[Federal Register Volume 84, Number 147 (Wednesday, July 31, 2019)]
[Notices]
[Pages 37369-37371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16238]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86479; File No. SR-FINRA-2019-021]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Exemptions From the Order Audit Trail 
System Recording and Reporting Requirements

July 25, 2019.
    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 July 12, 2019, 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 and 
II 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 7470 (Exemption to the Order 
Recording and Data Transmission Requirements) to extend for three years 
FINRA's ability to exempt certain members from the recording and 
reporting requirements of the Order Audit Trail System (``OATS'') Rules 
(``OATS Rules'') for manual orders received by the member.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

7000. Clearing, Transaction and Order Data Requirements, and Facility 
Charges

* * * * *

7400. Order Audit Trail System

* * * * *

7470. Exemption to the Order Recording and Data Transmission 
Requirements

    (a) through (b) No Change.
    (c) This Rule shall be in effect until July [10]11, 2022[2019].
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The OATS Rules impose obligations on FINRA members to record in 
electronic form and report to FINRA on a daily basis certain 
information with respect to orders originated, received, transmitted, 
modified, canceled, or executed by members relating to OTC equity 
securities and NMS stocks. OATS captures this order information and 
integrates it with quote and transaction information to create a time-
sequenced record of orders, quotes, and transactions. This information 
is then used by FINRA staff to conduct surveillance and investigations 
of member firms for violations of FINRA rules and federal securities 
laws and regulations.
    On September 28, 2005, the SEC approved amendments to the OATS 
Rules that, among other things, gave FINRA the authority to grant 
exemptive relief from the OATS reporting requirements for manual 
orders.\4\ In 2006, FINRA's exemptive authority was expanded to include 
the authority to exempt manual orders received by members from the OATS 
recording requirements.\5\ Under Rule 7470, at a minimum, members must 
meet the following criteria to be eligible to request an exemption from 
the OATS recording and reporting requirements for manual orders: (1) 
The member and current control affiliates and associated persons of the 
member have not been subject within the last five years to any final 
disciplinary action, and within the last ten years to any disciplinary 
action involving fraud; (2) the member has annual revenues of less than 
$2 million; (3) the member does not conduct any market making 
activities in any security subject to the OATS Rules; (4) the member 
does not execute principal transactions with its customers (with 
limited exceptions for principal transactions executed pursuant to 
error corrections); and (5) the member does not conduct clearing or 
carrying activities for other firms.\6\ An exemption granted by FINRA 
pursuant to Rule 7470 is for a maximum of two years; however, a member 
that continues to meet the criteria may request subsequent exemptions 
at or prior to the expiration of a grant of exemptive relief.\7\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 52521 (September 28, 
2005), 70 FR 57909 (October 4, 2005) (Order Approving File No. SR-
NASD-00-23).
    \5\ See Securities Exchange Act Release No. 53580 (March 30, 
2006), 71 FR 17529 (April 6, 2006) (Order Approving File No. SR-
NASD-2006-040). In 2006, the exemptive provision was also relocated 
from NASD Rule 6955(d) to NASD Rule 6958. As of December 15, 2008, 
NASD Rule 6958 was renumbered as FINRA Rule 7470. See FINRA 
Regulatory Notice 08-57 (October 2008).
    \6\ See Rule 7470(a).
    \7\ See Rule 7470(b).
---------------------------------------------------------------------------

    Rule 7470 also includes a sunset provision. As initially adopted, 
the exemptive provision expired as of July 10, 2011, which was five 
years from the original effective date of the rule.\8\ In 2011, FINRA 
filed a proposed rule change to extend the sunset provision until July 
10, 2015, noting that FINRA adopted this exemptive authority so that it 
would have the ability to grant relief to members that meet certain 
criteria in situations where, for example, the reporting of order 
information would be unduly burdensome for the member or where 
temporary relief from the OATS Rules, in the form of additional time to 
achieve compliance, would permit the members to avoid unnecessary 
expense

[[Page 37370]]

or hardship.\9\ FINRA noted that these concerns continued to be present 
for many firms and concluded it was appropriate to allow firms that 
have received an exemption from OATS to continue to rely on their 
current exemption (or request an additional two-year exemption) until 
the scope and application of the SEC's consolidated audit trail (CAT) 
was determined.\10\ In 2015,\11\ FINRA filed a proposed rule change to 
extend the sunset provision until July 10, 2019, noting that an 
additional four years was appropriate given the current state of the 
CAT. FINRA discussed the possibility that not all member firms 
reporting to OATS or relying on an exemption from OATS reporting would 
be reporting to the CAT by July 10, 2019, and the extension would allow 
member firms relying on the exemption to continue to do so provided 
they meet the criteria to qualify.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 52521 (September 28, 
2005), 70 FR 57909 (October 4, 2005) (Order Approving File No. SR-
NASD-00-23).
    \9\ See Securities Exchange Act Release No. 64717 (June 21, 
2011), 76 FR 37384 (June 27, 2011) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2011-029).
    \10\ The SEC proposed Rule 613 under Regulation NMS regarding 
the consolidated audit trail on May 26, 2010. See Securities 
Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 
2010).
    \11\ See Securities Exchange Act Release No. 75160 (June 11, 
2015), 80 FR 34727 (June 17, 2015) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2015-016) (``2015 Filing'').
---------------------------------------------------------------------------

    On July 18, 2012, the SEC adopted Rule 613 under Regulation NMS, 
which requires FINRA and the national securities exchanges (``SROs'') 
to jointly file an NMS plan to govern the creation, implementation, and 
maintenance of a consolidated audit trail and central repository (the 
``CAT NMS Plan'').\12\ The CAT NMS Plan was published for comment in 
the Federal Register on May 17, 2016,\13\ and approved by the 
Commission, as modified, on November 15, 2016.\14\ Under Rule 613 and 
the CAT NMS Plan, all broker-dealers that are members of FINRA or a 
national securities exchange must report order information to the 
central repository. FINRA expects that all FINRA members captured by 
this requirement will be reporting to the CAT by December 2021.
---------------------------------------------------------------------------

    \12\ See 17 CFR 242.613(a); see also Securities Exchange Act 
Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012).
    \13\ Securities Exchange Act Rel. No. 77724 (April 27, 2016), 81 
FR 30614 (May 17, 2016).
    \14\ Securities Exchange Act Rel. No. 79318 (November 15, 2016), 
81 FR 84696 (November 23, 2016) (``Approval Order'').
---------------------------------------------------------------------------

    FINRA believes that extending the sunset provision in Rule 7470 for 
an additional three years is appropriate given the current CAT 
reporting timeline.\15\ Specifically, FINRA expects that all of those 
FINRA member firms currently reporting to OATS or relying on an 
exemption from OATS reporting will be reporting to the consolidated 
audit trail no later than December 2021. Thus, FINRA believes it is 
appropriate to extend the sunset provision in Rule 7470 so that those 
firms relying on the exemption may continue to do so provided they meet 
the criteria to qualify. FINRA believes that the proposed rule change 
will enable FINRA to exempt manual orders received by certain small 
firms from the OATS Rules and avoid imposing potentially unnecessary 
expense or hardship on those firms that qualify for the exemption. 
FINRA is not proposing any substantive changes to the criteria 
necessary for firms to qualify for an exemption because FINRA believes 
that the criteria continue to ensure that only those firms with limited 
revenue, no recent final disciplinary actions, and limited business 
models will be eligible.
---------------------------------------------------------------------------

    \15\ See Timelines, CAT Reporting Timelines, https://www.catnmsplan.com/timelines/. FINRA notes that the instant filing 
would not impact the CAT reporting timeline or any other CAT 
reporting obligation.
---------------------------------------------------------------------------

    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ 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 
enable FINRA to exempt manual orders received by certain small firms 
from the OATS Rules and avoid imposing potentially unnecessary expense 
or hardship on those firms that qualify for the exemption. FINRA 
believes that the proposed rule change is particularly appropriate 
given that it is narrowly tailored to the CAT reporting timeline, which 
specifies that all member firms currently reporting to OATS or relying 
on an exemption from OATS will report to the CAT by December 2021.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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. As noted above, FINRA believes 
that the proposed rule change will enable FINRA to exempt manual orders 
received by certain small firms from the OATS Rules and avoid imposing 
potentially unnecessary expense or hardship on those firms that qualify 
for the exemption. FINRA notes that the compliance burden on these 
firms will be imposed for only a short period of time as these firms 
are required to develop a means to report order information to the 
central repository of the CAT.

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 \17\ and Rule 19b-
4(f)(6) thereunder.\18\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
FINRA has requested that the Commission waive this requirement. The 
Commission hereby grants this request.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to 30 days after the date of filing.\19\ 
However, Rule 19b-4(f)(6) \20\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. FINRA has requested that the 
Commission waive the 30-day operative delay so that the proposed rule 
change may become operative upon filing. The Commission believes that 
granting this request is consistent with the protection of investors 
and the public interest because the extension would allow qualifying 
member firms to continue to rely on the exemption from the date of 
filing of this proposed rule change until

[[Page 37371]]

July 11, 2022. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be effective 
and operative upon filing.\21\
---------------------------------------------------------------------------

    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ Id.
    \21\ For the purposes only of waiving the operative date of this 
proposal, 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 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-2019-021 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2019-021. 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 website (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 website 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 FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2019-021 and should be submitted 
on or before August 21, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16238 Filed 7-30-19; 8:45 am]
BILLING CODE 8011-01-P