[Federal Register Volume 74, Number 95 (Tuesday, May 19, 2009)]
[Notices]
[Pages 23455-23456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11607]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59905; File No. SR-FINRA-2007-012]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2 Thereto To Amend Trade Reporting Rules To 
Require a Related Market Center Indicator on Certain Non-Tape Reports 
Submitted to FINRA

May 12, 2009.

I. Introduction

    On September 12, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its trade reporting rules to require 
members to record a related market center indicator on certain non-tape 
reports submitted to FINRA. On December 18, 2007, FINRA filed Amendment 
No. 1 to the proposed rule change. The proposed rule change, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on December 28, 2007.\3\ The Commission received three 
comments on the proposal.\4\ FINRA filed Amendment No. 2 on March 27, 
2009.\5\ This order approves to the proposed rule change, as modified 
by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57020 (December 20, 
2007), 72 FR 73930 (``Notice'').
    \4\ See letter from Securities Industry and Financial Markets 
Association, dated January 24, 2008 (``SIFMA Letter''); letter from 
Citigroup Global Markets, Inc., dated February 1, 2008 (``Citi 
Letter''); and letter from Financial Information Forum, dated 
February 29, 2008 (``FIF Letter'').
    \5\ In Amendment No. 2, FINRA: (1) Addressed the comments 
received in response to the publication of the Notice and proposed 
certain minor modifications and clarifications in response to the 
comments; (2) reflected changes to the underlying rule text adopted 
pursuant to two intervening rule changes and made conforming 
modifications to the proposed rule change. This Amendment is a 
technical amendment and therefore not subject to notice and comment.
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II. Description of the Proposal

    As discussed more fully in the Notice, certain transactions can be 
reported in related tape (i.e., the transaction is reported to the tape 
for publication) and non-tape reports.\6\
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    \6\ Non-tape reports can be (1) ``non-tape, non-clearing,'' 
i.e., the transaction is not reported to the tape but is submitted 
to FINRA for regulatory (not clearing) purposes, or (2) ``clearing-
only,'' i.e., the transaction is not reported to the tape and is 
submitted to FINRA for clearing (and perhaps also regulatory) 
purposes.
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    Thus, agency transactions where one member acts as agent on behalf 
of another member can be reported in related tape and non-tape reports. 
Similarly, a riskless principal transaction,\7\ which is a functional 
equivalent of an agency trade, can be submitted to FINRA as a single 
trade report properly marked as riskless principal, or as two separate 
reports: (1) A tape report to reflect the initial leg of the 
transaction and (2) a non-tape report to reflect the offsetting, 
``riskless'' leg of the transaction. Currently, a non-tape report does 
not provide specific information pertaining to the related tape report.
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    \7\ For purposes of over-the-counter trade reporting 
requirements applicable to equity securities, a ``riskless 
principal'' transaction is a transaction in which a member, after 
having received an order to buy (sell) a security, purchases (sells) 
the security as principal (the initial leg) and satisfies the 
original order by selling (buying) as principal at the same price 
(the offsetting, ``riskless'' leg). See FINRA Regulatory Notice 07-
38 (August 2007).
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    FINRA proposed to amend FINRA Rules 7130 (relating to the ADF/
TRACS), 7230A (relating to the FINRA/NASDAQ TRF), 7230B (relating to 
the FINRA/NYSE TRF), and 7330 (relating to OTC RF) \8\ to require 
members for any non-tape report (either a non-tape, non-clearing report 
or a clearing-only report) submitted to a FINRA Facility associated 
with a previously executed trade that was not reported to that same 
FINRA Facility, to identify the facility or market to which the 
associated trade was reported. The proposed rule change also requires 
that members retain and produce to FINRA, upon request, documentation 
relating to the associated trade (e.g., a confirmation from the 
exchange identifying the ``street side'' of a riskless principal 
transaction).
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    \8\ The original filing contained different Rule numbers, which 
were revised in Amendment No. 2 to account for intervening rule 
filings. See supra note 5.
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    FINRA also proposed that where a single non-tape report is related 
to multiple tape reports: (1) If the multiple tape reports were made to 
a single exchange or, in the case of over-the-counter trades, a single 
FINRA Facility, that exchange or facility must be properly reflected on 
the single non-tape report; and (2) if the multiple tape reports were 
made to different exchanges and/or FINRA Facilities, the member will 
not be required to identify the specific exchanges or facilities; it 
will be required to populate the Related Market Center field with a 
standard indicator: ``multiple venues.'' \9\ In

[[Page 23456]]

addition, where a member routes an order and has no basis for 
identifying where the trade was ultimately executed or, in the case of 
over-the-counter trades, where the trade was ultimately reported, the 
member will be required to populate the Related Market Center field 
with a standard indicator: ``unknown venue.'' \10\
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    \9\ See Amendment No. 2.
    \10\ See id.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\12\ in 
that it is designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest.
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    \11\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change will result 
in a more complete and accurate audit trail and ensure that members are 
not using non-tape reports to circumvent FINRA or Commission rules. 
FINRA stated that currently it is difficult to determine with certainty 
where the associated trade was reported, especially if that trade was 
reported to an exchange or another FINRA Facility.\13\
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    \13\ Currently, FINRA must manually match non-tape reports with 
associated tape reports for purposes of monitoring member compliance 
with trade reporting rules. FINRA stated that by requiring that 
firms identify the market center or facility to which the associated 
tape report was submitted, the universe of tape reports that must be 
reviewed as part of the matching process will be significantly 
narrowed, and accordingly, the effectiveness and certainty of the 
matching process will be enhanced.
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    As noted above, the Commission received three comment letters in 
response to the Notice.\14\ The three commenters generally oppose the 
proposal and state that the potential costs, including required system 
changes, outweigh the benefits of the proposal. In addition, the 
commenters raise several concerns about the practical difficulties of 
complying with the proposed rule change. First, the commenters indicate 
it would be difficult (if not impossible) to identify multiple 
exchanges and/or FINRA Facilities where a single non-tape report is 
associated with multiple executions on multiple markets. Second, the 
three commenters point out that when a firm routes an order, it may not 
know the ultimate execution destination. Third, the commenters argue 
that even if a firm knows that a trade in an NMS stock was executed 
over-the-counter, the firm may not know where the trade was reported 
because FINRA's Uniform Service Bureau/Executing Broker Agreement 
(``USBEBA'') allows the reporting party to report to any TRF or ADF, 
without providing notice to the other party to the trade.\15\
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    \14\ See supra note 4.
    \15\ See SIFMA Letter and Citigroup Letter.
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    FINRA replied to the comments in Amendment No. 2 and revised and 
clarified the original proposal to alleviate the commenters' concerns. 
In particular, FINRA clarified that where a single non-tape report is 
related to multiple tape reports: (1) If the multiple tape reports were 
made to a single exchange or, in the case of over-the-counter trades, a 
single FINRA Facility, that exchange or facility must be reflected on 
the single non-tape report; and (2) if the multiple tape reports were 
made to different exchanges and/or FINRA Facilities, the member will be 
required to populate the Related Market Center field with a standard 
indicator: ``multiple venues.'' \16\ In addition, FINRA provided that 
where a member routes an order and has no basis for identifying the 
relevant exchange or FINRA Facility to determine where the trade was 
ultimately executed or, in the case of over-the-counter trades, where 
the trade was ultimately reported, the member will be required to 
populate the Related Market Center field with a standard indicator: 
``unknown venue.''
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    \16\ See Amendment No. 2.
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    To the extent technological enhancements are required, FINRA stated 
that it intends to provide adequate time for members to make the 
necessary changes and revised the original proposal to provide for the 
implementation of the proposed rule change at least 90 days following 
implementation on August 3, 2009, of the amendments to FINRA trade 
reporting rules adopted pursuant to SR-FINRA-2008-011.\17\
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    \17\ See FINRA Regulatory Notice 09-08 (January 2009).
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    The Commission believes that FINRA's approach that tailors the 
proposed reporting requirement to reflect informational limitations 
described by the commenters is reasonable, in that it reflects FINRA's 
expectation that members provide as much information as is reasonably 
available at the time the non-tape report is submitted. Further, the 
Commission notes that FINRA clarified that where a member routes to an 
exchange and has a reasonable basis for reporting that the trade was 
executed on that exchange, FINRA would not consider it a violation if, 
unbeknownst to the member, the trade is ultimately executed somewhere 
other than the routed exchange.\18\ The Commission also notes that it 
would expect FINRA to incorporate the proposed changes into its 
surveillance and examination programs to ensure that members are not 
improperly using the ``multiple venue'' or ``unknown venue'' 
indications.
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    \18\ The same approach would apply to reporting to other FINRA 
Facilities.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2007-012), as modified 
by Amendment Nos. 1 and 2 thereto, be and hereby is approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    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. E9-11607 Filed 5-18-09; 8:45 am]
BILLING CODE 8101-01-P