Document ID: SEC-2008-0616-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial IndustryRegulatory Authority, Inc.
Posted Date: 2008-04-24T04:00Z

[Federal Register: April 24, 2008 (Volume 73, Number 80)]
[Notices]               
[Page 22186-22191]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap08-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57681; File No. SR-FINRA-2008-011]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
Trade Reporting Structure and Require Submission of Non-Tape Reports To 
Identify Other Members for Agency and Riskless Principal Transactions

April 17, 2008.
    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 March 28, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a the National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
FINRA. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend its trade reporting rules applicable to 
over-the-counter (``OTC'') equity transactions \3\ to: (1) Replace the 
current market maker-based trade reporting framework with an 
``executing party'' framework; and (2) require that any member with the 
trade reporting obligation under FINRA rules that is acting in a 
riskless principal or agency capacity on behalf of one or more other 
members submit non-tape report(s) to FINRA, as necessary, to identify 
such other member(s) as a party to the trade. The text of the proposed 
rule change is available at FINRA, the Commission's Public Reference 
Room, and http://www.finra.org.
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    \3\ Specifically, OTC equity transactions are: (1) Transactions 
in NMS stocks, as defined in Rule 600(b) of Regulation NMS under the 
Act, effected otherwise than on an exchange, which are reported 
through the Alternative Display Facility (``ADF'') or a Trade 
Reporting Facility (``TRF''); and (2) transactions in ``OTC Equity 
Securities,'' as defined in NASD Rule 6610 (e.g., OTC Bulletin Board 
and Pink Sheets securities), Direct Participation Program (``DPP'') 
securities and PORTAL equity securities, which are reported through 
the OTC Reporting Facility (``ORF''). The ADF, TRFs and ORF are 
collectively referred to herein as the ``FINRA Facilities.''
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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
Trade Reporting Structure
    Currently, the following structure is in place for purposes of 
reporting most OTC equity transactions to FINRA: (1) In transactions 
between two market makers, the sell-side reports; (2) in transactions 
between a market maker and a non-market maker, the market maker 
reports; (3) in transactions between two non-market makers, the sell-
side reports; and (4) in transactions between a member and either a 
non-member or customer, the member reports.\4\ This reporting structure 
can result in confusion, delays and double-reporting, as the parties to 
a trade attempt to determine which party has the trade reporting 
obligation. Today, a firm's status as a market maker may not always be 
apparent to the contra-party to a trade and, increasingly, firms' 
proprietary desks (other than their market making desks) are handling 
and executing transactions in equity securities. In addition, members 
are required to report whether any applicable exception or exemption to 
Rule 611 of Regulation NMS (the Order Protection Rule) applies to a 
transaction, which is information that may not be readily known to the 
party with the reporting obligation if it is not the executing broker 
to the transaction, e.g., whether the executing broker has routed

[[Page 22187]]

intermarket sweep orders in compliance with Rule 611(b)(6).
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    \4\ See NASD Rules 4632(b) and 6130(c) relating to the NASD/
Nasdaq TRF; 4632A(b) relating to the ADF; 4632C(b) and 6130C(c) 
relating to the NASD/NSX TRF; 4632E(b) and 6130E(c) relating to the 
NASD/NYSE TRF; and 6130(c) and 6620(b) relating to the ORF.
    For purposes of reporting transactions in DPP securities to 
FINRA, NASD Rule 6920(b) requires that in a transaction between two 
members, the member representing the sell-side report and in a 
transaction between a member and customer, the member report.
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    Accordingly, FINRA is proposing to adopt a simpler, more uniform 
structure for purposes of reporting OTC equity transactions to FINRA. 
Specifically, FINRA is proposing to amend NASD Rules 4632(b), 4632A(b), 
4632C(b), 4632E(b), 6620(b) and 6920(b) to require that for 
transactions between members, the ``executing party'' report the trade 
to FINRA. For transactions between a member and a non-member or 
customer, the member would report the trade.\5\
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    \5\ In addition, FINRA is proposing to amend NASD Rules 6130(c), 
6130C(c) and 6130E(c) to delete the duplicative rule provisions in 
subparagraphs (1) through (4) and cross-reference NASD Rules 4632(b) 
and 6620(b), 4632C(b) and 4632E(b), respectively.
    FINRA also notes that the proposed executing party reporting 
structure would apply to the reporting of transactions in PORTAL 
equity securities to FINRA. Pursuant to NASD Rule 6732(a)(3), the 
member with the obligation to report such transactions to FINRA is 
determined in accordance with NASD Rule 6620(b).
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    FINRA is proposing to define ``executing party'' as the member that 
receives an order for handling or execution or is presented an order 
against its quote, does not subsequently re-route the order, and 
executes the transaction. In certain limited circumstances, it may not 
be clear which member should be deemed the executing party for trade 
reporting purposes (e.g., manually negotiated trades via the 
telephone). Accordingly, FINRA is proposing to require expressly that 
for transactions between two members where both members may satisfy the 
definition of executing party, the member representing the sell-side 
shall report the transaction to FINRA, unless the parties agree 
otherwise and the member representing the sell-side contemporaneously 
documents such agreement. In such instances, the sell-side will be 
presumed to be the member with the trade reporting obligation unless it 
can demonstrate there was an agreement to the contrary, e.g., 
contemporaneous notes of a telephone conversation or notation on the 
order ticket. FINRA believes that this approach will establish an 
objective standard for determining the reporting obligation in these 
circumstances, while affording the parties flexibility if, for example, 
the member representing the buy-side is the party that knows the 
material terms and details of the trade and thus is in the better 
position to report the trade.
    Under the proposed rule change, alternative trade systems 
(``ATSs''), including electronic communications networks (``ECNs''), 
would be the executing party and have the reporting obligation where 
the transaction is executed on the ATS. If an ATS routes an order to 
another member for handling and/or execution, then the other member 
would be the executing party and have the reporting obligation under 
the proposed rule change. If an ATS routes an order to a non-member 
that is executed OTC, then the ATS would report the trade. Accordingly, 
FINRA is proposing to delete subparagraphs (5) through (7) from NASD 
Rules 6130(c), 6130C(c) and 6130E(c) relating to trade reporting by a 
``Reporting ECN.'' \6\ Under the current rules, a Reporting ECN is 
required to ensure that trades are reported in accordance with one of 
three enumerated methods and must notify FINRA in writing of the method 
of reporting for each of its subscribers.\7\ FINRA notes that today, 
most ATSs elect to report transactions to FINRA using the first 
reporting method, i.e., the ATS submits the trade report and identifies 
itself as the Reporting Party. Thus, FINRA believes that the proposed 
rule change would clarify the reporting requirements for ATSs and would 
better align the rules with current trade reporting practices.
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    \6\ ``Reporting ECN'' generally is defined in NASD Rules 6110, 
6110C and 6110E as an electronic communications network or 
alternative trading system, as those terms are defined in SEC Rule 
600(b) of Regulation NMS.
    \7\ FINRA notes that the three reporting methods apply only for 
purposes of reporting trades to a TRF or the ORF. There is no 
comparable provision relating to reporting trades to the ADF.
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    Finally, FINRA is proposing to make certain technical conforming 
changes, including to (1) delete NASD Rules 4632(b)(5), 4632C(b)(5), 
4632E(b)(5), 6620(b)(5) and 6920(b)(3) relating to reporting by a 
Reporting ECN; (2) delete the definitions of, and references to, 
``Reporting ECN,'' ``Reporting Market Maker'' and ``Reporting Order 
Entry Firm'' in NASD Rules 6110, 6110C and 6110E, which terms would be 
obsolete as a result of the proposed rule change; and (3) amend NASD 
Rules 6130(d)(5), 6130C(d)(5) and 6130E(d)(5) to replace the terms 
``Market Maker side'' and ``Order Entry side'' with ``MMID or Reporting 
Party side'' and ``OEID or non-Reporting Party side,'' respectively.
    FINRA believes that the proposed rule change would result in more 
accurate and timely trade reporting and make the trade reporting 
process less cumbersome for members. The proposed rule change would 
ensure that the member with the trade reporting obligation is the party 
that knows the material terms and details of the transaction, including 
any exceptions or exemptions to the Order Protection Rule that may 
apply to the trade. Furthermore, many members have entered into 
agreements to permit the executing party to report on behalf of the 
member with the reporting obligation under FINRA's current rules. Thus, 
FINRA believes that, to a large extent, the proposed rule change would 
be consistent with current trade reporting practices.
Submission of Non-Tape Reports To Identify Other Members for Agency and 
Riskless Principal Transactions
    As a general matter, FINRA trade reporting rules require that a 
member that is a party to an OTC trade be identified in trade reports 
submitted to FINRA. Each trade report submitted for public 
dissemination purposes (or ``tape report'') generally only allows for 
the identification of two parties. Thus, where a FINRA member executes 
a trade in a riskless principal \8\ or agency capacity on behalf of 
another member, or matches, as agent, the orders of two or more 
members, the tape report will not identify all members involved in the 
trade. In such circumstances, additional ``non-tape reports,'' i.e., 
reports that are not submitted to the tape for public dissemination,\9\ 
would need to be submitted to identify all members involved in the 
trade.
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    \8\ For purposes of FINRA trade reporting rules applicable to 
equity securities, a ``riskless principal'' transaction is a 
transaction in which a member, after having received an order to buy 
(sell) a security, purchases (sells) the security as principal and 
satisfies the original order by selling (buying) as principal at the 
same price.
    \9\ Non-tape reports can be (1) ``non-tape, non-clearing,'' 
meaning that the report is submitted to FINRA solely for regulatory 
purposes, or (2) ``clearing-only,'' meaning that the report is 
submitted to FINRA for clearing, i.e., for submission by FINRA to 
the National Securities Clearing Corporation (and perhaps also 
regulatory purposes).
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    Today, some members submit non-tape reports to FINRA identifying 
the other members involved in the trade, while other members do not. 
FINRA trade reporting rules generally are not specific in this regard 
because, for the most part, they reflect the traditional two-party 
trade model where a broker-dealer acts as principal or as agent for a 
non-broker-dealer customer. Industry business models have evolved to 
include more trades where one broker-dealer acts as agent or riskless 
principal for another broker-dealer and order management systems and 
ATSs can simultaneously match one or more broker-dealer orders on one 
or both sides of a trade.
    To address these changes, FINRA is proposing to adopt NASD Rules 
4632(d)(4), 4632A(e)(1)(D), 4632C(d)(4), 4632E(d)(4), 6620(d)(4) and 
6920(d)(5) to require that any member with the

[[Page 22188]]

obligation to report the trade under FINRA rules that is acting in a 
riskless principal or agency capacity on behalf of one or more other 
members submit to FINRA one or more non-tape report(s) identifying such 
other member(s) as a party to the transaction, if such other member(s) 
is not identified on the initial trade report or a report submitted to 
FINRA to reflect the offsetting leg of a riskless principal 
transaction. In addition, FINRA is proposing to amend NASD Rule 
6732(a)(3), which currently cross-references the trade reporting 
structure in NASD Rule 6620(b), to also cross-reference NASD Rule 
6620(d), thereby making the proposed reporting requirement applicable 
to PORTAL equity security transactions. A member that matches, as 
agent, the orders of multiple members on one or both sides of the trade 
would be required to submit multiple non-tape reports, as necessary, to 
identify all members on whose behalf the member was acting.
    For example, where Member A, as agent or riskless principal on 
behalf of Member B, executes an OTC trade with Member C, and Member A 
has the obligation to report the trade to FINRA, Member A also would be 
required to submit a non-tape report to FINRA to indicate that it was 
acting on behalf of Member B. By way of further example, where Member A 
matches, as agent, the orders of Member B and Member C and submits to 
FINRA a tape report between Member A and Member C, Member A also would 
be required to submit a non-tape report to identify Member B as a party 
to the trade. In this example, if Member A were to report the trade to 
the tape as an agency cross (such that neither Member B nor Member C is 
identified on the tape report), then Member A would be required to 
submit two non-tape reports to identify Members B and C. In these 
examples, Member A can satisfy its reporting obligation under the 
proposed rule change by submitting a clearing-only report, if necessary 
to clear the offsetting leg(s) of the transaction through a FINRA 
Facility. However, if the parties do not need to clear the offsetting 
leg(s) of the transaction through a FINRA Facility, then Member A would 
be required to submit a non-tape, non-clearing report(s). Additionally, 
if Member A is required to submit a non-tape report to comply with 
applicable riskless principal reporting requirements under FINRA rules 
\10\ and such report identifies Member B, then Member A would have no 
separate reporting obligation under the proposed rule change.
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    \10\ If an OTC riskless principal transaction is not reported to 
FINRA in a single tape report properly marked as riskless principal, 
then two separate reports must be submitted: (1) A tape report to 
reflect the initial leg of the transaction and (2) a non-tape report 
to reflect the offsetting, ``riskless'' leg of the transaction, with 
the correct capacity of riskless principal. See NASD Rules 
4632(d)(3)(B), 4632A(e)(1)(C)(ii), 4632C(d)(3)(B), 4632E(d)(3)(B) 
and 6620(d)(3)(B).
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    The proposed reporting requirement would only apply to the member 
that has the responsibility under FINRA rules to report the trade to 
FINRA (i.e., the ``executing party'' in a trade between two members, as 
discussed above). For example, where Member A, as agent on behalf of 
Member B, and Member C execute an OTC trade, and Member C has the 
obligation to report the trade to FINRA, Member A would not be required 
under the proposed rule change to submit a non-tape report to indicate 
that it was acting on behalf of Member B.
    However, the proposed rule change expressly would not negate or 
modify the requirements for reporting riskless principal transactions 
under FINRA rules. Thus, drawing on the example in the paragraph above, 
if Member A is acting as riskless principal (as opposed to agent) on 
behalf of Member B, Member A currently is required to submit a non-tape 
report to reflect the offsetting leg of the transaction under FINRA 
riskless principal rules, if the tape report does not properly reflect 
Member A's capacity as riskless principal.\11\ This requirement would 
not change under the proposed rule change. Additionally, the proposed 
rule change would not change the reporting requirements applicable to 
riskless principal transactions with a customer.
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    \11\ If Member A's capacity is properly marked as riskless 
principal on the tape report, Member A would not be required to 
submit a non-tape report to FINRA.
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    FINRA notes that the proposed reporting requirement would not apply 
to transactions that are executed on and reported through an exchange. 
Today, where the initial leg of a riskless principal or agency 
transaction is executed on an exchange, members are not required to 
report either leg of the transaction to FINRA. The initial leg of the 
transaction is reported through the exchange (and therefore must not be 
reported to FINRA), and members have the option of submitting a non-
tape (typically, a clearing-only) report to FINRA for the offsetting 
leg of the transaction. Pursuant to the proposed rule change, members 
would continue to have the option of submitting a non-tape report for 
riskless principal and agency transactions where the initial leg is 
executed on an exchange; however, there would continue to be no 
obligation to submit a non-tape report for such trades. Thus, for 
example, where Member A, as agent or riskless principal on behalf of 
Member B, executes a trade on an exchange, the trade will be reported 
to the tape by the exchange and, under the proposed rule change, Member 
A would not be required to submit a non-tape report to FINRA to 
indicate that it was acting on behalf of Member B. However, Member A 
would be permitted to submit a clearing-only report to clear the 
offsetting leg of the transaction between Member A and Member B through 
a FINRA Facility.\12\
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    \12\ See FINRA Regulatory Notice 07-38 (August 2007).
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    To clarify the scope and application of the proposed reporting 
requirement, FINRA is proposing to include several examples in the 
proposed rule text. FINRA notes that these examples are not intended to 
represent all possible trade reporting scenarios under the proposed 
rule change. Additionally, consistent with the definition of ``riskless 
principal'' in other FINRA rules applicable to OTC equity trade 
reporting, FINRA is proposing to amend the definition of ``riskless 
principal transaction'' in NASD Rule 6910 to clarify that a member may 
act in a riskless principal capacity on behalf of another broker-dealer 
as well as a customer.\13\
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    \13\ FINRA also is proposing a technical change to insert 
paragraph headings for ease of reference in NASD Rules 4632(d), 
4632A(e)(1), 4632C(d), 4632E(d), 6620(d) and 6920(d).
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    Finally, FINRA notes that because members would be submitting non-
tape reports, the 90-second reporting requirement under FINRA trade 
reporting rules would not apply. Thus, members generally would have 
until the end of the day on trade date to submit the requisite non-tape 
reports.\14\
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    \14\ In certain circumstances, however, members must submit non-
tape reports contemporaneously with trade execution, e.g., to 
qualify for the exemption from the requirements of IM-2110-2 
(Trading Ahead of Customer Limit Order) for riskless principal 
transactions.
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    FINRA believes that the proposed rule change would enhance FINRA 
staff's ability to create a complete and accurate audit trail and 
assist in the automated surveillance of various customer protection and 
market integrity rules.
    Many members today submit clearing-only reports to FINRA in 
instances where the proposed reporting requirement would apply, e.g., 
if a member needs to clear the offsetting leg of an agency transaction 
through a FINRA Facility or if a member elects under FINRA rules to 
report an OTC riskless principal trade in related tape and non-tape 
reports. Thus, for some

[[Page 22189]]

members, the proposed rule change may not require any changes to 
current reporting practices and systems. For other members, however, 
the proposed rule change would require systems changes, e.g., if a 
member does not need to clear the offsetting leg of an agency 
transaction through a FINRA Facility. Additionally, where a member 
reports a riskless principal transaction to FINRA in a single properly 
marked tape report, a non-tape report would be required under the 
proposed rule change if the member is acting on behalf of another 
member.
    FINRA will announce the operative date of the proposed rule change 
on its website. In recognition of the technological changes that the 
proposed rule change will require, the operative date will be (1) at 
least 90 days following Commission approval for transactions executed 
on ATSs, including electronic communications networks; and (2) at least 
180 days following Commission approval with respect to all other 
transactions. FINRA believes that a shorter implementation period is 
appropriate for ATSs because, as noted above, most ATSs currently are 
the reporting party for transactions executed on the ATS and some 
voluntarily submit non-tape reports to reflect all FINRA members that 
are parties to a trade.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ which requires, among 
other things, that FINRA rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change to amend 
the trade reporting structure will result in more accurate and timely 
trade reporting and thus enhance market transparency. Additionally, 
FINRA believes that the proposed rule change to require the submission 
of non-tape reports to identify other members for agency and riskless 
principal transactions will promote a more complete and accurate audit 
trail.
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    \15\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    In September 2007, FINRA published Regulatory Notice 07-46 
(``Notice'') soliciting comment on a proposal to adopt a simpler and 
more uniform trade reporting structure. Nine comment letters were 
received in response to the Notice.\16\
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    \16\ See Letters from Liquidnet, Inc., to Office of the 
Corporate Secretary, FINRA, dated October 26, 2007 (``Liquidnet''); 
Archipelago Trading Services, Inc., to Barbara Z. Sweeney, Office of 
the Corporate Secretary, FINRA, dated November 6, 2007 
(``ArcaEdge''); Financial Information Forum, to Barbara Z. Sweeney, 
Office of the Corporate Secretary, FINRA, dated November 8, 2007 
(``FIF''); Pipeline Trading Systems LLC, to Barbara Z. Sweeney, 
Office of the Corporate Secretary, FINRA, dated November 12, 2007 
(``Pipeline''); Automated Trading Desk, LLC, to Barbara Z. Sweeney, 
Office of the Corporate Secretary, FINRA, dated November 12, 2007 
(``ATD''); TD AMERITRADE, Inc., to Barbara Z. Sweeney, Office of the 
Corporate Secretary, FINRA, dated November 15, 2007 (``TD 
AMERITRADE''); UBS Securities LLC, to Barbara Z. Sweeney, Office of 
the Corporate Secretary, FINRA, dated November 15, 2007 (``UBS''); 
The Securities Industry and Financial Markets Association, Barbara 
Z. Sweeney, Office of the Corporate Secretary, FINRA, dated November 
16, 2007 (``SIFMA''); and BNY ConvergEx Execution Solutions LLC, 
Charles Schwab & Co., Inc., National Financial Services LLC and 
Pershing LLC, to Barbara Z. Sweeney, Office of the Corporate 
Secretary, FINRA, dated November 30, 2007 (``BNY'').
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    All of the commenters support the adoption of a new trade reporting 
structure, asserting that the current structure can be confusing and 
create delays and reporting errors. Seven of the nine commenters 
support the proposed executing party reporting structure, asserting 
that this structure is the most logical and efficient approach.\17\ 
These commenters assert that the executing party knows the material 
terms and details of the transaction, as well as any Order Protection 
Rule exceptions or exemptions that apply to the trade,\18\ and thus is 
in the best position to report in a timely manner \19\ and to correct 
reporting errors.\20\ In addition, several commenters note that 
industry practice is for executing parties to trade report; most 
executing parties already have established systems to trade report and 
many firms have entered give-up agreements to replicate the executing 
party reporting structure.\21\
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    \17\ FIF, Pipeline, ATD, TD AMERITRADE, UBS, SIFMA and BNY.
    \18\ FIF, ATD, UBS and SIFMA.
    \19\ Pipeline and UBS.
    \20\ ATD.
    \21\ ATD, TD AMERITRADE and BNY.
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    One commenter states that it is unclear whether the advantages of 
Qualified Service Representative (QSR) agreements would remain under 
the proposed executing party reporting structure and strongly urges 
that any changes continue to keep the QSR process intact.\22\ FINRA 
notes that a QSR agreement is a National Securities Clearing 
Corporation agreement and, for FINRA purposes, merely establishes that 
one party can send a trade to clearing on behalf of the other party. A 
give up agreement still is required for a member to report trade 
information to a FINRA Facility on behalf of another member, even if 
the parties have a QSR agreement in effect.\23\ This proposed rule 
change would not change the QSR process or member obligations with 
respect to give up agreements.
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    \22\ TD AMERITRADE.
    \23\ See NASD Member Alert: Notice to All TRF, ADF and Other 
NASD Facility Participants Regarding AGU and QSR Relationships 
(January 25, 2007).
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    In the Notice, FINRA specifically requested comment on how 
``executing party'' should be defined. The commenters generally suggest 
that the ``executing party'' should be defined as the party that 
receives the order electronically for execution, does not subsequently 
re-route the order, and agrees to execute the trade, or in other words, 
the broker that is the ``final recipient'' and determines the 
price.\24\ One commenter states that in the electronic marketplace, the 
identity of the order entry broker generally will be readily apparent 
based on which party is initiating or seeking an execution, and the 
executing party's identity will be equally apparent based on which 
party is receiving the order for execution.\25\ This commenter provides 
the following example: A displays a limit order to sell 100 shares at 
$10. B routes an order to buy 100 shares against A's displayed order. 
In this example, it is clear that A is the executing broker and B is 
the order entry broker; B initiated and sought out an execution against 
A's displayed limit order.\26\ As discussed above, FINRA is proposing 
to define ``executing party'' substantially as proposed by these 
commenters.
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    \24\ FIF, ATD, UBS, SIFMA and BNY.
    \25\ ATD.
    \26\ ATD.
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    In instances of telephone orders, three commenters believe that the 
same approach should be followed (i.e., the executing party is the 
``answering'' or ``receiving'' or ``responding'' broker), unless the 
parties agree to the contrary.\27\ One commenter believes that in the 
case of telephone trades, the sell-side member should be the reporting 
party,\28\ while another commenter

[[Page 22190]]

asserts that the current trade reporting structure should apply in such 
instances.\29\ Additionally, one commenter asserts that the executing 
party may not be clear when a member requests a quote from another 
member, receives a quote and then agrees to trade at the quoted price, 
and suggests that the member responding to the request for a quote 
(i.e., the price-making firm) should be deemed the executing party.\30\ 
As discussed above, FINRA is proposing to require that where it may be 
difficult to determine which member satisfies the definition of 
``executing party,'' such as telephone and other manually negotiated 
trades, the member representing the sell-side report, unless the 
parties agree otherwise. Several commenters note that in today's 
market, the number of telephone negotiated trades is relatively small 
compared to the number of trades involving the routing of electronic 
orders, and thus the instances where it would not be clear which member 
is the executing party should be limited.\31\ In the words of one 
commenter, ``[a]ll but a tiny fraction of orders in the current 
marketplace are routed electronically'' and as such, ``in the vast 
majority of transactions, there is no doubt about which entity is the 
Executing Broker.'' \32\
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    \27\ ATD, SIFMA and BNY.
    \28\ FIF.
    \29\ UBS.
    \30\ BNY.
    \31\ UBS, SIFMA and BNY.
    \32\ BNY.
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    Two commenters support a sell-side reporting structure, whereby the 
member representing the sell-side would report a trade between 
members.\33\ One commenter asserts that in all cases, it would be clear 
which party is selling and which party is buying, but the distinction 
between the executing party and introducing broker could be unclear in 
certain cases.\34\ FINRA disagrees and believes that where Member A, an 
introducing broker, routes an order for handling and/or execution to 
Member B, and Member B does not re-route the order and executes the 
trade, it is clear that Member B is the executing party. This commenter 
also asserts that in a trade between two brokers, the selling broker 
should be the reporting party, but the brokers should have full 
flexibility to override this default rule and designate the buyer as 
the reporting party.\35\ FINRA believes that the determination of which 
member has the trade reporting obligation should not be subject to 
agreement between the parties, except in limited circumstances as 
discussed above, as that approach would result in confusion and 
possible under or double reporting. FINRA notes, however, that members 
can enter into give up agreements under FINRA rules, whereby one member 
can trade report on behalf of the other member, while the member with 
the reporting obligation under FINRA rules remains responsible for 
trades submitted on its behalf.
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    \33\ Liquidnet and ArcaEdge.
    \34\ Liquidnet.
    \35\ Liquidnet.
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    The second commenter supports sell-side reporting in light of the 
problems with the current market maker-based reporting structure, 
noting that these problems are compounded in the context of ATS trades, 
where non-subscribers may not recognize that the reporting 
responsibility lies with the ATS.\36\ As discussed above, under the 
proposed executing party structure, it would be clear that an ATS has 
the reporting responsibility where the trade is executed on the ATS.
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    \36\ ArcaEdge.
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    The commenters opposing the sell-side reporting structure assert 
that this approach would be less efficient and could increase the rate 
of unreported or inaccurately reported trades.\37\ These commenters 
further assert that a sell-side broker that is not also the executing 
party will not have access to necessary information, such as exceptions 
and exemptions under the Order Protection Rule, may not be able to 
easily obtain this information and will not be able to independently 
verify this information.\38\ Additionally, another commenter asserts 
that while an originating broker would be the seller if its sale were 
executed by the first broker to whom it routed its orders, frequently 
re-routed orders could make it difficult to determine which party has 
the reporting responsibility under a sell-side structure.\39\ 
Furthermore, the commenters assert that a sell-side reporting structure 
would be costly because it would require members that currently do not 
trade report to implement trade reporting systems.\40\ FINRA agrees 
with these commenters, and as discussed above, is proposing to adopt 
the executing party trade reporting structure.
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    \37\ FIF, Pipeline and BNY.
    \38\ FIF, SIFMA and BNY.
    \39\ Pipeline.
    \40\ TD AMERITRADE and BNY.
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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 FINRA 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 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-2008-011 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2008-011. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying 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

[[Page 22191]]

available publicly. All submissions should refer to File Number SR-
FINRA-2008-011 and should be submitted on or before May 15, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E8-8872 Filed 4-23-08; 8:45 am]

BILLING CODE 8010-01-P