[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74105-74107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30814]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65819; File No. SR-FINRA-2011-068]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Amend FINRA Rule 6121.01 (Trading Pauses) To
Exclude Rights and Warrants From the Trading Pause Pilot
November 23, 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 November 21, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``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 filing with 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 amend Supplementary Material .01 (Trading
Pauses) to FINRA Rule 6121 (Trading Halts Due to Extraordinary Market
Volatility) to exclude all rights and warrants from the trading pause
pilot.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to amend FINRA Rule 6121.01 (Trading Pauses) to
exclude all rights and warrants from the trading pause pilot. The
Commission approved FINRA Rule 6121.01 on a pilot basis on June 10,
2010 to provide for trading pauses in individual securities due to
extraordinary market volatility (``Trading Pause Pilot'').\4\ The pilot
was developed and implemented as a market-wide initiative by FINRA and
other self-regulatory organizations (``SROs'') in consultation with
Commission staff. Initially, the pilot covered only the securities
included in the S&P 500 [supreg] Index (``S&P 500'') (``Phase I
securities''). FINRA and the other SROs subsequently expanded the
Trading Pause Pilot to add the securities included in the Russell 1000
[supreg] Index and a specified list of exchange traded products
(``Phase II securities'').\5\ FINRA and the other SROs have stated in
previous filings that they would continue to review whether and when to
add securities to the pilot and whether the parameters of the pilot
should be adjusted for different securities.\6\
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\4\ See Securities Exchange Act Release No. 62251 (June 10,
2010), 75 FR 34183 (June 16, 2010) (Order Approving File No. SR-
FINRA-2010-025).
\5\ See Securities Exchange Act Release No. 62883 (September 10,
2010), 75 FR 56608 (September 16, 2010) (Order Approving File No.
SR-FINRA-2010-033).
\6\ See e.g., Securities Exchange Act Release No. 62416 (June
30, 2010), 75 FR 39069 (July 7, 2010) (Notice of Filing of File No.
SR-FINRA-2010-033).
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On June 23, 2011, the Commission approved proposed amendments by
FINRA and the other SROs to expand the Trading Pause Pilot to include
all remaining NMS stocks (``Phase III securities''), which included
rights and warrants.\7\ With respect to the Phase III securities, the
SRO rules \8\ apply wider percentage price moves for triggering a
trading pause than apply to the Phase I or Phase II securities.\9\
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\7\ See Securities Exchange Act Release No. 64735 (June 23,
2011), 76 FR 38243 (June 29, 2011) (Order Approving File No. SR-
FINRA-2011-023). This amendment became effective on August 8, 2011.
\8\ FINRA's trading pause rule does not include specific trigger
percentages, but rather provides that FINRA will halt trading
otherwise than on an exchange in a security if a primary listing
market has issued an individual stock trading pause under its rules.
\9\ For example, under amended NASDAQ Rule 4120(a)(11), a pause
is triggered by a 30% or more price move in a Phase III Security
priced at $1.00 or higher, and by a 50% or more price move to such a
security priced less than $1.00. The price of a security is based on
the closing price on the previous trading day or, if no closing
price exists, the last sale reported to the consolidated tape on the
previous trading day.
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The trading pauses triggered since the adoption of the Trading
Pause Pilot have been analyzed and over 25% of trading pauses have
occurred in rights and warrants. Further, the SROs have experienced a
significant increase in trading pauses involving rights and warrants
since the inclusion of the Phase III securities, with such pauses
representing as much as 52% of all trading pauses occurring through the
end of August 2011 on one exchange. Rights and warrants trade on equity
exchanges, but are closely related to call options.\10\ Like options,
the price of rights and warrants are affected by the price of the
underlying stock as well as other factors, particularly the volatility
of the stock. Consequently, the price of rights and warrants may move
more dramatically than the price of the underlying stock, even when the
rights and warrants (and the underlying stock)
[[Page 74106]]
are trading in an orderly manner. This difference in trading behavior
may result in a scenario whereby the rights and warrants trigger, and
are subject to, a trading pause, even while the underlying stock
continues to trade. This can be particularly true of lower-priced
rights and warrants. Accordingly, FINRA, in consultation with the other
SROs, is proposing to exclude rights and warrants from the trading
pause pilot of Rule 6121.01.
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\10\ Rights and warrants entitle owners to purchase shares of
stock at predetermined prices subject to timing and various other
conditions.
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the Commission waive the
requirement that the proposed rule change not become operative for 30
days after the date of filing to avoid further triggers of trading
pauses in rights and warrants, thereby avoiding the potential confusion
caused by such pauses.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\11\ 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 rule change meets
these requirements because it is consistent with the trading pause
rules of the primary listing markets and refines the trading pause
pilot to exclude certain securities that are prone to triggering pauses
because of their unique characteristics. Given the fact that the price
of rights and warrants may move more dramatically than the prices of
the underlying stocks to which they are related, even when both are
trading in an orderly manner, FINRA questions the benefit of applying
the trading pause pilot to such securities. FINRA also believes that
the proposed rule change promotes uniformity across markets concerning
decisions to pause trading in a security when there are significant
price movements.
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\11\ 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.
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
FINRA has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \12\ and Rule 19b-4(f)(6) thereunder.\13\
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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\
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\12\ 15 U.S.C. 78s(b)(3)(A)(iii).
\13\ 17 CFR 240.19b-4(f)(6).
\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires FINRA to give the Commission written notice of the 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) \16\ normally
does not become operative for 30 days after the date of filing.
However, pursuant to Rule 19b-4(f)(6)(iii) \17\ 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 immediately upon filing.
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\16\ 17 CFR 240.19b-4(f)(6).
\17\ 17 CFR 240.19b-4(f)(6)(iii).
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The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Including rights and warrants in the pilot program which may trigger a
circuit breaker and be subject to a trading pause, even while the
underlying security continues to trade, provides little benefit and has
the potential to create confusion among investors. Excluding rights and
warrants from the pilot program should minimize investor confusion that
could result from temporary trading pauses in these securities. For
this reason, the Commission designates the proposed rule change as
operative upon the date of this Notice.\18\
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\18\ 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.
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 No. SR-FINRA-2011-068 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 No. SR-FINRA-2011-068. 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
a.m. and 3 p.m. Copies of such filing
[[Page 74107]]
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 No. SR-FINRA-
2011-068 and should be submitted on or before December 21, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30814 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P