Document ID: SEC-2022-1576-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-12-06T05:00Z

[Federal Register Volume 87, Number 233 (Tuesday, December 6, 2022)]
[Notices]
[Pages 74672-74681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26445]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96415; File No. SR-FINRA-2022-031]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
FINRA Rules 6151 (Disclosure of Order Routing Information for NMS 
Securities) and 6470 (Disclosure of Order Routing Information for OTC 
Equity Securities)

November 30, 2022.
    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 November 16, 2022, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rules 6151 (Disclosure of Order 
Routing Information for NMS Securities) and 6470 (Disclosure of Order 
Routing Information for OTC Equity Securities) to require members to 
(i) publish order routing reports for orders in OTC Equity Securities, 
and (ii) submit their order routing reports for both OTC Equity 
Securities and NMS Securities to FINRA for publication on the FINRA 
website.
    The text of the proposed rule change is available on FINRA's 
website 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
    Rule 606(a) of Regulation NMS \3\ (``SEC Rule 606(a)'') requires 
broker-dealers to publicly disclose specified information about their 
order routing practices for NMS Securities,\4\ including for non-
directed orders in NMS stocks that are submitted on a ``held'' 
basis.\5\ The SEC has stated that, as a result of these disclosures, 
``customers--and retail investors in particular--that submit orders to 
their broker-dealers should be better able to assess the quality of 
order handling services

[[Page 74673]]

provided by their broker-dealers and whether their broker-dealers are 
effectively managing potential conflicts of interest.'' \6\
---------------------------------------------------------------------------

    \3\ 17 CFR 242.606(a).
    \4\ Generally, ``NMS Securities'' include listed stocks and 
options, and NMS stocks means any NMS Security other than an option. 
See 17 CFR 242.600(b).
    \5\ See Securities Exchange Act Release No. 84528 (November 2, 
2018), 83 FR 58338 (November 19, 2018) (Disclosure of Order Handling 
Information; Final Rule) (``2018 Amendments Release''). The SEC did 
not specifically define ``held'' or ``not held'' orders, but stated 
that typically a ``not held'' order provides the broker-dealer with 
price and time discretion in handling the order, whereas a broker-
dealer must attempt to execute a ``held'' order immediately. See id. 
at 58340 n.19. As noted by the SEC in the 2018 Amendments Release, 
broker-dealers utilize the ``held'' and ``not held'' order 
classifications as a matter of industry practice and to comply with 
regulatory requirements, including audit trail reporting 
requirements and the definition of ``covered order'' in Rule 600(b) 
of Regulation NMS. See id. at 58344.
    \6\ See 2018 Amendments Release, 83 FR 58338, 58423.
---------------------------------------------------------------------------

    FINRA believes these same goals would be furthered by providing 
investors with similar order handling information for unlisted stocks, 
which are not covered by the existing SEC Rule 606(a) disclosure 
requirements.\7\ Accordingly, FINRA is proposing to adopt new Rule 6470 
to require members to publish quarterly order routing disclosures 
primarily for non-directed held orders in OTC Equity Securities,\8\ 
generally aligned with the SEC Rule 606(a) disclosures for NMS stocks 
but with modifications to account for differences between the market 
for NMS Securities and over-the-counter (``OTC'') markets, as described 
below. In addition, to make both the existing SEC Rule 606(a) 
disclosures and the new OTC Equity Security disclosures more accessible 
to investors, FINRA is proposing new Rule 6151 and paragraph (d) of new 
Rule 6470 to require members to send both disclosures to FINRA for 
centralized publication on the FINRA website, as described further 
below.
---------------------------------------------------------------------------

    \7\ FINRA notes that the SEC's Equity Market Structure Advisory 
Committee (``EMSAC'') previously recommended enhancing the current 
order routing disclosures required under SEC Rule 606 with 
information about OTC Equity Securities, and also expressed support 
for centralization of the reports. See EMSAC, Recommendations 
Regarding Modifying Rule 605 and Rule 606 (November 29, 2016), 
https://www.sec.gov/spotlight/emsac/emsac-recommendations-rules-605-606.pdf.
    \8\ An ``OTC Equity Security'' means any equity security that is 
not an NMS stock, other than a Restricted Equity Security. See FINRA 
Rule 6420(f). A ``Restricted Equity Security'' means any equity 
security that meets the definition of ``restricted security'' as 
contained in Securities Act Rule 144(a)(3). See FINRA Rule 6420(k).
---------------------------------------------------------------------------

Disclosure of Order Routing Information for OTC Equity Securities
    Proposed new Rule 6470, entitled ``Disclosure of Order Routing 
Information for OTC Equity Securities,'' would require the publication 
of order routing disclosures for OTC Equity Securities. Specifically, 
as is already required for broker-dealers with respect to held orders 
in NMS stocks under SEC Rule 606(a)(1), proposed Rule 6470(a) would 
require, among other things, every member to make publicly available 
for each calendar quarter a report on its routing of non-directed 
orders in OTC Equity Securities that are submitted on a held basis 
during that quarter, broken down by calendar month, and keep such 
report posted on an internet website that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the internet website.\9\ Also in line with the 
required publication timeframe for NMS stock disclosures under SEC Rule 
606(a)(2), proposed Rule 6470(c) would require that a member make the 
new OTC Equity Security report publicly available within one month 
after the end of the quarter addressed in the report.\10\
---------------------------------------------------------------------------

    \9\ Proposed Rule 6470 would apply to ``every member,'' but 
FINRA notes that the focus of the proposed disclosures is held 
orders from customers in OTC Equity Securities, and some members may 
not engage in any activities involving held orders from customers in 
OTC Equity Securities. If a member does not accept any orders in OTC 
Equity Securities from customers during a given calendar quarter 
(whether held or not held), such member would not be required to 
publish a report under Rule 6470 for that quarter. Similarly, a 
member that accepted only not held orders in OTC Equity Securities 
from customers--but no held orders in OTC Equity Securities from 
customers--during a given calendar quarter would not be required to 
publish a report for that quarter. See infra note 21. Further, if a 
member accepted orders in OTC Equity Securities (whether held, not 
held, or both) only from other broker-dealers, but not from 
customers, during a given calendar quarter, such member would not be 
required to publish a report for that quarter.
    \10\ FINRA understands that some introducing firms route all of 
their orders in OTC Equity Securities to one or more clearing firms 
for further routing to other venues for execution. The SEC has 
provided guidance that, where an introducing firm routes all of its 
covered orders to one or more clearing firms for further routing and 
execution and the clearing firm in fact makes the routing decision, 
the introducing firm generally may comply with the order routing 
disclosure requirements by: (i) disclosing its relationship with the 
clearing firm(s) on its website that includes any payment for order 
flow received by the introducing firm, and (ii) adopting the 
clearing firm's disclosures by reference, provided that the 
introducing firm has examined the report and does not have reason to 
believe it materially misrepresents the order routing practices. 
FINRA intends to provide parallel guidance with respect to proposed 
Rule 6470. See SEC Division of Trading and Markets, Responses to 
Frequently Asked Questions Concerning Rule 606 of Regulation NMS, 
Question 12.01; see also SEC Division of Market Regulation, Staff 
Legal Bulletin No. 13A, Frequently Asked Questions About Rule 11Ac1-
6, Question 4.
---------------------------------------------------------------------------

    Under Rule 606(a)(1), the SEC Rule 606(a) reports for NMS 
Securities are required to be broken out into separate sections for NMS 
stocks in the S&P 500 Index as of the first day of the quarter, other 
NMS stocks, and NMS Securities that are options. Since these categories 
are not relevant to the OTC market, FINRA is proposing to instead 
require that the new quarterly reports for OTC Equity Securities under 
Rule 6470(a) be separated into three sections to better reflect the OTC 
market. Specifically, the new reports would be required to be separated 
into three sections for: (i) domestic OTC Equity Securities; (ii) 
American Depository Receipts (``ADRs'') and foreign ordinaries that are 
OTC Equity Securities; and (iii) Canadian-listed securities trading in 
the United States as OTC Equity Securities. To provide for consistency 
across member reports, FINRA will publish a list of the OTC Equity 
Security symbols that fall under each category, and members would be 
required to publish reports in a manner consistent with such list.\11\
---------------------------------------------------------------------------

    \11\ If the Commission approves the proposed rule change, FINRA 
will provide information in the Regulatory Notice announcing the 
effective date regarding where members may access the list of OTC 
Equity Security symbols that FINRA will maintain on its website.
---------------------------------------------------------------------------

    Under Rule 606(a)(1), the SEC Rule 606(a) reports for NMS 
Securities must be made available using the most recent versions of the 
XML schema and associated PDF renderer as published on the SEC's 
website. Similarly, Rule 6470(a) would specify that the new OTC Equity 
Security reports must be made available using the most recent versions 
of the XML schema and associated PDF renderer as published on the FINRA 
website. FINRA believes this requirement would ensure that reports are 
generated and published in standardized machine-readable and human-
readable forms, which would benefit investors by permitting the public 
to more easily analyze and compare the OTC Equity Security reports 
across members, as well as to more easily perform combined analysis of 
both SEC Rule 606(a) and OTC Equity Security reports.\12\
---------------------------------------------------------------------------

    \12\ FINRA would publish the technical specifications for the 
XML schema and associated PDF renderer on its website for member use 
in generating the new reports. FINRA expects that, subject to the 
differences between the SEC Rule 606(a) reports and the OTC Equity 
Security reports discussed above, the XML schema and associated PDF 
renderer published by FINRA would be substantially similar to those 
published by the SEC for the SEC Rule 606(a) reports.
---------------------------------------------------------------------------

    With respect to the content of the new reports, Rule 6470(a) would 
require that each section of the new OTC Equity Security reports 
include the information specified in paragraphs (a)(1) through (4) of 
proposed Rule 6470, specifically: \13\
---------------------------------------------------------------------------

    \13\ A template of the proposed new OTC Equity Security report 
that would be required under proposed Rule 6470 is attached as 
Exhibit 3 [sic].
---------------------------------------------------------------------------

     the percentage of total orders \14\ for the section that 
were not held orders and held orders, and the percentage of held orders 
for the section that were non-directed orders; \15\
---------------------------------------------------------------------------

    \14\ For purposes of proposed Rule 6470(a), ``total orders'' 
would include all orders from customers for the section, including 
both directed and non-directed orders from customers.
    \15\ For purposes of the proposed disclosures, a ``non-directed 
order'' would mean any order from a customer other than a directed 
order. Consistent with the definition of ``directed order'' under 
Regulation NMS, a ``directed order'' would mean an order from a 
customer that the customer specifically instructed the member to 
route to a particular venue for execution. See 17 CFR 242.600(b); 
see also 2018 Amendments Release, 83 FR 58338, 58339 n.4. FINRA 
notes that, similar to the definition of ``customer'' under Rule 
600(b)(23) of Regulation NMS, a ``customer'' is defined under FINRA 
rules to exclude a broker or dealer. See FINRA Rule 0160(b)(4). 
Orders from other broker-dealers would therefore be excluded from 
the proposed disclosures.

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

[[Page 74674]]

     the identity of the ten venues to which the largest number 
of total non-directed held orders for the section were routed for 
execution \16\ and of any venue to which five percent or more of non-
directed held orders for the section were routed for execution, and the 
percentage of total non-directed held orders for the section routed to 
the venue; \17\
---------------------------------------------------------------------------

    \16\ Consistent with the SEC's approach to SEC Rule 606(a), 
FINRA intends that, for purposes of the proposed disclosures for OTC 
Equity Securities, a ``venue'' would be defined broadly to cover any 
market center or any other person or entity to which a member routes 
orders for execution. See, e.g., Securities Exchange Act Release No. 
43590 (November 17, 2000), 65 FR 75414, 75427 n.63 (December 1, 
2000) (Disclosure of Order Execution and Routing Practices) (``The 
term `venue' is intended to be interpreted broadly to cover `market 
centers' within the meaning of Rule 11Ac1-5(a)(14) [now Rule 
600(b)(46) of Regulation NMS], as well as any other person or entity 
to which a broker routes non-directed orders for execution. 
Consequently, the term excludes an entity that is used merely as a 
vehicle to route an order to a venue selected by the broker-
dealer.''); see also 17 CFR 242.600(b)(46) (``Market center means 
any exchange market maker, OTC market maker, alternative trading 
system, national securities exchange, or national securities 
association.''). Accordingly, for purposes of proposed Rule 6470, 
where an alternative trading system (``ATS'') offers both automatic 
order execution and order delivery functionality, the ATS should be 
identified as the venue only when the ATS provides order execution. 
FINRA believes identification of the ATS in these circumstances is 
appropriate because the ATS is the venue where the order was routed 
``for execution,'' consistent with SEC guidance for the predecessor 
to SEC Rule 606. See SEC Division of Market Regulation, Staff Legal 
Bulletin No. 13A, Frequently Asked Questions About Rule 11Ac1-6, 
Question 12. Conversely, for purposes of proposed Rule 6470, in 
cases where the ATS instead provides order delivery, the separate 
market center to which the orders are delivered--e.g., a market 
maker or other ATS--should be identified as the venue where the 
order was routed for execution.
    \17\ However, the proposed rule change would include a de 
minimis venue exception parallel to exemptive relief that the SEC 
has provided with respect to the SEC Rule 606(a) reports. See Letter 
from Annette L. Nazareth, Director, SEC Division of Market 
Regulation, to Neal E. Sullivan & Gail Marshall-Smith, Bingham Dana 
LLP (on behalf of First Union Securities, Inc.), dated June 22, 
2001, 2001 SEC No-Act. LEXIS 903; see also SEC Division of Market 
Regulation, Staff Legal Bulletin No. 13A, Frequently Asked Questions 
About Rule 11Ac1-6, Question 2. Specifically, proposed Rule 6470(b) 
would provide an exception from the requirement for a member to 
identify venues that received less than 5% of non-directed held 
orders for a section, provided that the member has identified the 
top execution venues that in the aggregate received at least 90% of 
the member's total non-directed held orders for the section.
---------------------------------------------------------------------------

     for each identified venue, the net aggregate amount of any 
payment for order flow received, payment from any profit-sharing 
relationship received, transaction fees paid, and transaction rebates 
received, both as a total dollar amount and per order, for all non-
directed held orders for the section; and
     a discussion of the material aspects of the member's 
relationship with each identified venue, including, without limitation, 
a description of any arrangement for payment for order flow and any 
profit-sharing relationship and a description of any terms of such 
arrangements, written or oral, that may influence a member's order 
routing decision including, among other things: incentives for equaling 
or exceeding an agreed upon order flow volume threshold, such as 
additional payments or a higher rate of payment; disincentives for 
failing to meet an agreed upon minimum order flow threshold, such as 
lower payments or the requirement to pay a fee; volume-based tiered 
payment schedules; and agreements regarding the minimum amount of order 
flow that the member would send to a venue.\18\
---------------------------------------------------------------------------

    \18\ Similar to SEC Rule 606(a), the types of arrangements 
referenced above are not an exhaustive list of terms of payment for 
order flow arrangements or profit-sharing relationships that may 
influence a broker-dealer's order routing decision that would be 
required to be disclosed. For example, if a broker-dealer receives a 
discount on executions in other securities or some other advantage 
in directing order flow in a specific security to a venue, or if a 
broker-dealer receives equity rights in a venue in exchange for 
directing order flow there, then all terms of those arrangements 
would also be required to be disclosed. Similarly, if a broker-
dealer receives variable payments or discounts based on order types 
and the number of orders sent to a venue, such arrangements would be 
required to be disclosed. See 2018 Amendments Release, 83 FR 58338, 
58376 n.397. However, FINRA notes that these are only examples, and 
a member would be required to disclose any other material aspects of 
its relationship with each identified venue regardless of whether a 
particular example is listed in the proposed rule text or otherwise 
discussed in this proposed rule change.
---------------------------------------------------------------------------

    The proposed content of the new OTC Equity Security reports under 
proposed FINRA Rule 6470(a) generally parallels the content required to 
be included in SEC Rule 606(a) reports for NMS stocks pursuant to SEC 
Rule 606(a)(1)(i) through (iv), with the following differences to take 
into account the different market structure and characteristics of OTC 
Equity Securities. First, Rule 6470(a)(1) would require members to 
disclose the percentage of total orders for the section that were not 
held orders and held orders, in addition to disclosing the percentage 
of held orders for the section that were non-directed orders.\19\ While 
SEC Rule 606(a) similarly requires broker-dealers to disclose the 
percentage of orders for each section that were non-directed orders, it 
does not require broker-dealers to disclose the percentage of total 
orders for each section that were not held orders and held orders.\20\ 
FINRA believes that requiring members to provide information about the 
relative amount of a member's held and not held orders in the new 
reports proposed to be published under Rule 6470(a)(1) would provide 
investors, regulators, academics, and others seeking to review the 
reports with additional information regarding the business of brokers 
active in the OTC market.\21\
---------------------------------------------------------------------------

    \19\ See notes 14 and 15 supra.
    \20\ SEC Rule 606(b)(1) provides that customers may request 
customer-specific information about the handling of both their held 
and not held orders, and SEC Rule 606(b)(3) provides that customers 
may request additional customer-specific information about the 
handling of their not held orders. FINRA is not proposing parallel 
customer-specific disclosure requirements for OTC Equity Securities 
at this time.
    \21\ The proposed requirement to disclose the percentage of 
total orders for each section that were not held orders and held 
orders is the only disclosure requiring any information regarding 
not held orders, as the remainder of the proposed disclosures apply 
exclusively to held orders. If a member did not accept any held 
orders in OTC Equity Securities from customers in a given calendar 
quarter, it would not be required to publish a report under proposed 
Rule 6470 for that quarter (even if it accepted orders on a not held 
basis during that quarter). See note 9, supra.
---------------------------------------------------------------------------

    Second, the information required to be disclosed under SEC Rule 
606(a)(i) through (iii) is required to be broken out into sections for 
market orders, marketable limit orders, non-marketable limit orders, 
and other orders. However, FINRA is not adopting these categories for 
OTC Equity Securities due to the absence of a centralized, self-
regulatory organization (SRO)-disseminated national best bid and offer 
in the OTC market on which to standardize and base marketability. 
Finally, SEC Rule 606(a)(1)(iii) requires the disclosure of 
quantitative payment information both as a total dollar amount and per 
share. In light of different pricing practices in the OTC market, Rule 
6470(a)(3) would instead require the quantitative disclosures for OTC 
Equity Securities to be expressed as both a total dollar amount and per 
order (rather than per share).\22\
---------------------------------------------------------------------------

    \22\ For example, FINRA understands that, unlike in the market 
for NMS Securities where payment for order flow is typically paid as 
a specified dollar amount per share, payments in the OTC market are 
predominantly made on a per order basis (with rates typically 
bucketed by share price category).
---------------------------------------------------------------------------

Centralized Hosting of Order Routing Disclosures
    As discussed above, SEC Rule 606(a) requires broker-dealers to 
publish their SEC Rule 606(a) reports for NMS

[[Page 74675]]

Securities on an internet website that is free and readily accessible 
for at least three years, and proposed FINRA Rule 6470 would similarly 
require the new OTC Equity Security reports to be published on a 
website that is free and readily accessible for at least three years. 
Currently there is not one location where all SEC Rule 606(a) reports 
are consolidated, although FINRA understands some broker-dealers use 
vendors that make their client broker-dealers' reports available 
through common vendor pages. Thus, regulators, investors and others 
seeking to review the reports often must locate and obtain the reports 
from various individual broker-dealer or vendor websites.
    To make both the existing Rule 606(a) reports and the new OTC 
Equity Security reports more accessible for regulators, investors and 
others seeking to analyze and compare the data, FINRA is proposing to 
require that members provide the reports to FINRA for central 
publication on the FINRA website (in addition to posting on a public 
website for at least three years, as required under Rule 606(a) and 
proposed Rule 6470(a)).\23\ Specifically, paragraph (d) of proposed new 
Rule 6470 would require each member to provide the OTC Equity Security 
report to FINRA within one month after the end of the quarter addressed 
in the report in such a manner as may be prescribed by FINRA.\24\ 
Proposed new Rule 6151, entitled ``Disclosure of Order Routing 
Information for NMS Securities,'' would similarly require each member 
that is required to publish a report pursuant to SEC Rule 606(a) to 
provide the report to FINRA, in the manner prescribed by FINRA, within 
the same time and in the same formats that such report is required to 
be made publicly available pursuant to SEC Rule 606(a) (i.e., one month 
after the end of the calendar month addressed in the report). Under 
both provisions, FINRA would publish such reports on its public 
website. FINRA will publish both the SEC Rule 606(a) and OTC Equity 
Security reports in a centralized location on the FINRA website, free 
of charge and with no restrictions on use of the data.\25\
---------------------------------------------------------------------------

    \23\ FINRA also intends to engage in investor education efforts 
to help investors and others understand the purpose, content, and 
potential limitations of the disclosures.
    \24\ FINRA would specify details regarding the manner of 
submission of the reports to FINRA in a Regulatory Notice or similar 
publication. Members would be permitted to use a third-party vendor 
to assist with both the generation of the reports and transmission 
to FINRA. However, the member would remain responsible for the 
reports in all respects, including the accuracy of the disclosures 
and the timeliness and completeness of the submissions to FINRA. 
Accordingly, a member would be required to submit a corrected report 
to FINRA (and publish a corrected report on its publicly accessible 
website) promptly following the discovery of inaccurate data or 
other error in a previously submitted or posted report.
    \25\ As noted above, the SEC has provided guidance that 
introducing firms may comply with Rule 606(a) by incorporating their 
clearing firm(s) reports in specified circumstances, and FINRA 
intends to provide similar guidance with respect to the OTC Equity 
Security reports required under proposed Rule 6470. See supra note 
10. To facilitate centralized access to the reports, such 
introducing firms must provide FINRA with a list of their clearing 
firm(s) and the hyperlink to the web page where they disclose their 
clearing firm relationship(s) and adopt the clearing firm(s)'s 
reports by reference. Each introducing firm relying on this guidance 
would be required to provide this information to FINRA upon 
implementation of the proposed rule change and to update FINRA if 
the information previously provided changes. This information will 
enable FINRA to provide investors with relevant information for all 
firms, including introducing firms incorporating clearing firm 
reports by reference, on FINRA's website.
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be no later than 365 days following 
publication of the Regulatory Notice announcing Commission approval of 
the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\26\ 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.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the proposed requirement for members to publish 
order routing disclosures for OTC Equity Securities, similar to what is 
available under SEC rules for NMS Securities, would provide valuable 
information for investors and other market participants, academics, 
regulators and others regarding order routing practices in the OTC 
market, thereby enhancing the protection of investors and the public 
interest. In particular, these new disclosures will enable investors to 
better assess the quality of their broker-dealers' order handling 
services for these securities, provide more information on the 
financial incentives that may affect their broker-dealers' routing 
decisions, and allow investors to better evaluate whether their broker-
dealers are effectively managing potential conflicts of interest. The 
proposed requirements for members to send their disclosure reports for 
both NMS Securities and OTC Equity Securities to FINRA for centralized 
publication on the FINRA website will make this important information 
more accessible for regulators, investors, academics and others seeking 
to analyze and compare the data, particularly across firms, and would 
facilitate the ability of FINRA and the SEC to review the data for 
regulatory purposes.

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.
Economic Impact Assessment
    Based on the regulatory need discussed above and summarized below, 
FINRA has undertaken an economic impact assessment, as set forth below, 
to analyze the potential economic impacts of the proposed rule change, 
including potential costs, benefits, and distributional and competitive 
effects, relative to the current baseline.
Regulatory Need
    FINRA believes that in today's markets, where various incentives 
may impact broker-dealers' order handling decisions, customers have 
limited access to relevant information to help them assess how their 
orders are handled, and that different customers may have access to 
different amounts or categories of relevant information. The proposed 
requirement for members to publish quarterly order routing disclosures 
for non-directed held orders in OTC Equity Securities is designed to 
provide investors with information to better assess the quality of 
order handling services provided by their broker-dealers and whether 
their broker-dealers are effectively managing potential conflicts of 
interest. In addition, requiring members to send both the existing SEC 
Rule 606(a) disclosures and the proposed OTC Equity Security 
disclosures to FINRA for centralized publication on the FINRA website 
would make these disclosures more accessible to investors and others 
relevant stakeholders.
Economic Baseline
    Between October 1 and December 31, 2020, there were 85, 76, and 55 
firms \27\ quoting domestic OTC Equity Securities, ADRs and foreign 
ordinaries that are OTC Equity Securities, and

[[Page 74676]]

Canadian-listed securities trading in the U.S. as OTC Equity 
Securities, respectively. The average number of symbols quoted per firm 
in each of these respective security categories was: 496, 681, and 260. 
Furthermore, the average number of quote events per symbol and firm, 
37,831, was the largest for Canadian-listed securities that trade OTC 
in the U.S. as compared to 1,203 for domestic and 25,105 for ADRs and 
foreign ordinaries.
---------------------------------------------------------------------------

    \27\ A ``firm'' is any FINRA member that has a Central 
Registration Depository number.
---------------------------------------------------------------------------

    There are more firms executing trades than providing quotes in OTC 
Equity Securities. In the fourth quarter of 2020, there were 261, 250, 
and 196 firms executing trades in domestic, ADRs and foreign 
ordinaries, and Canadian-listed securities trading in the U.S. as OTC 
Equity Securities, respectively. The average number of symbols traded 
per firm was 287, 491, and 195, and the average number of executions 
per symbol and per firm was 1,215, 1,082, and 1,381 for these 
respective security categories. Although the average number of 
executions per symbol per firm was largest for Canadian-listed 
securities, the average dollar volume per symbol and per firm was 
largest for the ADRs and foreign ordinaries at $7,687,626, as compared 
to $3,621,871 for domestic and $2,660,868 for the Canadian-listed 
securities that trade OTC in the U.S. This reflects the generally lower 
prices for domestic OTC Equity Securities and Canadian-listed 
securities that trade OTC in the U.S. as compared to ADRs and foreign 
ordinary shares.
    In the fourth quarter of 2020, there were 560, 573, and 444 firms 
that routed orders in domestic OTC Equity Securities, ADRs or foreign 
ordinaries, and Canadian-listed securities that trade as OTC Securities 
in the U.S, respectively, with approximately 600 unique firms total 
across the three categories. These numbers represent the potential 
upper bound on the number of firms by security category that could be 
required to provide the proposed disclosure reports, as some firms may 
not handle orders from customers (based on fourth quarter of 2020 
data). The average number of symbols routed per firm is 104, 180, and 
67, and the average number of orders per symbol and per firm is 170, 
124, and 134 for each of the three security categories. Consequently, 
the largest average number of symbols routed per firm was for ADRs and 
foreign ordinaries, but the average number of orders per symbol per 
firm was largest for domestic OTC Equity Securities.
    FINRA believes that, at present, customers receive limited 
information on how members route their orders in OTC Equity Securities, 
any payments that members receive from execution venues related to the 
routing of these orders, and the relative order execution quality by 
member or execution venue. In the absence of regulatory disclosure 
requirements, any information that customers do receive may be 
selectively provided to individual customers and is likely not 
comparable across firms. Moreover, larger customers may receive more 
information relative to smaller customers, thereby giving the former an 
informational advantage. OTC Equity Security routing data is currently 
not required to be publicly available, and no studies have been 
conducted on the quality of order handling services provided by firms 
for such securities.
    There are, however, studies that examine the benefits of 
transparency around the implementation of Rules 605 \28\ and 606 of 
Regulation NMS with respect to member routing and venue execution 
quality for NMS stocks. These studies may inform the potential economic 
impacts from transparency in the market for OTC Equity Securities, 
although, as noted above, there are significant differences between the 
market for NMS Securities and OTC Equity Securities. In addition, as 
Rules 605 and 606 went into effect at approximately the same time, 
these studies are unable to distinguish the separate effects of order 
execution quality disclosure under Rule 605 and that of order routing 
disclosure under Rule 606 on activity in NMS stocks. After 
implementation of Rule 605, effective and quoted spreads for NYSE-, 
AMEX-, and NASDAQ-listed stocks declined significantly.\29\ In 
addition, the implementation of Rules 605 and 606 resulted in broker-
dealers increasingly routing orders in NMS stocks to venues that 
offered better execution quality on the dimensions of effective spreads 
and fill rates, which suggests these reports contain information that 
appears useful in routing decisions.\30\
---------------------------------------------------------------------------

    \28\ Under Rule 605 (formerly 11Ac1-5), the SEC requires market 
centers that trade NMS Securities to make monthly electronic 
reports. These reports include information about each market 
center's quality of executions on a stock-by-stock basis, including 
how market orders of different sizes are executed relative to the 
public quotes. These reports also disclose information about 
effective spreads and the extent to which executions occur at prices 
better than the public quotes for marketable orders.
    \29\ See Xin Zhao & Kee H. Chung, Information Disclosure and 
Market Quality: The Effect of SEC Rule 605 on Trading Costs, 42 The 
Journal of Financial and Quantitative Analysis, 657-682 (2007).
    \30\ See Ekkehart Boehmer, Robert Jennings, & Li Wei, Public 
Disclosure and Private Decisions: Equity Market Execution Quality 
and Order Routing, 20 Review of Financial Studies, 315-358 (2007).
---------------------------------------------------------------------------

    Studies analyzing the market for NMS stocks indicate that broker-
dealers may route orders to maximize order flow payments by sending 
market orders to venues making payments and sending limit orders to 
venues paying large liquidity rebates. Such routing may not always be 
in customers' best interests. Make-take fees may lead to agency 
conflicts and rebate volume pricing tiers may worsen such conflicts 
further.\31\ Theoretical models of the conflict between investors and 
their broker-dealers, who may be incentivized to route orders based on 
the take fees charged or rebates paid by exchanges, find that the 
conflict of interest reduces investor utility.\32\ Using Rule 606 data, 
one study examined broker-dealer routing of non-marketable limit orders 
in NMS stocks to exchanges offering the largest rebate. This analysis 
combined with proprietary limit order data found that low-fee (i.e., 
low-rebate) exchanges fill or fill more rapidly when high-fee (i.e., 
high-rebate) exchanges do not fill, and non-marketable limit orders 
earn higher average realized spreads on low-fee than high-fee 
exchanges.\33\
---------------------------------------------------------------------------

    \31\ See James J. Angel, Lawrence E. Harris & Chester S. Spatt, 
Equity Trading in the 21st Century,'' 1 Quarterly Journal of 
Finance, 1-53 (2011); Chester S. Spatt, Is Equity Market Exchange 
Structure Anti-Competitive? (Dec. 28, 2020) Working Paper.
    \32\ See David A. Cimon, Broker Routing Decisions in Limit Order 
Markets, 54 Journal of Financial Markets, 1386-4181 (2021).
    \33\ See Robert Battalio, Shawn A. Corwin & Robert Jennings, Can 
Brokers Have It All? On the Relation Between Make-Take Fees and 
Limit Order Execution Quality, 71 The Journal of Finance, 2193-2238 
(2016).
---------------------------------------------------------------------------

    In the absence of the proposed disclosures, investors may not know 
where a broker-dealer routes orders for execution or whether the 
broker-dealer receives payments or rebates from such venues. In 
addition, in the absence of order routing and payment for order flow 
information, customers may not possess information necessary to assist 
them in forming a preference concerning their brokers' routing 
choices--particularly where customer commission charges have been 
reduced or eliminated. Furthermore, if customers have information on 
how brokers route orders and are able to negotiate commissions to more 
closely represent the broker-dealer's average execution cost for a 
particular customer's order flow, then customers may be better able to 
submit the mix of liquidity-supplying and demanding orders to minimize 
commissions and improve order execution.\34\ Even where customers are

[[Page 74677]]

unable to negotiate fees, agency issues related to order flow payments 
may be reduced or eliminated if investors know where their orders are 
routed. As noted above, while these studies examine the benefits of 
transparency with respect to NMS stocks and there are significant 
differences between the market for NMS Securities and the market for 
OTC Equity Securities, these studies may inform analysis of the 
potential impacts of the proposed disclosure on the OTC market.
---------------------------------------------------------------------------

    \34\ See Shawn M. O'Donoghue, Transaction Fees: Impact on 
Institutional Order Types, Commissions, and Execution Quality, 60 
Journal of Financial Markets (2022).
---------------------------------------------------------------------------

Economic Impacts
Anticipated Benefits
    Under the proposed rule change, customers would have more 
information on the financial incentives that may affect their firms' 
routing decisions, because the reports would identify the net aggregate 
amount of any payment for order flow received, payment from any profit-
sharing relationship received, transaction fees paid, and transaction 
rebates received by their firms.
    At present, in the absence of order routing reports, customers may 
be less able to consider indirect costs that may impact execution 
quality than direct trading costs, such as commissions charged. This is 
particularly true for retail investors that use the services of zero-
commission broker-dealers. Under the proposed rule change, customers 
may more easily consider indirect and less observable costs, such as 
transaction fees paid less rebates or payment for order flow, and 
better assess potential conflicts of interest. Brokerage commissions, 
if charged, may depend on the amount of payment for order flow received 
and net make-take fees paid by the firm. For example, members that earn 
more payment for order flow may pass a portion of this revenue on to 
customers by offering lower commissions. However, routing solely to 
maximize rebates or minimize transaction fees may result in lower 
execution quality than alternative routing strategies and may raise 
best execution concerns. Without the proposed disclosures, customers 
may primarily assess the amount of commissions, if charged, when 
evaluating brokerage service costs. Customers may pay higher net 
trading costs should zero or lower commission firms offer inferior 
execution quality. Standardized reports, which would be available on 
the member's website and centralized on FINRA's website, would allow 
customers to compare order routing practices across different firms and 
observe changes in a firm's routing behavior over time. Customers would 
be able to better compare indirect trading costs and whether payment 
for order flow received and net transaction fees paid, considering 
rebates, may be affecting the routing decisions of some firms more than 
others or causing changes in routing behavior over time. The 
information in these reports would permit customers to evaluate firms' 
routing decisions more effectively and be better informed in making 
choices among firms. Dividing OTC Equity Securities into separate 
sections depending on whether they are domestic, ADRs or foreign 
ordinaries, or Canadian-listed OTC Equity Securities would provide 
customers with meaningful categories and potentially make the 
information more useful than if all securities were presented in one 
group.
    FINRA believes that direct benefits to customers stemming from the 
proposed standardized reports may be limited by a customer's ability to 
interpret the information in the reports or compare the reports across 
different members or over time. However, customers may also benefit 
indirectly through changes in a firm's behavior. A firm may use the 
standardized reports to compare its order routing to that of competing 
firms, and subsequently, to improve its order execution quality. Thus, 
firms that do not route solely based on payment for order flow 
received, net transaction fees paid (inclusive of rebates), or provide 
relatively better order execution quality may better compete for 
customers based on not receiving rebates or providing better order 
execution quality.\35\ In addition, academic or industry researchers 
may analyze the data in the proposed public reports, which will be 
centralized on FINRA's website, and make their findings describing 
differences in broker-dealer routing practices public.
---------------------------------------------------------------------------

    \35\ In light of differences between the market for NMS 
Securities and the market for OTC Equity Securities, including for 
example the absence of a centralized, SRO-disseminated national best 
bid and offer in the OTC market, FINRA is not proposing execution 
quality disclosure requirements for OTC Equity Securities at this 
time.
---------------------------------------------------------------------------

    Because FINRA members would be required to submit their existing 
Rule 606(a) reports to FINRA for central publication on the FINRA 
website, investors and academic and other industry researchers may more 
easily access the SEC Rule 606(a) reports, which should make it easier 
for users to examine data in SEC Rule 606(a) reports across broker-
dealers. The reporting and centralization of both the new OTC Equity 
Security reports and the existing Rule 606(a) reports should also ease 
FINRA's access to the reported data for regulatory purposes, thereby 
reducing FINRA's costs.
Anticipated Costs
    Members may incur fixed costs, such as programming, to create the 
initial proposed reports. These initial costs may vary depending on 
whether firms collect the data and produce the reports in-house or 
outsource the process to a third party. Members may pay costs to 
identify which orders are non-directed and submitted on a held basis 
and determine the net aggregate amount of any payment for order flow 
received and net rebates received in total and per order. To the extent 
that a member already has systems in place to create reports required 
for NMS Securities under Rule 606(a), which is probable in most cases, 
then these initial fixed costs may be relatively lower for such 
members, although the extent to which these costs would be lower for 
such firms would depend on the degree to which their existing systems 
for NMS Securities' disclosures may be used for OTC Equity Securities. 
Once the system to create the proposed reports is built, there would be 
fixed costs for maintaining the system and on-going compliance costs, 
and variable costs for creating and posting the publicly available 
quarterly reports and for transmitting the reports to FINRA.
    In addition, firms that route orders in OTC Equity Securities may 
re-evaluate their best execution evaluation methodologies and, if 
deemed beneficial, may choose to incorporate information from the 
proposed publicly available reports posted by competing firms, which 
may or may not involve costs to the firm depending on how a firm 
chooses to use this information.\36\ Furthermore, as noted by the 
Commission with respect to new disclosure requirements under Rule 
606(b)(3), ``[g]iven that broker-dealers will be aware of the metrics 
to be used a priori, they might route not held orders in a manner that 
promotes a positive reflection on their respective services but that 
may be suboptimal for their customers.'' \37\ FINRA notes the same 
possibility in connection with the proposed rule change requiring the 
disclosure of OTC order handling disclosures. However, FINRA also notes

[[Page 74678]]

any such effects would be constrained by a firm's obligations under 
FINRA Rule 5310. In addition, to the extent that the proposal increases 
costs to members, particularly smaller firms, they may attempt to 
recoup costs by increasing fees for customers or modifying the scope of 
services offered for OTC Equity Securities.
---------------------------------------------------------------------------

    \36\ While firms that route orders in OTC Equity Securities may 
re-evaluate their best execution evaluation methodologies and 
incorporate information from the proposed reports, the proposed new 
OTC Equity Security order routing disclosure reports themselves 
would not alter a firm's best execution obligations.
    \37\ See 2018 Amendments Release, 83 FR 58338, 58425.
---------------------------------------------------------------------------

    Further, if firms stop or limit routing orders to venues paying 
rebates or making payments for order flow given the existence of the 
proposed reports, then these venues may reduce or eliminate these 
financial incentives as volumes decline, which could in turn impact the 
extent to which a market participant is willing to provide liquidity at 
such venues, potentially resulting in fewer quotes, wider bid-ask 
spreads, or fewer shares posted at such venues. In addition, the cost 
of capital for firms that issue OTC Equity Securities may increase if 
their securities become less liquid. Because members will be 
responsible for submitting SEC Rule 606(a) reports currently required 
for NMS Securities under Regulation NMS to FINRA, they will bear either 
a direct cost to send the reports to FINRA or an indirect cost if an 
agent sends the report on their behalf. FINRA believes that introducing 
firm members that choose to rely on the proposed guidance \38\ would 
incur lower costs compared to preparing and providing the actual 
reports on a quarterly basis on their own or through a third-party 
vendor.
---------------------------------------------------------------------------

    \38\ See supra notes 10 and 25.
---------------------------------------------------------------------------

Alternatives Considered
    No other alternatives were considered for the proposed amendments.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 21-35 (October 2021). Five comments were received in response to 
the Regulatory Notice.\39\ A copy of the Regulatory Notice is available 
on FINRA's website at http://www.finra.org. Copies of the comment 
letters received in response to the Regulatory Notice are also 
available on FINRA's website. The comments are summarized below.
---------------------------------------------------------------------------

    \39\ See Comment submission from Keith L Hickman, dated October 
7, 2021; letter from Howard Meyerson, Managing Director, Financial 
Information Forum, to Jennifer Piorko Mitchell, Office of the 
Corporate Secretary, FINRA, dated December 2, 2021 (``FIF Letter''); 
letter from Derrick Chan, Head of Equity Trading and Sales, Fidelity 
Investments, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated December 6, 2021 (``Fidelity Letter''); 
letter from Michelle Bryan Oroschakoff, Chief Legal Officer, LPL 
Financial, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated December 6, 2021 (``LPL Letter''); and 
letter from Melanie Senter Lubin, President, North American 
Securities Administrators Association, Inc., to Jennifer Piorko 
Mitchell, Office of the Corporate Secretary, FINRA, dated December 
6, 2021 (``NASAA Letter'').
---------------------------------------------------------------------------

    NASAA supported the proposed rule change, stating that it is 
appropriately tailored to reveal potential conflicts of interest and 
would bring additional transparency to trading practices in the OTC 
market.\40\ NASAA also expressed support for FINRA's publication of 
order routing reports on its website, noting that centralization of the 
reports would allow investors to make comparisons easily, help inform 
and facilitate regulatory decisions, and help FINRA analyze compliance 
with the proposed rule, discover best reporting practices to share with 
its members, perform comparisons to facilitate risk-based examination 
selections, and determine whether disclosures give rise to the need for 
investigation.\41\ FINRA agrees and, as discussed above, is proposing 
to publish both the new OTC Equity Security reports and existing SEC 
Rule 606(a) reports in a centralized location on its website, free of 
charge and without usage restrictions. Finally, NASAA expressed its 
belief that investor education is necessary to make the reports useful, 
and accordingly suggested that FINRA develop and post information for 
investors on how to read and interpret the data. Alternatively, NASAA 
suggested that FINRA could develop standard educational materials that 
firms can either link to or be required to make available with the 
reports.\42\ FINRA agrees that investor education would be useful and, 
as noted above, intends to engage in investor education efforts 
regarding the purpose, content, and potential limitations of the 
disclosures.\43\
---------------------------------------------------------------------------

    \40\ See NASAA Letter at 1-3.
    \41\ See supra note 40 at 3-4.
    \42\ See supra note 40 at 5.
    \43\ See supra note 23.
---------------------------------------------------------------------------

    Fidelity also supported the proposed rule change, stating that it 
largely accomplishes the goals of providing transparency into broker 
routing and economic practices in OTC Equity Securities, an asset class 
that has experienced significant growth but remains opaque.\44\ 
Fidelity also made several recommendations to enhance the effectiveness 
of the proposed rule change. First, Fidelity recommended that FINRA and 
the SEC should consider how various order routing disclosure reports, 
including SEC Rules 605 and 606 reports, are used in the marketplace 
and could be used together, suggesting that FINRA and the SEC should 
coordinate their oversight of order routing reports to ensure 
consistency in process and interpretation.\45\ FINRA agrees with and, 
as described above, has sought to align the form and content of the new 
OTC Equity Security reports as closely as possible with the existing 
Rule 606(a) reports, unless there was a reason for the content to 
differ due to the unique characteristics of the OTC market. FINRA 
believes that this approach will assist in ensuring consistency in the 
process for generating the reports and regulatory interpretation 
concerning the reporting framework. FINRA also expects to continue its 
engagement with the SEC regarding order routing and execution quality 
information more broadly.
---------------------------------------------------------------------------

    \44\ See Fidelity Letter at 1-2.
    \45\ See supra note 44 at 2-3.
---------------------------------------------------------------------------

    Second, Fidelity recommended that FINRA make publicly available a 
list of OTC Equity Securities appearing in each section of the proposed 
OTC Equity Security reports, and provide further clarity concerning the 
definition of market center and fees to be disclosed.\46\ As noted 
above, FINRA will publish a list of the OTC Equity Security symbols 
that fall under each category to assist members in generating the 
reports and provide consistency across reports. FINRA has also provided 
clarifications regarding the scope of venues that should be disclosed 
on the reports and the types of fees that should be included.\47\ FINRA 
will continue to engage with members to provide additional guidance on 
these and other issues as appropriate.
---------------------------------------------------------------------------

    \46\ See supra note 44 at 3-4.
    \47\ See supra notes 16 and 18.
---------------------------------------------------------------------------

    Third, Fidelity stated that FINRA should explore obtaining data for 
all, or part, of the proposed OTC Equity Security reports from broker-
dealer CAT submissions.\48\ FINRA continues to believe that the most 
efficient and comprehensive means of providing the data included in the 
OTC Equity Security order routing disclosures is for members to 
generate the reports directly.
---------------------------------------------------------------------------

    \48\ See supra note 44 at 4-5.
---------------------------------------------------------------------------

    Finally, Fidelity expressed support for FINRA to consolidate all 
order routing reports on a centralized website and make this content 
available without cost.\49\ As discussed above, FINRA is proposing to 
publish both the new OTC Equity Security reports and existing SEC Rule 
606(a) reports in a centralized

[[Page 74679]]

location on its website, free of charge and without usage restrictions.
---------------------------------------------------------------------------

    \49\ See supra note 44 at 5.
---------------------------------------------------------------------------

    FIF neither supported nor opposed the proposed rule change but 
provided comments focused on achieving the most effective 
implementation in the event that FINRA moves forward with the proposed 
rule change. FIF first provided its views regarding the entity that 
should be reported as the ``venue'' on the reports when there are 
multiple levels of routing for an order, including the requirement to 
``look-through'' to the execution venue.\50\ FIF stated that, when a 
customer-facing broker-dealer routes an order to a second broker-
dealer, the customer-facing broker-dealer should report on its 
financial arrangement with the second broker-dealer instead of the fee 
arrangement between the second broker-dealer and that downstream venue. 
FIF stated that there are many scenarios where a customer-facing 
broker-dealer will route an OTC Equity Security order to another 
broker-dealer that is neither a market maker nor an alternative trading 
system and therefore the order is further routed by the receiving 
broker-dealer. In these situations, FIF argued that the customer-facing 
broker-dealer should report the second broker-dealer on any reports 
instead of the final downstream venue. Reporting the final downstream 
execution venue, i.e., the ``look-through'' requirement, would ignore 
any payment for order flow made by the second broker-dealer to the 
customer-facing broker. FIF also suggested modifying the proposed rule 
change such that any reference to ``venue'' be changed to ``venue or 
broker'' and any reference to ``routed for execution'' be changed to 
``routed'' or ``routed for execution or further routing'' or ``routed 
for execution (by the recipient or another party).'' FIF further stated 
that the look-through requirement would greatly increase the cost of 
the report due to the costs associated with coordination between the 
customer-facing broker-dealer and the second broker-dealer that routes 
to a venue for execution.\51\
---------------------------------------------------------------------------

    \50\ See FIF Letter at 1-3.
    \51\ See supra note 50 at 3.
---------------------------------------------------------------------------

    Consistent with the requirements of SEC Rule 606(a), FINRA's 
proposal would cover the venues to which non-directed held orders in 
OTC Equity Securities were ``routed for execution.'' As discussed 
above, the SEC has provided guidance in the SEC Rule 606(a) context 
that, if a broker-dealer routes orders to another broker-dealer, that 
receiving broker-dealer would be considered to be the relevant venue if 
that receiving broker-dealer executes orders. However, if the receiving 
broker-dealer does not execute orders, it would not be a venue to which 
orders were ``routed for execution.'' Rather, the venue to which the 
receiving broker-dealer subsequently routed the orders for execution 
(including child orders) would be the relevant venues for SEC Rule 
606(a) reporting purposes. Further, while the reporting responsibility 
remains with the customer-facing broker-dealer, the customer-facing 
broker-dealer may contract with the receiving broker-dealer for 
assistance in meeting its reporting responsibilities.\52\ FINRA 
continues to believe that this aspect of the proposed order routing 
disclosures for OTC Equity Securities should be consistent with the SEC 
Rule 606(a) disclosures for NMS Securities, including with respect to 
the ``look-through'' requirement when a receiving broker-dealer does 
not execute orders. FINRA believes that aligning the scope of the 
disclosures with the requirements of SEC Rule 606(a) would reduce the 
burden of the new disclosure requirements because members already have 
experience with SEC Rule 606(a) and may be able to utilize existing 
systems and arrangements with receiving broker-dealers to provide the 
disclosures for OTC Equity Securities. Further, because the purpose of 
the proposed disclosures--providing information about members' orders 
routing practices and potential conflicts of interest related to 
execution venues--is the same as the purpose of SEC Rule 606(a) for NMS 
Securities, FINRA believes that the same types of venues should be 
covered by the new reports for OTC Equity Securities.
---------------------------------------------------------------------------

    \52\ See SEC Division of Trading and Markets, Responses to 
Frequently Asked Questions Concerning Rule 606 of Regulation NMS, 
Question 12.01.
---------------------------------------------------------------------------

    FIF also responded to a number of specific questions posed in 
Regulatory Notice 21-35.\53\ As an initial matter, FIF agreed with a 
number of aspects of the proposed rule change, including (i) the 
quarterly reporting timeframe of the reports; (ii) not providing a 
separate reporting category for grey market securities; (iii) limiting 
the proposed reports to held orders in OTC Equity Securities; (iv) not 
breaking out the reports by market orders, marketable limit orders, 
non-marketable limit orders, and other orders; (v) requiring reporting 
of payments per order, rather than per share; (vi) not adopting 
customer-specific held order disclosures, like those required under SEC 
Rule 606(b)(3), at this time; and (vii) not adopting execution quality 
disclosures, like those required under SEC Rule 605, at this time.
---------------------------------------------------------------------------

    \53\ See FIF Letter at 3-9.
---------------------------------------------------------------------------

    FIF requested that FINRA incorporate a de minimis venue exception 
parallel to the exemptive relief that the SEC has provided with respect 
to the SEC Rule 606(a) reports. As noted above, FINRA agrees and has 
included a parallel exception in the proposed rule change.\54\
---------------------------------------------------------------------------

    \54\ See supra note 17.
---------------------------------------------------------------------------

    FIF also expressed support for centralized publication of SEC Rule 
606(a) reports and, if adopted, the proposed OTC Equity Security 
reports on the FINRA website (or another third-party website in a 
manner that can be accessed by all market participants at no cost), and 
further recommended that the SEC, FINRA, the other self-regulatory 
organizations and FINRA CAT consider how current reporting systems, 
such as the CAT, can be leveraged to reduce the general reporting 
burden for firms. As discussed above, FINRA is proposing to publish 
both the new OTC Equity Security reports and existing SEC Rule 606(a) 
reports in a centralized location on its website, free of charge and 
without usage restrictions. However, FINRA is not proposing to use CAT 
data for the proposed disclosure requirements in light of restrictions 
on the use of CAT data and FINRA's continued belief that, as for SEC 
Rule 606(a) reports, the most efficient method to create and publish 
the required disclosures is for members to provide the routing 
information directly.
    FIF stated that the proposed categories of OTC Equity Securities 
are appropriate and recommended that FINRA publish and maintain a file 
of which symbols are included in each category. As noted above, FINRA 
will publish a list of the OTC Equity Security symbols that fall under 
each category to assist members in generating the reports and provide 
consistency across reports.
    FIF stated that the proposed disclosures may have unintended 
consequences, as increased transparency may lead broker-dealers to 
change how they route held orders in OTC Equity Securities in ways that 
may be suboptimal for customers on execution quality dimensions that 
are less easily observable. To address this concern, FIF suggested that 
FINRA could publish guidance to investors on the purpose, content, and 
potential limitations of the reports. While FINRA does not believe that 
the transparency will likely result in suboptimal executions, FINRA 
intends to, as appropriate, provide members, investors, and others with 
information

[[Page 74680]]

about the purpose, content, and potential limitations of the reports.
    FIF further stated that the industry requires a significant time 
period for implementation, including sufficient time for industry 
members to identify and obtain guidance from FINRA on applicable 
interpretive questions. FINRA intends to provide an appropriate amount 
of time for implementation of the proposed rule change and will work 
with the industry to provide guidance as appropriate on interpretive 
questions. In particular, FIF requested that FINRA meet with industry 
members to discuss how the proposed routing disclosures should be 
applied to orders executed through OTC Link, and also requested that 
FINRA provide additional guidance on the level of detail required for 
the material aspects disclosure. FINRA intends to continue to engage 
with members and other interested parties prior to implementation of 
the proposed rule change, including to discuss order routing 
disclosures in scenarios involving OTC Link. FINRA also intends to 
provide guidance as appropriate on other interpretive questions, 
including the content of the material aspects disclosure. However, 
FINRA notes that it would generally expect the level of detail included 
in the material aspects disclosures to be consistent with that provided 
in SEC Rule 606(a) reports for NMS Securities.
    FIF generally agreed with the proposed content of the OTC Equity 
Security disclosure reports, but recommended removing the requirement 
that members report the number of directed orders because the routing 
decision in such cases is outside the control of the broker-dealer. 
FINRA notes that, as described above and consistent with SEC Rule 
606(a), the proposed disclosures would apply only to non-directed held 
orders. The proposed reports would include aggregate statistics 
regarding the percentage of total orders that were held and not held 
orders, and the percentage of held orders that were non-directed 
orders, but no other information about directed orders would be 
required.
    Finally, FIF stated that its members are divided on whether the 
reporting requirements should include routes to brokers and venues 
outside the U.S. FIF recommended that multiple approaches should be 
permitted and that the reporting firm should indicate which approach 
was adopted on the web page accompanying the routing reports. In any 
case, FIF stated that, if a foreign issuer does not have F shares in 
the U.S., the order should not be reportable. FINRA believes that, 
consistent with SEC Rule 606(a), the OTC Equity Security disclosures 
should include information about venues where a member's orders are 
routed for execution, regardless of the location of such venue. 
Particularly where orders are non-directed, the member has discretion 
to choose where it routes orders for execution; therefore, permitting a 
member to omit foreign venues could raise arbitrage concerns and 
provide incomplete information to investors. Moreover, information 
about incentives and potential conflicts of interest is just as 
relevant where an execution venue is located abroad. With respect to F 
shares, FINRA notes that orders in any security that meets the 
definition of OTC Equity Security would be included in the reports 
regardless of the location of the issuer.
    LPL did not support the proposed rule change, stating that, while 
LPL supports efforts to provide greater transparency as to the handling 
of orders, the proposed rule change would impose a significant burden 
on firms without providing useful information to investors.\55\ LPL 
stated that the proposed rule change would have limited benefits as 
compared to SEC Rule 606(a) for NMS Securities, which LPL believes can 
provide investors with useful information because it can be combined 
with order execution information available pursuant to SEC Rule 605; by 
contrast, the proposed OTC Equity Security disclosures would not have 
parallel execution quality disclosures.\56\
---------------------------------------------------------------------------

    \55\ See LPL Letter at 1.
    \56\ See supra note 55 at 1-2.
---------------------------------------------------------------------------

    FINRA believes that the proposed order routing disclosures will 
provide investors and other market participants with useful 
information, even in the absence of Rule 605-like disclosures at this 
time.\57\ FINRA believes the proposed order routing disclosures will 
facilitate investor understanding of where their brokers are routing 
orders and the relationships their brokers have with those execution 
venues. In addition, FINRA notes that SEC Rule 606(a) includes 
information about order routing practices for NMS Securities that are 
options, and options are not included in the execution quality 
disclosures under SEC Rule 605.
---------------------------------------------------------------------------

    \57\ In light of differences between the market for NMS 
Securities and OTC Equity Securities, including for example the 
absence of a centralized, SRO-disseminated national best bid and 
offer in the OTC market, FINRA is not proposing Rule 605-like 
execution quality disclosure requirements for OTC Equity Securities 
at this time. FINRA will continue to consider whether additional 
disclosures would provide useful information for investors in OTC 
Equity Securities.
---------------------------------------------------------------------------

    LPL also stated its belief that the proposed rule change would 
subject firms to costly burdens, including internal technology costs to 
identify and gather the needed data, vendor costs to prepare quarterly 
reports, and employee time to implement and supervise disclosures.\58\ 
Given that OTC Equity Securities are a very small part of LPL's core 
business, LPL stated that these additional burdens may have a chilling 
effect and cause firms to stop accepting orders for OTC Equity 
Securities. As discussed above, FINRA acknowledges that members would 
incur costs to capture the required data, generate the reports, publish 
the reports, and transmit the reports to FINRA for centralization 
publication. FINRA believes that such costs would be reduced for 
introducing firms that choose to rely on the guidance discussed 
above.\59\ In any case, FINRA continues to believe that the costs 
associated with the proposal are outweighed by the benefits to 
investors and the market of the transparency provided by the proposed 
OTC Equity Security disclosures.
---------------------------------------------------------------------------

    \58\ See LPL Letter at 2. LPL stated that it expects the initial 
costs to implement the proposed rule change would be similar to the 
cost of complying with recent amendments to SEC Rule 606.
    \59\ See supra notes 10 and 25.
---------------------------------------------------------------------------

    Finally, LPL stated that imposing the additional costs of the 
proposed OTC Equity Security disclosures on firms that do not receive 
payment for order flow would be both unfair and unproductive, and 
therefore requested that, if FINRA adopts the proposed rule change, the 
proposed rule change include an exemption for firms that do not receive 
payment for order flow.\60\ FINRA notes that, while payment for order 
flow arrangements are an important component of the information that 
would be required to be disclosed under the proposed rule change, the 
proposed disclosures also include information about other payments and 
arrangements that members may have with execution venues that may 
influence a member's order routing decision. FINRA continues to believe 
that the proposed disclosures would be valuable for investors and other 
market participants more broadly, regardless of whether a particular 
member receives payment for order flow, because the proposed 
disclosures would provide investors with a better understanding of 
where their brokers are routing orders and the overall relationships 
their brokers have with those execution venues.
---------------------------------------------------------------------------

    \60\ See LPL Letter at 2-3.

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

[[Page 74681]]

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 email to [email protected]. Please include 
File Number SR-FINRA-2022-031 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2022-031. 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 website (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 website 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. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2022-031 and should be submitted on or before December 27, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26445 Filed 12-5-22; 8:45 am]
BILLING CODE 8011-01-P