Document ID: SEC-2012-0641-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-04-20T04:00Z

[Federal Register Volume 77, Number 77 (Friday, April 20, 2012)]
[Notices]
[Pages 23770-23772]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9593]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66819; File No. SR-FINRA-2011-058]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 to Proposed Rule 
Change To Amend FINRA Rule 6433 (Minimum Quotation Size Requirements 
for OTC Equity Securities)

April 17, 2012.

I. Introduction

    On October 6, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``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 amend FINRA Rule 6433 (Minimum Quotation Size 
Requirements for OTC Equity Securities). The proposed rule change was 
published for comment in the Federal Register on October 20, 2011.\3\ 
The Commission received seven comment letters on the proposed rule 
change--two from individual investors, three from an inter-dealer 
quotation system and two from a member firm.\4\ FINRA responded to 
comments on December 23, 2011.\5\ The Commission published an order 
instituting proceedings pursuant to Section 19(b)(2)(B) of the Act,\6\ 
to determine whether to approve or disapprove the proposed rule change, 
in the Federal Register on January 24, 2012.\7\ The comment period 
closed on February 14, 2012, and FINRA's rebuttal period closed on 
February 28, 2012. The Commission received one comment letter in 
response to the Proceedings Order.\8\ On April 17, 2012, FINRA filed 
Amendment No. 1 to the proposed rule change. The text of Amendment No. 
1 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.
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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. 65568 (October 14, 
2011), 76 FR 65307 (October 20, 2011) (Notice of Filing of File No. 
SR-FINRA-2011-058) (``Original Proposal'').
    \4\ Letters to Elizabeth M. Murphy, Secretary, Commission, from 
Suzanne H. Shatto, Seattle, Washington, dated October 20, 2011; 
Naphtali M. Hamlet, Seattle, Washington, dated October 21, 2011; 
Daniel Zinn, General Counsel, OTC Markets Group, Inc., dated 
November 10, 2011; Michael T. Corrao, Managing Director, Knight 
Capital Group, Inc., dated November 16, 2011 (``Knight 
1''); R. Cromwell Coulson, President and CEO, OTC Markets, 
dated November 18, 2011; Daniel Zinn, General Counsel, OTC Markets 
Group, Inc., dated December 29, 2011; Michael T. Corrao, Managing 
Director, Knight Capital Group, Inc., dated January 13, 2012 
(``Knight 2'').
    Comment letters are available at www.sec.gov.
    \5\ On December 23, 2011, FINRA responded to comment letters 
received by the SEC as of that date. See letter to Elizabeth M. 
Murphy, Secretary, Commission, from Stephanie M. Dumont, Senior Vice 
President and Director of Capital Markets Policy, FINRA (``FINRA 
Response Letter'').
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 66168 (January 17, 
2012), 77 FR 3515 (January 24, 2012) (Order Instituting Proceedings 
to Determine Whether to Disapprove File No. SR-FINRA-2011-058) 
(``Proceedings Order'').
    \8\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Daniel Zinn, General Counsel, OTC Markets Group Inc., dated 
February 14, 2012.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    As stated in the Original Proposal, FINRA is amending FINRA Rule 
6433 (Minimum Quotation Size Requirements for OTC Equity Securities) 
(the ``Rule'') to, among other things, (1) Simplify the tier structure, 
(2) parallel the approach taken by the national securities exchanges 
for securities priced at or above $1.00, (3) expand the scope of the 
Rule to apply to all quotations or orders displayed on an inter-dealer 
quotation system, (4) incorporate the requirements of FINRA Rule 6434 
(Minimum Pricing Increments for OTC Equity Securities) \9\

[[Page 23771]]

and, importantly, (5) facilitate the display of customer limit orders 
under FINRA Rule 6460 (Display of Customer Limit Orders) (the ``limit 
order display rule'').\10\
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    \9\ See Securities Exchange Act Release No. 62359 (June 22, 
2010), 75 FR 37488 (June 29, 2010) (File No. SR-FINRA-2009-054; 
``Order Approving NMS-Principled Rules for OTC Equity Securities''). 
FINRA Rule 6434 became effective on February 11, 2011 and FINRA Rule 
6460 became effective on May 9, 2011. See Regulatory Notice 10-42 
(September 2010).
    \10\ See Order Approving NMS-Principled Rules for OTC Equity 
Securities.
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    In this Amendment No. 1, FINRA is modifying the Original Proposal 
in response to comment letters as well as further discussions with 
members, particularly with regard to the lower minimum dollar amount of 
displayed liquidity required under the proposed tiers.\11\ For example, 
commenters expressed concern that the Original Proposal would remove 
meaningful minimum dollar value level requirements for displayed 
liquidity by market makers and suggested that any changes be 
implemented as a pilot.\12\ FINRA believes that these proposed 
modifications, which increase several minimum tier sizes as compared to 
the Original Proposal, would address commenters' concerns by increasing 
the minimum dollar commitment to the market overall, while nonetheless 
facilitating investor protection by providing for increased display of 
customer limit orders than is currently provided under the limit order 
display rule. As noted in the FINRA Response Letter, through the 
extension of limit order display for OTC equity securities, investors 
may now benefit from enhanced transparency of limit orders, improved 
prices and increased execution opportunities.\13\
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    \11\ See, e.g., Knight 1 and Knight 2.
    \12\ See, e.g., Knight 1 and Knight 2.
    \13\ As previously stated by the SEC, customer limit order 
display is beneficial to the markets:
    The financial markets as a whole should benefit from [limit 
order display] because the price discovery process will be enhanced, 
market transparency will be improved and price competition will be 
promoted. By their very nature, these benefits are broad-based and 
pervasive.
    Securities Exchange Act Release No. 36310 (September 29, 1995), 
60 FR 52792 (October 10, 1995).
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    The minimum quotation sizes and liquidity ranges of the Original 
Proposal and the revised proposals are as follows:

                                                Original Proposal
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                    Tier size range                       Min. shares            Minimum liquidity range
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$0.0001...............................         $0.0199          10,000  $1.00...................         $199.00
$0.02.................................          0.2599           1,000  $20.00..................          259.90
$0.26.................................          0.5099             500  $130.00.................          254.95
$0.51.................................          0.9999             200  $102.00.................          199.98
$1.00.................................          174.99             100  $100.00.................       17,499.00
$175.00...............................  ..............               1  $175.00.................
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                                                Revised Proposal
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                    Tier size range                       Min. shares            Minimum liquidity range
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$0.0001...............................         $0.0999          10,000  $1.00...................         $999.00
$0.10.................................          0.1999           5,000  $500.00.................          999.50
$0.20.................................          0.5099           2,500  $500.00.................        1,274.75
$0.51.................................          0.9999           1,000  $510.00.................          999.90
$1.00.................................          174.99             100  $100.00.................       17,499.00
$175.00...............................  ..............               1  $175.00.................  ..............
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    These revisions increase the minimum quotation sizes for price 
points between $0.02 and $1.00 (as compared to the Original Proposal). 
Specifically, the minimum quotation size required for securities priced 
between $0.02 and $0.0999 would be increased from 1,000 shares to 
10,000 shares; between $0.10 and $0.1999 would be increased from 1,000 
shares to 5,000 shares; between $0.26 and $0.5099 would be increased 
from 500 shares to 2,500 shares; and between $0.51 and $0.9999 from 200 
shares to 1,000 shares. Therefore, under the revised tiers, for 
securities priced from $0.10 up to $1.00, the required minimum dollar 
value of displayed liquidity would range from $500.00 to $1,274.75--
dollar amounts FINRA believes represent both appropriate minimum dollar 
value of displayed liquidity for members and reasonable dollar values 
for customer orders to be eligible for display on an inter-dealer 
quotation system.
    Thus, FINRA believes that these revised tier sizes and 
corresponding liquidity minimum amounts are in the best interest of the 
market for OTC Equity Securities and investors in that they facilitate 
the display of additional liquidity by market makers and of 
approximately 95% of all customer limit orders reviewed.\14\ In 
addition, FINRA expects that--as the SEC has found in the context of 
its display rule--the improved display of customer limit orders 
resulting from the revised minimum quotation sizes will enhance the 
quality of published quotations for OTC Equity Securities and enhance 
competition and pricing efficiency in the market for OTC Equity 
Securities, which also should have a positive impact on capital 
formation.\15\
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    \14\ FINRA analyzed a random sample of over 100 million customer 
limit orders in OTC Equity Securities that were reported to FINRA 
during a six-month period.
    \15\ See Securities Exchange Act Release No. 37619A, 61 FR 48290 
(September 12, 1996) (``SEC Display Rule Adopting Release'').
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    Further, FINRA believes that the resulting increased display of 
customer limit orders will improve the public availability of quotation 
information, increase quote competition, market efficiency, best 
execution and disintermediation.\16\
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    \16\ See also SEC Display Rule Adopting Release.

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[[Page 23772]]

    The revised tiers also would continue to yield the other benefits 
discussed in the Original Proposal, including simplifying the existing 
Rule by reducing the number of minimum quotation tiers from nine tiers 
to six tiers and requiring a round lot of one hundred shares for all 
securities priced at or above $1.00.\17\
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    \17\ A round lot of 100 shares applies to most NASDAQ and NYSE 
listed securities. The Commission notes that those OTC Equity 
Securities priced at or above $175 are proposed to have a minimum 
quotation size that would equal the round lot size applicable to 
those securities, which is one share.
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    FINRA is proposing that the proposed rule change be implemented for 
all OTC Equity Securities displayed on an inter-dealer quotation system 
on a pilot basis for a period of one year from the effective date. The 
effective date of the minimum quotation size pilot will be 120 days 
from Commission approval. FINRA will provide the Commission with 
trading data, as necessary, to evaluate the impact of the pilot.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended by Amendment No. 1, 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 Number SR-FINRA-2011-058 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 Number SR-FINRA-2011-058. 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 Number SR-FINRA-2011-058 and should be 
submitted on or before May 7, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9593 Filed 4-19-12; 8:45 am]
BILLING CODE 8011-01-P