[Federal Register Volume 81, Number 164 (Wednesday, August 24, 2016)]
[Notices]
[Pages 57964-57967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20203]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78609; File No. SR-FINRA-2016-031]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Use of the Alternative Display 
Facility for Trade Reporting Purpose Only

August 18, 2016.
    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 August 11, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing a proposed rule change relating to use of the 
Alternative Display Facility (``ADF'') by FINRA members for trade 
reporting purposes only.
    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. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On January 20, 2016, FINRA published a Trade Reporting Notice with 
guidance on firms' over-the-counter (``OTC'') equity trade reporting 
obligations in the event of a systems issue during the trading day that 
prevents them from reporting OTC trades in NMS stocks in accordance 
with FINRA rules.\4\ As set forth in the Notice, a firm that routinely 
reports its OTC trades in NMS stocks to only one FINRA trade reporting 
facility (a firm's ``primary facility'') must establish and maintain 
connectivity and report to a second FINRA trade reporting facility (a 
firm's ``secondary facility''), if the firm intends to continue to 
support OTC trading as an executing broker while its primary facility 
is experiencing a widespread systems issue.\5\ FINRA currently has 
three facilities that support member reporting of OTC trades in NMS 
stocks, as defined in SEC Rule 600(b) of Regulation NMS: the ADF and 
two Trade Reporting Facilities (``TRFs''). The TRFs are facilities that 
are operated by both FINRA and its exchange partners (NASDAQ and NYSE).
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    \4\ See Trade Reporting Notice, January 20, 2016 (OTC Equity 
Trading and Reporting in the Event of Systems Issues).
    \5\ As discussed in the Notice, if a firm chooses not to have 
connectivity to a secondary facility, it should cease executing OTC 
trades altogether when its primary trade reporting facility is 
experiencing a widespread systems issue. In that instance, the firm 
could route orders for execution to an exchange or another FINRA 
member (i.e., a member with connectivity and the ability to report 
to a FINRA trade reporting facility that is operational).
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    Since publication of the Trade Reporting Notice, a number of firms 
have inquired about using the ADF as their secondary facility for trade 
reporting, and at least one has inquired about using the ADF as its 
primary facility. While the ADF historically has not been used by 
members for trade reporting without quoting activity, there is nothing 
in the ADF rules \6\ to prohibit it. Thus, to better accommodate firms 
in their efforts to comply with the guidance in the Trade Reporting 
Notice, and to provide an alternative to connecting to both TRFs, FINRA 
will make the ADF available to members for trade reporting purposes 
only.\7\ FINRA currently is making systems updates to the ADF and 
anticipates that the ADF will be available to members before the end of 
this year.\8\ Members that use the ADF for trade reporting purposes 
only would not be able to quote on the ADF without registering under 
one of the two categories of ``ADF Market Participant'' under current 
ADF rules (i.e., Registered Reporting ADF ECN and Registered Reporting 
ADF Market Maker) and satisfying all applicable requirements for 
quoting.\9\
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    \6\ See Rule 6200 and 7100 Series.
    \7\ While members will have the option of using the ADF as their 
primary facility for trade reporting, FINRA anticipates that members 
would be more likely to use the ADF as their secondary facility. 
FINRA has historically operated the ADF as a utility and has not 
attempted to actively attract participants in the OTC trade 
reporting space. For example, FINRA does not offer a market data 
revenue share program for the ADF comparable to the TRFs. See Rules 
7610A and 7610B.
    \8\ FINRA notes that in addition to the systems updates that 
will be completed this year, the ADF may need additional 
infrastructure enhancements to support significant trade reporting 
volume. However, the necessary enhancements, and the time it may 
take to make those enhancements, will not be known until FINRA has a 
more concrete understanding of the level of firms' interest in using 
the ADF for trade reporting purposes only and their potential 
volume.
    \9\ For example, in addition to registration, FINRA rules 
include certification and deposit requirements for ADF quoting 
participants, as well as capacity fees and penalties. See, e.g., 
Rules 6271 and 7580.
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    Because the substantive trade reporting and trade reporting 
participation requirements under current ADF rules are consistent with 
the trade reporting and participation requirements applicable to the 
TRFs,\10\ significant rulemaking is not needed to enable firms to use 
the ADF for trade reporting purposes only. However, FINRA is proposing 
the following additional requirements that would apply specifically to 
members that use the ADF for trade reporting purposes only.
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    \10\ See, e.g., Rules 6282 and 7120; 6380A and 7220A; and 6380B 
and 7220B.

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[[Page 57965]]

Proposed Testing Requirements
    FINRA is proposing to adopt new paragraph (b)(2)(E) of Rule 7120 
(Trade Reporting Participation Requirements) to require members that 
intend to use the ADF for trade reporting purposes only and connect to 
the ADF via a Financial Information eXchange (``FIX'') line to 
participate in annual connectivity and capacity/stress testing. Members 
that use only the web browser for trade reporting to the ADF and do not 
have any FIX connections would not be required to participate in 
connectivity and capacity/stress testing.\11\
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    \11\ FINRA notes that members using a web browser for trade 
reporting generally have relatively low volume, since it would be 
difficult for a member with significant volume to meet its 10-second 
trade reporting obligation under FINRA rules. Thus, FINRA expects 
that members using the web browser for trade reporting to the ADF 
will not put the same demands on the ADF system as firms reporting 
more significant volume using a FIX connection. As such, FINRA does 
not believe that it is necessary to require web browser users to 
participate in annual testing.
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    FINRA is proposing to waive the testing requirements under Rule 
7120(b)(2)(E) for members that meet certain thresholds. Specifically, 
members that report at least 100 trades per month to the ADF would not 
be required to participate in annual connectivity testing. Thus, a 
member that elects to use the ADF as its primary trade reporting 
facility likely would be excluded from this requirement. In addition, 
FINRA is proposing that members would not be required to participate in 
annual capacity/stress testing unless their actual ADF activity levels 
or their capacity projections based on their TRF usage \12\ increase by 
more than 20% from one year to the next. FINRA notes that the proposed 
waivers would apply independently. For example, a member may be subject 
to annual connectivity testing (because it reports fewer than 100 
trades per month to the ADF), while being excused from the capacity/
stress testing requirement (because its capacity projection based on 
its TRF usage has not increased by more than 20% from the prior year).
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    \12\ FINRA will develop capacity projections for members that 
will use the ADF for trade reporting purposes only based on their 
current usage of a TRF, and members may be asked to review and 
confirm these projections from time to time. If a member's volume on 
a TRF increases by more than 20% from one year to the next, the 
member would be required to participate in capacity/stress testing 
to retain connectivity to the ADF for use as a secondary facility 
for trade reporting.
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    Pursuant to proposed Rule 7120(b)(2)(E), members that are required 
to participate in annual connectivity and capacity/stress testing will 
not be charged fees under current Rule 7530(c) for the annual testing. 
However, members that request additional testing beyond the required 
annual connectivity and capacity/stress testing would be required to 
pay fees for testing services under Rule 7530(c).\13\
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    \13\ Pursuant to Rule 7530(c)(1), members are charged $333 per 
hour for testing with the ADF, subject to the exceptions identified 
in paragraph (c)(2) of the Rule.
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    FINRA believes that the proposed testing requirements will help 
ensure that the ADF has sufficient capability and capacity to support 
trade reporting, particularly in the event that members relying on the 
ADF as their secondary facility for trade reporting must report to the 
ADF in response to a widespread systems issue in their primary 
facility.
Proposed FIX Connectivity Fee
    FINRA is proposing to charge members that use the ADF for trade 
reporting purposes only and connect to the ADF via a FIX line a monthly 
fee of $500. The proposed fee would apply to all members that use the 
ADF for trade reporting purposes only (as either their primary or 
secondary facility for trade reporting).\14\
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    \14\ FINRA notes that the proposed fee would be in addition to 
any charges firms must pay NASDAQ, as FINRA's technology provider 
for the ADF, under NASDAQ rules. For example, firms that report to 
the ADF via FIX--either directly or indirectly through third party 
intermediaries (e.g., service bureaus)--would pay NASDAQ charges 
associated with FIX ports to connect to the ADF data center. See, 
e.g., NASDAQ Rule 7015.
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    The proposed fee would replace the fees for ADF terminal software 
and servers under current Rule 7520 (Equipment Related Charges).\15\ 
These fees are obsolete, as members no longer use workstations to 
connect to the ADF, but instead, connect via FIX or web browser. 
Members that elect to trade report to the ADF via web browser would pay 
the monthly fee of $20 per user ID under current Rule 7510(c), rather 
than the proposed monthly fee for FIX connectivity.\16\
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    \15\ Pursuant to this rule, the charge for ADF terminal software 
is $275 a month per terminal and $550 a month for each server.
    \16\ Members that submit trades to the ADF, via FIX or web 
browser, also would be subject to the trade reporting fees under 
current Rule 7510(a), which fees are assessed on a per reported 
transaction basis.
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    The proposed FIX connectivity fee would help cover the costs 
associated with maintaining the ADF platform and ensuring that there is 
sufficient capacity on the platform and at the securities information 
processors to accommodate trade reporting, particularly in the event 
that firms relying on the ADF as their secondary facility for trade 
reporting must report to the ADF in response to a widespread systems 
issue in their primary facility.
Technical Conforming Changes
    FINRA is proposing the following technical conforming changes to 
the ADF rules.
    First, FINRA is proposing to amend and rename Rule 6170 (Primary 
and Additional MPIDs for Alternative Display Facility Participants). 
With the exception of paragraphs (d) and (e), Rule 6170 relating to the 
use of multiple market participant identifiers (``MPIDs'') currently is 
limited to ADF quoting participants. FINRA is proposing to amend the 
Rule, as applicable, to also apply to members that use the ADF for 
trade reporting purposes only. In addition, FINRA is proposing to 
streamline and conform the Rule to Rule 6160 (Multiple MPIDs for Trade 
Reporting Facility Participants). The standards and processes 
applicable to the assignment and use of multiple MPIDs are the same for 
ADF and TRF participants, and as such, FINRA believes that the rules 
should be identical, to the extent possible.
    As amended, paragraph (b) of Rule 6170 would provide that any ADF 
participant (which would include a member that uses the ADF for trade 
reporting only) that is required to obtain, or otherwise wishes to use, 
more than one MPID for purposes of displaying quotes/orders or 
reporting trades to the ADF must submit a written request, in the form 
required by FINRA, to, and obtain approval from, FINRA Market 
Operations for such additional MPID(s). As amended, this paragraph 
would conform to the language of current Rule 6160(a). Paragraph (c) of 
Rule 6170, which currently applies only to Registered Reporting ADF 
ECNs, would be amended to apply to ``ADF Market Participants'' (which 
term encompasses both categories of ADF quoting participant, i.e., 
Registered Reporting ADF ECNs as well as Registered Reporting ADF 
Market Makers) and to conform to the language of Rule 6160(b).
    FINRA also is proposing to amend and reorganize the Supplementary 
Material under Rule 6170 to conform to Rule 6160 and to delete 
unnecessary, and in places repetitive, language regarding the specifics 
of assigning ``Primary'' and ``Additional'' MPIDs. As amended, Rule 
6170.01 would apply to any ADF participant (which would include a 
member that uses the ADF for trade reporting purposes only) and provide 
that an ADF participant must identify the purpose(s) and system(s) for 
which the multiple MPIDs will be used. If FINRA determines that the use 
of multiple MPIDs is detrimental to the marketplace, or that an ADF 
participant

[[Page 57966]]

is using one or more additional MPIDs improperly or for other than the 
purpose(s) identified by the member, FINRA staff retains full 
discretion to limit or withdraw its grant of the additional MPID(s) to 
such ADF participant for purposes of displaying quotes/orders or 
reporting trades through the ADF. This language incorporates language 
in current Rule 6170.01 and .05 and conforms to the language of Rule 
6160.01.
    Amended Rule 6170.02 would continue to provide that each MPID 
belonging to a Registered Reporting ADF ECN is subject to the 
requirements of Rule 6279 (Alternative Trading Systems). Rule 6170.03 
would be amended to apply to ``ADF Market Participants,'' which would 
encompass both categories of ADF quoting participant, and provide that 
if an ADF Market Participant no longer fulfills the conditions 
appurtenant to one of its MPIDs (e.g., by being placed into an 
unexcused withdrawal), it may not use another MPID for any purpose in 
that security. Rules 6170.04 and .05 would be deleted in their 
entirety.\17\
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    \17\ FINRA notes that as amended, Rule 6170.02 and .03 apply to 
quoting activity, and specifically to Registered Reporting ADF ECNs 
and ADF Market Participants, respectively, and thus do not 
correspond to any provisions of Rule 6160. FINRA further notes that 
Rule 6160.02 applies exclusively to the TRFs and thus there is no 
corresponding provision in Rule 6170. Otherwise, Rule 6160 and 6170 
are substantively identical, differing only with respect to the 
defined terms used or to reflect the fact that the TRFs are used for 
trade reporting only and the ADF could be used for both quoting and 
trade reporting.
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    Second, FINRA is proposing to amend paragraph (c)(1) of Rule 7510 
(System Related Fees) to clarify that the web browser fee of $20 per 
month per user ID will apply to all ADF participants, including members 
that use the ADF for trade reporting purposes only. The provision 
currently applies only to ``ADF Market Participants,'' which term is 
defined as a Registered Reporting ADF Market Maker or a Registered 
Reporting ADF ECN.
    Finally, FINRA is proposing to delete paragraph (a)(9) of Rule 
6220. The term ``Non-Registered Reporting Member'' is not used in the 
ADF rule set and as such should no longer be included in the 
definitions under Rule 6220.
    FINRA has filed the proposed rule change for immediate 
effectiveness and the operative date will be 30 days from the date of 
filing.
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 is 
consistent with the Act because it provides members with an alternative 
for meeting their trade reporting obligations under FINRA rules and 
will allow members that wish to connect to a secondary facility for 
trade reporting in accordance with the Trade Reporting Notice to 
continue executing OTC trades in NMS stocks in the event their primary 
facility is experiencing a widespread systems issue.
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    \18\ 15 U.S.C. 78o-3(b)(6).
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    In addition, FINRA believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act,\19\ 
which requires, among other things, that FINRA rules provide for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system that 
FINRA operates or controls. FINRA believes that the proposed rule 
change to apply the web browser fee under Rule 7510(c)(1) and the 
proposed FIX connectivity fee under Rule 7520 for members that use the 
ADF for trade reporting purposes only are reasonable in light of 
FINRA's regulatory and operational costs, including personnel, 
infrastructure and technology costs. FINRA further believes that the 
proposed fees are equitably allocated and not unfairly discriminatory 
because they will apply uniformly to all similarly situated members 
(i.e., the web browser fee will apply uniformly to all members that 
elect to use the web browser and the FIX connectivity fee will apply 
uniformly to all members that elect to connect to the ADF via FIX for 
trade reporting purposes only).
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    \19\ 15 U.S.C. 78o-3(b)(5).
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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.
Economic Impact Analysis
    As an initial matter, the Trade Reporting Notice applies only to 
members that have the trade reporting obligation under FINRA rules.\20\ 
Today, on average, several hundred firms execute and report OTC trades 
in NMS stocks to the TRFs on a regular basis. Many firms, including 
smaller firms, route their order flow to another firm, e.g., their 
clearing firm, for execution, and as the routing firm, they do not have 
the trade reporting obligation. Thus, the proposed rule change will 
have no impact on many members.
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    \20\ FINRA rules for reporting OTC transactions in equity 
securities require that for transactions between members, the 
``executing party'' report the trade to a FINRA facility. For 
transactions between a member and a non-member or customer, the 
member must report the trade. ``Executing party'' is defined under 
FINRA rules 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. See, 
e.g., Rule 6282(b).
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    Moreover, members are not required to use the ADF for purposes of 
meeting their trade reporting obligations under FINRA rules. As noted 
above, the ADF would simply be another option available to members for 
trade reporting, particularly those members that elect to connect to a 
secondary facility in accordance with the Trade Reporting Notice. 
Members that determine that the ADF is not a cost-effective option for 
them (as either a primary or secondary facility for trade reporting) 
can elect to use one (or both) of the TRFs.
    FINRA further notes that the proposed rule change does not create 
any new trade reporting obligations to members; rather it is designed 
to provide an alternative for members to meet their existing equity 
trade reporting obligations. Members that choose to rely upon the ADF 
as their primary or secondary facility for trade reporting will incur 
some costs. Members connecting to the ADF will incur a cost of $500 per 
month per FIX connection or $20 per month per user for web browser 
access. FINRA believes that members that report via FIX will also 
likely maintain at least one web user ID. Members reporting via FIX 
will also incur a NASDAQ charge of $575 per port per month. Members 
that report trades through the ADF will be assessed charges based upon 
the existing fee schedule, as detailed in Rule 7510(a).
    In addition, members maintaining FIX connectivity to the ADF for 
trade reporting purposes only will be required to conduct annual 
testing. The connectivity testing requirement will be waived for 
members reporting at least 100 trades per month through the ADF and the 
capacity/stress testing requirement will be waived for members with 
reported trading activity that does not increase by more than 20% from 
the previous year.
    By providing an alternative for trade reporting, FINRA is 
increasing the choices available to members. FINRA anticipates that few 
members will use the ADF for trade reporting purposes,

[[Page 57967]]

but this may change as the relative costs for trade reporting services 
shift. If a member chooses to use the ADF as a primary or secondary 
trade reporting venue, it will be because it is determined to be 
advantageous to that member.

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

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-
4(f)(6) thereunder.\22\ FINRA believes that the filing is appropriately 
designated as ``non-controversial'' because the proposed rule change 
does not create any new trade reporting obligations to members, but 
rather provides another alternative for members to meet their existing 
equity trade reporting obligations. Members that do not wish to be 
subject to the proposed testing requirements and fees or otherwise 
determine that the ADF is not a cost-effective option for them--as 
either a primary or secondary facility for trade reporting--can elect 
to use one (or both) of the TRFs to fulfill their trade reporting 
obligations under FINRA rules.
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the 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 to 
determine whether the proposed rule should be approved or 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 protected]. Please include 
File Number SR-FINRA-2016-031 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-FINRA-2016-031. 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 the 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-2016-031 and should be 
submitted on or before September 14, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20203 Filed 8-23-16; 8:45 am]
 BILLING CODE 8011-01-P