[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Notices]
[Pages 41339-41345]
From the Federal Register Online via the Government Publishing 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
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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
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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 [email protected]. 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