[Federal Register Volume 75, Number 222 (Thursday, November 18, 2010)]
[Notices]
[Pages 70757-70759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29079]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63311; File No. SR-FINRA-2010-044]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Relating to the
Expansion of the Order Audit Trail System to All NMS Stocks
November 12, 2010.
I. Introduction
On August 6, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule change to
amend its Order Audit Trail System rules to extend the recording and
reporting requirements to all NMS stocks and to exclude certain firms
that have limited trading activities. The proposed rule change was
published for comment in the Federal Register on August 25, 2010.\2\
The Commission received three comment letters on the proposed rule
change.\3\ FINRA responded to these comment letters in a letter dated
October 28, 2010.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ See Securities Exchange Act Release No. 62739 (August 18,
2010), 75 FR 52380.
\3\ See letter from Steve Allread, Equity Trader, Cutter
Company, to Commission, dated September 10, 2010 (``Cutter
Letter''); letter from Joan Conley, Senior Vice President and
Corporate Secretary, Nasdaq OMX Group, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated September 15, 2010 (``Nasdaq Letter'');
and letter from Manisha Kimmel, Executive Director, Financial
Information Forum, to Elizabeth M. Murphy, Secretary, Commission,
dated September 17, 2010 (``FIF Letter'').
\4\ See letter from Brant K. Brown, Associate General Counsel,
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated October
28, 2010 (``FINRA Response'').
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II. Description of Proposal
FINRA Rules 7410 through 7470 (the ``OATS Rules'') impose
obligations on FINRA members to record in electronic form and report to
FINRA, on a daily basis, certain information with respect to orders
originated, received, transmitted, modified, canceled, or executed by
members in OTC equity securities and equity securities listed and
traded on The Nasdaq Stock Market, Inc. (``Nasdaq'').\5\ This
[[Page 70758]]
information is used by FINRA staff to oversee the markets and to
determine if members are complying with FINRA's rules.
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\5\ As amended by SR-FINRA-2010-003, FINRA Rule 7410 defines an
``OTC equity security'' for purposes of the OATS Rules as an equity
security that is not an NMS stock, except that the term does not
include restricted equity securities and direct participation
programs, as those terms are defined in FINRA Rule 6420. See
Securities Exchange Act Release No. 61979 (April 23, 2010), 75 FR
23316 (May 3, 2010) (Order Approving File No. SR-FINRA-2010-003).
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FINRA is proposing to extend the OATS recording and reporting
requirements to cover all NMS securities.\6\ FINRA is also proposing to
exclude from the definition of ``Reporting Member'' \7\ in FINRA Rule
7410 certain firms that became FINRA members pursuant to NASD IM-1013-1
(Membership Waive-In Process for Certain New York Stock Exchange Member
Organizations), or NASD IM-1013-2 (Membership Waive-In Process for
Certain NYSE Alternext US LLC \8\ Member Organizations), and the rules
of the NYSE,\9\ and that engage in the floor activities permitted in
NASD IM-1013-1 and IM-1013-2 and receive orders through systems
operated and regulated by the NYSE or NYSE Amex.
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\6\ Rule 600(b)(47) of Regulation NMS defines ``NMS stock'' as
``any NMS security other than an option.'' 17 CFR 242.600(b)(47). An
``NMS security'' is defined as ``any security or class of securities
for which transaction reports are collected, processed, and made
available pursuant to an effective transaction reporting plan, or an
effective national market system plan for reporting transactions in
listed options.'' 17 CFR 242.600(b)(46).
\7\ A ``reporting member'' is defined in FINRA Rule 7410(o) as a
member that receives or originates an order and has an obligation to
record and report information under Rules 7440 and 7450.
\8\ In March 2009, NYSE Alternext US LLC changed its name to
NYSE Amex LLC (``NYSE Amex''). See Securities Exchange Act Release
No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009).
\9\ See NYSE Rule 2.
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III. Discussion of Comment Letters
The Commission received three comment letters on the proposed rule
change and FINRA responded to these comments.\10\ One commenter, FIF,
supported the proposal, but specified a variety of terms and provisions
that it believed should be incorporated by FINRA in its expansion of
OATS.\11\ Specifically, FIF suggested that FINRA ensure that the terms
currently used in the Order Tracking System (OTS) Rules are harmonized
with those used in the OATS Rule and noted, for example, that account
types currently are treated differently by NYSE and FINRA. The
commenter suggested using the ``FIX'' protocol to ensure
standardization. FIF also requested that FINRA take into consideration
that certain FINRA member firms do not have MPIDs, which are required
for OATS reporting, and that FINRA configure OATS to accept symbols
under the different Nasdaq and NYSE symbology plans.
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\10\ See supra notes 3 and 4.
\11\ See FIF Letter, supra note 3.
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FIF suggested that FINRA enhance its capacity and processing
bandwidth to accommodate the millions of additional OATS reports it
would receive under the proposed rule to ensure timely processing of
files and error free testing. FIF also requested that FINRA extend the
deadline to submit reports due to the additional volume of reports that
would be required. FIF also requested an extension of the current time
frame for members to repair and resubmit OATS rejections.\12\
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\12\ See FIF Letter, supra note 3.
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FINRA responded to these comments by stating that it is currently
reviewing OATS for potential efficiencies and will consider the issues
raised with respect to revising its reporting and rejection repair and
resubmission deadlines, as well as capacity limitations. FINRA believes
that a phased-in approach for inclusion of NMS stocks in OATS is
acceptable.
FIF also requested that FINRA adopt an exemption for, or provide
additional time for inclusion in OATS of, convertible and non-
convertible preferred stock listed on the NYSE explaining that these
securities managed by firms' Fixed Income Desks and systems and may not
be easily reportable on existing platforms.
FINRA responded that NYSE's current OTS rules do not contain an
exemption for preferred stock, and therefore, members are already
required to capture order information for these securities.
Consequentially, FINRA does not believe that preferred stock should be
exempted from OATS, or that it should provide additional time for
implementation of the requirement.
Another commenter questioned the regulatory usage of the data that
currently is required to be submitted to OATS.\13\ In response, FINRA
explained that it currently uses OATS data to conduct surveillance and
investigations of its members, and that the expansion of this data to
include NMS securities traded on other exchanges would enhance FINRA's
ability to surveil its members' trading activity across multiple
markets.
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\13\ See Allread Letter, supra note 3.
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The third commenter, Nasdaq, argued that the timing of the OATS
proposal, in light of the Commission's proposed consolidated audit
trail, is an effort by FINRA to make OATS the default consolidated
audit trail choice for the industry, and submitted questions for FINRA
regarding the cost, timing and use of its proposal.\14\ In response,
FINRA stated that its proposal is not intended to replace the
Commission's consolidated audit trail proposal, and that FINRA views it
instead as an effort to improve its own regulatory oversight. It
recognized that the proposal may impose costs on its members, but
believes that most of those affected would already have in place the
OTS infrastructure, which would allow them to adopt the proposed
changes quickly.
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\14\ See Nasdaq Letter, supra note 3.
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IV. Commission Findings
The Commission has carefully reviewed the proposed rule change, the
comments received, and FINRA's response to the comments, and finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities association.\15\ In particular, the Commission finds that
the proposed rule change is consistent with Section 15A(b)(6) of the
Act,\16\ which, among other things, requires 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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\15\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposed rule change, by requiring
members to record and report order information for all NMS stocks, not
just those securities listed on Nasdaq or traded over-the-counter, will
enhance FINRA's market surveillance and investigative capabilities.
FINRA has stated that it is currently unable to view a complete order
and transaction audit trail for all over-the-counter transactions in
NMS stocks; thus, the proposed expansion of surveillance to NMS stocks
listed on non-Nasdaq markets should enhance FINRA's oversight of the
U.S. equity markets.
The Commission believes the proposed rule change is a positive step
toward a cross-market audit trail. The Commission views FINRA's
proposed expansion of OATS as an interim measure that will improve
FINRA's regulatory capabilities by broadening its oversight. The
Commission notes that FINRA's proposal will also remove redundancies,
as FINRA has represented that OTS is expected to be retired by NYSE
upon the expansion of OATS.
Additionally, the Commission agrees that FINRA's amendment to its
definition of ``Reporting Members'' is
[[Page 70759]]
appropriate, as it excludes from the OATS recording and reporting
requirements those members who conduct a floor business through NYSE
and NYSE Amex and who are currently not subject to OTS, but to the
requirements of NYSE Rule 123 and NYSE Amex Equities Rule 123 (Record
of Orders).\17\ By exempting these members from the OATS requirements,
FINRA is not altering their current audit trail obligations.\18\ The
Commission believes that FINRA's proposed amendment to Rule 7410 is
appropriate as these members would continue to be required to record
and report information under NYSE Rule 123 and NYSE Amex Equities Rule
123, and would continue to be subject to FINRA regulation.
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\17\ NYSE Rule 123 and NYSE Amex Equities Rule 123 pertain to
orders or commitments or obligations to trade originated on or
transmitted to the floor of each exchange.
\18\ These members would be subject to FINRA's oversight, as
FINRA assumed the market surveillance and enforcement functions of
NYSE Regulation, Inc. in June 2010, pursuant to a multi-party
regulatory services agreement with NYSE Regulation, Inc., NYSE, NYSE
Amex, and NYSE Arca. See ``FINRA and NYSE Euronext Complete
Agreement for FINRA to Perform NYSE Regulation's Market Oversight
Functions,'' FINRA News Release (June 14, 2010), available at http://www.finra.org/Newsroom/NewsReleases/2010/P121622.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-FINRA-2010-044), be, and
hereby is, approved.
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\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29079 Filed 11-17-10; 8:45 am]
BILLING CODE 8011-01-P