Document ID: SEC-2015-1896-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-11-12T05:00Z

[Federal Register Volume 80, Number 218 (Thursday, November 12, 2015)]
[Notices]
[Pages 70042-70044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28681]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76360; File No. SR-FINRA-2015-046]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Mandatory Participation in Business 
Continuity and Disaster Recovery Testing Under Regulation SCI

November 5, 2015.
    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 October 30, 2015, 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. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 4380 related to mandatory 
participation in business continuity and disaster recovery (``BC/DR'') 
testing under Regulation Systems Compliance and Integrity (``Regulation 
SCI'').
    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
    Regulation SCI was adopted by the Commission on November 19, 2014, 
with the objective of strengthening the technology infrastructure of 
the U.S. securities markets.\4\ The regulation applies to ``SCI 
entities,'' which includes FINRA, the national securities exchanges and 
equity alternative trading systems (``ATSs'') that meet specified 
volume thresholds.\5\ One topic of several Regulation SCI rule 
requirements is BC/DR testing.
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    \4\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72252, 72254 (December 5, 2014) (``SCI Adopting 
Release'').
    \5\ Rule 1000 of SEC Regulation SCI.
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    Rule 1004 of SEC Regulation SCI requires FINRA, as an SCI entity, 
to do the following with respect to its BC/DR plan: (1) Establish 
standards to designate the members that FINRA reasonably determines 
are, taken as a whole, the minimum necessary for the maintenance of 
fair and orderly markets in the event of the activation of its BC/DR 
plan; (2) designate members pursuant to its established standards and 
require them to participate in scheduled functional and performance 
testing of the operation of FINRA's BC/DR plan, in the manner and 
frequency specified by FINRA, provided the frequency is no less than 
once every 12 months; and (3) coordinate the testing of FINRA's BC/DR 
plan on an industry- or sector-wide basis with other SCI entities.
    Consistent with Regulation SCI, FINRA proposes to adopt Rule 4380 
to establish authority to designate members for mandatory participation 
in its BC/DR testing. As noted in proposed Rule 4380(a), FINRA will 
designate members according to established criteria that are designed 
to ensure participation by those members that FINRA reasonably 
determines are, taken as a whole, the minimum necessary for the 
maintenance of fair and orderly markets in the event of the activation 
of its BC/DR plan. As further noted in proposed Rule 4380(a), FINRA's 
criteria will consider volume of activity on a FINRA market system over 
a specified period of time.\6\ FINRA will communicate to members its 
criteria for designation under this Rule, and any

[[Page 70043]]

changes to such criteria, on a prospective basis \7\ by Regulatory 
Notice.
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    \6\ Volume-based criteria may contemplate quoting, trading, or 
reportable order events, depending on the type of activity conducted 
on a FINRA system.
    \7\ For example, should FINRA change its volume-based criteria, 
or the specified period of time over which such volume is measured 
(i.e., the look-back period), it would not apply any of those 
changes retroactively. Instead, it would only apply such changes, 
after notice, to the next testing cycle with a full look-back 
period.
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    Proposed Rule 4380(b) would reiterate several important points from 
Regulation SCI with respect to BC/DR plan testing. Specifically, the 
rule would note that Regulation SCI requires BC/DR testing to include 
functional and performance testing, rather than simple connectivity 
testing, and that such testing must occur at least once per 12 
months.\8\ Proposed Rule 4380(b) would further state that FINRA will 
notify members that are designated to participate in the BC/DR test at 
least 90 days prior to the scheduled testing date.\9\
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    \8\ See SCI Adopting Release, 79 FR at 72351-52.
    \9\ FINRA believes, based on preliminary discussions among SCI 
entities that the yearly testing contemplated by this proposal would 
likely take the place of the current industry test facilitated by 
the Securities Industry and Financial Markets Association 
(``SIFMA'') each October. This would be consistent with Commission 
guidance--Regulation SCI recognized that the existing SIFMA test 
could provide a foundation for the regulation's mandatory testing 
requirements. See SCI Adopting Release, 79 FR at 72349.
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    Finally, proposed Rule 4380(c) would state the obligations of 
member firms that are designated for mandatory participation in BC/DR 
testing. As noted in the rule, designated members would be required to 
fulfill, within the time frames established by FINRA, certain testing 
requirements that FINRA determines are necessary and appropriate. These 
requirements could include, for example, bringing up their systems on 
the designated testing day and processing test scripts to simulate 
trading activity. Designated members may also be required to satisfy 
related reporting requirements, for example, reporting the member's 
testing results, so that FINRA may evaluate the efficacy of the test 
and, correspondingly, its BC/DR plan.\10\
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    \10\ FINRA anticipates that compliance with this proposal would 
be enforced consistent with existing FINRA rules and practice, and 
that a designated firm's failure to participate in mandatory testing 
could result in possible sanctions, including fines, under FINRA 
Rule 8310.
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    FINRA recognizes that there may be additional market participants 
that wish to participate on a voluntary basis in FINRA's annual BC/DR 
test, beyond those that are designated under Rule 4380. For example, 
certain system participants may wish to test their backup capabilities 
even if they do not exceed the system's threshold cutoff. Additionally, 
third party service providers, like service bureaus that transmit 
information to FINRA systems on behalf of FINRA members, may also wish 
to ensure their ability to function in FINRA's backup environment, even 
though the service providers are not themselves FINRA members subject 
to Rule 4380. FINRA will encourage any such market participant to 
consider voluntary participation in FINRA's BC/DR test, consistent with 
Commission guidance.\11\
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    \11\ See SCI Adopting Release, 79 FR at 72351 n.1170 
(encouraging SCI entities to permit voluntary participation).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA will announce its criteria for designated members 
for mandatory test participation in a Regulatory Notice by November 3, 
2015, the general compliance date for Regulation SCI. FINRA anticipates 
that the first BC/DR test that will include designated members' 
mandatory participation will occur in October, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ which requires that 
FINRA rules must be designed to, among other things, foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and 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.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposal, which would authorize FINRA to 
compel participation by certain designated members in FINRA's BC/DR 
testing, is consistent with these provisions of the Act for the reasons 
articulated by the Commission when it adopted Regulation SCI. As the 
Commission stated, ``unless there is effective participation by certain 
of its members or participants in the testing of [BC/DR] plans, the 
objective of ensuring resilient and available markets in general, and 
the maintenance of fair and orderly markets in particular, would not be 
achieved.'' \13\
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    \13\ SCI Adopting Release, 79 FR at 72351 (internal citations 
omitted).
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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. The proposal is intended to 
carry out the requirements imposed by Regulation SCI with respect to 
FINRA's BC/DR testing. When the Commission adopted the mandatory backup 
testing requirements of Regulation SCI, the Commission recognized that 
the requirements could have some cost impact on designated firms. It 
concluded, however, that such costs were justified by the need for SCI 
entities to prepare for the possibility of wide-scale disruptions in 
the securities markets.\14\
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    \14\ See SCI Adopting Release, 79 FR at 72348-49. The Commission 
explained that the designation of larger firms may result in minimal 
or relatively modest administrative costs because such firms are 
likely to already have established connectivity to backup sites and 
to monitor and maintain such connectivity. See id., 79 FR at 72341.
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    FINRA recognizes that the criteria it announces in its Regulatory 
Notice may impose costs, particularly on those members designated 
pursuant to the established criteria. However, the Commission noted its 
belief that the costs of this requirement could be mitigated by the 
fact that designated members are likely to be larger firms with greater 
resources.\15\ Consistent with the Commission's guidance, FINRA expects 
that its criteria will mitigate costs by designating larger firms that 
have greater resources, and likely have experience with the current 
SIFMA-facilitated industry test, and therefore are more likely to have 
existing connections to FINRA's backup systems. Moreover, other firms 
who may anticipate some competitive advantage to participating in the 
SCI testing are not precluded from doing so by this rule, further 
mitigating any competitive effects of the rule.
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    \15\ See SCI Adopting Release, 79 FR at 72351.
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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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which

[[Page 70044]]

it was filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder. A proposed 
rule change filed under Rule 19b-4(f)(6) \18\ normally does not become 
operative prior to 30 days after the date of the filing. However, 
pursuant to Rule 19b-4(f)(6)(iii),\19\ the Commission may designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
as it will allow the Exchange to incorporate changes required under 
Regulation SCI, such as establishing standards for designating BC/DR 
participants, prior to the November 3, 2015 compliance date. 
Accordingly, the Commission designates the proposed rule change to be 
operative upon filing.\20\
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    \20\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-046 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-2015-046. 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 
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-2015-046 and should be 
submitted on or before December 3, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-28681 Filed 11-10-15; 8:45 am]
 BILLING CODE 8011-01-P