Document ID: SEC-2010-0651-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-05-03T04:00Z

[Federal Register: May 3, 2010 (Volume 75, Number 84)]
[Notices]               
[Page 23316-23318]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my10-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61979; File No. SR-FINRA-2010-003]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, Relating to Trade Reporting of OTC Equity 
Securities and Restricted Equity Securities

April 23, 2010.

I. Introduction

    On January 15, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to trade reporting of 
OTC Equity Securities and certain restricted equity securities. On 
February 5, 2010, FINRA filed Amendment No. 1 to the proposed rule 
change. The proposed rule change, as modified by Amendment No. 1, was 
published for comment in the Federal Register on February 19, 2010.\3\ 
The Commission received no comment letters on the proposed rule change. 
On March 25, 2010, FINRA filed Amendment No. 2 to the proposed rule 
change.\4\ Because Amendment No. 2 is technical in nature, the 
Commission is not publishing it for comment. This order approves the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61510 (February 5, 
2010), 75 FR 7530 (``Notice'').
    \4\ Amendment No. 2 reflects changes to FINRA Rule 6635 that 
were made in SR-FINRA-2010-002, which was filed with the Commission 
for immediate effectiveness on January 14, 2010. See Securities 
Exchange Act Release No. 61427 (January 27, 2010), 75 FR 5834 
(February 4, 2010).
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Background

    In 1990, the SEC adopted Rule 144A (``SEC Rule 144A'') under the 
Securities Act of 1933 \5\ (``Securities Act'') to establish a safe 
harbor for the private resale of ``restricted securities'' to 
``qualified institutional buyers'' (``QIBs'').\6\ At the same time, 
FINRA (formerly known as the National Association of Securities 
Dealers, Inc. (``NASD'')) created the PORTAL Market to serve as a 
system for quoting, trading, and reporting trades in certain designated 
restricted securities that were eligible for resale under SEC Rule 144A 
(``PORTAL securities'').\7\ In September 2008, the NASDAQ Stock Market 
(``NASDAQ'') ceased the operation of the PORTAL Market.\8\ NASDAQ 
explained in its rule filing that it is taking a minority stake in a 
consortium that will control and operate a new electronic platform for 
handling transactions in SEC Rule 144A-eligible securities.\9\ In 
October 2009, NASDAQ filed a proposed rule change with the Commission 
for immediate effectiveness terminating NASDAQ's PORTAL security 
designation process and removing rules related to the PORTAL Market 
from its rulebook.\10\ As a result, NASDAQ no longer accepts new 
applications for debt or equity securities seeking PORTAL 
designation.\11\
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    \5\ 17 CFR 230.144A.
    \6\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933 (April 30, 1990). For the purpose of SEC Rule 144A, a QIB is 
generally defined as any institution acting for its own account, or 
for the accounts of other QIBs, that in the aggregate owns and 
invests on a discretionary basis at least $100 million in securities 
of issuers that are not affiliated with the institution.
    \7\ See Securities Exchange Act Release No. 27956 (April 27, 
1990), 55 FR 18781 (May 4, 1990).
    \8\ See Securities Exchange Act Release No. 58638 (September 24, 
2008), 73 FR 57188 (October 1, 2008). As part of the separation of 
NASDAQ from FINRA, certain functionality relating to PORTAL, 
including the qualification and designation of PORTAL securities, 
became part of NASDAQ's rules and were eliminated from the NASD 
rules. See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006).
    \9\ In addition to NASDAQ ceasing operation of the PORTAL 
Market, the Commission has also approved the deletion of the 
Depository Trust Company (``DTC'') requirement that a SEC Rule 144A 
security, other than investment grade securities, be included in an 
``SRO Rule 144A System'' in order to be eligible for DTC's deposit, 
book-entry delivery, and other depository services. See Securities 
Exchange Act Release No. 59384 (February 11, 2009), 74 FR 7941 
(February 20, 2009). The PORTAL Market was the only ``SRO Rule 144A 
System.'' Id.
    \10\ Securities Exchange Act Release No. 60991 (November 12, 
2009), 74 FR 60006 (November 19, 2009).
    \11\ See id. NASDAQ noted in the filing that nothing in the 
proposal was ``intended to impact securities previously designated 
as PORTAL securities or alter any existing regulatory obligation 
applicable to such securities, including, but not limited to, any 
trade reporting obligation imposed by any self-regulatory 
organization.'' Id.
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    In the instant rule proposal, FINRA has proposed to delete certain 
PORTAL rules from its rulebook, amend certain other rules to address 
gaps that elimination of such PORTAL rules would create, amend certain 
definitions to create consistent use of terminology in FINRA rules, and 
make certain other clarifying changes.

III. Description of the Proposal

    Current FINRA Rule 6610 requires that members report transactions 
in ``OTC Equity Securities'' to the OTC

[[Page 23317]]

Reporting Facility (``ORF'').\12\ Under the current definitions in Rule 
6420, ``restricted securities,'' as defined by SEC Rule 144(a)(3), and 
securities designated in the PORTAL Market are carved out of the ORF 
reporting requirement.\13\ Transaction reporting for certain of these 
securities to the ORF--specifically, restricted equity securities that 
are designated for inclusion in the PORTAL Market--is instead required 
by FINRA Rule 6633(a).\14\
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    \12\ See FINRA Rule 6610.
    \13\ See FINRA Rule 6420(c) and (d).
    \14\ See FINRA Rule 6633(a). See also, Notice, supra note 3.
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    In light of the recent elimination of NASDAQ's PORTAL rules, FINRA 
has proposed to eliminate certain of its PORTAL rules.\15\ However, 
because FINRA has determined that elimination of the PORTAL rules that 
govern transaction reporting would create a gap in the transaction 
reporting requirements for SEC Rule 144A securities, FINRA proposed to 
amend FINRA Rule 6622, to ensure that all equity securities that are 
``restricted securities'' under Rule 144(a)(3); \16\ and that are 
traded pursuant to SEC Rule 144A, will continue to be reported to the 
ORF. Under the proposal, transactions in all restricted equity 
securities effected pursuant to Commission Rule 144A would generally be 
required to be reported to the ORF no later than 8 p.m. Eastern Time 
without interruption.\17\ Transactions in restricted equity securities 
effected pursuant to Commission Rule 144A and executed between 8 p.m. 
and midnight would be required to be reported the following business 
day (T+1) by 8 p.m.
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    \15\ FINRA Rule 6633(a). The proposed rule change is limited in 
scope to equity securities and would not affect the Trade Reporting 
and Compliance Engine Service (``TRACE'') or the reporting 
requirements with respect to transactions in debt securities. See 
Notice supra note 3. In addition to the reporting rules, current 
FINRA Rule 6635 specifies which FINRA rules are and are not 
applicable to transactions and business activities relating to 
PORTAL securities. Under the proposal FINRA will retain FINRA Rule 
6635 as FINRA Rule 6630 to maintain the status quo with respect to 
the application of FINRA rules to those securities designated as 
PORTAL securities prior to October 26, 2009.
    \16\ See 17 CFR 230.144.
    \17\ See Notice supra note 3, explaining that the ORF reporting 
session deadline is 8:00 p.m.
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    In addition, FINRA proposed to amend the definition of ``OTC Equity 
Security'' in Rule 6420 to delete the reference to securities that 
``qualify for real-time trade reporting'' and, instead, to define the 
term as any equity security that is not an ``NMS stock'' as defined by 
the Commission in Regulation NMS.\18\ The proposed rule change also 
would eliminate the defined term ``non-exchange-listed security'' from 
Rule 6420.\19\ The effect of these changes is that any security or 
class of securities for which transaction reports are collected, 
processed, and made available pursuant to an effective transaction 
reporting plan will be excluded from the definition of ``OTC Equity 
Security'' in Rule 6420.
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    \18\ Rule 600 of Regulation NMS defines ``NMS stock'' as any NMS 
security other than an option. ``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.'' See 17 CFR 
242.600(b)(46), 242.600(b)(47).
    \19\ FINRA Rule 6440 (Submission of SEA Rule 15c2-11 Information 
on Non-Exchange-Listed Securities) and NASD Rule 2320(f), which is 
often referred to as the Three Quote Rule, use the term ``non-
exchange-listed security.'' Because the proposed rule change deletes 
the term ``non-exchange-listed security'' from Rule 6420, the 
proposed rule change also amends FINRA Rule 6440 and NASD Rule 
2320(f) to define the term for purposes of those rules. The proposed 
definition in each rule is identical to the definition as it 
appeared in FINRA Rule 6420. Consequently, there is no change in the 
application of either rule as a result of the proposed rule change.
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    Further, the proposal would amend the ORF rules to address 
explicitly transactions in OTC Equity Securities that are executed on 
an exchange. FINRA's trade reporting rules historically have been 
limited to only trades executed ``otherwise than on an exchange.'' \20\ 
As explained in the Notice, the FINRA/NASDAQ TRF Rules, the FINRA/NYSE 
TRF Rules, and the ADF Rules all include an exception from the 
reporting obligations for transactions reported on or through an 
exchange.\21\ These rules collectively provide for the submission of 
trade reports to FINRA for transactions in NMS stocks only if the 
transaction is executed over-the-counter. FINRA Rule 6622, which 
governs the submission of transaction reports to the ORF for 
transactions in OTC Equity Securities, does not include a similar 
exception for transactions in otherwise eligible securities that are 
reported on or through an exchange.\22\ Thus, FINRA proposed to amend 
Rule 6622 to include an explicit exception for transactions in OTC 
Equity Securities reported on or through an exchange, and to amend Rule 
6420(k) and Rule 6610 to clarify further that transactions in OTC 
Equity Securities must be reported to the ORF where such transactions 
are executed otherwise than on or through an exchange.
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    \20\ See, e.g., FINRA Rule 6100, 6200, and 6300 Series.
    \21\ See FINRA Rules 6282(i)(1)(C), 6380A(e)(1)(C), 
6380B(e)(1)(C).
    \22\ The ORF Rules do include an exception for transactions in 
foreign equity securities when the transaction is executed on and 
reported to a foreign securities exchange or the transaction is 
executed over-the-counter in a foreign country and is reported to 
the regulator of securities markets for that country. See FINRA Rule 
6622(g).
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    FINRA also proposed to conform the definition of ``OTC equity 
security'' in Rule 7410 of the OATS rules to the proposed definition in 
Rule 6420 and explained that the proposed change will not result in any 
change to the scope of securities required to be reported to OATS. 
FINRA similarly proposed to eliminate the separate definition of ``OTC 
Equity Security'' in FINRA Rule 4560 (Short-Interest Reporting),\23\ 
explaining that the proposal would ``exclude from the short-interest 
record keeping and reporting requirements all restricted equity 
securities, such that equity securities that are currently PORTAL 
securities would continue to be excepted from the record keeping and 
reporting requirements as well as any other restricted equity 
securities.'' \24\
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    \23\ In Amendment No. 1, FINRA stated as follows: ``The proposed 
rule change eliminates the separate definition of ``OTC Equity 
Security'' in FINRA Rule 4560 (Short-Interest Reporting). Currently, 
the PORTAL Rules carve out PORTAL securities from the record keeping 
and reporting requirements of Rule 4560. See Rule 6635(d). 
Consistent with this existing exclusion for PORTAL securities, FINRA 
is proposing to amend Rule 4560 to exclude from the short-interest 
record keeping and reporting requirements all restricted equity 
securities, such that equity securities that are currently PORTAL 
securities would continue to be excepted from the record keeping and 
reporting requirements as well as any other restricted equity 
securities.''
    \24\ See Amendment No. 1.
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    As stated in the Notice, FINRA represented that it will announce 
the effective date of the proposed rule change in a Regulatory Notice 
to be published no later than 60 days following Commission approval. 
The effective date will be 30 days following publication of the 
Regulatory Notice announcing Commission approval.

IV. Discussion and Commission's Findings

    The Commission has reviewed carefully the proposed rule change and 
finds that the proposal is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities association, 
including the provisions of Section 15A(b)(6) of the Act,\25\ which 
requires, among other things, that FINRA rules be designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
transactions in securities, and, in

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general, to protect investors and the public interest.\26\
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    \25\ 15 U.S.C. 78o-3(b)(6).
    \26\ 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).
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    The proposed rule change is intended to address the cessation of 
the PORTAL market and clarify the scope of the ORF Rules, as well as 
make conforming changes to other FINRA Rules. The Commission believes 
that the proposed rule change is reasonably designed to ensure that 
FINRA will continue to receive important transaction information with 
respect to securities that are traded over-the-counter. In addition, 
the Commission believes that the amended definition ``OTC Equity 
Security,'' the standardization of that definition throughout FINRA 
rules and FINRA's other proposed changes will close gaps and add 
clarity with respect to the application of specified FINRA rules to 
certain securities.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2010-003), as modified by 
Amendment Nos. 1 and 2, be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10252 Filed 4-30-10; 8:45 am]
BILLING CODE 8011-01-P