Document ID: SEC-2011-1143-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-08-09T04:00Z

[Federal Register Volume 76, Number 153 (Tuesday, August 9, 2011)]
[Notices]
[Pages 48937-48939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20171]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65025; File No. SR-FINRA-2011-027]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Trade Reporting Rules Relating to OTC Transactions in Equity Securities 
That Are Part of a Distribution and Transfers of Equity Securities To 
Create or Redeem Instruments Such as ADRs and ETFs

August 3, 2011.

I. Introduction

    On June 9, 2011, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rules 6282, 6380A, 6380B and 6622 
relating to trade reporting of over-the-counter (``OTC'') transactions 
in equity securities. The proposed rule change was published for 
comment in the

[[Page 48938]]

Federal Register on June 27, 2011.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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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. 64706 (June 20, 
2011), 76 FR 37382 (``Notice'').
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II. Description of the Proposal and Discussion

A. Background

    FINRA proposed to amend FINRA Rules 6282, 6380A, 6380B and 6622 
(``trade reporting rules'') relating to trade reporting of OTC 
transactions in equity securities. Under FINRA trade reporting rules, 
members are required to report OTC transactions in equity securities to 
FINRA unless they fall within an express exception. As a general 
matter, when members report OTC trades, FINRA facilitates the public 
dissemination of the trade information and/or assesses regulatory 
transaction fees under Section 3 of Schedule A to the FINRA By-Laws 
(``Section 3'') and the Trading Activity Fee (``TAF''). Certain 
transactions and transfers of securities are not required to be 
reported to FINRA (e.g., trades executed and reported through an 
exchange, transfers made pursuant to an asset purchase agreement that 
has been approved by a bankruptcy court), while other transactions must 
be reported to FINRA only for the purpose of assessing the regulatory 
transaction fee (e.g., away from the market sales and transfers in 
connection with certain corporate control transactions).\4\ Members 
must have policies and procedures and internal controls in place to 
enable them to determine whether a transaction qualifies for an 
exception under the rules.
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    \4\ See, e.g., Rules 6282(i), 6380A(e), 6380B(e) and 6622(e).
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B. Amended Rules

    FINRA proposed to amend its trade reporting rules to: (1) Clarify 
the existing exception for transactions that are part of a distribution 
of securities and impose certain notice requirements on members relying 
on the exception for transactions that are part of an ``unregistered 
secondary distribution''; and (2) expressly exclude from the trade 
reporting requirements, transfers of equity securities for the purpose 
of creating or redeeming instruments such as American Depositary 
Receipts (``ADRs'') and exchange-traded funds (``ETFs'').
1. Transactions That Are Part of Securities Distribution
    FINRA rules contain an exception from the trade reporting 
requirements for transactions that are effected in connection with a 
distribution of securities, specifically:

    Transactions that are part of a primary distribution by an 
issuer or of a registered secondary distribution (other than ``shelf 
distributions'') or of an unregistered secondary distribution.\5\

    \5\ See Rules 6282(i)(1)(A), 6380A(e)(1)(A), 6380B(e)(1)(A) and 
6622(e)(1)(A).
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    Thus, transactions that are part of a distribution (other than a 
secondary shelf distribution) are not reported to FINRA or publicly 
disseminated, and they are not assessed regulatory transaction fees 
under Section 3 or the TAF.\6\
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    \6\ FINRA explained that this exception was adopted to align the 
FINRA trade reporting requirements with the Consolidated Tape 
Association and the Nasdaq Unlisted Trading Privileges plans, which 
expressly identify transactions that are not required to be reported 
to the tape. See, e.g., Notice to Members 75-42 (June 1975).
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    FINRA proposed to amend its trade reporting rules to incorporate by 
reference the definition of ``distribution'' set forth in SEC 
Regulation M for purposes of this exception.\7\ A ``distribution'' is 
defined under Rule 100 of Regulation M as ``an offering of securities, 
whether or not subject to registration under the Securities Act, that 
is distinguished from ordinary trading transactions by the magnitude of 
the offering and the presence of special selling efforts and selling 
methods.'' \8\
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    \7\ 17 CFR 242.100-105.
    \8\ 17 CFR 242.100.
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    In addition, FINRA proposed to adopt Supplementary Material in its 
trade reporting rules that applies specifically to the trade reporting 
exception for transactions that are part of an ``unregistered secondary 
distribution'' which would require members to provide notice to FINRA 
that they are relying on this exception. Members also would be required 
to provide FINRA the security name and symbol, execution date, 
execution time, number of shares, trade price and parties to the trade, 
for each transaction that is part of the unregistered secondary 
distribution and not trade reported. Under the proposed rule, members 
must provide the notice and information no later than three business 
days following trade date. If the trade executions occur over multiple 
days, then the member would be required to provide initial notice and 
information available at that time to FINRA no later than three 
business days following the first trade date and final notice and 
information no later than three business days following the last trade 
date.
    The proposed Supplementary Material also would require that the 
member retain records sufficient to document its basis for relying on 
this trade reporting exception, including but not limited to, the basis 
for determining that the transactions are part of an unregistered 
secondary distribution, as defined under Rule 100 of Regulation M. 
FINRA explained that members would be required to demonstrate that they 
have satisfied the ``magnitude of the offering'' and ``special selling 
efforts'' criteria under Regulation M, and stated that the mere 
assertion that the order was large-sized or a block or that execution 
of the order was ``worked'' by a member would usually not by itself be 
sufficient. FINRA also explained that members must be able to 
demonstrate that they have complied with the applicable notification 
requirements in FINRA Rule 5190.\9\ The Commission notes that the 
proposed rule change imposes a notice requirement; it does not impose a 
trade reporting requirement. As is the case today, under the proposal, 
transactions that are part of a primary distribution by an issuer or of 
a registered secondary distribution (other than ``shelf 
distributions''), or of an unregistered secondary distribution, would 
not be trade reported nor would they be disseminated to the public. In 
addition, these transactions would not be assessed regulatory 
transaction fees under Section 3 or the TAF.
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    \9\ Rule 5190 imposes certain notice requirements on members 
participating in distributions of listed and unlisted securities and 
is designed to ensure that FINRA receives pertinent distribution-
related information from its members in a timely fashion in 
connection with its Regulation M compliance program.
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    The Commission believes that this requirement, as well as the 
modification to provide a definition of ``distribution'' for use in 
connection with the exception, should ensure that members apply the 
trade reporting exception correctly and should help ensure that members 
report all transactions that are required to be reported. The 
Commission specifically notes that large block trades must be reported 
to FINRA for tape dissemination purposes and are assessed regulatory 
transaction fees under Section 3 and the TAF. The trade reporting 
exception does not apply to block trades, unless they otherwise meet 
the definition of distribution under Regulation M.

2. Transfers of Equity Securities To Create or Redeem Instruments Such 
as ADRs and ETFs

    FINRA also proposed to amend its trade reporting rules to expressly

[[Page 48939]]

exclude from the trade reporting requirements any transfer of equity 
securities for the sole purpose of creating or redeeming an instrument 
that evidences ownership of or otherwise tracks the underlying 
securities transferred. FINRA explained that such transfers are not 
considered transactions for purposes of the trade reporting rules and 
thus are not reportable events.\10\ FINRA represented that the proposed 
rule change codifies current guidance and practice in this area. The 
Commission believes that this codification of current practice will 
help reduce confusion with regard to what is required to be reported 
under FINRA's trade reporting requirements and thus reduce reporting 
errors.
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    \10\ FINRA explained, however, that purchases and sales of the 
securities that are to be transferred for the purpose of creating or 
redeeming instruments such as ADRs and ETFs and subsequent purchases 
and sales of the instruments in the secondary market are OTC 
transactions and must be reported to FINRA in accordance with the 
trade reporting rules. FINRA also noted that purchases and sales of 
the underlying securities in order to track the performance of an 
instrument such as an ADR or ETF, without actually creating the 
instrument, are trade reportable and that such transactions are 
subject to regulatory transaction fees under Section 3 and the TAF.
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    FINRA stated that the proposed rule change will be effective 90 
days following the date of Commission approval.

III. Commission's Findings

    After carefully considering the proposed rule change, the 
Commission finds that it is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association. In particular, the Commission finds that the 
proposal is consistent with Section 15A(b)(6) of the Act,\11\ 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.\12\
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 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).
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    The Commission believes that the proposal is reasonably designed to 
clarify the interpretation and application of the current exception 
from the trade reporting requirements for transactions that are part of 
a distribution. The Commission believes that the proposal will: (1) 
Enhance market transparency by helping to ensure that transactions that 
are not part of an ``unregistered secondary distribution,'' such as 
large block trades, are properly reported; and (2) clarify members' 
obligations with respect to the reporting of transfers of equity 
securities to create or redeem instruments such as ADRs and ETFs under 
FINRA trade reporting rules.
    In addition, FINRA will receive information regarding transactions 
that are part of an unregistered secondary distribution which will 
enhance FINRA's ability to monitor compliance with the securities laws 
and rules.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-FINRA-2011-027), be, and it 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20171 Filed 8-8-11; 8:45 am]
BILLING CODE 8011-01-P