Document ID: SEC-2012-0387-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-03-09T05:00Z

[Federal Register Volume 77, Number 47 (Friday, March 9, 2012)]
[Notices]
[Pages 14454-14456]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5779]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66513; File No. SR-FINRA-2012-016]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Allow FINRA To Exempt Certain Alternative 
Trading Systems From the Trade Reporting Obligation Under the Trade 
Reporting and Compliance Engine (``TRACE'') Reporting Rules

March 5, 2012.
    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 February 28, 2012, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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 Rule 19b-4(f)(6) under the Act,\3\ which renders the 
proposal effective upon filing with 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 adopt new Rule 6731 to provide FINRA with 
authority to exempt a member alternative trading system (``ATS'') that 
meets the specified criteria from the trade reporting obligation under 
the Rule 6700 Series. In addition, FINRA is proposing a conforming 
change to Rule 9610 to specify that FINRA has exemptive authority under 
proposed Rule 6731.
    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
    A member that is a ``Party to a Transaction'' as defined in FINRA 
Rule 6710(e) in a transaction in a TRACE-Eligible Security must report 
the trade to TRACE under Rule 6730(a).\4\ ``Party to a Transaction'' is 
defined as ``an introducing broker-dealer, if any, an executing broker-
dealer, or a customer.'' \5\ An ATS, which term includes electronic 
communications networks, is a Party to a Transaction and has a trade 
reporting obligation when a transaction in a TRACE-Eligible Security is 
executed through the ATS.\6\
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    \4\ See Rule 6730(a). In transactions between members, each 
member must report the trade, and for transactions between a member 
and a customer, the member must report the trade.
    \5\ Under Rule 6710(e), ``customer'' includes a broker-dealer 
that is not a FINRA member.
    \6\ See www.finra.org/Industry/Compliance/MarketTransparency/TRACE/FAQ/P125244#reporting (FAQ: Who reports trades executed 
through electronic trading systems that are themselves broker-
dealers? All FINRA members that are ``parties to a transaction'' 
have a trade reporting obligation under TRACE Rules. Where two FINRA 
members effect/execute a transaction through an electronic trading 
system that is registered as a broker-dealer, both members, as well 
as the electronic trading system would have a trade reporting 
obligation).
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    FINRA is proposing to adopt new Rule 6731 to provide FINRA with 
authority to exempt, upon application and subject to specified terms 
and conditions, a member ATS from the

[[Page 14455]]

obligation to report a transaction in a TRACE-Eligible Security under 
certain limited circumstances. FINRA will only grant an exemption where 
all of the conditions set forth in the proposed rule are satisfied.
    First, trades must be between ATS subscribers that are both FINRA 
members. For any trades between non-members, or a FINRA member and a 
customer (which includes a broker-dealer that is not a FINRA member), 
the exemption will not apply, and the ATS will have a trade reporting 
obligation under Rule 6730.
    The ATS also must demonstrate that it meets the following criteria. 
First, the member subscribers must be fully disclosed to one another at 
all times on the ATS. Second, although the system brings together the 
orders of buyers and sellers and uses established, non-discretionary 
methods under which such orders interact with each other, the system 
does not permit automatic execution. A member subscriber must take 
affirmative steps beyond the submission of an order to agree to a trade 
with another member subscriber. Third, the trade does not pass through 
any ATS account, and the ATS does not in any way hold itself out to be 
a party to the specific trade. Fourth, the ATS does not exchange TRACE-
Eligible Securities or funds on behalf of the member subscribers, take 
either side of the trade for clearing or settlement purposes, 
including, but not limited to, at DTC or otherwise, or in any other way 
insert itself into the trade.
    In addition, the ATS and the member subscribers must acknowledge 
and agree in writing that the ATS shall not be deemed a party to the 
specific trade for purposes of trade reporting and that trades shall be 
reported by each member subscriber that satisfies the definition of 
``Party to a Transaction'' under Rule 6710. An ATS that is granted an 
exemption must obtain such written agreements from all of its member 
subscribers prior to relying on the exemption.\7\
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    \7\ FINRA reminds members of their books and records obligations 
under FINRA rules, the Exchange Act and applicable Exchange Act 
rules. Thus, any ATS that is granted an exemption under the proposed 
rule change would be required to retain the written agreements and 
be able to produce them to FINRA upon request.
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    Finally, the ATS must agree to provide to FINRA on a monthly basis, 
or such other basis as prescribed by FINRA, data relating to the volume 
of trades in TRACE-Eligible Securities executed by the ATS's member 
subscribers using the ATS's system (e.g., number of trades, number of 
bonds (or notes, etc.) traded and total settlement value for each 
TRACE-Eligible Security traded). Importantly, although an ATS exempted 
under the proposed rule will not have trade reporting obligations under 
FINRA rules, the trading occurring through the ATS is still considered 
volume of the ATS for purposes of, among other things, the 
recordkeeping requirements of Rule 302 of SEC Regulation ATS \8\ and 
determining whether the ATS triggers the Fair Access requirements under 
Rule 301(b)(5) of Regulation ATS or the Capacity, Integrity and 
Security of Automated Systems requirements of Rule 301(b)(6) of 
Regulation ATS, as applicable. The ATS also must acknowledge that 
failure to report such data to FINRA, in addition to constituting a 
violation of FINRA rules, will result in revocation of any exemption 
granted pursuant to the proposed rule change.
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    \8\ 17 CFR 242.300-303.
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    Where an exemption is granted, the ATS will not be deemed a Party 
to a Transaction for purposes of FINRA trade reporting rules and will 
not be identified in trade reports submitted to FINRA. As expressly 
stated in the proposed rule, the trade must be reported to FINRA by the 
member subscribers that also are Parties to a Transaction under Rule 
6710(e).\9\ For example, FINRA member BD1 displays a quote through ATS 
X and member BD2 routes an order to BD1 for the price and size of BD1's 
quote using a messaging system provided by ATS X. BD1 does not 
subsequently re-route the order and executes the trade. Assuming that 
ATS X meets all of the criteria set forth in the proposed rule and has 
been granted an exemption by FINRA, it will not be deemed a Party to 
the Transaction for trade reporting purposes and should not be 
identified as such in the trade report submitted to FINRA. In this 
example, BD1 and BD2 would each have a reporting obligation under Rule 
6730.
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    \9\ FINRA notes that where an ATS has been granted an exemption 
under the proposed rule, the member subscribers will be assessed the 
Trading Activity Fee under FINRA By-Laws, Schedule A, Sec.  1. The 
ATS will not be assessed such fees.
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    FINRA believes that the proposed rule change will reduce potential 
confusion and possible misreporting by clearly identifying the member 
with the trade reporting obligation in this instance. FINRA believes 
that an ATS that satisfies all conditions of the proposed rule change 
has a more limited involvement in the trade execution than the member 
subscribers and therefore the proposed exemption is appropriate in this 
narrow instance. FINRA expects that a large majority of ATSs will not 
qualify for the exemption, and the proposed rule change will not result 
in a change to their reporting.
    FINRA also is proposing a conforming change to Rule 9610 to add 
proposed Rule 6731 to the list of rules pursuant to which FINRA has 
exemptive authority.
    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, such that FINRA can implement the proposed rule 
change on the date of 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, 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 
reduce potential confusion and possible misreporting and enhance market 
transparency by clearly identifying the member with the trade reporting 
obligation under Rule 6730.
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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 if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section

[[Page 14456]]

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). In addition, Rule 19b-4(f)(6)(iii) 
requires FINRA to give the Commission written notice of its intent 
to file the proposed rule change, along with a brief description and 
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. The Commission has waived the 
five-day prefiling requirement in this case.
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    FINRA has asked the Commission to waive the 30-day operative delay 
so that the proposal may become operative immediately upon filing. The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest. The proposed 
rule change is based on FINRA Rules 6183 and 6625, which provide FINRA 
authority to exempt certain ATSs from equity trade reporting. Those 
rules were recently proposed, noticed for public comment, and approved 
by the Commission.\13\ The conditions and applicability of the proposed 
Rule 6731 are substantively identical. Therefore, the Commission 
designates the proposal operative upon filing.\14\
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    \13\ See Securities Exchange Act Release No. 65695 (November 4, 
2011), 76 FR 70190 (November 10, 2011) (approving FINRA-2011-051).
    \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.

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-2012-016 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-2012-016. 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 Web 
site viewing and printing 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 publicly available. All 
submissions should refer to File Number SR-FINRA-2012-016 and should be 
submitted on or before March 30, 2012.

    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. 2012-5779 Filed 3-8-12; 8:45 am]
BILLING CODE 8011-01-P