Document ID: SEC-2011-0890-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-06-27T04:00Z

[Federal Register Volume 76, Number 123 (Monday, June 27, 2011)]
[Notices]
[Pages 37382-37384]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16005]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64706; File No. SR-FINRA-2011-027]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend 
FINRA Trade Reporting Rules Relating to OTC Transactions in Equity 
Securities That Are Part of a Distribution and Transfers of Equity 
Securities To Create or Redeem Instruments Such as ADRs and ETFs

 June 20, 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 June 9, 2011, 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 to amend FINRA Rules 6282, 6380A, 6380B and 6622 
relating to trade reporting over-the-counter (``OTC'') transactions in 
equity securities to (1) Clarify the existing exception for 
transactions that are part of a distribution of securities and impose 
certain notice requirements on members relying on the exception for 
transactions that are part of an ``unregistered secondary 
distribution''; and (2) expressly exclude from the trade reporting 
requirements transfers of equity securities for the purpose of creating 
or redeeming instruments such as American Depositary Receipts 
(``ADRs'') and exchange-traded funds (``ETFs'').
    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
Background
    Under FINRA trade reporting rules, members are required to report 
OTC transactions in equity securities to FINRA unless they fall within 
an express exception. 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'') \3\ and the Trading 
Activity Fee (``TAF'').\4\ Under FINRA trade reporting rules, 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

[[Page 37383]]

reported to FINRA for regulatory transaction fee assessment purposes 
only (e.g., away from the market sales and transfers in connection with 
certain corporate control transactions).\5\ 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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    \3\ 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.
    \4\ 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, 1(b)(2).
    \5\ See Rules 6282(i) (Alternative Display Facility), 6380A(e) 
(FINRA/Nasdaq Trade Reporting Facility), 6380B(e) (FINRA/NYSE Trade 
Reporting Facility) and 6622(e) (OTC Reporting Facility).
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Transactions That Are Part of a Securities Distribution
    FINRA rules contain an exception from the trade reporting 
requirements for transactions that are effected in connection with a 
distribution of securities, specifically:

Transactions that are part of a primary distribution by an issuer or 
of a registered secondary distribution (other than ``shelf 
distributions'') or of an unregistered secondary distribution.\6\
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    \6\ See Rules 6282(i)(1)(A), 6380A(e)(1)(A), 6380B(e)(1)(A) and 
6622(e)(1)(A).

Thus, transactions that are part of a distribution (other than a 
secondary shelf distribution) are not reported to FINRA or publicly 
disseminated, and they are not assessed regulatory transaction fees 
under Section 3 or the TAF. This exception was adopted to align the 
FINRA trade reporting requirements with the Consolidated Tape 
Association and the Nasdaq Unlisted Trading Privileges plans, which 
expressly identify transactions that are not to be reported to the 
tape.\7\
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    \7\ See, e.g., Notice to Members 75-42 (June 1975).
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    FINRA is proposing to amend its rules \8\ to clarify that for 
purposes of this trade reporting exception, ``distribution'' has the 
meaning set forth under SEC Regulation M.\9\ A ``distribution'' is 
defined under Rule 100 of Regulation M as ``an offering of securities, 
whether or not subject to registration under the Securities Act, that 
is distinguished from ordinary trading transactions by the magnitude of 
the offering and the presence of special selling efforts and selling 
methods.'' \10\
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    \8\ See Rules 6282(i)(1)(A), 6380A(e)(1)(A), 6380B(e)(1)(A) and 
6622(e)(1)(A).
    \9\ 17 CFR 242.100-105.
    \10\ 17 CFR 242.100.
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    In addition, FINRA is proposing to adopt Supplementary Material in 
Rules 6282, 6380A, 6380B and 6622 that is specifically applicable to 
the trade reporting exception for transactions that are part of an 
``unregistered secondary distribution.'' Pursuant to the proposed 
Supplementary Material, members that would otherwise have the trade 
reporting obligation under FINRA rules \11\ must provide notice to 
FINRA that they are relying on this exception. The member also must 
provide the following information to FINRA for each transaction that is 
part of the unregistered secondary distribution and not trade reported: 
security name and symbol, execution date, execution time, number of 
shares, trade price and parties to the trade. Such notice and 
information must be provided no later than three (3) business days 
following trade date. If the trade executions will occur over multiple 
days, then initial notice and available information must be provided no 
later than three (3) business days following the first trade date and 
final notice and information must be provided no later than three (3) 
business days following the last trade date.
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    \11\ In transactions between members, the ``executing party,'' 
as defined by rule, is required to report the trade, and in 
transactions between a member and a non-member or customer, the 
member is required to report. See Rules 6282(b); 6380A(b) and 
7230A(c); 6380B(b) and 7230B(c); and 6622(b) and 7330(c).
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    The proposed Supplementary Material also requires that the member 
retain records sufficient to document the basis for relying on this 
trade reporting exception, including but not limited to, the basis for 
determining that the transactions are part of an unregistered secondary 
distribution, as defined under Rule 100 of Regulation M. In other 
words, members must be able to demonstrate that the ``magnitude of the 
offering'' and ``special selling efforts'' criteria under Regulation M 
have been satisfied. The mere assertion that the order was large sized 
or a block or that execution of the order was ``worked'' by a member 
will usually not by itself be sufficient. Additionally, members must be 
able to provide evidence of compliance with any applicable notification 
requirements under FINRA Rule 5190. Rule 5190 imposes certain notice 
requirements on members participating in distributions of listed and 
unlisted securities and is designed to ensure that FINRA receives 
pertinent distribution-related information from its members in a timely 
fashion to facilitate its Regulation M compliance program. Thus, if a 
member is relying on this exception from the trade reporting 
requirements, FINRA would expect to see that the requisite notice under 
Rule 5190 also has been provided.\12\
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    \12\ FINRA notes that the proposed notice requirement is 
separate and distinct from the Regulation M-related notice 
requirements under Rule 5190. Accordingly, providing notice under 
the trade reporting rules does not relieve a member of any 
obligations it may have under Rule 5190, nor does it impact the 
timing of any notice required under Rule 5190.
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    FINRA is reiterating that the proposed rule change imposes on 
members a notice requirement only and not a trade reporting 
requirement. Accordingly, as is the case today, these transactions will 
not be trade reported (i.e., through the Alternative Display Facility, 
a Trade Reporting Facility or the OTC Reporting Facility), nor will 
they be disseminated to the public. In addition, as is the case today, 
these transactions will not be assessed regulatory transaction fees 
under Section 3 or the TAF.
    FINRA believes that the proposed rule change is necessary to ensure 
that members interpret this trade reporting exception correctly and 
report all transactions that are reportable under FINRA rules. For 
example, under current rules, large block trades (even those at a 
significant discount from the current market price) must be reported to 
FINRA for tape dissemination purposes and are assessed regulatory 
transaction fees under Section 3 and the TAF. The proposed rule change 
clarifies that the trade reporting exception does not apply to block 
trades, unless they otherwise meet the definition of distribution under 
Regulation M.
Transfers of Equity Securities To Create or Redeem Instruments Such as 
ADRs and ETFs
    FINRA also is proposing to amend its rules \13\ to expressly 
exclude from the trade reporting requirements any transfer of equity 
securities for the sole purpose of creating or redeeming an instrument 
that evidences ownership of or otherwise tracks the underlying 
securities transferred. Such transfers are not considered OTC 
transactions for purposes of the trade reporting rules and thus are not 
reportable events.
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    \13\ See Rules 6282(i)(1), 6380A(e)(1), 6380B(e)(1) and 
6622(e)(1).
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    The proposed rule change codifies current guidance and practice in 
this area. For example, FINRA has previously stated that the conversion 
of foreign ordinary shares into ADRs (or vice versa) at a bank 
depository is not a trade reportable event.\14\ Similarly, when a 
financial institution or ``authorized participant'' deposits with an 
ETF a basket of securities (or other assets) and receives the ETF 
creation unit in return, these are not trade reportable events.\15\ 
Because the transfer of equity securities to create or redeem

[[Page 37384]]

instruments such as ADRs and ETFs is not considered an OTC transaction 
subject to real-time trade reporting and dissemination under FINRA 
rules, it is not assessed regulatory transaction fees under Section 3 
or the TAF.
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    \14\ See Notice to Members 07-25 (May 2007).
    \15\ For a general discussion of ETFs, including the creation of 
ETFs, see Securities Act Release No. 8901 (March 11, 2008), 73 FR 
14618 (March 18, 2008) (Proposed rule relating to exchange-traded 
funds; File No. S7-07-08).
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    FINRA notes, however, that purchases and sales of the securities 
that are to be transferred for the purpose of creating or redeeming 
instruments such as ADRs and ETFs and subsequent purchases and sales of 
the instruments in the secondary market are OTC transactions and must 
be reported to FINRA in accordance with the trade reporting rules.\16\ 
Additionally, purchases and sales of the underlying securities in order 
to track the performance of an instrument such as an ADR or ETF, 
without actually creating the instrument, are trade reportable. Such 
transactions are subject to regulatory transaction fees under Section 3 
and the TAF.\17\
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    \16\ FINRA reminds members that with respect to ADR swap 
transactions (sometimes called ``cross-book'' transactions), because 
the ADRs and the ordinary shares are separate securities and are 
executed in separate transactions, both the ADR and the foreign 
ordinary share transactions must be reported separately to FINRA for 
public dissemination, as required by FINRA rules. See Notice to 
Members 07-25 (May 2007).
    \17\ FINRA notes that secondary market transactions in 
instruments such as ADRs and ETFs must be reported in accordance 
with the rules and guidance that govern the reporting of OTC 
transactions. For example, members are required by rule to include 
the date and time of execution in all trade reports submitted to 
FINRA; the date and time of execution are the date and time when the 
parties have agreed to all essential terms of the transaction, 
including trade price and number of shares.
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    FINRA is proposing that the proposed rule change will be effective 
90 days following the date of Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\18\ 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 
clarify the interpretation and application of the current exception 
from the trade reporting requirements for transactions that are part of 
a distribution and will enhance market transparency by helping to 
ensure that transactions that are not part of an ``unregistered 
secondary distribution,'' such as large block trades, are properly 
reported. Additionally, FINRA believes that the proposed rule change 
will clarify members' obligations with respect to the reporting of 
transfers of equity securities to create or redeem instruments such as 
ADRs and ETFs under FINRA trade reporting rules.
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    \18\ 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

    Within 45 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 or disapprove 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 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-2011-027 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-2011-027. 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, 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-2011-027 
and should be submitted on or before July 18, 2011.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16005 Filed 6-24-11; 8:45 am]
BILLING CODE 8011-01-P