[Federal Register Volume 74, Number 220 (Tuesday, November 17, 2009)]
[Notices]
[Pages 59272-59275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-27463]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60960; File No. SR-FINRA-2009-061]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change, and
Amendment No. 1 Thereto, To Require Members To Report OTC Transactions
in Equity Securities Within 30 Seconds of Execution
November 6, 2009.
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 September 16, 2009, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') a proposed rule change SR-FINRA-2009-061 as
described in Items I, II, and III below, which Items have been prepared
by FINRA. On October 30, 2009, FINRA filed Amendment No. 1 to the
proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, 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 amend FINRA trade reporting rules to (1)
Require that members report over-the-counter (``OTC'') equity
transactions \3\ to FINRA within 30 seconds of execution; (2) require
that members report secondary market transactions in non-exchange-
listed direct participation program (``DPP'') securities to FINRA
within 30 seconds of execution; and (3) make certain conforming changes
to the rules
[[Page 59273]]
relating to the OTC Reporting Facility (``ORF'').
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\3\ Specifically, OTC equity transactions are: (1) transactions
in NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS,
effected otherwise than on an exchange, which are reported through
the Alternative Display Facility (``ADF'') or a Trade Reporting
Facility (``TRF''); and (2) transactions in ``OTC Equity
Securities,'' as defined in FINRA Rule 6420 (e.g., OTC Bulletin
Board and Pink Sheets securities), which are reported through the
OTC Reporting Facility (``ORF''). The ADF, TRFs and ORF are
collectively referred to herein as the ``FINRA Facilities.''
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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
30-Second Reporting Requirement
Under FINRA trade reporting rules, members generally must report
OTC equity transactions that are executed during the hours that the
FINRA Facilities are open within 90 seconds of execution.\4\ Last sale
information for such trades is publicly disseminated on a real-time
basis. There are certain limited exceptions to this general
requirement, including for trades in non-exchange-listed DPP
securities, as discussed below.\5\ The 90-second reporting requirement
has been in effect since 1982, when OTC trading was more manual in
nature. As trading has become increasingly automated, however, the vast
majority of trades are now reported in a much shorter period of time.
For example, during the period of February 23 through February 27,
2009, overall member compliance with the current 90-second reporting
requirement was 99.95% (for all trades submitted to a FINRA Facility
for public dissemination), and 99.90% of trades were reported in 30
seconds or less.
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\4\ See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and
6622(a).
\5\ Additionally, FINRA notes that transactions in PORTAL
securities, as defined in FINRA Rule 6631, are not subject to the
90-second reporting requirement, but must be reported to the ORF by
the end of the day. See FINRA Rule 6633.
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FINRA is proposing to amend the trade reporting rules to require
that members report OTC equity transactions to FINRA within 30 seconds
of execution. Specifically, the trade reporting rules would be amended
to replace the references to 90 seconds with 30 seconds.\6\ Trades not
reported within 30 seconds, unless expressly subject to a different
reporting requirement or excluded from the trade reporting rules
altogether, would be late. Although members would have 30 seconds to
report, FINRA reiterates that--as is the case today--members must
report trades as soon as practicable and cannot withhold trade reports,
e.g., by programming their systems to delay reporting until the last
permissible second.
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\6\ See FINRA Rules 6282(a); 6380A(a) and (g); 6380B(a) and (f);
6622(a) and (f); 7130(b); 7230A(b); 7230B(b); and 7330(b).
FINRA also is proposing to amend FINRA Rules 6181 and 6623 to
replace the reference to 90 seconds with a more general reference to
``the required time period'' to clarify that these provisions also
apply to trades that are subject to a different reporting
requirement (e.g., certain trades executed outside normal market
hours).
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Because of the automated nature of trade reporting today, FINRA
believes that in the vast majority of circumstances members should have
no difficulty complying with the proposed 30-second reporting
requirement. However, to better understand the potential limitations
some members may face, FINRA is requesting that the SEC solicit
comments specifically on whether there are any categories of trades
(e.g., trades that are manual in nature) or any firm structures (e.g.,
smaller firms that may not have automated systems for trade reporting)
that may justify a longer reporting time frame under FINRA rules.\7\
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\7\ FINRA notes that smaller firms that route their orders to
another member firm for handling or execution do not have the trade
reporting obligation under the ``executing party'' trade reporting
structure that became effective on August 3, 2009. For transactions
between members, the ``executing party'' (which is defined as the
member that receives an order for handling or execution or is
presented an order against its quote, does not subsequently re-route
the order, and executes the transaction) has the obligation to
report the trade to FINRA. See Regulatory Notice 09-08 (January
2009).
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FINRA believes that the proposed rule change will promote
consistent and timely reporting by all members and enhance market
transparency and price discovery by ensuring that trades are
disseminated closer in time to execution. Timely reporting has become
even more critical with the implementation of Regulation NMS. A delay
in the reporting and dissemination of a transaction could potentially
appear to other market participants as a violation of the Regulation
NMS Order Protection Rule; if a trade is not reported and disseminated
until a full 90 seconds after execution, the best displayed market
could have changed between the time of execution and ultimate
dissemination of the trade. Additionally, the proposed rule change will
ensure that members do not withhold important market information from
investors and other market participants for competitive or other
improper reasons.\8\
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\8\ FINRA reiterates the importance of timely reporting and
reminds members that a pattern and practice of late reporting may be
considered inconsistent with high standards of commercial honor and
just and equitable principles of trade in violation of FINRA Rule
2010.
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Reporting Requirements Applicable to Trades in Non-Exchange-Listed DPP
Securities
Pursuant to FINRA Rule 6643(a)(1), members are required to report
trades in non-exchange-listed DPP securities to the ORF by 1:30 p.m.
Eastern Time on the next business day (T+1) after the date of
execution; members that have the operational capability to report
transactions within 90 seconds of execution may do so at their option.
Transaction information for such trades is not disseminated on a real-
time trade-by-trade basis, but is included in end-of-day summary
information disseminated twice daily. By contrast, under FINRA rules,
OTC trades in exchange-listed DPP securities are reported to a TRF or
the ADF and are subject to the 90-second reporting requirement (just
like any other OTC trade in an NMS stock).\9\ The inconsistency in the
reporting and dissemination of DPPs can create confusion for market
participants, especially when an exchange-listed DPP is delisted and
dissemination of trading in the security goes from real-time to only
twice daily.
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\9\ See FINRA Rules 6282(a), 6380A(a) and 6380B(a).
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FINRA is proposing to amend the trade reporting rules to require
that transactions in non-exchange-listed DPP securities be reported
within 30 seconds of execution to conform to the reporting requirements
applicable to other OTC transactions, including those in exchange-
listed DPP securities. Specifically, the proposed rule change would
delete the FINRA Rule 6640 Series (Reporting Transactions in Direct
Participation Program Securities) in its entirety, and secondary market
transactions in non-exchange-listed DPPs would be reported to FINRA as
any other OTC Equity Security pursuant to the FINRA Rule 6620 and 7300
Series. In addition, the proposed rule change would amend (1) FINRA
Rule 6610 to clarify that secondary market transactions in non-
exchange-listed
[[Page 59274]]
DPPs are included in the OTC Equity Security transactions that must be
reported to the ORF; (2) FINRA Rule 6420 to add ``direct participation
program'' as a defined term (the proposed definition is identical to
the definition in current FINRA Rule 6642); (3) FINRA Rule 6622 to
include as Supplementary Material the definitions of ``date of
execution'' and ``time of execution'' for DPP transactions (the
proposed definitions are identical to the definitions in current FINRA
Rule 6642); and (4) FINRA Rules 6530, 6550, 7310, 7330 and 7410 to
delete or replace references to DPPs and the FINRA Rule 6640 Series, as
applicable.
FINRA notes that transactions in non-exchange-listed DPPs currently
are not subject to regulatory transaction fees under Section 3 of
Schedule A to the FINRA By-Laws (``Section 3'') because they are not
subject to prompt last sale reporting under FINRA rules.\10\ As a
result of the proposed rule change, transactions in non-exchange-listed
DPPs would become subject to Section 3 regulatory transaction fees.
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\10\ Pursuant to Section 31 of the Act, FINRA and the national
securities exchanges are required to pay transaction fees and
assessments to the SEC that are designed to recover the costs
related to the government's supervision and regulation of the
securities markets and securities professionals. FINRA obtains its
Section 31 fees and assessments from its membership in accordance
with Section 3.
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FINRA believes the proposed rule change would enhance market
transparency and promote consistency in trade reporting and
dissemination.
Proposed Conforming Amendments
The proposal to reduce the reporting time to 30 seconds requires
amendments to a number of subparagraphs within paragraph (a) of FINRA
Rule 6622 relating to the ORF. In this filing, FINRA is proposing
certain additional changes to these subparagraphs to conform, to the
extent practicable, to the rules relating to the ADF and TRFs.
Specifically, FINRA is proposing to reorganize FINRA Rule 6622(a)
(When and How Transactions are Reported) to conform to the current
format and structure of the rules relating to the ADF and TRFs.\11\ The
requirements in paragraphs (a)(1) and (a)(2), which apply separately to
OTC Market Makers and Non-Market Makers, respectively, would be
combined in paragraph (a)(1) and apply to all ``OTC Reporting Facility
Participants,'' as defined in proposed paragraph (n) of FINRA Rule
6420. Additionally, consistent with the ADF and TRF rules, FINRA is
proposing to amend FINRA Rule 6622(a) to delete the labels (e.g.,
``.W'') for the trade report modifiers that members are required to use
when reporting trades to the ORF. FINRA Rule 6622(a) would identify the
types of transactions that must have a unique modifier associated with
them and such modifiers would be labeled in the ORF technical
specifications rather than in the rules.
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\11\ See FINRA Rules 6282(a), 6380A(a) and 6380B(a).
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Proposed paragraph (a)(5) of FINRA Rule 6622 would enumerate the
transactions for which members must use a special trade report modifier
and would clarify that members must include such modifiers on all trade
reports, including reports of ``as/of'' trades.\12\ In addition,
proposed paragraph (a)(5) would expressly provide that in the event
that the rules require multiple modifiers on any given trade report,
members are to report in accordance with guidance published by FINRA
regarding priorities among modifiers.\13\ Members that report in
accordance with such guidance will not be in violation of the trade
reporting rules for failing to use a particular modifier.
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\12\ See, e.g., FINRA Rules 6282(a)(4), 6380A(a)(5) and
6380B(a)(5).
\13\ See, e.g., FINRA Rules 6380A(a)(5) and 6380B(a)(5).
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FINRA notes that most of the trade report modifiers referred to in
proposed paragraph (a)(5) already are required under current FINRA Rule
6622(a). However, proposed subparagraphs (B) through (D) would require
members to use special trade report modifiers for Seller's Option, Cash
and Next Day trades,\14\ and proposed subparagraph (E) would require
members to use a special trade report modifier for trades that occur at
a price based on an average weighting or another special pricing
formula.\15\ Although not required under current FINRA Rule 6622(a),
members can use these modifiers when reporting to the ORF today. In
addition, a separate modifier would be used for Stop Stock
Transactions, as defined in FINRA Rule 6420, pursuant to proposed
subparagraph (F).\16\ Such transactions would be disseminated to the
public with the weighted average price modifier, which is consistent
with the current dissemination policy with respect to Stop Stock
Transactions that are submitted to the ADF and TRFs. Members currently
are required to report Stop Stock Transactions with the .W trade report
modifier, in accordance with FINRA Rule 6622(a)(8).
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\14\ See, e.g., FINRA Rules 6282(a)(4)(B)-(D), 6380A(a)(5)(B)-
(D) and 6380B(a)(5)(B)-(D).
\15\ See, e.g., FINRA Rules 6282(a)(4)(E), 6380A(a)(5)(E) and
6380B(a)(5)(E).
\16\ See, e.g., FINRA Rules 6282(a)(4)(F), 6380A(a)(5)(F) and
6380B(a)(5)(F).
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Current paragraphs (a)(3), (a)(4), (a)(5), (a)(7) and (a)(9) of
FINRA Rule 6622 would be renumbered as paragraphs (a)(2), (a)(3),
(a)(4), (a)(6) and (a)(7), respectively, without substantive change.
In addition to the proposed amendments to FINRA Rule 6622, FINRA is
proposing to amend FINRA Rule 6420 to add ``normal market hours'' and
``OTC Reporting Facility Participant'' as defined terms.\17\
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\17\ See, e.g., FINRA Rules 6320A and 6320B. The proposed
definition of ``normal market hours'' is identical to the TRF rules,
and the proposed definition of ``OTC Reporting Facility
Participant'' is substantially similar to the definition of ``Trade
Reporting Facility Participant'' in the TRF rules.
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By conforming the trade reporting requirements to the extent
practicable, the proposed rule change will promote more consistent
trade reporting by members and a more complete and accurate audit
trail. FINRA notes that most of the proposed conforming changes to
FINRA Rule 6622(a) are technical in nature; however, some members may
need to make systems changes to comply with some of the requirements
that are not included expressly in the current rule.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice. To allow members sufficient time to make the
necessary systems changes, FINRA is proposing that the implementation
date will be between six and nine months following the date of
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. FINRA believes that the proposed rule change will
enhance market transparency and price discovery and promote more
consistent trade reporting by members.
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\18\ 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.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 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 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 e-mail to [email protected]. Please include
File Number SR-FINRA-2009-061 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-2009-061. This
file number should be included on the subject line if e-mail 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,\19\ 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 inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of FINRA. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make publicly available. All submissions should refer to File Number
SR-FINRA-2009-061 and should be submitted on or before December 8,
2009.
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\19\ The text of the proposed rule change is available on the
Commission's Web site at http://www.sec.gov/.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27463 Filed 11-16-09; 8:45 am]
BILLING CODE 8011-01-P