[Federal Register Volume 77, Number 19 (Monday, January 30, 2012)]
[Notices]
[Pages 4599-4600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-1880]



[[Page 4599]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66220; File No. SR-FINRA-2012-001]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change and Partial 
Amendment No. 1 To Amend FINRA Rule 4560 (Short-Interest Reporting)

January 24, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 10, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. On January 20, 2012, FINRA filed Partial Amendment No. 1.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Partial Amendment No. 1, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The text of proposed Partial Amendment No. 1 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.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 4560 (Short-Interest 
Reporting).
    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 Rule 4560 (``Short-Interest Reporting'' or the ``Rule'') 
requires each FINRA member to maintain a record of total short 
positions in all customer and proprietary firm accounts in all equity 
securities (other than Restricted Equity Securities as defined in Rule 
6420) and regularly report such information to FINRA in the manner 
prescribed by FINRA. The Rule generally provides that the short 
positions to be recorded and reported are those resulting from ``short 
sales'' as that term is defined in Rule 200(a) of SEC Regulation 
SHO.\4\ FINRA is proposing to amend the Rule to clarify members' 
recording and reporting obligations and to delete several exceptions to 
the Rule.
---------------------------------------------------------------------------

    \4\ Rule 200 of SEC Regulation SHO provides that ``short sale'' 
means ``any sale of a security which the seller does not own or any 
sale which is consummated by the delivery of a security borrowed by, 
or for the account of, the seller.'' See Rule 200(a) of SEC 
Regulation SHO, 17 CFR 242.200. SEC Rule 200 further provides, among 
other things, that a person is deemed to own a security if: (a) The 
person or his agent has title to it; or (b) The person has 
purchased, or has entered into an unconditional contract, binding on 
both parties thereto, to purchase it, but has not yet received it; 
or (c) The person owns a security convertible into or exchangeable 
for it and has tendered such security for conversion or exchange; or 
(d) The person has an option to purchase or acquire it and has 
exercised such option; or (e) The person has rights or warrants to 
subscribe to it and has exercised such rights or warrants; or (f) 
The person holds a security futures contract to purchase it and has 
received notice that the position will be physically settled and is 
irrevocably bound to receive the underlying security. See Rule 
200(b) of SEC Regulation SHO.
---------------------------------------------------------------------------

    First, FINRA is proposing to codify interpretive guidance 
previously issued by the Intermarket Surveillance Group (ISG) that 
instructed members to report ``gross'' short positions existing in each 
proprietary and customer account (rather than net positions across 
accounts).\5\ Thus, the proposed rule change provides that members must 
report all gross short positions existing in each firm or customer 
account, including the account of a broker-dealer, that resulted from a 
``short sale'' as that term is defined in Rule 200(a) of SEC Regulation 
SHO, as well as where the sale transaction that caused the short 
position was marked ``long,'' consistent with SEC Regulation SHO, due 
to the firm's or the customer's net long position at the time of the 
transaction (e.g., aggregation units).
---------------------------------------------------------------------------

    \5\ See Intermarket Surveillance Group, Consolidated Reporting 
of Short Interest Positions, ISG Regulatory Memorandum 95-01 (March 
6, 1995).
---------------------------------------------------------------------------

    Second, FINRA is clarifying that members' short-interest reports 
must reflect only those short positions that have settled or reached 
settlement date by the close of the reporting settlement date 
designated by FINRA. Therefore, short positions resulting from short 
sales that were effected but have not reached settlement date by the 
given designated reporting settlement date, should not be included in a 
member's short-interest report for that reporting cycle. Of course, 
short-interest positions resulting from short sales that reached the 
expected settlement date, but failed to settle (i.e., ``fails''), must 
be included.
    Third, FINRA is clarifying that members must reflect company-
related actions in their short-interest reports adjusted as of the ex-
date of the corporate action (and if no ex-date is declared by a self-
regulatory organization (``SRO''), then the payment date).\6\ 
Therefore, for the purposes of short-interest reporting, members must 
reflect corporate actions (e.g., a reverse or forward split) that 
impact the total number of shares in the short position in their short-
interest report for a reporting cycle if the ex-date of the corporate 
action occurs by the reporting settlement date designated by FINRA for 
such cycle (even if payment of the distribution is not received until 
after the designated reporting settlement date).
---------------------------------------------------------------------------

    \6\ The ex-date is the date on or after which a security is 
traded without a specific dividend or distribution. The ex-date also 
is the date that DTCC uses to determine who is entitled to the 
distribution. The payable date is the date that the dividend is sent 
to the record owner of the security. See e.g., Regulatory Notice 00-
54 (August 2000).
---------------------------------------------------------------------------

    Finally, consistent with discussions with the ISG, FINRA is 
proposing amendments to delete certain existing exceptions to the 
Rule.\7\ At present, the Rule provides five exceptions, including an 
exception for stabilizing activity, domestic arbitrage and 
international arbitrage. FINRA, in cooperation with the ISG Short 
Interest Working Group (``ISG Working Group''), determined that the 
transactions addressed in these three exceptions result in the type of 
short positions that would be of interest to regulators and the public, 
and

[[Page 4600]]

therefore, determined that these exceptions no longer are 
appropriate.\8\
---------------------------------------------------------------------------

    \7\ FINRA has worked closely with other SRO members of the ISG, 
a group that includes representatives of every U.S. SRO, to address 
problems that reach across marketplaces. Each ISG member adopted 
consistent short-interest reporting rules to enhance surveillance 
capabilities, augment market transparency, enable investors to make 
more informed decisions, and provide greater disclosure for 
regulatory purposes.
    \8\ FINRA and the ISG Working Group determined that the 
remaining two exceptions continue to be appropriate. Specifically, 
the exception for sales for an account in which the person has an 
interest, owns the security and intends to deliver it as soon as is 
possible (which FINRA is retaining) is intended to address 
circumstances where there may be a brief delay in delivery but the 
sale is a long sale, i.e., exercise of a right, option, or warrant. 
In addition, the over-allotment exception (which FINRA also is 
retaining) addresses the narrow circumstance where the underwriter 
has not received shares and results in a short position for a very 
brief duration.
---------------------------------------------------------------------------

    FINRA believes that the proposed amendments will remove confusion 
regarding the operation of the Rule and help facilitate the 
availability to the public and regulators of accurate and complete 
short-interest information.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 120 days following 
Commission approval. The effective date will be no more than 365 days 
following 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,\9\ 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 will 
promote consistency and accuracy in the calculation and reporting of 
short-interest positions by members.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2012-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2012-001. 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 also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-001 and should be 
submitted on or before February 21, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2012-1880 Filed 1-27-12; 8:45 am]
BILLING CODE 8011-01-P