Document ID: SEC-2011-1665-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-10-31T04:00Z

[Federal Register Volume 76, Number 210 (Monday, October 31, 2011)]
[Notices]
[Pages 67236-67238]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28061]

[[Page 67236]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65618; File No. SR-FINRA-2011-061]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Expand the Exception Relating to Transfers of 
Proprietary Securities Positions in Connection With Certain Corporate 
Control Transactions

October 25, 2011.
    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 October 14, 2011, the 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. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ 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\ 17 CFR 240.19b-4(f)(6).
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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 trade reporting rules to expand 
the scope of the existing exception for over-the-counter (``OTC'') 
transfers of proprietary positions in debt and equity securities 
effected in connection with certain corporate control transactions.
    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
    FINRA trade reporting rules require that OTC transactions in debt 
and equity securities be reported to FINRA unless they qualify for an 
express exception under the rules. For purposes of the trade reporting 
rules, a ``trade'' or ``transaction'' entails a change of beneficial 
ownership of securities between parties (e.g., a purchase or sale of 
securities) in which a FINRA member participates.\4\ As a general 
matter, when members report OTC trades, FINRA facilitates the public 
dissemination of the trade information and/or assesses regulatory 
transaction fees under Section 3 of Schedule A to the FINRA By-Laws 
(``Section 3'') \5\ and the Trading Activity Fee (``TAF'').\6\ Certain 
transactions and transfers are not reported to FINRA at all (e.g., 
trades executed and reported through an exchange and transfers made 
pursuant to an asset purchase agreement that has been approved by a 
bankruptcy court), while other transactions must be reported to FINRA 
for regulatory transaction fee assessment purposes only (e.g., away 
from the market sales).\7\ Members must have policies and procedures 
and internal controls in place to determine whether a transaction 
qualifies for an exception under the rules.
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    \4\ See Trade Reporting Frequently Asked Questions, FAQ 100.4, 
available at http://www.finra.org/Industry/Regulation/Guidance/P038942.
    \5\ Pursuant to Section 31 of the Act, FINRA and the national 
securities exchanges are required to pay transaction fees and 
assessments to the SEC that are designed to recover the costs 
related to the government's supervision and regulation of the 
securities markets and securities professionals. FINRA obtains its 
Section 31 fees and assessments from its membership in accordance 
with Section 3.
    \6\ The TAF is one of the member regulatory fees FINRA uses to 
fund its member regulation activities, market regulation activities, 
financial monitoring and policymaking, rulemaking and enforcement 
activities. Among others, the TAF is assessed for the sale of all 
exchange registered securities wherever executed and OTC equity 
securities. See FINRA By-Laws, Schedule A, Sec.  1(b)(1).
    \7\ See Rules 6282(i) (Alternative Display Facility), 6380A(e) 
(FINRA/Nasdaq Trade Reporting Facility), 6380B(e) (FINRA/NYSE Trade 
Reporting Facility), 6622(e) (OTC Reporting Facility), and 6730(e) 
and 6750 (Trade Reporting and Compliance Engine).
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    Under FINRA trade reporting rules,\8\ there is an exception for 
transfers of proprietary securities positions between a member and 
another member or non-member broker-dealer where the transfer (1) Is 
effected in connection with a merger of one broker-dealer with the 
other broker-dealer or a direct or indirect acquisition of one broker-
dealer by the other broker-dealer or the other broker-dealer's parent 
company and (2) is not in furtherance of a trading or investment 
strategy. Members are not required to report such transfers for 
publication purposes, but must report them to FINRA for purposes of 
assessing applicable regulatory transaction fees pursuant to Section 3 
and the TAF. Additionally, members must provide FINRA at least three 
business days advance written notice of their intent to use this 
exception, including the basis for their determination that the 
transfer meets the terms of the exception.
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    \8\ See Rules 6282(i)(2) and 7130(c); 6380A(e)(2) and 7230A(g); 
6380B(e)(2) and 7230B(f); 6622(e)(2) and 7330(g); and Rule 6750(b).
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    FINRA is proposing to expand the scope of this exception to apply 
to any transfer of proprietary securities positions where the transfer 
(1) Is effected in connection with a merger or direct or indirect 
acquisition and (2) is not in furtherance of a trading or investment 
strategy. Thus, the exception would no longer be limited to transfers 
between a member and another member or non-member broker-dealer 
effected in connection with a merger or acquisition involving the 
member or its parent company. However, for purposes of this exception, 
the distinguishing factor will continue to be whether the transfer is 
being effected as part of the corporate control transaction rather than 
being driven by a trading or investment strategy.
    For example, a member's parent company acquires a foreign financial 
institution, and as part of the corporate control transaction, the 
foreign financial institution's proprietary positions are transferred 
to the member. Under the proposed rule change, the transfer would not 
be reported for public dissemination purposes, but would be reported to 
FINRA for regulatory purposes. By way of further example, a member's 
parent company acquires two new subsidiaries, both of which are U.S. 
non-broker-dealer financial institutions, and as part of the corporate 
control transaction, the proprietary positions of one subsidiary are 
transferred to the other subsidiary. Both of the subsidiaries have 
custodial accounts at the member, and the member facilitates the 
transfer. Under the proposed rule

[[Page 67237]]

change, the transfer would not be reported for public dissemination 
purposes, but would be reported to FINRA for regulatory purposes.
    FINRA believes that the policy reasons behind the existing 
exception support expanding the scope of the exception as proposed 
herein. While such transfers are ``trades'' or ``transactions'' because 
they result in a change of beneficial ownership, they are unlike the 
typical securities transaction in that they are not driven by a trading 
or investment strategy (e.g., a desire to exit a position or lock in a 
profit) relating to a particular security position. Additionally, the 
securities being transferred typically are assigned a value, such as 
the closing price of the security on a date certain, solely for 
purposes of effectuating the transfer. As such, FINRA believes that 
public dissemination of such transfers would not provide meaningful 
price discovery information to the market. To the contrary, 
dissemination could confuse investors and other market participants, 
particularly where the positions being transferred are substantial. 
Public dissemination of significant and perhaps unusual trading 
activity could give the false impression of investor interest, market 
participant transactions and significant price discovery activities, 
and the volume reports could skew a variety of trading activity 
indicators.
    FINRA notes that the other provisions of the existing exception 
will remain unchanged under the proposed rule change. Specifically, 
members will continue to be required to provide FINRA at least three 
business days advance written notice of their intent to rely on this 
exception, including the basis for their determination that the 
transfer meets the terms of the exception. They also will continue to 
be required to report the transfers (for regulatory and not publication 
purposes) on the same day as the ultimate transfer of the positions on 
their books and records (unless later reporting is warranted under 
specific circumstances).\9\
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    \9\ See supra note 8; see also Regulatory Notice 09-21 (April 
2009).
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested waiver of the 30-day operative delay. 
FINRA is proposing to make the proposed rule change operative 
immediately upon filing.
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 [sic], 
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 the proposed rule change 
will clarify members' trade reporting obligations, enhance the utility 
of market information and protect investors and other market 
participants by ensuring that transfers that do not contribute to 
market price discovery and could confuse market participants are not 
disseminated.
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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

    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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    FINRA has requested that the Commission waive the requirement that 
the rule change, by its terms, not become operative for 30 days after 
the date of the filing, as set forth in Rule 19b-4(f)(6)(iii),\13\ to 
allow the trade reporting exception to apply to the broader range of 
transfers as soon as possible for the benefit of the marketplace and 
the investing public. FINRA proposes to make the proposed rule change 
operative immediately upon filing. The Commission has determined that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest, because it will allow the trade 
reporting exception to apply to transfers of securities positions which 
transfers do not contribute to market price discovery and could confuse 
investors.\14\ Accordingly, the Commission waives the 30-day operative 
delay requirement and designates the proposed rule change to be 
operative upon filing with the Commission.
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has 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-2011-061 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-2011-061. 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

[[Page 67238]]

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-2011-061 and should be submitted on or before November 21, 
2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28061 Filed 10-28-11; 8:45 am]
BILLING CODE 8011-01-P