[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33522-33527]
[FR Doc No: 2012-13638]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67079; File No. SR-FINRA-2012-025]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rule 5270 (Front Running of Block Transactions) in the
Consolidated FINRA Rulebook

May 30, 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 May 17, 2012, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to adopt NASD Interpretive Material (``IM'')
2110-3 (Front Running Policy) as FINRA Rule 5270 with the changes
described below.
    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
    As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD
IM-2110-3 (``Front Running Policy'') as FINRA Rule 5270 with the
changes described below.
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    \3\ 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''). The 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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    The Front Running Policy, which was adopted as interpretive
material to

Article III, Section 1 of the NASD's Rules of Fair Practice \4\ in
1987,\5\ states that it is considered conduct inconsistent with just
and equitable principles of trade for a member or an associated person
of a member to buy or sell security futures or certain options for
accounts in which the member or associated person has an interest when
the member or associated person has material, non-public market
information concerning an imminent block transaction \6\ in the
underlying security. Similarly, the same prohibition applies in the
underlying security when the material, non-public market information
regarding a block transaction concerns an option or security future on
that underlying security.\7\ The Front Running Policy also prohibits
providing material, non-public market information concerning an
imminent block transaction to customers who then trade on the basis of
the information. The Front Running Policy is limited to transactions in
equity securities and options that are required to be reported on a
last sale reporting system and to any transaction involving a security
future, regardless of whether the transaction is reported. The
prohibitions apply until the information concerning the block
transaction has been made publicly available (i.e., ``when [the
information] has been disseminated via the tape or high speed
communications line of one of those systems, a similar system of a
national securities exchange under Section 6 of the Act, an alternative
trading system under Regulation ATS, or by a third-party news wire
service'').
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    \4\ Article III, Section 1 of the NASD's Rules of Fair Practice
was subsequently renumbered as NASD Rule 2110, and is now FINRA Rule
2010. See Regulatory Notice 08-57 (October 2008).
    \5\ NASD adopted the Front Running Policy at the same time as
several other self-regulatory organizations (``SROs'') filed their
policies regarding front running of block transactions. See
Securities Exchange Act Release No. 25233 (December 30, 1987), 53 FR
296 (January 6, 1988). See also NASD Notice to Members 87-69
(October 1987).
    \6\ The rule states that ``[a] transaction involving 10,000
shares or more of an underlying security, or options or security
futures covering such number of shares is generally deemed to be a
block transaction, although a transaction of less than 10,000 shares
could be considered a block transaction in appropriate cases.''
    \7\ The Front Running Policy initially applied only to certain
options (either trading the option while in possession of material,
non-public market information regarding an imminent block
transaction in the underlying security or trading the underlying
security while in possession of material, non-public market
information regarding an imminent block transaction in the option).
In 2002, the rule was broadened to include the same prohibitions
with respect to security futures. See Securities Exchange Act
Release No. 46663 (October 15, 2002), 67 FR 64944 (October 22,
2002); see also NASD Notice to Members 02-73 (November 2002).
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    Finally, the Front Running Policy includes exceptions from the
general prohibitions in the rule for ``transactions executed by member
participants in automatic execution systems in those instances where
participants must accept automatic executions'' as well as situations
where a member receives a customer's block order relating to both an
option or security future and the underlying security and the member,
in furtherance of facilitating the customer's block order, positions
the other side of one or both components of the order. In the latter
case, a member is still prohibited from covering any resulting
proprietary position by entering an offsetting order until information
concerning the block transaction has been made publicly available.
    FINRA is proposing to adopt IM-2110-3 as FINRA Rule 5270 and amend
the rule in several ways to broaden its scope and provide further
clarity into activity that FINRA believes is inconsistent with just and
equitable principles of trade. First, FINRA is proposing to extend the
prohibitions in the rule to apply explicitly to all securities and
other financial instruments and contracts (i.e., not only options and
security futures) that overlay the security that is the subject of an
imminent block transaction and that have a value that is materially
related to, or otherwise acts as a substitute for, the underlying
security. Specifically, FINRA is proposing to extend the front running
prohibitions to cover trading in an option, derivative, or other
financial instrument overlying a security that is the subject of an
imminent block transaction if the value of the underlying security is
materially related to, or otherwise acts as a substitute for, such
security, as well as any contract that is the functional economic
equivalent of a position in such security (individually or collectively
a ``related financial instrument''). The reverse would also be true:
When the imminent block transaction itself involves a related financial
instrument, the proposed rule would prevent trading in the underlying
security. The proposed rule change also extends the trading provisions
in the rule to include explicitly trading in the same security or
related financial instrument that is the subject of an imminent block
transaction.\8\
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    \8\ The Commission noted in the release seeking comment on the
SRO front running rules that, generally, ``the SROs define
frontrunning as the practice of trading a security while in
possession of material, non-public information regarding an imminent
block transaction in the same or a related security.'' See
Securities Exchange Act Release No. 25233 (December 30, 1987), 53 FR
296 (January 6, 1988).
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    Although the proposed rule change would broaden the scope of
trading covered by the front running rule, FINRA believes that the type
of trading prohibited by the proposed rule change would generally
already violate other existing FINRA rules, such as FINRA Rule 2010
(Standards of Commercial Honor and Principles of Trade). As FINRA noted
when it first adopted the Front Running Policy, the adoption of the
rule was never intended to imply that other forms of trading activity
not explicitly covered by the Front Running Policy could not violate
FINRA rules.\9\ Because FINRA believes the Front Running Policy is
unduly narrow in capturing the types of front running activity that are
inconsistent with just and equitable principles of trade, FINRA is
proposing to broaden the language of the Front Running Policy to apply
equally to all related financial instruments (e.g., stock options and
futures, options futures, other derivatives, and security-based swaps)
rather than be limited to equity securities, security futures, and
certain options.\10\
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    \9\ FINRA has consistently noted that the Front Running Policy
does not provide an exhaustive list of prohibited front running
trading. See NASD Notice to Members 87-69 (October 1987) (``Although
the Board believes it is important to provide guidelines describing
the kind of [front running] conduct that will not be permitted,
members and persons associated with a member should be aware that
any conduct that is not consistent with their fiduciary
responsibilities in this area would be a violation of [just and
equitable principles of trade].''). See also NASD Notice to Members
96-66 (October 1996) (noting that although the Front Running Policy
applied only to equity securities, actions for similar conduct
involving government securities would violate just and equitable
principles of trade).
    \10\ Notwithstanding the amendments discussed in the proposed
rule change, FINRA notes that, as amended, the rule is still not
intended to provide an exhaustive list of prohibited trading
activity. Proposed Supplementary Material .05, for example, states
that front running orders not explicitly covered by the terms of
Rule 5270 could nonetheless violate other FINRA rules.
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    As noted above, the trading restrictions imposed by the current
Front Running Policy apply until information about the imminent
customer block transaction ``has been made publicly available,'' which
the rule defines as having been disseminated to the public in trade
reporting data. The proposed rule change generally retains this
standard for determining when information has become publicly
available; however, because FINRA is proposing to expand the rule to
include related financial instruments that may not result in publicly
available trading information

being made available, FINRA is also proposing that the prohibitions in
the rule be in place until the material, non-public market information
is either publicly available or ``otherwise becomes stale or
obsolete.''\11\
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    \11\ Whether information has become stale or obsolete will
depend upon the particular facts and circumstances involved,
including specific information the member has regarding the
transaction, but could include factors such as the amount of time
that has passed since the member learned of the block transaction,
subsequent trading activity in the security, or a significant change
in market conditions.
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    The proposed rule change also replaces several existing provisions
in the Front Running Policy with Supplementary Material to FINRA Rule
5270. Specifically, FINRA is proposing to replace the existing
exceptions in the Front Running Policy for certain transactions in
automatic execution systems and for positioning the other side of
certain orders when a member receives a customer's block order relating
to both an option and the underlying security or a security future and
the underlying security with new Supplementary Material that identifies
types of transactions that are permitted under the rule.
    Under the Supplementary Material, there are three broad categories
of permitted transactions: Transactions that the member can demonstrate
are unrelated to the customer block order, transactions that are
undertaken to fulfill or facilitate the execution of the customer block
order, and transactions that are executed, in whole or in part, on a
national securities exchange and comply with the marketplace rules of
that exchange.
    The first category of permitted transactions is [sic] those that
the member can demonstrate are unrelated to the customer block order.
Supplementary Material .04(a) recognizes that members may engage in
such transactions provided that the member can demonstrate that the
transactions are unrelated to the material, non-public market
information received in connection with the customer order. The
Supplementary Material includes an illustrative list of potentially
permitted transactions as examples of transactions that, depending upon
the circumstances, may be unrelated to the customer block order. These
types of transactions could include transactions where the member has
effective information barriers established to prevent internal
disclosure of customer order information,\12\ transactions in the
security that is the subject of the customer block order that are
related to a prior customer order in that security, transactions to
correct bona fide errors, and transactions to offset odd-lot orders.
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    \12\ In addition to more traditional information barriers, such
as those in place to prevent communication between trading units,
this provision could also include the use of automated systems
(e.g., trades through a ``black box'') where the orders placed into
the automated system are handled without the knowledge of a person
associated with the member who may be trading in the same security.
However, a person associated with a member who places an order into
a ``black box'' or other automated system, or otherwise has
knowledge of the order or the ability to access information in the
system, may not then trade in the same security or a related
financial instrument solely because the order ultimately was being
handled by the automated system rather than by the person. Traders
who have no knowledge of the order, due to the presence of an
information barrier or otherwise, could continue to trade in the
security or a related financial instrument. See infra note 23.
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    For each of these types of transactions, the member must be able to
demonstrate that the transaction at issue was unrelated to the customer
block order. Thus, for example, if the member can demonstrate that
transactions occurring in a security (or a related financial
instrument) that is the subject of an imminent customer block order
were undertaken by a desk that is walled off from the desk handling the
customer block order by the use of effective information barriers, the
trading activity would be unrelated to the customer block order and,
therefore, permitted.\13\
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    \13\ FINRA believes that this approach is compatible with the
existing provisions concerning customer order protection in Rule
5320 and its accompanying Supplementary Material concerning
protection of customer limit and market orders and the
implementation of effective information barriers.
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    Similarly, FINRA believes that transactions that a member can
demonstrate are related to other customer orders in the same security,
correct bona fide errors made in earlier transactions involving the
security, or offset other odd-lot orders in the security are generally
unrelated to the customer block order and therefore should be
permitted.
    The second category of permitted transactions involves [sic]
transactions that are undertaken to fulfill or facilitate the execution
of the customer block order. FINRA has acknowledged that firms are
permitted to trade ahead of a customer's block order when the purpose
of such trading is to fulfill the customer order and when the customer
has authorized such trading, including that the firm has disclosed to
the customer that it may trade ahead of, or alongside of, the
customer's order.\14\ Supplementary Material .04(b) thus makes clear
that Rule 5270 does not preclude transactions undertaken for the
purpose of fulfilling, or facilitating the execution of, a customer's
block order.\15\ However, when engaging in trading activity that could
affect the market for the security that is the subject of the customer
block order, the member must minimize any potential disadvantage or
harm in the execution of the customer's order, must not place the
member's financial interests ahead of those of its customer, and must
obtain the customer's consent to such trading activity. The
Supplementary Material provides that a member may obtain its customers'
consent through affirmative written consent or through means of a
negative consent letter. The negative consent letter must clearly
disclose to the customer the terms and conditions for handling the
customer's orders, and if the customer does not object, then the member
may reasonably conclude that the customer has consented and may rely on
the letter. In addition, a member may provide clear and comprehensive
oral disclosure to, and obtain consent from, the customer on an order-
by-order basis, provided the member documents who provided the consent
and such consent evidences the customer's understanding of the terms
and conditions for handling the customer's order.
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    \14\ See NASD Notice to Members 05-51 (August 2005); NASD Notice
to Members 97-57 (September 1997). Hedging and positioning activity
around a customer block order was discussed in coordinated guidance
published by both NASD and NYSE in 2005 with respect to volume-
weighted average price transactions. See NASD Notice to Members 05-
51 (August 2005); NYSE Information Memo 05-52 (August 2005).
    \15\ These transactions may include, for example, hedging or
other positioning activity undertaken in connection with the
handling of the customer order.
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    The third, and final, category of permitted transactions is
addressed in Supplementary Material .04(c) and concerns transactions
that are executed, in whole or in part, on a national securities
exchange and comply with the marketplace rules of that exchange. This
provision, which is being proposed in response to comments received
from exchanges, states that the prohibitions in Rule 5270 shall not
apply if the member's trading activity is undertaken in compliance with
the marketplace rules of a national securities exchange and at least
one leg of the trading activity is executed on that exchange.\16\ This
provision recognizes that it is not FINRA's intent to introduce
conflicts with other existing SRO rules.
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    \16\ See infra note 21.
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    Finally, FINRA is proposing to adopt Supplementary Material .05 to
the rule to reiterate that the front running of any customer order, not
just imminent block transactions, that places the financial interests
of the member ahead of those

of its customer or the misuse of knowledge of an imminent customer
order may violate other FINRA rules, including FINRA Rules 2010 and
5320, or the federal securities laws.\17\
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    \17\ Although ``not held'' orders are not subject to the
restrictions in FINRA Rule 5320, front running a ``not held'' order
that is not of block size may nonetheless violate FINRA Rule 2010.
See Securities Exchange Act Release No. 63895 (February 11, 2011),
76 FR 9386 (February 17, 2011). If the ``not held'' order is of
block size, the proposed rule change would apply to trading activity
ahead of the order.
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    FINRA 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 later
than 90 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,\18\ 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. The proposed rule change clarifies the types of front
running trading activity that FINRA believes are inconsistent with just
and equitable principles of trade while also ensuring that members may
continue to engage in transactions that do not present the risk of
abusive trading practices that the rule is intended to prevent. FINRA
believes that expanding the terms of the rule beyond options and
security futures will enhance the protection of customer orders by
addressing more directly within the rule other types of abusive trading
that may be intended to take advantage of customer orders. By
broadening the scope of prohibited trading activity addressed in the
rule, FINRA believes that imminent customer block orders will be better
protected and that the proposed rule change will prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and better protect investors and the public interest.
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    \18\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change also specifically identifies three
categories of trading activity that are permitted so that the expanded
rule will not hamper legitimate trading activity to the detriment of
customers, firms, or the market: Transactions that the member can
demonstrate are unrelated to the customer block order, transactions
that are undertaken to fulfill or facilitate the execution of the
customer block order, and transactions that are executed, in whole or
in part, on a national securities exchange and comply with the
marketplace rules of that exchange. FINRA believes that permitting the
trading activity in each of these three categories is consistent with
promoting just and equitable principles of trade and protecting
investors and the public interest and will not result in fraudulent and
manipulative acts and practices. As discussed in Section (a), FINRA
believes that transactions that the member can demonstrate are
unrelated to the customer block order do not present the potential for
abusive trading practices that can disadvantage a customer's order in
violation of the rule. FINRA believes that transactions that are
undertaken to fulfill or facilitate the execution of the customer block
order similarly do not present the potential for abuse the rule is
designed to prohibit but also will allow trading activity that can
enhance the execution of a customer block order, thus promoting just
and equitable principles of trade and protecting investors. Finally,
FINRA believes that permitting transactions that are executed, in whole
or in part, on a national securities exchange and comply with the
marketplace rules of that exchange is consistent with Section 15A(b)(6)
of the Act.\19\ The marketplace rules of the exchanges that may
otherwise conflict with the proposed rule change have been approved by
the Commission and found consistent with the Act. Consequently, FINRA
believes it promotes just and equitable principles of trade to permit
specific trading activity allowed under other approved SRO rules that
would otherwise be brought within the broader prohibitions of the
proposed rule change.
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    \19\ 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

    The proposed rule change was published for comment in Regulatory
Notice 08-83 (December 2008). FINRA received three comment letters in
response to the Regulatory Notice.\20\
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    \20\ Letter from International Association of Small Broker-
Dealers and Advisors (``IASBDA''), dated January 16, 2009; Letter
from Securities Industry and Financial Markets Association
(``SIFMA''), dated February 27, 2009; Letter from NYSE Regulation,
Inc. (``NYSER''), dated July 22, 2009.
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    One commenter, NYSER, agreed with FINRA's proposals in Regulatory
Notice 08-83 to broaden the scope of the rule by extending the
prohibitions to include trading in the same security as well as other
derivative securities and to add a consent provision for certain
hedging or positioning activities in relation to a customer order.
However, NYSER requested clarification on when information becomes
``publicly available'' under the proposed rule. Specifically, NYSER
wanted clarification regarding whether the proposed rule was intended
to apply to trading activity conducted in compliance with certain NYSE,
NYSE Arca, and NYSE Amex rules that permit trading based on information
related to imminent block transactions when the information has not yet
been disseminated via a last sale reporting system but, rather, has
entered the market in other ways (e.g., through gapped quotes or
disclosure to a trading crowd in the context of anticipatory hedging
with respect to options, which is permitted by rule by the options
exchanges).\21\
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    \21\ See NYSE Arca Rules 6.47A, 6.49(b); NYSE Amex Options Rules
934.3NY; 935NY. FINRA notes that other options exchanges also have
trading rules that may, in some scenarios, conflict with the
proposed rule change. See CBOE Rule 6.9(e).
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    By extending the front running prohibitions to explicitly cover
types of securities other than options and security futures, FINRA
intends to make clear that misusing material, non-public market
information concerning an imminent customer block order is
impermissible, regardless of the type of security that is the subject
of the order and/or the front running transaction. It is not FINRA's
intent to prohibit legitimate trading activity or to supersede other
existing SRO rules. Consequently, FINRA has amended the proposed rule
change and added a paragraph to the Supplementary Material regarding
permitted transactions to clarify that trading will not violate FINRA
Rule 5270 if such trading activity is permitted pursuant to the rules
of an exchange and at least one leg of the transaction is executed on
that exchange.
    In its comment letter, SIFMA raises a number of concerns regarding
the proposed changes. First, SIFMA opposes the proposed expansion of
the rule beyond equity securities or to non-publicly-reported block
trades because of the attenuated opportunity for firms to
inappropriately benefit from the

trade, absent dissemination, and the practical issues of when knowledge
of a non-reported block trade is ``stale and obsolete.'' FINRA
disagrees and believes that the front running rule should be broadened
to include all securities, including fixed income securities, and
related financial instruments. The primary issue the proposed rule
change is designed to address is straightforward: firms should not use
their knowledge of imminent block transactions to benefit themselves at
the expense of their customers. This fundamental obligation applies any
time a firm misuses this type of information to gain a benefit,
regardless of what specific securities or financial products are at
issue. Consequently, FINRA has proposed to make clear that front
running concerns are not limited to securities futures and options and
encompass the trading of any security or related financial instrument
under the circumstances outlined in the rule.
    FINRA recognizes, however, that because the terms of the front
running rule are broad, it could capture trading activity that should
otherwise be permitted. To balance this expansion, FINRA is also
proposing Supplementary Material .04 that lays out the types of trading
activity that would not violate the rule and would be permissible.\22\
The sole purpose of Supplementary Material .04 is to ensure that
appropriate trading activity not be prohibited by the breadth of the
rule. In response to comments by SIFMA, FINRA has modified portions of
proposed Supplementary Material .04 as discussed above.\23\
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    \22\ As noted above, Supplementary Material .04 would replace
the existing provisions in the Front Running Policy regarding
exceptions for transactions executed in automatic execution systems
and positioning activity when a member receives an order of block
size relating to both an option or security future and the
underlying security. Similarly, FINRA had proposed in its Regulatory
Notice an exception for riskless principal trades; however, this
exception is not separately included as it would fall within the
scope of Supplementary Material .04. FINRA believes that proposed
Supplementary Material .04 covers permissible trading activity under
the proposed rule change. Any trading activity that falls within the
current exceptions in the Front Running Policy would need to meet
one of the exceptions in the proposed Supplementary Material in
order to be excepted from the rule. See SIFMA.
    \23\ In addition to the modifications discussed above, FINRA has
removed the general exception for ```black box' orders where the
member has no actual knowledge that the customer order has been
routed for execution,'' which was proposed as part of Supplementary
Material .04 in Regulatory Notice 08-83. As discussed above in
footnote 12, automated systems may serve as a means by which orders
are handled and information regarding those orders is unavailable to
other trading units; however, FINRA believes that the use of an
automated system should not permit trading by those persons who may
know the terms of the order placed into the automated system.
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    SIFMA also requested that FINRA provide guidance and/or objective
standards concerning the scope of the term ``related financial
instrument.'' For example, SIFMA suggested a rebuttable presumption
with a more objective standard with respect to basket and index
transactions and noted that some financial instruments, such as
variable swaps and volatility swaps, are ``marginally linked to equity
securities'' and are ``sufficiently complex'' that it is ``virtually
impossible'' to determine on a trade-by-trade basis whether they would
be considered to be ``related financial instruments.''
    The proposed rule change defines a ``related financial instrument''
as ``any option, derivative, security-based swap, or other financial
instrument overlying a security, the value of which is materially
related to, or otherwise acts as a substitute for, such security, as
well as any contract that is the functional economic equivalent of a
position in such security.'' FINRA believes that the materiality
standard used in the proposed rule is a common and well-understood
standard in the securities industry. FINRA acknowledges SIFMA's
concerns about the increasing variety of financial products and the
complex nature of the relationships across products. It is for that
exact reason that FINRA believes a materiality standard is appropriate
and necessary in the context of the front running rule to ensure each
instrument and its impact across products is properly reviewed by
members and evaluated with respect to the potential for front running.
FINRA also notes that the proposed rule change would extend only to
those swaps that are security-based swaps.
    SIFMA also commented on the continued use of the term ``block
transaction'' in the proposed rule and recommended that FINRA replace
the definition of ``block transaction'' and focus instead on ``material
transactions.'' FINRA believes that the definition of ``block
transaction,'' coupled with the proposed new supplementary material
regarding non-block transactions, is sufficiently fluid to capture the
appropriate transactions. The definition of ``block transaction'' makes
clear that the 10,000-share threshold is not a strict standard and that
transactions involving fewer shares could be considered a block
transaction; moreover, a transaction more than 10,000 shares is only
``generally'' deemed to be a block transaction for purposes of the
rule. The addition of Supplementary Material .05 also clarifies that
the front running of other types of orders that may not be ``imminent
block transactions'' may nonetheless be considered conduct inconsistent
with just and equitable principles of trade and may violate other FINRA
rules or provisions of the federal securities laws because such
transactions may have violated the animating purpose of the rule that
firms should not use their knowledge of imminent customer orders to
benefit themselves.
    SIFMA also suggested amending the definition of ``customer'' for
purposes of the rule to exclude other institutions, such as banks and
unregistered affiliates of broker-dealers. SIFMA's underlying concern
is that a disclosure-based approach in the trading of OTC equity
derivatives is more appropriate given that the counter-parties in such
transactions are generally sophisticated institutional investors who
are, nonetheless, included in the general FINRA definition of
``customer'' since such investors are not broker-dealers.\24\ As an
initial matter, FINRA believes that the amendment suggested by SIFMA to
exclude banks, branches of foreign banks, or unregistered affiliates of
a broker-dealer from the definition of ``customer'' for purposes of the
rule is too broad. To exclude sophisticated institutional investors
from the definition of ``customer'' is inappropriate given the use of
the term throughout the rule for provisions that should include all
customers, including sophisticated investors (e.g., prohibiting a
member or an associated person of the member from providing material,
non-public market information to ``customers'' to allow them to trade
on the information). To address SIFMA's underlying concern regarding
the proposed rule change's potential impact on the trading of OTC
equity derivatives, FINRA notes that Supplementary Material .04
recognizes that certain trading can be affected provided the firm has
received its customer's consent, which can be through negative consent.
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    \24\ See FINRA Rule 0160(b)(4).
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    Two commenters also requested that FINRA provide guidance on the
knowledge standard in Supplementary Material .01, which provides that
the violative practices set forth in the rule ``may include
transactions that are executed based upon knowledge of less than all of
the terms of the block transaction, so long as there is knowledge that
all of the material terms of the transaction have been or will be
agreed upon imminently.'' \25\ This

provision, which remains substantively the same as the current standard
in the Front Running Policy, is intended to make clear that a member
need not know every detail of a potential block order for the front
running prohibitions to attach. As SIFMA noted, FINRA has provided
guidance in the past in the context of volume-weighted average price
transactions. For example, in NASD Notice to Members 05-51, FINRA
stated that a duty to refrain from trading may exist ``before a member
is awarded an order for execution [and] will turn on, among other
factors, the type of order and the specifics of the order known by the
member,'' which may include the security, the size of the order, the
side of the market, the weighting of a basket order, and the timing for
completion of the order. As this guidance recognizes, exactly when the
front running prohibitions may attach depends upon the facts and
circumstances of the communications between the member and its
customer.
---------------------------------------------------------------------------

    \25\ See IASBDA, SIFMA.
---------------------------------------------------------------------------

    Finally, SIFMA commented on the proposed rule change's potential
effects on the trading of OTC equity derivatives. SIFMA believes the
proposed rule change will require firms to substantially reorganize
their OTC equity derivatives operations to set up unwarranted
information barriers to accommodate their trading, given that customer-
facing OTC equity derivatives trading desks can be the same desks that
manage the risk of the firm's overall OTC equity derivatives book.
SIFMA asserts that the current regime of disclosure to sophisticated
customers and counterparties works well for OTC equity derivatives
(e.g., ISDA Master Agreements). FINRA does not believe that the
proposed rule change would necessitate the imposition of unwarranted
information barriers. FINRA believes that the provisions regarding
permitted transactions in proposed Supplementary Material .04, as
amended from the form proposed in Regulatory Notice 08-83 in response
to comments, are broad enough to exclude appropriate trading activity
from the scope of the rule, including trading activity that the member
can demonstrate is unrelated to the material, non-public market
information received in connection with an imminent customer block
order.

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<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2012-025 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-2012-025. 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 the Exchange. 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-2012-025 and should be
submitted on or before June 27, 2012.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13638 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: July 2, 2008 (Volume 73, Number 128)]
[Proposed Rules]
[Page 37900-37903]
[DOCID:fr02jy08-46]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2008-0731; Directorate Identifier 2008-NM-058-AD]
RIN 2120-AA64

Airworthiness Directives; Boeing Model 747-100, 747-100B, 747-
100B SUD, 747-200B, 747-200C, 747-200F, 747-300, 747-400, 747-400D,
747-400F, 747SR, and 747SP Series Airplanes

AGENCY: Federal Aviation Administration (FAA), Department of
Transportation (DOT).

ACTION: Notice of proposed rulemaking (NPRM).

-----------------------------------------------------------------------

SUMMARY: The FAA proposes to supersede an existing airworthiness
directive (AD) that applies to all Boeing Model 747 series airplanes.
The existing AD currently requires repetitive detailed inspections of
the aft pressure bulkhead for indications of ``oil cans'' and previous
oil can repairs, and corrective actions, if necessary. An oil can is an
area on a pressure dome web that moves when pushed from the forward
side. This proposed AD would reduce the compliance time for the initial
detailed inspection and clarify the applicability. This proposed AD
results from a report that cracks in oil-canned areas were found during
an inspection of the aft pressure bulkhead. We are proposing this AD to
detect and correct the propagation of fatigue cracks in the vicinity of
oil cans on the web of the aft pressure bulkhead, which could result in
rapid decompression of the airplane and overpressurization of the tail
section, and consequent loss of control of the airplane.

DATES: We must receive comments on this proposed AD by August 18, 2008.

ADDRESSES: You may send comments by any of the following methods:
     Federal eRulemaking Portal: Go to http://
www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590.
     Hand Delivery: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590, between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal holidays.
    For service information identified in this AD, contact Boeing
Commercial Airplanes, P.O. Box 3707, Seattle, Washington 98124-2207.

Examining the AD Docket

    You may examine the AD docket on the Internet at http://
www.regulations.gov; or in person at the Docket Management Facility
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays. The AD docket contains this proposed AD, the regulatory
evaluation, any comments received, and other information. The street
address for the Docket Office (telephone<PHONE_NUMBER>) is in the
ADDRESSES section. Comments will be available in the AD docket shortly
after receipt.

FOR FURTHER INFORMATION CONTACT: Ivan Li, Aerospace Engineer, Airframe
Branch, ANM-120S, FAA, Seattle Aircraft Certification Office, 1601 Lind
Avenue, SW., Renton, Washington 98057-3356; telephone<PHONE_NUMBER>;
fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposed AD. Send your comments to an address
listed under the ADDRESSES section. Include ``Docket No. FAA-2008-0731;
Directorate Identifier 2008-NM-058-AD'' at the beginning of your
comments. We specifically invite comments on the overall regulatory,
economic, environmental, and energy aspects of this proposed AD. We
will consider all comments received by the closing date and may amend
this proposed AD because of those comments.
    We will post all comments we receive, without change, to http://
www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this proposed AD.

Discussion

    On July 30, 2004, we issued AD 2004-16-09, amendment 39-13765 (69
FR 48133, August 9, 2004), for all Boeing Model 747 series airplanes.
That AD requires repetitive detailed inspections of the aft pressure
bulkhead for indications of ``oil cans'' and previous oil can repairs,
and corrective actions, if necessary. An oil can is an area on a
pressure dome web that moves when pushed from the forward side. That AD
resulted from a report indicating that a 2.1-inch long crack in the web
of the aft pressure bulkhead at the perimeter of an ``oil can'' was
found on a Model 747SR series airplane. We issued that AD to detect and
correct the propagation of fatigue cracks in the vicinity of oil cans
on the web of the aft pressure bulkhead, which could result in rapid
decompression of the airplane and overpressurization of the tail
section, and consequent loss of control of the airplane.

Actions Since Existing AD Was Issued

    Since we issued AD 2004-16-09, we received a report that 9 cracks
(up to 0.4-inch long in 2 oil-canned areas) were found during an
inspection on the aft pressure bulkhead of a Model 747-200F series
airplane with about 21,000 total flight cycles. Boeing recommends
reducing the initial inspection threshold (required in paragraph (b) of
AD 2004-16-09) from 30,000 total flight cycles to 20,000 total flight
cycles.

Relevant Service Information

    We have reviewed Boeing Alert Service Bulletin 747-53A2482,
Revision 1, dated February 21, 2008. The service bulletin describes
procedures that are the same as in Boeing Alert Service Bulletin 747-
53A2482, dated October 3, 2002, except for a reduction in a compliance
time and some editorial changes. Revision 1 of the service bulletin
also specifies contacting Boeing for repair data if any crack is found
during a detailed inspection of any previous ``oil can'' repair.

FAA's Determination and Requirements of the Proposed AD

    We have evaluated all pertinent information and identified an
unsafe condition that is likely to develop on other airplanes of the
same type design. For this reason, we are proposing this AD, which
would supersede AD 2004-16-09 and would retain the requirements of the
existing AD. This proposed AD would also require accomplishing the
actions specified in the service bulletin described previously at a
reduced threshold, except as discussed under ``Differences Between the
Proposed AD and Revision 1 of the Service Bulletin.''

Differences Between the Proposed AD and Revision 1 of the Service
Bulletin

    The service bulletin specifies to contact the manufacturer for
instructions on how to repair certain conditions, but this proposed AD
would require repairing those conditions in one of the following ways:
     Using a method that we approve; or
     Using data that meet the certification basis of the
airplane, and that have been approved by an Authorized Representative
for the Boeing Commercial Airplanes Delegation Option Authorization
Organization whom we have authorized to make those findings.
    We have revised paragraph (g) of AD 2004-16-09 to allow repairs in
accordance with data that conforms to an airplane's type certificate
and that are approved by an Authorized Representative for the Boeing
Commercial Airplanes Delegation Option Authorization Organization whom
we have authorized to make such findings.

Change to Existing AD

    This proposed AD would retain all requirements of AD 2004-16-09.
Since AD 2004-16-09 was issued, the AD format has been revised, and
certain paragraphs have been rearranged. As a result, the corresponding
paragraph identifiers have changed in this proposed AD, as listed in
the following table:

                      Revised Paragraph Identifiers
------------------------------------------------------------------------
                                            Corresponding requirement in
       Requirement in AD 2004-16-09               this proposed AD
------------------------------------------------------------------------
paragraph (a).............................  paragraph (f).
paragraph (b).............................  paragraph (g).
paragraph (c).............................  paragraph (h).
paragraph (d).............................  paragraph (i).
paragraph (e).............................  paragraph (j).
paragraph (f).............................  paragraph (k).
paragraph (g).............................  paragraph (l).
------------------------------------------------------------------------

    The cost information specified in AD 2004-16-09 inadvertently
contained information on on-condition inspections. The cost
information, below, has been revised to state only the work hours
necessary for the initial and repetitive inspections specified in
paragraph (g) of this proposed AD.

Costs of Compliance

    There are about 917 airplanes of the affected design in the
worldwide fleet.

This proposed AD would affect about 165 airplanes of U.S. registry.
    The actions that are required by AD 2004-16-09 and retained in this
proposed AD take about 2 work hours per airplane, at an average labor
rate of $80 per work hour. Based on these figures, the estimated cost
of the currently required actions to the U.S. operators is $26,400, or
$160 per airplane, per inspection cycle.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, Section 106, describes the
authority of the FAA Administrator. Subtitle VII, Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701, ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.

Regulatory Findings

    We have determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify that the proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979); and
    3. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.
    We prepared a regulatory evaluation of the estimated costs to
comply with this proposed AD and placed it in the AD docket. See the
ADDRESSES section for a location to examine the regulatory evaluation.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

    1. The authority citation for part 39 continues to read as follows:

    Authority: 49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

    2. The Federal Aviation Administration (FAA) amends Sec.  39.13 by
removing amendment 39-13765 (69 FR 48133, August 9, 2004) and adding
the following new airworthiness directive (AD):

Boeing: Docket No. FAA-2008-0731; Directorate Identifier 2008-NM-
058-AD.

Comments Due Date

    (a) The FAA must receive comments on this AD action by August
18, 2008.

Affected ADs

    (b) This AD supersedes AD 2004-16-09.

Applicability

    (c) This AD applies to all Boeing Model 747-100, 747-100B, 747-
100B SUD, 747-200B, 747-200C, 747-200F, 747-300, 747-400, 747-400D,
747-400F, 747SR, and 747SP series airplanes, certificated in any
category.

Unsafe Condition

    (d) This AD results from a report that cracks in oil-canned
areas were found during an inspection of the aft pressure bulkhead.
We are issuing this AD to detect and correct the propagation of
fatigue cracks in the vicinity of oil cans on the web of the aft
pressure bulkhead, which could result in rapid decompression of the
airplane and overpressurization of the tail section, and consequent
loss of control of the airplane.

Compliance

    (e) You are responsible for having the actions required by this
AD performed within the compliance times specified, unless the
actions have already been done.

    Note 1: This AD refers to certain portions of a Boeing service
bulletin for inspections and repair information. In addition, this
AD specifies requirements beyond those included in the service
bulletin. Where the AD and the service bulletin differ, the AD
prevails.

Service Bulletin References

    (f) The term ``service bulletin,'' as used in this AD, means the
Accomplishment Instructions of Boeing Alert Service Bulletin 747-
53A2482, dated October 3, 2002; or Boeing Alert Service Bulletin
747-53A2482, Revision 1, dated February 21, 2008. After the
effective date of this AD, Revision 1 must be used.

Requirements of AD 2004-16-09, With Reduced Threshold

Initial and Repetitive Inspections

    (g) At the earlier of the times specified in paragraphs (g)(1)
and (g)(2) of this AD, perform a detailed inspection of the aft
pressure bulkhead for indications of oil cans and previous oil can
repairs, in accordance with the service bulletin.
    (1) Prior to the accumulation of 30,000 total flight cycles, or
within 1,000 flight cycles after September 13, 2004 (the effective
date of AD 2004-16-09), whichever is later.
    (2) Prior to the accumulation of 20,000 total flight cycles, or
within 1,000 flight cycles after the effective date of this AD,
whichever occurs later.

    Note 2: For the purposes of this AD, a detailed inspection is
``an intensive examination of a specific item, installation, or
assembly to detect damage, failure, or irregularity. Available
lighting is normally supplemented with a direct source of good
lighting at an intensity deemed appropriate. Inspection aids such as
mirrors, magnifying lenses, etc. may be necessary. Surface cleaning
and elaborate procedures may be required.''

    (h) If no indication of an oil can is found and no indication of
a previous oil can repair is found during the detailed inspection
required by paragraph (g) of this AD, repeat the detailed inspection
thereafter at intervals not to exceed 2,000 flight cycles.

Indication of Oil Can

    (i) If any indication of an oil can is found during the detailed
inspection required by paragraph (g) or (h) of this AD, before
further flight, perform an eddy current inspection of the web around
the periphery of the oil can indication for cracks, as shown in
Figure 3 of the service bulletin.
    (j) If no crack is found during the eddy current inspection
required by paragraph (i) of this AD, do the actions specified in
paragraph (j)(1) or (j)(2) of this AD, as applicable.
    (1) For the oil can that meets the allowable limits specified in
the service bulletin: Repeat the eddy current inspection specified
in paragraph (i) of this AD thereafter at intervals not to exceed
1,000 flight cycles. As an option, repair the oil can in accordance
with paragraph (j)(2) of this AD.
    (2) For the oil can that does not meet the allowable limits
specified in the service bulletin: Before further flight, repair the
oil can in accordance with the service bulletin. If the repair
eliminates the oil can, accomplishment of this repair constitutes
terminating action for the repetitive eddy current inspection
requirements of paragraph (j)(1) of this AD for that location only.
However, the repetitive detailed inspection required by paragraph
(h) of this AD is still required. If any oil can remains after the
repair, repeat the eddy current inspection specified in paragraph
(i) of this AD thereafter at intervals not to exceed 1,000 flight
cycles.

Indication of Previous Oil Can Repairs

    (k) If any previous oil can repair is found during the detailed
inspection required by paragraph (g) or (h) of this AD, before
further flight, do a detailed inspection of the web for cracks and
oil cans, as shown in Figure 4 or Figure 5 of the service bulletin,
as applicable.
    (1) If no crack and no oil can are found, repeat the detailed
inspection in accordance with paragraph (h) of this AD.
    (2) If any oil can is found, before further flight, do the eddy
current inspection for cracks, as shown in Figure 3 of the service
bulletin. If no crack is found during the eddy current inspection
required by this paragraph, do the actions specified in paragraph
(j)(1) or (j)(2) of this AD, as applicable, at the time specified in
the applicable paragraph.

Repair of Cracks

    (l) If any crack is found during any inspection required by this
AD, before further flight, repair in accordance with the service
bulletin. If any crack or damage exceeds limits specified in the
service bulletin and the service bulletin specifies to contact
Boeing for appropriate action: Before further flight, repair per a
method approved by the Manager, Seattle Aircraft Certification
Office (ACO), FAA; or per data meeting the type certification basis
of the airplane approved by a Boeing Company Designated Engineering
Representative who has been authorized by the Manager, Seattle ACO,
to make such findings; or using a method approved in accordance with
the procedures specified in paragraph (n) of this AD. For a repair
method to be approved, the approval must specifically reference this
AD.

New Requirements of This AD

    (m) As of the effective date of this AD, if any crack or damage
is found during any inspection required by this AD, and Boeing Alert
Service Bulletin 747-53A2482, Revision 1, dated February 21, 2008,
specifies to contact Boeing for appropriate action (repair data):
Before further flight, repair the crack or damage using a method
approved in accordance with the procedures specified in paragraph
(n) of this AD.

Alternative Methods of Compliance (AMOCs)

    (n)(1) The Manager, Seattle Aircraft Certification Office, FAA,
has the authority to approve AMOCs for this AD, if requested in
accordance with the procedures found in 14 CFR 39.19.
    (2) To request a different method of compliance or a different
compliance time for this AD, follow the procedures in 14 CFR 39.19.
Before using any approved AMOC on any airplane to which the AMOC
applies, notify your appropriate principal inspector (PI) in the FAA
Flight Standards District Office (FSDO), or lacking a PI, your local
FSDO.
    (3) An AMOC that provides an acceptable level of safety may be
used for any repair required by this AD, if it is approved by an
Authorized Representative for the Boeing Commercial Airplanes
Delegation Option Authorization Organization who has been authorized
by the Manager, Seattle ACO, to make those findings. For a repair
method to be approved, the repair must meet the certification basis
of the airplane.
    (4) AMOCs approved previously in accordance with AD 2004-16-09
are not approved as AMOCs for the corresponding provisions of
paragraph (g) of this AD. They are approved as AMOCs for the
corresponding provisions of paragraphs (h), (i), (j), (k), (l), and
(m) of this AD.

    Issued in Renton, Washington, on June 24, 2008.
Ali Bahrami,
Manager, Transport Airplane Directorate, Aircraft Certification
Service.
 [FR Doc. E8-14974 Filed 7-1-08; 8:45 am]

BILLING CODE 4910-13-P


[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Proposed Rules]
[Pages 18255-18257]
[FR Doc No: 2013-06843]

=======================================================================
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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2013-0130; Directorate Identifier 2013-NE-07-AD]
RIN 2120-AA64

Airworthiness Directives; Hartzell Propeller, Inc. Propellers

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking (NPRM).

-----------------------------------------------------------------------

SUMMARY: We propose to adopt a new airworthiness directive (AD) for
Hartzell Propeller, Inc. propeller models HC-(1, D)2(X, V, MV)20-7, HC-
(1, D)2(X, V, MV)20-8 and HC-(1, D)3(X, V, MV)20-8. This proposed AD
was prompted by failures of the propeller hydraulic bladder diaphragm
and resulting engine oil leak. This proposed AD would require
replacement of the propeller hydraulic bladder diaphragm. We are
proposing this AD to prevent propeller hydraulic bladder diaphragm
rupture, loss of engine oil, damage to the engine, and loss of the
airplane.

DATES: We must receive comments on this proposed AD by May 28, 2013.

ADDRESSES: You may send comments, using the procedures found in 14 CFR
11.43 and 11.45, by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue SE., Washington, DC 20590.
     Hand Delivery: Deliver to Mail address above between 9
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
    For service information identified in this proposed AD, contact
Hartzell Propeller, Inc., 1 Propeller Place, Piqua, OH 45356; phone:
937-778-4200; email<EMAIL_ADDRESS>You may view this
service information at the FAA, 12 New England Executive Park,
Burlington, MA. For information on the availability of this material at
the FAA, call<PHONE_NUMBER>.

Examining the AD Docket

    You may examine the AD docket on the Internet at http://www.regulations.gov; or in person at the Docket Management Facility
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays. The AD docket contains this proposed AD, the regulatory
evaluation, any comments received, and other information. The street
address for the Docket Office (phone:<PHONE_NUMBER>) is in the ADDRESSES
section. Comments will be available in the AD docket shortly after
receipt.

FOR FURTHER INFORMATION CONTACT: Mark Grace, Aerospace Engineer,
Chicago Aircraft Certification Office, FAA, Propulsion Branch, 2300 E.
Devon Avenue, Des Planes, IL 60018; phone:<PHONE_NUMBER>; fax: 847-294-
7834; email<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposal. Send your comments to an address listed
under the ADDRESSES section. Include ``Docket No. FAA-2013-0130;
Directorate Identifier 2013-NE-07-AD'' at the beginning of your
comments. We specifically invite comments on the overall regulatory,
economic, environmental, and energy aspects of this proposed AD. We
will consider all comments received by the closing date and may amend
this proposed AD because of those comments.
    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this proposed AD.

Discussion

    We received a report of Hartzell propeller failures of the variable
pitch

propeller hydraulic bladder diaphragm, part number (P/N) B-119-2,
without tab, resulting in engine oil leakage. The variable pitch
propeller control mechanism uses engine oil as a hydraulic fluid.
Failure of this bladder diaphragm results in engine oil loss with oil
covering the airplane windshield and may lead to uncommanded loss of
engine power. This condition, if not corrected, could result in loss of
engine oil, damage to the engine, and loss of the airplane.

Relevant Service Information

    We reviewed Hartzell Alert Service Bulletin (ASB) HC-ASB-61-338,
Revision 1, dated December 18, 2012. The ASB lists the propeller hub
models that are affected and describes procedures for replacement of
propeller hydraulic bladder diaphragm with a new propeller hydraulic
bladder diaphragm, P/N B-119-2, with tab.
    Hartzell Propeller has redesigned bladder diaphragm, P/N B-119-2,
to include a tab containing the bladder diaphragm batch/lot number. The
tab with batch/lot number is visible after installation. The old design
bladder diaphragm, P/N B-119-2 has no such tab.

FAA's Determination

    We are proposing this AD because we evaluated all the relevant
information and determined the unsafe condition described previously is
likely to exist or develop in other products of the same type design.

Proposed AD Requirements

    This proposed AD would require removing the old propeller hydraulic
bladder diaphragm and replacing it with the redesigned part.

Differences Between the Proposed AD and the Service Information

    Hartzell ASB HC-ASB-61-338, Revision 1, dated December 18, 2012,
recommends replacement of all affected bladder diaphragms within 10
flight hours. This proposed AD would require replacement of affected
bladder diaphragms within 12 months of the effective date of the AD.
FAA risk analysis determined the 12 month period for compliance is
acceptable.

Costs of Compliance

    We estimate that this proposed AD would affect about 400 propellers
installed on airplanes of U.S. registry. We also estimate that it would
take about 4 hours per propeller to replace the bladder diaphragm. The
average labor rate is $85 per hour. We estimate parts costs at $53 per
engine. Based on these figures, we estimate the cost of the proposed AD
on U.S. operators to be $157,200. Our cost estimate is exclusive of
possible warranty coverage.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. Subtitle VII: Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701: ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.

Regulatory Findings

    We determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify this proposed
regulation:
    (1) Is not a ``significant regulatory action'' under Executive
Order 12866,
    (2) Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979),
    (3) Will not affect intrastate aviation in Alaska to the extent
that it justifies making a regulatory distinction, and
    (4) Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

0
Accordingly, under the authority delegated to me by the Administrator,
the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

0
2. The FAA amends Sec.  39.13 by adding the following new airworthiness
directive (AD):

Hartzell Propeller, Inc.: Docket No. FAA-2013-0130; Directorate
Identifier 2013-NE07-AD.

(a) Comments Due Date

    We must receive comments by May 28, 2013.

(b) Affected ADs

    None.

(c) Applicability

    This AD applies to Hartzell Propeller, Inc. propeller models HC-
(1, D)2(X, V, MV)20-7, HC-(1, D)2(X, V, MV)20-8 and HC-(1, D)3(X, V,
MV)20-8 with a propeller hydraulic bladder diaphragm, part number
(P/N) B-119-2, without tab, installed.

(d) Unsafe Condition

    This AD was prompted by failures of the propeller hydraulic
bladder diaphragm and resulting engine oil leak. We are issuing this
AD to prevent propeller hydraulic bladder diaphragm rupture, loss of
engine oil, damage to the engine, and loss of the airplane.

(e) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(f) Bladder Diaphragm Replacement

    (1) Within 12 months after the effective date of this AD, remove
from service the propeller hydraulic bladder diaphragm, P/N B-119-2,
without tab.
    (2) Install a redesigned propeller hydraulic bladder diaphragm,
P/N B-119-2, with tab. The bladder diaphragm, eligible for
installation, is identified by a tab with a batch/lot number. The
tab is visible after installation and confirms the installation of
the proper redesigned propeller hydraulic bladder diaphragm, P/N B-
119-2, with tab, in the Hartzell propeller assembly.

(g) Installation Prohibition

    After the effective date of this AD, do not install into any
engine any hydraulic bladder diaphragm, P/N B-119-2, that is without
tab.

(h) Alternative Methods of Compliance (AMOCs)

    The Manager, Chicago Aircraft Certification Office, FAA, may
approve AMOCs for this AD. Use the procedures found in 14 CFR 39.19
to make your request.

(i) Related Information

    (1) For more information about this AD, contact Mark Grace,
Aerospace Engineer, Chicago Aircraft Certification Office, FAA, 2300
E. Devon Ave., Des Plaines, IL 60018;

phone:<PHONE_NUMBER>; fax:<PHONE_NUMBER>; email<EMAIL_ADDRESS>    (2) For service information identified in this AD, contact
Hartzell Propeller Inc., 1 Propeller Place, Piqua, OH 45356-2634;
phone:<PHONE_NUMBER>; fax:<PHONE_NUMBER>; email:
<EMAIL_ADDRESS>You may view this service information
at the FAA, 12 New England Executive Park, Burlington, MA. For
information on the availability of this material at the FAA, call
781-238-7125.

    Issued in Burlington, Massachusetts, on March 19, 2013.
Colleen M. D'Alessandro,
Assistant Manager, Engine & Propeller Directorate, Aircraft
Certification Service.
[FR Doc. 2013-06843 Filed 3-25-13; 8:45 am]
BILLING CODE 4910-13-P


[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14063-14065]
[FR Doc No: 2017-05224]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80217; File No. SR-NASDAQ-2017-021]

Self-Regulatory Organizations; NASDAQ Stock Market, LLC; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Chapter X, Section 7(a) of the Exchange's Options Rules

March 10, 2017.
    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 March 6, 2017, NASDAQ Stock Market, LLC (the ``Exchange'') 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 the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Chapter X, Section 7(a) of the
Exchange's Rules applicable to the NASDAQ Options Market, LLC
(``NOM''), as described in further detail below.
    The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, 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, the Exchange 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. The Exchange 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
    The purpose of the proposed rule change is to amend Chapter X,
Section 7(a) of the Exchange's rules (the ``Rules'') applicable to NOM,
which sets forth NOM's minor rule violation penalties and in
particular, penalties for violating Chapter III, Section 7 of the Rules
pertaining to position limits, so that these penalties are consistent
with those of NOM's sister exchange, the International Securities
Exchange, LLC (``ISE''), as well as other competing options exchanges.
    Chapter III, Section 7 of the Exchange's Rules imposes position
limits for Options Participants in certain circumstances. Meanwhile,
Chapter X, Section 7(a) of the Rules assesses fines for minor rule
violations, including position limits violations, as follows.
    First, for violations occurring in customer accounts, Section
7(a)(i) assesses fines based upon the cumulative number of violations
that occur over the course of a two year rolling period. For the first
six violations that occur during any such period, an Option Participant
will either be issued a letter of caution (to the extent that the
violations are up to five percent in excess of applicable limits) or
assessed $1 per contract (to the extent that the violations are more
than five percent in excess of applicable limits). For the seventh
through twelfth violations that occur during any such period, the fine
is $1 per contract over the limit, regardless of the extent of the
violations. Finally, for the thirteenth or any additional violations
that occur during any such period, the fine increases to $5 per
contract over the limit. Notwithstanding the above, the Rule provides
that the minimum fine that the Exchange shall assess is $100.
    Second, for violations that occur in the accounts of Options
Participants (i.e., proprietary accounts and accounts of other Options
Participants), Section 7(a)(ii) again assesses fines based upon the
cumulative number of violations that occur over the course of a two
year rolling period. For the first three violations that occur in any
such period, an Option Participant will either be assessed a letter of
caution (to the extent that the violations are up to five percent in
excess of applicable limits) or $1 per contract (to the extent that the
violations are more than five percent in excess of applicable limits).
For the fourth through the sixth violations that occur during any such
period, the fine is $1 per contract over the limit, regardless of the
extent of the violations. Finally, for the seventh or any additional
violations that occur during any such period, the fine increases to $5
per contract over the limit. Notwithstanding the above, the Rule
provides that the minimum fine that the Exchange shall assess is $100.
    The Exchange proposes to replace NOM's schedule of fines for
position limit violations to mirror the schedule of fines that ISE and
other exchanges apply to such violations. The ISE schedule of position
limits fines set forth in ISE Rule 1614(d)(1) is simpler and, in
certain instances, more stringent than the NOM schedule of fines. It
provides that for any cumulative violations of the ISE position limits
rule \3\ that occur during any rolling two year period, ISE assesses a
fine of $500 for the first offense, $1,000 for the second offense,
$2,500 for the third offense, and $5,000 for the fourth and each
subsequent offense. The ISE rule is identical to that which several
other exchanges employ.\4\ The proposed rule change conforms the fine
schedule of NOM to that of ISE.
---------------------------------------------------------------------------

    \3\ ISE Rule 1614(d)(1) counts as a single violation, provided
that such a violation is inadvertent: (i) A 1 trade date overage;
(ii) a consecutive string of trade date overage violations where the
position does not change or where a steady reduction in the overage
occurs; or (iii) a consecutive string of trade date overage
violations resulting from other mitigating circumstances.
    \4\ See BATS BZX Exchange, Inc. Rule 25.3(a); C2 Options
Exchange Rule Chapter 17 (incorporating by reference CBOE Rule
17.50(g)(1); see also NYSE Arca, Inc. Rule 10.12(k)(i)(21) (imposing
fines of $1,000, $2,500, and $5,000 for the first, second, and third
violations, respectively while omitting corresponding verbiage that
defines the nature of a single violation subject to a fine).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\5\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\6\ in particular, 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
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that its proposed Rule change will be more
effective than the existing Rule in preventing manipulative acts and
practices and protecting investors because under the proposed Rule, the
Exchange will immediately impose a fine upon an Options Participant
that violates its position limits, and it will do so regardless of the
extent of the violation, as opposed to only imposing a fine (rather
than a caution letter) after the first six violations or to the extent
that a violation exceeds 5 percent of the applicable limits.
    Moreover, the proposed Rule change promotes fairness and
consistency in the marketplace by harmonizing penalties across
exchanges for the same conduct. As noted above, the proposed schedule
of fines would be identical to the schedules of fines that ISE, BATS
BZX, and C2 Options Exchange presently employ, and similar to that
which NYSE Arca employs.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposal will adopt the
same schedule of fines as exists at other exchanges and it will apply
the same schedule of fines to all Options Participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \7\ and Rule 19b-4(f)(6) thereunder.\8\
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 and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \8\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) under the Act
\9\ normally does not become operative prior to 30 days after the date
of the filing. However, pursuant to Rule 19b-4(f)(6)(iii),\10\ the
Commission may designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative upon filing. The Exchange has stated
that it is requesting this waiver so that it may implement the proposed
rule change at the earliest point in time possible. The Exchange
further stated that the proposed rule change promotes the protection of
investors and the public interest by imposing more immediate and
significant sanctions for violations of Exchange rules.
---------------------------------------------------------------------------

    \9\ Id.
    \10\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
The Commission notes that the proposal harmonizes the Exchange's
schedule of fines with respect to position limit violations with fines
currently imposed by other exchanges, and thus does not raise any new
or novel issues. For this reason, the Commission hereby waives the 30-
day operative delay requirement and designates the proposed rule change
as operative upon filing.\11\
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    \11\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \12\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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_ADDRESS>Please include
File Number SR-NASDAQ-2017-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2017-021. 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 the Exchange. 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-NASDAQ-2017-021, and should
be submitted on or before April 6, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05224 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P