[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10655-10656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03387]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68874; File No. SR-FINRA-2012-010]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Rule 6440 (Trading and Quotation Halt in OTC Equity Securities)

February 8, 2013.

I. Introduction

    On December 20, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 6440 (Trading and Quotation 
Halt in OTC Equity Securities). The proposed rule change was published 
for comment in the Federal Register on December 31, 2012.\3\ The 
Commission received one comment letter regarding the proposal.\4\ This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68526 (December 21, 
2012), 77 FR 77162 (``Notice'').
    \4\ See web comment from Suzanne H. Shatto, dated January 3, 
2013, available at http://www.sec.gov/comments/sr-finra-2012-010/finra2012010.shtml. This commenter stated that ``this circuit 
breaker does not serve the public well and provides brokers/
marketmakers/high frequency traders with the ability to limit their 
losses.'' The Commission believes that this comment is not pertinent 
to the proposed rule change, which concerns trading and quotation 
halts for OTC Equity Securities and not market-wide circuit 
breakers.
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II. Description of the Proposal

    FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity 
Securities) generally provides that, in circumstances where it is 
necessary to protect investors and the public interest, FINRA may 
direct members to halt trading and quotations in OTC Equity 
Securities.\5\ FINRA may impose a ``Foreign Regulatory Halt'' when a 
foreign securities exchange, market, or regulatory authority halts 
trading for regulatory reasons in an OTC Equity Security or a security 
underlying an American Depository Receipt (``ADR'') that is an OTC 
Equity Security (``OTC ADR'') listed on or registered with such foreign 
securities exchange or market.\6\ FINRA, however, will not impose a 
trading and quotation halt if the Foreign Regulatory Halt was imposed 
solely for material news, a regulatory filing deficiency, or 
operational reasons.\7\ In addition, FINRA may impose a ``Derivative 
Halt'' when a national securities exchange or foreign securities 
exchange or market halts trading in a listed security of which the OTC 
Equity Security or the security underlying an OTC ADR is a derivative 
or component.\8\ Further, FINRA may impose an ``Extraordinary Event 
Halt'' when it determines that an extraordinary event has occurred or 
is ongoing that has had a material effect on the market for the OTC 
Equity Security or has caused, or has the potential to cause, major 
disruption to the marketplace and/or significant uncertainty in the 
settlement and clearance process.\9\
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    \5\ FINRA Rule 6420 defines ``OTC Equity Security'' as ``any 
equity security that is not an `NMS stock' as that term is defined 
in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that 
the term `OTC Equity Security' shall not include any Restricted 
Equity Security.'' See FINRA Rule 6420(f).
    \6\ See FINRA Rule 6440(a)(1).
    \7\ See FINRA Rule 6440(a)(1).
    \8\ See FINRA Rule 6440(a)(2).
    \9\ See FINRA Rule 6440(a)(3).
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    FINRA proposes to amend Rule 6440(a)(1) to permit FINRA to initiate 
a trading and quotation halt as a result of a Foreign Regulatory Halt 
when the foreign halt is imposed for news pending.\10\ FINRA indicates 
that historically it has not halted in these instances because FINRA 
lacks privity with OTC equity issuers and cannot compel such issuers to 
disclose information to FINRA.\11\ FINRA believes that with the growth 
of foreign securities markets and the ease at which trading can occur 
across jurisdictions and markets, increased coordination of trading 
halts across markets would protect investors by reducing instances of 
potentially material disparities in information regarding the security, 
or even fraudulent or manipulative trading in the security, and would 
act to protect U.S. investors.\12\
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    \10\ See Notice, supra note 3, 77 FR at 77163. The limitations 
in Rule 6440(a)(1) relating to FINRA's halt authority where the 
Foreign Regulatory Halt is imposed solely for a regulatory filing 
deficiency or operational reasons would remain.
    \11\ See id.
    \12\ See id.
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    FINRA Rule 6440(b)(1) provides that upon receipt of information 
from a foreign securities exchange or market on which an OTC Equity 
Security or a security underlying the OTC ADR is listed or registered, 
or from a regulatory authority overseeing such issuer, exchange, or 
market, FINRA will promptly evaluate the information and determine 
whether a trading and quotation halt in the OTC Equity Security is 
appropriate. FINRA proposes to amend Rule 6440(b)(1) to clarify that 
FINRA may initiate a trading and quotation halt in an OTC Equity 
Security as a result of a Foreign Regulatory Halt or Derivative Halt 
upon notice from another reliable third-party source (e.g., The 
Depository Trust & Clearing Corporation, broker-dealers, or financial 
news data vendors) where FINRA can validate the information 
provided.\13\ The proposed revision to Rule 6440(b)(1) will provide 
that upon notice, not simply receipt of information, of a Foreign 
Regulatory Halt or Derivative Halt from (i) the national or foreign 
securities exchange or market on which the OTC Equity Security or the 
security underlying the OTC ADR is listed or registered; (ii) a 
regulatory authority overseeing such issuer, exchange, or market; or 
(iii) another reliable third-party source where FINRA can validate the 
information provided, FINRA will promptly initiate a trading and 
quotation halt in the OTC Equity Security.\14\
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    \13\ See id. FINRA states that it verifies all third-party 
information relating to trading and quotation halts in foreign 
markets before it acts upon such information. See id. at 77164. 
FINRA believes that having the authority to halt trading and 
quotation in an OTC Equity Security upon notice from a reliable 
third-party source that can be validated would allow FINRA to act 
more promptly to initiate trading and quotation halts in such 
securities. See id.
    \14\ The commencement of the trading and quotation halt for the 
OTC Equity Security will be effective simultaneous with the issuance 
of appropriate public notice by FINRA. See proposed FINRA Rule 
6440(b)(1).
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    Currently, under Rule 6440(b)(3), trading and quotations in an OTC 
Equity Security may resume when FINRA determines that the basis for the 
halt no longer exists, or when ten business days have elapsed from the 
date FINRA initiated the trading and quotation halt in the security, 
whichever occurs first. FINRA proposes to add new Rule 6440(b)(2) to 
provide that, after it initiates a halt in an OTC Equity Security as a 
result of a Foreign Regulatory Halt or a Derivative Halt, FINRA may 
continue the halt in trading and quoting in the OTC market for the OTC 
Equity Security until such time as FINRA receives notice that the 
applicable regulatory authority has or intends to resume trading in the 
security, even if such halt is longer than ten business days.\15\
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    \15\ FINRA stated that it will disseminate an appropriate public 
notice that a trading and quotation halt initiated under Rule 6440 
is no longer in effect. See proposed FINRA Rule 6440(b)(4).
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    FINRA proposes to amend Rule 6440(b)(3) to provide that, with 
respect to a halt in an OTC Equity Security as

[[Page 10656]]

a result of an Extraordinary Event Halt, trading and quotations in the 
OTC market for the OTC Equity Security may resume when FINRA determines 
that the basis for the halt no longer exists, or when ten business days 
have elapsed from the date FINRA initiated the trading and quotation 
halt in the security, whichever occurs first. In addition, FINRA will 
be permitted to extend an Extraordinary Event Halt for subsequent 
periods of up to ten business days each if, at the time of any such 
extension, FINRA finds that the extraordinary event is ongoing and 
determines that the continuation of the halt beyond the prior ten 
business day period is necessary in the public interest and for the 
protection of investors.\16\
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    \16\ See proposed FINRA Rule 6440, Supplementary Material .01. 
FINRA believes that the authority to halt beyond the initial ten 
business day period is vital in the OTC marketplace where concerns 
regarding settlement and clearance, pricing, or other extraordinary 
events can take time to be resolved. See Notice, supra note 3, 77 FR 
at 77164.
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III. Discussion and Commission's Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposed rule change is consistent with the requirements 
of Section 15A(b) of the Act \17\ and the rules and regulations 
thereunder applicable to a national securities association.\18\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\19\ which requires, among 
other things, that FINRA rules 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, and, in general, to protect investors and the public 
interest, and Section 15A(b)(11) of the Act,\20\ which requires, among 
other things, that FINRA rules relating to quotations 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).
    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(11).
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    The Commission believes that FINRA's trading and quotation halt 
rule for OTC Equity Securities, when appropriately applied under the 
circumstances specified in the rule, as proposed to be amended, is 
designed to promote the protection of investors and the public interest 
and to produce fair and informative quotations, and to prevent 
fictitious or misleading quotations, for OTC Equity Securities. 
Permitting FINRA to initiate a trading and quotation halt as a result 
of a Foreign Regulatory Halt that is imposed for news pending should 
enable FINRA to initiate trading and quotation halts in OTC Equity 
Securities under a broader set of circumstances than currently exists, 
which could help to reduce the potential that investors may trade on 
incomplete or inaccurate information in these securities. In addition, 
permitting FINRA to initiate a halt as a result of a Foreign Regulatory 
Halt or Derivative Halt upon notice from another reliable third-party 
source where FINRA can validate the information provided should allow 
FINRA to initiate a halt more promptly when such a halt is warranted.
    The Commission further believes that the provisions relating to the 
duration of a trading and quotation halt are reasonably designed to 
protect investors and the public interest and to produce fair and 
informative quotations, and to prevent fictitious or misleading 
quotations, for OTC Equity Securities. The Commission believes that it 
is reasonable for a halt in an OTC Equity Security as a result of a 
Foreign Regulatory Halt or a Derivative Halt to run concurrently with, 
and for as long as, the halt imposed on the security in the market on 
which it is listed or registered. In addition, allowing FINRA to extend 
an Extraordinary Event Halt for subsequent periods of up to ten 
business days will help allow for resolution of the event before 
trading and quoting in the OTC market for the OTC Equity Security 
resumes. The Commission notes that FINRA would be permitted to extend 
an Extraordinary Event Halt only if it finds that the extraordinary 
event is ongoing and determines that the continuation of the halt 
beyond the initial ten business day halt period is necessary and 
appropriate in the public interest and for the protection of investors.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-FINRA-2012-010) is approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03387 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P