Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Disapproving Proposed Rule Change To Amend FINRA Rule 6140 (Other Trading Practices), 9062-9064 [2011-3416]
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Federal Register / Vol. 76, No. 32 / Wednesday, February 16, 2011 / Notices
(d) an entity (other than a Third Party
Fund) in which a Capital Group entity
acts as a general partner or has a similar
capacity to control the sale or other
disposition of the entity’s securities.
The restrictions contained in this
condition, however, shall not be
deemed to limit or prevent the
disposition of an investment by an
Affiliated Co-Investor (a) To its direct or
indirect wholly-owned subsidiary, to
any company (a ‘‘Parent’’) of which the
Affiliated Co-Investor is a direct or
indirect wholly-owned subsidiary or to
a direct or indirect wholly-owned
subsidiary of its Parent, (b) to immediate
family members of the Affiliated CoInvestor or a trust or other investment
vehicle established for any Affiliated
Co-Investor or any such immediate
family member, or (c) when the
investment is comprised of securities
that are (i) listed on a national securities
exchange registered under section 6 of
the Exchange Act, (ii) NMS stocks
pursuant to section 11A(a)(2) of the
Exchange Act and rule 600(a) of
Regulation NMS thereunder, (iii)
government securities as defined in
section 2(a)(16) of the Act or other
securities that meet the definition of
‘‘Eligible Security’’ in rule 2a–7 under
the Act, or (iv) listed or traded on any
foreign securities exchange or board of
trade that satisfies regulatory
requirements under the law of the
jurisdiction in which such foreign
securities exchange or board of trade is
organized similar to those that apply to
a national securities exchange or a
national market system for securities.
4. Each Partnership and its General
Partner will maintain and preserve, for
the life of each Series of the Partnership
and at least six years thereafter, such
accounts, books and other documents
constituting the record forming the basis
for the audited financial statements that
are to be provided to the Limited
Partners in the Partnership, and each
annual report of the Partnership
required to be sent to the Limited
Partners, and agree that all such records
will be subject to examination by the
Commission and its staff.6
5. The General Partner of each
Partnership will send to each Limited
Partner having an Interest in the
Partnership at any time during the fiscal
year then ended, Partnership financial
statements audited by the Partnership’s
independent accountants with respect
to those Series in which the Limited
Partner had an Interest. At the end of
6 Each Partnership will preserve the accounts,
books and other documents required to be
maintained in an easily accessible place for the first
two years.
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each fiscal year, the General Partner will
make or cause to be made a valuation
of all of the assets of the Partnership as
of such fiscal year end in a manner
consistent with customary practice with
respect to the valuation of assets of the
kind held by the Partnership. In
addition, as soon as practicable after the
end of each fiscal year of the
Partnership, the General Partner will
send a report to each person who was
a Limited Partner at any time during the
fiscal year then ended, setting forth such
tax information as shall be necessary for
the preparation by the Limited Partner
of that partner’s federal and state
income tax returns and a report of the
investment activities of the Partnership
during that fiscal year.
6. If a Partnership makes purchases or
sales from or to an entity affiliated with
the Partnership by reason of an officer,
director or employee of a Capital Group
entity (a) serving as an officer, director,
general partner or investment adviser of
the entity, or (b) having a 5% or more
investment in the entity, such
individual will not participate in the
Partnership’s determination of whether
or not to effect the purchase or sale.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–3494 Filed 2–15–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63885; File No. SR–FINRA–
2010–055]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Disapproving
Proposed Rule Change To Amend
FINRA Rule 6140 (Other Trading
Practices)
February 10, 2011.
I. Introduction
On October 29, 2010, 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’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend FINRA Rule 6140, Other Trading
Practices. The proposed rule change was
published for comment in the Federal
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00067
Fmt 4703
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Register on November 12, 2010.3 The
Commission received two comments on
the proposal.4 On December 21, 2010,
the Commission extended the time
period in which to either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change, to
February 10, 2011.5 On January 24,
2011, FINRA submitted a response letter
to the comments.6 This order
disapproves the proposed rule change.
II. Description of the Proposal
FINRA Rule 6140 provides that
FINRA members may, but are not
obligated to, accept stop orders in NMS
stocks, as that term is defined in Rule
600(b)(47) of Regulation NMS.7 In
addition, FINRA Rule 6140 provides
that a stop order becomes a market
order, or a stop limit order becomes a
limit order, when a transaction takes
place at or above the stop price (in the
case of a buy stop order) or at or below
the stop price (in the case of a sell stop
order).8 Thus, under FINRA Rule 6140,
a stop order cannot be triggered by the
publication of a quotation at the stop
price, but only by a transaction.9 FINRA
proposes to eliminate these provisions
governing the handling of stop orders in
their entirety.
In support of its proposal to eliminate
entirely from its rules those provisions
governing the handling of stop orders,
FINRA states that its members believe
quotations may be a better indicator of
the current price of a security than
transactions, and have requested that
FINRA provide members the flexibility
to determine whether the trigger of a
stop order will be based on transactions
or quotations at the stop price. FINRA
represents that its rules do not typically
define the parameters of the various
order types that members may accept
and that FINRA believes that members
should have the ability to define the
triggering event for stop orders as well
as to design their systems consistent
with such determination. In addition,
3 See Securities Exchange Act Release No. 63256
(November 5, 2010), 75 FR 69503 (‘‘Notice’’).
4 See Letters from Gary S. Sheller, CFP, Sheller
Financial Services, dated November 24, 2010
(‘‘Sheller Letter’’); and Michael S. Nichols, PhD,
Principal/Financial Advisor, Cutter Advisors
Group, dated November 29, 2010 (‘‘Cutter Letter’’).
5 See Securities Exchange Act Release No. 63582
(December 21, 2010), 75 FR 81704 (December 28,
2010).
6 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Stephanie M. Dumont, Senior
Vice President and Director of Capital Markets
Policy, FINRA, dated January 24, 2011 (‘‘FINRA
Response Letter’’).
7 See FINRA Rule 6140(h) and (i).
8 See FINRA Rule 6140(h).
9 See FINRA Rule 6140(h) and (i).
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FINRA notes that it expects that,
irrespective of whether a transaction or
quotation is used as the trigger for a
customer stop order, each member will
apply the approach consistently firmwide to all customer orders and fully
disclose its practice to its customers.
Finally, FINRA proposes to relocate
the definition of ‘‘initial public offering’’
from Rule 6220 (Definitions) to Rule
6130 (Transactions Related to Initial
Public Offerings). FINRA proposes no
substantive changes to this definition.
III. Summary of Comment Letters and
FINRA’s Response
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The Commission received two
comment letters objecting to the
proposed rule change. The commenters
generally were concerned with the use
of quotations as a trigger for stop
orders.10 One commenter believed that
the triggering event for a stop order
should be a transaction, and expressed
concern that activating a stop order
‘‘based solely upon a bid opens the
process to manipulation by those
inclined to do so by flashing bids during
market turbulence.’’ 11 In response,
FINRA notes that FINRA Rule 5210
already prohibits the publication of a
quotation that is not bona fide, and
therefore the practice of flashing
quotations for the sole purpose of
activating a stop order, without the
intention of trading at the price and
volume quoted, is impermissible.12
The other commenter expressed
concern that investors and financial
advisors would not know whether the
triggering event was a quote or a trade,
and believed that investors would have
a legitimate complaint if their stop order
was triggered by a quote and there was
no evidence it ever traded at that
price.13 FINRA responds that it does not
believe that it is appropriate at this time
for FINRA to dictate the definitions for
the order types offered by a member to
its customers, and notes that numerous
member firms have concluded that
quotes are the more appropriate
triggering event for stop orders. FINRA
believes that each member should be
permitted to determine whether it will
use quotes or transactions to trigger stop
orders, provided that the member’s
approach is disclosed to its customers
and is consistently applied.
IV. Discussion
Under section 19(b)(2)(C) of the Act,
the Commission shall approve a
10 See Cutter Letter and Sheller Letter, supra
note 4.
11 See Sheller Letter, supra note 4.
12 See FINRA Letter, supra note 6, at p. 2.
13 See Cutter Letter, supra note 4.
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proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act, and
the rules and regulations thereunder
that are applicable to such
organization.14 The Commission shall
disapprove a proposed rule change if it
does not make such a finding.15
After careful consideration, the
Commission does not find that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
association.16 In particular, the
Commission does not find that the
proposed rule change is consistent with
Section 15A(b)(6) of the Act, which
requires that the rules of a national
securities association be designed,
among other things, ‘‘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.’’ 17
FINRA proposes to delete in its
entirety the provisions of Rule 6140
relating to the handling of stop orders in
NMS stocks by member firms. Those
provisions currently require that stop
orders offered by member firms be
triggered (i.e., become a market order or
limit order) by a transaction in the
security. Accordingly, this requirement
should be providing customers certainty
with respect to the operation of a key
element of their stop orders.
By proposing to eliminate this
provision, FINRA effectively would
allow member firms to offer stop orders
to customers that are triggered by a
transaction, a quote or another
mechanism altogether. While FINRA, in
its ‘‘Statement of the Purpose’’ of the
14 See
15 U.S.C. 78s(b)(2)(C)(i).
15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3) (‘‘The burden to demonstrate that a
proposed rule change is consistent with the
Exchange Act and the rules and regulations issued
thereunder * * * is on the self-regulatory
organization that proposed the rule change * * *
A mere assertion that the proposed rule change is
consistent with those requirements * * * is not
sufficient.’’) The description of a proposed rule
change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and
specific to support an affirmative Commission
finding. See 17 CFR 201.700(b)(3). Any failure of a
self-regulatory organization to provide the
information elicited by Form 19b–4 may result in
the Commission not having a sufficient basis to
make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the
rules and regulations issued thereunder that are
applicable to the self-regulatory organization. Id.
16 In disapproving the 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).
17 15 U.S.C. 78o–3(b)(6).
15 See
PO 00000
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9063
proposed rule change, notes that it
‘‘expects’’ each member to apply its
approach to stop orders consistently and
fully disclose its practice to its
customers, FINRA has not clearly made
this expectation enforceable by
requiring consistency and customer
disclosure in its rules.
The Commission acknowledges that
some may believe a quotation is a better
trigger mechanism for stop orders than
a transaction, and there may be good
reasons for allowing FINRA to provide
flexibility for this in its rules. FINRA,
however, has not articulated any such
reasons. In addition, the Commission
believes that, if FINRA rules were to
permit members flexibility in the types
of stop orders they offer, those rules
should clearly require, at a minimum,
that the member disclose to customers
the type of stop order it offers. The
Commission believes the regulatory
framework should promote the ability of
investors to understand the key
attributes of order types offered by their
brokers so that they can make an
informed choice as to whether to use a
particular type of order. This is
especially true with more complex order
types, such as stop loss orders, and
particularly if FINRA rules permit a
variety of stop loss orders to be offered.
Because of this potential investor
confusion, and resulting investor harm,
that could result from FINRA’s
proposed rule change, the Commission
is concerned the proposal is not
designed, among other things, to protect
investors and the public interest, and
promote just and equitable principles of
trade, as required by Section 15A(b)(6)
of the Exchange Act. The proposed rule
change filed by FINRA, and its
subsequent response to comments, does
not adequately address these concerns.
FINRA’s proposal simply states that
‘‘FINRA believes that adopting the
proposed rule change will provide
members with the flexibility to
determine whether the execution of stop
orders will be triggered by transactions
or quotations in the subject security
without compromising investor
protection.’’ 18 Neither the proposed rule
change, nor FINRA’s subsequent
response to comments, offers any
substantive explanation as to why
providing flexibility in the types of stop
orders offered by members—particularly
without a clearly enforceable disclosure
requirement—is consistent with the
provisions of Section 15A(b)(6)
referenced above. The Commission
notes that Rule 700(b)(3) of its Rules of
Practice reiterates that ‘‘[t]he burden to
demonstrate that a proposed rule change
18 See
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Notice, supra note 3.
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Federal Register / Vol. 76, No. 32 / Wednesday, February 16, 2011 / Notices
is consistent with the Exchange Act
* * * is on the self-regulatory
organization that proposed the rule
change’’ and that a ‘‘mere assertion that
the proposed rule change is consistent
with those requirements * * * is not
sufficient.’’ 19 For the reasons articulated
above, the Commission does not believe
that FINRA has met that burden in this
case.
IV. Conclusion
For the foregoing reasons, the
Commission does not find that the
proposed rule change is consistent with
the Act and the rules and regulations
thereunder applicable to a national
securities association, and, in particular,
with Section 15A(b)(6) of the Act.
It is therefore ordered, pursuant to
section 19(b)(2) of the Act, that the
proposed rule change (SR–FINRA–
2010–055) be, and hereby is,
disapproved.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)
proposes to amend its Fees Schedule
and circular regarding Trading Permit
Holder application and other related
fees (‘‘Trading Permit Fee Circular’’).
The text of the proposed rule change is
available on the Exchange’s Web site
(https://www.cboe.org/legal/), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
BILLING CODE 8011–01–P
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE 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. CBOE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
SECURITIES AND EXCHANGE
COMMISSION
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–3416 Filed 2–15–11; 8:45 am]
[Release No. 34–63876; File No. SR–CBOE–
2011–013]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Fees
Schedule and Circular Regarding
Trading Permit Holder Application and
Other Related Fees
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February 9, 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 February
1, 2011, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by CBOE. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
19 17
CFR 201.700(b)(3).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
20 17
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1. Purpose
CBOE Rule 2.20 grants the Exchange
the authority to, from time to time, fix
the fees and charges payable by Trading
Permit Holders. CBOE is proposing to
amend its Fees Schedule and Trading
Permit Fee Circular effective February 1,
2011 to: (i) Clarify that the tier
appointment fees will be assessed, as
applicable, for open outcry transactions
and not electronic transactions for those
Market-Maker Trading Permit Holders
that do not already have a tier
appointment; (ii) establish a minimum
open outcry contract level for
assessment of a tier appointment fee to
those Market-Maker Trading Permit
Holders that do not maintain a tier
appointment in VIX; and (iii) clarify that
written notification to terminate a tier
appointment should be provided to the
Market Quality Assurance & DPM
Administration Department.
CBOE Rule 8.3(e) provides that the
Exchange may establish one or more
types of tier appointments. In
accordance with CBOE Rule 8.3(e), a tier
appointment is an appointment to trade
one or more options classes that must be
held by a Market-Maker to be eligible to
act as a Market-Maker in the options
class or options classes subject to that
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Sfmt 4703
appointment. CBOE currently maintains
tier appointments for Market-Maker
Trading Permit Holders trading in SPX
and VIX.
Section 10(A) of the current Fees
Schedule provides that the SPX Tier
Appointment fee will be assessed to any
Market-Maker Trading Permit Holder
that either (a) has an SPX Tier
Appointment at any time during a
calendar month; or (b) conducts any
open outcry transactions in SPX or any
open outcry or electronic transaction in
SPX Weeklys at any time during a
calendar month. CBOE amended this
provision in January 2011 to reflect the
addition of SPX Weeklys and to
incorporate any electronic transactions
that occur in SPX Weeklys.3 However,
since the only Trading Permit Holders
that are able to submit quotes
electronically in SPX Weeklys are those
Market-Maker Trading Permit Holders
that have an appointment in SPX
Weeklys, CBOE is proposing to clarify
this provision by removing the language
that would assess the tier appointment
fee to any Market-Maker Trading Permit
Holder that conducts any electronic
transactions in SPX Weeklys. CBOE has
never intended to assess the tier
appointment fee to a Trading Permit
Holder that submits an occasional order
electronically in SPX Weeklys.
Similarly, Section 10(A) of the current
Fees Schedule provides that the VIX
Tier Appointment fee will be assessed
to any Market-Maker Trading Permit
Holder that either (a) has a VIX Tier
Appointment at any time during a
calendar month; or (b) conducts any
transactions in VIX at any time during
a calendar month. However, since the
only Market-Maker Trading Permit
Holders that are able to submit quotes
electronically in VIX are those MarketMaker Trading Permit Holders that have
an appointment in VIX, CBOE is
proposing to clarify this provision by
removing the language that would
assess the tier appointment fee to any
Market-Maker Trading Permit Holder
that conducts any electronic
transactions in VIX. CBOE has never
intended to assess the tier appointment
fee to a Trading Permit Holder that
submits an occasional order
electronically in VIX. CBOE is also
proposing to add language to the Fees
Schedule to provide that the VIX Tier
Appointment fee will be assessed to a
Market-Maker Trading Permit Holder
that trades at least 1,000 VIX options
contracts per month in open outcry. In
addition, because Market-Maker Trading
3 See Securities Exchange Act Release No. 63706
(January 12, 2011), 76 FR 3184 (January 19, 2011)
(SR–CBOE–2011–004).
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]]>Agencies
[Federal Register Volume 76, Number 32 (Wednesday, February 16, 2011)]
[Notices]
[Pages 9062-9064]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3416]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63885; File No. SR-FINRA-2010-055]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Disapproving Proposed Rule Change To Amend FINRA
Rule 6140 (Other Trading Practices)
February 10, 2011.
I. Introduction
On October 29, 2010, 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'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rule 6140, Other
Trading Practices. The proposed rule change was published for comment
in the Federal Register on November 12, 2010.\3\ The Commission
received two comments on the proposal.\4\ On December 21, 2010, the
Commission extended the time period in which to either approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change, to February 10, 2011.\5\ On January 24, 2011, FINRA submitted a
response letter to the comments.\6\ This order disapproves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 63256 (November 5,
2010), 75 FR 69503 (``Notice'').
\4\ See Letters from Gary S. Sheller, CFP, Sheller Financial
Services, dated November 24, 2010 (``Sheller Letter''); and Michael
S. Nichols, PhD, Principal/Financial Advisor, Cutter Advisors Group,
dated November 29, 2010 (``Cutter Letter'').
\5\ See Securities Exchange Act Release No. 63582 (December 21,
2010), 75 FR 81704 (December 28, 2010).
\6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Stephanie M. Dumont, Senior Vice President and Director of
Capital Markets Policy, FINRA, dated January 24, 2011 (``FINRA
Response Letter'').
---------------------------------------------------------------------------
II. Description of the Proposal
FINRA Rule 6140 provides that FINRA members may, but are not
obligated to, accept stop orders in NMS stocks, as that term is defined
in Rule 600(b)(47) of Regulation NMS.\7\ In addition, FINRA Rule 6140
provides that a stop order becomes a market order, or a stop limit
order becomes a limit order, when a transaction takes place at or above
the stop price (in the case of a buy stop order) or at or below the
stop price (in the case of a sell stop order).\8\ Thus, under FINRA
Rule 6140, a stop order cannot be triggered by the publication of a
quotation at the stop price, but only by a transaction.\9\ FINRA
proposes to eliminate these provisions governing the handling of stop
orders in their entirety.
---------------------------------------------------------------------------
\7\ See FINRA Rule 6140(h) and (i).
\8\ See FINRA Rule 6140(h).
\9\ See FINRA Rule 6140(h) and (i).
---------------------------------------------------------------------------
In support of its proposal to eliminate entirely from its rules
those provisions governing the handling of stop orders, FINRA states
that its members believe quotations may be a better indicator of the
current price of a security than transactions, and have requested that
FINRA provide members the flexibility to determine whether the trigger
of a stop order will be based on transactions or quotations at the stop
price. FINRA represents that its rules do not typically define the
parameters of the various order types that members may accept and that
FINRA believes that members should have the ability to define the
triggering event for stop orders as well as to design their systems
consistent with such determination. In addition,
[[Page 9063]]
FINRA notes that it expects that, irrespective of whether a transaction
or quotation is used as the trigger for a customer stop order, each
member will apply the approach consistently firm-wide to all customer
orders and fully disclose its practice to its customers.
Finally, FINRA proposes to relocate the definition of ``initial
public offering'' from Rule 6220 (Definitions) to Rule 6130
(Transactions Related to Initial Public Offerings). FINRA proposes no
substantive changes to this definition.
III. Summary of Comment Letters and FINRA's Response
The Commission received two comment letters objecting to the
proposed rule change. The commenters generally were concerned with the
use of quotations as a trigger for stop orders.\10\ One commenter
believed that the triggering event for a stop order should be a
transaction, and expressed concern that activating a stop order ``based
solely upon a bid opens the process to manipulation by those inclined
to do so by flashing bids during market turbulence.'' \11\ In response,
FINRA notes that FINRA Rule 5210 already prohibits the publication of a
quotation that is not bona fide, and therefore the practice of flashing
quotations for the sole purpose of activating a stop order, without the
intention of trading at the price and volume quoted, is
impermissible.\12\
---------------------------------------------------------------------------
\10\ See Cutter Letter and Sheller Letter, supra note 4.
\11\ See Sheller Letter, supra note 4.
\12\ See FINRA Letter, supra note 6, at p. 2.
---------------------------------------------------------------------------
The other commenter expressed concern that investors and financial
advisors would not know whether the triggering event was a quote or a
trade, and believed that investors would have a legitimate complaint if
their stop order was triggered by a quote and there was no evidence it
ever traded at that price.\13\ FINRA responds that it does not believe
that it is appropriate at this time for FINRA to dictate the
definitions for the order types offered by a member to its customers,
and notes that numerous member firms have concluded that quotes are the
more appropriate triggering event for stop orders. FINRA believes that
each member should be permitted to determine whether it will use quotes
or transactions to trigger stop orders, provided that the member's
approach is disclosed to its customers and is consistently applied.
---------------------------------------------------------------------------
\13\ See Cutter Letter, supra note 4.
---------------------------------------------------------------------------
IV. Discussion
Under section 19(b)(2)(C) of the Act, the Commission shall approve
a proposed rule change of a self-regulatory organization if it finds
that such proposed rule change is consistent with the requirements of
the Act, and the rules and regulations thereunder that are applicable
to such organization.\14\ The Commission shall disapprove a proposed
rule change if it does not make such a finding.\15\
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\14\ See 15 U.S.C. 78s(b)(2)(C)(i).
\15\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3) (``The burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder * * * is on the self-regulatory
organization that proposed the rule change * * * A mere assertion
that the proposed rule change is consistent with those requirements
* * * is not sufficient.'') The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See 17 CFR 201.700(b)(3). Any failure of a self-
regulatory organization to provide the information elicited by Form
19b-4 may result in the Commission not having a sufficient basis to
make an affirmative finding that a proposed rule change is
consistent with the Exchange Act and the rules and regulations
issued thereunder that are applicable to the self-regulatory
organization. Id.
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After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities association.\16\ In particular, the Commission does not find
that the proposed rule change is consistent with Section 15A(b)(6) of
the Act, which requires that the rules of a national securities
association be designed, among other things, ``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.'' \17\
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\16\ In disapproving the 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).
\17\ 15 U.S.C. 78o-3(b)(6).
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FINRA proposes to delete in its entirety the provisions of Rule
6140 relating to the handling of stop orders in NMS stocks by member
firms. Those provisions currently require that stop orders offered by
member firms be triggered (i.e., become a market order or limit order)
by a transaction in the security. Accordingly, this requirement should
be providing customers certainty with respect to the operation of a key
element of their stop orders.
By proposing to eliminate this provision, FINRA effectively would
allow member firms to offer stop orders to customers that are triggered
by a transaction, a quote or another mechanism altogether. While FINRA,
in its ``Statement of the Purpose'' of the proposed rule change, notes
that it ``expects'' each member to apply its approach to stop orders
consistently and fully disclose its practice to its customers, FINRA
has not clearly made this expectation enforceable by requiring
consistency and customer disclosure in its rules.
The Commission acknowledges that some may believe a quotation is a
better trigger mechanism for stop orders than a transaction, and there
may be good reasons for allowing FINRA to provide flexibility for this
in its rules. FINRA, however, has not articulated any such reasons. In
addition, the Commission believes that, if FINRA rules were to permit
members flexibility in the types of stop orders they offer, those rules
should clearly require, at a minimum, that the member disclose to
customers the type of stop order it offers. The Commission believes the
regulatory framework should promote the ability of investors to
understand the key attributes of order types offered by their brokers
so that they can make an informed choice as to whether to use a
particular type of order. This is especially true with more complex
order types, such as stop loss orders, and particularly if FINRA rules
permit a variety of stop loss orders to be offered.
Because of this potential investor confusion, and resulting
investor harm, that could result from FINRA's proposed rule change, the
Commission is concerned the proposal is not designed, among other
things, to protect investors and the public interest, and promote just
and equitable principles of trade, as required by Section 15A(b)(6) of
the Exchange Act. The proposed rule change filed by FINRA, and its
subsequent response to comments, does not adequately address these
concerns. FINRA's proposal simply states that ``FINRA believes that
adopting the proposed rule change will provide members with the
flexibility to determine whether the execution of stop orders will be
triggered by transactions or quotations in the subject security without
compromising investor protection.'' \18\ Neither the proposed rule
change, nor FINRA's subsequent response to comments, offers any
substantive explanation as to why providing flexibility in the types of
stop orders offered by members--particularly without a clearly
enforceable disclosure requirement--is consistent with the provisions
of Section 15A(b)(6) referenced above. The Commission notes that Rule
700(b)(3) of its Rules of Practice reiterates that ``[t]he burden to
demonstrate that a proposed rule change
[[Page 9064]]
is consistent with the Exchange Act * * * is on the self-regulatory
organization that proposed the rule change'' and that a ``mere
assertion that the proposed rule change is consistent with those
requirements * * * is not sufficient.'' \19\ For the reasons
articulated above, the Commission does not believe that FINRA has met
that burden in this case.
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\18\ See Notice, supra note 3.
\19\ 17 CFR 201.700(b)(3).
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IV. Conclusion
For the foregoing reasons, the Commission does not find that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder applicable to a national securities association,
and, in particular, with Section 15A(b)(6) of the Act.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (SR-FINRA-2010-055) be, and hereby is,
disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3416 Filed 2-15-11; 8:45 am]
BILLING CODE 8011-01-P
