Document ID: SEC-2014-1184-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-07-15T04:00Z

[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Notices]
[Pages 41339-41345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16501]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72575; File No. SR-FINRA-2014-030]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
Quotation Requirements for Unlisted Equity Securities and Deletion of 
the Rules Related to the OTC Bulletin Board Service

July 9, 2014.
    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 June 27, 2014, 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. 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 the 
Substance of the Proposed Rule Change

    FINRA is proposing amendments regarding quotation requirements for 
unlisted equity securities and deleting the rules related to the OTC 
Bulletin

[[Page 41340]]

Board Service (``OTCBB'' or ``Service'') and ceasing its operation.
    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, on the 
Commission's Web site at http://www.sec.gov, 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
    FINRA is proposing a rule change to: (1) Adopt rules governing the 
treatment of quotations in OTC equity securities \3\ by member inter-
dealer quotation systems,\4\ and addressing fair and non-discriminatory 
access to such systems; (2) require member inter-dealer quotation 
systems to provide FINRA with a written description of quotation-
related data products offered and related pricing information, 
including fees, rebates, discounts and cross-product pricing 
incentives; (3) expand the reporting requirements related to quotation 
information in OTC equity securities; and (4) delete the Rule 6500 
Series and related rules and cease operation of the OTCBB.
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    \3\ FINRA Rule 6420(f) defines ``OTC equity security'' as any 
equity security that is not an ``NMS stock'' as that term is defined 
in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that 
the term ``OTC equity security'' shall not include any Restricted 
Equity Security.
    \4\ FINRA Rule 6420(c) defines ``inter-dealer quotation system'' 
as any system of general circulation to brokers or dealers which 
regularly disseminates quotations of identified brokers or dealers.
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Background
    FINRA's statutory mandate under Section 15A of the Act includes, 
among other things, that FINRA's rules must govern the form and content 
of quotations relating to securities sold over the counter.\5\ In 
furtherance of this mandate, FINRA has adopted rules that are designed 
to: (1) Produce fair and informative quotations; (2) prevent fictitious 
or misleading quotations; and (3) promote orderly procedures for 
collecting, distributing, and publishing quotations.\6\ In particular, 
FINRA's Rule 6400 Series (Quoting and Trading in OTC Equity 
Securities), among other things, provides a regulatory framework 
governing the form and content of quotations in OTC equity securities 
and, together with other FINRA rules, including rules in the Rule 5200 
Series (Quotation and Trading Obligations and Practices), specifies 
provisions directed toward the mandate set forth in Section 15A(b)(11) 
of the Act (collectively referred to as the ``Quotation Governance 
Rules''). FINRA also operates the OTCBB and has established the Rule 
6500 Series, which governs the operation and use of the OTCBB.
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    \5\ See 15 U.S.C. 78o-3.
    \6\ Section 15A(b)(11) of the Act provides: ``The rules of the 
association include provisions governing the form and content of 
quotations relating to securities sold otherwise than on a national 
securities exchange which may be distributed or published by any 
member or person associated with a member, and the persons to whom 
such quotations may be supplied. Such rules relating to quotations 
shall be designed to produce fair and informative quotations, to 
prevent fictitious or misleading quotations, and to promote orderly 
procedures for collecting, distributing, and publishing 
quotations.'' See 15 U.S.C. 78o-3(b)(11).
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Current Regulatory Framework for Governing Quotations
    FINRA's Quotation Governance Rules generally prescribe limitations 
around the conduct of members that publish quotations in OTC equity 
securities, including quotations displayed on inter-dealer quotation 
systems. While these rules apply to member quotation activities, they 
generally do not include rules specifically directed to the member 
inter-dealer quotation systems on or through which such quotation 
activity may take place. For example, FINRA Rule 6432 (Compliance with 
the Information Requirements of SEA Rule 15c2-11) generally provides 
that members may not initiate or resume quotations in any quotation 
medium unless the member files a Form 211 with FINRA and complies with 
SEA Rule 15c2-11 (Initiation or resumption of quotations without 
specific information). Thus, the filing of a Form 211 with FINRA by a 
member, and FINRA's review thereof, helps ensure that, prior to 
publishing a quotation in an OTC equity security (or submitting a 
quotation for publication), members must have in their records the 
documents and information specified in SEA Rule 15c2-11 and have a 
reasonable basis for believing that the relevant information is 
accurate and that the sources of the information are reliable.\7\
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    \7\ SEA Rule 15c2-11(a) generally provides that, ``[a]s a means 
reasonably designed to prevent fraudulent, deceptive, or 
manipulative acts or practices, it shall be unlawful for a broker or 
dealer to publish any quotation for a security or, directly or 
indirectly, to submit any such quotation for publication, in any 
quotation medium . . . unless such broker or dealer has in its 
records the documents and information required [under this rule], 
and, based upon a review of the [required] information . . . has a 
reasonable basis under the circumstances for believing that the 
[required] information is accurate in all material respects, and 
that the sources of the [required] information are reliable.''
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    In 2010, the SEC approved four new FINRA rules governing quotation 
activity generally by prescribing additional requirements for members 
entering quotations on inter-dealer quotation systems in OTC equity 
securities: (1) Rule 6434 (Minimum Pricing Increment for OTC Equity 
Securities); (2) Rule 6437 (Prohibition from Locking or Crossing 
Quotations in OTC Equity Securities); (3) Rule 6450 (Restrictions on 
Access Fees); and (4) Rule 6460 (Display of Customer Limit Orders).\8\ 
These rules, known as the ``NMS-Principled Rules,'' extended to the 
over-the-counter market certain protections previously applicable only 
to exchange-listed securities, and were adopted to enhance market 
quality and investor protection in the over-the-counter marketplace.
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    \8\ See Securities Exchange Act Release No. 62359 (June 22, 
2010), 75 FR 37488 (June 29, 2010) (Order Approving File No. SR-
FINRA-2009-054) (the ``NMS-Principled Rules'').
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    The NMS-Principled Rules, respectively, generally: (1) Provide that 
members may not display, rank, or accept a bid or offer, an order, or 
an indication of interest in an OTC equity security priced greater than 
or equal to $1.00 in an increment less than a penny and, for OTC equity 
securities priced under $1.00, an increment less than $0.0001; (2) 
require members to implement policies and procedures to reasonably 
avoid displaying, or engaging in a pattern or practice of displaying, 
locking or crossing quotations in any OTC equity security within an 
inter-dealer quotation system; (3) prohibit members from imposing non-
subscriber access or post-transaction fees against published quotations 
in any OTC equity security that exceed or accumulate to more than the 
limits set forth in the rule; \9\ and (4)

[[Page 41341]]

require member OTC market makers displaying priced quotations in an OTC 
equity security on an inter-dealer quotation system to publish 
immediately a customer limit order that improves the OTC market maker's 
priced quotation (or that is equal to the OTC market maker's priced 
quotation at the BBO but increases the OTC market maker's posted size 
by more than a de minimis amount), subject to enumerated exceptions.
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    \9\ Rule 6450 (a) and (b) provide that access fees are limited 
to (a) $0.003 per share, if the published quotation is priced equal 
to or greater than $1.00; or (b) the lesser of 0.3% of the published 
quotation price on a per share basis or 30% of the minimum pricing 
increment under Rule 6434 (Minimum Pricing Increment for OTC Equity 
Securities) relevant to the display of the quotation on a per share 
basis if the published quotation is less than $1.00.
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    FINRA's current Quotation Governance Rules also prescribe the 
minimum share size applicable to members' quotations in OTC equity 
securities displayed on an inter-dealer quotation system. Specifically, 
Rule 6433 (Minimum Pricing Increment for OTC Equity Securities) 
generally provides that every member entering quotations in any inter-
dealer quotation system must enter and honor those quotations for at 
least the minimum sizes defined in the rule.\10\ The currently 
applicable quotation minimums are as follows:
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    \10\ Depending upon the price level of the quotation, a 
different minimum size can apply to each side of the market being 
quoted by the member in a given security. Recently, on November 5, 
2013, FINRA extended the pilot for an additional year until November 
14, 2014. See Securities Exchange Act Release No. 70839 (November 8, 
2013), 78 FR 68893 (November 15, 2013) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2013-049).

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                                                               Minimum
                   Price  (bid or offer)                      quote size
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0.0001-0.0999..............................................       10,000
0.10-0.1999................................................        5,000
0.20-0.5099................................................        2,500
0.51-0.9999................................................        1,000
1.00-174.99................................................          100
175.00+....................................................            1
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The current rule, which was revised as a pilot in November 2012, 
amended the tier sizes to, among other things, simplify the tier 
structure and facilitate the display of customer limit orders pursuant 
to Rule 6460.
    The FINRA Rule 5200 Series also includes rules that govern members' 
quotation activity in OTC equity securities. For example, Rule 5210 
(Publication of Transactions and Quotations) provides, among other 
things, that members are prohibited from publishing or circulating (or 
causing to be published or circulated) any notice or communication of 
any kind which purports to quote the bid price or asked price for any 
security, unless such member believes that such quotation represents a 
bona fide bid for, or offer of, such security (i.e., the ``fictitious 
quotation'' prohibition). In addition, Rule 5220 (Offers at Stated 
Prices) generally prohibits members from making an offer to buy from or 
sell to any person any security at a stated price unless such member is 
prepared to purchase or sell, as the case may be, at such price and 
under such conditions as are stated at the time of such offer to buy or 
sell (i.e., the ``firm quote'' requirement).

Proposed Requirements for Member Inter-Dealer Quotation Systems

    As described above, FINRA's existing Quotation Governance Rules 
explicitly regulate the activities of OTC market makers \11\ and other 
members that display quotations on inter-dealer quotation systems, but 
generally do not directly provide quotation governance standards for 
the member inter-dealer quotation systems itself on or through which 
such quotations are displayed. Given the significant role of inter-
dealer quotation systems in the over-the-counter markets in terms of 
both quotation transparency and resultant trading activity, FINRA 
believes it is appropriate to adopt new rules directly tailored to such 
systems to ensure they have in place minimum standards regarding the 
treatment of quotations received and governing fair access. Consistent 
with the goals and objectives of Section 17B of the Act \12\ regarding 
the facilitation of widespread dissemination of reliable and accurate 
quotation information in penny stocks, FINRA is proposing to complement 
the existing framework governing the form and content of quotations. 
FINRA is proposing to require that a member inter-dealer quotation 
system: (1) Adopt and provide to FINRA written policies and procedures 
relating to the collection and dissemination of quotation information 
in OTC equity securities, (2) establish and provide to FINRA fair and 
non-discriminatory written standards for granting access to quoting and 
trading on its system, and (3) provide to FINRA for regulatory purposes 
a written description of each quotation-related data product offered by 
such member inter-dealer quotation system and related pricing 
information, including fees, rebates, discounts and cross-product 
pricing incentives.\13\
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    \11\ FINRA Rule 6420(g) defines ``OTC Market Maker'' as a member 
of FINRA that holds itself out as a market maker by entering 
proprietary quotations or indications of interest for a particular 
OTC equity security in any inter-dealer quotation system, including 
any system that the SEC has qualified pursuant to Section 17B of the 
Act. A member is an OTC market maker only in those OTC equity 
securities in which it displays market making interest via an inter-
dealer quotation system.
    \12\ See 15 U.S.C. 78q-2. Section 17B was enacted by Congress as 
part of the Securities Enforcement Remedies and Penny Stock Reform 
Act of 1990 (``Penny Stock Act''). Pub. L. No. 101-429, 104 Stat. 
931 (1990).
    \13\ As further discussed below, a member also would be required 
to provide FINRA with any changes to these required submissions 
within five business days.
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Proposed Quotation Collection and Dissemination Policies and Procedures 
Requirement

    FINRA is proposing a new rule to require that a member inter-dealer 
quotation system (whether or not also an alternative trading system or 
``ATS'' as defined by Rule 300(a) of SEC Regulation ATS) that permits 
quotation updates on a real-time basis establish, maintain and enforce 
fair and reasonable written policies and procedures relating to the 
collection and dissemination of quotation information in OTC equity 
securities on or through its system. Such policies and procedures must 
ensure that quotations received are treated fairly and consistently, 
including by establishing fair and non-discretionary methods under 
which quotations are prioritized and displayed and such standards must 
be fully disclosed to subscribers. For example, a member inter-dealer 
quotation system would be required to address its methodology for 
ranking quotations, including at a minimum, addressing factors such as 
price (including any applicable quote access fee), size, time, capacity 
and type of quotation (such as unpriced quotes and bid/offer wanted 
quotations). The member inter-dealer quotation system also would be 
required to include any other factors relevant to the ranking and 
display of quotations (e.g., reserve sizes, quotation updates, 
treatment of closed quotations, and quotation information imported from 
other systems).
    FINRA believes that requiring member inter-dealer quotation systems 
to establish fair and reasonable written policies and procedures and 
provide such procedures to FINRA will, among other things, further 
promote orderly procedures for collecting, distributing, and publishing 
quotations submitted to inter-dealer quotation systems in securities 
traded over the counter. FINRA also is proposing that a member inter-
dealer quotation system provide FINRA with a copy of its written 
policies and procedures relating to the collection and dissemination of 
quotation information, and any material updates, modifications and 
revisions thereto, within five business days following the member's 
establishment of the written policy or procedure or

[[Page 41342]]

implementation of the material change.\14\
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    \14\ A member that is an inter-dealer quotation system at the 
time of the effective date of this proposed rule change would 
provide the required information upon the effective date and, 
thereafter, any material update, modification or revision thereto 
must be provided to FINRA within five business days of its 
implementation.
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Proposed Written Standards Governing System Access Requirement

    FINRA is proposing that a member inter-dealer quotation system 
establish fair and non-discriminatory written standards for granting 
access to quoting and trading on the system that do not unreasonably 
prohibit or limit any person in respect to access to services offered 
by such inter-dealer quotation system.\15\ This proposed requirement is 
consistent with the ``fair access'' requirements of Regulation ATS but 
would apply to quoting and trading in all OTC equity securities on the 
member inter-dealer quotation system, irrespective of the percentage of 
average daily volume that such inter-dealer quotation system had in the 
security.\16\ FINRA believes that these proposed amendments are 
necessary and appropriate to further the mandates of Section 15A of the 
Act.
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    \15\ FINRA proposes that a member inter-dealer quotation system 
also must make and keep records of all grants of access including 
(for all subscribers) the reasons for granting such access and all 
denials or limitations of access and reasons (for each applicant) 
for denying or limiting access. A policy prohibiting or limiting 
access to services offered by the member inter-dealer quotation 
system due to non-payment by a subscriber would not be prohibited 
under the proposed rule.
    \16\ Regulation ATS's ``fair access'' requirements apply with 
respect to securities where the ATS's trading accounted for 5% or 
more of the reported average daily trading volume (ADTV) in the 
security. The proposal would apply the fair access standards with 
respect to all securities quoted on the inter-dealer quotation 
system (not just those meeting the minimum 5% (or other) threshold).
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    Further, the proposed rule would require that a member inter-dealer 
quotation system provide FINRA with a copy of its written standards for 
granting access to quoting and trading on its system and any material 
updates, modifications and revisions thereto within five business days 
following: (a) The date of the member's establishment of the written 
standard, and (b) the date of the material update, modification or 
revision to the written standard.

Proposed Quotation-Related Data Product and Pricing Provision 
Requirement

    FINRA is proposing to require a member inter-dealer quotation 
system to provide FINRA with a written description of each quotation-
related data product offered by such member inter-dealer quotation 
system and related pricing information, including fees, rebates, 
discounts and cross-product pricing incentives, and any changes 
thereto, within five business days following: (a) The date of the 
establishment of the quotation-related data product or date of any 
change thereto (including discontinuance of the offering of the 
quotation-related data product), and (b) the date of the establishment 
of the quotation-related data product price, including a fee, rebate, 
discount and cross-product pricing incentive, or change thereto.
    FINRA believes that the proposed changes described above will 
facilitate the objectives of the Act, including Section 17B of the Act, 
by helping ensure that disseminated quotations are reliable and 
accurate and will provide FINRA with useful information to ensure 
compliance with FINRA rules and to monitor the widespread availability 
of quotation information to investors and market participants through 
non-SRO sources.

Proposed Amendments to the Quotation Recording and Reporting 
Requirements

    FINRA Rule 6431 (Recording of Quotation Information) was 
implemented in 2003 to provide FINRA with access to quotation data 
displayed on non-SRO sponsored and non-member systems so that FINRA 
could assess member compliance with applicable rules and regulations 
and, when necessary, to reconstruct market activity.\17\ FINRA is 
proposing to update and expand the rule to better reflect the current 
quoting structure of the OTC equity market. First, FINRA is proposing 
to expand the scope of the rule beyond quotations displayed on an 
inter-dealer quotation system by OTC market makers to include 
quotations displayed by any FINRA member, including ATSs. Since the 
initial adoption of this rule, quoting in OTC equity securities by ATSs 
and other members that are not OTC market makers has increased and 
FINRA believes Rule 6431's recording and reporting requirements should 
apply equally to all such quotes displayed on inter-dealer quotation 
systems.
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    \17\ See Securities Exchange Act Release No. 47587 (March 27, 
2003), 68 FR 16328 (April 3, 2003) (Order Approving File No. SR-
NASD-2000-042). See also Notice to Members 03-28 (June 2003).
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    Second, FINRA is proposing minor amendments to the items of 
information required to be recorded and reported under the rule. 
Specifically, the new rule would require the following items of 
quotation information:
    (1) MPID of quoting member (the current rule asks for ``submitting 
firm'');
    (2) Inter-dealer quotation system (the current rule asks members to 
specify the inter-dealer quotation system or ``medium'');
    (3) Date of quotation (the current rule asks for ``trade date'');
    (4) Time quotation displayed (expressed in hours, minutes, seconds 
and milliseconds if the reporting member's system captures time in 
milliseconds) (the current rule asks for time expressed in hours, 
minutes and seconds, but not milliseconds);
    (5) Security name and symbol (FINRA is not proposing amendments to 
this item of information);
    (6) Bid and bid quotation size (if applicable) (FINRA is not 
proposing amendments to this item of information);
    (7) Offer and offer quotation size (if applicable) (FINRA is not 
proposing amendments to this item of information);
    (8) Prevailing Inside Bid (FINRA is not proposing amendments to 
this item of information); and
    (9) Prevailing Inside Offer (FINRA is not proposing amendments to 
this item of information).
    Finally, at the time of the adoption of this rule, FINRA had 
determined not to apply the requirements to inter-dealer quotation 
systems that were FINRA members and, rather, to obtain quotation 
information directly from the FINRA member as needed pursuant to Rule 
8210. However, since the adoption of the rule, the primary inter-dealer 
quotation system from which FINRA receives quotation information (as 
reporting agent on behalf of member firms) has become a FINRA member 
firm and, therefore, FINRA believes the exception for quotations 
displayed on systems operated by a FINRA member no longer should 
apply.\18\ Instead, the proposed rule would directly require member 
inter-dealer quotation systems to report each attributed quotation 
displayed on the system by a broker-dealer. In the event that a FINRA 
member displays a quotation on a non-member inter-dealer quotation 
system, the member must record and report to FINRA the required 
information regarding the quotations displayed by such member.
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    \18\ FINRA has continued to receive quotation information on a 
weekly basis following the inter-dealer quotation system becoming a 
FINRA member.
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    FINRA believes that these amendments to the quotation recording and 
reporting requirements simplify and streamline the process of obtaining 
quotation information for regulatory purposes by directly requiring 
that member inter-dealer quotation systems report subscribing members' 
quotation

[[Page 41343]]

information to FINRA.\19\ Thus, individual quoting members no longer 
are required to report or arrange to have reported to FINRA the items 
of quotation information specified in the rule, unless such member is 
displaying a quotation on a non-member inter-dealer quotation system. 
The rule would continue to permit the use of a reporting agent by 
either a member inter-dealer quotation system or a member displaying a 
quotation on a non-member inter-dealer quotation system.\20\
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    \19\ Currently the reporting obligation is imposed on the 
quoting member itself, though, in practice, quoting members have 
used the inter-dealer quotation system to which their quotation is 
submitted and displayed as reporting agent for purposes of meeting 
the Rule 6431 reporting obligation.
    \20\ A ``reporting agent'' is a third party that enters into any 
agreement with a member pursuant to which such third party agrees to 
fulfill such member's obligations under Rule 6431.
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Proposed Deletion of OTCBB-Related Rules

    Finally, FINRA is proposing to delete the FINRA Rule 6500 Series, 
which governs the operation of the OTC Bulletin Board Service and cease 
operation of the OTCBB. FINRA previously proposed to delete the OTCBB 
rules and discontinue operation of the Service as part of a separate 
rule filing, the ``QCF Proposal.'' \21\ As discussed in the QCF 
Proposal, the level of transparency in OTC equity securities 
facilitated by the operation of the OTCBB has been declining 
significantly for years as other quotation venues have emerged. In 
fact, since the filing of the QCF Proposal on November 6, 2009, the 
amount of quotation information widely available to investors relying 
on OTCBB BBO data has further declined and has become negligible. Thus, 
FINRA believes that the remaining OTCBB information being disseminated 
to investors is so incomplete as to be potentially misleading with 
respect to the current pricing in these securities.
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    \21\ See Securities Exchange Act Release No. 60999 (November 13, 
2009), 74 FR 61183 (November 23, 2009) (Notice of Filing of File No. 
SR-FINRA-2009-077). FINRA intends to withdraw the currently pending 
QCF Proposal if the instant proposed rule change is approved by the 
Commission.
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    For example, of the approximately 10,000 OTC equity securities 
quoted over the counter on the largest inter-dealer quotation system, 
less than 10% of those issues also are eligible to be quoted on 
OTCBB.\22\ In addition, less than twelve securities out of the 10,000 
OTC equity securities are quoted solely on OTCBB. Furthermore, based 
upon a sample of 20 days in 2013, the OTCBB only disseminated an 
average of 27 computed BBOs, which means that OTCBB BBO quotation 
information was available through Level 1 on less than 0.3% of the 
10,000 OTC equity security symbols.\23\
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    \22\ Of the over 10,000 symbols quoted over the counter, as of 
December 17, 2013, 836 symbols were eligible to be quoted on the 
OTCBB, and we estimate that less than a dozen of those issues were 
being quoted solely on the OTCBB.
    \23\ During the week of December 2nd, there were a total of 14 
symbols for which an OTCBB BBO was calculated and disseminated.
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    Therefore, FINRA does not believe that the discontinuance of the 
OTCBB as an inter-dealer quotation system will have an appreciable 
impact on issuers, investors or member firms.\24\ For the same reasons, 
FINRA does not believe that the OTCBB, in its current form and with 
current levels of participation, furthers the goals and objectives of 
Section 17B of the Act \25\ and, therefore, does not meet the 
characteristics of a system described in Section 17B of the Act 
regarding the widespread dissemination of reliable and accurate 
quotation information with respect to ``penny stocks.'' \26\ However, 
FINRA notes that, since the inception of the OTCBB, non-self-regulatory 
organization (``SRO'') entities have increased their participation in 
the collection and dissemination of quotation information in OTC equity 
securities, including for those OTC equity securities meeting the 
definition of ``penny stock,'' and have made such quotation information 
available to investors and market participants. Thus, FINRA believes 
that discontinuance of the OTCBB as an inter-dealer quotation system 
will not have an appreciable impact on the current level of quotation 
transparency for OTC equity securities. In addition, the proposed rule 
change is intended to facilitate the widespread availability of 
reliable and accurate quotation information through non-SRO sources.
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    \24\ As part of the QCF Proposal, FINRA notes that no concerns 
were raised by commenters with respect to the portion of the QCF 
Proposal that would have deleted the OTCBB rules and discontinued 
operation of the Service.
    \25\ Section 17B of the Act provides, among other things, that 
the Commission shall facilitate the widespread dissemination of 
reliable and accurate last sale and quotation information with 
respect to penny stocks.
    \26\ Under SEC Rule 3a51-1, ``penny stock'' is defined to, among 
other things, exclude securities that have a price of five dollars 
or more as determined either on a per transaction basis or, in the 
absence of a transaction, on the basis of the inside bid quotation 
for the security displayed on an automated quotation system that has 
the characteristics set forth in Section 17B(b)(2) of the Act or any 
other system that is designated by the Commission. See 17 CFR 
240.3a51-1.
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    Importantly, FINRA will continue to centralize last sale 
transaction reporting through the FINRA OTC Reporting Facility 
(``ORF'') and, therefore, will continue to operate a system that 
collects and disseminates transaction information on, and provides 
widespread dissemination of reliable and accurate last sale information 
with respect to, OTC equity securities, including penny stocks.\27\ 
Thus, the objectives of Section 17B of the Act relating to the 
provision of price and volume information to investors and market 
participants will continue to be satisfied through FINRA's operation of 
the ORF.
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    \27\ FINRA members are required to report substantially all 
trades in OTC equity securities to ORF within 10 seconds of 
execution and FINRA widely disseminates this transaction information 
in real-time.
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    As was the case with the QCF Proposal, in advance of the 
discontinuance of the OTCBB, FINRA will take steps to ensure a smooth 
transition for issuers and members. Specifically, FINRA will publicize 
announcements through the FINRA.org and OTCBB.com Web sites; directly 
contact active OTCBB market makers; notify and educate the few 
remaining OTCBB-only issuers; and email dually quoted issuers about the 
cessation of quoting on the OTCBB. Thereafter, FINRA will continue to 
assess the widespread availability of quotation transparency to 
investors and market participants through non-SRO sources on a regular 
basis. If the availability of quotation information to investors 
significantly declines, FINRA will revisit and, if necessary, file a 
proposed rule change to establish an SRO-operated inter-dealer 
quotation system (or other measure) to facilitate the type of 
widespread quotation transparency described in Section 17B of the 
Act.\28\
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    \28\ Should FINRA determine it is necessary to recommence the 
operation of a system to facilitate quotation transparency, FINRA 
also would revisit at that time the necessity of the proposals 
described herein requiring inter-dealer quotation systems to provide 
FINRA specified policies and procedures, written standards, 
quotation-related data product descriptions and related pricing 
information.
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    FINRA discussed the concepts described in this proposed rule change 
with several of FINRA's industry advisory committees in developing its 
approach. The committees supported the proposed amendments and did not 
believe that compliance with the proposal would be burdensome for 
firms.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 180 days 
following Commission approval.

[[Page 41344]]

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\29\ 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 amendments will 
promote just and equitable principles of trade by helping ensure that 
subscribers (and potential subscribers) are afforded fair and non-
discriminatory access to the quotation system of a member-inter-dealer 
quotation system, and that the standards required for access be fully 
disclosed. In addition, the proposed provision requiring a member 
inter-dealer quotation system to provide FINRA with a copy of such 
written standards (and material updates, modifications and revisions 
thereto) within five business days is consistent with Section 15A(b)(6) 
of the Act in that it furthers FINRA's ability to review for compliance 
with the underlying provisions requiring fair access to the member's 
system.
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    \29\ 15 U.S.C. 78o-3(b)(6).
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    FINRA also believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(11) of the Act.\30\ Section 
15A(b)(11) requires that the rules of the association include 
provisions governing the form and content of quotations relating to 
securities sold otherwise than on a national securities exchange which 
may be distributed or published by any member or person associated with 
a member, and the persons to whom such quotations may be supplied.\31\ 
Specifically, FINRA believes that the proposed amendment requiring 
member-inter-dealer quotation systems to adopt policies and procedures 
addressing the collection and dissemination of quotations in OTC equity 
securities is consistent with Section 15A(b)(11) of the Act in that the 
amendments further govern the form and content of quotations relating 
to securities sold otherwise than on a national securities exchange 
which may be distributed or published by any member or person 
associated with a member, and the persons to whom such quotations may 
be supplied.\32\
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    \30\ 15 U.S.C. 78o-3(b)(11).
    \31\ See 15 U.S.C. 78o-3(b)(11).
    \32\ See 15 U.S.C. 78o-3(b)(11).
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    FINRA also believes that the proposed new rules for member inter-
dealer quotation systems requiring them to establish, maintain and 
enforce fair and reasonable written policies and procedures relating to 
the collection and dissemination of quotations in OTC equity securities 
on or through their systems, and to ensure that such quotations are 
treated fairly and consistently, are consistent with the Act by 
promoting orderly procedures for collecting, distributing, and 
publishing quotations. Similarly, the proposed provision requiring a 
member inter-dealer quotation system to provide FINRA with a copy of 
such written policies and procedures (and any material updates, 
modifications and revisions thereto) within five business days is 
consistent with Section 15A(b)(11) of the Act in that it provides FINRA 
with timely notification of material changes to the member's quotation 
collection and dissemination policies and procedures, which facilitates 
FINRA's ability to perform its oversight functions in this area.
    FINRA believes that the proposed amendments to the quotation 
recording and reporting requirements of Rule 6431 streamline, clarify 
and simplify the items of information and process for reporting 
quotation data to FINRA for regulatory purposes, such as for use in 
conducting reviews of over-the-counter market activity and surveillance 
of member conduct, consistent with FINRA's statutory mandate under the 
Act.\33\
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    \33\ See 15 U.S.C. 78o-3.
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    FINRA also believes that the proposed rule change will protect 
investors and the public interest by discontinuing the dissemination of 
potentially incomplete, inaccurate and misleading best bid and offer 
quotation data in OTC equity securities, as discussed above, by 
deleting the OTCBB rules and discontinuing operation of the Service. 
Further, FINRA believes that the proposed rule change is consistent 
with Section 17B of the Act.\34\ Section 17B was enacted by Congress as 
part of the Penny Stock Act, which was designed to remedy 
inefficiencies and address regulatory concerns caused by the lack of 
reliable market information on penny stocks traded over the counter 
and, in connection with this initiative, the Commission designated the 
OTCBB as a Qualifying Electronic Quotation System (``QEQS'') for 
purposes of the penny stock rules.\35\
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    \34\ See 15 U.S.C. 78q-2.
    \35\ See Securities Exchange Act Release No. 30608 (April 20, 
1992), 57 FR 18004 (April 28, 1992) (``Penny Stock Release'') 
(adopting seven rules (the ``penny stock rules'') under the Act 
requiring broker-dealers engaging in certain transactions in low-
priced, over the counter securities to provide customers with 
specified information).
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    Due to the decline of OTCBB, as discussed previously, FINRA is 
concerned that OTCBB is no longer a reliable source of complete 
quotation information for OTC equity securities and, therefore, 
operation of the Service no longer furthers the purposes of Section 17B 
of the Act. However, FINRA believes that discontinuing dissemination of 
potentially incomplete and misleading quotation information from the 
marketplace by ceasing operation of the OTCBB, coupled with the 
proposed changes to improve the governance of inter-dealer quotation 
systems on or through which quotations in OTC equity securities are 
displayed, best serves and promotes the goals of Section 17B of the Act 
with respect to the widespread availability of quotation information in 
penny stocks. In addition, to the extent necessary, FINRA requests that 
the Commission consider granting an exemption from Section 17B of the 
Exchange Act in connection with its consideration of this proposed rule 
change.
    Finally, the proposed requirement that a member inter-dealer 
quotation system provide FINRA with a written description of each 
quotation-related data product it offers and related pricing 
information, including fees, rebates, discounts and cross-product 
pricing incentives (and any changes thereto) within five business days, 
provides FINRA with useful information to ensure compliance with FINRA 
rules and to monitor the widespread availability of quotation 
information to investors and market participants through non-SRO 
sources, and to determine whether proposing the reestablishment of an 
SRO-operated inter-dealer quotation system (or other measure) to 
facilitate the type of quotation transparency described in Section 17B 
of the Act, is necessary. The FINRA ORF continues to provide for the 
reporting of the volume of penny stock transactions, including 
comprehensive last sale reporting and dissemination, consistent with 
Section 17B of the Act.

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. The proposed amendments to 
require a member inter-dealer quotation system to establish fair and 
non-discriminatory written standards for granting access to quoting and 
trading would apply to all members meeting the Rule 6420 definition of 
``inter-dealer quotation system,'' and therefore do not

[[Page 41345]]

disparately impose requirements on similarly situated members.
    In addition, the proposed amendments to require a member inter-
dealer quotation system to establish, maintain and enforce fair and 
reasonable written policies and procedures relating to the collection 
and dissemination of quotations in OTC equity securities are important 
to facilitate an orderly environment around quotation activity in OTC 
equity securities. Furthermore, the proposal provides for a ``policies 
and procedures'' approach and, therefore, affords all members within 
its scope a degree of flexibility in implementing measures to comply 
with the proposed rule.
    FINRA also does not believe that the proposed requirement that 
members provide copies of the aforementioned written policies, 
procedures and standards (and material updates, modifications and 
revisions thereto) results in an unwarranted burden on competition 
because the member inter-dealer quotation system would be permitted to 
proceed with the implementation of desired changes to its written 
policies, procedures and standards, as long as it notifies FINRA within 
five business days following the implementation of the changes.
    The proposal requiring a member inter-dealer quotation system to 
provide FINRA with a written description of each quotation-related data 
product offered by such member and related pricing information, 
including fees, rebates, discounts and cross-product pricing incentives 
(and any changes thereto) within five business days is essential to 
FINRA's ongoing monitoring of the widespread availability of quotation 
information on OTC equity securities. FINRA also does not believe that 
this requirement imposes an unwarranted burden on competition because 
the proposed rule would permit the member inter-dealer quotation system 
to launch a new quotation-related data product or related price (or 
change an existing data product or related price) without delay, 
followed by timely notification to FINRA. This proposed amendment would 
apply to all members meeting the Rule 6420 definition of ``inter-dealer 
quotation system,'' and therefore would not disparately impose 
requirements on similarly situated members.
    The proposed clarification and streamlining of the quotation 
recording and reporting requirements are minor and generally consistent 
with current practice; therefore, FINRA anticipates that members would 
need to make very few changes to comply with the revised regime. Thus, 
any burden associated with the rule change is negligible and its impact 
on competition nonexistent. Finally, FINRA does not believe that the 
proposed deletion of the OTCBB-related rules and the discontinuance of 
the operation of the Service would impose any burden on competition 
because the Service currently operates as a transparency utility and, 
therefore, its closure would not burden competition and in no way would 
hinder the ability of new competitors to enter the market.

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

    Not applicable.

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

    Within 45 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2014-030 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-2014-030. 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 
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-2014-030 and should be 
submitted on or before August 5, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16501 Filed 7-14-14; 8:45 am]
BILLING CODE 8011-01-P