Document ID: SEC-2014-0243-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-02-07T05:00Z

[Federal Register Volume 79, Number 26 (Friday, February 7, 2014)]
[Notices]
[Pages 7485-7486]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02619]

[[Page 7485]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71467; File No. SR-FINRA-2013-053]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Update the 
Rules Governing the Alternative Display Facility

February 3, 2014.

I. Introduction

    On December 9, 2013, 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 update the rules governing the Alternative 
Display Facility (``ADF''). The proposed rule change was published for 
comment in the Federal Register on December 26, 2013.\3\ The Commission 
received no comment letters regarding the proposed rule change. This 
order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71147 (December 19, 
2013), 78 FR 78451 (``Notice'').
---------------------------------------------------------------------------

II. Description

    The ADF is a quotation collection and trade reporting facility that 
provides ADF Market Participants the ability to post quotations, 
display orders and report transactions in NMS stocks for submission to 
the Securities Information Processors for consolidation and 
dissemination to vendors and other market participants.\4\ In addition, 
the ADF delivers real-time data to FINRA for regulatory purposes, 
including enforcement of requirements imposed by Regulation NMS.\5\
---------------------------------------------------------------------------

    \4\ See Notice, supra note 3.
    \5\ See 17 CFR 242.600 et seq.
---------------------------------------------------------------------------

    FINRA proposes to update the rules governing the ADF to: (i) 
Reflect regulatory requirements that have been put into place since the 
last comprehensive revision of the ADF rules and to enhance operational 
efficiency; (ii) address changes to the ADF's functionality resulting 
from FINRA's proposed migration of the ADF to the Multi-Product 
Platform (``MPP''); (iii) conform the ADF trade reporting rules, to the 
extent practicable, to current FINRA rules relating to trade reporting 
to the FINRA Trade Reporting Facilities (``TRFs''); and (iv) make other 
non-substantive changes.\6\ FINRA's changes to the ADF rules are 
described below.
---------------------------------------------------------------------------

    \6\ See Notice, supra note 3.
---------------------------------------------------------------------------

    FINRA proposes to revise FINRA Rule 6272, governing quotations 
posted on the ADF, to modify the quotation pricing obligations for 
Registered Reporting ADF Market Makers in response to the National 
Market System Plan to Address Extraordinary Market Volatility (``Limit 
Up-Limit Down Plan'').\7\ As amended, FINRA Rule 6272(a)(2) would 
specify that the suspension of pricing obligations for ADF Market 
Makers would apply during a trading halt except as permitted under the 
Limit Up-Limit Down Plan.\8\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \8\ For example, as FINRA notes, the Limit up-Limit Down Plan 
provides that ``[n]o trades in an NMS Stock shall occur during a 
Trading Pause, but all bids and offers may be displayed.'' Id. at 77 
FR 33514.
---------------------------------------------------------------------------

    FINRA also proposes to amend Rule 6272(b) to update the minimum 
quotation increment for ADF-eligible securities to account for 
quotations under $1.\9\ As revised, Rule 6272(b) would provide that the 
minimum quotation increment for quotations below $1.00 in all ADF-
eligible securities shall be $0.0001. FINRA states that this provision 
will enable ADF Participants to submit quotations for issues under $1 
in an increment that is consistent with Rule 612 of Regulation NMS.\10\
---------------------------------------------------------------------------

    \9\ FINRA Rule 6220 defines an ``ADF-eligible security'' as an 
NMS stock as defined in Rule 600(b)(47) of SEC Regulation NMS.
    \10\ Rule 612 of Regulation NMS permits, among other things, 
quotations in NMS stocks that are less than $1.00 per share to be 
priced in increments of $0.0001. See 17 CFR 242.612(b).
---------------------------------------------------------------------------

    FINRA proposes to provide additional detail as to how a Registered 
Reporting ADF ECN may voluntarily terminate its registration. As 
proposed, the rule will state that a Registered Reporting ADF ECN may 
voluntarily withdraw from participation on the ADF upon providing, 
through electronic delivery, written notice to FINRA Market Operations 
of its intention to withdraw as a Registered Reporting ADF ECN, with 
such withdrawal to be effective upon the first trading day following 
the issuance of the written notice announcing the Registered Reporting 
ADF ECN's intent to withdraw, or such other date as specified in the 
written notice.
    FINRA states that it requires ADF Trading Centers to report order 
information to it so that FINRA can have detailed information regarding 
the origination of orders underlying an ADF Trading Center's quotation 
and use that information to enhance its ability to monitor quotation 
activity on the ADF. FINRA proposes various modifications to the order 
reporting requirements set forth in FINRA Rule 6250, governing quote 
and access requirements, to enhance FINRA's ability to efficiently 
monitor quoting activity on the ADF on an automated basis and conduct 
surveillance.\11\ In particular, FINRA believes that certain of these 
changes would better reflect the order information necessary for its 
surveillance programs related to the Firm Quote Rule,\12\ and to reduce 
the reporting of excess information that may over-burden its systems 
and lead to false alerts.\13\ Further, FINRA proposes to update the 
reporting requirements for Order Time and Order Response Time in FINRA 
Rule 6250(b) so that ADF Trading Centers would report this information 
in hours, minutes, seconds and milliseconds if the ADF Trading Center's 
system captures such information in milliseconds.\14\
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3, at 78452.
    \12\ See 17 CFR 242.602(b)(2); see also FINRA Rule 5220.
    \13\ See Notice, supra note 3, at 78452-78453.
    \14\ See Proposed FINRA Rules 6250(b)(1)(I) and 6250(b)(2)(C).
---------------------------------------------------------------------------

    FINRA proposes to amend FINRA Rules 6281 and 6282 and the Rule 7100 
Series relating to trade reporting to the ADF to conform those rules, 
to the extent practicable, to current FINRA rules relating to trade 
reporting to the TRFs.\15\ FINRA believes that by conforming the trade 
reporting requirements for the ADF and TRFs, to the extent practicable, 
the proposed rule change will promote more consistent trade reporting 
by members and a more complete and accurate audit trail. FINRA notes 
that most of the proposed conforming changes to FINRA Rules 6281 and 
6282 and the Rule 7100 Series are technical and non-substantive in 
nature, and FINRA does not believe that any of the proposed changes 
would require members to make systems changes in order to comply. 
Furthermore, FINRA members that currently report to one of the TRFs 
would already be familiar with the rule amendments that are proposed 
herein. FINRA proposes to amend FINRA Rule 7510(a) to assess a $0.25 
fee to each party that cancels or corrects a trade.\16\ FINRA states 
that the purpose of adding this new change is to defray the 
administrative costs incurred by FINRA in processing corrective 
transaction charges, including cancel and correct requests.\17\
---------------------------------------------------------------------------

    \15\ See FINRA Rule 6300 and 7200 Series governing TRFs.
    \16\ See Notice, supra note 3, at 78455.
    \17\ See id.

---------------------------------------------------------------------------

[[Page 7486]]

    FINRA also proposes to delete FINRA Rule 7530, which assesses a 
minimum charge of $5,000 for installation costs associated with 
connecting to the ADF.\18\ FINRA proposes to delete this provision 
because it is no longer applicable, since the ADF is software-based and 
there is no hardware to install, remove or relocate.\19\ Finally, FINRA 
proposes a number of technical changes throughout the ADF rules.
---------------------------------------------------------------------------

    \18\ See id.
    \19\ See id.
---------------------------------------------------------------------------

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities association.\20\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\21\ which requires, among other things, that the rules of a 
national securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission also finds that the proposal is 
consistent with Section 15A(b)(5) of the Act,\22\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls.
---------------------------------------------------------------------------

    \20\ In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    The Commission notes that FINRA believes that the proposed changes 
are either: (1) Non-substantive; (2) delete functionalities that will 
not be available following the migration to the MPP; (3) reflect 
regulatory changes; (4) conform the ADF rules to other FINRA rules; or 
(5) otherwise increase the operational and regulatory efficiency of the 
ADF. To the extent that a number of the changes are non-substantive or, 
in the case of conforming the ADF trade reporting requirements to the 
TRF trade reporting requirements, mirror requirements currently 
applicable to FINRA members, FINRA does not believe that members will 
be significantly or adversely affected by these changes. In addition, 
FINRA also believes that certain of the proposed changes, such as the 
provision to allow for the voluntary termination of registration by a 
Registered Reporting ADF ECN, may increase operational and regulatory 
efficiency for FINRA and ADF Market Participants alike.
    As noted above, the proposed rule change is intended to update the 
rules governing the ADF to reflect changes to regulatory requirements 
that have occurred since FINRA last updated the ADF rules, as well as 
make a number of non-substantive changes to reflect changes in FINRA 
departments or systems, or to correct other outdated references.\23\ 
The Commission notes that proposed changes reflecting the Limit Up-
Limit Down Plan and allowing a minimum quoting increment of less than 
$0.01 for quotations below $1, modify the ADF rules to reflect 
regulatory initiatives that were previously approved or promulgated by 
the Commission.\24\ Further, the Commission believes that updating the 
rules to correct outdated references and reflect current FINRA 
departments and systems should provide greater clarity in FINRA's rules 
and thereby, eliminate potential confusion by market participants.
---------------------------------------------------------------------------

    \23\ Examples of such changes include FINRA's proposal to change 
the reference from TRACS to ``ADF'' or ``the System'' and changing 
the references from ``FINRA ADF Operations'' to ``FINRA Market 
Operations'' or ``FINRA Product Management'' as applicable. See 
Notice, supra note 3, at 78456.
    \24\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (Limit up-Limit Down adopting 
release); and Rule 612 of Regulation NMS, 17 CFR 242.612(b) 
(permitting quotations in NMS stocks that are less than $1.00 per 
share to be priced in increments of $0.0001).
---------------------------------------------------------------------------

    FINRA also proposes to delete rules regarding certain 
functionalities that would no longer be available following the 
migration of the ADF to MPP. In this regard, FINRA has represented that 
these functionalities are not currently being utilized, and would not 
be offered on the ADF upon its migration to the MPP.\25\ Accordingly, 
the Commission believes that these changes should ensure that the rules 
accurately reflect the operation of the ADF upon its migration to the 
new platform.
---------------------------------------------------------------------------

    \25\ See Notice, supra note 3, at 78456.
---------------------------------------------------------------------------

    The Commission also believes that FINRA's modifications to its 
order reporting and trade reporting rules, including making the ADF 
rules more consistent with the rules governing TRFs, are also 
consistent with the Act. The Commission believes that the proposed rule 
change should enhance FINRA's ability to monitor quoting activity and 
help to ensure that FINRA will continue to receive important 
information necessary to conduct surveillance, while reducing the 
receipt of excess order information that may contribute to false 
surveillance alerts. Further, FINRA has represented that the proposed 
rule change would promote more consistent trade reporting by members by 
better aligning the ADF trade reporting requirements with the TRF trade 
reporting requirements and would create a more complete and accurate 
audit trail.\26\ Moreover, FINRA has represented that it does not 
believe that this proposed rule change would require FINRA members to 
make any systems changes to comply with the ADF rules.\27\ Accordingly, 
the Commission believes that FINRA's proposed changes to the rules 
governing the ADF should help to ensure that FINRA could more 
efficiently monitor and prevent manipulative acts and practices on the 
ADF and could help foster cooperation and coordination with persons 
engaged in facilitating transactions in securities.
---------------------------------------------------------------------------

    \26\ See id. at 78455.
    \27\ See id.
---------------------------------------------------------------------------

    The Commission also finds that the proposed changes to the ADF fees 
are consistent with the Act. FINRA represents that the $0.25 charge 
would apply to ADF Market Participants that cancel or correct a trade 
in order to defray the administrative costs incurred by FINRA in 
processing corrective transactions, including cancel and correct 
requests.\28\ The Commission also believes that it is reasonable for 
FINRA to delete its fees associated with connecting to the ADF since 
those fees are no longer applicable.
---------------------------------------------------------------------------

    \28\ See id.
---------------------------------------------------------------------------

    For these reasons, the Commission believes that the proposal is 
consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-FINRA-2013-053) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02619 Filed 2-6-14; 8:45 am]
BILLING CODE 8011-01-P