Document ID: SEC-2009-1623-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change, and Amendment No. 1 Thereto
Posted Date: 2009-11-17T05:00Z

[Federal Register: November 17, 2009 (Volume 74, Number 220)]
[Notices]               
[Page 59272-59275]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no09-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60960; File No. SR-FINRA-2009-061]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change, and 
Amendment No. 1 Thereto, To Require Members To Report OTC Transactions 
in Equity Securities Within 30 Seconds of Execution

November 6, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 16, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') a proposed rule change SR-FINRA-2009-061 as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. On October 30, 2009, FINRA filed Amendment No. 1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, 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 FINRA trade reporting rules to (1) 
Require that members report over-the-counter (``OTC'') equity 
transactions \3\ to FINRA within 30 seconds of execution; (2) require 
that members report secondary market transactions in non-exchange-
listed direct participation program (``DPP'') securities to FINRA 
within 30 seconds of execution; and (3) make certain conforming changes 
to the rules

[[Page 59273]]

relating to the OTC Reporting Facility (``ORF'').
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    \3\ Specifically, OTC equity transactions are: (1) transactions 
in NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS, 
effected otherwise than on an exchange, which are reported through 
the Alternative Display Facility (``ADF'') or a Trade Reporting 
Facility (``TRF''); and (2) transactions in ``OTC Equity 
Securities,'' as defined in FINRA Rule 6420 (e.g., OTC Bulletin 
Board and Pink Sheets 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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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
30-Second Reporting Requirement
    Under FINRA trade reporting rules, members generally must report 
OTC equity transactions that are executed during the hours that the 
FINRA Facilities are open within 90 seconds of execution.\4\ Last sale 
information for such trades is publicly disseminated on a real-time 
basis. There are certain limited exceptions to this general 
requirement, including for trades in non-exchange-listed DPP 
securities, as discussed below.\5\ The 90-second reporting requirement 
has been in effect since 1982, when OTC trading was more manual in 
nature. As trading has become increasingly automated, however, the vast 
majority of trades are now reported in a much shorter period of time. 
For example, during the period of February 23 through February 27, 
2009, overall member compliance with the current 90-second reporting 
requirement was 99.95% (for all trades submitted to a FINRA Facility 
for public dissemination), and 99.90% of trades were reported in 30 
seconds or less.
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    \4\ See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and 
6622(a).
    \5\ Additionally, FINRA notes that transactions in PORTAL 
securities, as defined in FINRA Rule 6631, are not subject to the 
90-second reporting requirement, but must be reported to the ORF by 
the end of the day. See FINRA Rule 6633.
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    FINRA is proposing to amend the trade reporting rules to require 
that members report OTC equity transactions to FINRA within 30 seconds 
of execution. Specifically, the trade reporting rules would be amended 
to replace the references to 90 seconds with 30 seconds.\6\ Trades not 
reported within 30 seconds, unless expressly subject to a different 
reporting requirement or excluded from the trade reporting rules 
altogether, would be late. Although members would have 30 seconds to 
report, FINRA reiterates that--as is the case today--members must 
report trades as soon as practicable and cannot withhold trade reports, 
e.g., by programming their systems to delay reporting until the last 
permissible second.
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    \6\ See FINRA Rules 6282(a); 6380A(a) and (g); 6380B(a) and (f); 
6622(a) and (f); 7130(b); 7230A(b); 7230B(b); and 7330(b).
    FINRA also is proposing to amend FINRA Rules 6181 and 6623 to 
replace the reference to 90 seconds with a more general reference to 
``the required time period'' to clarify that these provisions also 
apply to trades that are subject to a different reporting 
requirement (e.g., certain trades executed outside normal market 
hours).
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    Because of the automated nature of trade reporting today, FINRA 
believes that in the vast majority of circumstances members should have 
no difficulty complying with the proposed 30-second reporting 
requirement. However, to better understand the potential limitations 
some members may face, FINRA is requesting that the SEC solicit 
comments specifically on whether there are any categories of trades 
(e.g., trades that are manual in nature) or any firm structures (e.g., 
smaller firms that may not have automated systems for trade reporting) 
that may justify a longer reporting time frame under FINRA rules.\7\
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    \7\ FINRA notes that smaller firms that route their orders to 
another member firm for handling or execution do not have the trade 
reporting obligation under the ``executing party'' trade reporting 
structure that became effective on August 3, 2009. For transactions 
between members, the ``executing party'' (which is defined as the 
member that receives an order for handling or execution or is 
presented an order against its quote, does not subsequently re-route 
the order, and executes the transaction) has the obligation to 
report the trade to FINRA. See Regulatory Notice 09-08 (January 
2009).
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    FINRA believes that the proposed rule change will promote 
consistent and timely reporting by all members and enhance market 
transparency and price discovery by ensuring that trades are 
disseminated closer in time to execution. Timely reporting has become 
even more critical with the implementation of Regulation NMS. A delay 
in the reporting and dissemination of a transaction could potentially 
appear to other market participants as a violation of the Regulation 
NMS Order Protection Rule; if a trade is not reported and disseminated 
until a full 90 seconds after execution, the best displayed market 
could have changed between the time of execution and ultimate 
dissemination of the trade. Additionally, the proposed rule change will 
ensure that members do not withhold important market information from 
investors and other market participants for competitive or other 
improper reasons.\8\
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    \8\ FINRA reiterates the importance of timely reporting and 
reminds members that a pattern and practice of late reporting may be 
considered inconsistent with high standards of commercial honor and 
just and equitable principles of trade in violation of FINRA Rule 
2010.
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Reporting Requirements Applicable to Trades in Non-Exchange-Listed DPP 
Securities
    Pursuant to FINRA Rule 6643(a)(1), members are required to report 
trades in non-exchange-listed DPP securities to the ORF by 1:30 p.m. 
Eastern Time on the next business day (T+1) after the date of 
execution; members that have the operational capability to report 
transactions within 90 seconds of execution may do so at their option. 
Transaction information for such trades is not disseminated on a real-
time trade-by-trade basis, but is included in end-of-day summary 
information disseminated twice daily. By contrast, under FINRA rules, 
OTC trades in exchange-listed DPP securities are reported to a TRF or 
the ADF and are subject to the 90-second reporting requirement (just 
like any other OTC trade in an NMS stock).\9\ The inconsistency in the 
reporting and dissemination of DPPs can create confusion for market 
participants, especially when an exchange-listed DPP is delisted and 
dissemination of trading in the security goes from real-time to only 
twice daily.
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    \9\ See FINRA Rules 6282(a), 6380A(a) and 6380B(a).
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    FINRA is proposing to amend the trade reporting rules to require 
that transactions in non-exchange-listed DPP securities be reported 
within 30 seconds of execution to conform to the reporting requirements 
applicable to other OTC transactions, including those in exchange-
listed DPP securities. Specifically, the proposed rule change would 
delete the FINRA Rule 6640 Series (Reporting Transactions in Direct 
Participation Program Securities) in its entirety, and secondary market 
transactions in non-exchange-listed DPPs would be reported to FINRA as 
any other OTC Equity Security pursuant to the FINRA Rule 6620 and 7300 
Series. In addition, the proposed rule change would amend (1) FINRA 
Rule 6610 to clarify that secondary market transactions in non-
exchange-listed

[[Page 59274]]

DPPs are included in the OTC Equity Security transactions that must be 
reported to the ORF; (2) FINRA Rule 6420 to add ``direct participation 
program'' as a defined term (the proposed definition is identical to 
the definition in current FINRA Rule 6642); (3) FINRA Rule 6622 to 
include as Supplementary Material the definitions of ``date of 
execution'' and ``time of execution'' for DPP transactions (the 
proposed definitions are identical to the definitions in current FINRA 
Rule 6642); and (4) FINRA Rules 6530, 6550, 7310, 7330 and 7410 to 
delete or replace references to DPPs and the FINRA Rule 6640 Series, as 
applicable.
    FINRA notes that transactions in non-exchange-listed DPPs currently 
are not subject to regulatory transaction fees under Section 3 of 
Schedule A to the FINRA By-Laws (``Section 3'') because they are not 
subject to prompt last sale reporting under FINRA rules.\10\ As a 
result of the proposed rule change, transactions in non-exchange-listed 
DPPs would become subject to Section 3 regulatory transaction fees.
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    \10\ Pursuant to Section 31 of the Act, FINRA and the national 
securities exchanges are required to pay transaction fees and 
assessments to the SEC that are designed to recover the costs 
related to the government's supervision and regulation of the 
securities markets and securities professionals. FINRA obtains its 
Section 31 fees and assessments from its membership in accordance 
with Section 3.
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    FINRA believes the proposed rule change would enhance market 
transparency and promote consistency in trade reporting and 
dissemination.
Proposed Conforming Amendments
    The proposal to reduce the reporting time to 30 seconds requires 
amendments to a number of subparagraphs within paragraph (a) of FINRA 
Rule 6622 relating to the ORF. In this filing, FINRA is proposing 
certain additional changes to these subparagraphs to conform, to the 
extent practicable, to the rules relating to the ADF and TRFs.
    Specifically, FINRA is proposing to reorganize FINRA Rule 6622(a) 
(When and How Transactions are Reported) to conform to the current 
format and structure of the rules relating to the ADF and TRFs.\11\ The 
requirements in paragraphs (a)(1) and (a)(2), which apply separately to 
OTC Market Makers and Non-Market Makers, respectively, would be 
combined in paragraph (a)(1) and apply to all ``OTC Reporting Facility 
Participants,'' as defined in proposed paragraph (n) of FINRA Rule 
6420. Additionally, consistent with the ADF and TRF rules, FINRA is 
proposing to amend FINRA Rule 6622(a) to delete the labels (e.g., 
``.W'') for the trade report modifiers that members are required to use 
when reporting trades to the ORF. FINRA Rule 6622(a) would identify the 
types of transactions that must have a unique modifier associated with 
them and such modifiers would be labeled in the ORF technical 
specifications rather than in the rules.
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    \11\ See FINRA Rules 6282(a), 6380A(a) and 6380B(a).
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    Proposed paragraph (a)(5) of FINRA Rule 6622 would enumerate the 
transactions for which members must use a special trade report modifier 
and would clarify that members must include such modifiers on all trade 
reports, including reports of ``as/of'' trades.\12\ In addition, 
proposed paragraph (a)(5) would expressly provide that in the event 
that the rules require multiple modifiers on any given trade report, 
members are to report in accordance with guidance published by FINRA 
regarding priorities among modifiers.\13\ Members that report in 
accordance with such guidance will not be in violation of the trade 
reporting rules for failing to use a particular modifier.
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    \12\ See, e.g., FINRA Rules 6282(a)(4), 6380A(a)(5) and 
6380B(a)(5).
    \13\ See, e.g., FINRA Rules 6380A(a)(5) and 6380B(a)(5).
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    FINRA notes that most of the trade report modifiers referred to in 
proposed paragraph (a)(5) already are required under current FINRA Rule 
6622(a). However, proposed subparagraphs (B) through (D) would require 
members to use special trade report modifiers for Seller's Option, Cash 
and Next Day trades,\14\ and proposed subparagraph (E) would require 
members to use a special trade report modifier for trades that occur at 
a price based on an average weighting or another special pricing 
formula.\15\ Although not required under current FINRA Rule 6622(a), 
members can use these modifiers when reporting to the ORF today. In 
addition, a separate modifier would be used for Stop Stock 
Transactions, as defined in FINRA Rule 6420, pursuant to proposed 
subparagraph (F).\16\ Such transactions would be disseminated to the 
public with the weighted average price modifier, which is consistent 
with the current dissemination policy with respect to Stop Stock 
Transactions that are submitted to the ADF and TRFs. Members currently 
are required to report Stop Stock Transactions with the .W trade report 
modifier, in accordance with FINRA Rule 6622(a)(8).
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    \14\ See, e.g., FINRA Rules 6282(a)(4)(B)-(D), 6380A(a)(5)(B)-
(D) and 6380B(a)(5)(B)-(D).
    \15\ See, e.g., FINRA Rules 6282(a)(4)(E), 6380A(a)(5)(E) and 
6380B(a)(5)(E).
    \16\ See, e.g., FINRA Rules 6282(a)(4)(F), 6380A(a)(5)(F) and 
6380B(a)(5)(F).
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    Current paragraphs (a)(3), (a)(4), (a)(5), (a)(7) and (a)(9) of 
FINRA Rule 6622 would be renumbered as paragraphs (a)(2), (a)(3), 
(a)(4), (a)(6) and (a)(7), respectively, without substantive change.
    In addition to the proposed amendments to FINRA Rule 6622, FINRA is 
proposing to amend FINRA Rule 6420 to add ``normal market hours'' and 
``OTC Reporting Facility Participant'' as defined terms.\17\
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    \17\ See, e.g., FINRA Rules 6320A and 6320B. The proposed 
definition of ``normal market hours'' is identical to the TRF rules, 
and the proposed definition of ``OTC Reporting Facility 
Participant'' is substantially similar to the definition of ``Trade 
Reporting Facility Participant'' in the TRF rules.
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    By conforming the trade reporting requirements to the extent 
practicable, the proposed rule change will promote more consistent 
trade reporting by members and a more complete and accurate audit 
trail. FINRA notes that most of the proposed conforming changes to 
FINRA Rule 6622(a) are technical in nature; however, some members may 
need to make systems changes to comply with some of the requirements 
that are not included expressly in the current rule.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice. To allow members sufficient time to make the 
necessary systems changes, FINRA is proposing that the implementation 
date will be between six and nine months following the date of 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\18\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
enhance market transparency and price discovery and promote more 
consistent trade reporting by members.
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    \18\ 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.

[[Page 59275]]

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-2009-061 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-061. 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,\19\ 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 such 
filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make publicly available. All submissions should refer to File Number 
SR-FINRA-2009-061 and should be submitted on or before December 8, 
2009.
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    \19\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27463 Filed 11-16-09; 8:45 am]

BILLING CODE 8011-01-P