Document ID: SEC-2007-1094-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-08-09T04:00Z

[Federal Register: August 9, 2007 (Volume 72, Number 153)]
[Notices]               
[Page 44899-44902]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09au07-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56199; File No. SR-FINRA-2007-001]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Reporting of Foreign Equity Securities to the Order Audit Trail 
System

August 3, 2007.
    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 July 31, 2007, the Financial Industry Regulatory

[[Page 44900]]

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 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 Rule 6952 to exclude certain orders and 
transactions in foreign equity securities from the Order Audit Trail 
System (``OATS'') recording and reporting requirements. The text of the 
proposed rule change is available at FINRA, the Commission's Public 
Reference Room, and http://www.finra.org.

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 Rules 6950 through 6958 (``OATS Rules'') impose obligations on 
member firms to record in electronic form and report to OATS on a daily 
basis certain information regarding orders in Nasdaq-listed equity 
securities originated, received, transmitted, modified, canceled, or 
executed by members.\3\ FINRA integrates the OATS information with 
quote and transaction information to create a time-sequenced record of 
orders, quotes, and transactions.
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    \3\ Beginning on February 4, 2008, members also will be required 
to record and report order information regarding all OTC equity 
securities, as defined in NASD Rule 6951. See Securities Exchange 
Act Release No. 54585 (October 10, 2006); 71 FR 61112 (October 17, 
2006) (SR-NASD-2005-101); NASD Notice to Members 06-70 (December 
2006); see also Securities Exchange Act Release No. 55440 (March 9, 
2007), 72 FR 12852 (March 19, 2007) (SR-NASD-2007-019).
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    Currently, a member has recording and reporting obligations under 
the OATS Rules only with respect to orders in Nasdaq-listed equity 
securities. On October 10, 2006, the Commission approved SR-NASD-2005-
101, which amended the OATS Rules and extended the OATS obligations to 
include orders in OTC equity securities.\4\ As amended by SR-NASD-2005-
101, Rule 6951 defines the term ``OTC equity security'' to mean ``any 
equity security that: (1) Is not listed on a national securities 
exchange; or (2) is listed on one or more regional stock exchanges and 
does not qualify for dissemination of transaction reports via the 
facilities of the Consolidated Tape.'' This broad definition of ``OTC 
equity security'' encompasses essentially all foreign equity 
securities, except those that are listed on a U.S. national securities 
exchange.
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    \4\ See Securities Exchange Act Release No. 54585 (October 10, 
2006); 71 FR 61112 (October 17, 2006) (SR-NASD-2005-101); NASD 
Notice to Members 06-70 (December 2006). The effective date of these 
amendments to the OATS Rules is February 4, 2008. See Securities 
Exchange Act Release No. 55440 (March 9, 2007), 72 FR 12852 (March 
19, 2007) (SR-NASD-2007-019).
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    After the Commission's approval of SR-NASD-2005-101 and the 
publication of NASD Notice to Members 06-70 in December 2006, numerous 
member firms and industry organizations raised issues with FINRA staff 
regarding the breadth of the application of the OATS Rules to foreign 
equity securities. The issues that were raised included the lack of 
U.S. symbols for many foreign securities, the programming difficulties 
associated with tracking trades in foreign symbols and currencies, and 
the fact that, for many firms, orders for foreign securities are 
handled by foreign affiliates that are not currently set up to record 
and report OATS information. In addition, many trades in foreign equity 
securities are routed to foreign broker-dealers and executed on a 
foreign stock exchange. Consequently, although FINRA would receive OATS 
information regarding the order origination and routing for such 
orders, FINRA would not receive execution reports, and FINRA would not 
have trade reporting data to consolidate with the OATS data.\5\
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    \5\ Trade reporting requirements under NASD Rule 6620 do not 
extend to a member's transactions in foreign equity securities 
executed on and reported to a foreign securities exchange or 
transactions executed over-the-counter in a foreign country that are 
reported to the regulator of securities markets for that country. 
See NASD Rule 6620(g); Securities Exchange Act Release No. 55745 
(May 11, 2007), 72 FR 27891 (May 17, 2007) (SR-NASD-2007-030).
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    In response to these concerns, FINRA reconsidered the issues 
associated with extending the OATS recording and reporting obligations 
to all foreign equity securities in light of the regulatory benefit 
provided by the information. FINRA has filed the proposed rule change 
to strike an appropriate balance between ensuring that FINRA can 
effectively monitor members' compliance with their order handling 
obligations (e.g., best execution and limit order protection) and 
avoiding overly burdensome reporting requirements. FINRA has concluded 
that the appropriate balance would be achieved by requiring firms to 
record and report order information regarding foreign equity securities 
only in those instances where any resulting execution is subject to the 
transaction reporting requirements in Rule 6620. This will provide 
FINRA with order information for the same transactions for which FINRA 
receives trade reporting information, thus allowing FINRA to review a 
complete audit trail of those transactions. At the same time, firms 
will not be required to record and submit information to FINRA for 
orders in a foreign equity security that do not result in a trade 
report to FINRA.
    At least two situations can arise in connection with orders for 
foreign equity securities that trade in the U.S. and abroad that may 
raise questions as to how these orders should be reported to OATS. In 
some circumstances, an order for a foreign equity security that is 
traded in the U.S. and abroad may be broken up and executed in multiple 
markets. If a firm breaks up an order and, as a result, part of the 
order is executed in the U.S. and part of the order is executed in a 
foreign market, the firm should report the entire order to OATS. The 
part of the order that was executed abroad should be reported as a 
route to a foreign broker-dealer or a foreign market (i.e., the firm is 
a member of the foreign market and is able to route the order directly 
to the foreign market), and the part of the order that was executed in 
the U.S. would be reported the same way as any other reportable order 
event.
    Similarly, with respect to foreign equity securities that trade in 
the U.S. and abroad, a firm may receive an order for such a security in 
the U.S. symbol and, at the time the order is received, the firm is 
uncertain whether the order will be executed in the U.S. or in the 
foreign market. In some cases, the trade may not be executed the day it 
is received. If the order is not executed before the firm is required 
to submit its OATS information for that day, the firm would not know 
whether it was

[[Page 44901]]

required to report the receipt of the order to OATS because the firm 
would not yet have a trade reporting obligation. In such a case, 
because the security had a U.S. symbol and the customer placed the 
order in the U.S. symbol, the firm should report the new order to OATS 
as though it were going to be executed in the U.S. (and, thus be 
subject to the trade reporting requirements).\6\ If the order is later 
executed in a foreign market, the firm would submit a route report 
indicating that the order was routed to a foreign broker-dealer or 
foreign market, as applicable. Of course, if a firm receives an order 
and executes that order the same day in a foreign market, no OATS 
report would be necessary if the firm was not required to report the 
transaction under Rule 6620.
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    \6\ If the security had no U.S. symbol, the firm could not 
report the information to OATS until a U.S. symbol is assigned. If 
the security has both a U.S. and foreign symbol and the order is 
received from the customer in the foreign symbol, the member would 
not be required to report the order to OATS unless the order is 
executed and trade reported to FINRA pursuant to Rule 6620 on the 
same day the order was received from the customer.
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Reportable Order Events for Foreign Equity Securities With No U.S. 
Symbol
    When a firm has a trade reporting obligation in a foreign equity 
security that does not have a U.S. symbol assigned to it at the time of 
the trade, the firm is required to: (1) Promptly request a symbol so 
that it can comply with its trade reporting obligations; and (2) comply 
with the OATS recording requirements under Rule 6954. Once a symbol is 
assigned, the member must report the trade to FINRA and report all 
applicable order information to OATS in accordance with Rule 6955. When 
reporting the information to OATS, the firm must properly code the 
report to indicate that the reported event occurred prior to the date 
of the OATS report. In these situations, if normal electronic trade 
reporting submission is not possible (e.g., the trade reporting 
facility will not accept a report because the foreign equity security 
had not been assigned a valid U.S. symbol on the actual trade date), 
the firm is required to report the transaction as soon as practicable 
on Form T.\7\
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    \7\ See e.g., NASD Rule 6620(a)(4) (regarding the use of Form T 
for trades reported to the OTC Reporting Facility).
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    In these instances where a Form T is used for trade reporting 
purposes, FINRA intends to provide firms the option of reporting the 
required OATS information through the firm's normal OATS reporting 
channels or as part of the Form T submission. In this way, firms will 
be able to fulfill both the firm's trade reporting and OATS obligations 
through its Form T submission.\8\ The ability to use a Form T to report 
OATS information will be available only for trades in foreign equity 
securities that do not have a U.S. symbol assigned at the time the OATS 
information would ordinarily be reported.
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    \8\ The revised OATS Reporting Technical Specifications that 
will be published following Commission approval of the proposed rule 
change will detail the precise procedures a firm may use to file the 
OATS report(s) in this situation.
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    The operative date of the proposed rule change will be February 4, 
2008, to coincide with the implementation date for the amendments to 
the OATS Rules requiring members to record and report order information 
for OTC Equity Securities.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\9\ 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 achieves 
a proper balance between reporting requirements that improve FINRA's 
ability to monitor members' order handling obligations and that have 
reasonable parameters regarding those orders that are subject to the 
requirements.
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    \9\ 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

    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-2007-001 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-2007-001. 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 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 available publicly. All 
submissions should refer to File Number SR-FINRA-2007-001 and should be 
submitted on or before August 30, 2007.

[[Page 44902]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-15551 Filed 8-8-07; 8:45 am]

BILLING CODE 8010-01-P