Document ID: SEC-2010-0666-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-05-06T04:00Z

[Federal Register: May 6, 2010 (Volume 75, Number 87)]
[Notices]               
[Page 25020-25022]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06my10-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61997; File No. SR-FINRA-2010-017]

 
 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Allow FINRA Members To Use the OTC Reporting 
Facility To Transfer Transaction Fees Charged by One Member to Another 
Member

April 28, 2010.
    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 12, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposal effective upon receipt of 
this filing by the Commission. Additionally, FINRA has designated the 
proposed rule change as ``establishing or changing a due, fee or other 
charge'' under Section 19(b)(3)(A) of the Act \5\ and Rule 19b-4(f)(2) 
thereunder,\6\ which renders the proposal effective upon receipt of 
this filing by the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(2).
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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) adopt FINRA Rule 7330(i) to permit FINRA 
members to use the OTC Reporting Facility (the ``ORF'') to transfer 
transaction fees charged by one member to another member on trades 
reported to the ORF; and (2) amend FINRA Rule 7710 to establish the fee 
to be charged by the ORF for use of the transaction fee transfer 
service.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, on the Commission's Web site at http://
www.sec.gov, 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
    Background:
    Rule 7230A(h) permits FINRA members to agree in advance to transfer 
a transaction fee charged by one member to another member on a 
transaction in NMS stocks effected otherwise than on an exchange 
through the submission of a clearing report to the FINRA/Nasdaq Trade 
Reporting Facility (``FINRA/Nasdaq TRF''). Prior to the adoption of 
Rule 7230A(h) in 2007,\7\ there was no mechanism for members to charge 
each other commissions or other explicit transaction fees through the 
FINRA trade reporting and clearance submission process. Generally, 
members wanting to charge other members an explicit transaction fee 
either billed and collected those fees directly from the other member 
outside the transaction reporting and clearing process or traded on a 
``net'' basis.\8\ Rule 7230A(h)

[[Page 25021]]

provides members with another alternative by permitting the transfer of 
a transaction fee as part of a clearing report submitted to the FINRA/
Nasdaq TRF.
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    \7\ See Securities Exchange Act Release No. 56007 (July 3, 
2007), 72 FR 37807 (July 11, 2007) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASD-2007-046). SR-NASD-2007-046 
proposed to adopt paragraph (h) of NASD Rule 6130. Pursuant to SR-
FINRA-2008-021, NASD Rule 6130 was renumbered as FINRA Rule 7230A. 
See Securities Exchange Act Release No. 58643 (September 25, 2008), 
73 FR 57174 (October 1, 2008) (Order Approving File No. SR-FINRA-
2008-021).
    \8\ Trading on a ``net basis'' means that the broker-dealer's 
compensation is implicitly included in the execution price 
disseminated to the tape and reported for clearance and settlement 
to the National Securities Clearing Corporation (``NSCC''). For 
example, broker-dealer 1 (B/D 1) purchases a security at $10 and 
sells the security to broker-dealer 2 (B/D 2) ``net'' at a price of 
$10.001. Because $10.001 is the reported trade price, the 
transaction fee is included as part of the trade and is transferred 
as part of the clearance and settlement process.
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    Proposed Amendments Relating to Transfer of Transaction Fees in 
Clearing Reports Submitted to the ORF:
    The proposed rule change would adopt a provision identical to Rule 
7230A(h) for purposes of transferring transaction fees between members 
as part of a clearing report submitted to the ORF. Specifically, 
pursuant to proposed Rule 7330(i), members would be required to provide 
in reports submitted to the ORF, in addition to all other information 
required to be submitted by any other rule, a total per share or 
contract price amount, inclusive of the transaction fee. As a result, 
members would submit two price amounts as part of their report to the 
ORF: one price including the transaction fee, which would be submitted 
by the ORF to NSCC for clearance and settlement; and one price 
exclusive of the transaction fee, which would be publicly disseminated. 
For example, if B/D 1 purchases from B/D 2 at $10.00 and B/D 1 and B/D 
2 agree to a transaction fee of $.001 per share, the trade price that 
would be publicly disseminated would be $10.00, while the trade would 
be cleared and settled by NSCC at $10.001.\9\ The parties to the trade 
would know both prices--the price reported for public dissemination and 
the clearance/settlement price.
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    \9\ If the parties were trading on a net basis with the fee 
incorporated in the trade price, the transaction at a price of 
$10.001 would be reported to the tape and also submitted to NSCC.
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    Proposed Rule 7330(i) provides that both members and their 
respective clearing firms, as applicable, must execute an agreement, as 
specified by FINRA, permitting the facilitation of the transfer of the 
transaction fee through the ORF, as well as any other applicable 
agreement, such as a give up agreement.\10\ Such agreement must be 
executed and submitted to the ORF before the members can transfer any 
transaction fee under the proposed rule. Among other things, the form 
of agreement specified by FINRA would expressly provide that the 
acceptance and processing by the ORF of the transaction fee as part of 
a trade report shall not constitute an estoppel as to FINRA or bind 
FINRA in any subsequent administrative, civil or disciplinary 
proceeding with respect to the transaction fee transferred. In other 
words, processing of a transaction fee by the ORF should not be taken 
to mean that FINRA approved that transaction fee or its amount or its 
appropriateness under FINRA rules or federal securities laws. The mere 
fact that the transaction fee flowed through a FINRA facility will not 
be a defense to any action taken by FINRA relating to the fee. The 
proposed rule also provides that the relevant agreements are considered 
member records for purposes of NASD Rule 3110(a) and must be made and 
preserved by both members in conformity with applicable FINRA rules.
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    \10\ FINRA also is proposing to adopt paragraph (h) of Rule 
6622, which would provide expressly that members may enter into 
``give up'' arrangements whereby one member reports to the ORF on 
behalf of another member, provided that both members have executed 
and submitted to the ORF the appropriate documentation. The proposed 
provision is identical to the current rules relating to the FINRA/
Nasdaq Trade Reporting Facility and the FINRA/NYSE Trade Reporting 
Facility and codifies current practice and guidance with respect to 
reporting to the FINRA Facilities. See Rules 6380A(h) and 6380B(g); 
Member Alert: Notice to All TRF, ADF and Other NASD Facility 
Participants Regarding AGU and QSR Relationships (January 25, 2007).
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    Furthermore, the proposed rule expressly provides that it shall not 
relieve a member from its obligations under FINRA rules and federal 
securities laws, including but not limited to, NASD Rule 2230 
(Confirmations) and SEA Rule 10b-10. To the extent that any transaction 
fee is passed onto the customer, members should review their customer 
confirmation obligations to ensure that they are disclosing such fees 
in compliance with all applicable rules and regulations, as well as 
other FINRA rules, including but not limited to, NASD Rules 2320 (Best 
Execution and Interpositioning) and 2440 (Fair Prices and Commissions).
    The proposed rule relates solely to transaction fees charged by one 
FINRA member to another FINRA member. Members would not be able to use 
the ORF to facilitate the transfer of fees for transactions with a 
customer (i.e., clients that are not brokers or dealers) or a non-
member. In addition, the ORF can only be used to facilitate the 
transfer of transaction fees. Members would not be able to use the ORF 
to transfer access fees or rebates on transactions.
    FINRA also is proposing to amend Rule 7330(d) to require that for 
any transaction for which the ORF is used to transfer a transaction fee 
between two members, the trade report must comply with the requirements 
of proposed Rule 7330(i). Thus, while use of the ORF to transfer 
transaction fees between members is voluntary, members that opt to use 
this service must comply with the requirements of proposed Rule 
7330(i), as well as all other applicable FINRA rules.
    Proposed Fee for Use of Transaction Fee Transfer Service:
    In this filing, FINRA also is proposing to establish the fee to be 
charged by the ORF for use by members of the transaction fee transfer 
service. Pursuant to Rule 7710, the fee will be $0.03 per side for each 
clearing report submitted to the ORF to transfer a transaction fee. 
This fee is in addition to any other fee applicable to the transaction. 
The amount of this fee is identical to the fee charged by the FINRA/
Nasdaq TRF under Rule 7620A for the same transaction fee transfer 
service.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date will be June 1, 2010.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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 by automating and improving 
transaction fee transfers between members as a value-added service, the 
proposed rule change will enhance market transparency.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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    Additionally, FINRA believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act,\12\ 
which requires, among other things, that FINRA rules provide for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system that 
FINRA operates or controls. FINRA believes that the proposed fee for 
the service is reasonably allocated among members based on their usage 
of the functionality to transfer transaction fees between members and 
is generally consistent with other fees charged by the ORF and other 
FINRA trade reporting facilities.
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    \12\ 15 U.S.C. 78o-3(b)(5).
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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

[[Page 25022]]

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.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\ Additionally, the foregoing rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
paragraph (f)(2) of Rule 19b-4 thereunder.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied the pre-filing requirement.
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

II. 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-2010-017 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-2010-017. 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 Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
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-2010-017 and should be submitted on or before May 27, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10594 Filed 5-5-10; 8:45 am]
BILLING CODE 8011-01-P