Document ID: SEC-2014-2080-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-12-11T05:00Z

[Federal Register Volume 79, Number 238 (Thursday, December 11, 2014)]
[Notices]
[Pages 73670-73672]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29013]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73762; File No. SR-FINRA-2014-050]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
TRACE Rules To Require Members To Identify Transactions With Non-Member 
Affiliates and To Change How FINRA Disseminates a Subset of Such 
Transactions

December 5, 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 November 21, 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 Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the FINRA Rule 6700 Series (Trade 
Reporting and Compliance Engine (TRACE)) to require members to identify 
transactions with non-member affiliates, and to change how FINRA 
disseminates a specific subset of these transactions.
    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
    FINRA is amending the TRACE rules: (1) To add a new contra-party 
type to be used in TRACE reports to identify transactions with non-
member affiliates, and (2) to require firms to identify when 
transactions with non-member affiliates meet specified conditions, so 
that FINRA can suppress dissemination of those trades.
    FINRA Rule 6730 (Transaction Reporting) sets forth the requirements 
applicable to members for reporting transactions in TRACE-Eligible 
Securities.\3\ Rule 6730(c) (Transaction Information To Be Reported) 
describes the items of information that must be included in a TRACE 
trade report. Among other things, members must identify the other side 
(i.e., contra-party or counterparty) for each transaction.\4\ Where the 
contra-party is a FINRA member, the reporting member must provide the 
contra-party's designated Market Participant ID (``MPID'') in the trade 
report. All other contra-parties (including non-member affiliates) can 
only be identified as a ``customer'' when reporting the transaction to 
TRACE.
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    \3\ Rule 6710 generally defines a ``TRACE-Eligible Security'' 
as: (1) A debt security that is U.S. dollar-denominated and issued 
by a U.S. or foreign private issuer (and, if a ``restricted 
security'' as defined in Securities Act Rule 144(a)(3), sold 
pursuant to Securities Act Rule 144A); or (2) a debt security that 
is U.S. dollar-denominated and issued or guaranteed by an ``Agency'' 
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise'' 
as defined in Rule 6710(n).
    \4\ FINRA Rule 6730(c)(6) provides that each TRACE trade report 
shall contain the contra-party's identifier.
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    FINRA is proposing to amend Rule 6730 to introduce a new contra-
party type to identify non-member affiliates of the member reporting 
the trade, and to disseminate publicly this contra-party identifier.\5\ 
Currently, as noted above, when a member engages in a transaction with 
a non-member affiliate, that transaction is reported by the member as a 
trade with a customer. Thus, the proposal would provide FINRA and 
market participants with additional identifying information regarding 
the

[[Page 73671]]

contra-party in the case of member trades with non-member-
affiliates.\6\
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    \5\ The proposed rule change would add a new definition to Rule 
6710 to define ``non-member affiliate'' as a non-member entity that 
controls, is controlled by or is under common control with a member. 
For the purposes of this definition, ``control,'' along with any 
derivative thereof, means legal, beneficial, or equitable ownership, 
directly or indirectly, of 25 percent or more of the capital stock 
(or other ownership interest, if not a corporation) of any entity 
ordinarily having voting rights. The term ``common control'' means 
the same natural person or entity controls two or more entities.
    \6\ The proposal would not change the way that FINRA members 
report trades with affiliates that also are FINRA members; the 
reporting member would continue to identify the contra-party by 
MPID. FINRA believes that trades between members generally are arms-
length, even if the member firms are affiliated. Furthermore, it is 
important for audit trail and surveillance purposes to obtain the 
MPID of all member contra-parties in submitted trade reports.
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    FINRA also proposes to require members to identify a narrow subset 
of transactions with non-member affiliates. Specifically, a member 
would need to flag transactions between itself and a non-member 
affiliate: (1) Where both parties are trading for their own account, 
and (2) where the transaction with the non-member affiliate occurs 
within the same day, at the same price and in the same security as a 
transaction engaged in by the member with a different counterparty. 
Identification of these transactions by members would enable FINRA to 
suppress the transactions from dissemination on the tape, which is 
desirable because they are not economically distinct transactions and 
provide the same pricing information as the disseminated transaction 
between the member and the other contra-party to the trade.
    The undesirability of disseminating these trades is illustrated by 
the following example. Firm A, a FINRA member, acquires a position in a 
TRACE-Eligible Security from another dealer, which Firm A reports for 
dissemination by TRACE. Firm A may choose to hold this security at a 
non-member affiliate, which it accomplishes by a back-to-back trade to 
the affiliate on the same terms as it acquired the security. Currently, 
this back-to-back trade with the affiliate would also be reported by 
the member for dissemination by TRACE. FINRA believes that only one of 
the trade reports related to this overall transaction should be 
disseminated--specifically, the transaction between the member and the 
other dealer, but not the trade between the member and its non-member 
affiliate. Dissemination of the transaction between the member and its 
non-member affiliate does not provide users of the disseminated data 
with useful information for pricing, valuation or risk evaluation 
purposes.
    FINRA would only suppress dissemination where a member purchases or 
sells a security and then, within the same trading day, engages in a 
back-to-back trade with its non-member affiliate in the same security 
at the same price. Because the trade of the security between the member 
and its non-member affiliate represents a change in beneficial 
ownership between different legal entities, it is a reportable 
transaction and is publicly disseminated under the current rule. 
However, the fact that the trade occurs with a non-member affiliated 
entity, during the same day and at the same price (no commission or 
mark-up was assessed) is indicia that the transaction is not an arms-
length trade and, therefore, does not constitute the type of 
transaction that adds value to the tape.
    FINRA believes the proposal will improve the information currently 
received for regulatory purposes by providing additional information on 
the relationship between parties to a trade. For example, knowledge of 
a contra-party's status as a non-member affiliate of the reporting 
member would be useful in FINRA's regulatory program, which is reliant 
upon the completeness and accuracy of the information members report to 
TRACE. For example, the proposed rule change would support the 
operation of the patterns that surveil for pre-arranged trading, best 
execution, parking and fair pricing. Thus, FINRA expects that the 
addition of the non-member affiliate contra-party identifier will 
facilitate a more effective program and reduce the number of false-
positive alerts from surveillance patterns and regulatory inquiries 
from FINRA to member firms. FINRA also believes the rule change will 
improve the quality of the information disseminated for transparency 
purposes by suppressing transaction reports that are not economically 
distinct from a separately reported (and disseminated) leg, and by 
disseminating a new contra-party identifier in all cases when a trade 
is with a non-member affiliate.
    FINRA staff discussed the proposal with advisory committees in 
developing its approach. These parties were supportive of the proposal, 
believing that it would improve the value of the information submitted 
to the tape by reducing the instances in which duplicative trade 
information is disseminated publicly. Members of the committees also 
did not express any particular concerns with respect to the operational 
impacts or costs of the proposal. Further discussions with firms that 
would be directly impacted by the proposal also indicated that the 
proposal to suppress dissemination of these trades would be beneficial 
to market participants, and that the necessary technological changes 
would not be unduly burdensome given an adequate implementation 
timeframe.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval. The implementation date will be no later 
than 90 days following publication of the Regulatory Notice announcing 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ 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.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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    As discussed above, FINRA believes the proposal would result in 
improved disseminated transaction information for TRACE-Eligible 
Securities by reducing the instances in which trade information for 
duplicative, non-economic trades is disseminated publicly. Under the 
proposal, TRACE reports also would include more specific contra-party 
information by adding an additional contra-party type to identify non-
member affiliates that would be used by FINRA for regulatory purposes 
and disseminated to investors and market participants. Thus, FINRA 
believes that the proposed rule change would enhance transparency by 
suppressing trade reports on transactions that are not economically 
distinct from a separately reported (and disseminated) leg, and the 
regulatory audit trail by providing additional granularity regarding 
the reporting firm's relationship with its contra-party.

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. While the proposal would 
require firms to implement changes to identify covered transactions 
with a non-member affiliate, FINRA does not believe these changes would 
impose differential costs on similarly situated firms. Discussions with 
members indicate that, so long as sufficient implementation time is 
provided to make the necessary technological changes, the proposed rule 
change would not be unduly burdensome, given its benefits to 
transparency. In addition to the benefits to public transparency, the 
non-member affiliate contra-party identifier will facilitate a more 
effective regulatory program by allowing FINRA further insight into 
whether a member's

[[Page 73672]]

transaction is arms-length. In addition, FINRA anticipates the proposal 
would result in a reduction in the number of false-positive alerts from 
surveillance patterns and fewer regulatory inquiries from FINRA to 
member firms.

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

    FINRA has not solicited, and does not intend to solicit, comments 
on this proposed rule change. FINRA has not received any written 
comments from members or other interested parties.

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-2014-050 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File Number SR-FINRA-2014-050. 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 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-2014-050 and should be 
submitted on or before January 2, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-29013 Filed 12-10-14; 8:45 am]
BILLING CODE 8011-01-P