[Federal Register Volume 82, Number 164 (Friday, August 25, 2017)]
[Notices]
[Pages 40610-40612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18000]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81448; File No. SR-FINRA-2017-026]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Clarify Application of FINRA Rule 11140 
(Transactions in Securities ``Ex-Dividend,'' ``Ex-rights'' or ``Ex-
Warrants'') in Connection With the Implementation of the Shortened 
Settlement Cycle (T+2) on September 5, 2017

August 21, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 17, 2017, 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.
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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 address the application of FINRA Rule 11140 
(Transactions in Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-
Warrants'') as it relates to establishing ex-dividend dates in 
connection with the implementation of the T+2 settlement cycle on 
September 5, 2017.
    No change to the text of FINRA Rule 11140(b)(1) is required by this 
proposal.

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
Background
    On March 22, 2017, the SEC adopted amendments to SEA Rule 15c6-1(a) 
to shorten the standard settlement cycle for U.S. secondary market 
transactions in equities, corporate and municipal bonds, unit 
investment trusts and financial instruments composed of these products, 
from three business days after the trade date (``T+3'') to two business 
days after the trade date (``T+2'').\4\ The industry-wide initiative is 
designed to reduce a number of risks, including credit risk, market 
risk, and liquidity risk and, as a result, reduce systemic risk for 
U.S. market participants.\5\ The compliance date for the rule 
amendments is September 5, 2017.
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    \4\ See Securities Exchange Act Release No. 80295 (March 22, 
2017), 82 FR 15564 (March 29, 2017) (Securities Transaction 
Settlement Cycle) (File No. S7-22-16) (stating that, as amended, SEA 
Rule 15c6-1(a) will prohibit broker-dealers from effecting or 
entering into a contract for the purchase or sale of a security 
(other than an exempted security, government security, municipal 
security, commercial paper, bankers' acceptances or commercial 
bills) that provides for payment of funds and delivery of securities 
later than the second business day after the date of the contract, 
unless otherwise expressly agreed to by the parties at the time of 
the transaction).
    \5\ See supra note 4.
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    In support of this initiative, FINRA proposed changes to its rules 
pertaining to securities settlement by, among other things, amending 
the definition of ``regular way'' settlement as occurring on T+2.\6\ On 
February 9, 2017, the SEC approved FINRA's amendments to the applicable 
rules, including Rule 11140(b), that establish or reference T+3 to 
conform to T+2, and these amendments will become effective on September 
5, 2017.\7\
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    \6\ See Securities Exchange Act Release No. 79648 (December 21, 
2016), 81 FR 95705 (December 28, 2016) (Notice of Filing of File No. 
SR-FINRA-2016-047).
    \7\ See Securities Exchange Act Release No. 80004 (February 9, 
2017), 82 FR 10835 (February 15, 2017) (Order Approving File No. SR-
FINRA-2016-047) and Securities Exchange Act Release No. 80004A 
(March 6, 2017), 82 FR 13517 (March 13, 2017) (Correction to Order 
Approving File No. SR-FINRA-2016-047).
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    During the transition period the industry and self-regulatory 
organizations (``SROs''), including The Depository Trust Company 
(``DTC'') which processes corporate action events, have raised concern 
that the

[[Page 40611]]

September 5, 2017 industry-wide transition date from T+3 to T+2 will 
result in September 7, 2017 being a ``double'' settlement date for 
trades that occur on September 1, 2017 (under T+3 and reflecting the 
Labor Day holiday on September 4, 2017) and trades that occur on 
September 5, 2017 (under T+2), which generally will result in investors 
who trade on either date being deemed a record holder of September 7, 
2017.\8\ In order to avoid confusion about the proper settlement date 
and to coordinate with other SROs, FINRA is proposing not to establish 
September 5, 2017 as an ex-dividend date for applicable securities.
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    \8\ See, e.g., Nasdaq Issuer Alert 2017-001, Changes to Ex-
dividend Procedures Effective September 5, 2017 to Accommodate T+2 
Settlement, http://nasdaq.cchwallstreet.com/nasdaq/pdf/nasdaq-issalerts/2017/2017-001.pdf; NYSE, NYSE MKT, NYSE ARCA: Changes 
Related to the Shortened Settlement Cycle (T+2) (July 11, 2017), 
https://www.nyse.com/trader-update/history#110000069618.
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Proposal
    FINRA is proposing to address the application of Rule 11140(b) as 
it relates to the ex-dividend date in connection with the 
implementation of the T+2 settlement cycle on September 5, 2017. As 
amended to address T+2, the timeframes in Rule 11140 to establish an 
ex-dividend date were generally reduced by one business day.
    The ex-dividend date (or ex-date) is the date on or after which a 
security is traded without a specific dividend or distribution.\9\ Rule 
11140(b) provides for the determination of normal ex-dividend and ex-
warrant dates for certain types of dividends and distributions. As 
amended to address T+2, Rule 11140(b)(1) provides that with respect to 
cash dividends or distributions, or stock dividends, and the issuance 
or distribution of warrants, which are less than 25% of the value of 
the subject security (i.e., ``regular'' distributions), if the 
definitive information is received sufficiently in advance of the 
record date, the date designated as the ``ex-dividend date'' is the 
first business day preceding the record date if the record date falls 
on a business day, or the second business day preceding the record date 
if the record date falls on a day designated by FINRA's Uniform 
Practice Code (``UPC'') Committee as a non-delivery date.\10\ Rule 
11140(b)(2), which did not require amendment in connection with T+2, 
establishes the ex-dividend date as the first business day following 
the payable date with respect to cash dividends or distributions, stock 
dividends and/or splits, and the distribution of warrants, which are 
25% or greater of the value of the subject security (i.e., ``large'' 
distributions).\11\
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    \9\ See generally Notice to Members 00-54 (August 2000).
    \10\ The record date is the date fixed by an issuer for the 
purpose of determining the holder of the security who is eligible to 
receive the dividend, interest or principal payment, or any other 
distribution relating to the security. See generally Notice to 
Members 00-54 (August 2000).
    \11\ The payable date is the date that the dividend is sent to 
the record owner of the security. See generally Notice to Members 
00-54 (August 2000).
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    Consistent with the compliance date of the amendments to SEA Rule 
15c6-1(a), the industry and FINRA have adopted Tuesday, September 5, 
2017 as the transition date to the T+2 settlement cycle.\12\ To 
mitigate the potential confusion that may result concerning proper 
settlement during the transition period, FINRA, in coordination with 
other SROs, supports the proposal that Tuesday, September 5, 2017 
should not be designated as an ex-dividend date.\13\
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    \12\ See Regulatory Notice 17-19 (SEC Approves Amendments to 
FINRA Rules to Conform to the Shortened Standard Settlement Cycle 
for Most Broker-Dealer Transactions From Three Business Days (T+3) 
to Two Business Days After the Trade Date (T+2)) (May 2017).
    \13\ See, e.g., Nasdaq Issuer Alert 2017-001, Changes to Ex-
dividend Procedures Effective September 5, 2017 to Accommodate T+2 
Settlement, http://nasdaq.cchwallstreet.com/nasdaq/pdf/nasdaq-issalerts/2017/2017-001.pdf; NYSE, NYSE MKT, NYSE ARCA: Changes 
Related to the Shortened Settlement Cycle (T+2) (July 11, 2017), 
http://www.ust2.com/pdfs/NYSE-T2-Announcements.pdf.
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    Accordingly, FINRA proposes to interpret Rule 11140(b)(1) so that 
the first record date to which the new ex-dividend date determination 
will be applied will be Thursday, September 7, 2017. The ex-dividend 
dates for ``regular'' distributions during the transition to T+2 will 
be as follows:

------------------------------------------------------------------------
                Record date                            Ex-date
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Friday, September 1, 2017 \14\............  Wednesday, August 30, 2017.
Tuesday, September 5, 2017 \15\...........  Thursday, August 31, 2017.
                                             \16\
Wednesday, September 6, 2017..............  Friday, September 1, 2017.
                                             \17\
Thursday, September 7, 2017 \18\..........  Wednesday, September 6,
                                             2017.
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    As described above, the ex-date  for ``large'' distributions under 
Rule 11140(b)(2) is the first business day following the payable date. 
This provision was not amended in connection with T+2. In order to 
ensure that September 5, 2017 will not be designated as an ex-dividend 
date for ``large'' distributions, FINRA will advise issuers to not set 
September 1, 2017 as the payable date for any ``large'' distribution 
under Rule 11140(b)(2) and proposes to interpret Rule 11140(b)(2) so 
that, if an issuer sets September 1, 2017 as the payable date for a 
``large'' distribution, the ex-dividend date will be September 6, 2017, 
not September 5, 2017.
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    \14\ The last day of the T+3 settlement cycle.
    \15\ The first day of the T+2 settlement cycle.
    \16\ Monday, September 4, 2017 is Labor Day, a Federal holiday.
    \17\ See supra note 16.
    \18\ The date on which previous trades settling on a T+3 
settlement cycle and current trades on the T+2 settlement cycle will 
be processed.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\19\ 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, 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. FINRA believes that the proposal to address the application 
of Rule 11140(b) to exclude September 5, 2017 as an ex-dividend date 
for ``regular'' or ``large'' distributions supports the collective 
effort among the industry and SROs to mitigate the potential confusion 
concerning proper settlement during the transition from the T+3 
settlement cycle to the T+2 settlement cycle.
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    \19\ 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. As noted above, the SROs 
support that no securities will be subject to an ex-date ruling on 
September 5, 2017. The primary benefit of this proposed rule change is 
to minimize potential confusion about proper settlement that may arise 
during the transition to the T+2 settlement cycle.\20\ FINRA believes

[[Page 40612]]

that the proposed rule change would not impose any additional costs on 
the industry. As noted above, the proposed rule change does not change 
the text to Rule 11140(b). Instead, the proposed rule change interprets 
the application of the rule solely to refrain from designating 
September 5, 2017 as an ex-dividend date for ``regular'' or ``large'' 
distributions.
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    \20\ As a result of the September 5, 2017 transition date for 
regular-way settlement from T+3 to T+2, September 7, 2017 will be a 
``double'' settlement date for trades that occur on September 1, 
2017 (under T+3 and reflecting the Labor Day holiday on September 4, 
2017) and trades that occur on September 5, 2017 (under T+2).
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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

    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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) 
thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires FINRA to give the Commission written notice of 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) \23\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\24\ 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 upon filing. FINRA has stated that the purpose of the 
proposed rule change is to minimize confusion about proper settlement 
that may arise during the transition to the T+2 settlement cycle on 
September 5, 2017. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest to avoid the confusion that could arise in connection 
with the transition to the T+2 settlement cycle on September 5, 2017, 
if normal or large distributions were to be ex-dividend on that date. 
Accordingly, the Commission hereby waives the 30-day operative delay 
requirement and designates the proposed rule change as operative upon 
filing.\25\
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    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2017-026 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2017-026. 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 
10:00 a.m. and 3:00 p.m. Copies of the 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-2017-026, and should 
be submitted on or before September 15, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-18000 Filed 8-24-17; 8:45 am]
BILLING CODE 8011-01-P