Document ID: SEC-2007-1387-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc
Posted Date: 2007-10-04T04:00Z

[Federal Register: October 4, 2007 (Volume 72, Number 192)]
[Notices]               
[Page 56816-56817]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04oc07-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56571; File No. SR-FINRA-2007-001]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to the 
Reporting of Foreign Equity Securities to the Order Audit Trail System

September 28, 2007.

I. Introduction

    On July 31, 2007, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a the National Association of Securities Dealers, Inc. 
(``NASD'')) 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 relating to

[[Page 56817]]

reporting of order information for foreign equity securities to the 
Order Audit Trail System (``OATS''). The proposed rule change was 
published for comment in the Federal Register on August 9, 2007.\3\ The 
Commission received no comments on the proposal. 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. 56199 (August 3, 
2007), 72 FR 44899 (the ``Notice'').
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II. Description of the Proposal

    NASD Rules 6950 through 6958 (``OATS Rules'') impose obligations on 
member firms to record in electronic form and report to OATS on a daily 
basis certain information regarding orders in Nasdaq-listed equity 
securities originated, received, transmitted, modified, canceled, or 
executed by members. FINRA integrates the OATS information with quote 
and transaction information from a number of different sources to 
create a time-sequenced record of orders, quotes, and transactions.
    Currently, a member has recording and reporting obligations under 
the OATS Rules only with respect to orders in Nasdaq-listed equity 
securities. Beginning on February 4, 2008, members also will be 
required to record and report order information regarding all OTC 
equity securities, as defined in NASD Rule 6951.\4\ The definition of 
``OTC equity security'' encompasses essentially all foreign equity 
securities, except those that are listed on a U.S. national securities 
exchange.
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    \4\ See Securities Exchange Act Release No. 54585 (October 10, 
2006); 71 FR 61112 (October 17, 2006) (SR-NASD-2005-101); NASD 
Notice to Members 06-70 (December 2006); see also Securities 
Exchange Act Release No. 55440 (March 9, 2007), 72 FR 12852 (March 
19, 2007) (SR-NASD-2007-019).
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    After approval of NASD-2005-101, FINRA indicated that numerous 
member firms and industry organizations raised issues with its staff 
regarding the breadth of the application of the OATS Rules to foreign 
equity securities, as well as issues presented by the lack of U.S. 
symbols for many foreign securities; the programming difficulties 
associated with tracking trades in foreign symbols and currencies; and 
the fact that, for many firms, orders for foreign securities are 
handled by foreign affiliates that are not currently set up to record 
and report OATS information. In addition, FINRA noted that many trades 
in foreign equity securities are routed to foreign broker-dealers and 
executed on a foreign stock exchange. Consequently, pursuant to the 
OATS Rules although FINRA would receive OATS information regarding the 
origination and routing of such orders, FINRA would not receive 
execution reports, and FINRA would not have trade report data to 
consolidate with the OATS data.\5\
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    \5\ Trade reporting requirements under NASD Rule 6620 do not 
extend to a member's transactions in foreign equity securities 
executed on and reported to a foreign securities exchange or 
transactions executed over-the-counter in a foreign country that are 
reported to the regulator of securities markets for that country. 
See NASD Rule 6620(g); Securities Exchange Act Release No. 55745 
(May 11, 2007), 72 FR 27891 (May 17, 2007) (SR-NASD-2007-030).
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    In response to these concerns, FINRA proposed to amend Rule 6952 to 
exclude certain orders and transactions in foreign equity securities 
from the OATS recording and reporting requirements. With this change 
members will only have to record and report order information regarding 
foreign equity securities only in those instances where any resulting 
execution is subject to the transaction reporting requirements in Rule 
6620. Members would not be required to record and submit information to 
FINRA for orders in a foreign equity security that do not result in a 
trade report to FINRA.\6\ FINRA will receive order information for the 
same transactions for which FINRA receives trade report information. 
FINRA believes this change strikes the appropriate balance enabling 
FINRA to effectively monitor its members' compliance with their order 
handling requirements while avoiding overly burdensome reporting 
requirements.
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    \6\ See the Notice at 44900-44901 for examples of trade 
reporting scenarios.
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    In addition, FINRA proposed to permit firms to use Form T to report 
required OATS information instead for reporting through the firm's 
normal OATS reporting channels in instances where a firm has a 
reporting obligation in a foreign equity security, but does not have a 
U.S. symbol assigned to it at the time of the trade.

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\7\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\8\ which, 
among other things, requires that FINRA rules 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.
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    \7\ 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).
    \8\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change addresses 
concerns unique to OATS reporting requirements for orders in foreign 
equity securities in a manner consistent with the Act, and strikes an 
appropriate balance between ensuring that FINRA can effectively monitor 
members' compliance with their order handling obligations and avoiding 
overly burdensome reporting requirements. Members will continue to be 
required to record and report OATS data to FINRA in those instances 
where a resulting execution in a foreign equity security is subject to 
a transaction reporting requirement pursuant to Rule 6620(g). 
Therefore, FINRA will receive OATS data that it can use in connection 
with trade reports to effectively monitor its members' activities in 
foreign equity securities. However, members will be relieved of the 
obligation to record and report OATS data to FINRA in instances where 
there is not a transaction reporting requirement.
    Further, the Commission believes that allowing members to report 
required OATS data for orders in a foreign equity security that has not 
been assigned a symbol at the time of the reportable event on Form T 
instead of through a member's normal OATS report channels will allow 
members to fulfill their trade reporting obligations and OATS 
obligations more efficiently while still ensuring the FINRA receives 
the information it requires to effectively monitor its members' trading 
activity in foreign equity securities.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-FINRA-2007-001), be, and 
hereby is, approved. It will become operative on February 4, 2008.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-19593 Filed 10-3-07; 8:45 am]

BILLING CODE 8011-01-P