Document ID: SEC-2014-0862-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-05-27T04:00Z

[Federal Register Volume 79, Number 101 (Tuesday, May 27, 2014)]
[Notices]
[Pages 30219-30221]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12070]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72191; File No. SR-FINRA-2014-024]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Definition of ``Reporting Member'' 
in the Order Audit Trail System Rules

May 20, 2014.
    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 May 12, 2014, 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 and 
II below, which Items have been prepared by FINRA. 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.
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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 FINRA Rule 7410 to permit members to 
route orders to two Reporting Members for a defined period of time 
provided certain conditions are met without losing the exception from 
the definition of ``Reporting Member'' in the Order Audit Trail System 
(``OATS'') rules.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

7000. CLEARING, TRANSACTION AND ORDER DATA REQUIREMENTS, AND FACILITY 
CHARGES

* * * * *

7400. ORDER AUDIT TRAIL SYSTEM

7410. Definitions

    (a) through (n) No Change.
    (o) ``Reporting Member'' shall mean a member that receives or 
originates an order and has an obligation to record and report 
information under Rules 7440 and 7450.
    (1) A member shall not be considered a Reporting Member in 
connection with an order, if the following conditions are met:
    (A) the member engages in a non-discretionary order routing 
process, pursuant to which it immediately routes, by electronic or 
other means, all of its orders to:
    (i) a single receiving Reporting Member; or
    (ii) two receiving Reporting Members, provided:
    (a) orders are routed by the member to each receiving Reporting 
Member on a pre-determined schedule approved by FINRA; and
    (b) orders are routed to two receiving Reporting Members pursuant 
to the schedule for a time period not to exceed one year; and
    (B) the member does not direct and does not maintain control over 
subsequent routing or execution by the receiving Reporting Member(s);
    (C) the receiving Reporting Member(s) record(s) and report(s) all 
information required under Rules 7440 and 7450 with respect to the 
order; and
    (D) the member has a written agreement with the receiving Reporting 
Member(s) specifying the respective functions and responsibilities of 
each party to effect full compliance with the requirements of Rules 
7440 and 7450.
    (2) No Change.
* * * * *

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.

[[Page 30220]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    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 relating to OTC equity securities and NMS stocks. OATS captures 
this order information and integrates it with quote and transaction 
information to create a time-sequenced record of orders, quotes, and 
transactions. This information is then used by FINRA staff to conduct 
surveillance and investigations of member firms for potential 
violations of FINRA rules and federal securities laws.
    In general, the OATS Rules apply to any FINRA member that is a 
``Reporting Member,'' which is defined in Rule 7410 as ``a member that 
receives or originates an order and has an obligation to record and 
report information under Rules 7440 and 7450.'' \3\ Under Rule 7410, a 
member is not considered a Reporting Member in connection with an order 
if the following four criteria are met:
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    \3\ Rule 7410(o).
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     The member engages in a non-discretionary order routing 
process, pursuant to which it immediately routes, by electronic or 
other means, all of its orders to a single receiving Reporting Member;
     The member does not direct and does not maintain control 
over subsequent routing or execution by the receiving Reporting Member;
     The receiving Reporting Member records and reports all 
information required under Rules 7440 and 7450 with respect to the 
order; and
     The member has a written agreement with the receiving 
Reporting Member specifying the respective functions and 
responsibilities of each party to effect full compliance with the 
requirements of Rules 7440 and 7450.\4\
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    \4\ Rule 7410(o)(1). Rule 7410 also includes an exception from 
Reporting Member for certain firms who waived into FINRA membership 
pursuant to NASD IM-1013-1 or NASD IM-1013-2. See Rule 7410(o)(2).
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    One of the current criteria that must be met for a member to take 
advantage of the exception from the definition of Reporting Member is 
that the member immediately route orders on a non-discretionary basis 
to a single receiving Reporting Member. Thus, members will not be 
excepted from the definition if they route orders to more than one 
receiving firm. This exception is generally, though not exclusively, 
relied upon by introducing firms that route all of their orders to a 
single clearing firm that reports the introducing firms' orders on 
their behalf. As FINRA noted when it adopted the exception, it is 
intended largely to avoid duplicative reporting of the same order 
information by two different firms and to avoid imposing unnecessary 
compliance costs and burdens on firms that route all of their orders 
immediately to another single firm that reports the information to 
OATS.\5\
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    \5\ See Securities Exchange Act Release No. 52521 (September 28, 
2005), 70 FR 57909 (October 4, 2005) (Order Approving SR-NASD-2000-
23).
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    The proposed rule change would permit a member to continue to rely 
on the exception from the definition of Reporting Member if, for a 
limited time, the member routes orders to two different Reporting 
Members, provided certain criteria are met. Although not limited to 
this purpose, the proposed rule change is intended to accommodate 
introducing firms that transition to a different clearing firm over 
time and, during the transition, route their orders to two different 
clearing firms, both of which report the introducing firm's order 
information to OATS during the transition period. Without the proposed 
rule change, introducing firms would be subject to the OATS Rules 
during the transition period, which is generally less than one year. 
FINRA believes it is unnecessarily burdensome to require introducing 
firms to report order information directly to OATS under these 
circumstances when the transition period is less than one year. FINRA 
notes that the concern over duplicative reporting is similarly present 
in the case where all of a firm's order information is being reported 
by another Reporting Member even if, for a limited period of time, 
order information is reported by two separate Reporting Members. 
Further, FINRA believes it would be burdensome for a member that meets 
the exception to Reporting Member to have to commence OATS reporting 
for a limited period, to only later meet the terms of the exception 
again.
    Under the proposed rule change, a member would remain excepted from 
the definition of Reporting Member during a transition period to a new 
clearing firm when it routes to both its former and new clearing firm 
provided certain additional criteria are met in addition to the 
existing criteria necessary to meet the exception. Specifically, under 
the terms of the proposed rule change: (i) All orders must be routed by 
the member to each receiving Reporting Member on a pre-determined 
schedule approved by FINRA; and (ii) the orders may only be routed to 
two receiving Reporting Members pursuant to the schedule for a time 
period not to exceed one year. In addition to these additional 
criteria, members must continue to meet the existing criteria in the 
rule.
    Under the proposed rule change, FINRA must be notified in advance 
and must approve the schedule for the transition to a new clearing 
firm.\6\ The time period for the transition set out in the schedule may 
not exceed one year. This requirement is necessary to ensure that FINRA 
staff is aware of the transition schedule and can ensure that 
surveillance using OATS data is conducted correctly and that order 
information is properly identified. In addition, FINRA believes that 
the ability to rely on the exception should be limited to transition 
periods of one year or less. FINRA believes that members otherwise 
excepted from the definition of Reporting Member should not be required 
to incur the costs associated with OATS reporting for standard 
transitions between clearing firms; however, FINRA does not believe it 
is appropriate to permit members to take advantage of the exception and 
avoid directly reporting to OATS for lengthy periods of time (i.e., in 
excess of one year) where they route orders to multiple firms.
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    \6\ FINRA anticipates that firms would notify FINRA by 
contacting OATS Operations staff by telephone and then supplying 
FINRA with a copy of the transition schedule prepared by the firm.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ which requires, among 
other things, that FINRA rules must 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 permitting members that are 
excepted from the definition of ``Reporting Member'' to continue to 
rely on the exception during a transition to another clearing firm will 
avoid duplicative order information being reported to

[[Page 30221]]

OATS and will avoid the imposition of unnecessary compliance costs on 
introducing firms.
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    \7\ 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. FINRA believes the proposed 
rule change will reduce the potential burden of reporting to OATS for a 
limited time for a member that does not meet the current exception to 
Reporting Member only to later meet the terms of the exception again. 
FINRA believes that, in the limited circumstances in which the proposed 
rule change will apply, members should not be compelled to undertake 
the time and costs associated with OATS reporting when FINRA is able to 
ensure the accuracy and completeness of OATS information when the terms 
in the proposed rule change are met.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), FINRA provided the Commission with written notice of 
its intent to file the proposed rule change, along with a brief 
description and the text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    FINRA has asked the Commission to waive the 30-day operative delay 
so that the proposal may become operative upon filing. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest as it will allow 
members that currently rely on the exception from being considered a 
Reporting Member to continue to do so for a limited period of time 
while they change clearing firms, provided the criteria in the proposed 
rule change are met, thus eliminating the burden of reporting directly 
to OATS for such members and maintaining the integrity of the OATS 
data. For this reason, the Commission designates the proposed rule 
change to be operative upon filing.\10\
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    \10\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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 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.

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 Number SR-FINRA-2014-024 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2014-024. 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-2014-024 and should be 
submitted on or before June 17, 2014.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12070 Filed 5-23-14; 8:45 am]
BILLING CODE 8011-01-P