Document ID: SEC-2007-1765-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-12-28T05:00Z

[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Notices]               
[Page 73930-73932]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-190]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57020; File No. SR-FINRA-2007-012]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 thereto to Amend Trade Reporting Rules to Require Related Market 
Center Indicator on Certain Non-Tape Reports Submitted to FINRA

December 20, 2007.
    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 September 12, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by 
FINRA.\3\ On December 18, 2007, FINRA filed Amendment No. 1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change as modified by Amendment 
No. 1 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to the Financial Industry Regulatory 
Authority, Inc., or FINRA, in connection with the consolidation of 
the member firm regulatory functions of NASD and NYSE Regulation, 
Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007), 
72 FR 42190 (August 1, 2007).
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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 its trade reporting rules to require 
that on any non-tape report (a non-tape, non-clearing report or a 
clearing-only report) submitted to a FINRA Facility (i.e., the 
Alternative Display Facility (``ADF''), a Trade Reporting Facility 
(``TRF'') \4\ or the OTC Reporting Facility (``ORF'')) associated with 
a previously executed trade that was not reported to that same

[[Page 73931]]

FINRA Facility, members identify the facility or market where the 
associated trade was reported. The text of the proposed rule change is 
available at FINRA, the Commission's Public Reference Room, and http://www.finra.org
.

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    \4\ Effective July 30, 2007, FINRA was formed through the 
consolidation of NASD and the member regulatory functions of NYSE 
Regulation, Inc. Accordingly, the TRFs are now doing business as the 
FINRA TRFs (i.e., the FINRA/Nasdaq TRF, the FINRA/NSX TRF and the 
FINRA/NYSE TRF). The formal name change of each TRF is pending and 
once completed, FINRA will file a separate proposed rule change to 
reflect those changes in the Manual.
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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

    Certain transactions can be trade reported in related tape (i.e., 
the transaction is reported to the tape for publication) and non-tape 
(i.e., the transaction is not reported to the tape for publication but 
is reported for clearing or regulatory purposes) reports. Non-tape 
reports can be (1) ``non-tape, non-clearing,'' i.e. the transaction is 
not reported to the tape and is submitted to FINRA for regulatory--and 
not clearing--purposes, or (2) ``clearing-only,'' i.e., the transaction 
is not reported to the tape and is submitted to FINRA for clearing (and 
perhaps also regulatory) purposes.
    A riskless principal transaction \5\ can be submitted to FINRA as a 
single trade report properly marked as riskless principal, or as two 
separate reports: (1) A tape report to reflect the initial leg of the 
transaction and (2) a non-tape report to reflect the offsetting, 
``riskless'' leg of the transaction. For example, where the initial leg 
of a riskless principal transaction is executed on and reported through 
an exchange (often referred to as the ``street leg'' or ``street 
side''), a tape report is not submitted to FINRA to reflect the initial 
leg; however, members are permitted, but not required, to submit a non-
tape report to FINRA for the offsetting, ``riskless'' leg of the 
transaction. Similarly, agency transactions where one member acts as 
agent on behalf of another member, which transactions are the 
functional equivalent of riskless principal transactions, can also be 
reported in related tape and non-tape reports. Thus, for example, 
similar to the riskless principal reporting structure, where Member A, 
as agent for Member B, executes a trade on an exchange (and that trade 
is reported to the tape through the exchange), Member A may submit a 
non-tape report to FINRA to reflect the offsetting portion of the 
agency trade between Member A and Member B.\6\ Currently, a non-tape 
report provides no specific information pertaining to a related tape 
report and as such, it is difficult for FINRA to determine where the 
associated trade was reported, especially if that trade was reported to 
an exchange or another FINRA Facility.
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    \5\ For purposes of over-the-counter trade reporting 
requirements applicable to equity securities, a ``riskless 
principal'' transaction is a transaction in which a member, after 
having received an order to buy (sell) a security, purchases (sells) 
the security as principal (the initial leg) and satisfies the 
original order by selling (buying) as principal at the same price 
(the offsetting, ``riskless'' leg).
    \6\ See FINRA Regulatory Notice 07-38 (August 2007).
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Proposed Amendments to NASD Rules 6130, 6130A, 6130C and 6130E

    FINRA is proposing to amend NASD Rules 6130 (relating to the NASD/
Nasdaq TRF and ORF), 6130A (relating to the ADF), 6130C (relating to 
the NASD/NSX TRF) and 6130E (relating to the NASD/NYSE TRF) to require 
that on any non-tape report (either a non-tape, non-clearing report or 
a clearing-only report) submitted to a FINRA Facility associated with a 
previously executed trade that was not reported to that same FINRA 
Facility, members must identify the facility or market where the 
associated trade was reported. The proposed rule change also requires 
that members retain and produce to FINRA, upon request, documentation 
relating to the associated trade (e.g., a confirmation from the 
exchange identifying the ``street side'' of a riskless principal 
transaction).
    For example, pursuant to the proposed rule change, if the initial 
leg of a riskless principal (or agency) transaction is executed on and 
reported through the Nasdaq Exchange, a member submitting a non-tape 
report for the offsetting leg of the transaction to the NASD/Nasdaq TRF 
would be required to use a special indicator on that report to 
designate that the initial leg was reported through the Nasdaq 
Exchange. By way of further example, if the initial leg is executed 
otherwise than on an exchange and reported to the NASD/NYSE TRF, a 
member submitting a non-tape report for the offsetting leg to the NASD/
Nasdaq TRF would be required to use a special indicator on that report 
to designate that the initial leg was reported to the NASD/NYSE TRF. 
Finally, if the initial leg is executed on and reported through a 
foreign exchange,\7\ a member submitting a non-tape report for the 
offsetting leg to the ORF would be required to use a special indicator 
on that report to designate that the initial leg was reported through a 
foreign exchange.
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    \7\ This leg would not be reported to FINRA pursuant to NASD 
Rule 6620(g).
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    In addition, FINRA is proposing to clarify and consolidate into a 
single paragraph in NASD Rules 6130, 6130A, 6130C and 6130E the rules 
relating to the submission of non-tape reports associated with 
previously executed trades. Pursuant to current Rules 6130(i), 
6130A(d), 6130C(h) and 6130E(h), members are prohibited from submitting 
to a FINRA Facility any non-tape report, including but not limited to 
reports of step-outs and reversals, associated with a previously 
executed trade that was not reported to that FINRA Facility, except 
where such report reflects the offsetting, ``riskless'' portion of a 
riskless principal transaction.\8\ This exception also applies to 
agency transactions where a FINRA member is acting as agent on behalf 
of another FINRA member.\9\ The requirement proposed herein, i.e., that 
a member identify on a non-tape report the market or facility where an 
associated trade was reported, would apply where a transaction falls 
within this exception for riskless principal or agency transactions and 
the related tape and non-tape reports are submitted to different FINRA 
Facilities or the non-tape report is associated with a trade that was 
reported to the tape through an exchange. Thus, for ease of reference, 
FINRA is proposing to include the proposed requirement that members 
identify the facility or market where the associated trade was reported 
in the same paragraph with the prohibition on the submission of certain 
non-tape reports to FINRA in current NASD Rules 6130(i), 6130A(d), 
6130C(h) and 6130E(h) and to clarify that the proposed requirement 
applies where a non-tape report is permitted pursuant to current Rules 
6130(i), 6130A(d), 6130C(h) and 6130E(h).
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    \8\ See Securities Exchange Act Release No. 55962 (June 26, 
2007), 72 FR 36536 (July 3, 2007) (notice of filing and immediate 
effectiveness of SR-NASD-2007-040). SR-NASD-2007-040 became 
operative on November 5, 2007. See also FINRA Regulatory Notice 07-
38 (August 2007).
    \9\ See FINRA Regulatory Notice 07-38 (August 2007).

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[[Page 73932]]

    FINRA believes that the proposed rule change will promote a more 
complete and accurate audit trail. Additionally, the proposed rule 
change will help ensure that members are not using non-tape reports to 
circumvent FINRA or Commission rules (e.g., trade-through rules).
    FINRA will announce the operative date of the proposed rule change 
on its Web site. In recognition of the technological and systems 
changes that the proposed rule change will require, the operative date 
will be at least 90 days following 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,\10\ which requires, among 
other things, 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. FINRA believes that the proposed rule change will 
promote a more complete and accurate audit trail.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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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

    Within 35 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 FINRA consents, the Commission will:
    (A) By order approve 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 rule-comments@sec.gov. Please include 

File Number SR-FINRA-2007-012 on the subject line.

Paper comments

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

All submissions should refer to File Number SR-FINRA-2007-012. 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 inspection 
and copying 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-2007-012 and should be 
submitted on or before January 18, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25206 Filed 12-27-07; 8:45 am]

BILLING CODE 8011-01-P