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 Modified by Amendment No. 1, To Adopt a Supplementary Schedule for Inventory Positions Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information), 58390-58393 [2014-23048]
Download as PDF
<![CDATA[
58390
Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Notices
current self-regulatory subsidiaries as
well as any subsidiaries that in the
future meet the definition of ‘‘selfregulatory organization’’ under the Act.
Consequently, such future selfregulatory subsidiaries will
automatically be subject to the By-Law
provisions relating to these subsidiaries
without NASDAQ OMX having to take
formal action to amend the By-Laws to
include them.
The proposed By-Law amendments
also include the correction of a
typographical error in Article I and
minor edits to Section 12.5 to conform
the language regarding the 5% voting
limitation to the language in the
analogous provision of the Charter.
tkelley on DSK3SPTVN1PROD with NOTICES
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,5 in general, and furthers the
objectives of Section 6(b)(5) of the Act,6
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
NASDAQ OMX is proposing changes
to its Charter and By-Laws to conform
the provisions in each document
relating to the procedures by which
NASDAQ OMX’s Board may grant an
exemption to the prohibition on any
NASDAQ OMX stockholder voting
shares in excess of 5% of the Company’s
then-outstanding shares of capital stock.
The Exchange believes that the changes
will protect investors and the public
interest by eliminating confusion that
may exist because of the current
language differences between the two
provisions. In addition, NASDAQ OMX
is proposing to define ‘‘self-regulatory
subsidiary’’ with reference to a
definition in the Act. The Exchange
believes that this will protect investors
and the public interest by ensuring that
any NASDAQ OMX subsidiary that
meets the definition of ‘‘self-regulatory
organization’’ in the Act will be subject
to the Charter and By-Law provisions
relating to self-regulatory subsidiaries.
Finally, the remaining changes are
clarifying in nature, and they enhance
investor protection by making NASDAQ
OMX’s governance documents clearer
and easier to understand.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Because the proposed rule change
relates to the governance of NASDAQ
5 15
U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
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OMX and not to the operations of the
Exchange, the Exchange does not
believe that the proposed rule change
will impose any burden on competition
not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were either
solicited or received.
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 Exchange consents,
the Commission shall: (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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2014–093 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–NASDAQ–2014–093. 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 (https://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
PO 00000
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proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. 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–
NASDAQ–2014–093, and should be
submitted on or before October 20,
2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–23049 Filed 9–26–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73192; File No. SR–FINRA–
2014–025]
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 Modified by
Amendment No. 1, To Adopt a
Supplementary Schedule for Inventory
Positions Pursuant to FINRA Rule 4524
(Supplemental FOCUS Information)
September 23, 2014.
I. Introduction
On June 16, 2014, 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 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to adopt a supplementary
schedule for inventory positions
pursuant to FINRA Rule 4524
(Supplemental FOCUS Information).
The proposed rule change was
7 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 See 17 CFR 240.19b–4.
1 See
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Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Notices
published for comment in the Federal
Register on June 26, 2014.3 The
Commission received three comment
letters on the proposed rule change.4 On
September 22, 2014, FINRA filed
Amendment No. 1 with the Commission
to respond to the comment letters and
to add clarifying instructions.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.
tkelley on DSK3SPTVN1PROD with NOTICES
II. Description of Proposal
Pursuant to Exchange Act Rule 17a–
5,6 most firms are required to file with
FINRA reports concerning their
financial and operational status using
the Financial and Operational
Combined Uniform Single (FOCUS)
Report.7 In general, firms with a FOCUS
filing requirement must either file a
FOCUS Report Part II if they clear
transactions or carry customer
accounts 8 or file a FOCUS Report Part
IIA if they do not.9 Firms that are
government securities broker-dealers
registered under Section 15C of the
Exchange Act 10 do not file a FOCUS
Report and instead are required to file
reports concerning their financial and
operational status using the Report on
Finances and Operations of Government
Securities Brokers and Dealers (‘‘FOGS
Report’’).11 These firms are required to
file a FOGS Report Part I and either a
FOGS Report Part II if they clear
transactions or carry customer accounts
or FOGS Report Part IIA if they do not.12
FINRA Rule 4524 (Supplemental
FOCUS Information) requires each firm,
as FINRA shall designate, to file such
3 See Exchange Act Release No. 72444 (June 20,
2014), 79 FR 36357 (June 26, 2014).
4 See Letter from Holly H. Smith, Sutherland
Asbill & Brennan LLP, to Elizabeth M. Murphy,
Secretary, SEC, dated July 17, 2014 (‘‘Sutherland’’);
Letter from Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA
LLC, to Elizabeth M. Murphy, Secretary, SEC, dated
July 17, 2014 (‘‘IMS’’); Letter from Suzanne Shatto,
dated September 7, 2014 (‘‘Shatto’’).
5 See SEC File No. SR–FINRA–2014–025
Amendment No. 1, dated September 22, 2014
(‘‘Amendment No. 1’’). Amendment No. 1 is
described below in Section III and the text of
Amendment No. 1 is available on FINRA’s Web site
at https://www.finra.org, at the principal office of
FINRA, and on the Commission’s Web site at
https://www.sec.gov/rules/sro.shtml.
6 See 17 CFR 240.17a–5.
7 See SEC Form X–17A–5.
8 Firms that calculate net capital using Appendix
E to Exchange Act Rule 15c3–1 file FOCUS Report
Part II CSE, rather than FOCUS Report Part II.
9 See 17 CFR 240.17a–5.
10 See 15 U.S.C. 78o–5.
11 See Department of the Treasury Form G–405.
12 See 17 CFR 405.2; 17 CFR 240.17a–5.
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additional financial or operational
schedules or reports as FINRA may
deem necessary or appropriate for the
protection of investors or in the public
interest as a supplement to the FOCUS
Report.13 Pursuant to FINRA Rule 4524,
FINRA is proposing the adoption of a
supplemental schedule to the FOCUS
Report Part II, FOCUS Report Part IIA
and the FOGS Report Part I that would
provide more detailed information
about inventory positions held by firms.
The proposed Supplemental Inventory
Schedule (‘‘SIS’’) would be due 20
business days after the end of a firm’s
FOCUS or FOGS reporting period.14
The proposal requires the SIS to be
filed by firms that are required to file
FOCUS Report Part II, FOCUS Report
Part IIA or FOGS Report Part I with
inventory positions as of the end of the
FOCUS or FOGS reporting period with
two exceptions. The first exception is
for firms that have a minimum dollar
net capital or liquid capital
requirement 15 of less than $100,000.
Such firms are not allowed to engage in
dealer activities and are limited to 10
proprietary transactions per year.
Further, such firms are not permitted to
self-clear or carry customer accounts.
The second exception is for firms that
have inventory positions consisting only
of money market mutual funds. Money
market mutual funds limit their
investments to short-term, high-quality
debt securities and are permitted to sell
and redeem shares at a stable price,
typically at $1.00 per share, without
regard to small variations in the value
of the funds’ underlying securities.16 A
firm with inventory positions consisting
only of money market mutual funds
would need to affirmatively indicate
through functionality on the eFOCUS
system that no SIS filing is required for
the reporting period. FINRA believes
that firms that meet either of these two
criteria pose significantly less risk to
customers and other market
participants. These exceptions would
not only minimize the burden on firms,
13 The reference to FOCUS Reports under FINRA
Rule 4524 includes FOGS Reports required to be
filed by government securities broker-dealers
registered under Section 15C of the Exchange Act
in lieu of FOCUS Reports.
14 Firms that file FOCUS Report Part II CSE would
not be subject to the proposed SIS. As part of
FOCUS Report Part II CSE, the Aggregate Securities
and OTC Derivative Positions schedule requires
firms to provide information that is similar to the
proposed SIS.
15 Firms that file the FOCUS Report must comply
with a minimum dollar net capital requirement,
while firms that file the FOGS Report must comply
with a minimum liquid capital requirement.
16 See Securities Act Release No. 9408 (June 5,
2013), 78 FR 36834, 36835 (June 19, 2013)
(Proposed Rule: Money Market Fund Reform;
Amendments to Form PF).
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58391
but also would allow FINRA to focus its
resources where the risk is most
concerning.
The proposed SIS is intended to
capture more details of a firm’s long and
short inventory positions than what is
captured on the FOCUS Report Part II,
FOCUS Report Part IIA and FOGS
Report Part I. For example, FOCUS
Report Part II, FOCUS Report Part IIA
and FOGS Report Part I require total
inventory of securities sold short to be
reported in aggregate (Item 1620),
providing no information on the types
of securities sold short by firms. In
addition, FOGS Report Part I requires
that all long inventory be reported in
aggregate (Item 850). Further, on FOCUS
Report Part II and IIA, long inventory is
reported in categories that aggregate
securities with different market risk
profiles (e.g., the Corporate Obligations
category on the FOCUS Report Part II
(Item 400) and Debt Securities category
on the FOCUS Report Part IIA (Item
419) include single name corporate
bonds, private-label mortgage-backed
securities and foreign issuer debt
obligations). The proposed SIS would
enhance FINRA’s ongoing surveillance
monitoring of firms’ financial condition
by providing greater transparency into
the market risk posed by a firm’s
inventory positions and the potential
impact to a firm’s net capital or liquid
capital, as well as related funding and
liquidity needs. In addition, the
information provided by the proposed
SIS would enable FINRA staff to
perform more targeted examinations of
firms’ market risk exposure.
The proposed rule change will be
effective upon Commission approval.
FINRA will announce the
implementation date of the proposed
supplemental schedule in a Regulatory
Notice to be published no later than 60
days following Commission approval.
The due date for the first proposed
schedule will be no later than 90 days
following Commission approval of the
proposed rule change.
III. Summary of Comment Letters,
FINRA’s Response, and Amendment
No. 1
As stated above, the Commission
received three comment letters in
response to the proposed rule change.17
One commenter opposed the definition
of ‘‘arbitrage’’ in the instructions for the
SIS and questioned why the definition
was limited to firms that have a separate
arbitrage trading desk.18 The commenter
stated that the SIS should take into
account arbitrage strategies and
17 See
18 See
E:\FR\FM\29SEN1.SGM
supra note 4.
IMS.
29SEN1
tkelley on DSK3SPTVN1PROD with NOTICES
58392
Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Notices
recommended amending the SIS to
allow firms ‘‘to indicate how much of
the gross market value reported in the
long or short columns represented
positions that were offsets or related to
other positions, directly or
indirectly.’’ 19 In addition, the
commenter recommended eliminating
line 10 (Arbitrage) and the parenthetical
description on line 9 (Stocks and
Warrants (other than arbitrage
positions)) on the SIS on the grounds
that they would become redundant if
the columns for offsets were added.20
Finally, the commenter suggested the
definition of ‘‘arbitrage’’ in the
instructions ‘‘be changed to indicate
something to the effect that arbitrage is
whatever the reporting firm thinks it
is.’’ 21
In response to the commenter’s
concern regarding the definition of
‘‘arbitrage,’’ FINRA agrees that the
definition should not be limited to firms
that have a separate arbitrage trading
desk and is proposing to amend the
instructions to provide that firms would
report the market value of all securities
that are part of a ‘‘bona fide arbitrage.’’
For purposes of the SIS, a security
would be considered part of a ‘‘bona
fide arbitrage’’ if a security is
convertible into or exchangeable for
another security within a period of 90
days, subject to no conditions other than
the payment of money, and the other
securities into which such security is
convertible or for which it is
exchangeable, are short in the accounts
of such broker or dealer. The definition
of ‘‘bona fide arbitrage’’ is substantially
similar to the provision in Exchange Act
Rule 15c3–1(c)(2)(vi)(J)(1). With respect
to the additional changes requested by
the commenter, FINRA believes, at this
time, that the proposed SIS captures the
information that is needed to enable
FINRA staff to assess the related market
risk and impact on firms’ liquidity and
funding needs arising from inventory
holdings.
Another commenter had concerns
‘‘with FINRA’s piecemeal approach to
requesting supplemental financial and
operational information’’ and
recommended ‘‘that FINRA coordinate
with the SEC to propose an amended
FOCUS report that requests all of the
information FINRA is collecting or
plans to collect from firms via
supplementary schedules or reports.’’ 22
In addition, the commenter requested
that FINRA: (1) ‘‘define the term
‘inventory’ by reference to specific
19 See
IMS.
20 See IMS.
21 See IMS.
22 See Sutherland.
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reporting lines of the FOCUS report, so
that member firms know exactly what
FOCUS line items are required to be disaggregated for the SIS’’; (2) confirm that
‘‘investments held by member firms for
the purpose of funding employee benefit
plans for a member firm’s associated
persons’’ would not be considered
inventory under the SIS; and (3) publish
general directions for firms with nothing
to report because they have no
inventory.23
In response to the commenter’s
recommendation that FINRA coordinate
with the SEC to propose an amended
FOCUS Report, FINRA proposed the SIS
pursuant to FINRA Rule 4524, which,
subject to FINRA meeting the
requirements of Section 19(b)(1) of the
Exchange Act 24 and Rule 19b–4
thereunder,25 provides an independent
basis for FINRA to supplement
information provided on FOCUS and
FOGS Reports filed pursuant to
Exchange Act Rule 17a–5 and FINRA
Rule 2010.26 In response to this
commenter, FINRA further notes that
Form X–17A–5 is an SEC form, and any
changes to it must be proposed and
adopted by the SEC. However, FINRA
would support updates to Form X–17A–
5 by the SEC that would incorporate
more detailed reporting, and, if such
updates were made, FINRA staff would
seek to reduce accordingly the
requirement for firms to file
supplemental information. With respect
to the term ‘‘inventory,’’ for purposes of
the SIS, FINRA is proposing to define
the term ‘‘inventory positions’’ to mean
securities or commodities positions
(long, short or both) which are required
to be reported on the balance sheet
pursuant to GAAP. Consequently, if
‘‘investments held by member firms for
the purpose of funding employee benefit
plans for a member firm’s associated
persons’’ fall within the term ‘‘inventory
positions,’’ as defined in the proposed
SIS, then such investments would be
required to be reported. Finally, in
regard to firms with nothing to report,
the eFOCUS system would not require
an affirmative indication from the firm
that no filing is required for the
reporting period.
A third commenter raised a number of
issues that are outside the scope of the
proposal.27 This commenter, however,
also suggested daily reporting for the
23 See
Sutherland.
15 U.S.C. 78s(b)(1).
25 See 17 CFR 240.19b–4.
26 See Securities Exchange Act Release No. 66364
(Feb. 9, 2012), 77 FR 8938 (Feb. 15, 2012) (Order
Granting Accelerated Approval of SR–FINRA–
2011–064).
27 See Shatto.
proposed SIS.28 FINRA believes daily
reporting for the proposed SIS would be
overly burdensome on firms without a
concomitant benefit to FINRA regarding
its understanding of a firm’s market risk.
In addition to the changes proposed
in response to some of the comments
the SEC received, discussed above,
FINRA is proposing to clarify that the
capital exception for filing the proposed
SIS is based on the minimum dollar net
capital requirement or liquid capital
requirement. Firms that have a
minimum dollar net capital or liquid
capital requirement, as applicable, of
less than $100,000 would not have to
file the proposed SIS.
IV. Commission’s Findings
After careful consideration of the
proposed rule change, as modified by
Amendment No. 1, the comment letters
received, and FINRA’s response to the
comment letters, the Commission finds
that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Exchange Act, and the rules and
regulations thereunder that are
applicable to a national securities
association.29 In particular, the
Commission finds that the proposal, as
modified by Amendment No. 1, is
consistent with Section 15A(b)(6) of the
Exchange Act,30 which requires, among
other things, that the rules of a national
securities association be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission
believes that FINRA adequately
addressed the comments raised in
response to FINRA’s notice.
The proposed SIS should provide
FINRA with the ability to obtain more
specific information about the inventory
of a member broker-dealer. Thus, the
Commission believes that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the provisions
of the Exchange Act noted above in that
the proposed SIS could provide FINRA
with greater insights into the types of
securities held in inventory by firms
and the related market risk associated
with such inventory positions. In
addition, the proposed SIS would
enable FINRA staff to review inventory
24 See
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Fmt 4703
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28 See
Shatto.
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).
30 See 15 U.S.C. 78o–3(b)(6).
29 In
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Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Notices
trends and assess the related impact on
firms’ liquidity and funding needs. The
information provided on the proposed
SIS would be used by FINRA to monitor
firms’ financial condition and perform
more targeted examinations of firms’
market risk exposure.
The Commission believes that the
proposed rule change, as modified by
Amendment No. 1, works in
conjunction with the existing
Commission broker-dealer financial
responsibility rules and will further
FINRA’s ability to oversee its members
by, among other things, capturing trends
in the securities held in broker-dealers’
inventory.
The Commission does not believe that
the proposed rule change, as modified
by Amendment No. 1, will result in
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act. As
stated above, the Commission believes
the proposed SIS will allow FINRA to
better understand the potential impact
of broker-dealers’ inventory on net
capital, leverage and liquidity, and
ability to fulfill customer protection
obligations. Ready access to the
information in the proposed SIS is
important for FINRA to efficiently
monitor on an ongoing basis the
financial condition of firms.
The Commission also believes FINRA
has carefully crafted the proposed SIS to
achieve its intended and necessary
regulatory purpose while being
cognizant of the burden on firms. The
information required to complete the
proposed SIS should be readily
available to firms due to firms’
obligations to maintain books and
records and apply applicable capital
charges to their inventory. Further, for
smaller firms, the proposed SIS contains
exceptions for firms that (1) have a
minimum dollar net capital or liquid
capital requirement, as applicable, of
less than $100,000, or (2) have inventory
positions consisting only of money
market mutual funds.
tkelley on DSK3SPTVN1PROD with NOTICES
V. Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Exchange Act 31 for approving the
proposal, as modified by Amendment
No. 1, prior to the 30th day after
publication of Amendment No. 1 in the
Federal Register. The changes proposed
in Amendment No. 1 are technical or
clarifying changes and do not raise
regulatory concerns.
Accordingly, the Commission finds
that good cause exists to approve the
31 See
15 U.S.C. 78s(b)(2).
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16:44 Sep 26, 2014
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proposal, as modified by Amendment
No. 1, on an accelerated basis.
VI. Solicitation of Comments
58393
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,32
that the proposed rule change (SR–
FINRA–2014–025), as modified by
Amendment No. 1, be and hereby is
approved on an accelerated basis.
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether Amendment No. 1 to
the proposed rule change is consistent
with the Exchange Act. Comments may
be submitted by any of the following
methods:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Jill M. Peterson,
Assistant Secretary.
Electronic Comments
[FR Doc. 2014–23048 Filed 9–26–14; 8:45 am]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2014–025 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–2014–025. 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 (https://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–2014–025 and
should be submitted on or before
October 20, 2014.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73194; File No. SR–Phlx–
2014–61)
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Amend the Amended and Restated
Certificate of Incorporation and ByLaws of the NASDAQ OMX Group, Inc.
September 23, 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
September 10, 2014, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) 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 the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing this proposed
rule change with respect to amendments
of the Amended and Restated Certificate
of Incorporation (the ‘‘Charter’’) and ByLaws (the ‘‘By-Laws’’) of its parent
corporation, The NASDAQ OMX Group,
Inc. (‘‘NASDAQ OMX’’ or the
‘‘Company’’). The proposed
amendments will be implemented on a
date designated by NASDAQ OMX
following approval by the Commission.
The text of the proposed rule change is
available on the Exchange’s Web site at
https://
nasdaqomxphlx.cchwallstreet.com, at
32 See
15 U.S.C. 78s(b)(2).
17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
33 See
E:\FR\FM\29SEN1.SGM
29SEN1
]]>Agencies
[Federal Register Volume 79, Number 188 (Monday, September 29, 2014)]
[Notices]
[Pages 58390-58393]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23048]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73192; File No. SR-FINRA-2014-025]
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 Modified by
Amendment No. 1, To Adopt a Supplementary Schedule for Inventory
Positions Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information)
September 23, 2014.
I. Introduction
On June 16, 2014, 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt a supplementary schedule
for inventory positions pursuant to FINRA Rule 4524 (Supplemental FOCUS
Information). The proposed rule change was
[[Page 58391]]
published for comment in the Federal Register on June 26, 2014.\3\ The
Commission received three comment letters on the proposed rule
change.\4\ On September 22, 2014, FINRA filed Amendment No. 1 with the
Commission to respond to the comment letters and to add clarifying
instructions.\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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\1\ See 15 U.S.C. 78s(b)(1).
\2\ See 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 72444 (June 20, 2014), 79 FR
36357 (June 26, 2014).
\4\ See Letter from Holly H. Smith, Sutherland Asbill & Brennan
LLP, to Elizabeth M. Murphy, Secretary, SEC, dated July 17, 2014
(``Sutherland''); Letter from Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing Director, Integrated
Management Solutions USA LLC, to Elizabeth M. Murphy, Secretary,
SEC, dated July 17, 2014 (``IMS''); Letter from Suzanne Shatto,
dated September 7, 2014 (``Shatto'').
\5\ See SEC File No. SR-FINRA-2014-025 Amendment No. 1, dated
September 22, 2014 (``Amendment No. 1''). Amendment No. 1 is
described below in Section III and the text of Amendment No. 1 is
available on FINRA's Web site at https://www.finra.org, at the
principal office of FINRA, and on the Commission's Web site at
https://www.sec.gov/rules/sro.shtml.
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II. Description of Proposal
Pursuant to Exchange Act Rule 17a-5,\6\ most firms are required to
file with FINRA reports concerning their financial and operational
status using the Financial and Operational Combined Uniform Single
(FOCUS) Report.\7\ In general, firms with a FOCUS filing requirement
must either file a FOCUS Report Part II if they clear transactions or
carry customer accounts \8\ or file a FOCUS Report Part IIA if they do
not.\9\ Firms that are government securities broker-dealers registered
under Section 15C of the Exchange Act \10\ do not file a FOCUS Report
and instead are required to file reports concerning their financial and
operational status using the Report on Finances and Operations of
Government Securities Brokers and Dealers (``FOGS Report'').\11\ These
firms are required to file a FOGS Report Part I and either a FOGS
Report Part II if they clear transactions or carry customer accounts or
FOGS Report Part IIA if they do not.\12\
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\6\ See 17 CFR 240.17a-5.
\7\ See SEC Form X-17A-5.
\8\ Firms that calculate net capital using Appendix E to
Exchange Act Rule 15c3-1 file FOCUS Report Part II CSE, rather than
FOCUS Report Part II.
\9\ See 17 CFR 240.17a-5.
\10\ See 15 U.S.C. 78o-5.
\11\ See Department of the Treasury Form G-405.
\12\ See 17 CFR 405.2; 17 CFR 240.17a-5.
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FINRA Rule 4524 (Supplemental FOCUS Information) requires each
firm, as FINRA shall designate, to file such additional financial or
operational schedules or reports as FINRA may deem necessary or
appropriate for the protection of investors or in the public interest
as a supplement to the FOCUS Report.\13\ Pursuant to FINRA Rule 4524,
FINRA is proposing the adoption of a supplemental schedule to the FOCUS
Report Part II, FOCUS Report Part IIA and the FOGS Report Part I that
would provide more detailed information about inventory positions held
by firms. The proposed Supplemental Inventory Schedule (``SIS'') would
be due 20 business days after the end of a firm's FOCUS or FOGS
reporting period.\14\
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\13\ The reference to FOCUS Reports under FINRA Rule 4524
includes FOGS Reports required to be filed by government securities
broker-dealers registered under Section 15C of the Exchange Act in
lieu of FOCUS Reports.
\14\ Firms that file FOCUS Report Part II CSE would not be
subject to the proposed SIS. As part of FOCUS Report Part II CSE,
the Aggregate Securities and OTC Derivative Positions schedule
requires firms to provide information that is similar to the
proposed SIS.
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The proposal requires the SIS to be filed by firms that are
required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS
Report Part I with inventory positions as of the end of the FOCUS or
FOGS reporting period with two exceptions. The first exception is for
firms that have a minimum dollar net capital or liquid capital
requirement \15\ of less than $100,000. Such firms are not allowed to
engage in dealer activities and are limited to 10 proprietary
transactions per year. Further, such firms are not permitted to self-
clear or carry customer accounts. The second exception is for firms
that have inventory positions consisting only of money market mutual
funds. Money market mutual funds limit their investments to short-term,
high-quality debt securities and are permitted to sell and redeem
shares at a stable price, typically at $1.00 per share, without regard
to small variations in the value of the funds' underlying
securities.\16\ A firm with inventory positions consisting only of
money market mutual funds would need to affirmatively indicate through
functionality on the eFOCUS system that no SIS filing is required for
the reporting period. FINRA believes that firms that meet either of
these two criteria pose significantly less risk to customers and other
market participants. These exceptions would not only minimize the
burden on firms, but also would allow FINRA to focus its resources
where the risk is most concerning.
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\15\ Firms that file the FOCUS Report must comply with a minimum
dollar net capital requirement, while firms that file the FOGS
Report must comply with a minimum liquid capital requirement.
\16\ See Securities Act Release No. 9408 (June 5, 2013), 78 FR
36834, 36835 (June 19, 2013) (Proposed Rule: Money Market Fund
Reform; Amendments to Form PF).
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The proposed SIS is intended to capture more details of a firm's
long and short inventory positions than what is captured on the FOCUS
Report Part II, FOCUS Report Part IIA and FOGS Report Part I. For
example, FOCUS Report Part II, FOCUS Report Part IIA and FOGS Report
Part I require total inventory of securities sold short to be reported
in aggregate (Item 1620), providing no information on the types of
securities sold short by firms. In addition, FOGS Report Part I
requires that all long inventory be reported in aggregate (Item 850).
Further, on FOCUS Report Part II and IIA, long inventory is reported in
categories that aggregate securities with different market risk
profiles (e.g., the Corporate Obligations category on the FOCUS Report
Part II (Item 400) and Debt Securities category on the FOCUS Report
Part IIA (Item 419) include single name corporate bonds, private-label
mortgage-backed securities and foreign issuer debt obligations). The
proposed SIS would enhance FINRA's ongoing surveillance monitoring of
firms' financial condition by providing greater transparency into the
market risk posed by a firm's inventory positions and the potential
impact to a firm's net capital or liquid capital, as well as related
funding and liquidity needs. In addition, the information provided by
the proposed SIS would enable FINRA staff to perform more targeted
examinations of firms' market risk exposure.
The proposed rule change will be effective upon Commission
approval. FINRA will announce the implementation date of the proposed
supplemental schedule in a Regulatory Notice to be published no later
than 60 days following Commission approval. The due date for the first
proposed schedule will be no later than 90 days following Commission
approval of the proposed rule change.
III. Summary of Comment Letters, FINRA's Response, and Amendment No. 1
As stated above, the Commission received three comment letters in
response to the proposed rule change.\17\ One commenter opposed the
definition of ``arbitrage'' in the instructions for the SIS and
questioned why the definition was limited to firms that have a separate
arbitrage trading desk.\18\ The commenter stated that the SIS should
take into account arbitrage strategies and
[[Page 58392]]
recommended amending the SIS to allow firms ``to indicate how much of
the gross market value reported in the long or short columns
represented positions that were offsets or related to other positions,
directly or indirectly.'' \19\ In addition, the commenter recommended
eliminating line 10 (Arbitrage) and the parenthetical description on
line 9 (Stocks and Warrants (other than arbitrage positions)) on the
SIS on the grounds that they would become redundant if the columns for
offsets were added.\20\ Finally, the commenter suggested the definition
of ``arbitrage'' in the instructions ``be changed to indicate something
to the effect that arbitrage is whatever the reporting firm thinks it
is.'' \21\
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\17\ See supra note 4.
\18\ See IMS.
\19\ See IMS.
\20\ See IMS.
\21\ See IMS.
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In response to the commenter's concern regarding the definition of
``arbitrage,'' FINRA agrees that the definition should not be limited
to firms that have a separate arbitrage trading desk and is proposing
to amend the instructions to provide that firms would report the market
value of all securities that are part of a ``bona fide arbitrage.'' For
purposes of the SIS, a security would be considered part of a ``bona
fide arbitrage'' if a security is convertible into or exchangeable for
another security within a period of 90 days, subject to no conditions
other than the payment of money, and the other securities into which
such security is convertible or for which it is exchangeable, are short
in the accounts of such broker or dealer. The definition of ``bona fide
arbitrage'' is substantially similar to the provision in Exchange Act
Rule 15c3-1(c)(2)(vi)(J)(1). With respect to the additional changes
requested by the commenter, FINRA believes, at this time, that the
proposed SIS captures the information that is needed to enable FINRA
staff to assess the related market risk and impact on firms' liquidity
and funding needs arising from inventory holdings.
Another commenter had concerns ``with FINRA's piecemeal approach to
requesting supplemental financial and operational information'' and
recommended ``that FINRA coordinate with the SEC to propose an amended
FOCUS report that requests all of the information FINRA is collecting
or plans to collect from firms via supplementary schedules or
reports.'' \22\ In addition, the commenter requested that FINRA: (1)
``define the term `inventory' by reference to specific reporting lines
of the FOCUS report, so that member firms know exactly what FOCUS line
items are required to be dis-aggregated for the SIS''; (2) confirm that
``investments held by member firms for the purpose of funding employee
benefit plans for a member firm's associated persons'' would not be
considered inventory under the SIS; and (3) publish general directions
for firms with nothing to report because they have no inventory.\23\
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\22\ See Sutherland.
\23\ See Sutherland.
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In response to the commenter's recommendation that FINRA coordinate
with the SEC to propose an amended FOCUS Report, FINRA proposed the SIS
pursuant to FINRA Rule 4524, which, subject to FINRA meeting the
requirements of Section 19(b)(1) of the Exchange Act \24\ and Rule 19b-
4 thereunder,\25\ provides an independent basis for FINRA to supplement
information provided on FOCUS and FOGS Reports filed pursuant to
Exchange Act Rule 17a-5 and FINRA Rule 2010.\26\ In response to this
commenter, FINRA further notes that Form X-17A-5 is an SEC form, and
any changes to it must be proposed and adopted by the SEC. However,
FINRA would support updates to Form X-17A-5 by the SEC that would
incorporate more detailed reporting, and, if such updates were made,
FINRA staff would seek to reduce accordingly the requirement for firms
to file supplemental information. With respect to the term
``inventory,'' for purposes of the SIS, FINRA is proposing to define
the term ``inventory positions'' to mean securities or commodities
positions (long, short or both) which are required to be reported on
the balance sheet pursuant to GAAP. Consequently, if ``investments held
by member firms for the purpose of funding employee benefit plans for a
member firm's associated persons'' fall within the term ``inventory
positions,'' as defined in the proposed SIS, then such investments
would be required to be reported. Finally, in regard to firms with
nothing to report, the eFOCUS system would not require an affirmative
indication from the firm that no filing is required for the reporting
period.
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\24\ See 15 U.S.C. 78s(b)(1).
\25\ See 17 CFR 240.19b-4.
\26\ See Securities Exchange Act Release No. 66364 (Feb. 9,
2012), 77 FR 8938 (Feb. 15, 2012) (Order Granting Accelerated
Approval of SR-FINRA-2011-064).
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A third commenter raised a number of issues that are outside the
scope of the proposal.\27\ This commenter, however, also suggested
daily reporting for the proposed SIS.\28\ FINRA believes daily
reporting for the proposed SIS would be overly burdensome on firms
without a concomitant benefit to FINRA regarding its understanding of a
firm's market risk.
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\27\ See Shatto.
\28\ See Shatto.
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In addition to the changes proposed in response to some of the
comments the SEC received, discussed above, FINRA is proposing to
clarify that the capital exception for filing the proposed SIS is based
on the minimum dollar net capital requirement or liquid capital
requirement. Firms that have a minimum dollar net capital or liquid
capital requirement, as applicable, of less than $100,000 would not
have to file the proposed SIS.
IV. Commission's Findings
After careful consideration of the proposed rule change, as
modified by Amendment No. 1, the comment letters received, and FINRA's
response to the comment letters, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Exchange Act, and the rules and regulations
thereunder that are applicable to a national securities
association.\29\ In particular, the Commission finds that the proposal,
as modified by Amendment No. 1, is consistent with Section 15A(b)(6) of
the Exchange Act,\30\ which requires, among other things, that the
rules of a national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The
Commission believes that FINRA adequately addressed the comments raised
in response to FINRA's notice.
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\29\ 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).
\30\ See 15 U.S.C. 78o-3(b)(6).
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The proposed SIS should provide FINRA with the ability to obtain
more specific information about the inventory of a member broker-
dealer. Thus, the Commission believes that the proposed rule change, as
modified by Amendment No. 1, is consistent with the provisions of the
Exchange Act noted above in that the proposed SIS could provide FINRA
with greater insights into the types of securities held in inventory by
firms and the related market risk associated with such inventory
positions. In addition, the proposed SIS would enable FINRA staff to
review inventory
[[Page 58393]]
trends and assess the related impact on firms' liquidity and funding
needs. The information provided on the proposed SIS would be used by
FINRA to monitor firms' financial condition and perform more targeted
examinations of firms' market risk exposure.
The Commission believes that the proposed rule change, as modified
by Amendment No. 1, works in conjunction with the existing Commission
broker-dealer financial responsibility rules and will further FINRA's
ability to oversee its members by, among other things, capturing trends
in the securities held in broker-dealers' inventory.
The Commission does not believe that the proposed rule change, as
modified by Amendment No. 1, will result in burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Exchange Act. As stated above, the Commission believes the proposed SIS
will allow FINRA to better understand the potential impact of broker-
dealers' inventory on net capital, leverage and liquidity, and ability
to fulfill customer protection obligations. Ready access to the
information in the proposed SIS is important for FINRA to efficiently
monitor on an ongoing basis the financial condition of firms.
The Commission also believes FINRA has carefully crafted the
proposed SIS to achieve its intended and necessary regulatory purpose
while being cognizant of the burden on firms. The information required
to complete the proposed SIS should be readily available to firms due
to firms' obligations to maintain books and records and apply
applicable capital charges to their inventory. Further, for smaller
firms, the proposed SIS contains exceptions for firms that (1) have a
minimum dollar net capital or liquid capital requirement, as
applicable, of less than $100,000, or (2) have inventory positions
consisting only of money market mutual funds.
V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act \31\ for approving the proposal, as modified by
Amendment No. 1, prior to the 30th day after publication of Amendment
No. 1 in the Federal Register. The changes proposed in Amendment No. 1
are technical or clarifying changes and do not raise regulatory
concerns.
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\31\ See 15 U.S.C. 78s(b)(2).
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Accordingly, the Commission finds that good cause exists to approve
the proposal, as modified by Amendment No. 1, on an accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Exchange Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2014-025 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-2014-025. 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 (https://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-2014-025 and should be
submitted on or before October 20, 2014.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\32\ that the proposed rule change (SR-FINRA-2014-025), as
modified by Amendment No. 1, be and hereby is approved on an
accelerated basis.
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\32\ See 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\ See 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-23048 Filed 9-26-14; 8:45 am]
BILLING CODE 8011-01-P
