52380 Federal Register / Vol. 75, No. 164 / Wednesday, August 25, 2010 / Notices 

2 17 CFR 242.602(b). 

3Under Rule 602(b)(5), electronic 

communications networks (‘‘ECNs’’) have the option 

of reporting to an exchange or association for public 

dissemination, on behalf of customers that are OTC 

market makers or exchange market makers, the bestpriced orders and the full size for such orders 

entered by market makers on the ECN, to satisfy 

such market makers’ reporting obligation under 

Rule 602(b). Since this reporting requirement is an 

alternative method of meeting the market makers’ 

reporting obligation, and because it is directed to 

nine or fewer persons (ECNs), this collection of 

information is not subject to OMB review under the 

Paperwork Reduction Act (‘‘PRA’’). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 17 CFR 242.600(b)(47). 

4As amended by SR–FINRA–2010–003, FINRA 

Rule 7410 defines an ‘‘OTC equity security’’ for 

purposes of the OATS Rules as an equity security 

that is not an NMS stock, except that the term does 

not include restricted equity securities and direct 

participation programs, as those terms are defined 

in FINRA Rule 6420. See Securities Exchange Act 

Release No. 61979 (April 23, 2010), 75 FR 23316 

(May 3, 2010) (Order Approving File No. SR– 

FINRA–2010–003). 

5Rule 600(b)(47) of Regulation NMS defines 

‘‘NMS stock’’ as ‘‘any NMS security other than an 

option.’’ 17 CFR 242.600(b)(47). An ‘‘NMS security’’ 

is defined as ‘‘any security or class of securities for 

which transaction reports are collected, processed, 

and made available pursuant to an effective 

transaction reporting plan, or an effective national 

market system plan for reporting transactions in 

listed options.’’ 17 CFR 242.600(b)(46). 

national securities association to make 

available to quotation vendors for 

dissemination to the public the best bid, 

best offer, and aggregate quotation size 

for each ‘‘subject security,’’ as defined 

under the Rule. The second collection of 

information is found in Rule 602(b).2

This reporting requirement obligates 

exchange members and over-the-counter 

(‘‘OTC’’) market makers that are a 

‘‘responsible broker or dealer,’’ as 

defined under the Rule, to communicate 

to an exchange or association their best 

bids, best offers, and quotation sizes for 

subject securities.3

It is anticipated that 15 respondents, 

consisting of 14 national securities 

exchanges and one national securities 

association, will collectively respond 

approximately 741,127,661,148 times 

per year pursuant to Rule 602(a) at 18.22 

microseconds per response, resulting in 

an annual aggregate burden of 

approximately 3,750 hours. 

It is anticipated that approximately 

130 respondents, consisting of OTC 

market makers, will collectively 

respond approximately 24,440,000 

times per year pursuant to Rule 602(b) 

at 3 seconds per response, resulting in 

an annual aggregate burden of 

approximately 20,367 hours. 

Written comments are invited on: (a) 

Whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(b) the accuracy of the Commission’s 

estimate of the burden of the proposed 

collections of information; (c) ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(d) ways to minimize the burden of 

collections of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology. Consideration will be given 

to comments and suggestions submitted 

in writing within 60 days of this 

publication. 

Please direct your written comments 

to: Charles Boucher, Director/Chief 

Information Officer, Securities and 

Exchange Commission, c/o Shirley 

Martinson, 6432 General Green Way, 

Alexandria, Virginia 22312 or send an 

e-mail to: PRA_Mailbox@sec.gov. 

Dated: August 18, 2010. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–21035 Filed 8–24–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62739; File No. SR–FINRA– 

2010–044] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change Relating to the 

Expansion of the Order Audit Trail 

System to All NMS Stocks 

August 18, 2010. 

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 6, 

2010, the 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. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to amend the 

Order Audit Trail System (‘‘OATS’’) 

rules to extend the recording and 

reporting requirements to all NMS 

stocks, as that term is defined in Rule 

600(b)(47) of Regulation NMS,3 and to 

exclude certain firms that became 

FINRA members pursuant to NASD IM– 

1013–1 or NASD IM–1013–2 and the 

rules of the NYSE and that have limited 

trading activities. 

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, at the Commission’s 

Web site at http://www.sec.gov, 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 

FINRA Rules 7410 through 7470 (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 equity securities listed 

and traded on The Nasdaq Stock 

Market, Inc. (‘‘Nasdaq’’).4 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. 

To enhance the effectiveness of OATS 

as a regulatory tool, FINRA is proposing 

to amend the OATS Rules to extend the 

recording and reporting requirements to 

all NMS stocks, as that term is defined 

in Rule 600(b)(47) of Regulation NMS.5

The proposed rule change would thus 

effectively extend the OATS recording 

and reporting requirements to NMS 

stocks listed on markets other than 


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Federal Register / Vol. 75, No. 164 / Wednesday, August 25, 2010 / Notices 52381 

6FINRA Rule 6110. 

7See FINRA Rule 6400 Series. 

8See ‘‘FINRA and NYSE Euronext Complete 

Agreement for FINRA to Perform NYSE 

Regulation’s Market Oversight Functions,’’ FINRA 

News Release (June 14, 2010), available at http:// 

www.finra.org/Newsroom/NewsReleases/2010/ 

P121622. However, certain gaps will continue to 

exist (e.g., information relating to orders from nonFINRA member broker-dealers). 

9See Securities Exchange Act Release No. 62174 

(May 26, 2010), 75 FR 32556 (June 8, 2010). 

10The Commission has proposed that national 

securities exchanges and national securities 

associations would begin submitting data to the 

central repository required by the proposed rule 

within one year after effectiveness of the NMS plan 

and that members would begin submitting data one 

year later. See supra note 9. 

11See FINRA Rule 7410(o). 

12See NYSE Rules 132B, 132C. 

13NASD IM–1013–1 and NASD IM–1013–2 

establish a waive-in membership application 

process for certain firms to become FINRA members 

that were members of the NYSE or NYSE Alternext 

(n/k/a NYSE Amex) but were not members of the 

National Association of Securities Dealers, Inc. See 

Securities Exchange Act Release No. 58707 (October 

1, 2008), 73 FR 59001 (October 8, 2008); Securities 

Exchange Act Release No. 56653 (October 12, 2007), 

72 FR 59127 (October 18, 2007). 

14See NYSE Rule 2. 

15 15 U.S.C. 78o–3(b)(6). 

Nasdaq (e.g., NYSE, NYSE Amex, and 

NYSE Arca). By including order 

information for both OTC equity 

securities and all NMS stocks in OATS, 

FINRA would receive a substantial 

portion of order information for all U.S. 

equity securities, which would 

significantly enhance the scope of the 

order audit trail in the U.S. equity 

markets. In connection with the 

expansion of the OATS requirements, 

FINRA is also proposing to create an 

exclusion from the definition of 

‘‘Reporting Member’’ in FINRA Rule 

7410 to exclude certain firms that 

became FINRA members pursuant to 

NASD IM–1013–1 or NASD IM–1013–2 

and the rules of the NYSE and that have 

limited trading activities. 

Although FINRA members generally 

are required to report trades to FINRA 

for all over-the-counter transactions in 

all NMS stocks 6 (in addition to OTC 

equity securities 7), the OATS Rules do 

not currently require members to report 

order information to FINRA for NMS 

stocks listed on markets other than 

Nasdaq. As a result, FINRA is unable to 

recreate, on an automated basis, a 

complete order and transaction audit 

trail for all over-the-counter transactions 

in NMS stocks. Expansion of the OATS 

requirements to include all NMS stocks 

would enhance FINRA’s ability to 

review and examine for member 

compliance with certain trading rules, 

including, but not limited to, NASD 

Rule 2320 (Best Execution and 

Interpositioning) and NASD IM–2110–2 

(Limit Order Protection) [sic]. 

By capturing OATS information for 

all NMS stocks, FINRA will also be able 

to expand its existing surveillance 

patterns to conduct more 

comprehensive cross-market 

surveillance, which also is in 

furtherance of NYSE’s recent 

outsourcing of surveillance and other 

regulatory functions to FINRA.8

Specifically, to have comprehensive 

surveillance patterns that monitor 

trading in Nasdaq and NYSE-listed 

securities across all markets in a 

consistent manner, it is necessary for 

FINRA to have the same complement of 

order, trade, and quote information for 

these securities. Without OATS 

information for NYSE-listed securities, 

FINRA has a less robust data set upon 

which to monitor activity in NYSElisted securities and would be forced to 

continue to have multiple patterns, 

some less optimal, to surveil for the 

same activity. 

FINRA notes that the Commission has 

recently published a proposed rule that, 

if adopted, would ultimately result in a 

consolidated audit trail for the U.S. 

securities markets.9 FINRA believes that 

the proposed rule change is necessary 

notwithstanding the Commission’s rule 

proposal concerning a consolidated 

audit trail. The consolidated audit trail, 

as proposed by the Commission, is still 

in its proposal stage and may be several 

years away from providing a means by 

which self-regulatory organizations and 

the Commission can use the data to 

surveil the equity markets.10 In the 

interim, FINRA believes that extending 

the OATS recording and reporting 

requirements to NMS stocks listed on 

markets other than Nasdaq will greatly 

enhance its audit trail and its ability to 

identify illicit trading activity in a more 

effective and efficient manner. 

Moreover, because Reporting 

Members 11 already are reporting order 

information to OATS regarding Nasdaq 

and OTC equity securities, they should 

have the technological framework in 

place to report information regarding 

orders in the remaining NMS stocks as 

well. In addition, those FINRA members 

that are also member organizations of 

the NYSE already are recording order 

information under the NYSE’s Order 

Tracking System (‘‘OTS’’) rules that are 

substantially similar to the information 

required by the OATS Rules.12 FINRA 

believes that extending the OATS Rules 

to NMS stocks listed on markets other 

than Nasdaq can be accomplished in a 

comparatively short timeframe and can 

provide FINRA with order data for these 

securities much sooner than the 

consolidated audit trail proposed by the 

Commission. 

Expanding the categories of securities 

to which the OATS Rules apply to 

include securities listed on the NYSE or 

other national securities exchanges, 

such as those listed on NYSE Amex, 

would have the ancillary effect of 

extending the OATS recording and 

reporting requirements to certain 

members that became members of 

FINRA pursuant to NASD IM–1013–1 or 

IM–1013–2 13 and the rules of the 

NYSE.14 These members generally 

conduct their trading activities on the 

floor of an exchange, which is overseen 

by the relevant exchange. FINRA 

believes it is appropriate to exclude 

these firms from the OATS recording 

and reporting requirements. 

Consequently, FINRA is proposing to 

amend the definition of ‘‘Reporting 

Member’’ in FINRA Rule 7410 so that a 

member will not be considered a 

‘‘Reporting Member’’ with respect to an 

order if: (i) The firm was approved as a 

FINRA member pursuant to NASD IM– 

1013–1 or NASD IM–1013–2; (ii) the 

firm operates consistent with NASD IM– 

1013–1 or NASD IM–1013–2, including 

limiting its business operations to 

‘‘permitted floor activities,’’ as that term 

is defined in NASD IM–1013–1 and 

NASD IM–1013–2; and (iii) the order 

was received by the firm through 

systems operated and regulated by the 

NYSE or NYSE Amex. 

FINRA will announce the effective 

date of the proposed rule change in a 

Regulatory Notice to be published no 

later than 60 days following 

Commission approval. The effective 

date will be no later than 180 days 

following publication of the Regulatory 

Notice announcing 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,15 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. The proposed rule 

change is consistent with the Act 

because it will enhance FINRA’s ability 

to conduct surveillance and 

investigations of member firms for 

violations of FINRA’s rules and Federal 

securities laws. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in any 


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52382 Federal Register / Vol. 75, No. 164 / Wednesday, August 25, 2010 / Notices 

16Three other proposals were discussed in the 

Notice. The first involved expanding the OATS 

requirements to OTC equity securities. The second 

would require enhanced information, including 

execution data, relating to orders routed to nonmembers or exchanges. The third would require 

members to record and report to OATS proprietary 

orders generated in the ordinary course of market 

making activities. The proposal regarding OTC 

equity securities was approved by the SEC in 2006 

and became effective on February 4, 2008. See 

Securities Exchange Act Release No. 54585 (October 

10, 2006), 71 FR 61112 (October 17, 2006); see also 

Securities Exchange Act Release No. 55440 (March 

9, 2007), 72 FR 12852 (March 19, 2007); Notice to 

Members 06–70 (December 2006). As part of that 

proposed rule change, FINRA discussed the 

comments related to the expansion of OATS to OTC 

equity securities. See SR–NASD–2005–101. Neither 

of the other two proposals is part of the current 

proposed rule change. Accordingly, FINRA is not 

addressing the comments received in response to 

those proposals. 

17Letter from Emily Vitale dated November 24, 

2004 (‘‘Vitale’’); Letter from ML Stern & Co., LLC 

dated January 14, 2005 (‘‘ML Stern’’); Letter from 

Ameritrade, Inc. dated January 18, 2005 

(‘‘Ameritrade’’); Letter from Instinet Group dated 

January 20, 2005 (‘‘Instinet’’); Letter from Operations 

Committee of the Securities Industry Association 

dated January 20, 2005 (‘‘SIA’’); Letter from 

royalblue Financial Corp. dated January 20, 2005 

(‘‘royalblue’’); Letter from Jed Bandes dated January 

20, 2005 (‘‘Bandes’’); and Letter from The Financial 

Information Forum dated January 21, 2005 (‘‘FIF’’). 

18The Commission notes that Exhibits 2a and 2b 

are attached to the filing itself and not to this 

notice. 

19See Ameritrade. 

20See ML Stern. 

21See Bandes, Vitale. 

22See Ameritrade, FIF, Instinet, SIA, royalblue. 

23See NYSE Rules 132B, 132C. 24 17 CFR 200.30–3(a)(12). 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The proposed rule change was 

published for comment in Notice to 

Members 04–80 (November 2004).16

Eight comments were received in 

response to the Notice.17 A copy of the 

Notice is attached as Exhibit 2a. Copies 

of the comment letters received in 

response to the Notice are attached as 

Exhibit 2b.18 Seven commenters were 

generally opposed to the proposed rule 

change. One commenter generally 

supported the proposal provided firms 

could report all equity securities in the 

same format and there were no 

redundant reporting responsibilities.19

One commenter opposed the 

proposed rule change without 

additional discussion but noted that the 

system in place for OATS at the time 

was inefficient in several ways.20 Two 

other commenters opposed the OATS 

rules generally, without specifically 

commenting on any of the proposals.21

These commenters cited the additional 

costs and burdens to member firms of 

complying with the OATS 

requirements. 

The predominant concern among the 

commenters with respect to the 

proposal to extend the OATS Rules to 

securities traded on markets other than 

Nasdaq regarded the potential 

regulatory duplication that could occur 

by expanding OATS to include NYSElisted equity securities 22 because NYSE 

maintains its own rules regarding the 

retention and reporting of order 

information in its OTS Rules.23 As 

noted above, FINRA now has regulatory 

responsibility for performing the market 

surveillance and enforcement functions 

previously conducted by NYSE 

Regulation. It is FINRA’s understanding 

that NYSE will propose to retire OTS 

upon the expansion of OATS to all NMS 

stocks. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 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 or disapprove 

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 rulecomments@sec.gov. Please include File 

No. SR–FINRA–2010–044 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 No. 

SR–FINRA–2010–044. 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, 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 

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 available publicly. All 

submissions should refer to File No. 

SR–FINRA–2010–044 and should be 

submitted on or before September 15, 

2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.24

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–21031 Filed 8–24–10; 8:45 am] 

BILLING CODE 8010–01–P 


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