[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Notices]
[Pages 9083-9086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02709]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68808; File No. SR-FINRA-2013-012]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Extend the Clearly Erroneous Pilot Period and 
To Adopt a New Provision in Connection With the Limit Up-Limit Down 
Plan

February 1, 2013.
    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 30, 2013, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).

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

[[Page 9084]]

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

    FINRA is proposing to amend FINRA Rule 11892 (Clearly Erroneous 
Transactions in Exchange-Listed Securities) to extend the effective 
date of the clearly erroneous pilot, which is currently scheduled to 
expire on February 4, 2013. FINRA also proposes to adopt new 
supplementary material in connection with the upcoming operation of the 
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of 
SEC Regulation NMS (the ``Limit Up-Limit Down Plan'' or ``Plan'').\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release'').
---------------------------------------------------------------------------

    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 proposes to amend FINRA Rule 11892 (Clearly Erroneous 
Transactions in Exchange-Listed Securities) (the ``Rule'') to extend 
the effective date of the amendments set forth in File No. SR-FINRA-
2010-032 (the ``clearly erroneous pilot''), which are currently 
scheduled to expire on February 4, 2013,\5\ until September 30, 2013, 
and to adopt new Supplementary Material .03 in connection with the 
upcoming operation of the Limit Up-Limit Down Plan.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 67579 (August 2, 
2012), 77 FR 47467 (August 8, 2012) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2012-038).
---------------------------------------------------------------------------

Proposal To Extend Pilot
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to the self-regulatory organizations' (``SROs'') clearly 
erroneous rules, including FINRA Rule 11892, to provide for uniform 
treatment: (1) Of clearly erroneous execution reviews in multi-stock 
events involving twenty or more securities; and (2) in the event 
transactions occur that result in the issuance of an individual stock 
trading pause by the primary market and subsequent transactions that 
occur before the trading pause is in effect for transactions otherwise 
than on an exchange.\6\ FINRA also adopted additional changes to the 
Rule as part of the clearly erroneous pilot that reduced the ability of 
FINRA to deviate from the objective standards set forth in the Rule. 
FINRA believes the benefits to market participants derived from this 
more-objective clearly erroneous rule should continue on a pilot basis 
through September 30, 2013, which is the date that FINRA anticipates 
that the phased implementation of the Limit Up-Limit Down Plan will be 
complete.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 62885 (September 10, 
2010), 75 FR 56641 (September 16, 2010) (Order Approving File No. 
SR-FINRA-2010-032).
---------------------------------------------------------------------------

    As explained in further detail below, although the Limit Up-Limit 
Down Plan is intended to prevent executions that would need to be 
deemed erroneous, FINRA believes that certain protections should be 
maintained while the industry gains initial experience operating with 
the Limit Up-Limit Down Plan, including the provisions of Rule 11892 
that currently operate as a pilot.
Proposed Limit Up-Limit Down Provision for Rule 11892
    FINRA proposes to adopt new Supplementary Material .03 to provide 
that the existing provisions of Rule 11892 will continue to apply to 
all over-the-counter transactions involving an exchange-listed security 
reported through a FINRA system, including transactions in securities 
subject to the Plan, other than as set forth in proposed Supplementary 
Material .03. Accordingly, other than as proposed below, FINRA proposes 
to maintain and continue to apply the clearly erroneous standards as it 
does today. Notably, this means that FINRA might deem as clearly 
erroneous transactions that occur within the price bands disseminated 
pursuant to the Limit Up-Limit Down Plan to the extent such 
transactions qualify as clearly erroneous under existing criteria.
    As an example, assume that a Tier 1 security pursuant to the Plan 
has a reference price of $100.00 pursuant to both the Plan and Rule 
11892. The lower price band under the Plan would be $95.00 and the 
upper price band under the Plan would be $105.00. An execution could 
occur otherwise than on an exchange in this security at $96.00, as this 
is within the Plan's price bands. However, if subjected to review as 
potentially clearly erroneous, FINRA would deem an execution at $96.00 
as clearly erroneous because it exceeds the 3% threshold that is in 
place pursuant to Rule 11892(b)(1) for securities priced above $50.00 
(i.e., with a reference price of $100.00, any transactions at or below 
$97.00 or above $103.00 could be deemed clearly erroneous). 
Accordingly, this proposal maintains the status quo with respect to 
reviews of clearly erroneous transactions and the application of 
objective numerical guidelines by FINRA. The proposal does not increase 
the discretion afforded to FINRA in connection with reviews of clearly 
erroneous transactions.
    The Limit Up-Limit Down Plan is designed to prevent executions from 
occurring outside of dynamic price bands disseminated to the public by 
the single plan processor as defined in the Limit Up-Limit Down 
Plan.\7\ The possibility remains that a member may experience a 
technology or systems problem that results in the occurrence of an 
over-the-counter transaction in an exchange-listed security outside of 
the applicable price bands. To address this possibility, FINRA proposes 
to adopt language to make clear that if a member's technology or 
systems issue results in any transaction being reported to a FINRA 
system outside of the price bands disseminated pursuant to the Plan, a 
FINRA officer, acting on his or her own motion or at the request of a 
member, shall review and deem any such trades as clearly erroneous, so 
long as the member certifies that the subject transaction(s) occurring 
outside of the applicable price bands disseminated pursuant to the Plan 
is the result of the member's bona fide technological or systems 
issue.\8\
---------------------------------------------------------------------------

    \7\ See Limit Up-Limit Down Release, supra note 4.
    \8\ During for cause reviews of clearly erroneous trades or 
examinations of member firms, FINRA will review whether there is 
sufficient documentation of technology or system issues to 
reasonably substantiate the certifications. FINRA also will review 
members' procedures for complying with the Limit Up-Limit Down Plan.
---------------------------------------------------------------------------

    Absent extraordinary circumstances, any action by a FINRA officer 
shall be taken in a timely fashion, generally within thirty (30) 
minutes of the detection of the erroneous transaction. When 
extraordinary circumstances exist, any such action of the FINRA officer 
must be taken by no later than

[[Page 9085]]

the start of normal market hours on the trading day following the date 
on which the execution(s) under review occurred.
    Although FINRA will act as promptly as possible and the proposed 
objective standard (i.e., whether an execution occurred outside the 
band) should make it feasible to quickly make a determination, FINRA 
may require additional time to obtain the required certification from a 
member that the transaction(s) outside of the price bands occurred as a 
result of the member's bona fide technological or systems issue. In 
addition, there may be circumstances in which additional time may be 
needed for verification of facts or coordination with outside parties, 
including the single plan processor responsible for disseminating the 
price bands and other SROs. Accordingly, FINRA believes it necessary to 
maintain some flexibility to make a determination outside of the thirty 
(30) minute guideline. In addition, FINRA proposes that a transaction 
that is deemed clearly erroneous pursuant to new Supplementary Material 
.03 would be appealable in accordance with the provisions of Rule 
11894. In addition, FINRA proposes to make clear that, in the event 
that a single plan processor experiences a technology or systems 
problem that prevents the dissemination of price bands, FINRA would 
make the determination of whether to deem transactions clearly 
erroneous based on Rule 11892 paragraphs (a) and (b) and Supplementary 
Material .01.
    FINRA believes that it is consistent with the purpose and intent of 
the Plan to deem as clearly erroneous transactions that occur otherwise 
than on an exchange and are reported to a FINRA system that occur 
outside of the price bands disseminated pursuant to the Plan as a 
result of a members technology or systems issue.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The effective date of the proposed rule change will be 
the date of filing.
2. Statutory Basis
    FINRA believes that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities association and, in particular, 
with the requirements of Section 15A of the Act.\9\ In particular, the 
proposal is consistent with Section 15A(b)(6) \10\ because it is 
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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the pilot program promotes just and equitable 
principles of trade in that it promotes transparency and uniformity 
across SROs concerning reviews of transactions as clearly erroneous. 
More specifically, FINRA believes that the extension of the clearly 
erroneous pilot would help assure that the determination of whether a 
clearly erroneous trade has occurred will be based on clear and 
objective criteria, and that the resolution of the incident will occur 
promptly through a transparent process. The proposed rule change also 
would help assure consistent results in handling erroneous trades 
across the U.S. markets, thus furthering fair and orderly markets, the 
protection of investors and the public interest. Although the Limit Up-
Limit Down Plan will be operational during the same time period as the 
proposed extended clearly erroneous pilot, FINRA believes that 
maintaining the clearly erroneous pilot for at least through the phased 
implementation of the Plan will help to protect against unanticipated 
consequences. To that end, the extension will allow FINRA to determine 
whether Rule 11892 is necessary once the Plan is operational and, if 
so, whether improvements can be made.
    Further, FINRA believes it is consistent with the protection of 
investors and the public interest to adopt objective criteria to deem 
transactions reported to a FINRA system outside of the price bands as 
clearly erroneous when a member has certified that such transaction was 
due to the member's bona fide systems or technology issue.

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

    FINRA does not believe that the proposed rule change implicates any 
competitive issues. To the contrary, FINRA believes that the other SROs 
also are filing similar proposals and, thus, the proposal will help to 
ensure consistent rules across the marketplace.

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

    FINRA has not solicited, and does not intend to solicit, comments 
on this proposed rule change. FINRA has not received any written 
comments from members or other interested parties.

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

    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 for 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 \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), FINRA provided the Commission with written notice of 
its intent to file the proposed rule change, along with a brief 
description and the 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 asked the Commission to waive the 30-day operative delay 
so that the proposal may become operative immediately upon filing. 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 the pilot program to continue uninterrupted, thereby 
avoiding the investor confusion that could result from a temporary 
interruption in the pilot program. For this reason, the Commission 
designates the proposed rule change to be operative upon filing.\13\
---------------------------------------------------------------------------

    \13\ 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).
---------------------------------------------------------------------------

    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

[[Page 9086]]

     Send an email to [email protected]. Please include 
File Number SR-FINRA-2013-012 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-2013-012. 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 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 offices 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-2013-012, and should be submitted on or before 
February 28, 2013.
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02709 Filed 2-6-13; 8:45 am]
BILLING CODE 8011-01-P