Document ID: SEC-2011-1460-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-09-29T04:00Z

[Federal Register Volume 76, Number 189 (Thursday, September 29, 2011)]
[Notices]
[Pages 60567-60569]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25072]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65388; File No. SR-FINRA-2011-051]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Create an 
Exemption From Certain Reporting Obligations Under the Equity Trade 
Reporting Rules for Certain Alternative Trading Systems

September 23, 2011.
    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 September 16, 2011, 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, II, and III 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 adopt new Rules 6183 and 6625 to provide 
FINRA with authority to exempt a member alternative trading system 
(``ATS'') that meets the specified criteria from the trade reporting 
obligation under the equity trade reporting rules. In addition, FINRA 
is proposing a conforming change to Rule 9610 to specify that FINRA has 
exemptive authority under proposed Rules 6183 and 6625.
    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
    FINRA trade reporting rules require that over-the-counter (``OTC'') 
transactions in equity securities \3\ between members be reported to 
FINRA by the ``executing party.'' \4\ ``Executing party'' is defined as 
the member that receives an order for handling or execution or is 
presented an order against its quote, does not subsequently re-route 
the order, and executes the transaction. An ATS, which term includes 
electronic communications networks, is the ``executing party'' and has 
the trade reporting obligation where the transaction is executed on the 
ATS.\5\
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    \3\ Specifically, these transactions are: (1) Transactions in 
NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS, 
effected otherwise than on an exchange, which are reported through 
the Alternative Display Facility or a Trade Reporting Facility; and 
(2) transactions in OTC Equity Securities and Restricted Equity 
Securities, as those terms are defined in Rule 6420, which are 
reported through the OTC Reporting Facility.
    FINRA notes that the proposed rule change applies to OTC 
transactions in equity securities only. It does not apply to TRACE-
eligible securities, nor does it impact the reporting rules 
applicable to transactions in TRACE-eligible securities, which are 
subject to a separate reporting structure under the Rule 6700 
Series.
    \4\ See Rules 6282(b), 6380A(b), 6380B(b) and 6622(b). For 
transactions between a member and a non-member or customer, the 
member must report the trade.
    \5\ See Securities Exchange Act Release No. 58903 (November 5, 
2008), 73 FR 67905 (November 17, 2008) (Order Approving File No. SR-
FINRA-2008-011); and Regulatory Notice 09-08 (January 2009). See 
also, e.g., Trade Reporting Frequently Asked Questions, Sections 307 
and 308, available at http://www.finra.org/Industry/Regulation/Guidance/P038942.
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    FINRA is proposing to adopt new Rules 6183 and 6625 to provide 
FINRA with authority to exempt, upon application and subject to 
specified terms and conditions, a member ATS from the trade reporting 
obligation under certain limited circumstances. FINRA will only grant 
an exemption where all of the conditions set forth in the proposed rule 
are satisfied.
    First, trades must be between ATS subscribers that are both FINRA 
members. For any trades between non-members or a FINRA member and a 
non-member, the exemption will not apply, and the ATS will have the 
trade reporting obligation under FINRA rules.
    The ATS also must demonstrate that it meets the following criteria. 
First, the member subscribers must be fully disclosed to one another at 
all times on the ATS. Second, although the system brings together the 
orders of buyers and sellers and uses established, non-discretionary 
methods under which such orders interact with each other, the system 
does not permit automatic execution. A member subscriber must take 
affirmative steps beyond the submission of an order to agree to a trade 
with another member subscriber. Third, the trade does not pass through 
any ATS account, and the ATS does not in any way hold itself out to be 
a party to the trade. Fourth, the ATS does not exchange shares or funds 
on behalf of the member subscribers, 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.
    In addition, the ATS and the member subscribers must acknowledge 
and agree in writing that the ATS shall not be deemed a party to the 
trade for purposes of trade reporting and that trades shall be reported 
by the member subscriber that, as between the two member subscribers, 
would satisfy the definition of ``executing party'' under FINRA trade 
reporting rules. An ATS that is granted an exemption must obtain such 
written agreements from all of its member subscribers prior to relying 
on the exemption.\6\
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    \6\ FINRA reminds members of their books and records obligations 
under FINRA rules, the Exchange Act and applicable Exchange Act 
rules. Thus, any ATS that is granted an exemption under the proposed 
rule change would be required to retain the written agreements and 
be able to produce them to FINRA upon request.
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    Finally, the ATS must agree to provide to FINRA on a monthly basis, 
or such other basis as prescribed by FINRA, data relating to the volume 
of trades by security executed by the ATS's member subscribers using 
the ATS's system (e.g., number of trades, number of shares traded and 
total settlement value for each security traded). Importantly, although 
an ATS exempted under the proposed rule will not have trade reporting 
obligations under FINRA rules, the trading occurring through the ATS is 
still considered volume of the ATS for purposes of, among other

[[Page 60568]]

things, the recordkeeping requirements of Rule 302 of SEC Regulation 
ATS \7\ and determining whether the ATS triggers the Fair Access 
requirements under Rule 301(b)(5) of Regulation ATS or the Capacity, 
Integrity and Security of Automated Systems requirements of Rule 
301(b)(6) of Regulation ATS. The ATS also must acknowledge that failure 
to report such data to FINRA, in addition to constituting a violation 
of FINRA rules, will result in revocation of any exemption granted 
pursuant to the proposed rule change.
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    \7\ 17 CFR 242.300-303.
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    Where an exemption is granted, the ATS will not be deemed a party 
to the trade for purposes of FINRA trade reporting rules and will not 
be identified in trade reports submitted to FINRA. As expressly stated 
in the proposed rule, the trade must be reported to FINRA by the member 
subscriber that, as between the two member subscribers, satisfies the 
definition of ``executing party'' under paragraph (b) of Rules 6282, 
6380A, 6380B or 6622.\8\ For example, FINRA member BD1 displays a quote 
through ATS X and member BD2 routes an order to BD1 for the price and 
size of BD1's quote using a messaging system provided by ATS X. BD1 
does not subsequently re-route the order and executes the trade. 
Assuming that ATS X meets all of the criteria set forth in the proposed 
rule and has been granted an exemption by FINRA, it will not be deemed 
a party to the trade for trade reporting purposes and should not be 
identified as such in the trade report submitted to FINRA. In this 
example, BD1 is the ``executing party'' and has the obligation to 
report the trade between BD1 and BD2.
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    \8\ FINRA notes that where an ATS has been granted an exemption 
under the proposed rule, the member subscribers, as the parties 
identified in the trade report, will be assessed regulatory 
transaction fees under Section 3 of Schedule A to the FINRA By-Laws 
and the Trading Activity Fee under FINRA By-Laws, Schedule A, Sec.  
1(b)(2). The ATS will not be assessed such fees.
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    FINRA believes that the proposed rule change will reduce potential 
confusion and possible misreporting by clearly identifying the member 
with the trade reporting obligation in this instance. FINRA believes 
that an ATS that satisfies all conditions of the proposed rule change 
has a more limited involvement in the trade execution than the member 
subscribers and therefore the proposed exemption is appropriate in this 
narrow instance. FINRA expects that a large majority of ATSs will not 
qualify for the exemption, and the proposed rule change will not result 
in a change to their reporting. These ATSs will continue to report, as 
``executing party,'' trades that are matched and executed on their 
systems.
    FINRA also is proposing a conforming change to Rule 9610 to add 
proposed Rules 6183 and 6625 to the list of rules pursuant to which 
FINRA has exemptive authority.
    FINRA is proposing that the proposed rule change will be effective 
on the date of Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that FINRA 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. FINRA believes that the proposed rule change will 
reduce potential confusion and possible misreporting and enhance market 
transparency by clearly identifying the member with the trade reporting 
obligation (i.e., the party to the trade that meets the definition of 
``executing party'' for purposes of trade reporting to FINRA).
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    \9\ 15 U.S.C. 78o-3(b)(6).
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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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-051 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2011-051. This 
file number should be included on the subject line if e-mail 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-2011-051 
and should be submitted on or before October 20, 2011.

[[Page 60569]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25072 Filed 9-28-11; 8:45 am]
BILLING CODE 8011-01-P