raises concerns regarding the November 10, 
2010 implementation date for the proposed rule changes given other 
regulatory initiatives with similar implementation timeframes. In 
response to these concerns, FINRA points out that the proposed 
amendments are to facilitate its surveillance efforts concerning firms' 
compliance with amendments to Regulation SHO, which becomes effective 
November 10, 2010. FINRA believes that it is necessary that the 
implementation date of the proposed amendments coincide with the 
implementation date of the amendments to Regulation SHO.
    The FIF Letter also raises concerns with the amount of time allowed 
for testing prior to implementation of the proposed amendments. In 
response, FINRA has represented that it has moved up the testing 
timetable to allow firms to begin testing on October 11th, rather than 
on October 20th as initially proposed.
    The FIF Letter expresses concerns regarding the complexity of the 
proposed changes and cites the creation of certain route reports for 
post trade agency allocation as an example of such complexity. FINRA 
explains that the requirement to provide the price of a routed order on 
route reports does not change any of the reporting requirements for 
orders handled on an agency average price or post trade allocation 
basis. FINRA also states that it has published a new FAQ on its OATS 
Web site on this issue.
    Lastly, the FIF Letter indicates that there may be confusion 
regarding the proposed November 10th implementation date of the 
proposed rule change and the November 8th date when the changes will be 
available in the OATS production environment.\18\ FINRA clarifies that 
although the OATS field format changes will be placed in the production 
environment on November 8th, they will not be required to be populated 
until the proposed November 10th implementation date of the proposed 
rule change. FINRA also states that it has published a new FAQ on its 
OATS Web site to this effect.
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    \18\ The FIF Letter also raises concerns regarding the ISO 
Indicator on route reports. FINRA notes that firms are already 
required to indicate on route reports whether an order is routed as 
an Intermarket Sweep Order. FINRA also points out that the ISO 
indicator is not one of the proposed amendments in the proposed rule 
change and therefore should not affect the Commission's 
consideration of the proposal.
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    The Wiesenberg Letter raises an issue, not with respect to one of 
the proposed amendments in the proposed rule change, rather with 
respect to one of the proposed requirements in FINRA's OATS Reporting 
Technical Specifications \19\ related to the proposed rule change, the 
addition of the Routed Order Type Indicator. The commenter believes 
that the proposed requirement ``can be determined from [other OATS] 
information supplied'' by the reporting member, ``serve[s] no purpose'' 
and ``provides no useful additional information.'' \20\ The commenter 
also generally questions whether such requirement is consistent with 
the Act and urges FINRA to reconsider the proposed requirement in 
FINRA's OATS Reporting Technical Specifications and re-file the 
proposed rule change \21\ or, in the alternative, that the Commission 
reject the proposal. FINRA disagrees with the commenter and responds 
that the Routed Order Type Indicator ``helps FINRA to validate whether 
a price must be included on a Route Report, particularly since the 
order type of a route may not be the same as the order type of the 
parent order received from the firm.'' \22\
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    \19\ FINRA's OATS Reporting Technical Specifications outline 
detailed reporting requirements concerning the OATS rules, 
including, among other things, providing firms with record and file 
formats and transmission requirements.
    \20\ See Wiesenberg Letter.
    \21\ The commenter's suggestion that FINRA re-file the proposed 
rule change would not address the addition of the Routed Order Type 
Indicator, as such requirement is contained in FINRA's OATS 
Reporting Technical Specifications, not the proposed rule change.
    \22\ See FINRA Response Letter.
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IV. Discussion and Commission's Findings

    After careful review of the proposed rule change, the comment 
letters received and the FINRA Response Letter, the Commission believes 
that the proposed rule change is consistent with the requirements of 
the Act, and the rules and regulations thereunder that are applicable 
to a national securities association.\23\ 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, and, in general, to protect 
investors and the public interest.
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    \23\ 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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    With regard to the comments received, the Commission believes that 
FINRA has adequately responded to the commenters' concerns. 
Additionally, the Commission agrees with FINRA and believes that the 
proposed rule change to amend FINRA's trade reporting and OATS rules, 
including changes relating to recent amendments to SEC Regulation SHO, 
will enhance FINRA's surveillance for member compliance, including with 
SEC Regulation SHO.
    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (File No. SR-FINRA-2010-043) be 
and hereby is approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25331 Filed 10-7-10; 8:45 am]
BILLING CODE 8011-01-P

