
[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33527-33531]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13698]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67088; File No. SR-FINRA-2012-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
FINRA Rule 4210 Margin Requirements

May 31, 2012.
    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 23, 2012, 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, II 
and III 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 Rule 4210 (Margin Requirements) 
to: (1) Revise the definitions and margin treatment of option spread 
strategies; (2) clarify the maintenance margin requirement for non-
margin eligible equity securities; (3) clarify the maintenance margin 
requirements for non-equity securities; (4) eliminate the current 
exemption from the free-riding prohibition for designated accounts; (5) 
conform the definition of ``exempt account''; and (6) eliminate the 
requirement to stress test portfolio margin accounts in the aggregate. 
In addition, the proposed rule change would amend FINRA Rule 4210 to 
make non-substantive technical and stylistic changes.
    The text of the proposed rule change is available on FINRA's Web 
site at

[[Page 33528]]

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
    The proposed rule change would amend FINRA Rule 4210 (Margin 
Requirements) to: (1) Revise the definitions and margin treatment of 
option spread strategies; (2) clarify the maintenance margin 
requirement for non-margin eligible equity securities; (3) clarify the 
maintenance margin requirements for non-equity securities; (4) 
eliminate the current exemption from the free-riding prohibition for 
designated accounts; (5) conform the definition of ``exempt account''; 
and (6) eliminate the requirement to stress test portfolio margin 
accounts in the aggregate. In addition, the proposed rule change would 
amend FINRA Rule 4210 to make non-substantive technical and stylistic 
changes.
Option Spread Strategies
    Basic option spreads can be paired in such ways that they offset 
each other in terms of risk. The total risk of the combined spreads is 
less than the sum of the risk of both spread positions if viewed as 
stand-alone strategies. FINRA Rule 4210(f)(2) currently recognizes 
several specific option spread strategies.\3\ These strategies consist 
of either a ``long'' and a ``short'' option contract or two ``long'' 
and two ``short'' option contracts. The ``long'' and ``short'' option 
contracts have the same underlying security or instrument and the 
``long'' option contracts must expire on or after the expiration of the 
``short'' option contracts.
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    \3\ See FINRA Rule 4210(f)(2)(A) that currently recognizes the 
following spread strategies: box spread, butterfly spread, calendar 
(or time) spread, ``long'' calendar butterfly spread, ``long'' 
calendar condor spread, ``long'' condor spread, ``short'' calendar 
iron butterfly spread, ``short'' calendar iron condor spread, 
``short'' iron butterfly spread and ``short'' iron condor spread.
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    While the strategies recognized under FINRA Rule 4210 are the most 
common types of option spread strategies used by investors, there are 
other combinations of calls and/or puts that are similar in terms of 
their risk profile. Accordingly, FINRA proposes a broader definition of 
a spread in FINRA Rule 4210(f)(2)(A)(xxxii) to mean a ``long'' and 
``short'' position in different call option series, different put 
option series, or a combination of call and put option series, that 
collectively have a limited risk/reward profile, and meet the following 
conditions: (1) All options must have the same underlying security or 
instrument; (2) all ``long'' and ``short'' option contracts must be 
either all American-style or all European-style; \4\ (3) all ``long'' 
and ``short'' option contracts must be either all listed or all OTC; 
\5\ (4) the aggregate underlying contract value of ``long'' versus 
``short'' contracts within option type(s) must be equal; and (5) the 
``short'' option (s) must expire on or before the expiration date of 
the ``long'' option(s).
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    \4\ American-style options can be exercised or assigned at any 
time during the life of the contract. European-style options can 
only be exercised or assigned at the time of expiration.
    \5\ See FINRA Rule 4210(f)(2)(A)(xxvi) (renumbered as 
4210(f)(2)(A)(xxiv)) that defines a listed option as an option 
contract that is traded on a national securities exchange and is 
issued and guaranteed by a registered clearing agency. See also 
FINRA Rule 4210(f)(2)(A)(xxxii) (renumbered as 4210(f)(2)(A)(xxvii)) 
that defines an OTC option as an over-the-counter option contract 
that is not traded on a national securities exchange and is issued 
and guaranteed by the carrying broker-dealer.
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    The proposed revised margin requirements are set forth in FINRA 
Rule 4210(f)(2)(H) and would require that the ``long'' option contracts 
within such spreads must be paid for in full. The margin required for 
the ``short'' option contracts within such spreads would be the lesser 
of: (1) The margin required pursuant to FINRA Rule 4210(f)(2)(E); or 
(2) the maximum potential loss. The maximum potential loss would be 
determined by computing the intrinsic value of the options at price 
points for the underlying security or instrument that are set to 
correspond to every exercise price present in the spread. The intrinsic 
values are netted at each price point, and the maximum potential loss 
is the greatest loss, if any. The proceeds of the ``short'' options may 
be applied towards the cost of the ``long'' options and/or any margin 
requirement. FINRA Rule 4210(f)(2)(H)(iv) would also make clear that 
OTC option contracts that comprise a spread must be issued and 
guaranteed by the same carrying broker-dealer and the carrying broker-
dealer must also be a FINRA member. If the OTC option contracts are not 
issued and guaranteed by the same carrying broker-dealer, or if the 
carrying broker-dealer is not a FINRA member, then the ``short'' option 
contracts must be margined separately pursuant to FINRA Rule 
4210(f)(2)(E)(iii) or (E)(iv). In addition, FINRA proposes to amend 
FINRA Rule 4210(f)(2)(N) to similarly conform the margin requirements 
for spreads that are permitted in a cash account.
    FINRA proposes to eliminate the definitions for the option spread 
strategies currently recognized within the rule, along with the 
specific margin requirements associated with each spread, with the 
exception of a ``long'' box spread consisting of European-style 
options.\6\ FINRA Rule 4210(f)(2)(H)(v)g.\7\ currently allows a margin 
requirement equal to 50% of the aggregate difference in the exercise 
prices. This is the only spread strategy that allows loan value, and 
FINRA believes that retaining this provision is appropriate.
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    \6\ See FINRA Rule 4210(f)(2)(A)(vi). A box spread means an 
aggregation of positions in a ``long'' call and ``short'' put with 
the same exercise price (``buy side'') coupled with a ``long'' put 
and ``short'' call with the same exercise price (``sell side'') 
structured as: (1) a ``long'' box spread in which the sell side 
exercise price exceeds the buy side exercise price; or (2) a 
``short'' box spread in which the buy side exercise price exceeds 
the sell side exercise price, all of which have the same contract 
size, underlying component or index and time of expiration, and are 
based on the same aggregate current underlying value.
    \7\ FINRA Rule 4210(f)(2)(H)(v)g. would be renumbered as FINRA 
Rule 4210(f)(2)(H)(v)e.
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Non-Margin Eligible Equity Securities
    FINRA proposes to clarify the maintenance margin requirement for 
non-margin eligible equity securities. FINRA Rule 4210(c)(1) prescribes 
a maintenance margin requirement of 25% of the current market value of 
all securities (except for security futures contracts) held ``long'' in 
an account. FINRA believes that non-margin eligible equity securities 
should be subject to more stringent margin requirements in light of the 
nature of such securities. Accordingly, FINRA proposes to amend FINRA 
Rule 4210(c)(1) regarding securities held ``long'' to clarify that the 
maintenance margin requirement of 25% of the current market value would 
apply only to margin securities as defined in Regulation T.\8\ 
Consequently, non-margin eligible equity securities would be excluded 
from such margin treatment and the maintenance margin requirement for 
non-margin eligible equity securities would be 100% of the

[[Page 33529]]

current market value.\9\ This maintenance margin requirement of 100% 
for non-margin eligible equity securities is consistent with the 
requirement outlined in Regulatory Notice 11-16. However, FINRA notes 
that two provisions of Regulatory Notice 11-16 would be superseded. 
Firms may no longer extend maintenance loan value on non-margin 
eligible equity securities either to satisfy maintenance margin 
deficiencies or when used to collateralize non-purpose loans, except as 
otherwise provided by FINRA in writing. To this end, FINRA intends to 
allow a firm to extend credit on a non-margin eligible security \10\ 
only to the extent: (1) The security is collateralizing a non-purpose 
loan debit; and (2) such security can be liquidated in a period not 
exceeding 20 business days, based on a rolling 20 business day median 
trading volume. The maintenance loan value for the non-margin eligible 
security would be calculated based on the applicable maintenance margin 
requirements for a margin eligible security. If the security fails to 
meet the trading volume requirement, then the security would no longer 
be entitled to maintenance loan value, and a 100% maintenance margin 
requirement would be applied together with a deduction to net capital 
pursuant to Rule 15c3-1 and, if applicable, FINRA Rule 4110(a). 
Notwithstanding the foregoing, FINRA intends to allow that in the case 
of offshore mutual funds, a firm may extend maintenance loan value, 
based on a 25% maintenance margin requirement, to collateralize a non-
purpose loan, provided that the fund has an affiliation with a U.S.-
based fund registered with the SEC under the Investment Company Act of 
1940, and the fund shares can be liquidated or redeemed daily.
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    \8\ See Regulation T section 200.2 for the definition of margin 
security.
    \9\ See Regulatory Notice 11-16 (April 2011) and Regulatory 
Notice 11-30 (June 2011) (Regulatory Notice 11-30 delayed the 
effective date of Regulatory Notice 11-16 until October 3, 2011).
    \10\ The exception to permit firms to extend maintenance loan 
value would apply to both equity and non-equity non-margin eligible 
securities.
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    Similar to the treatment above, FINRA also proposes to amend Rule 
4210(f)(8)(B)(iii) to clarify that the special maintenance margin 
requirement for day traders, based on the cost of all day trades made 
during the day, would be 25% for margin eligible equity securities, and 
100% for non-margin eligible equity securities.\11\
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    \11\ The special maintenance margin requirement for non-margin 
eligible equity securities for day traders is consistent with the 
margin requirements outlined in Regulatory Notice 11-16.
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    In addition, FINRA proposes to adopt new paragraph (g)(7)(E) of 
FINRA Rule 4210 regarding the margin requirements for non-margin 
eligible equity securities held in a portfolio margin account. 
Consistent with the margin treatment above, the provision would clarify 
that non-margin eligible equity securities held ``long'' in a portfolio 
margin account would have a maintenance margin requirement equal to 
100% of the current market value at all times.\12\ Paragraph (g)(7)(E) 
would also provide that non-margin eligible equity securities held 
``short'' in a portfolio margin account would have a maintenance margin 
requirement equal to 50% of the current market value at all times.\13\ 
FINRA believes that setting this specific requirement is necessary to 
help ensure that customers do not attempt to circumvent the initial 
margin requirements of Regulation T and place all short sales in a 
portfolio margin account to obtain lower margin requirements.\14\
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    \12\ The maintenance margin requirement for non-margin eligible 
equity securities held ``long'' in a portfolio margin account is 
consistent with the margin requirements outlined in Regulatory 
Notice 11-16.
    \13\ The maintenance margin requirement for ``short'' non-margin 
eligible equity securities held in a portfolio margin account would 
supersede the maintenance margin requirement for such securities 
specified in Regulatory Notice 11-16.
    \14\ See Rule 4210(g)(7).
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    FINRA also proposes to amend paragraph (g)(7)(D) of FINRA Rule 4210 
to clarify that although non-margin eligible equity securities are not 
eligible for portfolio margin treatment, they may be carried in a 
portfolio margin account, provided that the member uses strategy-based 
margin requirements unless such securities are subject to other 
provisions of paragraph (g). For example, non-margin eligible equity 
securities may be carried in a portfolio margin account, but the 
amendment would clarify that they would be subject to the margin 
treatment set forth in FINRA Rule 4210(g)(7)(E), rather than FINRA Rule 
4210(c).
Non-Equity Securities
    FINRA proposes to further amend FINRA Rule 4210 to clarify the 
appropriate maintenance margin requirement for non-equity securities in 
a margin account. Paragraph (c)(4) stipulates a maintenance margin 
requirement for each bond held ``short'' in a margin account. Paragraph 
(e)(2)(C) stipulates the maintenance margin requirements on any 
positions in specified non-equity securities \15\ that are inconsistent 
with the requirements in paragraph (c)(4). FINRA received several 
inquiries as to the appropriate maintenance margin requirement for any 
``short'' non-equity security. Accordingly, FINRA proposes to amend 
FINRA Rule 4210 to clarify that the margin requirements in paragraph 
(c)(4) would apply to non-margin eligible, non-equity securities held 
``short'' \16\ while the margin requirements in paragraph (e)(2)(C) 
would apply to the specified margin-eligible non-equity securities held 
``short'' or ``long.'' \17\ FINRA also proposes to add a reference to 
``short'' or ``long'' to each of paragraphs (e)(2)(B), (F) and (G) to 
further clarify that such provisions apply to securities held short or 
long.
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    \15\ Paragraph (e)(2)(C) provides the maintenance margin 
requirements for (1) investment grade debt securities and (2) all 
other listed non-equity securities and all other margin eligible 
non-equity securities as defined in FINRA Rule 4210(a)(16).
    \16\ Non-margin eligible non-equity securities held ``long'' 
would be excluded from such margin treatment, and the maintenance 
margin requirement for such securities would be 100% of the current 
market value.
    \17\ See also FINRA Rule 4210(e)(2)(A), which establishes the 
maintenance margin requirements for long or short positions on 
obligations issued or guaranteed by the United States or obligations 
that are highly rated foreign sovereign debt securities.
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``Free-Riding''
    ``Free-riding'' is the purchase of a security and the selling of 
the same security in the cash account, using the proceeds of the sale 
to satisfy the purchase. Such activity is prohibited under section 
220.8(a)(1)(ii) of Regulation T. FINRA Rule 4210(f)(9) addresses free-
riding in the cash account and currently exempts broker-dealers and 
``designated accounts.'' \18\ While the term ``designated account'' 
generally includes banks, savings associations, insurance companies, 
investment companies, states or political subdivisions, and ERISA 
pension or profit sharing plans, FINRA believes that it is appropriate 
to treat such accounts as any other customer regarding this activity. 
Accordingly, FINRA proposes to eliminate this exemption for designated 
accounts consistent with Regulation T.
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    \18\ See FINRA Rule 4210(a)(4) for the definition of 
``designated account.''
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``Exempt Account''
    Certain non-equity securities such as exempted securities, mortgage 
related securities, highly rated foreign sovereign debt securities, and 
investment grade debt securities may be subject to reduced maintenance 
margin requirements (or require no margin be deposited) for an ``exempt 
account,'' as defined in FINRA Rule 4210(a)(13).\19\ FINRA notes that 
FINRA Rule 4210(f)(2)(E)(iv) regarding reduced maintenance margin 
requirements for OTC put and call options on certain U.S. Government 
and U.S. Government

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Agency debt securities retained an earlier definition of ``exempt 
account'' that was not updated in 2003 when the NYSE and NASD amended 
the definition of ``exempt account'' by raising the dollar threshold in 
paragraph (a)(13) for all other purposes in their respective margin 
rules.\20\ The definition of ``exempt account'' currently referenced in 
paragraph (f)(2)(E)(iv) was retained as a result of comment letters 
received by the SEC in 2003, expressing concern that customers who no 
longer qualified as ``exempt accounts'' in the amended paragraph 
(a)(13) definition would be subject to higher maintenance margin 
requirements for the securities addressed in paragraph (f)(2)(E)(iv). 
Therefore, such definition was maintained only for the provision in 
paragraph (f)(2)(E)(iv) to allow existing customers to continue to 
avail themselves of the reduced margin requirements. However, the SEC 
noted that exempt accounts that met the requirements for exempt account 
status would be ``grandfathered'' on the existing credit transactions 
but that the new requirements (the current paragraph (a)(13) ``exempt 
account'' requirements) would apply to any new credit transactions or 
roll-overs of existing transactions.\21\ In light of the application of 
the 2003 exempt account definition to new and roll-over transactions 
and the significant passage of time, FINRA believes that maintaining 
these separate definitions is no longer necessary and proposes to 
delete the definition of ``exempt account'' contained in paragraph 
(f)(2)(E)(iv) and require an exempt account to satisfy the definition 
of ``exempt account'' in paragraph (a)(13) to qualify for the reduced 
margin on such options.
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    \19\ See FINRA Rule 4210(e)(2)(F), (G) and (H).
    \20\ See Securities Exchange Act Release No. 48407 (August 25, 
2003), 68 FR 52259 (September 2, 2003) (Order Approving File No. SR-
NASD-2000-08) (``NASD Order''); Securities Exchange Act Release No. 
48365 (August 19, 2003), 68 FR 51314 (August 26, 2003) (Order 
Approving File No. SR-NYSE-98-14); and Securities Exchange Act 
Release No. 48133 (July 7, 2003), 68 FR 41672 (July 14, 2003) 
(Notice of Filing of File No. SR-NYSE-98-14) (``NYSE Notice of 
Filing'').
    \21\ See note 20, page 52261 of the NASD Order and page 41676 of 
NYSE Notice of Filing.
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Portfolio Margin
    FINRA proposes to eliminate the monitoring requirement contained in 
FINRA Rule 4210(g)(1)(D) that stress testing of accounts must be done 
in the aggregate for portfolio margin accounts. The rule would continue 
to require firms to stress test portfolio margin accounts on an 
individual account basis. FINRA has been reviewing the portfolio margin 
program and believes that the stress testing on an individual account 
basis is sufficient from a risk perspective.
Technical Changes
    Finally, the proposed rule change amends FINRA Rule 4210 to make 
non-substantive technical and stylistic changes to encourage 
consistency throughout the rule and enhance readability.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 90 days 
following publication of the Regulatory Notice announcing 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,\22\ 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 the proposed rule change regarding 
the options spread strategies would set margin requirements 
commensurate with the risk of options spread strategies. FINRA further 
believes that the proposed rule change would clarify the margin 
requirements for non-margin eligible equity securities and non-equity 
securities to ensure consistent regulation regarding the margin 
treatment for such securities and strategies. FINRA also believes that 
the proposed rule change regarding conforming the definition of 
``exempt accounts'' would ensure consistent regulation regarding such 
accounts. In addition, FINRA believes that the proposed rule change 
regarding eliminating the exemption from the ``free-riding'' provision 
for ``designated accounts'' is consistent with Regulation T. Finally, 
FINRA believes that the proposed rule change regarding stress testing 
of individual portfolio margin accounts is reflective of the risk of 
such accounts.
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    \22\ 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA 2012-024 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-2012-024. This 
file number should be included on the subject line if email 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

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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-2012-024 and should be 
submitted on or before June 27, 2012.
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    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13698 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P


