Document ID: SEC-2008-0856-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-06-26T04:00Z

[Federal Register: June 26, 2008 (Volume 73, Number 124)]
[Notices]               
[Page 36363-36365]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jn08-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57986; File No. SR-FINRA-2008-016]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Align the 
Reporting Requirements and Dissemination Protocols for OTC Equity 
Transactions Involving Foreign Securities With All Other OTC Equity 
Securities

June 18, 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 April 25, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. On June 12, 2008, FINRA submitted 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: (1) Amend NASD Rule 6620 to align the 
reporting requirements for over-the-counter (``OTC'') equity 
transactions involving foreign securities with the reporting 
requirements for other OTC equity transactions; and (2) align the 
dissemination protocols for all last sale reports of OTC equity 
transactions. The text of the proposed rule change is available on 
FINRA's Web site at http://www.finra.org, at FINRA's principal office, 
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
    NASD Rule 6620(a) generally requires that transactions in OTC 
Equity Securities that are executed between 8 a.m. and 8 p.m. Eastern 
Time be reported to the OTC Reporting Facility within 90 seconds of 
execution.\3\ This 90-second reporting requirement currently applies to 
transactions in OTC Equity Securities that are domestic equity 
securities, ADRs, and Canadian issues.\4\ Thus, all ADRs and Canadian 
issues, including those that are not registered with the Commission and 
otherwise subject to financial reporting, are subject to 90-second 
reporting under NASD Rule 6620. All other foreign equity securities are 
excluded from the 90-second reporting requirement and instead must be 
reported by 1:30 p.m. Eastern Time the day after the transaction is 
executed.\5\ Although not required, a member may choose to report 
transactions in foreign securities within 90 seconds of execution.\6\
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    \3\ For purposes of the NASD Rule 6600 Series, ``OTC Equity 
Securities'' means equity securities for which real-time trade 
reporting is not otherwise required. See NASD Rule 6600. NASD Rule 
6610(d) further defines ``OTC Equity Security'' as ``any non-
exchange-listed security and certain exchange-listed securities that 
do not otherwise qualify for real-time trade reporting.''
    \4\ An ADR is a negotiable instrument that represents an 
ownership interest in a specified number or fraction of securities 
that have been deposited with a depositary. The deposited securities 
are typically equity securities of a foreign issuer, and the 
depositary is usually a U.S. bank or trust company. See Securities 
Exchange Act Release No. 48482 (September 11, 2003), 68 FR 54644 
(September 17, 2003) (File No. S7-16-03).
    \5\ See NASD Rule 6620(a)(3)(C)(iii).
    \6\ See NASD Rule 6620 n.1.
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    In addition to the disparity in the trade reporting requirements 
under NASD Rule 6620, there is also a disparity in the way last sale 
information of OTC equity transactions is disseminated to the 
marketplace. Although last sale information for transactions in 
domestic OTC Equity Securities reported pursuant to Rule 6620 is 
disseminated on a real-time basis, irrespective of whether the security 
is registered with the Commission, there is no uniformity regarding the 
dissemination of last sale information for transactions in ADRs and 
foreign securities. Last sale reports of ADRs and Canadian issues that 
are quoted on the OTC Bulletin Board (``OTCBB''), which requires 
registration with the Commission, are disseminated on a real-time 
basis. However, only summary information is disseminated at the end of 
each trading day for OTC ADRs and Canadian issues that are not quoted 
on the OTCBB, whether or not they are registered with the Commission. 
Transactions in foreign securities, other than Canadian issues and 
ADRs, that are quoted on the OTCBB are disseminated on a real-time 
basis if they are received on the day of the trade. However, as noted 
above, there is no current requirement to report these trades to FINRA 
within 90 seconds of execution, or even on the trade date. If an OTC 
transaction in a foreign security is not reported on the trade date, 
last sale information for that transaction is not disseminated.
    The bifurcation with respect to dissemination of OTC ADRs and 
foreign securities arose in the broader context of the establishment 
and evolution of the OTCBB. When real-time reporting for OTC Equity 
Securities, including ADRs and Canadian securities, was proposed in 
1992, FINRA agreed not to publish quotations and trade reports of 
foreign securities and ADRs in order to avoid any reconsideration of 
the exemption from registration pursuant to SEC Rule

[[Page 36364]]

12g3-2(b).\7\ In connection with the permanent approval of the OTCBB in 
1997, unregistered ADRs and foreign securities became ineligible for 
quotation on the OTCBB, and at that time, real-time dissemination of 
transactions in those securities was limited to only those quoted on 
the OTCBB.\8\ Since the Commission approved FINRA's assumption of 
direct authority for the activities related to OTC trading, including 
but not limited to the OTCBB,\9\ FINRA staff has been reviewing, among 
other areas, the trade reporting and dissemination requirements for OTC 
Equity Securities.
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    \7\ See Securities Exchange Act Release No. 31695 (January 6, 
1993), 58 FR 4189 (January 13, 1993) (notice of filing of proposed 
rule change SR-NASD-92-48). FINRA notes that, during the OTCBB pilot 
phase, the Commission had permitted the quotation of unregistered 
foreign securities on the OTCBB, but raised concerns that quotation 
of such securities on the OTCBB would provide an active secondary 
trading market in unregistered securities and could result in such 
securities no longer meeting the terms of the SEC Rule 12g3-2(b) 
exemption, which is not available for securities quoted in an 
automated inter-dealer quotation system. Therefore, the quotation of 
foreign securities on the OTCBB was limited at that time to ``non-
firm'' quotations that could be updated a maximum of two times per 
day (thus, quotes in foreign securities on the OTCBB were 
effectively stale), and trade report information was not publicly 
disseminated. See, e.g., Securities Exchange Act Release No. 38456 
(March 31, 1997), 62 FR 16635 (April 7, 1997) (order approving SR-
NASD-92-7).
    \8\ See id.
    \9\ See Securities Exchange Act Release No. 52508 (September 26, 
2005), 70 FR 57346 (September 30, 2005) (order approving SR-NASD-
2005-089).
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    FINRA staff believes that the different treatment with respect to 
the reporting and dissemination of trade reports for OTC equity 
transactions in domestic securities, foreign securities, ADRs, and 
Canadian issues should be eliminated and that all transactions in OTC 
Equity Securities should be reported within 90 seconds of execution and 
that last sale information regarding those transactions should be 
disseminated on a real-time basis. FINRA created the exclusion to the 
90-second reporting requirement for foreign securities in the early 
1990s in response to concerns that requiring 90-second reporting for 
transactions in foreign equity securities could pose significant and 
costly operational problems for firms.\10\ Currently, FINRA receives an 
overwhelming majority of reports for OTC transactions in foreign 
securities within 90 seconds of execution. FINRA believes that the 
operational issues that may have been present when the exclusion was 
adopted are no longer applicable. Consequently, the proposed rule 
change would eliminate the distinctions between domestic, foreign, ADR, 
and Canadian securities and would treat all OTC transactions in the 
same manner, from both a reporting and a dissemination standpoint.\11\
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    \10\ See Securities Exchange Act Release No. 32647 (July 16, 
1993), 58 FR 39262 (July 22, 1993) (order approving SR-NASD-92-48).
    \11\ The single exception would be for transactions in foreign 
equity securities executed over-the-counter in a foreign country and 
reported to the regulator of securities markets for that country. 
See NASD Rule 6620(g)(2)(B). Transactions in foreign equity 
securities executed on and reported to a foreign securities exchange 
also are excepted from the FINRA reporting requirements. See NASD 
Rule 6620(g)(2)(A).
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    By requiring 90-second reporting for foreign securities 
transactions, FINRA can uniformly disseminate that information on a 
real-time basis as well, providing improved transparency to the OTC 
market. Accordingly, the proposed rule change would not only eliminate 
the exclusion to the 90-second reporting requirement for transactions 
in foreign securities (and thus impose the same reporting requirements 
on all transactions in OTC equity securities), but would also provide 
for the real-time dissemination of this information.\12\ FINRA believes 
that moving to a transaction reporting regime where all transactions in 
OTC Equity Securities are subject to prompt last sale reporting and 
real-time dissemination would substantially improve the transparency of 
the OTC market.\13\
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    \12\ With the exception of NASD Rule 6250, which applies to 
dissemination of transaction information for TRACE-eligible 
securities, dissemination of trade reports is typically not governed 
by FINRA's rules, but rather by its protocols. Thus, FINRA is not 
proposing to amend any rules to effectuate the changes to the 
dissemination protocols discussed in this rule filing.
    \13\ Section 31 of the Act requires FINRA to pay transaction 
fees and assessments to the Commission for sales transacted by or 
through its members otherwise than on a national securities exchange 
of securities subject to prompt last sale reporting (pursuant to the 
rules of the Commission or FINRA). This fee is designed to recover 
the costs related to the government's supervision and regulation of 
the securities markets and securities professionals. To recover the 
costs of FINRA's section 31 obligation, FINRA assesses a regulatory 
transaction fee on its members under section 3 of Schedule A to the 
FINRA By-Laws, the amount of which is set in accordance with section 
31. Because transactions in foreign securities (other than ADRs and 
Canadian issues) are not currently required to be reported 
``promptly,'' they are excluded from the regulatory transaction fee. 
The requirement to report transactions in foreign securities to 
FINRA within 90 seconds of execution would result in those 
transactions being subject to the regulatory transaction fee.
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    FINRA believes that prompt last sale reporting and real-time 
dissemination of trade reports for all OTC transactions in ADRs, 
foreign securities, and Canadian issues will enhance the amount of 
market information available to investors and better enable investors 
to monitor the executions they receive in these securities. FINRA 
believes that it would not be providing a vehicle for quoting or 
trading unregistered securities, a prior concern raised by the 
Commission.\14\ Instead, FINRA would merely be disseminating, on a 
real-time basis, reports of transactions that have already occurred in 
the OTC market and have been submitted to FINRA by its members within 
90 seconds of execution. FINRA believes that real-time dissemination is 
wholly consistent with the Commission's own views stated in its order 
approving the OTCBB on a permanent basis:
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    \14\ Quotations in unregistered ADRs and foreign securities, 
including some Canadian issues, already are published via the 
Electronic Pink Sheets.

    [FINRA] could increase transparency with less customer confusion 
by requiring transaction reporting for foreign securities traded 
over-the-counter in the U.S. Transaction reporting information has 
the potential to greatly enhance the amount of market information 
available to investors and better enable investors to monitor the 
executions they receive in foreign securities.\15\
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    \15\ See Securities Exchange Act Release No. 38456 (March 31, 
1997), 62 FR 16635 (April 7, 1997) (order approving SR-NASD-92-7).

    Because FINRA would simply be collecting and disseminating trade 
reports and not providing a vehicle for quoting or trading securities, 
FINRA does not believe that the proposed rule change gives rise to the 
concerns previously voiced by the Commission in the context of the 
OTCBB regarding the quotation of ``unregistered securities on a visible 
U.S. market operated by a self-regulatory organization.'' \16\ Nor 
would it produce what the Commission has sought to avoid: ``a regulated 
public marketplace for unregistered securities.'' \17\
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    \16\ See id.
    \17\ See id.
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    FINRA intends to announce the effective date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval of this proposed rule change. The 
effective date will be 30 days following publication of the Regulatory 
Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\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. In addition, section 11A(a)(1) of the Act \19\ 
articulates the

[[Page 36365]]

Congressional findings and policy goals and objectives with respect to 
the development of a national market system.\20\ Essentially, Congress 
found that new data processing and communication techniques should be 
applied to improve the efficiency of market operations, broaden the 
distribution of market information, enhance opportunities to achieve 
best execution and promote competition among market participants. FINRA 
believes that the proposed rule change will enhance transparency in 
foreign securities and promote pricing efficiency. Investors and other 
market participants will be afforded greater market information and be 
better able to monitor the executions they receive in these securities.
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    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ 15 U.S.C. 78k-1(a)(1).
    \20\ Although section 11A does not provide the Commission with 
authority to approve a self-regulatory organization's proposal, it 
is relevant in that it sets forth the Act's general policy goals for 
securities markets.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received. However, in 
connection with two other rule filings, SR-NASD-2005-089 and SR-NASD-
2007-039, the Commission received eight written comment letters,\21\ in 
which the commenters urged the Commission to require real-time 
dissemination of OTC-traded ADRs. For example, several commenters noted 
that real-time trade information enables investors to evaluate the 
quality of executions they receive and deters ``trading ahead'' of 
orders and other improper trading practices.\22\ One commenter argued 
that the ``assertion that the dissemination of this data will encourage 
trading in unregistered securities is unsustainable, given the fact 
that FINRA already releases real-time data on unregistered domestic 
issues. Especially as regards unregistered ADRs, more information, 
delivered in a more timely way, can only serve to benefit investors.'' 
\23\ Another commenter, in discussing the delisting of an ADR from the 
NYSE, stated that ``[d]eprived of access to real time trading 
information, I, a market participant, just lost the ability to monitor 
the quality and firmness of quotation and executions of the security, 
thus hampering my ability to have a full grasp of the pulse of its 
trading.'' \24\
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    \21\ See Letter dated August 26, 2005 from R. Cromwell Coulson, 
Pink Sheets LLC, to Jonathan Katz; Letter dated September 19, 2005 
from William Vance and Kimberly Unger, The Security Traders 
Association of New York, Inc., to Jonathan Katz; Letter dated August 
13, 2007 from R. Cromwell Coulson, Pink Sheets LLC, to Nancy Morris 
(``Coulson Letter''); Letter dated August 13, 2007 from Stephen Kay 
and Kimberly Unger, The Security Traders Association of New York, 
Inc., to Nancy Morris (``Kay/Unger Letter''); Letter dated August 
13, 2007 from Lisa Utasi and John Giesea, Security Traders 
Association, to Nancy Morris (``Utasi/Giesea Letter''); Letter dated 
August 17, 2007 from Bryce Engel, TD Ameritrade, Inc., to Nancy 
Morris (``Engel Letter''); Letter dated August 23, 2007 from Xin Ye 
to Nancy Morris (``Ye Letter''); and Letter dated August 30, 2007 
from Leonard Amoruso, Knight Capital Group Inc., to Nancy Morris.
    \22\ See Coulson Letter; Kay/Unger Letter; Engel Letter.
    \23\ Utasi/Giesea Letter. See also Coulson Letter.
    \24\ Ye Letter.
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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 the self-regulatory organization consents, the Commission will:
    (A) By order approve the 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. Specifically, the Commission 
requests comment as to whether the proposed rule change would 
significantly change the factors considered by foreign private issuers 
in deciding whether to list on a U.S. securities exchange and register 
with the Commission, and whether the proposed rule change would serve 
to promote the U.S. over-the-counter market for unregistered foreign 
securities.
    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-2008-016 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-2008-016. 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 the self-regulatory 
organization. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2008-016 and should be submitted on or before July 17, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-14466 Filed 6-25-08; 8:45 am]

BILLING CODE 8010-01-P