FINRA Rule 4320 in the Consolidated FINRA Rulebook

[sandi66]

... Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt NASD Rule 3210 (Short Sale Delivery
Requirements) as FINRA Rule 4320 in the Consolidated FINRA Rulebook

July 20, 2010.
On May 21, 2010, the Financial Industry Regulatory Authority, Inc. (``FINRA'') filed with the Securities and Exchange Commission (``SEC''


The Commission believes that the proposed rule change to adopt NASD Rule 3210 as FINRA Rule 4320 in the Consolidated FINRA Rulebook continues to be necessary to provide regulatory coverage for fails to deliver in non-reporting over-the-counter equity securities and will continue to help reduce long-term fails to deliver in this sector of the marketplace.


edocket.access.gpo.gov/2010/2010-18168.htm


[Federal Register: July 26, 2010 (Volume 75, Number 142)]
[Notices]
[Page 43588-43589]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jy10-98]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62533; File No. SR-FINRA-2010-028]


Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt NASD Rule 3210 (Short Sale Delivery
Requirements) as FINRA Rule 4320 in the Consolidated FINRA Rulebook

July 20, 2010.
On May 21, 2010, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt NASD Rule 3210 as FINRA Rule 4320 in the
consolidated FINRA rulebook. On June 11, 2010, FINRA filed Amendment
No. 1 to the proposed rule change.\3\ The proposed rule change, as
modified by Amendment No. 1, was published for comment in the Federal
Register on June 17, 2010.\4\ The Commission received no comments on
the proposal. This order approves the proposed rule change, as modified
by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 was a partial amendment that made minor
clarifications, provided additional detail and made technical edits
to the purpose section of the proposed rule change.
\4\ See Securities Exchange Act Release No. 62288 (Jun. 11,
2010), 75 FR 34496 (Jun. 17, 2010).
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I. Description of the Proposed Rule Change

As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\5\

[[Page 43589]]

FINRA has proposed to adopt NASD Rule 3210 (Short Sale Delivery
Requirements), with minor changes, as FINRA Rule 4320 in the
Consolidated FINRA Rulebook.
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\5\ FINRA stated that the current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE
(``Incorporated NYSE Rules'') (together, the NASD Rules and
Incorporated NYSE Rules are referred to as the ``Transitional
Rulebook''). While the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only to those members of
FINRA that are also members of the NYSE (``Dual Members''). FINRA
also stated that FINRA Rules apply to all FINRA members, unless such
rules have a more limited application by their terms. For more
information about the rulebook consolidation process, see
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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On April 4, 2006, the SEC approved NASD Rule 3210, which applies
short sale delivery requirements to those equity securities not
otherwise covered by the close-out requirements of Regulation SHO. The
Regulation SHO close-out requirements apply only to the equity
securities of ``reporting'' issuers (i.e., issuers that are registered
pursuant to Section 12 of the Act \6\ or that are required to file
reports pursuant to Section 15(d) of the Act \7\).
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\6\ 15 U.S.C. 78l.
\7\ 15 U.S.C. 78o(d).
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NASD Rule 3210, among other things, requires participants of
registered clearing agencies to take action on failures to deliver that
exist for 13 consecutive settlement days in certain non-reporting
securities. In addition, if the fail to deliver position is not closed
out in the requisite time period, a participant of a registered
clearing agency or any broker-dealer for which it clears transactions
is prohibited from effecting further short sales in the particular
specified security without borrowing, or entering into a bona fide
arrangement to borrow, the security until the fail to deliver position
is closed out. Pursuant to NASD Rule 3210, FINRA publishes a daily
``Threshold Security List.'' \8\ The rule became effective on July 3,
2006. In adopting NASD Rule 3210, FINRA believed that the rule
represented an important step in reducing long-term fails to deliver in
this sector of the marketplace.
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\8\ FINRA stated that, for purposes of Rule 3210, a non-
reporting threshold security is any equity security that is not a
reporting security and, for five consecutive settlement days, has:
(1) Aggregate fails to deliver at a registered clearing agency of
10,000 shares or more; and (2) a reported last sale during normal
market hours (9:30 a.m. to 4 p.m., Eastern Time (ET)) for the
security on that settlement day that would value the aggregate fail
to deliver position at $50,000 or more.
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In July 2009, the SEC adopted the substance of temporary Rule 204T
\9\ under Regulation SHO as a permanent rule, Rule 204 of Regulation
SHO.\10\ This rule is intended to further the goal of reducing fails to
deliver and addressing potentially abusive ``naked'' short selling in
all equity securities by requiring that, subject to certain limited
exceptions, if a registered clearing agency participant has a fail to
deliver position resulting from a short sale at a registered clearing
agency it must immediately purchase or borrow securities to close out a
fail to deliver position by no later than the beginning of regular
trading hours on the settlement day following settlement date.\11\
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\9\ See Securities Exchange Act Release No. 58785 (Oct. 14,
2008), 73 FR 61678 (Oct. 17, 2008).
\10\ See Securities Exchange Act Release No. 60388 (July 27,
2009), 74 FR 38266 (July 31, 2009).
\11\ Rule 204 of Regulation SHO further provides that fails to
deliver resulting from long sales or certain bona fide market making
activity must be closed out by no later than the beginning of
regular trading hours on the third settlement day after settlement
date (i.e., T+6).
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Notwithstanding the SEC's adoption of this new rule, FINRA believes
proposed FINRA Rule 4320 continues to be necessary to provide
regulatory coverage for fails to deliver in non-reporting over-the-
counter equity securities that pre-exist the SEC's implementation of
temporary Rule 204T in September 2008.\12\
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\12\ Likewise, the SEC is retaining Rule 203(b)(3) of Regulation
SHO in order to cover pre-existing temporary Rule 204T fails in
threshold securities as defined in Rule 203(c)(6) of Regulation SHO.
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Therefore, FINRA has proposed to adopt NASD Rule 3210 as FINRA Rule
4320 with minor changes to delete language that provided allowances for
``grandfathered'' securities during the initial implementation period
of NASD Rule 3210 and that, therefore, is no longer relevant. The
proposed rule change also clarifies, consistent with Regulation SHO,
the borrowing requirements for clearing agency participants, including
broker-dealers for which they clear transactions, that sell short non-
reporting threshold securities for which a fail to deliver position has
not been closed out in the requisite time. Specifically, if a fail to
deliver position is not closed out in accordance with Rule 4320(a), the
clearing agency participant and any broker-dealer for which it clears,
including market makers otherwise entitled to rely on the Rule
203(b)(2)(iii) exception of Regulation SHO, would not be able to short
sell the non-reporting threshold security either for itself or for the
account of another, unless it has previously arranged to borrow or
borrowed the security, until the participant closes out the fail to
deliver position by purchasing securities of like kind and quantity and
that purchase has cleared and settled at a registered clearing agency.
In addition, the proposed rule change makes certain technical
amendments to the rule, including changing references to ``NASD'' to
``FINRA.''
FINRA has represented that it will announce the implementation date
of the proposed rule change in a Regulatory Notice to be published no
later than 90 days following Commission approval. The implementation
date will be no more than 180 days following Commission approval.

III. Discussion and Commission's Findings

After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act, and the rules and regulations thereunder that
are applicable to a national securities association.\13\ In particular,
the Commission believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act, in that it is
designed to prevent fraudulent and manipulative acts and practices, 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 Commission believes that the proposed rule change to
adopt NASD Rule 3210 as FINRA Rule 4320 in the Consolidated FINRA
Rulebook continues to be necessary to provide regulatory coverage for
fails to deliver in non-reporting over-the-counter equity securities
and will continue to help reduce long-term fails to deliver in this
sector of the marketplace.
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\13\ In approving 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).
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IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-FINRA-2010-028), as
modified by Amendment No. 1, be and hereby is approved.
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\14\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18168 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P


edocket.access.gpo.gov/2010/2010-18168.htm

ty donwat

[sandi66]

New FINRA 4320 Short Sale Delivery Requirements


HERE'S THE NEW LAW AS OF TOMORROW:

FINRA 4320. Short Sale Delivery Requirements

(a) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity.

(1) Provided, however, if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency for thirty-five consecutive settlement days in a non-reporting threshold security that was sold pursuant to SEC Rule 144, the participant shall immediately thereafter close out the fail to deliver position in the security by purchasing securities of like kind and quantity. The requirements in paragraph (b) shall apply to all such fails to deliver that are not closed out in conformance with this paragraph (a)(1).

(b) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days (or 35 consecutive settlement days if entitled to rely on paragraph (a)(1)), the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception provided in paragraph (b)(2)(iii) of Rule 203 of SEC Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the participant closes out the fail to deliver position by purchasing securities of like kind and quantity and that purchase has cleared and settled at a registered clearing agency.

(c) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this Rule relating to such fail to deliver position shall apply to the portion of the fail to deliver position allocated to such registered broker or dealer, and not to the participant.

(d) A participant of a registered clearing agency shall not be deemed to have fulfilled the requirements of this Rule where the participant enters into an arrangement with another person to purchase securities as required by this Rule, and the participant knows or has reason to know that the other person will not deliver securities in settlement of the purchase.

(e) For the purposes of this Rule, the following terms shall have the meanings below:

(1) the term “market maker” has the same meaning as in Section 3(a)(38) of the Exchange Act.

(2) the term “non-reporting threshold security” means any equity security of an issuer that is not registered pursuant to Section 12 of the Exchange Act and for which the issuer is not required to file reports pursuant to Section 15(d) of the Exchange Act:

(A) for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and for which on each settlement day during the five consecutive settlement day period, the reported last sale during normal market hours for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more, provided that if there is no reported last sale on a particular settlement day, then the price used to value the position on such settlement day would be the previously reported last sale; and

(B) is included on a list published by FINRA.
A security shall cease to be a non-reporting threshold security if the aggregate fail to deliver position at a registered clearing agency does not meet or exceed either of the threshold tests specified in paragraph (e)(2)(A) of this Rule for five consecutive settlement days.

(3) the term “participant” means a participant as defined in Section 3(a)(24) of the Exchange Act, that is a FINRA member. The term “registered clearing agency” means a clearing agency, as defined in Section 3(a)(23)(A) of the Exchange Act, that is registered with the SEC pursuant to Section 17A of the Exchange Act.

(This is 3(a)(23)(A): The term "clearing agency" means any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who (i) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.


(5) the term “settlement day” means any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency.


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WHY IS FINRA 4320 SO EXCITING TO THE SECURITIES LAWYERS AND THE CORPORATIONS THAT HAVE SURVVIVED THESE NSS ATTACKS?

1) It finally addresses abusive naked short selling in non-reporting issuers. Up until now the regulators and SROs have found that the investors in development stage corporations somehow did not deserve the provision of investor protection.

2) Even though it is entitled “short sale delivery requirements” it covers the failures to deliver (FTDs) involved with intentionally mislabeled “long sales”. One way to bypass the newer short selling rules is to illegal mislabel your short sale as a “long sale” and just voluntarily fail to deliver the shares.

3) It affects FTDs held in “ex-clearing” because all (approximately 1,000) clearing firms that are “participants” of the NSCC/DTCC are indeed “registered clearing agencies” in and of themselves. (see 3(a)(23)(A) in the smaller print above.)

4) It addresses the FTDs of even market makers held at registered clearing agencies. The bona fide MM exemption from needing to pre-borrow or “locate” shares before making admittedly naked short sales is the main loophole being abused. THIS IS A VERY BIG DEAL.

5) It expressly forbids a crooked clearing firm from “crossing” failed to be delivered shares to a co-conspiring clearing firm in order to reset the 13-day clock. These illegal “wash sales” are pandemic.

6) There is no “grandfathering” in of old delivery failures held in illegal “ex-clearing arrangements” as these are still FTDs as nothing ever got delivered. The mere marking to market of the monetary value of failed delivery obligations has nothing whatsoever to do with making the “good form delivery” of the securities sold needed to accomplish the “settlement” of a trade.

7) In the abusive naked short selling world there are very, very bad guys and other semi-bad guys. The semi-bad guys will probably voluntarily cover their not so huge naked short positions BEFORE the really bad guys will have time to. They may even go net long after covering knowing that their bigger brother bad guys might be in deep doo-doo.

8) All of the crooks are not going to run willy-nilly tomorrow morning and cover BUT THOSE CORPORATIONS WITH IMMENSE NAKED SHORT POSITIONS THAT ARE ABLE TO PULL OFF SOME SORT OF LARGE CORPORATE ACCOMPLISHMENT WILL BE GREATLY BENEFITTED AND THEIR NAKED SHORT POSITIONS MIGHT RISE TO THE TOP OF THE “SHORT POSITIONS TO IMMEDIATELY COVER” LIST.


========================================



From HookMeister:
Doc, I've posted this question previously and haven't heard any response from anyone so I thought I'd ask you if you don't mind.

With respect to the NSS issue and the new regulations starting Monday, will MMs who already hold short positions prior to the new regulations be required to now comply with the new regs concerning their already existing short positions or will it only apply to new short positions going forward??

Hi HookMeister,
It’s actually the combination of all of the various new rules kicking in right now that will FINALLY make a difference as they all block some of the various loopholes in existence. The weak link has always been that the old rules only applied to delivery failures held at “registered clearing agencies” like the NSCC. The crooked clearing firms simply “paired off” outside of the NSCC, entered into illegal “ex-clearing arrangements” and forgave each other’s delivery obligations. Instead they chose to merely mark to market the monetary value of their failed delivery obligations and hide them in a “side pocket”. As a result, U.S. investors have no clue as to the damaged nature of the corporation they are investing in.

What the various “securities cops” were just reminded of is that these crooked clearing firms are indeed “registered clearing agencies” in and of themselves as per the ’34 Exchange Act. Up until now, nobody has been tallying the delivery failures hiding in these illegal “ex-clearing arrangements”. The new FINRA 4320 as of tomorrow mandates the buying in of 13 day old delivery failures of non-reporting issuers (like Medinah) IF MEDINAH’S NAME APPEARS ON THE FINRA THRESHOLD LIST. Medinah’s name is to appear on this list if both their delivery failures exceed 10,000 shares and are worth over $50,000 in the aggregate. Although Medinah’s approximately 1.3 billion shares of failed delivery failures are currently (@12-cents) worth approximately $156 million MEDINAH IS STILL NOT ON THE LIST. This is a testimony to the pandemic nature of these illegal “ex-clearing arrangements”

Why is this? FINRA leaves the tallying of the delivery failures up to the NSCC. The NSCC only tallies the delivery failures officially held at the NSCC which the crooks now avoid like the plague as the hiding spot for their delivery failures. The NSCC management, which operates as an “SRO” or “self-regulatory organization”, insanely holds that the delivery failures held by their “participants/bosses” outside of the NSCC in “ex-clearing arrangements” are of a “contractual” nature which is none of their business.

Wait a minute, the SEC has said that the SROs like FINRA and the NSCC are to provide “the first line of defense against market abuses”. Congress in Section 17A of the’34 Exchange Act mandated that its parent the DTCC “promptly settle” all securities transactions. This means that the sellers of securities must promptly deliver that which they sold on or near T+3. Illegal “ex-clearing arrangements” intentionally circumvent the “prompt settlement” of securities transactions. By definition, an SRO like the NSCC is mandated to “draft and enforce rules and regulations and to monitor the “BUSINESS CONDUCT” of its co-owning “participants.”

How can the management of an SRO like the NSCC with that SRO mandate as well as that congressional mandate as well as acting as the party acting in the capacity of providing “the first line of defense against market abuses” claim that it has no authority to address the efforts of their bosses to intentionally circumvent the “prompt settlement” of securities transactions? How can you claim to be “powerless” to follow a congressional mandate?

Forced buy-ins of 13-day old delivery failures are critical as they represent the only source of meaningful DETERRENCE to these crimes and they are the only treatment available when the sellers of securities absolutely refuse to deliver that which they sell. With FINRA 4320 in effect, non-reporting issuers are FINALLY afforded protection via mandated buy-ins but only if that 10,000 shares and $50,000 worth of delivery failures metric is reached. If the NSCC management continues to refuse to tally the delivery failures held in these “regulated clearing agencies” known as “clearing firms” in these “ex-clearing arrangements” in order to keep their bosses from being bought-in then the issue of a “securities cop” with all of these various mandates acting to directly aid and abet as well as cover up these frauds comes front and center.

The gist of it is that the mere marking to market of the monetary value of a failed delivery obligation has nothing to do whatsoever with the congressionally mandated “prompt settlement” of a securities transaction. In fact, although from a distance it serves to lend an air of legitimacy it actually is the ideal COVER UP FRAUD used to mask the fact that “prompt settlement” is not occurring.

Most securities lawyers I work with predict that FINRA 4320 will force the NSCC management to pull a “Pontius Pilate” and wash its hands of this aiding and abetting role and providing this cover up fraud and buy-in these previously unaddressed delivery failures which they theoretically had no idea existed. No doubt they will say WE ARE SHOCKED, SHOCKED and shame on you abusive bosses of ours. We had no idea these crimes were being committed on our watch.

The concept of a “securities cop” like the NSCC intentionally MANIPULATING downwards the metric needing to be reached so that investor protection is provided in order to look after the financial interests of its misbehaving bosses is unconscionable and the investing public will not tolerate these thefts any longer.


ty DrD and AlanC