Document ID: SEC-2015-1460-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-09-03T04:00Z

[Federal Register Volume 80, Number 171 (Thursday, September 3, 2015)]
[Notices]
[Pages 53375-53377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21868]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75782; File No. SR-FINRA-2015-025]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Require 
Members To Report Transactions in TRACE-Eligible Securities as Soon as 
Practicable

August 28, 2015.

I. Introduction

    On July 2, 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 July 16, 2015.\3\ The Commission 
received two comment letters on the proposed rule change.\4\ FINRA 
responded to the comment letters on August 20, 2015.\5\ This order 
approves the proposed rule change.
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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. 75428 (July 10, 
2015), 80 FR 42149.
    \4\ See letter from Darren Wasney, Program Manager, Financial 
Information Forum, to Robert W. Errett, Deputy Secretary, 
Commission, dated August 5, 2015 (``FIF Letter'') and letter from 
Michael Nicholas, Chief Executive Officer, Bond Dealers of America, 
to Secretary, Commission, dated August 6, 2015 (``BDA Letter'').
    \5\ See letter from Racquel L. Russell, Associate General 
Counsel, FINRA, to Robert W. Errett, Deputy Secretary, Commission, 
dated August 20, 2015 (``FINRA Response Letter'').
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II. Description of the Proposed Rule Change

    FINRA Rule 6730 currently requires that each FINRA member that is a 
Party to a Transaction \6\ in a TRACE-Eligible Security \7\ report the 
transaction within 15 minutes of the Time of Execution,\8\ unless a 
different time period for the security is otherwise specified in the 
rule. Otherwise, the transaction report will be deemed ``late.'' The 
proposed rule change amends Rule 6730 to provide that, for a TRACE-
Eligible Security subject to dissemination, each member that is a Party 
to a Transaction must report the transaction to TRACE as soon as 
practicable, but no later than within 15 minutes of the Time of 
Execution or other timeframe specified in Rule 6730. Further, the 
proposed rule change adds new Supplementary Material .03 that requires 
members to adopt policies and procedures reasonably designed to comply 
with this amendedrequirement by implementing, without delay, systems 
that commence the trade reporting process at the Time of Execution. The 
proposed rule change also provides that, where a member has in place 
such reasonably designed policies, procedures, and systems, the member 
generally will not be viewed as violating the ``as soon as 
practicable'' reporting requirement because of delays that are due to 
extrinsic factors that are not reasonably predictable and where the 
member does not purposely intend to delay the reporting of the trade. 
The proposed rule change states that in no event may a member purposely 
withhold trade reports, for example, by programming its systems to 
delay reporting until the end of the reporting time period.
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    \6\ FINRA Rule 6710(e) provides that a ``Party to a 
Transaction'' is an introducing broker-dealer, if any, an executing 
broker-dealer, or a customer. ``Customer'' includes a broker-dealer 
that is not a FINRA member.
    \7\ See FINRA Rule 6710(a) (defining ``TRACE-Eligible 
Security'').
    \8\ FINRA Rule 6710(d) provides, among other things, that the 
``Time of Execution'' for a transaction in a TRACE-Eligible Security 
is the time when the Parties to a Transaction agree to all of the 
terms of the transaction that are sufficient to calculate the dollar 
price of the trade.
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    The proposed rule change also recognizes that members may manually 
report transactions in TRACE-Eligible Securities and, as a result, the 
trade reporting process may not be completed as quickly as where an 
automated trade reporting system is used. FINRA states that, in these 
cases, in determining whether the member's policies and procedures are 
reasonably designed to report the trade ``as soon as practicable,'' it 
will take into consideration the manual nature of the member's trade 
reporting process.
    While the current rules provide time periods for members to conduct 
the necessary actions to report transactions, FINRA cites concerns 
about members delaying the reporting of executed transactions, 
particularly, for example, by imbedding into the trade reporting 
process deliberate delays until the end of the reporting time period. 
FINRA also represents that it observed instances that appear to 
indicate that firms have taken more time than is operationally 
necessary to report trades, which raises the possibility that certain 
firms may have intentionally delayed trade reporting, possibly to delay 
public dissemination of the trade. FINRA believes that such conduct is 
inconsistent with the purpose of the trade reporting rules and that it 
is

[[Page 53376]]

important for public price transparency that members do not delay 
reporting executed transactions.
    FINRA already has taken certain steps to deter such conduct. 
Paragraph (a)(4) of Rule 6730 currently provides that members have an 
ongoing obligation to report transaction information promptly, 
accurately, and completely. In addition, FINRA previously has conveyed 
its expectation, through regulatory notices, that members not delay the 
reporting of transactions through certain communications with its 
members.\9\ FINRA now believes that Rule 6730 should be explicitly 
amended to prohibit delays, thereby promoting consistent and timely 
reporting by all members and improving the usefulness of disseminated 
TRACE information for regulators, investors, and other market 
participants. FINRA also states that the proposed rule change will 
clarify that intentionally delaying trade reporting is violative of a 
member's ongoing obligation to report transaction information to TRACE 
promptly.
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    \9\ See, e.g., Trade Reporting Notice, May 10, 2011 (Reporting 
Asset-Backed Securities to the Trade Reporting and Compliance 
Engine) (although firms have up to two business days to report 
transactions in ABSs, firms should submit reports as soon as 
practicable after the execution of a transaction and throughout the 
trading day, rather than queuing such reports until the end of the 
reporting time period); Regulatory Notice 12-52 (December 2012) 
(transactions in securities subject to TRACE reporting requirements 
should be reported without delay, even though the TRACE rule 
generally allows for up to 15 minutes to report transactions in 
corporate and agency debt securities).
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    FINRA anticipates that the proposal will not impose any significant 
new compliance costs on members. FINRA also represents that it 
understands that the vast majority of firms that report transactions to 
TRACE have automated their trade reporting systems, which may 
facilitate their ability to comply with the proposed rule change.\10\ 
FINRA acknowledges the additional timing needs for firms that manually 
report their TRACE trades and represents that it will consider those 
needs when evaluating the policies and procedures of those members.
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    \10\ FINRA provided statistics, based on a review of TRACE trade 
reporting data from January 2014 through December 2014, that over 
90% of trade reports in corporate and agency debt were submitted 
within five minutes of the time of execution and 79% were reported 
within one minute. Furthermore, approximately 71% of trade reports 
in securitized products were submitted within five minutes of 
execution, and over 55% were reported within one minute.
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III. Summary of Comments and FINRA's Response

    As noted above, the Commission received two comment letters on the 
proposed rule change \11\ and a response letter from FINRA.\12\ The 
comment letters and FINRA's response are summarized below.
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    \11\ See supra note 4.
    \12\ See supra note 5.
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    The FIF Letter requests clarification regarding how the proposed 
rule change would apply to member firms and suggests that FINRA only 
include language explicitly stating that intentionally delaying 
reporting would constitute a violation of Rule 6730. The FIF Letter 
also suggests that FINRA eliminate the ``as soon as practicable'' 
language included in the proposed rule change.\13\
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    \13\ See FIF Letter at 1-2.
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    FINRA rejects this suggested change. While intentionally delaying 
reporting would constitute a violation of the proposed rule, FINRA 
states that the proposal puts an affirmative obligation on firms to 
implement efficient reporting systems, a goal that goes beyond the 
policing of intentional delays. FINRA notes the importance of price 
transparency to the investing public and the marketplace overall and 
states that each member should take steps to ensure that transaction 
information is reported promptly without taking more time than is 
operationally necessary.\14\
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    \14\ See FINRA Response Letter at 1-2.
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    The FIF Letter also asks whether firms may be deemed in violation 
of the proposed rule under certain scenarios. The Letter inquires, for 
example, whether brokers, due to using different data providers and 
having different internal workflows, have different reporting time 
requirements.\15\ Further, the FIF Letter also asks whether firms would 
be expected to modify existing systems to comply with the proposed rule 
change.\16\
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    \15\ See FIF Letter at 2.
    \16\ See FIF Letter at 2.
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    In its response letter, FINRA recognizes that members' processes 
around TRACE reporting are diverse and may differ depending on the 
degree of automation, the method of order receipt and execution, and 
other factors. FINRA also states that it understands a certain amount 
of time is operationally needed for reporting and that its rule text 
acknowledged this. FINRA states that compliance with the rule would 
hinge on whether the member firm's policies and procedures are 
reasonably designed to report trades as soon as practicable by having 
systems that commence reporting at the time of execution without 
delay.\17\ It also states that, if a member currently has such policies 
and procedures, then no further changes would be required to comply 
with the proposed rule change.\18\
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    \17\ See FINRA Response Letter at 2.
    \18\ See FINRA Response Letter at 3.
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    The BDA Letter generally supports the proposal but suggests that 
FINRA alter the wording of the proposed rule text to read that members 
``generally will not be viewed as violating the `as soon as 
practicable' requirement because of delays in trade reporting that are 
due to the facts and circumstances of the transaction.'' \19\ The BDA 
Letter cites some examples of intrinsic factors that it states can 
cause reporting delays, including changes in staff, routine day-to-day 
business and personnel issues, and transactions in complex securitized 
products or by telephone, which may require additional time for 
reporting. The BDA Letter states that firms experiencing reporting 
delays due to such factors should not be considered out of 
compliance.\20\
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    \19\ See BDA Letter at 1-2. The proposed rule provides that 
delays due to ``extrinsic factors that are not reasonably 
predictable'' will generally not be viewed as violative of Rule 
6730.
    \20\ See BDA Letter at 2-3.
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    FINRA, in response, states that it agrees that the facts and 
circumstances of a transaction are one of the factors that may be 
considered in determining whether a transaction was reported as soon as 
practicable, but rejects the suggested modification. FINRA states that 
the intent of the proposed rule language is to provide comfort to 
members experiencing delays resulting from unpredictable extrinsic 
factors, which are by their nature outside of a member's control. FINRA 
further provides that the predictable and routine factors noted by the 
BDA Letter (such as staff turnover, voice transactions, and trading in 
new or complex security types) are factors that should be considered 
when designing reporting systems to facilitate prompt transaction 
reporting. FINRA acknowledges, however, that the particulars of what 
operationally is necessary to report a specific trade or type of trade 
legitimately may vary depending on the circumstances.\21\
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    \21\ See FINRA Letter 3-4.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\22\ In particular, the Commission finds that the proposed

[[Page 53377]]

rule change is consistent with Section 15A(b)(2) of the Act,\23\ which 
requires, among other things, that FINRA be so organized and have the 
capacity to be able to carry out the purposes of the Act, to comply 
with the Act, and to enforce compliance by FINRA members and persons 
associated with members with the Act, the rules and regulations 
thereunder, and FINRA rules. The Commission also finds the proposed 
rule change consistent with Section 15A(b)(6) of the Act,\24\ 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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    \22\ 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).
    \23\ 15 U.S.C. 78o-3(b)(2).
    \24\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change is reasonably 
designed to clarify the manner in which firms must comply with existing 
FINRA Rule 6730(a)(4). The Commission believes that it is consistent 
with the Act for FINRA to explicitly prohibit the delay of transaction 
reporting and to require members to establish and implement policies 
and procedures that are reasonably designed to comply with the TRACE 
reporting requirement as amended. The Commission believes that the 
proposed rule change will promote timely trade reporting and thereby 
enhance public price transparency, consistent with the protection of 
investors and public interest.
    The Commission notes that FINRA recognizes that members may 
manually report transactions in TRACE-Eligible Securities and, as a 
result, the trade reporting process may not be completed as quickly as 
where an automated trade reporting system is used. The Commission 
believes it is appropriate that, in these cases, FINRA would take into 
consideration the manual nature of the member's trade reporting process 
in determining whether its policies and procedures are reasonably 
designed to report the trade ``as soon as practicable.''
    The Commission also notes that one commenter suggested removing the 
``as soon as practicable'' requirement, while another commenter, who 
supported the requirement, suggested modifications to the proposed rule 
text to account for intrinsic factors that may delay reporting. 
Further, both commenters raised concerns about certain circumstances 
that may affect the timeliness of trade reporting, including the 
variations in member reporting mechanisms, routine business matters, or 
the complexity of the securities traded.
    The Commission believes FINRA's decision not to modify the rule 
text as suggested by the commenters is appropriate. The Commission 
notes that FINRA acknowledges that reporting processes differ by member 
firm and by security and that its rule text already accounted for this. 
As FINRA notes, compliance with the rule would hinge on whether the 
member firm's policies and procedures are reasonably designed to report 
trades as soon as practicable by having systems that commence reporting 
at the time of execution without delay. The Commission also notes that 
FINRA acknowledges that the facts and circumstances of a particular 
transaction are among the factors that may be considered in determining 
whether a transaction was reported as soon as practicable. Moreover, 
FINRA states that routine and predictable factors that affect the 
timing of reporting should be accounted for when a member designs 
policies, procedures, and systems for trade reporting, in contrast to 
unpredictable, extrinsic factors, which are by their nature outside of 
a member's control.
    While the proposed rule would require firms to undertake an 
assessment of existing policies and procedures for compliance with the 
rule and may entail some additional costs for member firms that do not 
already have policies and procedures in place to report trades as soon 
as practicable, the Commission believes the proposed rule is be 
reasonably designed to achieve compliance with FINRA rules and the 
applicable federal securities law and regulations.
    Therefore, for the foregoing reasons, the Commission finds that the 
proposed rule change is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-FINRA-2015-025), be, and 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-21868 Filed 9-2-15; 8:45 am]
BILLING CODE 8011-01-P