Document ID: SEC-2012-1135-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-07-16T04:00Z

[Federal Register Volume 77, Number 136 (Monday, July 16, 2012)]
[Notices]
[Pages 41832-41835]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17219]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67385; File No. SR-FINRA-2012-032]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Modify Fees and Transaction Credits Applicable 
to Members That Use the FINRA/NYSE Trade Reporting Facility

July 10, 2012.
    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 2, 2012, 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 ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the FINRA Rule 7600B Series to modify 
fees and transaction credits applicable to members that use the FINRA/
NYSE Trade Reporting Facility (the ``FINRA/NYSE TRF'').
    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. 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
Background
    The FINRA/NYSE TRF is one of three FINRA facilities that FINRA 
members can use to report over-the-counter (``OTC'') trades in NMS 
stocks.\5\ The FINRA/NYSE TRF is operated by The NYSE Market, Inc. 
(``NYSE''). In connection with the establishment of the FINRA/NYSE TRF, 
FINRA and NYSE entered into a limited liability company agreement (the 
``LLC Agreement''). Under the LLC Agreement, FINRA, the ``SRO Member,'' 
has sole regulatory responsibility for the FINRA/NYSE TRF. NYSE, the 
``Business Member,'' is primarily responsible for the management of the 
FINRA/NYSE TRF's business affairs to the extent those affairs are not 
inconsistent with the regulatory and oversight functions of FINRA. As 
such, the Business Member establishes pricing for use of the FINRA/NYSE 
TRF, and such pricing is implemented pursuant to FINRA rules that must 
be filed with the SEC and be consistent with the Act.\6\ In addition, 
the Business Member is obligated to pay the cost of regulation and is 
entitled to the profits and losses, if any, derived from the operation 
of the FINRA/NYSE TRF.\7\
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    \5\ In addition to the FINRA/NYSE TRF, members have the option 
of reporting OTC trades in NMS stocks to the FINRA Alternative 
Display Facility (the ``ADF'') or the FINRA/Nasdaq Trade Reporting 
Facility (the ``FINRA/Nasdaq TRF'').
    \6\ Because there are two FINRA Trade Reporting Facilities 
operated by different exchange Business Members competing for market 
share (the FINRA/NYSE TRF and the FINRA/Nasdaq TRF), FINRA does not 
take a position on whether the pricing for one TRF is more favorable 
or competitive than the pricing for the other TRF.
    \7\ FINRA notes that the same contractual arrangement is in 
place for the FINRA/Nasdaq TRF, with FINRA as the SRO Member and 
Nasdaq as the Business Member. The LLC agreements for the FINRA/NYSE 
TRF and the FINRA/Nasdaq TRF were submitted as part of the rule 
filings to establish the respective TRFs and can be found in the 
FINRA Manual.

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[[Page 41833]]

    As discussed in greater detail below, FINRA/NYSE TRF participants 
currently are not charged any fees, and the FINRA/NYSE TRF currently 
shares with its participants 100% of the market data revenue it earns. 
This fee and credit structure has applied since the FINRA/NYSE TRF 
commenced operation in April 2007, and since that time, the NYSE, as 
the Business Member, has funded all costs associated with operating the 
FINRA/NYSE TRF, including all regulatory costs, from NYSE general 
revenues. The NYSE has indicated that the cost of operating the FINRA/
NYSE TRF has increased since 2007, in part because the FINRA/NYSE TRF's 
market share has grown and therefore regulatory costs have increased. 
Accordingly, the proposed fees and revisions to the market data revenue 
share [sic] program will provide revenue to help offset these increased 
operating costs, while allowing the FINRA/NYSE TRF to remain 
competitive. NYSE will continue to fund any costs associated with the 
FINRA/NYSE TRF that are not covered by the proposed fees and changes in 
the market data revenue sharing program from NYSE's general revenues.
Proposed Amendments to Rule 7610B
    The FINRA/NYSE TRF receives revenue for transactions reported to 
the three tapes \8\ from the Consolidated Tape Association and Nasdaq 
Securities Information Processor. Pursuant to Rule 7610B, the FINRA/
NYSE TRF currently shares 100% of the market data revenue it earns with 
FINRA members reporting trades in Tape A, Tape B and Tape C securities 
to the FINRA/NYSE TRF.
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    \8\ Market data is transmitted to three tapes based on the 
listing venue of the security: New York Stock Exchange securities 
(``Tape A''), American Stock Exchange and regional exchange 
securities (``Tape B''), and Nasdaq Stock Market securities (``Tape 
C''). Tape A and Tape B are generally referred to as the 
Consolidated Tape.
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    FINRA is proposing to adopt a tiered schedule for market data 
revenue sharing for the FINRA/NYSE TRF that is comparable to the tiered 
schedule that currently is in place for the FINRA/Nasdaq TRF under 
FINRA Rule 7610A.\9\ Specifically, FINRA is proposing to amend Rule 
7610B to base the percentage of market data revenue shared with a FINRA 
member reporting trades to the FINRA/NYSE TRF on the member's ``Market 
Share.'' FINRA proposes to define ``Market Share'' in Rule 7610B as the 
percentage calculated by dividing the total number of shares 
represented by trades reported by a member to the FINRA/NYSE TRF \10\ 
during a given calendar quarter by the total number of shares 
represented by all trades reported to the Consolidated Tape Association 
or the Nasdaq Securities Information Processor, as applicable, during 
that quarter. Market Share will be calculated separately for each tape. 
The proposed definition of ``Market Share'' is identical to the 
definition in Rule 7610A applicable to the FINRA/Nasdaq TRF.
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    \9\ FINRA notes, however, that the proposed tiers and 
percentages of revenue shared are not identical to the tiers and 
percentages for the FINRA/Nasdaq TRF.
    \10\ The calculation of ``Market Share'' is based only on a 
member's trades that are reported to the Consolidated Tape 
Association or the Nasdaq Securities Information Processor (``tape 
reports'') and will not include trades that are only reported for 
regulatory and/or clearing--and not dissemination--purposes (``non-
tape reports'').
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    Under the proposed rule change, a member with a Market Share of 
0.9% or more in Tape A or Tape C, or 0.7% or more in Tape B, would 
receive 90% of the attributable market data revenue; a member with less 
than 0.9% but at least 0.5% in Tape A or Tape C, or less than 0.7% but 
at least 0.5% in Tape B, would receive 75%; a member with less than 
0.5% but at least 0.4% in Tape A, Tape B or Tape C would receive 70%; a 
member with less than 0.4% but at least 0.075% in Tape A, Tape B or 
Tape C would receive 25%; and a member with less than 0.075% in Tape A, 
Tape B or Tape C would not be eligible for the market data revenue 
sharing program. Thus, as a general matter, market participants that 
make the most use of the FINRA/NYSE TRF will be eligible for the 
highest level of revenue sharing with others receiving progressively 
lower percentages. FINRA notes that the Market Share and revenue 
percentages for each tape are independent of each other and, as such, 
may subsequently be adjusted individually.\11\
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    \11\ Any change to one or more of these percentages would be 
subject to a proposed rule change by FINRA.
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    According to the NYSE, as the Business Member, the different 
percentages required for different tapes reflect the current extent to 
which participants use the FINRA/NYSE TRF to report trades in different 
stocks, i.e., comparatively higher volumes of trades in Tape A and Tape 
C stocks are reported through the FINRA/NYSE TRF than in Tape B stocks. 
Thus for Tapes A and C, the levels of revenue sharing are tied to 
higher market share levels. The NYSE has indicated that for competitive 
reasons and in light of the cost of operating the FINRA/NYSE TRF, it 
has determined to sunset the 100% revenue share program. However, NYSE 
believes that, particularly at the lower market share levels, the 
percentage of revenue shared is favorable to other revenue share 
programs.\12\ For example, a member with a Market Share of 0.45% in 
Tape A or Tape C would share 70% of market data revenue and a member 
with a Market Share of 0.08% in Tape A or Tape C would share 25% of 
market data revenue under the proposed tiered schedule.
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    \12\ See, e.g., Rule 7610A.
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Proposed Amendments to Rule 7620B
    Pursuant to Rule 7620B, FINRA members currently are not charged a 
fee for use of the FINRA/NYSE TRF. FINRA is proposing to amend Rule 
7620B to begin charging members a monthly fee for use of the FINRA/NYSE 
TRF. Members will be charged either $500 or $1,000 per month beginning 
in the month of the member's first trade report on or after July 2, 
2012, the proposed operative date of the proposed rule change. 
Specifically, members reporting an average of 100 trades or less per 
day during the calendar month will be charged $500, and members 
reporting an average of more than 100 trades per day during the 
calendar month will be charged $1,000. For purposes of meeting the 100 
trade threshold, both tape and non-tape reports will be included; 
however, reversals and other modifications to previously reported 
trades will not be included. A member's fee could vary from month to 
month, depending on the number of trade reports the member submits. For 
example, if a member averages 90 trades per day in July, 120 trades per 
day in August, and 80 trades per day in September, the member will pay 
a monthly fee of $500, $1,000 and $500, respectively. In addition, once 
a member's fee begins, the member will be charged a fee each month 
unless and until the member cancels its access to the FINRA/NYSE TRF, 
even if the member reports no trades to the FINRA/NYSE TRF in a given 
month. In that instance, the member will be charged the lower fee of 
$500. The fee will be charged at the end of the calendar month; a 
member's trades will be counted and the appropriate fee will be 
assessed on the member's invoice after the month closes.
    This fee includes full access to the FINRA/NYSE TRF and supporting 
functionality, e.g., trade submission, reversal and cancellation, and 
unlimited use of the Client Management Tool. In addition to submitting, 
correcting, breaking, and reversing trades, the

[[Page 41834]]

Client Management Tool currently allows users to View/Query/Export 
trade reports, potential trade throughs and rejected trade submissions.
    As noted above, members have the option of reporting OTC trades in 
NMS stocks to one of three FINRA facilities. The NYSE, as the Business 
Member, has determined that the FINRA/NYSE TRF would be more 
competitive with these other facilities if users are charged a flat fee 
for access to the complete range of functionality offered by the FINRA/
NYSE TRF rather than a separate fee for each activity (e.g., a per 
trade or per side fee for reporting a trade, a separate per trade fee 
for canceling a trade, a per terminal fee, etc.).\13\ Rather than 
charging the same fee to all FINRA/NYSE TRF participants irrespective 
of usage, the fees are designed such that more frequent, higher volume 
users pay more for access to the FINRA/NYSE TRF, while less frequent, 
lower volume users pay less.
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    \13\ See, e.g., Rules 7510(a) and 7520 (trade reporting fees and 
equipment-related charges for the ADF) and Rule 7620A (trade 
reporting fees for the FINRA/Nasdaq TRF).
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Proposed Rule 7630B
    Proposed Rule 7630B would allow affiliated members to aggregate 
their activity for purposes of the fee and credit schedule applicable 
to the FINRA/NYSE TRF. For example, affiliated members that might not 
qualify by themselves for a certain Market Share percentage under the 
proposed changes to Rule 7610B may be able to qualify by aggregating 
their activity.
    Under proposed Rule 7630B, a member may request that the FINRA/NYSE 
TRF aggregate its activity with the activity of its affiliates.\14\ 
Paragraph (c) of the proposed rule defines an ``affiliate'' of the 
member as any wholly owned subsidiary, parent or sister (as those terms 
are defined under the rule) of the member that is also a member. Thus, 
the proposed rule requires that one affiliated member own 100% of the 
voting interests in the other, or that they both be under the common 
control of a parent that owns 100% of each.
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    \14\ The proposed rule will be administered by NYSE, in its 
capacity as the ``Business Member'' and operator of the FINRA/NYSE 
TRF on behalf of FINRA. FINRA's oversight of this function performed 
by the Business Member is conducted through an annual assessment and 
review of TRF operations by an outside independent audit firm.
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    Under paragraph (a) of proposed Rule 7630B, a member requesting 
aggregation of affiliate activity will be required to certify the 
affiliate status of entities whose activity it seeks to aggregate and 
immediately to provide notice of any event that causes an entity to 
cease to be an affiliate. A review of information regarding the 
entities will be conducted, and the member may be requested to provide 
additional information to verify the affiliate status of an entity. A 
request will be approved unless it is determined that the member's 
certification is not accurate.\15\
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    \15\ In the event of an inaccurate certification, FINRA would 
investigate whether the member had violated FINRA rules and would 
take appropriate disciplinary action.
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    Paragraph (b) of the proposed rule expressly states that for 
purposes of applying any provision of the Rule 7600B Series that 
reflects a charge assessed, or credit provided, by the FINRA/NYSE Trade 
Reporting Facility, references to an entity (including references to a 
``member,'' a ``participant,'' or a ``Trade Reporting Facility 
Participant'') shall be deemed to include the entity and its affiliates 
that have been approved for aggregation.
    FINRA notes that proposed Rule 7630B is identical to current Rule 
7630A relating to the FINRA/Nasdaq TRF, except that the proposed rule 
does not contain the stated policy with respect to the timing of 
recognition of aggregation requests that is contained in Rule 
7630A(a)(2). For purposes of applying proposed Rule 7630B, if two or 
more members submit a request for aggregation before the end of the 
month in which they become affiliated, the request will be recognized 
as if it had been submitted on the first of the month and the members 
will be able to aggregate all activity during the entire month.
    FINRA has filed the proposed rule change for immediate 
effectiveness and the effective date is July 2, 2012.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\16\ 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 transaction credit schedule 
under Rule 7610B is reasonable and equitable in that it bases the 
percentage of revenue shared on members' respective contributions to 
the revenues of the FINRA/NYSE TRF, i.e., market participants that make 
the most use of the FINRA/NYSE TRF will be eligible for the highest 
level of revenue sharing with others receiving progressively lower 
percentages.\17\ In addition, FINRA believes that the proposed fees 
under Rule 7620B are reasonable and equitable in that FINRA members 
that are more frequent, higher volume users will pay more for access to 
the FINRA/NYSE TRF, while less frequent, lower volume users will pay 
less. NYSE, as the Business Member, has determined that the proposed 
fee and credit structure will help offset the increased cost of 
operating the FINRA/NYSE TRF, and as such, FINRA believes that the 
proposed rule change is equitable and reasonable. FINRA further 
believes that the proposed fee and credit structure is reasonable and 
equitable in that it will apply only to members that choose to use the 
FINRA/NYSE TRF. Access to the FINRA/NYSE TRF is offered on fair and 
non-discriminatory terms, and FINRA members will continue to have the 
option of using another FINRA facility for purposes of reporting OTC 
trades in NMS stocks if they determine that the fees and credits of 
another facility are more favorable. Finally, NYSE has indicated that 
it expects that the proposed changes will offset some--but not all--of 
the cost of operating the FINRA/NYSE TRF, and any costs, including 
regulatory costs, that are not funded out of market data revenue or 
trade reporting fees will continue to be funded by NYSE general 
revenues.
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    \16\ 15 U.S.C. 78o-3(b)(5).
    \17\ The proposed tiered schedule is comparable in approach to 
the schedule that currently exists for the FINRA/Nasdaq TRF. See 
Rule 7610A.
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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.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \18\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\19\ 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

[[Page 41835]]

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.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(2).
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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 rule-comments@sec.gov. Please include 
File No. SR-FINRA-2012-032 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-2012-032. 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 
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-2012-032 and should be 
submitted on or before August 6, 2012.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17219 Filed 7-13-12; 8:45 am]
BILLING CODE 8011-01-P