Document ID: SEC-2015-1611-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-06T04:00Z

[Federal Register Volume 80, Number 193 (Tuesday, October 6, 2015)]
[Notices]
[Pages 60421-60424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25330]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76061; File No. SR-FINRA-2015-035]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Submission of ``Clearing-Only, 
Non-Regulatory Reports'' to the FINRA Equity Trade Reporting Facilities

September 30, 2015.
    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 22, 2015, 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, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend FINRA rules governing the reporting of 
over-the-counter (``OTC'') transactions in equity securities to the 
FINRA Facilities \4\ to allow the submission of ``clearing-only, non-
regulatory reports,'' as defined herein, relating to previously 
executed and reported transactions and exempt such reports from certain 
reporting requirements under FINRA rules.
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    \4\ For purposes of this filing, the FINRA Facilities are the 
Alternative Display Facility (``ADF'') and the Trade Reporting 
Facilities (``TRF''), to which members report OTC transactions in 
NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS; and the 
OTC Reporting Facility (``ORF''), to which members report 
transactions in ``OTC Equity Securities,'' as defined in Rule 6420 
(i.e., non-NMS stocks such as OTC Bulletin Board and OTC Market 
securities), as well as transactions in Restricted Equity 
Securities, as defined in Rule 6420, effected pursuant to Securities 
Act Rule 144A.
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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
Background
    With limited exceptions, FINRA trade reporting rules require that 
members report OTC transactions in equity securities by submitting a 
``tape'' report (the transaction is reported for public dissemination 
purposes) to FINRA.\5\ In some instances, members may be required (or 
may choose) to also submit one or more ``non-tape'' reports (the 
transaction is not reported for publication) in connection with the 
transaction. For example, members executing OTC transactions as 
riskless principal \6\ or agent on behalf of other members are required 
to submit non-tape report(s) to identify other FINRA members that are 
parties to the trade.\7\ Non-tape reports can be (1) ``non-tape, non-
clearing'' (the transaction is not reported to the tape and is 
submitted to FINRA solely for regulatory purposes) or (2) ``clearing-
only'' (the transaction is not reported to the tape and is submitted to 
FINRA for clearing (and perhaps also regulatory) purposes). FINRA notes 
that members can elect, but are not required, to have the FINRA 
Facility submit their trades to the National Securities Clearing 
Corporation (``NSCC'') for clearance and settlement, and in such 
instance, they would designate the submission for clearing.\8\
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    \5\ FINRA trade reporting rules 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 must report the trade. ``Executing party'' is defined under 
FINRA rules 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. See 
Rules 6282(b), 6380A(b), 6380B(b) and 6622(b).
    \6\ For purposes of OTC trade reporting requirements 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 (the 
initial leg) and satisfies the original order by selling (buying) as 
principal at the same price.
    \7\ See Rules 6282(d)(4), 6380A(d)(4), 6380B(d)(4) and 
6622(d)(4).
    \8\ As noted, FINRA rules do not mandate that members submit OTC 
transactions for clearing through a FINRA Facility, and for example, 
members may elect to clear via direct submission to the NSCC by a 
Qualified Special Representative (``QSR'').
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    Effective February 2, 2015, any member operating an alternative 
trading system (``ATS'') must obtain for each such ATS a single, unique 
market participant identifier (``MPID'') that is designated for 
exclusive use for

[[Page 60422]]

reporting the ATS's transactions.\9\ The member must use such separate 
MPID to report all transactions executed within the ATS to FINRA. 
Members that operate multiple ATSs or engage in other lines of business 
requiring the use of MPIDs must obtain and use multiple MPIDs.
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    \9\ See Rules 6160, 6170 and 6480.
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    Following implementation of the ATS MPID requirement, some firms 
that operate an ATS and use a FINRA Facility to submit trades to NSCC 
submit separate clearing-only reports to FINRA using their main broker-
dealer MPID. In other words, the firm submits a tape report and any 
required non-tape, non-clearing (i.e., regulatory) reports using the 
ATS MPID, and also submits one or more separate clearing-only reports 
using the firm's main broker-dealer MPID. FINRA understands that firms 
report in this manner to facilitate externally facing back office 
clearing processes, such as client reporting and step-out trade 
processing, that are built using the firm's main broker-dealer MPID. 
Firms have indicated that it would be a significant burden to change 
these established clearing processes and use the ATS MPID for purposes 
of clearing-only submissions.
    Currently, these additional clearing reports with the firm's main 
broker-dealer MPID duplicate the trade information previously reported 
to FINRA. Because they are not identified with the same MPID and are 
not linked to the related tape and non-tape, non-clearing reports, 
FINRA is unable to distinguish duplicative clearing-only reports from 
other reports that are submitted to satisfy a firm's regulatory 
reporting obligations. This creates confusion in the audit trail which 
in turn can result in the generation of false alerts in FINRA's 
automated surveillance programs.
Clearing-Only, Non-Regulatory Reports
    After reviewing the system capabilities and consulting with 
industry representatives, FINRA is proposing to adopt new subparagraph 
(4) under Rules 7130(g), 7230A(i), 7230B(h) and 7330(h) to create a 
uniquely identified category of submissions to FINRA that are 
``clearing-only, non-regulatory reports,'' i.e., the transaction is 
submitted solely to facilitate clearing and not for dissemination or 
regulatory purposes. As described in more detail below, ATSs would be 
permitted to use their main broker-dealer MPID on this limited subset 
of reports.
    Pursuant to the proposed rule change, a member may submit a 
clearing-only, non-regulatory report to a FINRA Facility for a 
previously executed trade for which a tape report has been submitted to 
the Facility, or for the offsetting portion of a riskless principal or 
agency transaction for which a non-tape, non-clearing report already 
has been submitted to the Facility satisfying FINRA regulatory 
requirements.\10\ In other words, the information contained in a 
clearing-only, non-regulatory report must be duplicative of information 
reported to the FINRA Facility in other submissions.
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    \10\ See, e.g., current Rules 7130(g)(1), 7230A(i)(1), 
7230B(h)(1) and 7330(h)(1), which prohibit members from submitting 
to a FINRA Facility any non-tape report associated with a previously 
executed trade that was not reported to that FINRA Facility, except 
where submitting the offsetting portion of a riskless principal or 
agency transaction. See also Regulatory Notice 07-38 (August 2007).
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    Pursuant to the proposed rule change, a clearing-only, non-
regulatory report cannot be used to satisfy any regulatory reporting 
requirement under FINRA rules that may apply to the transaction, e.g., 
the identification of other members for agency or riskless principal 
transactions.\11\ Thus, members will only be permitted to use such 
reports where the member's regulatory reporting obligations have been 
satisfied through other reports (tape or non-tape, as applicable) 
submitted to the FINRA Facility. Submission of a clearing-only, non-
regulatory report constitutes certification by the member that it has 
satisfied all regulatory reporting requirements that may apply to the 
transaction through its other submissions.
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    \11\ See Rules 6282(d)(4), 6380A(d)(4), 6380B(d)(4) and 
6622(d)(4).
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    Members that opt to submit such reports would be required to use a 
unique indicator to denote that the report is submitted solely for 
purposes of clearing the transaction and not for purposes of satisfying 
any regulatory reporting requirements. If a clearing submission does 
not comply with the provisions of the Rule, e.g., if it is being used 
to satisfy any regulatory reporting requirements, then the member must 
not use the unique indicator. FINRA is proposing a conforming change to 
Rules 7130(d), 7230A(d), 7230B(d) and 7330(d), which identify the 
information that must be included in trade reports submitted to FINRA, 
to require members to append the unique indicator to denote a clearing-
only, non-regulatory report, if applicable.
    Although clearing-only, non-regulatory reports will not be used by 
members to satisfy their regulatory reporting obligations, the 
information contained in such reports must nonetheless be consistent 
with previously submitted information for the same transaction, unless 
otherwise expressly provided under FINRA rules. Thus, FINRA is also 
proposing to amend Rules 6160, 6170 and 6480 to expressly allow members 
that operate an ATS to use an MPID other than their ATS MPID on 
clearing-only, non-regulatory reports.\12\ FINRA notes, however, that 
this relief relates solely to the MPID requirement, and the member firm 
with the trade reporting obligation under FINRA rules (or the 
``executing party'') must continue to be identified as such in all 
clearing-only, non-regulatory reports.
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    \12\ If a member is using its clearing submission to satisfy any 
of its regulatory reporting obligations, then it must use its ATS 
MPID (and may not use its main broker-dealer MPID) in the clearing 
submission.
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    In addition, FINRA is proposing to amend Rules 7130(d), 7230A(d), 
7230B(d) and 7330(d) to provide that members are not required to use 
the short sale (or short sale exempt) indicator, if applicable, on 
clearing-only, non-regulatory reports. The short sale indictor must be 
included on the required tape report and if submitted, non-tape non-
clearing report that identifies the FINRA member that is selling short 
(or short exempt). The member is not required to duplicate this 
information on the optional clearing-only, non-regulatory report.
    FINRA reiterates that use of the clearing-only, non-regulatory 
report is not mandatory, and members will have the option of continuing 
to use clearing submissions to satisfy their regulatory reporting 
obligations. However, where a member opts to submit a clearing-only, 
non-regulatory report that duplicates trade information reported to 
FINRA in other tape and non-tape, non-clearing reports, then the member 
would be required to comply with the requirements set forth in this 
proposed rule change.
    To further illustrate the application of the proposed rule change, 
FINRA is providing the following detailed example: Member Firm 1 
operates an ATS that uses the MPID ``MATS,'' and Firm 1's main broker-
dealer MPID is ``MOTH.'' Firm 1 executes an agency cross transaction in 
its ATS between member Firm 2, as the buyer, and member Firm 3, as the 
seller. Under FINRA rules, using its ATS MPID ``MATS,'' Firm 1 must 
report the transaction to FINRA for public dissemination (for purposes 
of this example, ``MATS'' reports a cross transaction) and must submit 
non-tape report(s) to identify Firms 2 and 3 as parties to the trade, 
because they are

[[Page 60423]]

FINRA members (``MATS'' sells to Firm 2 and ``MATS'' buys from Firm 3). 
Firm 1 has the option, but is not required, to also report the 
transaction to FINRA for submission to clearing. Under the proposed 
rule change, Firm 1 could opt to submit two additional reports, i.e., 
two clearing-only, non-regulatory reports, with the unique indicator 
specified by FINRA, using an MPID other than its ATS MPID (``MOTH'' 
sells to Firm 2 and ``MOTH'' buys from Firm 3). In making such 
submissions, per the terms of the proposed rule change, Firm 1 is 
certifying that it has satisfied all regulatory reporting requirements 
through the submission of the tape and non-tape, non-clearing reports. 
Alternatively, Firm 1 would have the option of designating the non-tape 
reports showing ``MATS'' sells to Firm 2 and ``MATS'' buys from Firm 3 
for clearing. In that instance, Firm 1 would not use the special 
indicator because the reports are also satisfying Firm 1's reporting 
obligation under FINRA rules to identify Firms 2 and 3 as parties to 
the trade.
    Finally, FINRA notes that while the proposed rule change has been 
prompted by issues involving ATS trade reporting, any FINRA member 
(e.g., a member that does not operate an ATS but nonetheless uses 
multiple MPIDs) could elect to use clearing-only, non-regulatory 
reports in accordance with the proposed rule change.
    FINRA believes that the proposed rule change will ensure the 
accuracy and efficiency of FINRA's audit trail and automated 
surveillance programs while accommodating firms' business models and 
reporting and clearing processes that rely on clearing against their 
main broker-dealer MPID. The proposed rule change will ensure a more 
accurate audit trail by distinguishing voluntary trade reports that are 
submitted only to facilitate clearing from reports that are required 
under FINRA's trade reporting rules to satisfy a member's regulatory 
reporting obligations. Further, by distinguishing clearing-only, non-
regulatory reports from other trade submissions, the proposed rule 
change will improve the efficiency of FINRA's automated surveillance 
programs by potentially preventing false alerts that require both FINRA 
and member firms to unnecessarily expend resources to address such 
alerts.
    FINRA has filed the proposed rule change for immediate 
effectiveness and proposes that the operative date will be in February 
2016. FINRA will announce the operative date in a Regulatory Notice. To 
provide members sufficient time to make the required systems changes, 
FINRA expects to publish updated technical specifications for the FINRA 
Facilities at least four months prior to the operative date.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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 change is consistent 
with the Act because it will ensure a more accurate audit trail and 
enhance FINRA's ability to surveil on an automated basis for compliance 
with FINRA trade reporting rules.
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    \13\ 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.
Economic Impact Analysis
    As described above, implementation of FINRA's reporting rules for 
ATSs creates an obligation for firms to report transactions to FINRA 
using an ATS-specific MPID. FINRA understands that requiring the 
submission of clearing reports with a firm's ATS-specific MPID would 
impose significant costs for firms with clearing processes that use 
their main broker-dealer MPID, and such a requirement would provide no 
material additional regulatory or market information beyond what is 
already provided through tape and non-tape regulatory reporting. 
Consequently, the proposed rule change is intended to remove a burden 
on firms that would provide no significant regulatory benefit if 
maintained.
    While the proposed rule change would require some firms to 
implement systems changes to identify clearing-only, non-regulatory 
reports with a unique indicator, FINRA does not believe that these 
changes would impose significant or differential costs on similarly 
situated firms.\14\ Firms will not be required to submit clearing-only, 
non-regulatory reports and may continue to combine their regulatory 
reporting and clearing in the same report. Thus, firms will be free to 
select the method of reporting that best suits their business model. 
FINRA notes that firms would not be required to report consistently for 
all trades, i.e., a firm could submit clearing-only, non-regulatory 
reports for some trades, but not all.\15\ FINRA is proposing to provide 
members a sufficient implementation period to accommodate any such 
changes.
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    \14\ FINRA notes that today, on average, approximately 350 
members regularly report trades to the FINRA Facilities. Many firms, 
including smaller firms, route their order flow to another firm, 
e.g., their clearing firm, for execution, and as the routing firm, 
they do not have the trade reporting obligation. Thus, the proposed 
rule change will have no impact on many members.
    \15\ FINRA further notes that firms would not be required to 
provide prior notice to FINRA of their intention to use clearing-
only, non-regulatory reports.
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    As noted above, the information in clearing-only, non-regulatory 
reports will be duplicative of information provided to FINRA in other 
reports. Accordingly, there will be no impact on the regulatory 
information that FINRA receives, and FINRA will be able to identify 
firms' use of clearing-only, non-regulatory reports in its audit trail. 
Therefore, the proposed rule change is not anticipated to create 
significant economic or informational impacts on the public, member 
firms or FINRA.

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

    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)(iii) of the Act \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

[[Page 60424]]

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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-035 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-2015-035. This 
file number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-2015-035, and should 
be submitted on or before October 27, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25330 Filed 10-5-15; 8:45 am]
 BILLING CODE 8011-01-P