Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities), 77162-77165 [2012-31256]

Download as PDF 77162 Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices 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 rulecomments@sec.gov. Please include File Number SR–CME–2012–34 on the subject line. Paper Comments mstockstill on DSK4VPTVN1PROD with • 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–CME–2012–34. 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 such filing also will be available for inspection and copying at the principal office of CME and on CME’s Web site at http://www.cmegroup.com/marketregulation/files/SEC_19B–4_12–34.pdf. 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–CME–2012–34 and should be submitted on or before January 22, 2013. VerDate Mar<15>2010 21:28 Dec 28, 2012 Jkt 229001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.5 Kevin M. O’Neill, Deputy Secretary . [FR Doc. 2012–31241 Filed 12–28–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68526; File No. SR–FINRA– 2012–010] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities) December 21, 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 December 20, 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 prepared by FINRA. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities to clarify that FINRA may (1) initiate a trading and quotation halt in an OTC Equity Security upon notice of a foreign regulatory halt for news pending, including notice from a reliable thirdparty source; (2) continue to halt trading and quoting in such OTC Equity Security until notice from the appropriate foreign regulatory authority is received that it has or intends to resume trading in the security, even if such halt is longer than 10 business days; and (3) extend a halt initiated under Rule 6440(a)(3) for an extraordinary event beyond 10 business days if it determines that the basis for the halt still exists. 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. 5 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00160 Fmt 4703 Sfmt 4703 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 6440 (Trading and Quotation Halt in OTC Equity Securities) provides FINRA with the authority to initiate a trading and quotation halt for OTC Equity Securities.3 Generally, Rule 6440(a) provides that, in circumstances where it is necessary to protect investors and the public interest, FINRA may direct members to halt trading and quotations of an OTC Equity Security when: (1) A foreign securities exchange or market halts trading in its market, for regulatory reasons, in an OTC Equity Security or the security underlying an American Depository Receipt (‘‘ADR’’) that is an OTC Equity Security (‘‘OTC ADR’’) that is listed on or registered with such foreign securities exchange or market, except that FINRA will not impose halts if the foreign halt was imposed solely for material news, a regulatory filing deficiency or operational reasons (‘‘Foreign Regulatory Halt’’); (2) a national securities exchange or foreign securities exchange halts trading in a listed security of which the OTC Equity Security or the security underlying the OTC ADR is a derivative or component (‘‘Derivative Halt’’); or (3) FINRA determines an extraordinary event has occurred or is ongoing that has a material effect on the market for the OTC Equity Security, or has the potential to cause major disruption to the marketplace or significant uncertainty in the settlement and clearing process (‘‘Extraordinary Event Halt’’). Pursuant to Rule 6440(b)(3), FINRA has authority to halt trading and quotations in the OTC market pursuant 3 ‘‘OTC Equity Security’’ means 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). E:\FR\FM\31DEN1.SGM 31DEN1 Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices mstockstill on DSK4VPTVN1PROD with to an Extraordinary Event Halt for up to 10 business days. FINRA is proposing to amend Rule 6440 to: (1) Eliminate the restriction in Rule 6440(a)(1) on FINRA’s ability to initiate a Foreign Regulatory Halt when the foreign halt is imposed for material news; (2) modify the halt procedures outlined in paragraph (b) of the Rule 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 a reliable third-party source; (3) modify the halt procedures outlined in paragraph (b) of the Rule to clarify that in instances where FINRA initiates a trading and quotation halt upon notice of a foreign halt pursuant to a Foreign Regulatory Halt or Derivative Halt, trading and quotation in the OTC Equity Security or the OTC ADR, FINRA may continue the halt until such time as FINRA receives notice that trading has been resumed in the security on the appropriate securities exchange on which it is listed or registered or by the other applicable regulatory authority, even if such halt is longer than 10 business days; and (4) amend Rule 6440 Supplementary Material .01 to clarify that FINRA may extend and continue in effect an Extraordinary Event Halt for subsequent periods of up to 10 business days each if, at the time of any such extension, FINRA finds that the basis for the halt still exists and determines that the continuation of the halt beyond the prior 10 business day period is necessary in the public interest and for the protection of investors. Background FINRA performs several critical functions with respect to the OTC market in furtherance of its obligations under Exchange Act Section 15A to have rules that are designed ‘‘to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.’’ 4 In particular, FINRA believes its authority to halt trading and quotations in OTC Equity Securities pursuant to Rule 6440 is a valuable tool for maintaining fair and orderly markets, as provided in Exchange Act Section 15A. However, FINRA does not operate a ‘‘listed’’ market and thus has no ability to compel issuers to disclose information. While FINRA may obtain halt 4 See 15 U.S.C. 78o–3(b)(6). VerDate Mar<15>2010 21:28 Dec 28, 2012 Jkt 229001 information provided by issuers to national securities markets or foreign securities exchanges or markets on which their securities are listed or registered, such markets are under no obligation to provide halt information to FINRA. For this reason, FINRA’s current authority to halt trading and quotations in an OTC Equity Security as a result of a Foreign Regulatory Halt provides that FINRA will not halt for material news, regulatory deficiencies or operational reasons. However, FINRA believes that with the globalization of securities markets, cross-border coordination of trading and quotation halts is important to ensure fairness in trading. Proposal FINRA is proposing several amendments to Rule 6440. The first amendment that FINRA is proposing would eliminate the restriction in Rule 6440(a)(1) on FINRA’s ability to initiate a halt as a result of a Foreign Regulatory Halt when the foreign halt is imposed for material news. FINRA has historically not halted in these instances because, as noted above, FINRA lacks privity with OTC issuers and cannot compel such issuers to disclose information to FINRA. However, with the growth of foreign securities markets and the ease at which trading can occur across jurisdictions and markets (especially exchanges in Canada where many issuers of OTC Equity Securities are listed), FINRA believes increased coordination of trading halts across markets will protect investors by reducing instances of potentially material disparities in information regarding the security or even fraudulent or manipulative trading in the security and act to protect U.S. investors. Moreover, such coordination is consistent with how FINRA currently imposes news pending trading halts on OTC Equity Securities that are derivatives or components of securities listed on national or foreign securities exchanges pursuant to Rule 6440(a)(2). As noted above, FINRA would be relying on the ability of the foreign market on which the security is listed or registered to oversee the issuer and evaluate news pending or other information regarding the issuer and the securities to determine if a trading halt is warranted. For example, a foreign exchange may halt trading and quoting in the security of an issuer on its market when the issuer is the subject of a significant corporate event, such as a change in ownership or corporate structuring as a result of a merger or acquisition, borrows a significant amount of funds or triggers events of default, enters into or terminates a PO 00000 Frm 00161 Fmt 4703 Sfmt 4703 77163 significant contract, or is subject to major litigation. 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 would remain because FINRA believes that the regulatory filing deficiency may be a listing jurisdiction requirement that is not consistent across market centers and may be of less concern to market participants outside that jurisdiction. For example, in some instances, a foreign regulatory jurisdiction may impose a regulatory filing deficiency halt for failure to file timely financials or information related to significant corporate events. The limitation with regard to the operational halt would also remain because these halts may reflect local market trading conditions only. Rules relating to regulatory filing deficiency halts and operational halts are not consistent across market centers. It is important to note that with respect to ‘‘domestic’’ OTC Equity Securities (e.g., securities that are not ADRs or are listed or registered with a foreign securities exchange or market), FINRA will have the authority to halt trading and quotation solely for news pending, only if such OTC Equity Security is a derivative or component of a security listed on or registered with a national securities exchange. Where the domestic OTC Equity Security is not a derivative or component of a security listed or registered with an exchange, FINRA will not have the authority to halt trading or quotation of the security in the OTC market. FINRA believes this distinction is consistent with the authority it is proposing with respect to foreign stocks given that in both cases, FINRA would be relying on the market on which the stock is listed or registered or the regulator with direct authority over the issuer, to compel timely notification of news pending events and determine whether trading should be halted. The second amendment that FINRA is proposing would modify the halt procedures outlined in paragraph (b)(1) of the Rule 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 where FINRA can validate the information provided. Rule 6440(b)(1) currently provides that, upon receipt of information from a securities exchange or market, or regulatory authority overseeing the issuer, exchange or market, FINRA will promptly evaluate the information and determine if a trading and quotation halt in the OTC Equity Security is E:\FR\FM\31DEN1.SGM 31DEN1 mstockstill on DSK4VPTVN1PROD with 77164 Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices appropriate. Proposed Rule 6440(b)(1) would clarify 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 thirdparty source where FINRA can validate the information provided, FINRA will promptly initiate a trading and quotation halt in the OTC Equity Security. FINRA generally receives notice of foreign trading and quotation halts from official sources, such as the relevant foreign exchange or regulator (i.e., the Canadian Securities Commission, the Toronto Stock Exchange, the London Stock Exchange, etc.). However, in some cases, notice of a trading and quotation halt may be received from reliable third-party sources, such as The Depository Trust & Clearing Corporation, broker-dealers or financial news data vendors. FINRA verifies all third-party information relating to trading and quotation halts in foreign markets before it acts upon such information. FINRA believes 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 provides a valuable tool that will allow FINRA to act more promptly to initiate trading and quotation halts in such securities. The third amendment that FINRA is proposing would modify the halt procedures outlined in paragraph (b)(2) of the Rule to clarify the circumstances under which FINRA will resume trading after initiating a Foreign Regulatory Halt or Derivative Halt. Proposed Rule 6440(b)(2) clarifies that 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 trading has resumed in the security on the national or foreign securities exchange on which it is listed or registered, even if such halt is longer than 10 business days. FINRA adopted the 10-business day halt standard largely to be consistent with trading suspensions ordered by the SEC pursuant to Exchange Act Section 12(k).5 However, with respect to halts in OTC securities as a result of a Foreign Regulatory Halt or a Derivative Halt for a security listed on or registered with a national or foreign securities exchange, FINRA believes that such halt should run concurrently with, and for as long 5 15 U.S.C. 78l(k). VerDate Mar<15>2010 21:28 Dec 28, 2012 as, the halt imposed on the security in the market on which it is listed or registered. FINRA will disseminate an appropriate public notice that a trading and quotation halt under the Rule is no longer in effect. The fourth amendment that FINRA is proposing would modify Rule 6440 Supplementary Material .01 to clarify that FINRA may extend and continue in effect a trading and quotation halt under the Extraordinary Event Halt authority for subsequent periods of up to 10 business days each, if at the time of any such extension, FINRA finds that the basis for the halt still exists and determines that the continuation of the halt beyond the prior 10 business day period is necessary in the public interest and for the protection of investors. FINRA believes the authority to halt beyond the initial 10 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. FINRA is also proposing to add headings to Rule 6440 Supplementary Material .01 and .02 for clarity. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 30 days following publication of the Regulatory Notice announcing Commission approval. extraordinary events can take time to be resolved. 2. Statutory Basis IV. Solicitation of Comments FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,6 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 amendments to Rule 6440 will act to increase coordination of trading halts across markets and help reduce the potential for investors’ trading based on materially disparate levels of information, and even fraudulent or manipulative activities in an OTC security, while it is halted by another regulatory authority. In addition, FINRA believes the authority to extend Extraordinary Event Halts for the additional 10 business day periods is vital in the OTC marketplace where concerns regarding settlement and clearance, pricing, or other 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: 6 15 Jkt 229001 PO 00000 U.S.C. 78o–3(b)(6). Frm 00162 Fmt 4703 Sfmt 4703 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. FINRA will exercise judgment in each trading halt situation to assure that the halt is necessary to protect investors and not unnecessarily burden competition. 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. Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–FINRA–2012–010 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–2012–010. This file number should be included on the subject line if email is used. To help the E:\FR\FM\31DEN1.SGM 31DEN1 Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices 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– 2012–010, and should be submitted on or before January 22, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–31256 Filed 12–28–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68528; File No. SR– NASDAQ–2012–140] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Retire the Automated Quote Management Functionality Described Under Rules 4613(a)(2)(F) and (G), and Make Conforming Changes to Rule 4751(f)(15) mstockstill on DSK4VPTVN1PROD with December 21, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 17, 2012, The NASDAQ Stock Market 7 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 21:28 Dec 28, 2012 Jkt 229001 LLC (‘‘NASDAQ’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to retire the automated quote management functionality described under Rules 4613(a)(2)(F) and (G) on January 16, 2013, and make conforming changes to Rule 4751(f)(15). The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com, at NASDAQ’s principal office, 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, NASDAQ 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose On August 2, 2012, the Commission approved the Exchange’s new Market Maker Peg Order, which was designed to replace the automated quotation refresh functionality (‘‘AQR’’) provided to Exchange market makers under Rules 4613(a)(2)(F) and (G).5 The Exchange committed to sunset AQR three months after fully implementing the Market Maker Peg Order.6 On October 15, 2012, the Exchange completed the 3 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 5 Securities Exchange Act Release No. 67584 (August 2, 2012), 77 FR 47472 (August 8, 2012) (SR–NASDAQ–2012–066). 6 Id. at 47473 n 4. 4 17 PO 00000 Frm 00163 Fmt 4703 Sfmt 4703 77165 implementation of the Market Maker Peg Order and, accordingly, is proposing to delete the text under Rule 4613(a)(2)(F) and (G) from the NASDAQ rulebook, effective January 16, 2013, thereby retiring AQR.7 The Exchange is also proposing to amend Rule 4751(f)(15) to include language from Rule 4613(a)(2)(F), which is currently referenced only by citation in the rule. The proposed language taken from Rule 4613(a)(2)(F) merely provides the percentage move necessary to trigger a repricing of a Market Maker Peg Order, and in no way changes how the Market Maker Peg Order operates. 2. Statutory Basis The statutory basis for the proposed rule change is Section 6(b)(5) of the Act,8 which requires the rules of an exchange to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule meets these requirements in that it eliminates a duplicative function, AQR, which has been replaced with a new order type that allows member firms to better meet their minimum market maker quotation requirements and also comply with the regulatory requirements of the Market Access Rule and Regulation SHO. In seeking approval of the Market Maker Peg Order,9 the Exchange committed to retiring AQR at the conclusion of a three-month transition period and this proposed change merely effectuates that change. B. Self-Regulatory Organization’s Statement on Burden on Competition NASDAQ 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 amended. 7 On October 9, 2012, NASDAQ announced that the Market Maker Peg Order was available and that it would retire AQR by the end of 2012. See Equity Technical Update # 2012–31 (http:// www.nasdaqtrader.com/TraderNews.aspx ?id=ETU2012-31). Because the Market Maker Peg Order was not made available to QIX protocol users until October 15, 2012 and therefore not fully implemented, NASDAQ is retiring AQR effective January 16, 2013, three months from the full implementation of the Market Maker Peg Order. 8 15 U.S.C. 78f(b)(5). 9 See, supra note 7. E:\FR\FM\31DEN1.SGM 31DEN1

Agencies

[Federal Register Volume 77, Number 250 (Monday, December 31, 2012)]
[Notices]
[Pages 77162-77165]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31256]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68526; File No. SR-FINRA-2012-010]


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

December 21, 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 December 20, 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 prepared by FINRA.
---------------------------------------------------------------------------

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

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

    FINRA is proposing to amend FINRA Rule 6440 (Trading and Quotation 
Halt in OTC Equity Securities to clarify that FINRA may (1) initiate a 
trading and quotation halt in an OTC Equity Security upon notice of a 
foreign regulatory halt for news pending, including notice from a 
reliable third-party source; (2) continue to halt trading and quoting 
in such OTC Equity Security until notice from the appropriate foreign 
regulatory authority is received that it has or intends to resume 
trading in the security, even if such halt is longer than 10 business 
days; and (3) extend a halt initiated under Rule 6440(a)(3) for an 
extraordinary event beyond 10 business days if it determines that the 
basis for the halt still exists.
    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 6440 (Trading and Quotation Halt in OTC Equity 
Securities) provides FINRA with the authority to initiate a trading and 
quotation halt for OTC Equity Securities.\3\ Generally, Rule 6440(a) 
provides that, in circumstances where it is necessary to protect 
investors and the public interest, FINRA may direct members to halt 
trading and quotations of an OTC Equity Security when: (1) A foreign 
securities exchange or market halts trading in its market, for 
regulatory reasons, in an OTC Equity Security or the security 
underlying an American Depository Receipt (``ADR'') that is an OTC 
Equity Security (``OTC ADR'') that is listed on or registered with such 
foreign securities exchange or market, except that FINRA will not 
impose halts if the foreign halt was imposed solely for material news, 
a regulatory filing deficiency or operational reasons (``Foreign 
Regulatory Halt''); (2) a national securities exchange or foreign 
securities exchange halts trading in a listed security of which the OTC 
Equity Security or the security underlying the OTC ADR is a derivative 
or component (``Derivative Halt''); or (3) FINRA determines an 
extraordinary event has occurred or is ongoing that has a material 
effect on the market for the OTC Equity Security, or has the potential 
to cause major disruption to the marketplace or significant uncertainty 
in the settlement and clearing process (``Extraordinary Event Halt''). 
Pursuant to Rule 6440(b)(3), FINRA has authority to halt trading and 
quotations in the OTC market pursuant

[[Page 77163]]

to an Extraordinary Event Halt for up to 10 business days.
---------------------------------------------------------------------------

    \3\ ``OTC Equity Security'' means 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).
---------------------------------------------------------------------------

    FINRA is proposing to amend Rule 6440 to: (1) Eliminate the 
restriction in Rule 6440(a)(1) on FINRA's ability to initiate a Foreign 
Regulatory Halt when the foreign halt is imposed for material news; (2) 
modify the halt procedures outlined in paragraph (b) of the Rule 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 a reliable third-party source; (3) modify the 
halt procedures outlined in paragraph (b) of the Rule to clarify that 
in instances where FINRA initiates a trading and quotation halt upon 
notice of a foreign halt pursuant to a Foreign Regulatory Halt or 
Derivative Halt, trading and quotation in the OTC Equity Security or 
the OTC ADR, FINRA may continue the halt until such time as FINRA 
receives notice that trading has been resumed in the security on the 
appropriate securities exchange on which it is listed or registered or 
by the other applicable regulatory authority, even if such halt is 
longer than 10 business days; and (4) amend Rule 6440 Supplementary 
Material .01 to clarify that FINRA may extend and continue in effect an 
Extraordinary Event Halt for subsequent periods of up to 10 business 
days each if, at the time of any such extension, FINRA finds that the 
basis for the halt still exists and determines that the continuation of 
the halt beyond the prior 10 business day period is necessary in the 
public interest and for the protection of investors.
Background
    FINRA performs several critical functions with respect to the OTC 
market in furtherance of its obligations under Exchange Act Section 15A 
to have rules that are designed ``to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.'' \4\ In particular, FINRA 
believes its authority to halt trading and quotations in OTC Equity 
Securities pursuant to Rule 6440 is a valuable tool for maintaining 
fair and orderly markets, as provided in Exchange Act Section 15A. 
However, FINRA does not operate a ``listed'' market and thus has no 
ability to compel issuers to disclose information. While FINRA may 
obtain halt information provided by issuers to national securities 
markets or foreign securities exchanges or markets on which their 
securities are listed or registered, such markets are under no 
obligation to provide halt information to FINRA. For this reason, 
FINRA's current authority to halt trading and quotations in an OTC 
Equity Security as a result of a Foreign Regulatory Halt provides that 
FINRA will not halt for material news, regulatory deficiencies or 
operational reasons. However, FINRA believes that with the 
globalization of securities markets, cross-border coordination of 
trading and quotation halts is important to ensure fairness in trading.
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    \4\ See 15 U.S.C. 78o-3(b)(6).
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Proposal
    FINRA is proposing several amendments to Rule 6440. The first 
amendment that FINRA is proposing would eliminate the restriction in 
Rule 6440(a)(1) on FINRA's ability to initiate a halt as a result of a 
Foreign Regulatory Halt when the foreign halt is imposed for material 
news. FINRA has historically not halted in these instances because, as 
noted above, FINRA lacks privity with OTC issuers and cannot compel 
such issuers to disclose information to FINRA. However, with the growth 
of foreign securities markets and the ease at which trading can occur 
across jurisdictions and markets (especially exchanges in Canada where 
many issuers of OTC Equity Securities are listed), FINRA believes 
increased coordination of trading halts across markets will protect 
investors by reducing instances of potentially material disparities in 
information regarding the security or even fraudulent or manipulative 
trading in the security and act to protect U.S. investors. Moreover, 
such coordination is consistent with how FINRA currently imposes news 
pending trading halts on OTC Equity Securities that are derivatives or 
components of securities listed on national or foreign securities 
exchanges pursuant to Rule 6440(a)(2).
    As noted above, FINRA would be relying on the ability of the 
foreign market on which the security is listed or registered to oversee 
the issuer and evaluate news pending or other information regarding the 
issuer and the securities to determine if a trading halt is warranted. 
For example, a foreign exchange may halt trading and quoting in the 
security of an issuer on its market when the issuer is the subject of a 
significant corporate event, such as a change in ownership or corporate 
structuring as a result of a merger or acquisition, borrows a 
significant amount of funds or triggers events of default, enters into 
or terminates a significant contract, or is subject to major 
litigation.
    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 would remain because FINRA believes that 
the regulatory filing deficiency may be a listing jurisdiction 
requirement that is not consistent across market centers and may be of 
less concern to market participants outside that jurisdiction. For 
example, in some instances, a foreign regulatory jurisdiction may 
impose a regulatory filing deficiency halt for failure to file timely 
financials or information related to significant corporate events. The 
limitation with regard to the operational halt would also remain 
because these halts may reflect local market trading conditions only. 
Rules relating to regulatory filing deficiency halts and operational 
halts are not consistent across market centers.
    It is important to note that with respect to ``domestic'' OTC 
Equity Securities (e.g., securities that are not ADRs or are listed or 
registered with a foreign securities exchange or market), FINRA will 
have the authority to halt trading and quotation solely for news 
pending, only if such OTC Equity Security is a derivative or component 
of a security listed on or registered with a national securities 
exchange. Where the domestic OTC Equity Security is not a derivative or 
component of a security listed or registered with an exchange, FINRA 
will not have the authority to halt trading or quotation of the 
security in the OTC market. FINRA believes this distinction is 
consistent with the authority it is proposing with respect to foreign 
stocks given that in both cases, FINRA would be relying on the market 
on which the stock is listed or registered or the regulator with direct 
authority over the issuer, to compel timely notification of news 
pending events and determine whether trading should be halted.
    The second amendment that FINRA is proposing would modify the halt 
procedures outlined in paragraph (b)(1) of the Rule 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 where FINRA can 
validate the information provided. Rule 6440(b)(1) currently provides 
that, upon receipt of information from a securities exchange or market, 
or regulatory authority overseeing the issuer, exchange or market, 
FINRA will promptly evaluate the information and determine if a trading 
and quotation halt in the OTC Equity Security is

[[Page 77164]]

appropriate. Proposed Rule 6440(b)(1) would clarify 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. FINRA generally receives notice of foreign trading and 
quotation halts from official sources, such as the relevant foreign 
exchange or regulator (i.e., the Canadian Securities Commission, the 
Toronto Stock Exchange, the London Stock Exchange, etc.). However, in 
some cases, notice of a trading and quotation halt may be received from 
reliable third-party sources, such as The Depository Trust & Clearing 
Corporation, broker-dealers or financial news data vendors. FINRA 
verifies all third-party information relating to trading and quotation 
halts in foreign markets before it acts upon such information.
    FINRA believes 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 provides a valuable tool that will allow 
FINRA to act more promptly to initiate trading and quotation halts in 
such securities.
    The third amendment that FINRA is proposing would modify the halt 
procedures outlined in paragraph (b)(2) of the Rule to clarify the 
circumstances under which FINRA will resume trading after initiating a 
Foreign Regulatory Halt or Derivative Halt. Proposed Rule 6440(b)(2) 
clarifies that 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 trading has resumed in the security on the 
national or foreign securities exchange on which it is listed or 
registered, even if such halt is longer than 10 business days. FINRA 
adopted the 10-business day halt standard largely to be consistent with 
trading suspensions ordered by the SEC pursuant to Exchange Act Section 
12(k).\5\ However, with respect to halts in OTC securities as a result 
of a Foreign Regulatory Halt or a Derivative Halt for a security listed 
on or registered with a national or foreign securities exchange, FINRA 
believes that such halt should run concurrently with, and for as long 
as, the halt imposed on the security in the market on which it is 
listed or registered. FINRA will disseminate an appropriate public 
notice that a trading and quotation halt under the Rule is no longer in 
effect.
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    \5\ 15 U.S.C. 78l(k).
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    The fourth amendment that FINRA is proposing would modify Rule 6440 
Supplementary Material .01 to clarify that FINRA may extend and 
continue in effect a trading and quotation halt under the Extraordinary 
Event Halt authority for subsequent periods of up to 10 business days 
each, if at the time of any such extension, FINRA finds that the basis 
for the halt still exists and determines that the continuation of the 
halt beyond the prior 10 business day period is necessary in the public 
interest and for the protection of investors. FINRA believes the 
authority to halt beyond the initial 10 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. 
FINRA is also proposing to add headings to Rule 6440 Supplementary 
Material .01 and .02 for clarity.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 30 days 
following publication of the Regulatory Notice announcing 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,\6\ 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 amendments to Rule 
6440 will act to increase coordination of trading halts across markets 
and help reduce the potential for investors' trading based on 
materially disparate levels of information, and even fraudulent or 
manipulative activities in an OTC security, while it is halted by 
another regulatory authority. In addition, FINRA believes the authority 
to extend Extraordinary Event Halts for the additional 10 business day 
periods is vital in the OTC marketplace where concerns regarding 
settlement and clearance, pricing, or other extraordinary events can 
take time to be resolved.
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    \6\ 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. FINRA will exercise judgment in 
each trading halt situation to assure that the halt is necessary to 
protect investors and not unnecessarily burden competition.

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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-010 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-2012-010. This 
file number should be included on the subject line if email is used. To 
help the

[[Page 77165]]

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-2012-010, and should be submitted 
on or before January 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31256 Filed 12-28-12; 8:45 am]
BILLING CODE 8011-01-P