Document ID: SEC-2015-0454-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-03-17T04:00Z

[Federal Register Volume 80, Number 51 (Tuesday, March 17, 2015)]
[Notices]
[Pages 13940-13943]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06012]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74482; File No. SR-FINRA-2014-050]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Amended, To Require 
a Member To Identify Transactions With a Non-Member Affiliate and To 
Change How FINRA Disseminates a Subset of Such Transactions

March 11, 2015

I. Introduction

    On November 21, 2014, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934

[[Page 13941]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the FINRA Rule 6700 Series (Trade Reporting and Compliance Engine 
(TRACE)): (1) To add a new contra-party type to be used in TRACE 
reports to identify a transaction with a non-member affiliate, and (2) 
to require a firm to identify when a transaction with a non-member 
affiliate meets specified conditions, so that FINRA can suppress 
dissemination of such trade. The proposed rule change was published for 
comment in the Federal Register on December 11, 2014, and the comment 
period expired on January 2, 2015.\3\ The Commission received two 
comments on the proposal.\4\
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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. 73762 (December 5, 
2015), 79 FR 73670 (December 11, 2015) (``Notice of Original 
Proposal'').
    \4\ See Letters to the Commission from Sean C. Davy, Managing 
Director, Securities Industry and Financial Markets Association, 
dated December 23, 2014 (``SIFMA Letter'') and Kyle C. Wooten, 
Deputy Director--Compliance and Regulatory, Thomson Reuters, dated 
January 2, 2015 (``Thomson Reuters Letter'').
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    On January 14, 2015, FINRA granted the Commission an extension of 
time to act on the proposal until March 11, 2015. On February 24, 2015, 
FINRA filed Amendment No. 1 with the Commission to respond to the 
comment letters and to propose modifications and clarifications to its 
proposal.\5\ The Commission is publishing this notice and order to 
solicit comments on Amendment No. 1 and to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \5\ See FINRA Response to Comments, dated February 24, 2015 
(``FINRA Response Letter''). The FINRA Response Letter is included 
in the public comment file for SR-FINRA-2014-050.
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II. Description of the Proposal

    FINRA has proposed to amend the TRACE rules 6700 Series: (1) To add 
a new contra-party type to be used in TRACE reports to identify a 
transaction with a non-member affiliate, and (2) to require a firm to 
identify when a transaction with a non-member affiliate meets specified 
conditions, so that FINRA can suppress dissemination of such trade.
    FINRA Rule 6730 (Transaction Reporting) sets forth the requirements 
applicable to members for reporting transactions in TRACE-Eligible 
Securities. 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, a member must identify the other side 
(i.e., contra-party or counterparty) for each transaction.\6\ Where the 
contra-party is a 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 
be identified only as a ``customer'' when reporting the transaction to 
TRACE.
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    \6\ FINRA Rule 6730(c)(6) provides that each TRACE trade report 
shall contain the contra-party's identifier.
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    FINRA has proposed to amend Rule 6730 to introduce a new contra-
party type to identify a non-member affiliate of the member reporting 
the trade, and to disseminate publicly this contra-party identifier.\7\ 
Currently, 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.\8\ Thus, the proposal would provide FINRA and market 
participants with additional identifying information regarding the 
contra-party in the case of a member trade with a non-member 
affiliate.\9\
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    \7\ The proposed rule change would define ``non-member 
affiliate'' in Rule 6710 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.
    \8\ FINRA's Response Letter indicated that a member may conduct 
a periodic assessment of its affiliate relationships to determine 
whether a relationship qualifies for non-member affiliate 
identification requirements. See FINRA Response Letter at 5.
    \9\ The proposal would not change the way that a member reports 
a trade with an affiliate that also is a member; the reporting 
member would continue to identify the contra-party by MPID.
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    FINRA also proposed to require members to identify a narrow subset 
of transactions with non-member affiliates. Specifically, a member 
would need to apply a ``Suppression Indicator'' to a transaction 
between itself and a non-member affiliate where: (1) Each party is 
trading for its own account, and (2) 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 (``Suppression Criteria''). Identification of 
these transactions by members would enable FINRA to suppress the 
transactions from dissemination on the tape, as FINRA believes that 
these transactions are not economically distinct from the disseminated 
transaction between the member and the other contra-party to the trade.
    FINRA would suppress dissemination only 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.\10\ Because the transaction 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.
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    \10\ In FINRA's Response Letter, it clarified that, when a 
member and a non-member affiliate enter into a transaction in a 
TRACE-eligible security and do not initially include the Suppression 
Indicator, but meet the Suppression Criteria during the day, the 
member would not be required to correct the trade report to include 
the Suppression Indicator. However, if the Suppression Indicator is 
included but ultimately the transaction does not meet the 
Suppression Criteria, the member must correct the prior trade report 
and remove the Suppression Indicator. See FINRA Response Letter at 
4-5.
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Implementation Schedule
    FINRA stated in the Notice of Original Proposal that it would 
announce the implementation date of the proposed rule change in a 
Regulatory Notice to be published no later than 60 days following 
Commission approval, and that the implementation date would be no later 
than 90 days following publication of the Regulatory Notice announcing 
Commission approval.
    In Amendment No. 1, FINRA revised its implementation schedule in 
response to commenters' concerns. FINRA stated that it would announce 
the implementation date in a Regulatory Notice to be published no later 
than 120 days following Commission approval, and the implementation 
date would be no sooner than 120 days, and no later than 270 days, 
following publication of the Regulatory Notice.\11\
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    \11\ See FINRA Response Letter at 5.
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III. Summary of Comments, FINRA's Response, and Proposed Modifications 
and Clarifications in Amendment No. 1

    As noted above, the Commission received two comment letters 
concerning the proposal.\12\ Although both commenters were generally 
supportive of FINRA's goal to improve the quality of information 
reported to and disseminated by TRACE, one commenter supported the 
proposed requirement to identify and suppress back-to-back trades done 
with a non-member affiliate on the same day for the same price and in 
the same security \13\ while the other opposed it.\14\
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    \12\ See supra note 4.
    \13\ See SIFMA Letter at 1.
    \14\ See Thomson Reuters Letter at 3.
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    The supporting comment letter acknowledged that continued 
dissemination of transactions that meet the Suppression Criteria would 
be

[[Page 13942]]

undesirable, but asked that FINRA permit members to check for affiliate 
status at specific or periodic points in time, because the level of 
ownership interest in an affiliate is subject to change over time.\15\ 
This commenter requested that FINRA better align and coordinate 
reporting changes both internally and with the MSRB. Coordination was 
requested to reduce the burden on updating technology and compliance 
processes by packaging potential changes together, thereby alleviating 
multiple changes at different times in the same year.\16\ This same 
commenter requested that FINRA and the MSRB work more closely to 
coordinate and use similar approaches and methodologies for trade 
reporting that would lower costs of implementation and maintenance.\17\
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    \15\ See SIFMA Letter at 2.
    \16\ See id.
    \17\ See id.
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    The other commenter was opposed to the proposal's requirement to 
identify and suppress back-to-back trades done with a non-member 
affiliate.\18\ This commenter believed that the effort and cost to 
implement the change would be unduly burdensome.\19\
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    \18\ See Thomson Reuters Letter at 3.
    \19\ See id.
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    Both commenters requested an extension in the implementation 
timeline of four \20\ to six \21\ months for technological 
implementation. One commenter requested the additional time to provide 
sufficient time for implementation and to be less disruptive to the 
technology budgets, plans, and priorities for 2015.\22\ The commenter 
stated that the proposed timeframe was ``too aggressive'' and would 
``add to what already is a collective strain on industry technology and 
compliance resources and subject matter expertise.'' \23\
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    \20\ See SIFMA Letter at 1 (requesting an implementation period 
of four to five months).
    \21\ See Thomson Reuters Letter at 2 (requesting an 
implementation period of ``not less than six months. . .'').
    \22\ See Thomson Reuters Letter at 2.
    \23\ Id.
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FINRA's Response
    In response to these comments concerning the implementation and 
application of the proposed rule change, FINRA filed Amendment No. 
1.\24\ FINRA extended the time period for implementation, as described 
above, and provided guidance on classifying an entity as a non-member 
affiliate. FINRA also reaffirmed that it would ``continue to coordinate 
with other regulators, where practicable.'' \25\
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    \24\ See supra note 5.
    \25\ FINRA Response Letter at note 7.
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    In addition, FINRA agreed that there are instances where including 
the Suppression Indicator would cause operational difficulties. 
Therefore, FINRA clarified that, when a member and a non-member 
affiliate enter into a transaction in a TRACE-Eligible Security and do 
not initially include the Suppression Indicator but meet the 
Suppression Criteria during the day, the member would not be required 
to correct the trade report to include the Suppression Indicator.\26\ 
However, if the Suppression Indicator is included but ultimately the 
transaction does not meet the Suppression Criteria, the member must 
correct the prior trade report and remove the Suppression 
Indicator.\27\
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    \26\ See FINRA Response Letter at 4-5 (stating that ``where a 
member does not append the non-member affiliate--principal 
transaction indicator to a trade report reflecting a transaction 
with a non-member affiliate that ultimately proved to have been the 
initial leg of a same day, same price trade with another contra-
party, the member would not be required to correct the prior trade 
report solely for the purpose of appending the indicator so long as 
the member did not reasonably expect (at the time of the initial 
trade report) to engage in a subsequent same day, same price 
transaction in the same security with another contra-party'').
    \27\ See FINRA Response Letter at 5.
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    FINRA indicated that a member may conduct a periodic assessment of 
its affiliate relationships to determine whether a relationship 
qualifies for non-member affiliate identification requirements. The 
member may conduct a periodic assessment, no less than annually, unless 
the member has undergone an organizational or operational restructuring 
that would likely impact its prior identification of non-member 
affiliate relationships.\28\
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    \28\ See id.
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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 20549-1090.

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 the filing will also 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 publicly available. All 
submissions should refer to File Number SR-FINRA-2014-050 and should be 
submitted on or before April 7, 2015.

V. Commission Findings

    After carefully considering the proposed rule change, the comments 
submitted, and FINRA's response to the comments and Amendment No. 1, 
the Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\29\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
15A(b)(6) of the Act,\30\ 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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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(6).
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    The proposal requires a reporting member to include a new ``non-
member affiliate'' identifier in the reports of a transaction in a 
TRACE-Eligible Security, and to identify a narrow subset

[[Page 13943]]

of such transactions that meet the Suppression Criteria. FINRA stated 
that this additional information would facilitate a more effective 
surveillance program and improve post-trade transparency. The 
Commission believes that these new requirements are reasonably designed 
to carry out these objectives and are therefore consistent with the 
Act. Furthermore, the Commission does not believe that commenters 
raised any issue that would preclude approval of this proposal, and 
that FINRA reasonably responded to the comments in Amendment No. 1.

VI. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\31\ for approving the proposed rule change, as modified by 
Amendment No. 1 thereto, prior to the 30th day after publication of 
Amendment No. 1 in the Federal Register. Amendment No. 1 responds to 
the specific issue regarding the implementation timeframe raised by 
both comment letters. Furthermore, Amendment No. 1 clarifies when the 
Suppression Indicator should be included as well as when to determine 
non-member affiliate status. The Commission notes that the rest of the 
proposed rule change is not being amended and was subject to a full 
notice-and-comment period. These revisions add clarity to the proposal 
and do not raise any novel regulatory concerns. Accordingly, the 
Commission finds that good cause exists to approve the proposal, as 
modified by Amendment No. 1, on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    IT IS THEREFORE ORDERED pursuant to Section 19(b)(2) of the Act 
\32\ that the proposed rule change (SR-FINRA-2014-050), as modified by 
Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06012 Filed 3-16-15; 8:45 am]
 BILLING CODE 8011-01-P