Document ID: SEC-2008-1137-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-08-15T04:00Z

[Federal Register: August 15, 2008 (Volume 73, Number 159)]
[Notices]               
[Page 47990-47991]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15au08-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58331; File No. SR-FINRA-2008-016]

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

August 8, 2008.

I. Introduction

    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 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal: (1) To 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) to align the 
dissemination protocols for all last sale reports of OTC equity 
transactions. On June 12, 2008, FINRA submitted Amendment No. 1 to the 
proposed rule change. The proposal was published for comment in the 
Federal Register on June 26, 2008.\3\ The Commission received five 
comments regarding the proposal.\4\ This order approves the proposed 
rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57986 (June 18, 
2008), 73 FR 36363 (``Notice'').
    \4\ See letters from Verdun Edgtton, Vice President and 
Corporate Governance Officer, The Bank of New York Mellon, to 
Secretary, Commission, dated July 17, 2008 (``BNYMellon Letter''); 
Sam Guidetti, Director of Compliance, Hill, Thompson, Magid & Co., 
to Florence E. Harmon, Acting Secretary, Commission, dated July 15, 
2008 (``Hill Thompson Letter''); Peter Coolidge, Portfolio Manager, 
Deltec Special Situations Partners, L.P., to Secretary, Commission, 
dated July 9, 2008 (``Deltec Letter''); R. Cromwell Coulson, Chief 
Executive Officer, Pink OTC Markets, to Secretary, Commission, dated 
July 7, 2008 (``Pink OTC Markets Letter''); and Robert Arancio, 
President, and Kimberly Unger, Executive Director, The Security 
Traders Association of New York, to Secretary, Commission, dated 
June 27, 2008 (``STANY Letter'').
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II. Description of the Proposed Rule Change

    Currently, NASD rules require that transactions in OTC Equity 
Securities (which term encompasses domestic equity securities, American 
Depositary Receipts (``ADRs''), and Canadian issues) 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.\5\ Thus, transactions in all 
ADRs and Canadian issues, including those that are not registered with 
the Commission and thus are not subject to the Commission's reporting 
requirements, are subject to 90-second reporting under NASD Rule 6620. 
Transactions in 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.\6\
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    \5\ See NASD Rule 6620(a). 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.''
    \6\ See NASD Rule 6620(a)(3)(C)(iii). Although not required, a 
member may choose to report transactions in foreign securities 
within 90 seconds of execution. See NASD Rule 6620 n.1.
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    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. However, 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 has an eligibility 
requirement that OTCBB issuers must be reporting issuers,\7\ 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.
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    \7\ See NASD Rule 6530(b)(1).
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    FINRA now proposes: (1) To require all transactions in OTC Equity 
Securities to be reported within 90 seconds of execution; and (2) to

[[Page 47991]]

disseminate last sale information regarding those transactions on a 
real-time basis. Thus, the proposed rule change would eliminate the 
distinctions between domestic, foreign, ADR, and Canadian securities 
and would require prompt reporting and real-time dissemination for all 
OTC transactions.\8\ FINRA believes that the proposal would 
substantially improve the transparency of the OTC market.
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    \8\ 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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    FINRA represented that it would 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 would be 30 days following publication of 
that Regulatory Notice.

III. Summary of Comments

    The Commission received letters from five commenters.\9\ All of the 
commenters supported the proposal. The commenters stated that the 
proposal would lead to greater transparency, better price discovery, 
and/or better trading practices, and should therefore foster a strong 
and competitive U.S. OTC market in foreign securities.\10\ The 
commenters also unanimously stated that the proposal would provide 
industry participants with the ability to monitor the quality of 
executions that they receive in foreign securities, which they believe 
would increase competition among broker-dealers and enhance best 
execution practices in the industry.\11\ Two commenters noted that the 
proposal would help prevent improper trading practices, such as front-
running.\12\
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    \9\ See supra note 4.
    \10\ See BNYMellon Letter; Hill Thompson Letter; Deltec Letter; 
Pink OTC Markets Letter; STANY Letter.
    \11\ See id.
    \12\ See Pink OTC Markets Letter; STANY Letter.
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IV. Discussion and Findings

    After careful consideration of the proposal and the comments 
submitted, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\14\ which 
requires, among other things, that FINRA rules 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.
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    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78o-3(b)(6).
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    FINRA stated in its proposal that it believed that prompt last sale 
reporting and real-time dissemination of trade reports for all OTC 
transactions in ADRs, foreign securities, and Canadian issues would 
enhance the amount of market information available to investors and 
better enable investors to monitor the executions they receive in these 
securities. The Commission notes that all the commenters agreed with 
this statement.\15\
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    \15\ See supra notes 10 and 11 and accompanying text.
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    In its request for comments, the Commission specifically requested 
comment regarding 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.\16\ In response to the first inquiry, one commenter stated 
that it did not believe that the proposal would ``in any way serve to 
encourage foreign firms to trade their issues in the United States 
without registration.'' \17\ Regarding the second inquiry, the 
commenters noted the benefits of greater transparency that would allow 
U.S. broker-dealers to better compete with foreign markets, and U.S. 
investors to better assess the executions that they receive, when 
effecting OTC transactions in foreign securities.\18\
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    \16\ See Notice, supra note 3.
    \17\ STANY Letter, supra note 4.
    \18\ See supra notes 10 and 11 and accompanying text.
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    The Commission believes that it is appropriate to eliminate the 
distinctions in trade reporting and dissemination that currently exist 
for OTC transactions in domestic, foreign, ADR, and Canadian 
securities. The Commission believes that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (File No. SR-FINRA-2008-016), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    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,
Acting Secretary.
[FR Doc. E8-18896 Filed 8-14-08; 8:45 am]

BILLING CODE 8010-01-P