[Federal Register Volume 87, Number 192 (Wednesday, October 5, 2022)]
[Notices]
[Pages 60421-60427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21560]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95939; File No. SR-FINRA-2022-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 11892 (Clearly Erroneous 
Transactions in Exchange-Listed Securities)

September 29, 2022.
    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 September 28, 2022, the 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. FINRA 
has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 11892 (Clearly Erroneous 
Transactions in Exchange-Listed Securities) to make the current clearly 
erroneous pilot program permanent and limit the circumstances under 
which clearly erroneous review would be available.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal

[[Page 60422]]

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
    On September 1, 2022, the Commission approved the proposal of Cboe 
BZX Exchange, Inc. (``BZX'') to amend BZX Rule 11.17, Clearly Erroneous 
Executions, to: (1) make the current clearly erroneous pilot program 
permanent; and (2) limit the circumstances where clearly erroneous 
review would continue to be available during regular trading hours,\4\ 
when the LULD Plan to Address Extraordinary Market Volatility (the 
``LULD Plan'') \5\ already provides similar protections for trades 
occurring at prices that may be deemed erroneous.\6\ FINRA now proposes 
to similarly amend FINRA's rules for clearly erroneous transactions in 
exchange-listed securities to: (1) make the current clearly erroneous 
pilot program permanent; and (2) limit the circumstances where clearly 
erroneous review would continue to be available during normal market 
hours,\7\ when the LULD Plan already provides similar protections for 
trades occurring at prices that may be deemed erroneous.\8\ FINRA 
believes that these changes are appropriate as the LULD Plan has been 
approved by the Commission on a permanent basis,\9\ and in light of 
amendments to the LULD Plan, including changes to the applicable price 
bands \10\ around the open and close of trading.
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    \4\ Under BZX rules, the term ``regular trading hours'' means 
the time between 9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 
1.5(w).
    \5\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \6\ See Securities Exchange Act Release No. 95658 (September 1, 
2022), 87 FR 55060 (September 8, 2022) (Order Approving File No. SR-
CboeBZX-2022-037).
    \7\ The term ``normal market hours'' means the time between 9:30 
a.m. and 4:00 p.m. Eastern Time. See FINRA Rule 11892(b)(1) 
(proposed to be moved to FINRA Rule 11892(a)(1)).
    \8\ FINRA understands that the other self-regulatory 
organizations (``SROs'') have or will similarly submit to the 
Commission substantively identical proposals.
    \9\ See Securities Exchange Act Release No. 84843 (December 18, 
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April 
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631) 
(``Amendment Eighteen'').
    \10\ ``Price bands'' refers to the term provided in Section V of 
the LULD Plan.
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Proposal To Make the Clearly Erroneous Pilot Permanent
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to FINRA Rule 11892 that, among other things: (i) provided for 
uniform treatment of clearly erroneous execution reviews in multi-stock 
events involving twenty or more securities; and (ii) reduced the 
ability of FINRA to deviate from the objective standards set forth in 
the rule.\11\ In 2013, FINRA adopted a provision designed to address 
the operation of the LULD Plan.\12\ Finally, in 2014, FINRA adopted two 
additional provisions providing that: (i) a series of transactions in a 
particular security on one or more trading days may be viewed as one 
event if all such transactions were effected based on the same 
fundamentally incorrect or grossly misinterpreted issuance information 
resulting in a severe valuation error for all such transactions; and 
(ii) in the event of any disruption or malfunction in the operation of 
the electronic communications and trading facilities of a SRO or 
responsible single plan processor in connection with the transmittal or 
receipt of a trading halt, a FINRA Officer, acting on his or her own 
motion, shall nullify any transaction that occurs after a trading halt 
has been declared by the primary listing market for a security and 
before such trading halt has officially ended according to the primary 
listing market.\13\ These changes are currently scheduled to operate 
for a pilot period that would end at the close of business on October 
20, 2022.\14\
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    \11\ See Securities Exchange Act Release No. 62885 (September 
10, 2010), 75 FR 56641 (September 16, 2010) (Order Approving File 
No. SR-FINRA-2010-032).
    \12\ See Securities Exchange Act Release No. 68808 (February 1, 
2013), 78 FR 9083 (February 7, 2013) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2013-012).
    \13\ See Securities Exchange Act Release No. 72434 (June 19, 
2014), 79 FR 36110 (June 25, 2014) (Order Approving File No. SR-
FINRA-2014-021).
    \14\ See Securities Exchange Act Release No. 95322 (July 19, 
2022), 87 FR 44160 (July 25, 2022) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2022-020).
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    When it originally approved the clearly erroneous pilot, the 
Commission explained that the changes were ``being implemented on a 
pilot basis so that the Commission and FINRA can monitor the effects of 
the pilot on the markets and investors, and consider appropriate 
adjustments, as necessary.'' \15\ In the 12 years since that time, 
FINRA and the national securities exchanges have gained considerable 
experience in the operation of the rule, as amended on a pilot basis. 
Based on that experience, FINRA believes that the program should be 
allowed to continue on a permanent basis so that equities market 
participants and investors can benefit from the increased certainty 
provided by the amended rule.
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    \15\ See Securities Exchange Act Release No. 62885 (September 
10, 2010), 75 FR 56641, 56645 (September 16, 2010) (Order Approving 
File No. SR-FINRA-2010-032).
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    The clearly erroneous pilot was implemented following a severe 
disruption in the U.S. equities markets on May 6, 2010 (``Flash 
Crash'') to ``provide greater transparency and certainty to the process 
of breaking trades.'' \16\ Largely, the pilot reduced the discretion of 
FINRA and the national securities exchanges to deviate from the 
objective standards in their respective rules when dealing with 
potentially erroneous transactions. The pilot has thus helped afford 
greater certainty to members and investors about when trades will be 
deemed erroneous pursuant to SRO rules and has provided a more 
transparent process for conducting such reviews. FINRA proposes to make 
the current pilot permanent so that market participants can continue to 
benefit from the increased certainty afforded by the current rule.\17\
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    \16\ See 75 FR 56641, 56642.
    \17\ To accomplish this, FINRA proposes to remove the text of 
existing Supplementary Material .02 of FINRA Rule 11892, which 
currently provides that the amendments set forth in File Nos. SR-
FINRA-2010-032 and SR-FINRA-2014-021, and the provisions of 
Supplementary Material .03 of this Rule shall be in effect during a 
pilot period that expires at the close of business on October 20, 
2022. Existing Supplementary Material .02 further provides that, if 
the pilot period is not extended or approved as permanent, the 
version of this Rule prior to SR-FINRA-2010-032 shall be in effect, 
and the amendments set forth in File No. SR-FINRA-2014-021 and the 
provisions of Supplementary Material .03 of this Rule shall be null 
and void.
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Amendments to the Clearly Erroneous Rules
    When the Participants to the LULD Plan filed to introduce the Limit 
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash 
Crash, a handful of commenters noted the potential discordance between 
the clearly erroneous rules and the Price Bands used to limit the price 
at which trades

[[Page 60423]]

would be permitted to be executed pursuant to the LULD Plan. For 
example, two commenters requested that the clearly erroneous rules be 
amended so the presumption would be that trades executed within the 
Price Bands would not be not subject to review.\18\ While the 
Participants acknowledged that the potential to prevent clearly 
erroneous executions would be a ``key benefit'' of the LULD Plan, the 
Participants decided not to amend the clearly erroneous rules at that 
time.\19\ In the years since, industry feedback has continued to 
reflect a desire to eliminate the discordance between the LULD 
mechanism and the clearly erroneous rules so that market participants 
would have more certainty that trades executed within the LULD price 
bands would stand. For example, the Equity Market Structure Advisory 
Committee (``EMSAC'') Market Quality Subcommittee included in its April 
19, 2016 status report a preliminary recommendation that clearly 
erroneous rules be amended to conform to the price bands--i.e., ``any 
trade that takes place within the band would stand and not be broken 
and trades outside the LU/LD bands would be eligible for the 
consideration of the Clearly Erroneous rules.'' \20\
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    \18\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498, 33505 (June 6, 2012) (File No. 4-631).
    \19\ See supra note 18.
    \20\ See EMSAC Market Quality Subcommittee, Recommendations for 
Rulemaking on Issues of Market Quality (November 29, 2016), 
available at https://www.sec.gov/spotlight/emsac-/emsac/recommendations-rulemaking-market-quality.pdf.
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    FINRA believes that it is important for there to be some mechanism 
to ensure that investors' orders are either not executed at clearly 
erroneous prices or are subsequently busted as needed to maintain a 
fair and orderly market. At the same time, FINRA believes that the LULD 
Plan, as amended, would provide sufficient protection for trades 
executed during normal market hours. Indeed, the LULD mechanism could 
be considered to offer superior protection as it prevents potentially 
erroneous trades from being executed in the first instance. After 
gaining experience with the LULD Plan, FINRA now believes that it is 
appropriate to largely eliminate clearly erroneous review during normal 
market hours when price bands are in effect. Thus, as proposed, trades 
executed within the price bands would stand, barring one of a handful 
of identified scenarios where such review may still be necessary for 
the protection of investors. FINRA believes that this change would be 
beneficial for the U.S. equities markets as it would ensure that trades 
executed within the price bands are subject to clearly erroneous review 
in only rare circumstances, resulting in greater certainty for members 
and investors.
    The current LULD mechanism for addressing extraordinary market 
volatility is available solely during normal market hours. Thus, trades 
outside of normal market hours would not benefit from this protection 
and could ultimately be executed at prices that may be considered 
erroneous. For this reason, FINRA proposes that transactions executed 
outside of normal market hours would continue to be reviewable as 
clearly erroneous. Continued availability of the clearly erroneous rule 
at times outside of normal market hours would therefore ensure that 
FINRA has appropriate authority when erroneous trades are executed 
outside of the hours where similar protection can be provided by the 
LULD Plan. Further, the proposal is designed to eliminate the potential 
discordance between clearly erroneous review and LULD price bands, 
which does not exist outside of normal market hours because the LULD 
Plan is not in effect. Thus, FINRA believes that it is appropriate to 
continue to allow transactions to be eligible for clearly erroneous 
review if executed outside of normal market hours.
    On the other hand, there would be much more limited potential for 
clearly erroneous transactions during normal market hours. With the 
introduction of the LULD mechanism in 2013, clearly erroneous trades 
are largely prevented by the requirement that trades be executed within 
the price bands. In addition, in 2019, Amendment Eighteen to the LULD 
Plan eliminated double-wide price bands: (1) at the open, and (2) at 
the close for Tier 2 NMS Stocks 2 with a reference price above 
$3.00.\21\ Due to these changes, FINRA believes that the price bands 
would provide sufficient protection to investor orders such that 
clearly erroneous review would no longer be necessary during normal 
market hours. As the Participants to the LULD Plan explained in 
Amendment Eighteen: ``[b]roadly, the Limit Up-Limit Down mechanism 
prevents trades from happening at prices where one party to the trade 
would be considered `aggrieved,' and thus could be viewed as an 
appropriate mechanism to supplant clearly erroneous rules.'' While the 
Participants also expressed concern that the price bands might be too 
wide to afford meaningful protection around the open and close of 
trading, amendments to the LULD Plan adopted in Amendment Eighteen 
narrowed price bands at these times in a manner that FINRA believes is 
sufficient to ensure that investors' orders would be appropriately 
protected in the absence of clearly erroneous review. FINRA therefore 
believes that it is appropriate to rely on the LULD mechanism as the 
primary means of preventing clearly erroneous trades during normal 
market hours.
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    \21\ See Amendment Eighteen, supra note 9.
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    At the same time, FINRA is cognizant that there may be limited 
circumstances where clearly erroneous review may continue to be 
appropriate, even during normal market hours. Thus, FINRA proposes to 
amend its clearly erroneous rules to enumerate the specific 
circumstances where such review would remain available during the 
course of normal market hours, as follows. All transactions that fall 
outside of these specific enumerated exceptions would be ineligible for 
clearly erroneous review.
    First, pursuant to proposed paragraph (b)(1)(A), a transaction 
executed during normal market hours would continue to be eligible for 
clearly erroneous review if the transaction is not subject to the LULD 
Plan. In such case, the numerical guidelines set forth in paragraph 
(b)(2) of FINRA Rule 11892 will be applicable to such NMS stock. While 
the majority of exchange-listed securities would be subject to the LULD 
Plan, certain equity securities, such as rights and warrants, are 
explicitly excluded from the provisions of the LULD Plan and would 
therefore be eligible for clearly erroneous review instead.\22\ 
Similarly, there are instances, such as the opening auction on the 
primary listing market,\23\ where transactions are not ordinarily 
subject to the LULD Plan, or circumstances where a transaction that 
ordinarily would have been subject to the LULD Plan is not--due, for 
example, to some issue with processing the price bands. These 
transactions would continue to be eligible for clearly erroneous 
review, effectively ensuring that such review remains available as a 
backstop when the LULD Plan would not prevent executions from occurring 
at erroneous prices in the first instance.
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    \22\ See Appendix A of the LULD Plan.
    \23\ The initial reference price used to calculate price bands 
is typically set by the opening price on the primary listing market. 
See Section V(B) of the LULD Plan.
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    Second, transactions that resulted from certain systems issues 
pursuant to proposed paragraph (b)(1)(B) would continue to be eligible 
for clearly erroneous review. This limited exception would help to 
ensure that trades that should not have been

[[Page 60424]]

executed would continue to be subject to clearly erroneous review. 
Specifically, as proposed, transactions executed during normal market 
hours would be eligible for clearly erroneous review pursuant to 
proposed paragraph (b)(1)(B) if as a result of a member's technology or 
systems issue any transaction reported to a FINRA system, such as a 
FINRA TRF or ADF, occurs outside of the applicable LULD price bands 
pursuant to Supplementary Material .02 of FINRA Rule 11892. A 
transaction subject to review pursuant to this paragraph shall be found 
to be clearly erroneous if the price of the subject transaction to buy 
(sell) is greater than (less than) the reference price, described in 
proposed paragraph (c) of FINRA Rule 11892, by an amount that equals or 
exceeds the applicable ``percentage parameter,'' as defined in Appendix 
A to the LULD Plan.
    Third, FINRA proposes to narrowly allow for the review of 
transactions during normal market hours when the reference price, 
described in proposed paragraph (c), is determined to be erroneous by a 
FINRA officer. Specifically, a transaction executed during normal 
market hours would be eligible for clearly erroneous review pursuant to 
proposed paragraph (b)(1)(C) if the transaction involved, in the case 
of (1) a corporate action or new issue or (2) a security that enters a 
trading pause pursuant to the LULD Plan and resumes trading without an 
auction,\24\ a reference price that is determined to be erroneous by a 
FINRA officer because it clearly deviated from the theoretical value of 
the security. In such circumstances, FINRA may use a different 
reference price pursuant to proposed paragraph (c)(2) of FINRA Rule 
11892. A transaction subject to review pursuant to this paragraph shall 
be found to be clearly erroneous if the price of the subject 
transaction to buy (sell) is greater than (less than) the new reference 
price, described in paragraph (c)(2) of FINRA Rule 11892, by an amount 
that equals or exceeds the applicable numerical guidelines or 
percentage parameters, as applicable depending on whether the security 
is subject to the LULD Plan. Specifically, the percentage parameters 
would apply to all transactions except those in an NMS Stock that is 
not subject to the LULD Plan, as described in paragraph (b)(1)(A).
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    \24\ FINRA notes that the ``resumption of trading without an 
auction'' provision of the proposed rule text applies only to 
securities that enter a trading pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's reference price is later determined 
FINRA to be erroneous (e.g., because of a bad first trade for a new 
issue), and subsequent LULD price bands are calculated from that 
incorrect reference price. In determining whether the reference price 
is erroneous in such instances, FINRA would generally look to see if 
such reference price clearly deviated from the theoretical value of the 
security. In such cases, FINRA would consider a number of factors to 
determine a new reference price that is based on the theoretical value 
of the security, including but not limited to, the offering price of 
the new issue, the ratio of the stock split applied to the prior day's 
closing price, the theoretical price derived from the numerical terms 
of the corporate action transaction such as the exchange ratio and 
spin-off terms, and the prior day's closing price on the over-the-
counter (``OTC'') market for an OTC up-listing.\25\ In the foregoing 
instances, the theoretical value of the security would be used as the 
new reference price when applying the percentage parameters under the 
LULD Plan (or numerical guidelines if the transaction is in an NMS 
stock that is not subject to the LULD Plan) to determine whether 
executions would be cancelled as clearly erroneous.
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    \25\ Using transaction data reported to the FINRA OTC Reporting 
Facility, FINRA disseminates via the Trade Data Dissemination 
Service a final closing report for OTC equity securities for each 
business day that includes, among other things, each security's 
closing last sale price.
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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, 
and the previous day close was $5, but the new theoretical price 
based on the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is 
trading at an erroneous price based on the valuation of the 
remaining outstanding shares
4. The theoretical price of $50 would be used as the new reference 
price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a 
spin off where a new issue will be listed, BCDE. ABCD trades at $50, 
and the spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE 
$10
4. BCDE would be deemed to have had an incorrect reference price and 
the theoretical value of $10 would be used as the new reference 
price when applying the LULD bands to determine if executions would 
be cancelled as clearly erroneous
Example 3
1. ABCD is an up-list from the OTC market, the prior day's close on 
the OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an 
erroneous order entry
3. The new reference price to determine clearly erroneous executions 
would be $20, the theoretical value of the stock based on where it 
was last traded

    In the context of the rare situation in which a security that 
enters a LULD trading pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
reference price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\26\ This can result in a reference price and 
subsequent LULD price band calculation that is significantly away from 
the security's last traded or more relevant price, especially in less 
liquid names. In such rare instances, FINRA is proposing to use a 
different reference price that is based on the prior LULD band that 
triggered the trading pause, rather than the midpoint of the BBO.
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    \26\ See LULD Plan, Section I(U) and V(C)(1).
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    The following example illustrates the proposed application of the 
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD bands at $18 x $22
2. An incoming buy order causes the stock to enter a limit state 
trading pause and then a trading pause at $22
3. During the trading pause, the buy order causing the trading pause 
is cancelled
4. At the end of the 5-minute halt, there is no crossed interest for 
an auction to occur, thus trading would resume on a quote
5. Upon resumption, a quote that was available prior to the trading 
pause (e.g., a quote was resting on the book prior to the trading 
pause), is widely set at $10 x $90
6. The reference price upon resumption is $50 (mid-point of BBO)
7. The SIP will use this reference price and publish LULD bands of 
$45 x $55 (i.e., far away from BBO prior to the halt)
8. The bands will be calculated correctly, but the $50 reference 
price is subsequently determined to be incorrect as the price 
clearly deviated from where it previously traded prior to the 
trading pause

[[Page 60425]]

9. The new reference price would be $22 (i.e., the last effective 
price band that was in a limit state before the trading pause), and 
the LULD bands would be applied to determine if the executions 
should be cancelled as clearly erroneous

    In all of the foregoing situations, FINRA would not have authority 
to review transactions as clearly erroneous without the proposed 
carveouts in paragraph (b)(1)(C) because the trades occurred within the 
LULD price bands (albeit LULD price bands that were calculated from an 
erroneous reference price). FINRA believes that removing the current 
ability for FINRA to review in these narrow circumstances would lessen 
investor protections.
Numerical Guidelines
    Today, paragraph (b)(1) defines the numerical guidelines that are 
used to determine if a transaction is deemed clearly erroneous during 
normal market hours, or outside of normal market hours. With respect to 
normal market hours, trades are generally deemed clearly erroneous if 
the execution price differs from the reference price (i.e., last sale) 
by 10% if the reference price is greater than $0.00 up to and including 
$25.00; 5% if the reference price is greater than $25.00 up to and 
including $50.00; and 3% if the reference price is greater than $50.00. 
Wider parameters are also used for reviews for multi-stock events, as 
described in paragraph (b)(2). With respect to transactions in 
leveraged ETF/ETN securities executed during normal market hours and 
outside of normal market hours, trades are deemed clearly erroneous if 
the execution price exceeds the normal market hours numerical 
guidelines multiplied by the leverage multiplier.
    Given the changes described in this proposed rule change, FINRA 
proposes to amend the way that the numerical guidelines are calculated 
during normal market hours in the handful of instances where clearly 
erroneous review would continue to be available. Specifically, FINRA 
would base these numerical guidelines, as applied to the circumstances 
described in paragraph (b)(1)(A), on the percentage parameters used to 
calculate price bands, as set forth in Appendix A to the LULD Plan. 
Without this change, a transaction that would otherwise stand if price 
bands were properly applied to the transaction may end up being subject 
to review and deemed clearly erroneous solely due to the fact that the 
price bands were not available due to a systems or other issue. FINRA 
believes that it makes more sense to instead base the price bands on 
the same parameters as would otherwise determine whether the trade 
would have been allowed to execute within the price bands. FINRA also 
proposes to modify the numerical guidelines applicable to leveraged 
ETF/ETN securities during normal market hours. As noted above, the 
numerical guidelines will only be applicable to transactions eligible 
for review pursuant paragraph (b)(1)(A) (i.e., to NMS stocks that are 
not subject to the LULD Plan). As leveraged ETF/ETN securities are 
subject to LULD and thus the percentage parameters will be applicable 
during normal market hours, FINRA proposes to eliminate the numerical 
guidelines for leveraged ETF/ETN securities traded during normal market 
hours. However, as no price bands are available outside of normal 
market hours, FINRA proposes to keep the existing numerical guidelines 
in place for transactions in leveraged ETF/ETN securities that occur 
outside of normal market hours.
    FINRA also proposes to move existing paragraphs (b)(2) and (b)(3) 
to proposed paragraph (b)(2)(B) and (b)(2)(C), respectively, as multi-
stock events and additional factors will only be subject to review if 
those NMS stocks are not subject to the LULD Plan or occur outside of 
normal market hours. Proposed paragraph (b)(2)(B) is substantially 
similar to existing paragraph (b)(2) except to update the opening 
language to limit application of paragraph (b)(2)(B) to multi-stock 
events occurring outside of normal market hours or eligible for review 
pursuant to paragraph (b)(1)(A). Proposed paragraph (b)(2)(C) is also 
substantially similar to existing paragraph (b)(3) except to update its 
application to executions occurring outside of normal market hours or 
eligible for review pursuant to paragraph (b)(1)(A).
Reference Price
    As proposed, the reference price used would continue to be based on 
last sale and would be memorialized in proposed paragraph (c). 
Continuing to use the last sale as the reference price is necessary for 
operational efficiency as it may not be possible to perform a timely 
clearly erroneous review if doing so required computing the arithmetic 
mean price of eligible reported transactions over the past five 
minutes, as contemplated by the LULD Plan. While this means that there 
would still be some differences between the price bands and the clearly 
erroneous parameters, FINRA believes that this difference is reasonable 
in light of the need to ensure timely review if clearly erroneous rules 
are invoked. FINRA also proposes to allow for an alternate reference 
price to be used as prescribed in proposed paragraphs (c)(1), (2), and 
(3). Specifically, the reference price may be a value other than the 
consolidated last sale immediately prior to the execution(s) under 
review: (1) in the case of multi-stock events involving twenty or more 
securities, as described in paragraph (b)(2)(B); (2) in the case of an 
erroneous reference price, as described in paragraph (b)(1)(C); \27\ or 
(3) in other circumstances, such as, for example, relevant news 
impacting a security or securities, periods of extreme market 
volatility, sustained illiquidity, or widespread system issues, where 
use of a different reference price is necessary for the maintenance of 
a fair and orderly market and the protection of investors and the 
public interest, provided that such circumstances occurred outside of 
normal market hours or are eligible for review pursuant to paragraph 
(b)(1)(A).
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    \27\ As discussed above, in the case of (b)(1)(C)(1), FINRA 
would consider a number of factors to determine a new reference 
price that is based on the theoretical value of the security, 
including but not limited to, the offering price of the new issue, 
the ratio of the stock split applied to the prior day's closing 
price, the theoretical price derived from the numerical terms of the 
corporate action transaction such as the exchange ratio and spin-off 
terms, and the prior day's closing price on the OTC market for an 
OTC up-listing. In the case of (b)(1)(C)(2), the reference price 
will be the last effective price band that was in a limit state 
before the trading pause.
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Procedures for Reviewing Transactions
    Paragraph (a)(1) sets forth the procedures for reviewing 
transactions under FINRA Rule 11892 and currently provides that a FINRA 
officer may, on his or her own motion, review any OTC transaction 
involving an exchange-listed security arising out of or reported 
through a trade reporting system owned or operated by FINRA or FINRA 
Regulation and authorized by the Commission, provided that the 
transaction meets the thresholds set forth in paragraph (b), except as 
provided for in paragraphs (c) and (d). In light of the proposed 
structural changes to the Rule described above, FINRA proposes to amend 
paragraph (a)(1) to clarify that such review is only available for 
transactions occurring outside of normal market hours or eligible for 
review pursuant to paragraph (b)(1), and to conform and streamline 
other language and references throughout paragraph (a)(1).\28\
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    \28\ As noted above, given that the term ``normal market hours'' 
would now appear in paragraph (a)(1) of the Rule, FINRA proposes to 
define it here rather than in paragraph (b).
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Appeals
    Paragraph (a)(2) currently provides that if a FINRA officer acting 
pursuant to FINRA Rule 11892 declares any transaction null and void, 
each party

[[Page 60426]]

involved in the transaction shall be notified as soon as practicable by 
FINRA, and the party aggrieved by the action may appeal such action in 
accordance with Rule 11894, unless the officer making the determination 
also determines that the number of the affected transactions is such 
that immediate finality is necessary to maintain a fair and orderly 
market and to protect investors and the public interest, and further 
provided that rulings made by FINRA in conjunction with one or more 
other self-regulatory organizations are not appealable. Consistent with 
the proposed structural changes to the Rule described above, FINRA 
proposes to amend paragraph (a)(2) to remove the limitation on appeals 
where the officer determines that the number of affected transactions 
is such that immediate finality is necessary, and to add a limitation 
on appeals where the decision is made by an officer under Supplementary 
Material .02 of FINRA Rule 11892 regarding transactions that occurred 
outside of the applicable Price Bands disseminated pursuant to the LULD 
Plan.\29\
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    \29\ In connection with these proposed changes, FINRA is also 
proposing conforming edits to paragraph (a) of FINRA Rule 11894 
(Review by the Uniform Practice Code (``UPC'') Committee, which 
includes parallel provisions relating to the availability of 
appeals.
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Securities Subject To Limit Up-Limit Down Plan
    FINRA proposes to renumber Supplementary Material .03 as 
Supplementary Material .02 based on the proposal to eliminate existing 
paragraph Supplementary Material .02, and to rename new Supplementary 
Material .02 to address transactions occurring outside of LULD price 
bands. Given that proposed paragraph (b)(1) defines the LULD Plan, 
FINRA also proposes to eliminate redundant language from proposed 
Supplementary Material .02. Finally, FINRA also proposes to update 
references to the LULD Plan and price bands so that they are uniform 
throughout the Rule, to update rule references throughout the paragraph 
to conform to the structural changes to the Rule described above, and 
to renumber paragraphs (b) and (c) of Supplementary Material .02 to 
paragraphs (a) and (b) given the proposed deletion of existing 
paragraph (a).
Multi-Day Event and Trading Halts
    FINRA proposes to renumber paragraphs (c) and (d) to paragraphs (d) 
and (e), respectively, based on the proposal to add new paragraph (c). 
Additionally, FINRA proposes to modify the text of both paragraphs to 
reference the percentage parameters as well as the numerical 
guidelines. Specifically, the existing text of proposed paragraphs (d) 
and (e) provides that any action taken in connection with this 
paragraph will be taken without regard to the numerical guidelines set 
forth in this Rule. FINRA proposes to amend the rule text to provide 
that any action taken in connection with this paragraph will be taken 
without regard to the percentage parameters or numerical guidelines set 
forth in this Rule, with the percentage parameters being applicable to 
an NMS stock subject to the LULD Plan and the numerical guidelines 
being applicable to an NMS stock not subject to the LULD Plan.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, so FINRA can implement the proposed rule change on 
October 1, 2022.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\30\ which requires, among 
other things, that FINRA rules must be designed 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.
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    \30\ 15 U.S.C. 78o-3(b)(6).
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    As explained in the purpose section of this proposed rule change, 
the current pilot was implemented following the Flash Crash to bring 
greater transparency to the process for conducting clearly erroneous 
reviews, and to help assure that the review process is based on clear, 
objective, and consistent rules across the U.S. equities markets. FINRA 
believes that the amended clearly erroneous rules have been successful 
in that regard and have thus furthered fair and orderly markets. 
Specifically, FINRA believes that the pilot has successfully ensured 
that such reviews are conducted based on objective and consistent 
standards across SROs and has therefore afforded greater certainty to 
members and investors. FINRA therefore believes that making the current 
pilot a permanent program is appropriate so that equities market 
participants can continue to reap the benefits of a clear, objective, 
and transparent process for conducting clearly erroneous reviews. In 
addition, FINRA understands that the U.S. equities exchanges have or 
will also file largely identical proposals to make their respective 
clearly erroneous pilots permanent. FINRA therefore believes that the 
proposed rule change would promote transparency and uniformity across 
markets concerning review of transactions as clearly erroneous and 
would also help assure consistent results in handling erroneous trades 
across the U.S. equities markets, thus furthering fair and orderly 
markets, the protection of investors, and the public interest.
    Similarly, FINRA believes that it is consistent with just and 
equitable principles of trade to limit the availability of clearly 
erroneous review during normal market hours. The LULD Plan was approved 
by the Commission to operate on a permanent rather than pilot basis. As 
a number of market participants have noted, the LULD Plan provides 
protections that ensure that investors' orders are not executed at 
prices that may be considered clearly erroneous. Further, amendments to 
the LULD Plan approved in Amendment Eighteen serve to ensure that the 
price bands established by the LULD Plan are ``appropriately tailored 
to prevent trades that are so far from current market prices that they 
would be viewed as having been executed in error.'' \31\ Thus, FINRA 
believes that clearly erroneous review should only be necessary in very 
limited circumstances during normal market hours. Specifically, such 
review would only be necessary in instances where a transaction was not 
subject to the LULD Plan, or was the result of some form of systems 
issue, as detailed in the purpose section of this proposed rule change. 
Additionally, in narrow circumstances where the transaction was subject 
to the LULD Plan, a clearly erroneous review would be available in the 
case of (1) a corporate action or new issue or (2) a security that 
enters a trading pause pursuant to LULD and resumes trading without an 
auction, where the reference price is determined to be erroneous by a 
FINRA officer because it clearly deviated from the theoretical value of 
the security. Thus, eliminating clearly erroneous review in all other 
instances will serve to increase certainty for members and investors 
that trades executed during normal market hours would typically stand 
and would not be subject to review.
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    \31\ See Amendment Eighteen, supra note 9.
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    Given the fact that clearly erroneous review would largely be 
limited to transactions that were not subject to the LULD Plan, FINRA 
also believes that it

[[Page 60427]]

is necessary to change the parameters used to determine whether a trade 
is clearly erroneous. Specifically, due to the different parameters 
currently used for clearly erroneous review and for determining price 
bands, it is possible that a trade that would have been permitted to 
execute within the price bands would later be deemed clearly erroneous, 
if, for example, a systems issue prevented the dissemination of the 
price bands. FINRA believes that this result is contrary to the 
principle that trades within the price bands should stand, and has the 
potential to cause investor confusion if trades that are properly 
executed within the applicable parameters described in the LULD Plan 
are later deemed erroneous. By using consistent parameters for clearly 
erroneous reviews conducted during normal market hours and the 
calculation of the price bands, FINRA believes that this change would 
also serve to promote greater certainty with regards to when trades may 
be deemed erroneous.
    Finally, the proposed rule change makes organizational updates to 
FINRA Rule 11892, as well as minor updates and corrections to the Rule 
to improve readability and clarity and conforming edits to FINRA Rule 
11894.

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. The proposed rule change would 
ensure the continued, uninterrupted operation of harmonized clearly 
erroneous execution rules across the U.S. equities markets while also 
amending those rules to provide greater certainty to members and 
investors that trades will stand if executed during normal market hours 
where the LULD Plan provides adequate protection against trading at 
erroneous prices. FINRA understands that the national securities 
exchanges have or will also file similar proposals, the substance of 
which are largely identical to this proposed rule change. Thus, the 
proposed rule change will help to ensure consistency across SROs 
without implicating any competitive issues.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \32\ and Rule 19b-
4(f)(6) thereunder.\33\
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    \32\ 15 U.S.C. 78s(b)(3)(A).
    \33\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \34\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \35\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. FINRA has asked the 
Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative on October 1, 2022. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, as it will allow FINRA 
to coordinate its implementation of the revised clearly erroneous 
execution rules with the national securities exchanges, and will help 
ensure consistency across the SROs.\36\ For this reason, the Commission 
hereby waives the 30-day operative delay and designates the proposed 
rule change as operative upon filing.\37\
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    \34\ 17 CFR 240.19b-4(f)(6).
    \35\ 17 CFR 240.19b-4(f)(6)(iii).
    \36\ See SR-CboeBZX-2022-37 (July 8, 2022).
    \37\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 [email protected]. Please include 
File Number SR-FINRA-2022-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-027. 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 website (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 website 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 10:00 a.m. and 
3:00 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2022-027 and should be submitted 
on or before October 26, 2022.
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    \38\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21560 Filed 10-4-22; 8:45 am]
BILLING CODE 8011-01-P


