Document ID: SEC-2010-1771-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-11-18T05:00Z

[Federal Register: November 18, 2010 (Volume 75, Number 222)]
[Notices]               
[Page 70757-70759]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18no10-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63311; File No. SR-FINRA-2010-044]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to the 
Expansion of the Order Audit Trail System to All NMS Stocks

November 12, 2010.

I. Introduction

    On August 6, 2010, the 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\ a proposed rule change to 
amend its Order Audit Trail System rules to extend the recording and 
reporting requirements to all NMS stocks and to exclude certain firms 
that have limited trading activities. The proposed rule change was 
published for comment in the Federal Register on August 25, 2010.\2\ 
The Commission received three comment letters on the proposed rule 
change.\3\ FINRA responded to these comment letters in a letter dated 
October 28, 2010.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 62739 (August 18, 
2010), 75 FR 52380.
    \3\ See letter from Steve Allread, Equity Trader, Cutter 
Company, to Commission, dated September 10, 2010 (``Cutter 
Letter''); letter from Joan Conley, Senior Vice President and 
Corporate Secretary, Nasdaq OMX Group, Inc., to Elizabeth M. Murphy, 
Secretary, Commission, dated September 15, 2010 (``Nasdaq Letter''); 
and letter from Manisha Kimmel, Executive Director, Financial 
Information Forum, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 17, 2010 (``FIF Letter'').
    \4\ See letter from Brant K. Brown, Associate General Counsel, 
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated October 
28, 2010 (``FINRA Response'').
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II. Description of Proposal

    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 in OTC equity securities and equity securities listed and 
traded on The Nasdaq Stock Market, Inc. (``Nasdaq'').\5\ This

[[Page 70758]]

information is used by FINRA staff to oversee the markets and to 
determine if members are complying with FINRA's rules.
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    \5\ As 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).
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    FINRA is proposing to extend the OATS recording and reporting 
requirements to cover all NMS securities.\6\ FINRA is also proposing to 
exclude from the definition of ``Reporting Member'' \7\ in FINRA Rule 
7410 certain firms that became FINRA members pursuant to NASD IM-1013-1 
(Membership Waive-In Process for Certain New York Stock Exchange Member 
Organizations), or NASD IM-1013-2 (Membership Waive-In Process for 
Certain NYSE Alternext US LLC \8\ Member Organizations), and the rules 
of the NYSE,\9\ and that engage in the floor activities permitted in 
NASD IM-1013-1 and IM-1013-2 and receive orders through systems 
operated and regulated by the NYSE or NYSE Amex.
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    \6\ Rule 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).
    \7\ A ``reporting member'' is defined in FINRA Rule 7410(o) as a 
member that receives or originates an order and has an obligation to 
record and report information under Rules 7440 and 7450.
    \8\ In March 2009, NYSE Alternext US LLC changed its name to 
NYSE Amex LLC (``NYSE Amex''). See Securities Exchange Act Release 
No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009).
    \9\ See NYSE Rule 2.
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III. Discussion of Comment Letters

    The Commission received three comment letters on the proposed rule 
change and FINRA responded to these comments.\10\ One commenter, FIF, 
supported the proposal, but specified a variety of terms and provisions 
that it believed should be incorporated by FINRA in its expansion of 
OATS.\11\ Specifically, FIF suggested that FINRA ensure that the terms 
currently used in the Order Tracking System (OTS) Rules are harmonized 
with those used in the OATS Rule and noted, for example, that account 
types currently are treated differently by NYSE and FINRA. The 
commenter suggested using the ``FIX'' protocol to ensure 
standardization. FIF also requested that FINRA take into consideration 
that certain FINRA member firms do not have MPIDs, which are required 
for OATS reporting, and that FINRA configure OATS to accept symbols 
under the different Nasdaq and NYSE symbology plans.
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    \10\ See supra notes 3 and 4.
    \11\ See FIF Letter, supra note 3.
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    FIF suggested that FINRA enhance its capacity and processing 
bandwidth to accommodate the millions of additional OATS reports it 
would receive under the proposed rule to ensure timely processing of 
files and error free testing. FIF also requested that FINRA extend the 
deadline to submit reports due to the additional volume of reports that 
would be required. FIF also requested an extension of the current time 
frame for members to repair and resubmit OATS rejections.\12\
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    \12\ See FIF Letter, supra note 3.
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    FINRA responded to these comments by stating that it is currently 
reviewing OATS for potential efficiencies and will consider the issues 
raised with respect to revising its reporting and rejection repair and 
resubmission deadlines, as well as capacity limitations. FINRA believes 
that a phased-in approach for inclusion of NMS stocks in OATS is 
acceptable.
    FIF also requested that FINRA adopt an exemption for, or provide 
additional time for inclusion in OATS of, convertible and non-
convertible preferred stock listed on the NYSE explaining that these 
securities managed by firms' Fixed Income Desks and systems and may not 
be easily reportable on existing platforms.
    FINRA responded that NYSE's current OTS rules do not contain an 
exemption for preferred stock, and therefore, members are already 
required to capture order information for these securities. 
Consequentially, FINRA does not believe that preferred stock should be 
exempted from OATS, or that it should provide additional time for 
implementation of the requirement.
    Another commenter questioned the regulatory usage of the data that 
currently is required to be submitted to OATS.\13\ In response, FINRA 
explained that it currently uses OATS data to conduct surveillance and 
investigations of its members, and that the expansion of this data to 
include NMS securities traded on other exchanges would enhance FINRA's 
ability to surveil its members' trading activity across multiple 
markets.
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    \13\ See Allread Letter, supra note 3.
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    The third commenter, Nasdaq, argued that the timing of the OATS 
proposal, in light of the Commission's proposed consolidated audit 
trail, is an effort by FINRA to make OATS the default consolidated 
audit trail choice for the industry, and submitted questions for FINRA 
regarding the cost, timing and use of its proposal.\14\ In response, 
FINRA stated that its proposal is not intended to replace the 
Commission's consolidated audit trail proposal, and that FINRA views it 
instead as an effort to improve its own regulatory oversight. It 
recognized that the proposal may impose costs on its members, but 
believes that most of those affected would already have in place the 
OTS infrastructure, which would allow them to adopt the proposed 
changes quickly.
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    \14\ See Nasdaq Letter, supra note 3.
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IV. Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's response to the comments, and finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association.\15\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\16\ 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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    \15\ 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).
    \16\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change, by requiring 
members to record and report order information for all NMS stocks, not 
just those securities listed on Nasdaq or traded over-the-counter, will 
enhance FINRA's market surveillance and investigative capabilities. 
FINRA has stated that it is currently unable to view a complete order 
and transaction audit trail for all over-the-counter transactions in 
NMS stocks; thus, the proposed expansion of surveillance to NMS stocks 
listed on non-Nasdaq markets should enhance FINRA's oversight of the 
U.S. equity markets.
    The Commission believes the proposed rule change is a positive step 
toward a cross-market audit trail. The Commission views FINRA's 
proposed expansion of OATS as an interim measure that will improve 
FINRA's regulatory capabilities by broadening its oversight. The 
Commission notes that FINRA's proposal will also remove redundancies, 
as FINRA has represented that OTS is expected to be retired by NYSE 
upon the expansion of OATS.
    Additionally, the Commission agrees that FINRA's amendment to its 
definition of ``Reporting Members'' is

[[Page 70759]]

appropriate, as it excludes from the OATS recording and reporting 
requirements those members who conduct a floor business through NYSE 
and NYSE Amex and who are currently not subject to OTS, but to the 
requirements of NYSE Rule 123 and NYSE Amex Equities Rule 123 (Record 
of Orders).\17\ By exempting these members from the OATS requirements, 
FINRA is not altering their current audit trail obligations.\18\ The 
Commission believes that FINRA's proposed amendment to Rule 7410 is 
appropriate as these members would continue to be required to record 
and report information under NYSE Rule 123 and NYSE Amex Equities Rule 
123, and would continue to be subject to FINRA regulation.
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    \17\ NYSE Rule 123 and NYSE Amex Equities Rule 123 pertain to 
orders or commitments or obligations to trade originated on or 
transmitted to the floor of each exchange.
    \18\ These members would be subject to FINRA's oversight, as 
FINRA assumed the market surveillance and enforcement functions of 
NYSE Regulation, Inc. in June 2010, pursuant to a multi-party 
regulatory services agreement with NYSE Regulation, Inc., NYSE, NYSE 
Amex, and NYSE Arca. See ``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.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2010-044), be, and 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29079 Filed 11-17-10; 8:45 am]
BILLING CODE 8011-01-P