Document ID: SEC-2015-1705-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-22T04:00Z

[Federal Register Volume 80, Number 204 (Thursday, October 22, 2015)]
[Notices]
[Pages 64039-64041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26808]

[[Page 64039]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76176; File No. SR-FINRA-2015-026]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Amendment No. 1 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment No. 1, To Require an Indicator When a TRACE Report Does Not 
Reflect a Commission or Mark-up/Mark-down

October 16, 2015.

I. Introduction

    On July 20, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), 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 to amend FINRA Rule 6730, which governs the 
reporting of eligible transactions to its Trade Reporting and 
Compliance Engine (``TRACE''). The proposed rule change was published 
for comment in the Federal Register on August 7, 2015.\3\ The 
Commission received two comment letters on the proposed rule change.\4\ 
On September 10, 2015, the Commission extended the time to act on the 
proposal until November 5, 2015.\5\ On October 6, 2015, FINRA filed 
Amendment No. 1 to the proposed rule change.\6\ The Commission is 
publishing this Notice and Order to solicit comment on Amendment No. 1 
and to approve the proposed rule change, as modified by Amendment No. 
1, on an accelerated basis.
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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. 75588 (August 3, 
2015), 80 FR 47546 (August 7, 2015) (``Notice'').
    \4\ See letter from Sean Davy, Managing Director, SIFMA, to 
Elizabeth M. Murphy, Secretary, Commission, dated August 27, 2015 
(``SIFMA Letter''); letter from Michael Nicholas, Chief Executive 
Officer, Bond Dealers of America, to Secretary, Commission, dated 
August 28, 2015 (``BDA Letter'').
    \5\ See Securities Exchange Act Release No. 75875, 80 FR 55671 
(September 16, 2015).
    \6\ Amendment No. 1 revised the proposal to include three 
exceptions to the requirement that members append the ``no 
remuneration'' indicator to trade reports that do not reflect either 
a commission or mark-up/mark-down, for: (i) List or Fixed Offering 
Price Transactions, (ii) Takedown Transactions, and (iii) inter-
dealer transactions. Amendment No. 1 is available in the public 
comment file for SR-FINRA-2015-026 on the Commission's Web site.
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II. Description of the Proposal

    FINRA Rule 6730 (Transaction Reporting) sets forth the requirements 
applicable to members reporting transactions in TRACE-Eligible 
Securities,\7\ and provides the specific items of information that must 
be included in a TRACE trade report. Rules 6730(c) and (d) require a 
member firm to report the commission (total dollar amount) separately 
on the TRACE trade report for an agency transaction. FINRA combines the 
dollar amount that is reported as the commission with the amount that 
is reported in the price field, and disseminates to the market this 
aggregate amount as the transaction's price. For a principal 
transaction, Rule 6730(d)(1) provides that a firm must report a price 
that includes the mark-up/mark-down, and FINRA disseminates this price 
to the market. FINRA notes that the goal of these reporting 
requirements is to provide investors and market participants with 
pricing information that better reflects comparable prices for 
principal and agency trades in a TRACE-Eligible Security.
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    \7\ See FINRA Rule 6710 (defining ``TRACE-Eligible Security''). 
Most transactions reported to TRACE are publicly disseminated 
immediately upon receipt of a transaction report.
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    FINRA believes that the pricing information currently being 
disseminated might be incomplete and in some cases misleading, given 
that disseminated prices on transactions that do not include 
remuneration are not distinguished from transactions that do include a 
commission or mark-up/mark-down. This proposal is designed to provide 
more meaningful pricing transparency through TRACE by identifying any 
transaction where a commission or mark-up/mark-down was not charged or 
known at the time of TRACE reporting.
    The proposal amends Rule 6730 to require a member firm to identify 
any transactions for which a commission or mark-up/mark-down is not 
reflected in the TRACE trade report because the firm does not charge, 
or does not know the amount of, the commission or mark-up/mark-down at 
the time of TRACE reporting. For example, a firm might assess a charge 
that is not transaction-based, as in the case of a ``fee-based 
account'' where remuneration is based upon assets under management (and 
individual commissions or mark-ups/mark-downs are not charged).\8\ 
Thus, for such transactions, the price is not inclusive of a commission 
or mark-up/mark-down. In another case, a firm might charge a commission 
or mark-up/mark-down, but might not know the exact amount of that 
commission or mark-up/mark-down at the time that the TRACE transaction 
report is required to be submitted because of their remuneration 
structure (e.g., a firm might not calculate a mark-up for a transaction 
on a trade-by-trade basis, but could nonetheless ultimately assess 
transaction remuneration pursuant to a monthly volume-based 
schedule).\9\ The proposal requires a firm to identify all such trades 
for which the firm does not charge or does not know the amount of the 
commission or mark-up/market-down at the time of TRACE reporting. In 
addition, if a firm does not charge any remuneration associated with 
the trade (in any form), it would be required to identify the trade as 
one for which no remuneration was assessed to the transaction. FINRA 
will flag these disseminated transactions as not being inclusive of 
remuneration. Based on current rules, the disseminated TRACE feed will 
not explicitly distinguish between agency and principal transactions, 
and the ``no remuneration'' flag will apply to both principal and 
agency transactions.
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    \8\ Another example of a fee structure that is not transaction-
based is where an alternative trading system (``ATS'') charges 
subscribers a fixed fee for unlimited trading each month. See 
Notice, 80 FR at 47547.
    \9\ FINRA states that, as a practical matter, firms have 
difficulty complying with the current TRACE rules for these types of 
volume-based mark-up/mark-down arrangements, since they are unable 
to report accurately all the required information related to the 
transaction on a timely basis and would need to submit a cancel and 
replace to update the pricing information. In some cases, this 
information might not be known until the end of the month. See id.
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    FINRA believes that, in addition to improving transparency for 
disseminated prices, this proposal will enhance its regulatory audit 
trail and surveillance patterns. With this additional level of detail, 
surveillance patterns should yield fewer false positives regarding 
mark-up and best execution surveillance, reduce regulatory inquiries, 
and provide greater focus for FINRA's regulatory efforts. FINRA has 
represented, for example, that without the ``no remuneration'' 
designation FINRA's surveillance patterns for best execution might 
generate alerts for transactions whose prices reflect a commission or a 
mark-up as being outliers compared to transactions whose prices do not 
reflect a charge.\10\
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    \10\ See Notice, 80 FR at 47548.
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    FINRA plans to implement the proposal on May 23, 2016.

III. Summary of Comments and Amendment No. 1

    As noted above, the Commission received two comment letters on the

[[Page 64040]]

proposal.\11\ The SIFMA Letter generally supports the proposal. 
However, SIFMA believes that the requirement to report trades involving 
no remuneration should be limited to customer trades and should not 
apply to dealer-to-dealer trades, consistent with SR-MSRB-2015-02.\12\ 
The BDA Letter also supports the proposal but recommends that the 
proposed reporting requirement extend only to customer trades, 
consistent with MSRB Rule G-14.\13\ The BDA Letter expresses concern 
with how the proposed requirement would affect smaller introducing 
dealers and dealers already having difficulty with trade reporting 
deadlines under current rules, particularly if the requirement applies 
to inter-dealer transactions.
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    \11\ See supra note 4.
    \12\ See SIFMA Letter at 1. See also Securities Exchange Act 
Release No. 75039 (May 22, 2015), 80 FR 31084 (June 1, 2015) (SR-
MSRB-2015-02) (approving an MSRB proposal to, among other things, 
require dealers to include a new indicator on their trade reports 
that would be disseminated publicly to distinguish customer 
transactions that do not include a dealer compensation component and 
those that include a markup, mark-down, or a commission) (``MSRB 
Order'').
    \13\ See BDA Letter at 1.
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    In response to commenters' concerns, FINRA proposed in Amendment 
No. 1 to provide an exception to the proposed ``no remuneration'' 
requirement for inter-dealer transactions. FINRA notes that this change 
would further align the proposal with the comparable MSRB rule, as 
requested by the commenters.\14\ FINRA believes that, given that inter-
dealer transactions typically do not involve remuneration, excluding 
such transactions from the requirement better focuses the use of the 
indicator on the types of transactions that would provide the 
additional price transparency sought by the proposal, which are 
transactions between dealers and customers.
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    \14\ The MSRB's rule limits the use of its ``non-transaction-
based compensation arrangement indicator'' to transactions with 
customers. See MSRB Order, 80 FR at 31085.
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    Also in Amendment No. 1, FINRA proposed to add exceptions from the 
``no remuneration'' indicator requirement for List or Fixed Offering 
Price Transactions, as defined in FINRA Rule 6710(q), and Takedown 
Transactions, as defined in FINRA Rule 6710(r). These transactions are 
not currently subject to dissemination; FINRA believes, therefore, that 
applying the ``no remuneration'' indicator to these transactions would 
not provide additional transparency to the market.

IV. Discussion and Commission Findings

    After careful review of the proposal and comments submitted, the 
Commission finds that the proposal, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\16\ which 
requires, among other things, that FINRA's 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. The Commission also finds the proposal 
consistent with Section 15A(b)(9) of the Act,\17\ which requires that 
FINRA's rules not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
Commission notes that it previously has approved a similar proposed 
rule change of the MSRB.\18\
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    \15\ 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).
    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(9).
    \18\ See MSRB Order, 80 FR at 31086-87.
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    The Commission believes that the proposed rule change is reasonably 
designed to improve transparency of disseminated TRACE trade reports by 
requiring firms to indicate when the trade report does not include a 
commission or mark-up/mark-down. Use of a ``no remuneration'' indicator 
will make investors better able to assess disseminated transaction 
prices. Finally, the Commission believes that it is reasonable and 
consistent with the Act for FINRA to provide exceptions to this 
requirement for inter-dealer transactions, which do not typically have 
remuneration, and for List or Fixed Offering Price and Takedown 
Transactions, for which there currently is no TRACE dissemination of 
the transaction information.
    Therefore, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the Act.

V. Accelerated Approval of Proposal, as Modified by Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act \19\ for approving the proposal, as modified by 
Amendment No. 1, prior to the 30th day after publication of Amendment 
No. 1 in the Federal Register.
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    \19\ See 15 U.S.C. 78s(b)(2).
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    Amendment No. 1 revised the proposal to include limited exceptions 
to the proposed ``no remuneration'' indicator requirement. The 
Commission believes that Amendment No. 1 does not raise any novel 
regulatory issues because these exceptions are measured and do not 
appear to impose any undue burdens on affected persons.
    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-2015-026 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-026. 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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

[[Page 64041]]

should refer to File Number SR-FINRA-2015-026, and should be submitted 
on or before November 12, 2015.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-FINRA-2015-026), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Brent J. Fields,
Secretary.
[FR Doc. 2015-26808 Filed 10-21-15; 8:45 am]
BILLING CODE 8011-01-P