[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Notices]
[Pages 43207-43210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-20532]
[[Page 43207]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60515; File No. SR-FINRA-2009-054]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Extend
Certain Regulation NMS Protections to Quoting and Trading in the Market
for OTC Equity Securities
August 17, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 7, 2009, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``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 adopt new FINRA Rules 6434 (Minimum Pricing
Increment for OTC Equity Securities), 6437 (Prohibition from Locking or
Crossing Quotations in OTC Equity Securities), 6450 (Restrictions on
Access Fees) and 6460 (Display of Customer Limit Orders).
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
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
FINRA is proposing to adopt new rules to extend certain Regulation
NMS protections to quoting and trading in over-the-counter equity
securities (``OTC Equity Securities'').\3\ Specifically, FINRA is
proposing rules to: (1) Restrict sub-penny quoting; (2) restrict locked
and crossed markets; (3) implement a cap on access fees; and (4)
require the display of customer limit orders.\4\
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\3\ ``OTC Equity Security'' means any non-exchange-listed
security and certain exchange-listed securities that do not
otherwise qualify for real-time trade reporting. See FINRA Rule
6420(d).
\4\ The proposed rule also corrects certain cross-references to
FINRA rules that have been adopted in the consolidated FINRA
rulebook.
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A. Background
On June 9, 2005, the SEC adopted Regulation NMS.\5\ Regulation NMS,
in addition to re-designating the national market system rules
previously adopted under Section 11A of the Act, also established new
substantive rules to modernize and strengthen the regulatory structure
of the U.S. equity markets.
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\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Among other things, in adopting Regulation NMS, the SEC prohibited
the imposition of access fees in excess of certain prescribed
limitations; required SRO rules to address locked or crossed
quotations; and prohibited the display of orders, quotations, and
indications of interest in a pricing increment smaller than a penny
(except where the security is priced at less than $1.00 per share in
which case certain restrictions apply). Regulation NMS also includes a
pre-existing customer limit order display requirement, which renumbered
Exchange Act Rule 11Ac1-4 as Rule 604 under the Regulation.
These provisions of Regulation NMS apply only to trading in NMS
stocks as defined in Rule 600(b)(47) of Regulation NMS and do not apply
to trading in OTC Equity Securities. FINRA previously filed with the
SEC rule changes to apply aspects of Regulation NMS to quoting and
trading in OTC Equity Securities. In particular, FINRA filed with the
SEC a proposed rule change to impose sub-penny quoting prohibitions on
OTC Equity Securities and a separate proposed rule change to impose
restrictions on access fees.\6\
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\6\ See Securities Exchange Act Release No. 52280 (August 17,
2005), 70 FR 49959 (August 25, 2005) (Proposed rule change to impose
restrictions on the display of quotes and orders in sub-penny
increments for non-Nasdaq OTC equity securities; File No. SR-NASD-
2005-095). See Securities Exchange Act Release No. 55717 (May 7,
2007), 72 FR 26856 (May 11, 2007) (Proposed amendment to exclude
from the access fee display requirements any access fees below a
specified level; File No. SR-NASD-2007-029).
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In light of developments to date, FINRA has determined that
extending certain NMS principles to the OTC equity market would be best
if proposed together, rather than individually. Thus FINRA is now
proposing to adopt rules to: (1) Restrict sub-penny quoting; (2)
restrict locked and crossed markets; (3) implement a cap on access
fees; and (4) require the display of customer limit orders. FINRA
believes that these Regulation NMS principles, if applied to OTC Equity
Securities, would enhance market quality and investor protections in
this market.
B. Restrictions on Sub-penny Quoting
FINRA is proposing new FINRA Rule 6434 (Minimum Pricing Increment
for OTC Equity Securities) to impose restrictions on the display of
quotes and orders in sub-penny increments for OTC Equity Securities.
Specifically, FINRA is proposing to prohibit members from displaying,
ranking, or accepting from any person a bid or offer, order, or
indication of interest in an OTC Equity Security in an increment
smaller than $0.01 if the bid or offer, order, or indication of
interest is priced $1.00 or greater per share, in an increment smaller
than $0.0001 if the bid or offer, order, or indication of interest is
priced below $1.00 and greater than $0.01 per share, and in an
increment smaller than $0.000001 if the bid or offer, order or
indication of interest is priced less than $0.01 per share.
Market participants currently quote in increments ranging from
pennies to hundredths of pennies. As the SEC stated in the proposing
release for Regulation NMS and in the Regulation NMS Adopting Release,
potential harms associated with sub-penny quoting include an increase
in the incidence of market participants stepping ahead of standing
limit orders for an economically insignificant amount and added
difficulty for broker-dealers to meet certain of their regulatory
obligations by increasing the incidence of so-called ``flickering''
quotes.\7\ FINRA believes that essentially the same potential problems
exist with respect to sub-penny quoting in OTC Equity Securities.
Accordingly, FINRA is
[[Page 43208]]
proposing a new rule that would adopt an approach to sub-penny quoting
that is consistent with that implemented by the SEC in Regulation NMS.
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\7\ See Securities Exchange Act Release No. 49325 (Feb. 26,
2004), 69 FR 11126 (Mar. 9, 2004). See also Securities Exchange Act
Release No. 50870 (December 16, 2004), 69 FR 77423 (December 27,
2004).
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FINRA believes that the proposed restrictions on sub-penny quoting
will promote greater price transparency and consistency. As noted
above, FINRA also believes that sub-penny restrictions limit the
practice of ``stepping ahead'' of displayed limit orders by trivial
amounts and, therefore, the proposed new rule should further encourage
the display of limit orders and improve the depth and liquidity of the
market.
C. Locked and Crossed Markets
FINRA rules do not currently prohibit locking or crossing
quotations in OTC Equity Securities.\8\ As the SEC noted in the
Regulation NMS Adopting Release, locked and crossed markets can cause
confusion among investors concerning trading interest in a stock and,
therefore, FINRA believes that restricting the practice of submitting
locking or crossing quotations will enhance the usefulness of quotation
information for OTC Equity Securities.
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\8\ A ``locking quotation'' is the display of a bid (or offer)
at a price that equals the displayed price of an offer (or bid) for
a security in the same ``inter-dealer quotation system'' (as defined
in proposed Rule 6437). A ``crossing quotation'' is the display of a
bid (or offer) at a price that is higher than the displayed price of
an offer (or bid) for a security in the same inter-dealer quotation
system.
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Rule 610(d) of Regulation NMS (Access to Quotations) requires that
each national securities exchange and national securities association
establish, maintain, and enforce written rules restricting locking and
crossing activities. In furtherance of this requirement, FINRA adopted
Rule 6240 (Prohibition from Locking or Crossing Quotations in NMS
Stocks), which generally requires members to avoid displaying, or
engaging in a pattern or practice of displaying, any quotations that
lock or cross a protected quotation, and any manual quotations that
lock or cross a quotation previously disseminated pursuant to an
effective NMS Plan.
Consistent with the principles of Regulation NMS's locking and
crossing restrictions, FINRA is proposing to require that members
implement policies and procedures that reasonably avoid the display of,
or engaging in a pattern or practice of displaying, locking or crossing
quotations in any OTC Equity Security within the same inter-dealer
quotation system.\9\ FINRA believes that the proposed policies and
procedures approach is appropriate for addressing locked and crossed
quotations in this market in light of the differences inherent in the
quoting and trading of OTC Equity Securities as compared to NMS stocks.
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\9\ Because there currently is not a mandated consolidated
quotation dissemination mechanism for OTC Equity Securities as
exists with NMS stocks, the proposed rule only restricts locking and
crossing quotations within inter-dealer quotation systems, but not
across inter-dealer quotations systems.
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As the SEC noted in the Regulation NMS Adopting Release with
respect to the adoption of Rule 610(d), FINRA also recognizes that a
member's quotations may, on occasion, accidentally lock or cross
another member's quotations. Thus, similar to Rule 6240, FINRA would
expect that members' policies and procedures would require the quoting
participant to make ``reasonable efforts'' to first contact or route an
order to execute against the full displayed size of any quotation
before locking and crossing that quotation. For example, a member firm
may also include so-called ``ship and post'' procedures that require
such firm to attempt to execute against a relevant displayed quotation
while posting a quotation that could lock or cross such a quotation. In
addition, members' policies and procedures must be reasonably designed
to enable the reconciliation of locked or crossed quotations, including
requiring the member to take reasonable action to resolve the locked or
crossed market when such member is responsible for displaying the
locking or crossing quotation. FINRA believes that implementation of
policies and procedures to avoid locking and crossing quotations, in
conjunction with members' existing obligation to honor posted
quotations pursuant to NASD Rule 3320 (Offers at Stated Prices) and
NASD IM-3320 (Firmness of Quotations), will facilitate more fair and
orderly markets and support market efficiency.
D. Access Fee Cap
FINRA is proposing a new rule to prohibit members from imposing
non-subscriber access or post-transaction fees against published
quotations in any OTC Equity Security that exceed or accumulate to more
than specified amounts.
Currently, FINRA Rule 6540(c) requires that an ATS or ECN reflect
non-subscriber access or post-transaction fees in the ATS's or ECN's
posted quote in the OTC Bulletin Board montage. There are no
restrictions on ATS or ECN access fees displayed in other inter-dealer
quotation systems, such as the Pink Sheets. FINRA is proposing to
eliminate the requirement that members reflect access fees in OTCBB
posted quotations, and to replace that requirement with a uniform
access fee cap, consistent with Rule 610(c) of Regulation NMS. The
proposed fee cap, as set forth in proposed Rule 6450, would restrict
access fees in all OTC Equity Securities that exceed or accumulate to
more than the following limits:
a. If the price of the quotation is $1.00 or more, the fee or fees
cannot exceed or accumulate to more than $0.003 per share; or
b. If the price of the quotation is less than $1.00, the fee or
fees cannot exceed or accumulate to more than 0.3% of the quotation
price per share.\10\
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\10\ These standards are substantially similar to the access fee
restrictions in Regulation NMS. See Regulation NMS Adopting Release.
Note, however, that the restrictions under Rule 610(c) of Regulation
NMS are limited to ``protected quotations,'' for which there is no
comparable designation in the OTC equity market. Instead, the
proposal would apply the restrictions uniformly to all quotations
displayed in the OTC equity market.
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Also consistent with Regulation NMS, the proposal would codify that
market makers, as well as ATSs, are permitted to charge access fees
within the framework of the proposed access fee cap.
Consistent with the SEC's conclusions in adopting Regulation NMS,
FINRA believes that capping access fees is the most effective approach
of the available alternatives, as well as the least disruptive to
current market practice (other alternatives include an access fee
display requirement and an outright prohibition on access fees). As the
SEC stated in the Regulation NMS Adopting Release, a single, uniform
fee limitation of $0.003 per share is the fairest and most appropriate
resolution of the access fee issue. First, it will not seriously
interfere with current business practices because trading centers have
very few fees on their books of more than $0.003 per share and do not
earn substantial revenues from such fees. In addition, a uniform fee
limitation promotes equal regulation of different types of trading
centers, where previously some had been permitted to charge fees and
some had not. The SEC also noted that if wide disparities in access
fees were permitted, the prices of quotations would be less useful and
accurate. Therefore, a limitation on the level of access fees addresses
the potential distortions caused by substantial, disparate fees.
E. Limit Order Display
Rule 604 of Regulation NMS requires the immediate display of
customer limit orders. Specifically, Regulation NMS requires the
display of (1) the price and
[[Page 43209]]
the full size of each customer limit order that is at a price that
would improve the bid or offer of the specialist or OTC market maker in
such security; and (2) the full size of each customer limit order held
by the specialist or OTC market maker that: Is priced equal to the bid
or offer of such specialist or OTC market maker for such security; is
priced equal to the national best bid or national best offer; and
represents more than a de minimis change in relation to the size
associated with the specialist or OTC market maker's bid or offer.
FINRA is proposing to impose a similar requirement on customer
limit orders in OTC Equity Securities, specifically, a market maker
displaying a priced quote would be required to immediately \11\ display
customer limit orders that it receives that (1) improve the price of
the bid or offer displayed by the market maker, or (2) improve the size
of its bid or offer by more than a de minimis amount where it is the
best bid or offer in the inter-dealer quotation system where the market
maker is quoting.\12\ Regulation NMS includes several exceptions from
its limit order display requirements, which also would apply to the
proposed limit order display rule for OTC Equity Securities. Thus the
proposed rule would except any customer limit order:
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\11\ Under Rule 604 of Regulation NMS, the requirement to
``publish immediately'' a customer limit order requires the display
(or execution or re-routing) of customer limit orders as soon as is
practicable after receipt which, under normal market conditions,
would require display no later than 30 seconds after receipt. See
Securities Exchange Act Release No. 37619A, 61 FR 48290 (September
12, 1996). FINRA proposes to adopt this same interpretation with
respect to the timing of display of customer limit orders in OTC
Equity Securities.
\12\ Under Rule 604 of Regulation NMS, a customer limit order
should be considered de minimis if it is less than or equal to 10%
of the displayed size associated with a specialist's or OTC market
maker's bid or offer and FINRA proposes to adopt this same
interpretation with respect to the proposed rule. See Exchange Act
Release No. 37619A, 61 FR 48290 (September 12, 1996).
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a. That is executed upon receipt of the order.
b. That is placed by a customer who expressly requests that the
order not be displayed.
c. That is an odd-lot order.\13\
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\13\ As discussed in Trade Reporting Notice 3/18/08, with
respect to OTC Equity Securities trading at $175 or more per share,
FINRA has designated the ``unit of trade'' as one share rather than
100 shares for purposes of public dissemination. As such, trades in
these securities for fewer than 100 shares are not considered ``odd-
lot transactions'' and are disseminated by FINRA. However, for all
other purposes, including the amendments proposed herein,
transactions and orders of fewer than 100 shares are considered
``odd lots,'' unless otherwise specifically determined by FINRA.
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d. That is a block size order, unless a customer placing such order
requests that the order be displayed.\14\
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\14\ Under Regulation NMS, a ``block size'' with respect to an
order means it is: (i) of at least 10,000 shares or (ii) for a
quantity of stock having a market value of at least $200,000.
Because of the lower average trade prices (and corresponding higher
average total share amount) of orders in OTC Equity Securities,
FINRA believes that a 10,000 share standard alone would exclude
customer limit orders that should otherwise be displayed. Therefore,
FINRA is proposing that the definition of ``block size'' under the
rule for OTC Equity Securities be an order that is: (i) Of at least
10,000 shares and (ii) has a market value of at least $100,000. This
is consistent with the large order size exception under IM-2110-2
(Trading Ahead of Customer Limit Order).
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e. That is delivered immediately upon receipt to a national
securities exchange or an electronic communications network that widely
disseminates such order and immediately provides to an inter-dealer
quotation system the prices and sizes of the orders at the highest buy
price and the lowest sell price for such security.\15\
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\15\ FINRA also is proposing to exclude from Rule 2320(g)(2)
those priced quotations that represent a customer limit order
displayed on an electronic communications network in conformance
with this proposed exception. Rule 2320(g)(2) requires that members
display the same priced quotation in a non-exchange-listed security
when quoting in two or more quotation mediums.
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f. That is delivered immediately upon receipt to another OTC market
maker that complies with the proposed limit order display requirements
with respect to that order.
g. That is an all-or-none order.
In adopting the limit order display requirements for NMS stocks,
the SEC stated that the display of limit orders is designed, among
other objectives, to publicize accurate market interest and increase
quote competition. While the SEC recognized that the rule may lead to
reduced spreads and a diminution in market maker profits per trade, the
SEC also noted that narrower spreads could result in increased customer
orders and volume over time and thus, ultimately improve liquidity.
FINRA believes that extending limit order display requirements to OTC
Equity Securities will improve transparency in the OTC equity market.
In addition, as has been stated by the SEC, the display of customer
limit orders advances the goal of the public availability of quotation
information, as well as fair competition, market efficiency, best
execution and disintermediation.
Because the proposed new rules provide for significant regulatory
changes, FINRA plans to implement the requirements in two phases to
minimize the impact on firms. Phase one would implement sub-penny
quoting restrictions, an access fee cap and restrictions on locked and
crossed markets. Phase two would implement customer limit order display
requirements. FINRA will announce the implementation dates for the
proposed rule change in a Regulatory Notice to be published no later
than 90 days following Commission approval. The implementation date of
Phase one will be at least 120 days but no more than 365 days from the
date of Commission approval and Phase two will be at least 90 days
following the implementation of Phase one, but no more than 365 days
from the date of 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,\16\ which requires that
FINRA rules must be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, 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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\16\ 15 U.S.C. 78o-3(b)(6).
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FINRA further believes that the proposed rule change is consistent
with the provisions of 15A(b)(11) of the Act,\17\ which requires, among
other things, that FINRA rules must govern the form and content of
quotations relating to securities sold otherwise than on a national
securities exchange and require that such rules relating to quotations
shall be designed to produce fair and informative quotations, to
prevent fictitious or misleading quotations, and to promote orderly
procedures for collecting, distributing, and publishing quotations.
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\17\ 15 U.S.C. 78o-3(b)(11).
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FINRA is proposing to: (1) Restrict subpenny quoting; (2) restrict
locked and crossed markets; (3) implement a cap on access fees; and (4)
require the display of customer limit orders. FINRA believes that the
proposed restrictions on sub-penny quoting will promote greater price
transparency and consistency, reduce the potential harms associated
with sub-penny quoting in OTC equity securities and improve the depth
and liquidity of this market.
FINRA believes that locked and crossed markets can cause confusion
among investors concerning trading interest in a stock and that
restricting the practice of submitting locking or
[[Page 43210]]
crossing quotations will enhance the usefulness of quotation
information in the over-the-counter market, facilitate more fair and
orderly markets and support market efficiency.
Where wide disparities in access fees are permitted, the prices of
quotations are less useful and accurate. Therefore, FINRA believes that
a cap on access fees would improve the usefulness and accuracy of
quotations and address the potential distortions caused by substantial,
disparate fees. Finally, FINRA believes that applying limit order
display requirements to OTC Equity Securities would improve
transparency in the OTC equity market and advance the goal of the
public availability of quotation information, as well as fair
competition, market efficiency, best execution and disintermediation.
FINRA believes that the proposed extension of the specified
Regulation NMS protections to quoting and trading in OTC Equity
Securities will prevent fraudulent and manipulative acts and practices
in this market, promote just and equitable principles of trade, and
protect investors and the public interest.
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 35 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 such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2009-054 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2009-054. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying 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 publicly available. All
submissions should refer to File Number SR-FINRA-2009-054 and should be
submitted on or before September 16, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20532 Filed 8-25-09; 8:45 am]
BILLING CODE 8010-01-P