[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74105-74107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65819; File No. SR-FINRA-2011-068]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Amend FINRA Rule 6121.01 (Trading Pauses) To 
Exclude Rights and Warrants From the Trading Pause Pilot

November 23, 2011.
    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 November 21, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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 filing with 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 Supplementary Material .01 (Trading 
Pauses) to FINRA Rule 6121 (Trading Halts Due to Extraordinary Market 
Volatility) to exclude all rights and warrants from the trading pause 
pilot.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA proposes to amend FINRA Rule 6121.01 (Trading Pauses) to 
exclude all rights and warrants from the trading pause pilot. The 
Commission approved FINRA Rule 6121.01 on a pilot basis on June 10, 
2010 to provide for trading pauses in individual securities due to 
extraordinary market volatility (``Trading Pause Pilot'').\4\ The pilot 
was developed and implemented as a market-wide initiative by FINRA and 
other self-regulatory organizations (``SROs'') in consultation with 
Commission staff. Initially, the pilot covered only the securities 
included in the S&P 500 [supreg] Index (``S&P 500'') (``Phase I 
securities''). FINRA and the other SROs subsequently expanded the 
Trading Pause Pilot to add the securities included in the Russell 1000 
[supreg] Index and a specified list of exchange traded products 
(``Phase II securities'').\5\ FINRA and the other SROs have stated in 
previous filings that they would continue to review whether and when to 
add securities to the pilot and whether the parameters of the pilot 
should be adjusted for different securities.\6\
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    \4\ See Securities Exchange Act Release No. 62251 (June 10, 
2010), 75 FR 34183 (June 16, 2010) (Order Approving File No. SR-
FINRA-2010-025).
    \5\ See Securities Exchange Act Release No. 62883 (September 10, 
2010), 75 FR 56608 (September 16, 2010) (Order Approving File No. 
SR-FINRA-2010-033).
    \6\ See e.g., Securities Exchange Act Release No. 62416 (June 
30, 2010), 75 FR 39069 (July 7, 2010) (Notice of Filing of File No. 
SR-FINRA-2010-033).
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    On June 23, 2011, the Commission approved proposed amendments by 
FINRA and the other SROs to expand the Trading Pause Pilot to include 
all remaining NMS stocks (``Phase III securities''), which included 
rights and warrants.\7\ With respect to the Phase III securities, the 
SRO rules \8\ apply wider percentage price moves for triggering a 
trading pause than apply to the Phase I or Phase II securities.\9\
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    \7\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (Order Approving File No. SR-
FINRA-2011-023). This amendment became effective on August 8, 2011.
    \8\ FINRA's trading pause rule does not include specific trigger 
percentages, but rather provides that FINRA will halt trading 
otherwise than on an exchange in a security if a primary listing 
market has issued an individual stock trading pause under its rules.
    \9\ For example, under amended NASDAQ Rule 4120(a)(11), a pause 
is triggered by a 30% or more price move in a Phase III Security 
priced at $1.00 or higher, and by a 50% or more price move to such a 
security priced less than $1.00. The price of a security is based on 
the closing price on the previous trading day or, if no closing 
price exists, the last sale reported to the consolidated tape on the 
previous trading day.
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    The trading pauses triggered since the adoption of the Trading 
Pause Pilot have been analyzed and over 25% of trading pauses have 
occurred in rights and warrants. Further, the SROs have experienced a 
significant increase in trading pauses involving rights and warrants 
since the inclusion of the Phase III securities, with such pauses 
representing as much as 52% of all trading pauses occurring through the 
end of August 2011 on one exchange. Rights and warrants trade on equity 
exchanges, but are closely related to call options.\10\ Like options, 
the price of rights and warrants are affected by the price of the 
underlying stock as well as other factors, particularly the volatility 
of the stock. Consequently, the price of rights and warrants may move 
more dramatically than the price of the underlying stock, even when the 
rights and warrants (and the underlying stock)

[[Page 74106]]

are trading in an orderly manner. This difference in trading behavior 
may result in a scenario whereby the rights and warrants trigger, and 
are subject to, a trading pause, even while the underlying stock 
continues to trade. This can be particularly true of lower-priced 
rights and warrants. Accordingly, FINRA, in consultation with the other 
SROs, is proposing to exclude rights and warrants from the trading 
pause pilot of Rule 6121.01.
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    \10\ Rights and warrants entitle owners to purchase shares of 
stock at predetermined prices subject to timing and various other 
conditions.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the Commission waive the 
requirement that the proposed rule change not become operative for 30 
days after the date of filing to avoid further triggers of trading 
pauses in rights and warrants, thereby avoiding the potential confusion 
caused by such pauses.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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 meets 
these requirements because it is consistent with the trading pause 
rules of the primary listing markets and refines the trading pause 
pilot to exclude certain securities that are prone to triggering pauses 
because of their unique characteristics. Given the fact that the price 
of rights and warrants may move more dramatically than the prices of 
the underlying stocks to which they are related, even when both are 
trading in an orderly manner, FINRA questions the benefit of applying 
the trading pause pilot to such securities. FINRA also believes that 
the proposed rule change promotes uniformity across markets concerning 
decisions to pause trading in a security when there are significant 
price movements.
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    \11\ 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

    FINRA has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \12\ and Rule 19b-4(f)(6) thereunder.\13\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires FINRA to give the Commission written notice of the FINRA's 
intent to file the proposed rule change along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. FINRA 
has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \17\ the Commission may 
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 proposal may 
become operative immediately upon filing.
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Including rights and warrants in the pilot program which may trigger a 
circuit breaker and be subject to a trading pause, even while the 
underlying security continues to trade, provides little benefit and has 
the potential to create confusion among investors. Excluding rights and 
warrants from the pilot program should minimize investor confusion that 
could result from temporary trading pauses in these securities. For 
this reason, the Commission designates the proposed rule change as 
operative upon the date of this Notice.\18\
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    \18\ 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.

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 No. SR-FINRA-2011-068 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 No. SR-FINRA-2011-068. 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 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

[[Page 74107]]

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 No. SR-FINRA-
2011-068 and should be submitted on or before December 21, 2011.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30814 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P