[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78422-78423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30764]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71143]
Order Granting Application by Financial Industry Regulatory
Authority, Inc. for Exemption Pursuant to Section 36(a) of the Exchange
Act From the Rule Filing Requirements of Section 19(b) of the Exchange
Act With Respect to Certain Rules Incorporated by Reference
December 19, 2013.
The Financial Industry Regulatory Authority, Inc. (``FINRA'') has
filed with the Securities and Exchange Commission (``Commission'') an
application for an exemption under Section 36(a)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ from the rule filing
requirements of Section 19(b) of the Exchange Act \2\ with respect to
certain rules of other self-regulatory organizations (``SROs'') that
FINRA seeks to incorporate by reference. Section 36 of the Exchange Act
authorizes the Commission to conditionally or unconditionally exempt
any person, security, or transaction, or any class thereof, from any
provision of the Exchange Act or rule thereunder, if necessary or
appropriate in the public interest and consistent with the protection
of investors.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78mm(a)(1).
\2\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
FINRA Rule 2360 (Options) and FINRA Rule 2359 (Position and
Exercise Limits; Liquidations) incorporate by reference comparable
position and exercise limit rules of the options exchanges.
Specifically: (i) FINRA Rule 2360(b)(3)(B) incorporates position limits
for index options established by the exchange on which the option
trades; (ii) FINRA Rule 2360(b)(2) incorporates position and exercise
limits for FLEX Equity Options (as defined in FINRA Rule 2360(a)(16))
established by the exchange on which such FLEX Equity Options are
traded; and (iii) FINRA Rule 2359 incorporates position and exercise
limits for index warrants established by the exchange on which the
index warrant is listed.\3\ Thus, FINRA members comply with these FINRA
rules by complying with the relevant, incorporated exchange rule.\4\
---------------------------------------------------------------------------
\3\ See FINRA Rules 2359 and 2360; see also Letter from Robert
L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy,
Secretary, Commission, dated October 10, 2013 (``FINRA Exemptive
Request''), at 1 n.1.
\4\ FINRA has not previously sought an exemption from the
Commission pursuant to Section 36(a)(1) of the Exchange Act from the
rule filing requirements of Section 19(b) of the Exchange Act with
respect to these incorporations by reference.
---------------------------------------------------------------------------
In addition, if its request for an exemption is granted, FINRA
intends to propose further amendments to FINRA Rule 2360, pursuant to
Section 19(b)(1) of the Exchange Act, to incorporate by reference other
rules of the options exchanges regarding position limits. Specifically,
with respect to standardized equity options, FINRA intends to propose
that FINRA Rule 2360(b)(3) be amended so that the FINRA position limit
will be the highest position limit established by an exchange on which
the option trades.\5\ With respect to conventional equity options,\6\
FINRA intends to propose that FINRA Rule 2360(b)(3) be amended so that
the position limit tiers for such options reflect the same tier
structure used in exchange rules for standardized equity options and,
for each tier, incorporate for conventional equity options the same
position limit that exchange rules establish for standardized equity
options in the equivalent tier.\7\ In addition, FINRA
[[Page 78423]]
Rule 2360(b)(4) sets forth exercise limits by referring to the position
limits in FINRA Rule 2360(b)(3).\8\ Accordingly, FINRA's anticipated
proposed rule change also would correspondingly raise exercise
limits.\9\
---------------------------------------------------------------------------
\5\ See FINRA Exemptive Request, supra note 3, at 1 n.2. Based
on the standardized equity option position limits currently imposed
by the option exchanges, this incorporation by reference would have
the immediate effect of eliminating FINRA's position limit for
standardized options on Standard and Poor's Depository Receipts
Trust (``SPY'') and increasing FINRA's position limit for
standardized options on the iShares MSCI Emerging Markets Index Fund
(``EEM'') to 500,000 contracts.
\6\ The term ``conventional option'' means any option contract
not issued, or subject to issuance, by the Options Clearing
Corporation. See FINRA Rule 2360(a)(9).
\7\ See FINRA Exemptive Request, supra note 3, at 1 n.2. This
aspect of FINRA's intended proposal would not change position limits
for conventional equity options, as FINRA's rule currently imposes
conventional equity option position limits that are the same as the
tiered limits for standardized equity options set forth in FINRA
Rule 2360(b)(3)(A)(ii) through (v) for which the underlying security
qualifies or would be able to qualify. See FINRA Rule
2360(b)(3)(A)(viii). Currently, FINRA Rule 2360(b)(3)(A)(viii) cross
references FINRA Rule 2360(b)(3)(A)(ii) through (v) instead of
reproducing the language of those paragraphs setting forth the
position limit tiers. This aspect of FINRA's intended proposal would
amend FINRA's conventional equity option position limit rule to
replace that cross reference with the actual language setting forth
the position limit tiers.
\8\ See FINRA Exemptive Request, supra note 3, at 1 n.2.
\9\ Id.
---------------------------------------------------------------------------
FINRA has requested, pursuant to Rule 0-12 under the Exchange
Act,\10\ that the Commission grant it an exemption from the rule filing
requirements of Section 19(b) of the Exchange Act for changes to FINRA
Rule 2359 and FINRA Rule 2360, as amended by FINRA's intended proposal,
that are effected solely by virtue of a change to the corresponding
cross-referenced rules of the options exchanges. Specifically, FINRA
requests that it be permitted to incorporate by reference changes made
to each such options exchange rule without the need for FINRA to file
separately the same proposed rule changes pursuant to Section 19(b) of
the Exchange Act.\11\ By virtue of these incorporations by reference,
the requirements applicable to FINRA members will change when the
applicable incorporated exchanges' rules change, without the need for
FINRA to file separately the proposed rule changes pursuant to Section
19(b) of the Exchange Act.\12\ FINRA represents that the rules it seeks
to incorporate by reference into FINRA Rules 2359 and 2360 are
categories of exchange rules (rather than individual rules within a
category) that are not trading rules.\13\ FINRA has agreed to provide
written notice to its members whenever an exchange proposes a change to
its relevant, cross-referenced rule (or series of rules).\14\
---------------------------------------------------------------------------
\10\ 17 CFR 240.0-12.
\11\ See FINRA Exemptive Request, supra note 3, at 2.
\12\ Id.
\13\ Id.
\14\ Id. at 3. FINRA states that it will provide such notice on
its Web site where it posts its own proposed rule change filings as
required by Rule 19b-4(l). In addition, FINRA states that the Web
site posting will include a link to the location on the exchange's
Web site where the proposed rule change is posted. Id. at 3 n.8.
---------------------------------------------------------------------------
FINRA believes this exemption is necessary and appropriate to
maintain the consistency between FINRA rules and the relevant
provisions of the exchanges' rules at all times, thus helping to ensure
identical regulation of members of FINRA that are also members of one
or more exchanges with respect to the incorporated provisions, as well
as helping to ensure that FINRA-only members are subject to consistent
regulation as members that are members of exchanges.\15\ Without such
an exemption, such members could be subject to two different
standards.\16\
---------------------------------------------------------------------------
\15\ Id. at 2-3.
\16\ Id. at 3.
---------------------------------------------------------------------------
The Commission has issued exemptions to other exchanges similar to
FINRA's request.\17\ In granting one such exemption in 2010, the
Commission repeated a prior, 2004 Commission statement that it would
consider similar future exemption requests from other SROs, provided
that:
---------------------------------------------------------------------------
\17\ For example, on behalf of their respective options markets,
BATS Exchange, Inc., NASDAQ OMX BX, Inc., and The NASDAQ Stock
Market LLC incorporate, among other things, the position limit rules
of other exchanges. See, e.g., Securities Exchange Act Release No.
61534 (February 18, 2010), 75 FR 8760 (February 25, 2010) (order
granting BATS Exchange, Inc. exemptive request relating to rules
incorporated by reference by the BATS Exchange Options Market rules)
(``BATS Options Market Order''); Securities Exchange Act Release No.
67256 (June 26, 2012), 77 FR 39277, 39286 (July 2, 2012) (order
approving SR-BX-2012-030 and granting exemptive request relating to
rules incorporated by reference by the BX Options rules); Securities
Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521, 14539-
40 (March 18, 2008) (order approving SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080, and granting exemptive request relating to rules
incorporated by reference by The NASDAQ Options Market).
---------------------------------------------------------------------------
An SRO wishing to incorporate rules of another SRO by
reference has submitted a written request for an order exempting it
from the requirement in Section 19(b) of the Exchange Act to file
proposed rule changes relating to the rules incorporated by reference,
has identified the applicable originating SRO(s), together with the
rules it wants to incorporate by reference, and otherwise has complied
with the procedural requirements set forth in the Commission's release
governing procedures for requesting exemptive orders pursuant to Rule
0-12 under the Exchange Act; \18\
---------------------------------------------------------------------------
\18\ See 17 CFR 240.0-12 and Securities Exchange Act Release No.
39624 (February 5, 1998), 63 FR 8101 (February 18, 1998) (Commission
Procedures for Filing Applications for Orders for Exemptive Relief
Pursuant to Section 36 of the Exchange Act; Final Rule).
---------------------------------------------------------------------------
An incorporating SRO has requested incorporation of
categories of rules (rather than individual rules within a category)
that are not trading rules (e.g., the SRO has requested incorporation
of rules such as margin, suitability, or arbitration); and
The incorporating SRO has reasonable procedures in place
to provide written notice to its members each time a change is proposed
to the incorporated rules of another SRO.\19\
---------------------------------------------------------------------------
\19\ See BATS Options Market Order, supra note 17 (citing
Securities Exchange Act Release No. 49260 (February 17, 2004), 69 FR
8500 (February 24, 2004) (order granting exemptive request relating
to rules incorporated by reference by several SROs) (``2004
Order'')).
---------------------------------------------------------------------------
The Commission believes that FINRA has satisfied each of these
conditions. The Commission also believes that granting FINRA an
exemption from the rule filing requirements under Section 19(b) of the
Exchange Act will promote efficient use of Commission and FINRA
resources by avoiding duplicative rule filings based on simultaneous
changes to identical rule text sought by more than one SRO.\20\ The
Commission therefore finds it appropriate in the public interest and
consistent with the protection of investors to exempt FINRA from the
rule filing requirements under Section 19(b) of the Exchange Act with
respect to the above-described rules it has incorporated, and intends
to incorporate, by reference. This exemption is conditioned upon FINRA
promptly providing written notice to its members whenever an exchange
changes a rule that FINRA has incorporated by reference.
---------------------------------------------------------------------------
\20\ See BATS Options Market Order, supra note 17, 75 FR at
8761; see also 2004 Order, supra note 19, 69 FR at 8502.
---------------------------------------------------------------------------
Accordingly, it is ordered, pursuant to Section 36 of the Exchange
Act,\21\ that FINRA is exempt from the rule filing requirements of
Section 19(b) of the Exchange Act solely with respect to changes to the
rules identified in its request that incorporate by reference certain
rules of the options exchanges,\22\ provided that FINRA promptly
provides written notice to its members whenever an exchange proposes to
change a rule that FINRA has incorporated by reference.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78mm.
\22\ See supra notes 3 through 9, and accompanying text.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(76).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30764 Filed 12-24-13; 8:45 am]
BILLING CODE 8011-01-P