Document ID: SEC-2010-0259-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-02-19T05:00Z

[Federal Register: February 19, 2010 (Volume 75, Number 33)]
[Notices]               
[Page 7530-7532]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19fe10-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61510; File No. SR-FINRA-2010-003]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change, as Modified 
by Amendment No. 1, Relating to Trade Reporting of OTC Equity 
Securities and Restricted Equity Securities

 February 5, 2010.
    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 January 15, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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. On February 
5, 2010, FINRA filed Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 clarifies the proposed revision to FINRA 
Rule 4560. See infra note 20.
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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 the FINRA OTC Reporting Facility 
(``ORF'') Rules and the PORTAL Rules (FINRA Rule 6630 Series) regarding 
the reporting requirements for restricted equity securities; update the 
definition of ``OTC Equity Security;'' and clarify member reporting 
obligations with respect to certain trades reported on or through an 
exchange.
    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
    The proposed rule change includes several amendments to the 
reporting provisions regarding the ORF. In general, the proposed rule 
change amends the definition of ``OTC Equity Security'' in the FINRA 
trade reporting rules to address the cessation of the PORTAL Market and 
clarifies the scope of the ORF rules. The proposed rule change also 
makes conforming changes to other FINRA rules, including the Order 
Audit Trail System (``OATS'') rules.
(a) Amendments to the ORF Rules
    In 1990, the SEC adopted Rule 144A (``SEC Rule 144A'') under the 
Securities Act of 1933 \4\ (``Securities Act'') to establish a safe 
harbor for the private resale of ``restricted securities'' to 
``qualified institutional buyers'' (``QIBs'').\5\ At the same time, 
FINRA (then NASD) created the PORTAL Market to serve as a system for 
quoting, trading, and reporting trades in certain designated restricted 
securities that were eligible for resale under SEC Rule 144A (``PORTAL 
securities'').\6\ In September 2008, the NASDAQ Stock Market 
(``NASDAQ'') ceased the operation of the PORTAL Market.\7\ NASDAQ 
explained in the rule filing that it is taking a minority stake in a 
consortium that will control and operate a new electronic platform for 
handling transactions in SEC Rule 144A-eligible securities.\8\ On 
October 26, 2009, NASDAQ filed a proposed rule change with the 
Commission for immediate effectiveness terminating NASDAQ's PORTAL 
security designation process and removing rules related to the PORTAL 
Market from its rulebook.\9\ As a result, NASDAQ no longer accepts new 
applications for debt or equity securities seeking PORTAL 
designation.\10\
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    \4\ 17 CFR 230.144A.
    \5\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933 (April 30, 1990). For the purpose of SEC Rule 144A, a QIB is 
generally defined as any institution acting for its own account, or 
for the accounts of other QIBs, that in the aggregate owns and 
invests on a discretionary basis at least $100 million in securities 
of issuers that are not affiliated with the institution.
    \6\ See Securities Exchange Act Release No. 27956 (April 27, 
1990), 55 FR 18781 (May 4, 1990).
    \7\ See Securities Exchange Act Release No. 58638 (September 24, 
2008), 73 FR 57188 (October 1, 2008). As part of the separation of 
NASDAQ from FINRA, certain functionality relating to PORTAL, 
including the qualification and designation of PORTAL securities, 
became part of NASDAQ's rules and were eliminated from the FINRA 
rules. See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006).
    \8\ In addition to NASDAQ ceasing operation of the PORTAL 
Market, the Commission has also approved the deletion of the 
Depository Trust Company (``DTC'') requirement that a SEC Rule 144A 
security, other than Investment Grade Securities, be included in an 
``SRO Rule 144A System'' in order to be eligible for DTC's deposit, 
book-entry delivery, and other depository services. See Securities 
Exchange Act Release No. 59384 (February 11, 2009), 74 FR 7941 
(February 20, 2009). The PORTAL Market was the only ``SRO Rule 144A 
System.'' Id.
    \9\ Securities Exchange Act Release No. 60991 (November 12, 
2009), 74 FR 60006 (November 19, 2009).
    \10\ See id. NASDAQ noted in the filing that nothing in the 
proposal was ``intended to impact securities previously designated 
as PORTAL securities or alter any existing regulatory obligation 
applicable to such securities, including, but not limited to, any 
trade reporting obligation imposed by any self-regulatory 
organization.'' Id.
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    FINRA's transaction reporting rules for restricted equity 
securities are currently tied to whether the security is designated for 
inclusion in the PORTAL Market. Specifically, FINRA's general 
transaction reporting rules for over-the-counter equity securities 
specifically exclude restricted securities and PORTAL securities from 
the reporting requirements.\11\ FINRA's PORTAL rules (FINRA Rule 6630 
Series) require that transactions in PORTAL equity securities be 
reported to the ORF no later than 6:30 p.m. Eastern Time.\12\

[[Page 7531]]

However, this requirement applies only to those restricted equity 
securities that are designated for inclusion in the PORTAL Market. 
Thus, the cessation of the operation of the PORTAL Market and the 
designation of securities as PORTAL securities creates a gap in FINRA's 
transaction reporting requirements for restricted equity securities 
that are traded pursuant to SEC Rule 144A.
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    \11\ See FINRA Rule 6400 Series.
    \12\ FINRA Rule 6633(a). The proposed rule change is limited in 
scope to equity securities and would not affect the Trade Reporting 
and Compliance Engine Service (``TRACE'') or the reporting 
requirements with respect to transactions in debt securities. With 
respect to PORTAL securities that are debt securities, FINRA Rule 
6633(b) currently requires members to report secondary market 
transactions to TRACE in accordance with the FINRA Rule 6700 Series. 
Thus, under current FINRA rules, reporting obligations for debt 
securities are set forth in the TRACE rules rather than the PORTAL 
rules. The proposed rule change deletes FINRA Rule 6633(b); however, 
the deletion of this provision does not affect the reporting 
obligations with respect to transactions in any debt security.
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    FINRA believes it is appropriate to continue to receive information 
regarding transactions in restricted equity securities traded pursuant 
to SEC Rule 144A for audit trail and other regulatory purposes. FINRA 
is therefore proposing to eliminate the current PORTAL reporting rules 
\13\ and amend the ORF rules to include reporting requirements for all 
equity securities that are ``restricted securities'' under Rule 
144(a)(3) of the Securities Act and that are traded pursuant to SEC 
Rule 144A, irrespective of whether they are designated as PORTAL 
securities. Under the proposed rule change, transactions in all 
restricted equity securities effected pursuant to SEC Rule 144A would 
generally be required to be reported to the ORF no later than 8:00 p.m. 
Eastern Time without interruption.\14\ Transactions in restricted 
equity securities effected pursuant to SEC Rule 144A and executed 
between 8:00 p.m. and midnight would be required to be reported the 
following business day (T+1) by 8:00 p.m.
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    \13\ In addition to the reporting rules, FINRA Rule 6635 
specifies which FINRA rules are and are not applicable to 
transactions and business activities relating to PORTAL securities. 
FINRA is proposing to retain Rule 6635 as FINRA Rule 6630 to 
maintain the status quo with respect to the application of FINRA 
rules to those securities previously designated as PORTAL securities 
prior to October 26, 2009.
    \14\ FINRA Rule 6633(a)(2) currently requires that transactions 
in PORTAL equity securities be reported to the ORF ``no later than 
6:30 p.m. Eastern Time (or the end of the OTC Reporting Facility 
reporting session that is in effect at that time).'' Since December 
4, 2006, the ORF reporting session has remained open until 8:00 p.m. 
Eastern Time. See Securities Exchange Act Release No. 54773 
(November 17, 2006), 71 FR 68665 (November 27, 2006); see also 
Nasdaq Head Trader Alert 2006-120 (August 23, 2006). The proposed 
rule change amends the time deadline reference in the rule to 
reflect the current hours of operation.
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    In addition to the changes relating to restricted equity 
securities, FINRA is proposing clarifying changes to the definition of 
``OTC Equity Security'' to delete the outdated reference to securities 
that ``qualify for real-time trade reporting'' and, instead, to define 
the term as any equity security that is not an ``NMS stock'' as defined 
by the SEC in Regulation NMS.\15\ The proposed rule change will also 
eliminate the defined term ``non-exchange-listed security'' from Rule 
6420.\16\ The effect of these changes is that any security or class of 
securities for which transaction reports are collected, processed, and 
made available pursuant to an effective transaction reporting plan will 
be excluded from the definition of ``OTC Equity Security'' in Rule 
6420.
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    \15\ Rule 600 of Regulation NMS defines ``NMS stock'' as any NMS 
security other than an option. ``NMS security'' is defined as ``any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options.'' See 17 CFR 
242.600(b)(46), 242.600(b)(47).
    \16\ FINRA Rule 6440 (Submission of SEA Rule 15c2-11 Information 
on Non-Exchange-Listed Securities) and NASD Rule 2320(f), which is 
often referred to as the Three Quote Rule, use the term ``non-
exchange-listed security.'' Because the proposed rule change deletes 
the term ``non-exchange-listed security'' from Rule 6420, the 
proposed rule change also amends FINRA Rule 6440 and NASD Rule 
2320(f) to define the term for purposes of those rules. The proposed 
definition in each rule is identical to the definition as it 
appeared in FINRA Rule 6420. Consequently, there is no change in the 
application of either rule as a result of the proposed rule change.
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    The proposed rule change also amends the ORF rules to address 
explicitly transactions in OTC Equity Securities that are executed on 
an exchange. FINRA's trade reporting rules historically have been 
limited to only trades executed ``otherwise than on an exchange.'' \17\ 
For example, the FINRA/NASDAQ TRF Rules, the FINRA/NYSE TRF Rules, and 
the ADF Rules all include an exception from the reporting obligations 
for transactions reported on or through an exchange.\18\ These rules 
collectively provide for the submission of trade reports to FINRA for 
transactions in NMS stocks only if the transaction is executed over the 
counter.
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    \17\ See e.g., FINRA Rule 6100, 6200, and 6300 Series.
    \18\ See FINRA Rules 6282(i)(1)(C), 6380A(e)(1)(C), 
6380B(e)(1)(C).
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    FINRA Rule 6622 sets forth the requirements for members regarding 
the submission of transaction reports to the ORF for transactions in 
OTC Equity Securities. While, as discussed above, the FINRA TRF and ADF 
rules explicitly except transactions executed on or through an 
exchange, the ORF rules do not include a similar exception for 
transactions in otherwise eligible securities that are reported on or 
through an exchange.\19\ Thus, FINRA proposes to amend FINRA Rule 6622 
to explicitly include an exception for transactions in OTC Equity 
Securities reported on or through an exchange. In addition, the 
proposed changes to Rule 6420(k) and Rule 6610 further clarify that 
transactions in OTC Equity Securities must be reported to the ORF where 
such transactions are executed otherwise than on or through an 
exchange.
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    \19\ The ORF Rules do include an exception for transactions in 
foreign equity securities when the transaction is executed on and 
reported to a foreign securities exchange or the transaction is 
executed over the counter in a foreign country and is reported to 
the regulator of securities markets for that country. See FINRA Rule 
6622(g).
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(b) Amendments to the OATS Rules
    FINRA is proposing to conform the definition of ``OTC equity 
security'' in Rule 7410 of the OATS rules to the proposed definition in 
Rule 6420.\20\ Under the OATS rules, members are required to record and 
report order information for transactions in equity securities listed 
on NASDAQ and for ``OTC equity securities.'' \21\ For purposes of the 
OATS rules, Rule 7410(l) defines ``OTC equity security'' as any equity 
security that: (1) is not listed on a national securities exchange, or 
(2) is listed on one or more regional stock exchanges and does not 
qualify for dissemination of transaction reports via the facilities of 
the Consolidated Tape. The rule currently excludes direct participation 
program securities from the scope of the OATS requirements, and the 
proposed rule change will maintain this exclusion.\22\ The proposed 
change will not result in any change to the scope of securities 
required to be reported to OATS. By using substantially similar 
definitions in both rule series, FINRA will ensure that the appropriate 
types of securities are addressed throughout FINRA's order reporting, 
quotation, and trade reporting rules and that key terminology reflects 
current market structure and trends.
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    \20\ In Amendment No. 1, FINRA states as follows: ``The proposed 
rule change eliminates the separate definition of ``OTC Equity 
Security'' in FINRA Rule 4560 (Short-Interest Reporting). Currently, 
the PORTAL Rules carve out PORTAL securities from the record keeping 
and reporting requirements of Rule 4560. See Rule 6635(d). 
Consistent with this existing exclusion for PORTAL securities, FINRA 
is proposing to amend Rule 4560 to exclude from the short-interest 
record keeping and reporting requirements all restricted equity 
securities, such that equity securities that are currently PORTAL 
securities would continue to be excepted from the record keeping and 
reporting requirements as well as any other restricted equity 
securities.''
    \21\ See FINRA Rules 7440 and 7450.
    \22\ In addition, the proposed rule change codifies prior FINRA 
guidance that the OATS rules do not apply to orders for restricted 
equity securities. See Regulatory Notice 06-70 n.2 (December 2006).
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no

[[Page 7532]]

later than 60 days following Commission approval. The effective date 
will be 30 days following publication of the Regulatory Notice 
announcing 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,\23\ 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. FINRA believes that the proposed rule change will 
ensure that FINRA continues to receive important information regarding 
transactions in restricted securities traded pursuant to SEC Rule 144A.
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    \23\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the other proposed changes to the definition of 
``OTC Equity Security'' will ensure that the appropriate types of 
securities are addressed in the applicable FINRA rules and that key 
terminology reflects current market structure and trends.

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 35 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 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 Exchange 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-2010-003 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-2010-003. 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,\24\ 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 the 
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-2010-003 and should be submitted on or before March 12, 2010.
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    \24\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3142 Filed 2-18-10; 8:45 am]
BILLING CODE 8011-01-P