[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)]
[Notices]
[Pages 10835-10837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80004; File No. SR-FINRA-2016-047]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change To 
Amend FINRA Rules To Conform to the Commission's Proposed Amendment to 
Commission Rule 15c6-1(a) and the Industry-Led Initiative To Shorten 
the Standard Settlement Cycle for Most Broker-Dealer Transactions From 
T+3 to T+2

February 9, 2017.

I. Introduction

    On December 14, 2016, 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 conform its rules to an amendment proposed by 
the Commission to Rule 15c6-1(a) under the Act to shorten the standard 
settlement cycle for most broker-dealer transactions from three 
business days after the trade date (``T+3'') to two business days after 
the trade date (``T+2'').\3\ The proposed rule change was published for 
comment in the Federal Register on December 28, 2016.\4\ The Commission 
received three comment letters on the proposed rule change.\5\ This 
order approves the proposed rule change.
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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. 78962 (Sep. 28, 
2016), 81 FR 69240 (Oct. 5, 2016) (Amendment to Securities 
Transaction Settlement Cycle) (File No. S7-22-16) (T+2 Proposing 
Release'').
    \4\ See Securities Exchange Act Release No. 79648 (Dec. 21, 
2016), 81 FR 95705.
    \5\ See Letters to Brent J. Fields, Secretary, Commission from 
Mike Nicholas, Chief Executive Officer, Bond Dealers of America 
(``BDA''), dated Jan. 18, 2017 (``BDA Letter''), Manisha Kimmel, 
Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated 
Jan. 19, 2017, and Thomas F. Price, Managing Director, Operations, 
Technology & BCP, Securities Industry and Financial Markets 
Association (``SIFMA''), dated Jan. 19, 2017 (``SIFMA Letter '').
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II. Description of the Proposal

    FINRA is proposing to amend FINRA Rules 2341 (Investment Company 
Securities), 11140 (Transactions in Securities ``Ex-Dividend,'' ``Ex-
Rights'' or ``Ex-Warrants''), 11150 (Transactions ``Ex-Interest'' in 
Bonds Which Are Dealt in ``Flat''), 11210 (Sent by Each Party), 11320 
(Dates of Delivery), 11620 (Computation of Interest), 11810 (Buy-In 
Procedures and Requirements), and 11860 (COD Orders), to conform to the 
Commission's proposed amendment to Rule 15c6-1(a) under the Act that 
would shorten the standard settlement cycle for most broker-dealer 
transactions from T+3 to T+2.
    FINRA Rule 2341(m) requires members, including underwriters, that 
engage in direct retail transactions for investment company shares to 
transmit payments received from customers for the purchase of 
investment company shares to the payee by the end of the third business 
day after receipt of a customer's order to purchase the shares, or by 
the end of one business day after receipt of a customer's payment for 
the shares, whichever is later. FINRA is proposing to amend Rule 
2341(m) to change the three-business day transmittal requirement to two 
business days, while retaining the one-business day alternative.
    FINRA Rule 11140(b)(1) concerns the determination of normal ex-
dividend and ex-warrants dates for certain types of dividends and 
distributions. Currently, with respect to cash dividends or 
distributions, or stock dividends, and the issuance or distribution of 
warrants, which are less than 25% of the value of the subject security, 
if the definitive information is received sufficiently in advance of 
the record date, the date designated as the ``ex-dividend date'' is the 
second business day preceding the record date if the record date falls 
on a business day, or the third business day preceding the record date 
if the record date falls on a day designated by FINRA's UPC Committee 
as a non-delivery day. Under the proposal, the ``ex-dividend date'' 
would be the first business day preceding the record date if the record 
date falls on a business day, or the second business day preceding the 
record date if the record date falls on a day designated by FINRA's UPC 
Committee as a non-delivery date.
    FINRA Rule 11150(a) concerns the determination of normal ex-
interest dates for certain types of transactions. Currently, all 
transactions, except ``cash'' transactions, in bonds or similar 
evidences of indebtedness which are traded ``flat'' are ``ex-interest'' 
on the second business day preceding the record date if the record date 
falls on a business day, on the third business day preceding the record 
date if the record date falls on a day other than a business day, and 
on the third business day preceding the date on which an interest 
payment is to be made if no record date has been fixed. Under the 
proposal, these transactions would be ``ex-interest'' on the first 
business day preceding the record date if the record date falls on a 
business day, on the second business day preceding the record date if 
the record date falls on a day other than a business day, and on the 
second business day preceding the date on which an interest payment is 
to be made if no record date has been fixed.
    FINRA Rules 11210(c) and (d) set forth ``DK'' procedures using 
``Don't Know Notices'' and other forms of notices, respectively.\6\ 
FINRA Rule 11210(c) currently provides that, when a party to a 
transaction sends a comparison or confirmation of a trade, but does not 
receive a comparison or confirmation or a signed DK from the contra-
member by the close of four business days following the trade date of 
the transaction, the party may use the procedures set forth in the 
rule. FINRA proposes to shorten the ``four business days'' time period 
to one business day. FINRA Rule 11210(c)(2)(A) currently provides that 
a contra-member has four business days after the ``Don't Know Notice'' 
is received to either confirm or DK the transaction in accordance with 
FINRA Rule 11210(c)(2)(B) or (C). FINRA proposes to shorten the ``four 
business days'' time period to two business days.\7\ FINRA Rule 
11210(c)(3) currently provides that if the confirming member does not 
receive a response from the contra-member by the close of four business 
days after receipt by the confirming member the fourth copy of

[[Page 10836]]

the ``Don't Know Notice'' if delivered by messenger, or the post office 
receipt if delivered by mail, such shall constitute a DK and the 
confirming member shall have no further liability for the trade. FINRA 
proposes to shorten the ``four business days'' time period to two 
business days.
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    \6\ FINRA Rule 11210 does not apply to transactions that clear 
through the National Securities Clearing Corporation or other 
clearing organizations registered under the Act. See FINRA Rule 
11210(a)(4).
    \7\ FINRA also proposes to make non-substantive, formatting 
changes to cross-references to reflect FINRA Manual style 
convention.
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    FINRA proposes similar changes to FINRA Rule 11210(d). FINRA Rule 
11210(d) currently provides that, when a party to a transaction sends a 
comparison or confirmation of a trade, but does not receive a 
comparison or confirmation or a signed DK from the contra-member by the 
close of four business days following the date of the transaction, the 
party may use the procedures set forth in the rule. FINRA proposes to 
shorten the ``four business days'' time period to one business day. 
FINRA Rule 11210(d)(5) currently provides that if the confirming member 
does not receive a response in the form of a notice from the contra-
member by the close of four business days after receipt of the 
confirming member's notice, such shall constitute a DK and the 
confirming member shall have no further liability. FINRA proposes to 
shorten the ``four business days'' time period to two business days.
    FINRA Rule 11320 prescribes delivery dates for various types of 
transactions. FINRA Rule 11320(b) currently provides that in connection 
with a transaction ``regular way,'' delivery is made at the office of 
the purchaser on, but not before, the third business day following the 
date of the transaction. Under the proposal, delivery would be required 
to be made on, but not before, the second business day following the 
date of the transaction. FINRA Rule 11320(c) currently provides in part 
that, in connection with a transaction ``seller's option,'' delivery 
may be made by the seller on any business day after the third business 
day following the date of transaction and prior to the expiration of 
the option, provided the seller delivers at the office of the 
purchaser, on a business day preceding the day of delivery, written 
notice of intention to deliver. Under the proposal, delivery may be 
made by the seller on any business day after the second business day 
following the date of the transaction and prior to expiration of the 
option.
    FINRA Rule 11620 governs the computation of interest. FINRA Rule 
11620(a) currently provides in part that, in the settlement of 
contracts in interest-paying securities other than for ``cash,'' there 
shall be added to the dollar price interest at the rate specified in 
the security, which shall be computed up to but not including the third 
business day following the date of the transaction. Under the proposal, 
the interest would be computed up to but not including the second 
business day following the date of the transaction.\8\
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    \8\ FINRA also proposes to capitalize certain words in the title 
of FINRA Rule 11620(a).
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    FINRA 11810(j)(1)(A) sets forth the circumstances under which a 
receiving member may deliver a Liability Notice to the delivering 
member as an alternative to the close-out procedures set forth in FINRA 
11810(b)-(h). Currently, when the parties to a contract are not both 
participants in a registered clearing agency that has an automated 
service for notifying a failing party of the liability that will be 
attendant to a failure to deliver, the notice must be issued using 
written or comparable electronic media having immediate receipt 
capabilities ``no later than one business day prior to the latest time 
and the date of the offer or other event'' in order to obtain the 
protection provided by the rule. Under the proposal, the notice must be 
``sent as soon as practicable but not later than two hours prior to the 
cutoff time set forth in the instructions on a specific offer or other 
event'' in order to obtain the protection provided by the rule.
    FINRA Rule 11860(a) concerns various procedures regarding collect 
on delivery (``COD'') or payment on delivery orders. FINRA is proposing 
to amend Rule 11860(a)(4)(A) to provide that the time period for a 
customer buying COD to furnish instructions to the agent will be no 
later than the close of business on the first business day after the 
date of execution of the trade, rather than the close of business on 
the second business day.
    FINRA represents that it will announce the effective date of the 
proposed rule change in an Equity Regulatory Alert, which date would 
correspond with the industry-led transition to a T+2 standard 
settlement, and the effective date of the Commission's proposed 
amendment to Rule 15c6-1(a) under the Act.\9\
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    \9\ See supra note 3.
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III. Discussion and Commission's Findings

    After careful review of the proposed rule change and the comments, 
the Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities association.\10\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\11\ which requires that the rules of a 
national securities association be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and to protect 
investors and the public interest. As noted above, the Commission 
received three comment letters on the proposed rule change.\12\ All 
comment letters express support for Commission approval of the proposed 
rule change.\13\
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ See supra note 5.
    \13\ One of the commenters requests guidance from FINRA with 
respect to FINRA Rule 11210(c) to permit the use of electronic means 
to communicate DK notices. The commenter notes that, currently, 
FINRA Rule 11210(c)(1) requires that such notices be sent ``by 
certified mail, return receipt requested, or messenger.'' See SIFMA 
Letter, at 3. The Commission notes that this request is beyond the 
scope of the current proposed rule change. However, the Commission 
notes that FINRA could work with the commenter and other market 
participants to determine whether changes to the communication 
methods specified in FINRA Rule 11210(c) would be appropriate. One 
commenter expressed concern with how the proposed amendments to Rule 
15c6-1(a) may affect Reg. T. The Commission notes that this comment 
pertains to the Commission's proposed rule and not directly to the 
proposal. See BDA Letter.
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    The Commission notes that the proposal would amend FINRA rules to 
conform to the amendment that the Commission has proposed to Rule 15c6-
1(a) under the Act \14\ and support a move to a T+2 standard settlement 
cycle. In the T+2 Proposing Release the Commission stated its 
preliminary belief that shortening the standard settlement cycle from 
T+3 to T+2 will result in a reduction of credit, market, and liquidity 
risk,\15\ and as a result a reduction in systemic risk for U.S. market 
participants.\16\ The Commission also notes that it has not yet adopted 
the proposed amendment to Rule 15c6-1(a),

[[Page 10837]]

and that FINRA has, accordingly, not proposed to make its amended rules 
effective at present. Instead, FINRA has proposed to announce the 
effective date of the proposed rule change in an Equity Regulatory 
Alert. The Commission expects that the effective date of the proposed 
rule change would correspond with the compliance date of any amendment 
to Rule 15c6-1(a) under the Act that is adopted by the Commission. The 
Commission notes that, in October 2014, Depository Trust and Clearing 
Corporation (``DTCC''), in collaboration with the Investment Company 
Institute, SIFMA, and other market participants, formed an Industry 
Steering Group (``ISC'') and an industry working group to facilitate 
the transition to a T+2 settlement cycle for U.S. trades in equities, 
corporate and municipal bonds, and unit investment trusts.\17\ The ISC 
has identified September 5, 2017, as the target date for the transition 
to a T+2 settlement cycle to occur.\18\
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    \14\ See supra note 3.
    \15\ Credit risk refers to the risk that the credit quality of 
one party to a transaction will deteriorate to the extent that it is 
unable to fulfill its obligations to its counterparty on settlement 
date. Market risk refers to the risk that the value of securities 
bought and sold will change between trade execution and settlement 
such that the completion of the trade would result in a financial 
loss. Liquidity risk describes the risk that an entity will be 
unable to meet financial obligations on time due to an inability to 
deliver funds or securities in the form required though it may 
possess sufficient financial resources in other forms. See T+2 
Proposing Release, supra note 3, 81 FR at 69241 n. 3.
    \16\ See id., 81 FR at 69241.
    \17\ See Press Release, DTCC, Industry Steering Committee and 
Working Group Formed to Drive Implementation of T+2 in the U.S. 
(Oct. 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
    \18\ See Press Release, ISC, US T+2 ISC Recommends Move to 
Shorter Settlement Cycle On September 5, 2017 (Mar. 7, 2016), http://www.ust2.com/pdfs/T2-ISC-recommends-shorter-settlement-030716.pdf.
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    For the reasons noted above, the Commission finds that the proposal 
is consistent with the requirements of the Act and would foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2016-047), be and 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02998 Filed 2-14-17; 8:45 am]
 BILLING CODE 8011-01-P