[Federal Register Volume 72, Number 114 (Thursday, June 14, 2007)]
[Notices]
[Pages 32926-32927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11439]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55884]
Order Exempting Certain Error Correction Transactions From Rule
611 of Regulation NMS Under the Securities Exchange Act of 1934
June 8, 2007.
I. Introduction
Pursuant to Rule 611(d) \1\ of Regulation NMS \2\ under the
Securities Exchange Act of 1934 (``Exchange Act''), the Securities and
Exchange Commission (``Commission''), by order, may exempt from the
provisions of Rule 611 of Regulation NMS (``Rule 611'' or ``Rule''),
either unconditionally or on specified terms and conditions, any
person, security, transaction, quotation, or order, or any class or
classes of persons, securities, quotations, or orders, if the
Commission determines that such exemption is necessary or appropriate
in the public interest, and is consistent with the protection of
investors.\3\ As discussed below, the Commission is exempting from Rule
611(a) certain transactions to correct bona fide errors in the
execution of customer orders, subject to specified conditions discussed
below. The exemption is designed to promote efficiency and the best
execution of investor orders by allowing trading centers to correct
bona fide errors in a manner consistent with their customers' orders,
without the trading centers incurring additional costs to meet the
requirements of Rule 611(a).
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\1\ 17 CFR 242.611(d).
\2\ 17 CFR 242.600 et seq.
\3\ See also 15 U.S.C. 78mm(a)(1) (providing general authority
for the Commission to grant exemptions from provisions of the
Exchange Act and rules thereunder).
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II. Background
The Commission adopted Regulation NMS in June 2005.\4\ Rule 611
addresses intermarket trade-throughs of displayed quotations in NMS
stocks. Rule 611(a)(1) requires a trading center to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to prevent trade-throughs on that trading center of
protected quotations in NMS stocks that do not fall within an exception
set forth in the Rule. Rule 611(b)(6) provides an exception for a
trade-through transaction effected by a trading center that
simultaneously routes an intermarket sweep order (``ISO'') to execute
against the full displayed size of any protected quotation in the NMS
stock that was traded through. Rule 611(b)(5) provides an exception for
a trade-through transaction that is an execution of an ISO. Finally,
Rule 611(c) requires that the trading center, broker, or dealer
responsible for the routing of an ISO take reasonable steps to
establish that such order meets the definition of an ISO in Rule
600(b)(30).\5\
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\4\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting
Release'').
\5\ 17 CFR 242.600(b)(30).
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The Trading Committee of the Securities Industry and Financial
Markets Association (``SIFMA'') has requested that the Commission
exempt certain error correction transactions from Rule 611(a).\6\
According to the SIFMA Exemption Request, error correction transactions
are the mechanism through which broker-dealers remedy the execution of
customer orders that have been placed in error or mishandled due to an
error involving any term of an order, including, for example, price,
number of shares, identification of the security, or execution of a
transaction on the wrong side of the market.\7\ In addition, the SIFMA
Exemption Request noted that, given the high level of automation in
today's marketplace, errors often result from delays, outages, or other
failures of communications systems used in the delivery or execution of
an order. Broker-dealers typically remedy such bona fide errors by
entering a subsequent trade on behalf of the customer on the correct
terms of the original order. In the interim, however, the market prices
for a security may have moved, and the subsequent error correction
transaction may be effected at a price that is no longer within the
national best protected bid and offer.\8\
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\6\ Letter to Nancy M. Morris, Secretary, Commission, from Jerry
O'Connell, Chairman, SIFMA Trading Committee, dated May 1, 2007
(``SIFMA Exemption Request'').
\7\ Id. at 2.
\8\ Id.
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According to the SIFMA Exemption Request, broker-dealers seeking to
execute error corrections, if required to comply with Rule 611, would
need to satisfy all better-priced protected quotations prior to
effecting the error correction transaction.\9\ Although some error
correction transactions that are ``underwater'' within the meaning of
the stopped order exception in Rule
[[Page 32927]]
611(b)(9) could qualify for such exception, the SIFMA Exemption Request
states that there are many instances in which bona fide errors need to
be remedied, but may not meet the definition of an underwater trade.
The inability of broker-dealers to correct all bona fide errors in a
manner consistent with a customer's original order without incurring
additional expense would impede the effective correction of trading
errors. As a result, SIFMA believes that all bona fide error correction
transactions, including those not underwater, merit a specific
exemption from Rule 611.\10\
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\9\ Id.
\10\ Id.
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The SIFMA Exemption Request states that the benefits of the
requested exemption would far outweigh any disadvantages.\11\ The
exemption would facilitate the ability of broker-dealers to provide
fair remediation to customers who otherwise would suffer economic
consequences as a result of inadvertent mistakes or system failures.
Also, the SIFMA Exemption Requests asserts that the number of bona fide
error correction transactions is likely to be small in comparison to
the total number of trades executed in NMS stocks, so that the number
of exempted trade-throughs would not unduly detract from the objectives
of Rule 611.\12\
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\11\ Id. at 5.
\12\ Id. at 5.
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III. Discussion
The Commission has decided to exempt trading centers from the
requirement in Rule 611(a) to establish, maintain, and enforce written
policies and procedures that are reasonably designed to prevent trade-
throughs when the transaction that constituted the trade-through meets
the following terms and conditions (``Error Correction Transaction''):
(1) The trading center effects the transaction solely to correct a
``bona fide error,'' \13\ which is defined as: (i) The inaccurate
conveyance or execution of any term of an order including, but not
limited to, price, number of shares or other unit of trading;
identification of the security; identification of the account for which
securities are purchased or sold; lost or otherwise misplaced order
tickets; short sales that were instead sold long or vice versa; or the
execution of an order on the wrong side of a market; (ii) the
unauthorized or unintended purchase, sale, or allocation of securities,
or the failure to follow specific client instructions; (iii) the
incorrect entry of data into relevant systems, including reliance on
incorrect cash positions, withdrawals, or securities positions
reflected in an account; or (iv) a delay, outage, or failure of a
communication system used to transmit market data prices or to
facilitate the delivery or execution of an order.\14\
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\13\ The exemption solely addresses the status of a transaction
under Rule 611. It presumes that the trading center has complied
with all requirements applicable to error transactions, including
SRO rules.
\14\ Absent a bona fide error as defined above, the exemption
does not apply to a broker-dealer's mere failure to execute a not-
held order in accordance with a customer's expectations.
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(2) The bona fide error is evidenced by objective facts and
circumstances, and the trading center maintains documentation of such
facts and circumstances;
(3) The trading center records the transaction in its error
account;
(4) The trading center establishes, maintains, and enforces written
policies and procedures that are reasonably designed to address the
occurrence of errors and, in the event of an error, the use and terms
of a transaction to correct the error in compliance with this
exemption; and
(5) The trading center regularly surveils to ascertain the
effectiveness of its policies and procedures to address errors and
transactions to correct errors and takes prompt action to remedy
deficiencies in such policies and procedures.
The exemption applies only to the Error Correction Transaction
itself. It does not, for example, apply to any subsequent trades
effected by a trading center to eliminate a proprietary position
connected with the Error Correction Transaction.
The Commission believes that an exemption for Error Correction
Transactions is appropriate to promote efficiency and the best
execution of investor orders.\15\ The exemption will allow trading
centers to execute Error Correction Transactions at the appropriate
prices to correct bona fide errors without a requirement to prevent
trade-throughs of the current protected quotations or to qualify for
one of the exceptions in Rule 611(b). It thereby will minimize the
expense incurred by trading centers to remedy certain errors in a
manner consistent with their customers' orders.
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\15\ See Exchange Act Section 11A(a)(1)(C)(i) and (iv) (assuring
efficient execution of securities transactions and the
practicability of executing investors' orders in the best market are
two of the primary objectives for the national market system).
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In addition, the terms of the exemption are designed to minimize
the potential for abuse, such as claiming its applicability to
transactions other than those to correct bona fide errors. For example,
a bona fide error must be evidenced by objective facts and
circumstances, and the trading center must document such facts and
circumstances. A trading center must record the Error Correction
Transaction in an error account and implement policies and procedures
that reasonably address errors and the use of Error Correction
Transactions. A trading center's use of the exemption therefore should
be readily reviewable by the applicable regulatory authorities.
Finally, Error Correction Transactions should represent a very
small percentage of the total number of trades in NMS stocks. The
exemption therefore should not significantly detract from the policy
objectives of Rule 611.
For the foregoing reasons, the Commission finds that granting the
foregoing exemption is necessary and appropriate in the public
interest, and is consistent with the protection of investors.
IV. Conclusion
It is hereby ordered, pursuant to Rule 611(d) of Regulation NMS,
that trading centers shall be exempt from the requirement in Rule
611(a) to establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent trade-throughs when
the transaction that constituted the trade-through qualifies as an
Error Correction Transaction, as defined above.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(82).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-11439 Filed 6-13-07; 8:45 am]
BILLING CODE 8010-01-P