Document ID: SEC-2021-1689-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-11-30T05:00Z

[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 67996-67999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25988]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93651; File No. SR-FINRA-2021-029]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 6732 and Expand the Scope of Exemptions That FINRA May Grant 
ATSs From the TRACE Reporting Requirements

November 23, 2021.
    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 15, 2021, the 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 and 
II 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 Rule 6732 to provide FINRA with 
authority to, subject to conditions, exempt transactions by a member 
alternative trading system (``ATS'') that meet specified criteria from 
the transaction reporting obligations of FINRA Rule 6730 (Transaction 
Reporting).
    The text of the proposed rule change is available on FINRA's 
website 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
    Rule 6730 generally requires that each FINRA member that is a party 
to a transaction in a TRACE-Eligible Security \3\ report the 
transaction to

[[Page 67997]]

TRACE within the period of time prescribed in the rule. ``Party to a 
transaction'' means an introducing broker-dealer, if any, an executing 
broker-dealer or a customer.\4\ Thus, in transactions in a TRACE-
Eligible Security between members, each member is a party to the 
transaction and is required to report the transaction. An ATS is a 
party to each transaction in a TRACE-Eligible Security occurring 
through its system and has a TRACE transaction reporting obligation 
unless an exception or exemption applies.\5\
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    \3\ ``TRACE-Eligible Security'' generally is defined as a debt 
security that is U.S. dollar-denominated and is: (1) Issued by a 
U.S. or foreign private issuer, and, if a ``restricted security'' as 
defined in Securities Act Rule 144(a)(3), sold pursuant to 
Securities Act Rule 144A; (2) issued or guaranteed by an Agency as 
defined in paragraph (k) or a Government-Sponsored Enterprise as 
defined in paragraph (n); or (3) a U.S. Treasury Security as defined 
in paragraph (p). ``TRACE-Eligible Security'' does not include a 
debt security that is issued by a foreign sovereign or a Money 
Market Instrument as defined in paragraph (o). See Rule 6710(a).
    \4\ ``Customer'' includes a broker-dealer that is not a FINRA 
member.
    \5\ See Regulatory Notice 14-53 (November 2014).
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    FINRA adopted Rule 6732 (Exemption from Trade Reporting Obligation 
for Certain Alternative Trading Systems) in response to concerns raised 
by members regarding operational difficulties with respect to certain 
transactions on an ATS--particularly, with respect to ATS models where 
the ATS does not always have a role in the clearance and settlement of 
transactions occurring on its system.\6\ In such cases, because back-
end systems often are programmed to clear against the contra-party 
identified on TRACE trade reports, member subscribers preferred to 
TRACE report against the party with which they clear and settle the 
trade (i.e., another subscriber, rather than the ATS). Rule 6732 
addresses these concerns by providing FINRA with the authority, subject 
to specified conditions, to exempt the ATS from the TRACE reporting 
requirement so that member subscribers can report against their contra-
party for clearance and settlement purposes. To be eligible for the 
relief, the ATS must ensure, among other things, that: The trade is 
between FINRA members; the trade does not pass through any ATS account; 
and the ATS does not exchange TRACE-Eligible Securities or funds on 
behalf of the subscribers or 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.\7\
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    \6\ See Securities Exchange Act Release No. 76677 (December 17, 
2015), 80 FR 79966 (December 23, 2015) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2015-055).
    \7\ An ATS granted an exemption pursuant to Rule 6732 continues 
to be deemed a ``party'' to the transactions covered by the 
exemption; is required to submit monthly files of all exempted 
trades to FINRA; is required to remit to FINRA a transaction 
reporting fee based on the fee schedule set forth in Rule 7730(b)(1) 
for each exempted sell transaction occurring on the ATS; and is 
required to enter into an agreement with each member subscriber that 
is a ``party to a transaction'' with respect to any trade for which 
the ATS is exempted specifying that trades must be reported by such 
party pursuant to Rule 6730(c)(13) identifying the trade as having 
occurred on the ATS (using the ATS's separate MPID obtained in 
compliance with Rule 6720(c)).
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    FINRA now is amending Rule 6732 to expand the scope of transactions 
that may be exempted under the rule to include trades that involve only 
one FINRA member (other than the ATS). FINRA has observed that in many 
cases, transactions on an ATS that involve only one member are 
otherwise similar to the transactions that are currently eligible for 
exemptive relief under Rule 6732. Specifically, in such transactions, 
the counterparties on the ATS (e.g., a member and a bank) may clear 
directly with each other rather than the ATS. FINRA believes that 
expanding the scope of the current exemption to permit its use for 
transactions between a member (other than the ATS) and a non-member 
subscriber would extend the benefits of the rule--including simplifying 
compliance with TRACE trade reporting obligations--for additional ATS 
models and member subscribers, while capturing substantially the same 
regulatory information and enabling public dissemination of the 
transaction in a more streamlined manner.
    For example, under current reporting requirements, where a member 
(BD) sells a TRACE-Eligible Security to a non-member (C) on an ATS, 
Rule 6730 generally requires that BD report a sale to the ATS and the 
ATS report a buy from BD. The ATS must also report the corresponding 
sale to C.\8\ Under the proposed expansion to the exemption, where 
granted, the ATS would not be required to report its transaction with 
BD or C to TRACE. However, the overall transaction would continue to be 
transparent to the public, as the member subscriber would report the 
transaction with the non-member subscriber counterparty and the trade 
would be disseminated, subject to the limitations on dissemination set 
forth in Rule 6750 (Dissemination of Transaction Information).\9\
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    \8\ In transactions between members, FINRA disseminates only the 
sale transaction. However, in a transaction between a member and a 
non-member, FINRA disseminates the purchase or sale transaction with 
the non-member.
    \9\ Under Rule 6750(c) (Transaction Information Not 
Disseminated), FINRA will not disseminate information on a 
transaction in a TRACE-Eligible Security that is: Appended with the 
non-member affiliate-principal transaction indicator pursuant to 
Rule 6730(d)(4)(E); a transfer of certain proprietary securities 
positions effected in connection with a merger or direct or indirect 
acquisition; a List or Fixed Offering Price Transaction or a 
Takedown Transaction; a Securitized Product that is: A CMBS; a CDO; 
or a CMO if the CMO transaction value is $1 million or more 
(calculated based upon original principal balance) and the 
transaction does not qualify for periodic dissemination under Rule 
6750(b), except as may be otherwise provided in Rule 7730; or a U.S. 
Treasury Security.
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    Thus, for a sale transaction, BD would be required to report to 
TRACE a sale to C, identifying the trade as having occurred on the ATS 
in its TRACE report using the ATS's separate identifier obtained in 
compliance with Rule 6720(c) (Alternative Trading Systems). This sale 
transaction would be disseminated upon receipt consistent with Rule 
6750.\10\ Similarly, for a purchase transaction, BD would be required 
to report to TRACE a buy from C, identifying the trade as having 
occurred on the ATS in its TRACE report using the ATS's separate 
identifier. This purchase transaction would be disseminated upon 
receipt consistent with Rule 6750.\11\ In both cases, the ATS would be 
required to submit monthly files of all exempted trades to FINRA as is 
required under the existing exemption.
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    \10\ See supra note 9.
    \11\ See supra note 9.
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    FINRA believes it is appropriate to expand the eligibility criteria 
for the Rule 6732 exemption to include transactions between a member 
and non-member because, where the parties clear directly with each 
other, these transactions can present the same operational challenges 
for members as trades between two members, and granting the exemption 
with regard to these types of trades would not compromise transparency 
because such transactions will continue to be trade reported by members 
and disseminated by FINRA in accordance with existing rules. Moreover, 
exempt trades would be disseminated by FINRA in a more streamlined 
manner because there would be one, rather than two, disseminated trade 
reports in connection with the transaction on the ATS. In addition, the 
other conditions for the exemption would continue to apply, including 
the requirement that any ATS granted an exemption must enter into a 
written agreement with each member that is a ``Party to a Transaction'' 
with respect to exempted trades, thereby ensuring that reporting 
members are aware that the ATS has been granted a Rule 6732 exemption 
and that exempted trades on the ATS are subject to different reporting 
requirements--specifically, that the reporting member must identify a 
party other than the ATS as its contra-party and identify the ATS on 
which the trade had occurred in its TRACE reports. With respect to a 
transaction between a member and a non-member on an ATS

[[Page 67998]]

that is a ``covered ATS'' under Rule 6730.07, the ATS must provide to 
the member subscriber (and the member subscriber must report to TRACE 
using) the FINRA-assigned identifier for each non-FINRA member 
subscriber.\12\
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    \12\ Likewise, an exempt ATS that is a ``covered ATS'' under 
6730.07 must use the FINRA-assigned identifier to identify each non-
FINRA member subscriber in the monthly transaction files that are 
required to be submitted to FINRA.
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    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be no later than 365 days following 
Commission approval of the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Exchange Act,\13\ which 
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.
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    \13\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change will simplify 
compliance for certain ATSs and their member subscribers by permitting 
the ATS to report on a periodic basis to FINRA and permitting member 
subscribers to trade report with the party against which it will clear 
the trade. FINRA also notes that the regulatory information captured 
and the public transparency with respect to exempted trades will not be 
compromised because such transactions will continue to be trade 
reported by members and disseminated by FINRA in accordance with 
existing rules.

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 Exchange Act. Any ATS that meets the 
criteria set forth in the proposed rule would be able to apply for the 
exemption with respect to eligible transactions occurring on its 
platform. In addition, irrespective of an ATS's model or whether the 
ATS is granted an exemption pursuant to this proposal, all ATSs that 
are a ``party to a transaction'' must continue to pay a transaction 
reporting fee based on the fee schedule set forth in Rule 7730(b)(1) 
for each exempted sell transaction occurring through the ATS.
Economic Impact Assessment
(a) Need for the Rule
    As discussed above, an ATS is a party to a transaction in any 
TRACE-eligible securities occurring on that ATS. As such, an ATS must 
report the transaction to TRACE as provided for in Rule 6730, unless an 
exception or exemption applies. An ATS's business model structure 
impacts the way trades are facilitated on the platform and, therefore, 
which trades must be reported to TRACE and by whom. In instances where 
the functional activities of the ATS are more limited with respect to a 
transaction, as discussed above, FINRA believes that the proposed rule 
change is appropriate and may simplify compliance for these ATSs and 
their member subscribers and enables public dissemination of these 
transactions in a more streamlined manner.
(b) Economic Baseline
    Rule 6732 provides FINRA with authority to exempt an ATS from TRACE 
transaction reporting requirements where the transactions on the ATS 
meet the conditions of Rule 6732. Not all ATSs that have been granted 
the Rule 6732 exemption could benefit from the proposed expanded 
scope--which relates to trades between a member and a non-member 
occurring on the platform. However, to the extent that trades on an ATS 
involve a member and a non-member, then such ATS could benefit from the 
expanded exemption (if it satisfies the other conditions in the rule). 
It is also possible that other ATSs may adapt their business models and 
become eligible for the expanded exemption, or that new entrants could 
arise that may benefit from the proposed expanded rule.
(c) Economic Impacts
    FINRA has identified a small number of current ATSs on which trades 
between a member and a non-member occur (i.e., trades that may 
potentially fall within the scope of the additional relief that the 
proposed exemption would provide).\14\ If the exemption is requested by 
and granted to an ATS, member subscribers who execute trades on such 
ATS may be impacted. Where granted, an ATS that operates under the 
exemption presumably would benefit from reduced compliance costs by 
shifting from contemporaneous reporting of transactions to TRACE to 
periodic reporting and by paying a reporting fee only on exempted sell 
transactions.
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    \14\ FINRA is unable to estimate the number of transactions that 
may be covered under the expanded scope of the exemption because 
information on whether all trades meet all of the rule's conditions 
is not readily available.
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    An ATS that seeks and is granted an exemption under this proposed 
rule may incur costs to modify its system and must update its policies 
and procedures to reflect reporting consistent with the requirements of 
the rule. Each ATS may determine independently whether it wants to 
request the exemption, and, thus, it is likely that an ATS would only 
seek this exemption where it is preferable to standard reporting 
requirements.
    Where an ATS seeks and is granted the exemption, member subscribers 
who transact through the ATS also may incur costs associated with 
modifying the reporting system to identify the ATS on TRACE reports 
(and to report the non-member as its counter party). These costs may 
include additional programming and testing along with updating policies 
and procedures. Members may also benefit where they prefer to trade 
report against the contra-party with which they will clear and settle 
the trade. Both member subscribers and ATSs may incur additional costs 
associated with creating and maintaining a written agreement with 
respect to the reporting exempt trades.
    FINRA also considered the potential impacts of the proposed rule on 
investors and other parties that might rely on TRACE reporting. The 
proposed rule would not reduce the information collected and 
disseminated by FINRA on TRACE-eligible securities transactions 
occurring on an ATS. Member subscribers would continue to report to 
TRACE transactions occurring on an ATS that was granted the exemption 
within the time prescribed by FINRA rules and would identify the ATS on 
which the trade occurred. In addition, public transparency with respect 
to exempted trades will not be compromised because exempted 
transactions will continue to be disseminated by FINRA in accordance 
with existing rules.
(d) Alternatives Considered
    No alternatives were considered.

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.

[[Page 67999]]

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 up to 90 days (i) as the 
Commission may designate 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 email to [email protected]. Please include 
File Number SR-FINRA-2021-029 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2021-029. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2021-029, and should be submitted 
on or before December 21, 2021.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25988 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P