Document ID: SEC-2009-1641-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to the Restructuring of Quotation Collection and Dissemination for OTC Equity Securities
Posted Date: 2009-11-23T05:00Z

[Federal Register: November 23, 2009 (Volume 74, Number 224)]
[Notices]               
[Page 61183-61186]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no09-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60999; File No. SR-FINRA-2009-077]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Restructuring of Quotation Collection and Dissemination for OTC 
Equity Securities

November 13, 2009.
    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 November 6, 2009, 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, 
II, and III 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 a rule change to restructure quotation 
collection and dissemination for OTC Equity Securities.
    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,

[[Page 61184]]

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 is proposing to: (1) Create a Quotation Consolidation 
Facility (``QCF'') for OTC Equity Securities for regulatory and 
transparency purposes that would serve as a data consolidator for all 
quote data in the over-the-counter equity market; (2) delete the FINRA 
Rule 6500 Series, which governs the operation of the OTC Bulletin Board 
Service (``OTCBB''); \3\ and (3) modify the position charge from $6.00/
security/month to $4.00/security/month.
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    \3\ FINRA intends to cease operation of the OTCBB upon 
implementation of this proposed rule change.
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Background
    The OTCBB and Pink OTC Markets Inc. (``Pink Sheets'') are the 
primary attributable quotation platforms for OTC Equity Securities.\4\ 
The OTC Equity Security class generally is comprised of: (i) Securities 
quoted solely on the OTCBB (approximately 75 issues); \5\ (ii) 
securities quoted solely on the Pink Sheets (approximately 5,877 
issues); (iii) securities quoted on both the Pink Sheets and the OTCBB 
(approximately 3,372 issues); and (iv) ``Grey Market'' securities 
(i.e., publicly traded, non-exchange listed securities that are not 
otherwise quoted on any inter-dealer quotation system (approximately 
14,000 issues)).\6\
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    \4\ ``OTC Equity Security'' means any non-exchange-listed 
security and certain exchange-listed securities that do not 
otherwise qualify for real-time trade reporting. See FINRA Rule 
6420(d).
    \5\ To be eligible for quoting on the OTCBB, an issuer must 
generally not be listed on an exchange (or otherwise qualify for 
real-time trade reporting via the Consolidated Tape) and be a 
current, timely filer of periodic financial reports as set forth in 
FINRA Rule 6530.
    \6\ Notwithstanding that quotation activity in OTC Equity 
Securities occurs on both the Pink Sheets and on the OTCBB, trade 
reporting is centralized through the FINRA OTC Reporting Facility 
(``ORF''). Currently FINRA members are required to report 
substantially all trades in OTC Equity Securities to the ORF within 
90 seconds of execution and FINRA disseminates this transaction 
information in real-time.
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    OTCBB quotation data, as well as OTC Equity Security trade report 
data, has historically been consolidated through FINRA into the Nasdaq 
Level 1 data feed.\7\ The Commission specifically approved the 
incorporation of this commingled data into Level 1 to ensure that it is 
widely disseminated for a reasonable cost to investors and market 
participants.\8\ FINRA believes that the creation of a consolidated OTC 
Equity Security national best bid or offer (``NBBO'') and last sale 
trade tape through the Level 1 data feed will continue to benefit 
market integrity, foster investor protection, and directly support the 
original intent of the Commission in approving the commingling of OTC 
Equity Security data with the Level 1 data feed.
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    \7\ The Level 1 feed is a consolidated best bid or offer 
(``BBO'') data feed for Nasdaq-listed securities and OTCBB-eligible 
securities. The Level 1 feed is carried by virtually all trading 
firms and market data distributors.
    \8\ See Securities Exchange Act Release No. 29616 (August 27, 
1991), 56 FR 43826 (September 4, 1991) (Notice of Filing and 
Immediate Effectiveness of File No. SR-NASD-91-38); Securities 
Exchange Act Release No. 35054 (December 6, 1994), 59 FR 64225 
(December 13, 1994) (Notice of Filing of File No. SR-NASD-94-70); 
and Securities Exchange Act Release No. 35217 (January 11, 1995), 60 
FR 3890 (January 19, 1995) (Order Approving File No. SR-NASD-94-70). 
Pink Sheets quotation data is not currently included in this data 
feed but is sold as a proprietary product by Pink Sheets.
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    FINRA notes that an increasing amount of quotation data is not made 
directly available through the Level 1 data feed for a variety of 
reasons. For example, some market makers are opting to utilize inter-
dealer quotation systems other than the OTCBB Service for some or all 
of their quoting activity. In addition, certain classes of securities 
that are not currently eligible by rule for quotation on the OTCBB have 
experienced significant growth in the recent past (e.g., unsponsored 
American Depository Receipts). In contrast to the market for OTC Equity 
Securities, the NMS consolidated data system ensures that investors, 
market participants, and regulators have ready access to consolidated 
real-time data for NMS stocks quoted and traded on an inter-market 
basis for a reasonable cost. Thus, FINRA believes a number of factors, 
including members' best execution obligations and the potential for 
future market fragmentation in the OTC Equity Security space, 
necessitate a widely available NBBO for over-the-counter quotations in 
OTC Equity Securities. Further to that point, a consolidated OTC Equity 
Security NBBO that is integrated in real time into FINRA regulatory 
systems will be beneficial for conducting surveillance for compliance 
with other FINRA rules. FINRA also notes that this proposal is 
consistent with the goals articulated in a separate filing proposing to 
extend selected Regulation NMS protections to the over-the-counter 
market.\9\
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    \9\ See Securities Exchange Act Release No. 60515 (August 17, 
2009), 74 FR 43207 (August 26, 2009) (Notice of Filing of File No. 
SR-FINRA-2009-054). The proposed rule change would: (1) Restrict 
sub-penny quoting; (2) restrict locked and crossed markets; (3) 
implement a cap on access fees; and (4) require the display of 
customer limit orders.
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The Proposed Restructuring
    As discussed above, data consolidation for OTC Equity Securities is 
currently in place for last sale trade reports through the FINRA ORF, 
but no readily available, complementary, consolidated system exists for 
quotations in OTC Equity Securities. Thus, FINRA is proposing to 
implement a new over-the-counter transparency structure by ceasing 
operation of the OTCBB and establishing an OTC Equity Security QCF.\10\
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    \10\ To ensure a smooth transition in connection with the launch 
of the QCF and the sale of the OTCBB, FINRA is actively engaged in 
an outreach campaign to inform investors, issuers, market 
participants, and the market data community regarding the 
initiative.
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    Under the proposal, FINRA would require: (1) Members to submit 
contemporaneously to the QCF any quotation in an OTC Equity Security 
that is displayed directly by a member on an inter-dealer quotation 
system that permits updates on a real-time basis,\11\ and (2) a member 
that is an ATS (as defined by Rule 300(a) of Regulation ATS) to submit 
contemporaneously to the QCF its highest displayed buy price and size 
and lowest displayed sell price and size (i.e., ``top-of-book''), 
irrespective of whether it chooses to display its quotations on an 
inter-dealer quotation system.\12\ Quotation information reported to 
the QCF must reflect all changes in quotations or quotation size 
displayed and the time any such change was effected.
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    \11\ Rule 15c2-11(e)(2) under the Act defines ``inter-dealer 
quotation system'' as ``any system of general circulation to brokers 
or dealers which regularly disseminates quotations of identified 
brokers or dealers.''
    \12\ The QCF reporting obligations apply to quotations in ``OTC 
Equity Securities,'' which may include certain exchange-listed 
securities (i.e., securities that are listed on a national 
securities exchange that do not meet the definition of ``NMS stock'' 
as that term is defined in Rule 600(b)(47) of Regulation NMS). 
However, FINRA is not proposing to require members to submit to 
FINRA quotations in OTC Equity Securities that are displayed on an 
exchange. Thus, the consolidated NBBO disseminated through the QCF 
will include quotations in certain exchange-listed, non-NMS stocks 
quoted over-the-counter on an inter-dealer quotation system (or 
ATS), but will not include quotations in those securities displayed 
on an exchange. This is consistent with current transaction 
dissemination whereby the Level 1 data feed includes all OTC 
transactions in OTC Equity Securities, but does not currently 
consolidate transactions in OTC Equity Securities reported on or 
through an exchange. With respect to quotations displayed by the 
QCF, FINRA will append a modifier to the symbol of each OTC Equity 
Security disseminated by the QCF that also is listed on an exchange 
in order to indicate that the QCF NBBO may not represent the 
complete best bid and offer for such security.
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    Specifically, members would be required to report, at a minimum, 
the following information for every

[[Page 61185]]

quotation displayed by the member during the trading day:
     Submitting firm;\13\
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    \13\ In the case that the submitting firm is an ATS, this field 
shall include the name of such ATS (rather than the identification 
of the member firm originating the trading interest).
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     Inter-dealer quotation system on which the quotation is 
displayed (if applicable);
     Quotation date;
     Time quotation displayed (expressed in hours, minutes and 
seconds);
     Security name and symbol;
     Bid and bid quotation size (if applicable) and offer and 
offer quotation size (if applicable); \14\ and
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    \14\ These fields are applicable only to a member that is not an 
ATS.
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     Highest displayed buy price and size and lowest displayed 
sell price and size of an ATS (if applicable).\15\
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    \15\ This field is applicable only to a member that is an ATS.
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    Members must use the QCF to report quotation information on a real-
time basis and the QCF will collect, consolidate and then disseminate 
the NBBO on a real-time basis for all over-the-counter quotations in 
OTC Equity Securities.\16\ Thus, the proposal will effectively ensure 
that all over-the-counter quotation data for OTC Equity Securities is 
submitted to FINRA for the purpose of creating a NBBO for dissemination 
through the Level 1 consolidated quote feed. Moreover, this centralized 
NBBO will be complemented with consolidated last sale trade report data 
through FINRA's operation of the existing ORF in concert with the 
QCF.\17\ Members would have the option of using a vendor (including an 
inter-dealer quotation system) to transmit their quotation data to the 
QCF, but the member would remain ultimately responsible for the real-
time submission of their quotation data to the QCF. FINRA currently 
intends to disseminate the NBBO of each OTC Equity Security displayed 
by an ATS or by a member on an inter-dealer quotation system, but does 
not intend to disseminate depth of book quotation data through the QCF. 
Instead, mirroring the approach taken by the Commission in the NMS 
market, quotation mediums operating in the OTC Equity Security space 
would be free to create and sell data products related to depth of book 
data.
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    \16\ Under the current proposal, FINRA intends to build QCF 
functionality such that the QCF's disseminated NBBO field will 
extend to four decimal places. FINRA recognizes that certain 
quotation mediums currently accommodate quotations in increments of 
smaller than $0.0001; therefore, FINRA will work with members and 
vendors with regard to uniform and consistent normalization of 
quotation data for submission to the QCF. As with other FINRA rules, 
FINRA will oversee member conduct in its usual course with regard to 
compliance with its rules in the context of this quote normalization 
issue.
    \17\ As would be the case with the QCF, data for OTC Equity 
Securities reported on or through an exchange currently is not 
included in the FINRA ORF. See supra note 12.
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    FINRA also is proposing to create an additional level of 
transparency related to OTC Equity Securities directly within the 
primary consolidated Level 1 quote feed. Specifically, FINRA is 
proposing to append a modifier to each symbol for every OTC Equity 
Security to indicate its financial reporting status. These appendages 
would be disseminated on the Level 1 consolidated data stream 
indicating whether the issuer of the OTC Equity Security is a timely 
financial reporting company, a delinquent financial reporting company, 
or a non-financial reporting company. FINRA views this enhanced issuer 
transparency as carrying significant benefits, including that it will 
provide more granular information regarding the status of an issuer of 
each OTC Equity Security directly through the consolidated Level 1 data 
feed.\18\
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    \18\ FINRA will track issuer reporting status in a substantially 
similar manner as is done with respect to securities for which 
quotations are posted on the OTCBB. See supra note 5. If a party 
believes that the modifier appended by FINRA reflects an error, such 
party may contact FINRA at no charge. Specific contact information 
will be provided by FINRA in the Regulatory Notice announcing the 
implementation date of these proposed rules. However, FINRA reserves 
the right to make the final determination as to the status of the 
issuer based on the sole reasonable discretion of the staff. In 
addition, consistent with current OTCBB procedures, because FINRA 
relies solely on publicly available data to track issuer reporting 
status (i.e., FINRA does no independent verification of issuer 
filing status), issuer status changes will only be made in 
extraordinary cases and, generally, only if written notice of status 
change is received by FINRA directly from the Commission or other 
regulator, as applicable.
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    To account for its broader role as the operator of the QCF and for 
growing fragmentation in the market for OTC Equity Securities, FINRA is 
proposing to implement a new, broader approach to the application of 
the existing FINRA OTCBB position fee (currently $6.00/security/month). 
FINRA is proposing that an OTC Equity Security-wide position fee should 
be established in place of the current OTCBB-specific position fee. The 
proposed fee would be a flat $4.00/security/month and would be assessed 
upon any FINRA member that submits or is required to submit its 
quotations to the QCF, either directly or indirectly through a service 
provider.
    FINRA will cease operation of the OTCBB concurrent with the 
implementation of the QCF and intends to provide ample time for 
investors and market participants to prepare for the transition. The 
effective date of the proposed rule change will, therefore, be no 
sooner than 60 days and no later than 365 days from Commission 
approval; provided, however, that the proposed rule change will not 
take effect prior to the cessation of operation of the OTCBB.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act.\19\ Section 15A(b)(6) 
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. The proposed rule change will 
prevent fraudulent and manipulative acts and practices by enhancing the 
transparency and accessibility of consolidated quotation information 
for over-the-counter quotations in OTC Equity Securities and will 
promote better compliance with FINRA rules applicable to quoting and 
trading in OTC Equity Securities including, among other things, 
members' best execution obligations.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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    FINRA also believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(11) of the Act.\20\ Section 
15A(b)(11) requires that the rules of the association include 
provisions governing the form and content of quotations relating to 
securities sold otherwise than on a national securities exchange which 
may be distributed or published by any member or person associated with 
a member, and the persons to whom such quotations may be supplied.
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    \20\ 15 U.S.C. 78o-3(b)(11).
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    Consistent with the requirements of Section 15A(b)(11), FINRA 
believes that the implementation of a consolidated quote stream (in 
addition to the existing FINRA trade report data stream) represents an 
orderly system for collecting, distributing and publishing quotation 
and trade data for over-the-counter quotations and transactions in OTC 
Equity Securities, thereby providing the investing public and market 
participants with ready access to informative, consolidated trade and 
quotation information.

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

[[Page 61186]]

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 self-regulatory organization 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 Exchange 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-2009-077 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-2009-077. 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,\21\ 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 the 
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-2009-077 and should be submitted on or before December 14, 
2009.
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    \21\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27994 Filed 11-20-09; 8:45 am]

BILLING CODE 8011-01-P