Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the Trade Reporting Structure and Require Submission of Non-Tape Reports To Identify Other Members for Agency and Riskless Principal Transactions, 22186-22191 [E8-8872]
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Federal Register / Vol. 73, No. 80 / Thursday, April 24, 2008 / Notices
finds that it is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.6 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,7 which,
among other things, requires that the
rules of a national securities exchange
be designed to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating
transactions in securities, 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 the
Exchange’s proposal to permit it the
flexibility to determine whether it
conducts fingerprint-based criminal
record checks of Exchange staff and
other persons, or whether it obtains
those background checks in another
manner, is reasonable and consistent
with the Act. The Commission notes
that the proposed rule change has no
effect on the current fingerprinting
obligations of Exchange participants and
participant firm personnel under the
rules of the Exchange or of the Act and
the rules thereunder.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,8 that the
proposed rule change (SR–CHX–2008–
03), be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Nancy M. Morris,
Secretary.
[FR Doc. E8–8875 Filed 4–23–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57681; File No. SR–FINRA–
2008–011]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Amend the
Trade Reporting Structure and Require
Submission of Non-Tape Reports To
Identify Other Members for Agency
and Riskless Principal Transactions
April 17, 2008.
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 March 28,
2008, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a the
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
substantially prepared by the FINRA.
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
FINRA is proposing to amend its trade
reporting rules applicable to over-thecounter (‘‘OTC’’) equity transactions 3
to: (1) Replace the current market
maker-based trade reporting framework
with an ‘‘executing party’’ framework;
and (2) require that any member with
the trade reporting obligation under
FINRA rules that is acting in a riskless
principal or agency capacity on behalf
of one or more other members submit
non-tape report(s) to FINRA, as
necessary, to identify such other
member(s) as a party to the trade. The
text of the proposed rule change is
available at FINRA, the Commission’s
Public Reference Room, and https://
www.finra.org.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Specifically, OTC equity transactions are: (1)
Transactions in NMS stocks, as defined in Rule
600(b) of Regulation NMS under the Act, effected
otherwise than on an exchange, which are reported
through the Alternative Display Facility (‘‘ADF’’) or
a Trade Reporting Facility (‘‘TRF’’); and (2)
transactions in ‘‘OTC Equity Securities,’’ as defined
in NASD Rule 6610 (e.g., OTC Bulletin Board and
Pink Sheets securities), Direct Participation
Program (‘‘DPP’’) securities and PORTAL equity
securities, which are reported through the OTC
Reporting Facility (‘‘ORF’’). The ADF, TRFs and
ORF are collectively referred to herein as the
‘‘FINRA Facilities.’’
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2 17
6 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).
7 15 U.S.C. 78f(b)(5).
8 15 U.S.C. 78s(b)(2).
9 17 CFR 200.30–3(a)(12).
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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
Trade Reporting Structure
Currently, the following structure is
in place for purposes of reporting most
OTC equity transactions to FINRA: (1)
In transactions between two market
makers, the sell-side reports; (2) in
transactions between a market maker
and a non-market maker, the market
maker reports; (3) in transactions
between two non-market makers, the
sell-side reports; and (4) in transactions
between a member and either a nonmember or customer, the member
reports.4 This reporting structure can
result in confusion, delays and doublereporting, as the parties to a trade
attempt to determine which party has
the trade reporting obligation. Today, a
firm’s status as a market maker may not
always be apparent to the contra-party
to a trade and, increasingly, firms’
proprietary desks (other than their
market making desks) are handling and
executing transactions in equity
securities. In addition, members are
required to report whether any
applicable exception or exemption to
Rule 611 of Regulation NMS (the Order
Protection Rule) applies to a transaction,
which is information that may not be
readily known to the party with the
reporting obligation if it is not the
executing broker to the transaction, e.g.,
whether the executing broker has routed
4 See NASD Rules 4632(b) and 6130(c) relating to
the NASD/Nasdaq TRF; 4632A(b) relating to the
ADF; 4632C(b) and 6130C(c) relating to the NASD/
NSX TRF; 4632E(b) and 6130E(c) relating to the
NASD/NYSE TRF; and 6130(c) and 6620(b) relating
to the ORF.
For purposes of reporting transactions in DPP
securities to FINRA, NASD Rule 6920(b) requires
that in a transaction between two members, the
member representing the sell-side report and in a
transaction between a member and customer, the
member report.
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intermarket sweep orders in compliance
with Rule 611(b)(6).
Accordingly, FINRA is proposing to
adopt a simpler, more uniform structure
for purposes of reporting OTC equity
transactions to FINRA. Specifically,
FINRA is proposing to amend NASD
Rules 4632(b), 4632A(b), 4632C(b),
4632E(b), 6620(b) and 6920(b) to require
that for transactions between members,
the ‘‘executing party’’ report the trade to
FINRA. For transactions between a
member and a non-member or customer,
the member would report the trade.5
FINRA is proposing to define
‘‘executing party’’ as the member that
receives an order for handling or
execution or is presented an order
against its quote, does not subsequently
re-route the order, and executes the
transaction. In certain limited
circumstances, it may not be clear
which member should be deemed the
executing party for trade reporting
purposes (e.g., manually negotiated
trades via the telephone). Accordingly,
FINRA is proposing to require expressly
that for transactions between two
members where both members may
satisfy the definition of executing party,
the member representing the sell-side
shall report the transaction to FINRA,
unless the parties agree otherwise and
the member representing the sell-side
contemporaneously documents such
agreement. In such instances, the sellside will be presumed to be the member
with the trade reporting obligation
unless it can demonstrate there was an
agreement to the contrary, e.g.,
contemporaneous notes of a telephone
conversation or notation on the order
ticket. FINRA believes that this
approach will establish an objective
standard for determining the reporting
obligation in these circumstances, while
affording the parties flexibility if, for
example, the member representing the
buy-side is the party that knows the
material terms and details of the trade
and thus is in the better position to
report the trade.
Under the proposed rule change,
alternative trade systems (‘‘ATSs’’),
including electronic communications
networks (‘‘ECNs’’), would be the
executing party and have the reporting
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5 In
addition, FINRA is proposing to amend
NASD Rules 6130(c), 6130C(c) and 6130E(c) to
delete the duplicative rule provisions in
subparagraphs (1) through (4) and cross-reference
NASD Rules 4632(b) and 6620(b), 4632C(b) and
4632E(b), respectively.
FINRA also notes that the proposed executing
party reporting structure would apply to the
reporting of transactions in PORTAL equity
securities to FINRA. Pursuant to NASD Rule
6732(a)(3), the member with the obligation to report
such transactions to FINRA is determined in
accordance with NASD Rule 6620(b).
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obligation where the transaction is
executed on the ATS. If an ATS routes
an order to another member for
handling and/or execution, then the
other member would be the executing
party and have the reporting obligation
under the proposed rule change. If an
ATS routes an order to a non-member
that is executed OTC, then the ATS
would report the trade. Accordingly,
FINRA is proposing to delete
subparagraphs (5) through (7) from
NASD Rules 6130(c), 6130C(c) and
6130E(c) relating to trade reporting by a
‘‘Reporting ECN.’’ 6 Under the current
rules, a Reporting ECN is required to
ensure that trades are reported in
accordance with one of three
enumerated methods and must notify
FINRA in writing of the method of
reporting for each of its subscribers.7
FINRA notes that today, most ATSs
elect to report transactions to FINRA
using the first reporting method, i.e., the
ATS submits the trade report and
identifies itself as the Reporting Party.
Thus, FINRA believes that the proposed
rule change would clarify the reporting
requirements for ATSs and would better
align the rules with current trade
reporting practices.
Finally, FINRA is proposing to make
certain technical conforming changes,
including to (1) delete NASD Rules
4632(b)(5), 4632C(b)(5), 4632E(b)(5),
6620(b)(5) and 6920(b)(3) relating to
reporting by a Reporting ECN; (2) delete
the definitions of, and references to,
‘‘Reporting ECN,’’ ‘‘Reporting Market
Maker’’ and ‘‘Reporting Order Entry
Firm’’ in NASD Rules 6110, 6110C and
6110E, which terms would be obsolete
as a result of the proposed rule change;
and (3) amend NASD Rules 6130(d)(5),
6130C(d)(5) and 6130E(d)(5) to replace
the terms ‘‘Market Maker side’’ and
‘‘Order Entry side’’ with ‘‘MMID or
Reporting Party side’’ and ‘‘OEID or
non-Reporting Party side,’’ respectively.
FINRA believes that the proposed rule
change would result in more accurate
and timely trade reporting and make the
trade reporting process less cumbersome
for members. The proposed rule change
would ensure that the member with the
trade reporting obligation is the party
that knows the material terms and
details of the transaction, including any
exceptions or exemptions to the Order
Protection Rule that may apply to the
6 ‘‘Reporting ECN’’ generally is defined in NASD
Rules 6110, 6110C and 6110E as an electronic
communications network or alternative trading
system, as those terms are defined in SEC Rule
600(b) of Regulation NMS.
7 FINRA notes that the three reporting methods
apply only for purposes of reporting trades to a TRF
or the ORF. There is no comparable provision
relating to reporting trades to the ADF.
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22187
trade. Furthermore, many members have
entered into agreements to permit the
executing party to report on behalf of
the member with the reporting
obligation under FINRA’s current rules.
Thus, FINRA believes that, to a large
extent, the proposed rule change would
be consistent with current trade
reporting practices.
Submission of Non-Tape Reports To
Identify Other Members for Agency and
Riskless Principal Transactions
As a general matter, FINRA trade
reporting rules require that a member
that is a party to an OTC trade be
identified in trade reports submitted to
FINRA. Each trade report submitted for
public dissemination purposes (or ‘‘tape
report’’) generally only allows for the
identification of two parties. Thus,
where a FINRA member executes a trade
in a riskless principal 8 or agency
capacity on behalf of another member,
or matches, as agent, the orders of two
or more members, the tape report will
not identify all members involved in the
trade. In such circumstances, additional
‘‘non-tape reports,’’ i.e., reports that are
not submitted to the tape for public
dissemination,9 would need to be
submitted to identify all members
involved in the trade.
Today, some members submit nontape reports to FINRA identifying the
other members involved in the trade,
while other members do not. FINRA
trade reporting rules generally are not
specific in this regard because, for the
most part, they reflect the traditional
two-party trade model where a brokerdealer acts as principal or as agent for
a non-broker-dealer customer. Industry
business models have evolved to
include more trades where one brokerdealer acts as agent or riskless principal
for another broker-dealer and order
management systems and ATSs can
simultaneously match one or more
broker-dealer orders on one or both
sides of a trade.
To address these changes, FINRA is
proposing to adopt NASD Rules
4632(d)(4), 4632A(e)(1)(D), 4632C(d)(4),
4632E(d)(4), 6620(d)(4) and 6920(d)(5)
to require that any member with the
8 For purposes of FINRA trade reporting rules
applicable to equity securities, a ‘‘riskless
principal’’ transaction is a transaction in which a
member, after having received an order to buy (sell)
a security, purchases (sells) the security as principal
and satisfies the original order by selling (buying)
as principal at the same price.
9 Non-tape reports can be (1) ‘‘non-tape, nonclearing,’’ meaning that the report is submitted to
FINRA solely for regulatory purposes, or (2)
‘‘clearing-only,’’ meaning that the report is
submitted to FINRA for clearing, i.e., for submission
by FINRA to the National Securities Clearing
Corporation (and perhaps also regulatory purposes).
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obligation to report the trade under
FINRA rules that is acting in a riskless
principal or agency capacity on behalf
of one or more other members submit to
FINRA one or more non-tape report(s)
identifying such other member(s) as a
party to the transaction, if such other
member(s) is not identified on the initial
trade report or a report submitted to
FINRA to reflect the offsetting leg of a
riskless principal transaction. In
addition, FINRA is proposing to amend
NASD Rule 6732(a)(3), which currently
cross-references the trade reporting
structure in NASD Rule 6620(b), to also
cross-reference NASD Rule 6620(d),
thereby making the proposed reporting
requirement applicable to PORTAL
equity security transactions. A member
that matches, as agent, the orders of
multiple members on one or both sides
of the trade would be required to submit
multiple non-tape reports, as necessary,
to identify all members on whose behalf
the member was acting.
For example, where Member A, as
agent or riskless principal on behalf of
Member B, executes an OTC trade with
Member C, and Member A has the
obligation to report the trade to FINRA,
Member A also would be required to
submit a non-tape report to FINRA to
indicate that it was acting on behalf of
Member B. By way of further example,
where Member A matches, as agent, the
orders of Member B and Member C and
submits to FINRA a tape report between
Member A and Member C, Member A
also would be required to submit a nontape report to identify Member B as a
party to the trade. In this example, if
Member A were to report the trade to
the tape as an agency cross (such that
neither Member B nor Member C is
identified on the tape report), then
Member A would be required to submit
two non-tape reports to identify
Members B and C. In these examples,
Member A can satisfy its reporting
obligation under the proposed rule
change by submitting a clearing-only
report, if necessary to clear the offsetting
leg(s) of the transaction through a
FINRA Facility. However, if the parties
do not need to clear the offsetting leg(s)
of the transaction through a FINRA
Facility, then Member A would be
required to submit a non-tape, nonclearing report(s). Additionally, if
Member A is required to submit a nontape report to comply with applicable
riskless principal reporting
requirements under FINRA rules 10 and
10 If an OTC riskless principal transaction is not
reported to FINRA in a single tape report properly
marked as riskless principal, then two separate
reports must be submitted: (1) A tape report to
reflect the initial leg of the transaction and (2) a
non-tape report to reflect the offsetting, ‘‘riskless’’
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such report identifies Member B, then
Member A would have no separate
reporting obligation under the proposed
rule change.
The proposed reporting requirement
would only apply to the member that
has the responsibility under FINRA
rules to report the trade to FINRA (i.e.,
the ‘‘executing party’’ in a trade between
two members, as discussed above). For
example, where Member A, as agent on
behalf of Member B, and Member C
execute an OTC trade, and Member C
has the obligation to report the trade to
FINRA, Member A would not be
required under the proposed rule
change to submit a non-tape report to
indicate that it was acting on behalf of
Member B.
However, the proposed rule change
expressly would not negate or modify
the requirements for reporting riskless
principal transactions under FINRA
rules. Thus, drawing on the example in
the paragraph above, if Member A is
acting as riskless principal (as opposed
to agent) on behalf of Member B,
Member A currently is required to
submit a non-tape report to reflect the
offsetting leg of the transaction under
FINRA riskless principal rules, if the
tape report does not properly reflect
Member A’s capacity as riskless
principal.11 This requirement would not
change under the proposed rule change.
Additionally, the proposed rule change
would not change the reporting
requirements applicable to riskless
principal transactions with a customer.
FINRA notes that the proposed
reporting requirement would not apply
to transactions that are executed on and
reported through an exchange. Today,
where the initial leg of a riskless
principal or agency transaction is
executed on an exchange, members are
not required to report either leg of the
transaction to FINRA. The initial leg of
the transaction is reported through the
exchange (and therefore must not be
reported to FINRA), and members have
the option of submitting a non-tape
(typically, a clearing-only) report to
FINRA for the offsetting leg of the
transaction. Pursuant to the proposed
rule change, members would continue
to have the option of submitting a nontape report for riskless principal and
agency transactions where the initial leg
is executed on an exchange; however,
there would continue to be no
leg of the transaction, with the correct capacity of
riskless principal. See NASD Rules 4632(d)(3)(B),
4632A(e)(1)(C)(ii), 4632C(d)(3)(B), 4632E(d)(3)(B)
and 6620(d)(3)(B).
11 If Member A’s capacity is properly marked as
riskless principal on the tape report, Member A
would not be required to submit a non-tape report
to FINRA.
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obligation to submit a non-tape report
for such trades. Thus, for example,
where Member A, as agent or riskless
principal on behalf of Member B,
executes a trade on an exchange, the
trade will be reported to the tape by the
exchange and, under the proposed rule
change, Member A would not be
required to submit a non-tape report to
FINRA to indicate that it was acting on
behalf of Member B. However, Member
A would be permitted to submit a
clearing-only report to clear the
offsetting leg of the transaction between
Member A and Member B through a
FINRA Facility.12
To clarify the scope and application
of the proposed reporting requirement,
FINRA is proposing to include several
examples in the proposed rule text.
FINRA notes that these examples are not
intended to represent all possible trade
reporting scenarios under the proposed
rule change. Additionally, consistent
with the definition of ‘‘riskless
principal’’ in other FINRA rules
applicable to OTC equity trade
reporting, FINRA is proposing to amend
the definition of ‘‘riskless principal
transaction’’ in NASD Rule 6910 to
clarify that a member may act in a
riskless principal capacity on behalf of
another broker-dealer as well as a
customer.13
Finally, FINRA notes that because
members would be submitting non-tape
reports, the 90-second reporting
requirement under FINRA trade
reporting rules would not apply. Thus,
members generally would have until the
end of the day on trade date to submit
the requisite non-tape reports.14
FINRA believes that the proposed rule
change would enhance FINRA staff’s
ability to create a complete and accurate
audit trail and assist in the automated
surveillance of various customer
protection and market integrity rules.
Many members today submit clearingonly reports to FINRA in instances
where the proposed reporting
requirement would apply, e.g., if a
member needs to clear the offsetting leg
of an agency transaction through a
FINRA Facility or if a member elects
under FINRA rules to report an OTC
riskless principal trade in related tape
and non-tape reports. Thus, for some
12 See FINRA Regulatory Notice 07–38 (August
2007).
13 FINRA also is proposing a technical change to
insert paragraph headings for ease of reference in
NASD Rules 4632(d), 4632A(e)(1), 4632C(d),
4632E(d), 6620(d) and 6920(d).
14 In certain circumstances, however, members
must submit non-tape reports contemporaneously
with trade execution, e.g., to qualify for the
exemption from the requirements of IM–2110–2
(Trading Ahead of Customer Limit Order) for
riskless principal transactions.
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members, the proposed rule change may
not require any changes to current
reporting practices and systems. For
other members, however, the proposed
rule change would require systems
changes, e.g., if a member does not need
to clear the offsetting leg of an agency
transaction through a FINRA Facility.
Additionally, where a member reports a
riskless principal transaction to FINRA
in a single properly marked tape report,
a non-tape report would be required
under the proposed rule change if the
member is acting on behalf of another
member.
FINRA will announce the operative
date of the proposed rule change on its
website. In recognition of the
technological changes that the proposed
rule change will require, the operative
date will be (1) at least 90 days
following Commission approval for
transactions executed on ATSs,
including electronic communications
networks; and (2) at least 180 days
following Commission approval with
respect to all other transactions. FINRA
believes that a shorter implementation
period is appropriate for ATSs because,
as noted above, most ATSs currently are
the reporting party for transactions
executed on the ATS and some
voluntarily submit non-tape reports to
reflect all FINRA members that are
parties to a trade.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,15 which
requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
FINRA believes that the proposed rule
change to amend the trade reporting
structure will result in more accurate
and timely trade reporting and thus
enhance market transparency.
Additionally, FINRA believes that the
proposed rule change to require the
submission of non-tape reports to
identify other members for agency and
riskless principal transactions will
promote a more complete and accurate
audit trail.
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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.
15 15
U.S.C. 78o–3(b)(6).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
In September 2007, FINRA published
Regulatory Notice 07–46 (‘‘Notice’’)
soliciting comment on a proposal to
adopt a simpler and more uniform trade
reporting structure. Nine comment
letters were received in response to the
Notice.16
All of the commenters support the
adoption of a new trade reporting
structure, asserting that the current
structure can be confusing and create
delays and reporting errors. Seven of the
nine commenters support the proposed
executing party reporting structure,
asserting that this structure is the most
logical and efficient approach.17 These
commenters assert that the executing
party knows the material terms and
details of the transaction, as well as any
Order Protection Rule exceptions or
exemptions that apply to the trade,18
and thus is in the best position to report
in a timely manner 19 and to correct
reporting errors.20 In addition, several
commenters note that industry practice
is for executing parties to trade report;
most executing parties already have
established systems to trade report and
many firms have entered give-up
agreements to replicate the executing
party reporting structure.21
One commenter states that it is
unclear whether the advantages of
Qualified Service Representative (QSR)
agreements would remain under the
16 See Letters from Liquidnet, Inc., to Office of the
Corporate Secretary, FINRA, dated October 26, 2007
(‘‘Liquidnet’’); Archipelago Trading Services, Inc.,
to Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 6, 2007
(‘‘ArcaEdge’’); Financial Information Forum, to
Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 8, 2007 (‘‘FIF’’);
Pipeline Trading Systems LLC, to Barbara Z.
Sweeney, Office of the Corporate Secretary, FINRA,
dated November 12, 2007 (‘‘Pipeline’’); Automated
Trading Desk, LLC, to Barbara Z. Sweeney, Office
of the Corporate Secretary, FINRA, dated November
12, 2007 (‘‘ATD’’); TD AMERITRADE, Inc., to
Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 15, 2007 (‘‘TD
AMERITRADE’’); UBS Securities LLC, to Barbara Z.
Sweeney, Office of the Corporate Secretary, FINRA,
dated November 15, 2007 (‘‘UBS’’); The Securities
Industry and Financial Markets Association,
Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 16, 2007
(‘‘SIFMA’’); and BNY ConvergEx Execution
Solutions LLC, Charles Schwab & Co., Inc., National
Financial Services LLC and Pershing LLC, to
Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 30, 2007
(‘‘BNY’’).
17 FIF, Pipeline, ATD, TD AMERITRADE, UBS,
SIFMA and BNY.
18 FIF, ATD, UBS and SIFMA.
19 Pipeline and UBS.
20 ATD.
21 ATD, TD AMERITRADE and BNY.
PO 00000
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Fmt 4703
Sfmt 4703
22189
proposed executing party reporting
structure and strongly urges that any
changes continue to keep the QSR
process intact.22 FINRA notes that a
QSR agreement is a National Securities
Clearing Corporation agreement and, for
FINRA purposes, merely establishes that
one party can send a trade to clearing
on behalf of the other party. A give up
agreement still is required for a member
to report trade information to a FINRA
Facility on behalf of another member,
even if the parties have a QSR
agreement in effect.23 This proposed
rule change would not change the QSR
process or member obligations with
respect to give up agreements.
In the Notice, FINRA specifically
requested comment on how ‘‘executing
party’’ should be defined. The
commenters generally suggest that the
‘‘executing party’’ should be defined as
the party that receives the order
electronically for execution, does not
subsequently re-route the order, and
agrees to execute the trade, or in other
words, the broker that is the ‘‘final
recipient’’ and determines the price.24
One commenter states that in the
electronic marketplace, the identity of
the order entry broker generally will be
readily apparent based on which party
is initiating or seeking an execution, and
the executing party’s identity will be
equally apparent based on which party
is receiving the order for execution.25
This commenter provides the following
example: A displays a limit order to sell
100 shares at $10. B routes an order to
buy 100 shares against A’s displayed
order. In this example, it is clear that A
is the executing broker and B is the
order entry broker; B initiated and
sought out an execution against A’s
displayed limit order.26 As discussed
above, FINRA is proposing to define
‘‘executing party’’ substantially as
proposed by these commenters.
In instances of telephone orders, three
commenters believe that the same
approach should be followed (i.e., the
executing party is the ‘‘answering’’ or
‘‘receiving’’ or ‘‘responding’’ broker),
unless the parties agree to the
contrary.27 One commenter believes that
in the case of telephone trades, the sellside member should be the reporting
party,28 while another commenter
22 TD
AMERITRADE.
NASD Member Alert: Notice to All TRF,
ADF and Other NASD Facility Participants
Regarding AGU and QSR Relationships (January 25,
2007).
24 FIF, ATD, UBS, SIFMA and BNY.
25 ATD.
26 ATD.
27 ATD, SIFMA and BNY.
28 FIF.
23 See
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Federal Register / Vol. 73, No. 80 / Thursday, April 24, 2008 / Notices
sroberts on PROD1PC70 with NOTICES
asserts that the current trade reporting
structure should apply in such
instances.29 Additionally, one
commenter asserts that the executing
party may not be clear when a member
requests a quote from another member,
receives a quote and then agrees to trade
at the quoted price, and suggests that
the member responding to the request
for a quote (i.e., the price-making firm)
should be deemed the executing party.30
As discussed above, FINRA is proposing
to require that where it may be difficult
to determine which member satisfies the
definition of ‘‘executing party,’’ such as
telephone and other manually
negotiated trades, the member
representing the sell-side report, unless
the parties agree otherwise. Several
commenters note that in today’s market,
the number of telephone negotiated
trades is relatively small compared to
the number of trades involving the
routing of electronic orders, and thus
the instances where it would not be
clear which member is the executing
party should be limited.31 In the words
of one commenter, ‘‘[a]ll but a tiny
fraction of orders in the current
marketplace are routed electronically’’
and as such, ‘‘in the vast majority of
transactions, there is no doubt about
which entity is the Executing Broker.’’ 32
Two commenters support a sell-side
reporting structure, whereby the
member representing the sell-side
would report a trade between
members.33 One commenter asserts that
in all cases, it would be clear which
party is selling and which party is
buying, but the distinction between the
executing party and introducing broker
could be unclear in certain cases.34
FINRA disagrees and believes that
where Member A, an introducing
broker, routes an order for handling
and/or execution to Member B, and
Member B does not re-route the order
and executes the trade, it is clear that
Member B is the executing party. This
commenter also asserts that in a trade
between two brokers, the selling broker
should be the reporting party, but the
brokers should have full flexibility to
override this default rule and designate
the buyer as the reporting party.35
FINRA believes that the determination
of which member has the trade
reporting obligation should not be
subject to agreement between the
parties, except in limited circumstances
29 UBS.
as discussed above, as that approach
would result in confusion and possible
under or double reporting. FINRA notes,
however, that members can enter into
give up agreements under FINRA rules,
whereby one member can trade report
on behalf of the other member, while
the member with the reporting
obligation under FINRA rules remains
responsible for trades submitted on its
behalf.
The second commenter supports sellside reporting in light of the problems
with the current market maker-based
reporting structure, noting that these
problems are compounded in the
context of ATS trades, where nonsubscribers may not recognize that the
reporting responsibility lies with the
ATS.36 As discussed above, under the
proposed executing party structure, it
would be clear that an ATS has the
reporting responsibility where the trade
is executed on the ATS.
The commenters opposing the sellside reporting structure assert that this
approach would be less efficient and
could increase the rate of unreported or
inaccurately reported trades.37 These
commenters further assert that a sellside broker that is not also the executing
party will not have access to necessary
information, such as exceptions and
exemptions under the Order Protection
Rule, may not be able to easily obtain
this information and will not be able to
independently verify this information.38
Additionally, another commenter
asserts that while an originating broker
would be the seller if its sale were
executed by the first broker to whom it
routed its orders, frequently re-routed
orders could make it difficult to
determine which party has the reporting
responsibility under a sell-side
structure.39 Furthermore, the
commenters assert that a sell-side
reporting structure would be costly
because it would require members that
currently do not trade report to
implement trade reporting systems.40
FINRA agrees with these commenters,
and as discussed above, is proposing to
adopt the executing party trade
reporting structure.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 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
30 BNY.
31 UBS,
SIFMA and BNY.
36 ArcaEdge.
32 BNY.
37 FIF,
33 Liquidnet
38 FIF,
Pipeline and BNY.
SIFMA and BNY.
39 Pipeline.
40 TD AMERITRADE and BNY.
and ArcaEdge.
34 Liquidnet.
35 Liquidnet.
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16:15 Apr 23, 2008
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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 FINRA consents, the
Commission will:
(A) By order approve 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 e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2008–011 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2008–011. This file
number should be included on the
subject line if e-mail 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 inspection and copying 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 the 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
E:\FR\FM\24APN1.SGM
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Federal Register / Vol. 73, No. 80 / Thursday, April 24, 2008 / Notices
available publicly. All submissions
should refer to File Number SR–FINRA–
2008–011 and should be submitted on
or before May 15, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Nancy M. Morris,
Secretary.
[FR Doc. E8–8872 Filed 4–23–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57685; File No. SR–
NASDAQ–2008–013]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change
Relating to the Adoption of Additional
Initial Listing Standards for Special
Purpose Acquisition Vehicles
April 18, 2008.
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 March 14,
2008, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by Nasdaq. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
sroberts on PROD1PC70 with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The proposed rule change adopts
additional listing criteria that Nasdaq
proposes to apply when listing
acquisition vehicles. Nasdaq will
implement the proposed rule upon
approval.
The text of the proposed rule change
is below. Proposed new language is in
italics; proposed deletions are in
brackets.3
[IM–4300.] IM–4300–1. Use of
Discretionary Authority
No changes.
IM–4300–2. Listing of Companies Whose
Business Plan Is To Complete One or
More Acquisitions
Generally, Nasdaq will not permit the
initial or continued listing of a company
that has no specific business plan or
41 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Changes are marked to the rule text that appears
in the electronic manual of Nasdaq found at
https://nasdaq.complinet.com.
1 15
VerDate Aug<31>2005
16:51 Apr 23, 2008
Jkt 214001
that has indicated that its business plan
is to engage in a merger or acquisition
with an unidentified company or
companies.
However, in the case of a company
whose business plan is to complete an
initial public offering and engage in a
merger or acquisition with one or more
unidentified companies within a
specific period of time, Nasdaq will
permit the listing if the company meets
all applicable initial listing
requirements, as well as the conditions
described below.
(a) Gross proceeds from the initial
public offering must be deposited in a
trust account maintained by an
independent trustee, an escrow account
maintained by an ‘‘insured depository
institution,’’ as that term is defined in
Section 3(c)(2) of the Federal Deposit
Insurance Act or in a separate bank
account established by a registered
broker or dealer (collectively, a ‘‘deposit
account’’).
(b) Within 36 months of the
effectiveness of its IPO registration
statement, the company must complete
one or more business combinations
having an aggregate fair market value of
at least 80% of the value of the deposit
account (excluding any deferred
underwriters fees and taxes payable on
the income earned on the deposit
account) at the time of the agreement to
enter into the initial combination.
(c) Until the company has satisfied
the condition in paragraph (b) above,
each business combination must be
approved by a majority of the
company’s independent directors.
(d) Until the company has satisfied
the condition in paragraph (b) above,
each business combination must be
approved by a majority of the shares of
common stock voting at the meeting at
which the combination is being
considered.
Until the company completes a
business combination where all
conditions in paragraph (b) above are
met, the company must notify Nasdaq
on the appropriate form about each
proposed business combination.
Following each business combination,
the combined company must meet the
requirements for initial listing. If the
company does not meet the
requirements for initial listing following
a business combination or does not
comply with one of the requirements set
forth above, Nasdaq will issue a Staff
Determination under Rule 4804 to delist
the company’s securities.
PO 00000
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22191
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
Nasdaq 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. Nasdaq 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
In the past, Nasdaq has applied its
discretionary authority under Rule 4300
to deny listing to companies whose
business plan is to complete an initial
public offering and engage in a
subsequent, unidentified merger or
acquisition (an ‘‘acquisition vehicle’’).4
However, Nasdaq has observed that a
number of such recent offerings have
included investor protections that serve
to mitigate Nasdaq’s past concerns about
listing such companies.5 As a result,
Nasdaq has reconsidered its prior policy
and determined to list acquisition
vehicles provided they do not otherwise
raise public interest concerns.6 In order
to provide transparency to that change
in policy, and to describe certain
additional criteria that Nasdaq will
require for acquisition vehicles, Nasdaq
proposes to adopt IM–4300–2, which
will set out criteria designed to afford
investors in acquisition vehicles
additional protection.
First, these companies must meet all
applicable initial listing requirements.
Thus, for initial listing, companies
seeking to list on the Nasdaq Global
Market must have a minimum market
value of listed securities of $75 million
and companies seeking to list on the
4 Nasdaq Rule 4300 provides Nasdaq with broad
discretionary authority over the initial and
continued listing of securities in order to maintain
the quality of and public confidence in its market,
to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles
of trade, and to protect investors and the public
interest, even though the securities meet all
enumerated criteria for initial or continued listing.
5 In addition, while some of Nasdaq’s past denials
were based, in part, upon concerns surrounding the
underwriter or sponsor of the company, Nasdaq has
observed that the underwriters and sponsors of
recent offerings do not raise similar concerns.
6 As it does with any initial listing, Nasdaq will
evaluate the reputation of the company’s sponsors
and underwriters pursuant to Nasdaq Rule 4300 in
determining whether listing is appropriate.
E:\FR\FM\24APN1.SGM
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]]>Agencies
[Federal Register Volume 73, Number 80 (Thursday, April 24, 2008)]
[Notices]
[Pages 22186-22191]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-8872]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57681; File No. SR-FINRA-2008-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the
Trade Reporting Structure and Require Submission of Non-Tape Reports To
Identify Other Members for Agency and Riskless Principal Transactions
April 17, 2008.
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 March 28, 2008, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a the National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been substantially prepared by the
FINRA. The Commission is publishing this notice to solicit comments on
the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend its trade reporting rules applicable to
over-the-counter (``OTC'') equity transactions \3\ to: (1) Replace the
current market maker-based trade reporting framework with an
``executing party'' framework; and (2) require that any member with the
trade reporting obligation under FINRA rules that is acting in a
riskless principal or agency capacity on behalf of one or more other
members submit non-tape report(s) to FINRA, as necessary, to identify
such other member(s) as a party to the trade. The text of the proposed
rule change is available at FINRA, the Commission's Public Reference
Room, and https://www.finra.org.
---------------------------------------------------------------------------
\3\ Specifically, OTC equity transactions are: (1) Transactions
in NMS stocks, as defined in Rule 600(b) of Regulation NMS under the
Act, effected otherwise than on an exchange, which are reported
through the Alternative Display Facility (``ADF'') or a Trade
Reporting Facility (``TRF''); and (2) transactions in ``OTC Equity
Securities,'' as defined in NASD Rule 6610 (e.g., OTC Bulletin Board
and Pink Sheets securities), Direct Participation Program (``DPP'')
securities and PORTAL equity securities, which are reported through
the OTC Reporting Facility (``ORF''). The ADF, TRFs and ORF are
collectively referred to herein as the ``FINRA Facilities.''
---------------------------------------------------------------------------
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
Trade Reporting Structure
Currently, the following structure is in place for purposes of
reporting most OTC equity transactions to FINRA: (1) In transactions
between two market makers, the sell-side reports; (2) in transactions
between a market maker and a non-market maker, the market maker
reports; (3) in transactions between two non-market makers, the sell-
side reports; and (4) in transactions between a member and either a
non-member or customer, the member reports.\4\ This reporting structure
can result in confusion, delays and double-reporting, as the parties to
a trade attempt to determine which party has the trade reporting
obligation. Today, a firm's status as a market maker may not always be
apparent to the contra-party to a trade and, increasingly, firms'
proprietary desks (other than their market making desks) are handling
and executing transactions in equity securities. In addition, members
are required to report whether any applicable exception or exemption to
Rule 611 of Regulation NMS (the Order Protection Rule) applies to a
transaction, which is information that may not be readily known to the
party with the reporting obligation if it is not the executing broker
to the transaction, e.g., whether the executing broker has routed
[[Page 22187]]
intermarket sweep orders in compliance with Rule 611(b)(6).
---------------------------------------------------------------------------
\4\ See NASD Rules 4632(b) and 6130(c) relating to the NASD/
Nasdaq TRF; 4632A(b) relating to the ADF; 4632C(b) and 6130C(c)
relating to the NASD/NSX TRF; 4632E(b) and 6130E(c) relating to the
NASD/NYSE TRF; and 6130(c) and 6620(b) relating to the ORF.
For purposes of reporting transactions in DPP securities to
FINRA, NASD Rule 6920(b) requires that in a transaction between two
members, the member representing the sell-side report and in a
transaction between a member and customer, the member report.
---------------------------------------------------------------------------
Accordingly, FINRA is proposing to adopt a simpler, more uniform
structure for purposes of reporting OTC equity transactions to FINRA.
Specifically, FINRA is proposing to amend NASD Rules 4632(b), 4632A(b),
4632C(b), 4632E(b), 6620(b) and 6920(b) to require that for
transactions between members, the ``executing party'' report the trade
to FINRA. For transactions between a member and a non-member or
customer, the member would report the trade.\5\
---------------------------------------------------------------------------
\5\ In addition, FINRA is proposing to amend NASD Rules 6130(c),
6130C(c) and 6130E(c) to delete the duplicative rule provisions in
subparagraphs (1) through (4) and cross-reference NASD Rules 4632(b)
and 6620(b), 4632C(b) and 4632E(b), respectively.
FINRA also notes that the proposed executing party reporting
structure would apply to the reporting of transactions in PORTAL
equity securities to FINRA. Pursuant to NASD Rule 6732(a)(3), the
member with the obligation to report such transactions to FINRA is
determined in accordance with NASD Rule 6620(b).
---------------------------------------------------------------------------
FINRA is proposing to define ``executing party'' as the member that
receives an order for handling or execution or is presented an order
against its quote, does not subsequently re-route the order, and
executes the transaction. In certain limited circumstances, it may not
be clear which member should be deemed the executing party for trade
reporting purposes (e.g., manually negotiated trades via the
telephone). Accordingly, FINRA is proposing to require expressly that
for transactions between two members where both members may satisfy the
definition of executing party, the member representing the sell-side
shall report the transaction to FINRA, unless the parties agree
otherwise and the member representing the sell-side contemporaneously
documents such agreement. In such instances, the sell-side will be
presumed to be the member with the trade reporting obligation unless it
can demonstrate there was an agreement to the contrary, e.g.,
contemporaneous notes of a telephone conversation or notation on the
order ticket. FINRA believes that this approach will establish an
objective standard for determining the reporting obligation in these
circumstances, while affording the parties flexibility if, for example,
the member representing the buy-side is the party that knows the
material terms and details of the trade and thus is in the better
position to report the trade.
Under the proposed rule change, alternative trade systems
(``ATSs''), including electronic communications networks (``ECNs''),
would be the executing party and have the reporting obligation where
the transaction is executed on the ATS. If an ATS routes an order to
another member for handling and/or execution, then the other member
would be the executing party and have the reporting obligation under
the proposed rule change. If an ATS routes an order to a non-member
that is executed OTC, then the ATS would report the trade. Accordingly,
FINRA is proposing to delete subparagraphs (5) through (7) from NASD
Rules 6130(c), 6130C(c) and 6130E(c) relating to trade reporting by a
``Reporting ECN.'' \6\ Under the current rules, a Reporting ECN is
required to ensure that trades are reported in accordance with one of
three enumerated methods and must notify FINRA in writing of the method
of reporting for each of its subscribers.\7\ FINRA notes that today,
most ATSs elect to report transactions to FINRA using the first
reporting method, i.e., the ATS submits the trade report and identifies
itself as the Reporting Party. Thus, FINRA believes that the proposed
rule change would clarify the reporting requirements for ATSs and would
better align the rules with current trade reporting practices.
---------------------------------------------------------------------------
\6\ ``Reporting ECN'' generally is defined in NASD Rules 6110,
6110C and 6110E as an electronic communications network or
alternative trading system, as those terms are defined in SEC Rule
600(b) of Regulation NMS.
\7\ FINRA notes that the three reporting methods apply only for
purposes of reporting trades to a TRF or the ORF. There is no
comparable provision relating to reporting trades to the ADF.
---------------------------------------------------------------------------
Finally, FINRA is proposing to make certain technical conforming
changes, including to (1) delete NASD Rules 4632(b)(5), 4632C(b)(5),
4632E(b)(5), 6620(b)(5) and 6920(b)(3) relating to reporting by a
Reporting ECN; (2) delete the definitions of, and references to,
``Reporting ECN,'' ``Reporting Market Maker'' and ``Reporting Order
Entry Firm'' in NASD Rules 6110, 6110C and 6110E, which terms would be
obsolete as a result of the proposed rule change; and (3) amend NASD
Rules 6130(d)(5), 6130C(d)(5) and 6130E(d)(5) to replace the terms
``Market Maker side'' and ``Order Entry side'' with ``MMID or Reporting
Party side'' and ``OEID or non-Reporting Party side,'' respectively.
FINRA believes that the proposed rule change would result in more
accurate and timely trade reporting and make the trade reporting
process less cumbersome for members. The proposed rule change would
ensure that the member with the trade reporting obligation is the party
that knows the material terms and details of the transaction, including
any exceptions or exemptions to the Order Protection Rule that may
apply to the trade. Furthermore, many members have entered into
agreements to permit the executing party to report on behalf of the
member with the reporting obligation under FINRA's current rules. Thus,
FINRA believes that, to a large extent, the proposed rule change would
be consistent with current trade reporting practices.
Submission of Non-Tape Reports To Identify Other Members for Agency and
Riskless Principal Transactions
As a general matter, FINRA trade reporting rules require that a
member that is a party to an OTC trade be identified in trade reports
submitted to FINRA. Each trade report submitted for public
dissemination purposes (or ``tape report'') generally only allows for
the identification of two parties. Thus, where a FINRA member executes
a trade in a riskless principal \8\ or agency capacity on behalf of
another member, or matches, as agent, the orders of two or more
members, the tape report will not identify all members involved in the
trade. In such circumstances, additional ``non-tape reports,'' i.e.,
reports that are not submitted to the tape for public dissemination,\9\
would need to be submitted to identify all members involved in the
trade.
---------------------------------------------------------------------------
\8\ For purposes of FINRA trade reporting rules applicable to
equity securities, a ``riskless principal'' transaction is a
transaction in which a member, after having received an order to buy
(sell) a security, purchases (sells) the security as principal and
satisfies the original order by selling (buying) as principal at the
same price.
\9\ Non-tape reports can be (1) ``non-tape, non-clearing,''
meaning that the report is submitted to FINRA solely for regulatory
purposes, or (2) ``clearing-only,'' meaning that the report is
submitted to FINRA for clearing, i.e., for submission by FINRA to
the National Securities Clearing Corporation (and perhaps also
regulatory purposes).
---------------------------------------------------------------------------
Today, some members submit non-tape reports to FINRA identifying
the other members involved in the trade, while other members do not.
FINRA trade reporting rules generally are not specific in this regard
because, for the most part, they reflect the traditional two-party
trade model where a broker-dealer acts as principal or as agent for a
non-broker-dealer customer. Industry business models have evolved to
include more trades where one broker-dealer acts as agent or riskless
principal for another broker-dealer and order management systems and
ATSs can simultaneously match one or more broker-dealer orders on one
or both sides of a trade.
To address these changes, FINRA is proposing to adopt NASD Rules
4632(d)(4), 4632A(e)(1)(D), 4632C(d)(4), 4632E(d)(4), 6620(d)(4) and
6920(d)(5) to require that any member with the
[[Page 22188]]
obligation to report the trade under FINRA rules that is acting in a
riskless principal or agency capacity on behalf of one or more other
members submit to FINRA one or more non-tape report(s) identifying such
other member(s) as a party to the transaction, if such other member(s)
is not identified on the initial trade report or a report submitted to
FINRA to reflect the offsetting leg of a riskless principal
transaction. In addition, FINRA is proposing to amend NASD Rule
6732(a)(3), which currently cross-references the trade reporting
structure in NASD Rule 6620(b), to also cross-reference NASD Rule
6620(d), thereby making the proposed reporting requirement applicable
to PORTAL equity security transactions. A member that matches, as
agent, the orders of multiple members on one or both sides of the trade
would be required to submit multiple non-tape reports, as necessary, to
identify all members on whose behalf the member was acting.
For example, where Member A, as agent or riskless principal on
behalf of Member B, executes an OTC trade with Member C, and Member A
has the obligation to report the trade to FINRA, Member A also would be
required to submit a non-tape report to FINRA to indicate that it was
acting on behalf of Member B. By way of further example, where Member A
matches, as agent, the orders of Member B and Member C and submits to
FINRA a tape report between Member A and Member C, Member A also would
be required to submit a non-tape report to identify Member B as a party
to the trade. In this example, if Member A were to report the trade to
the tape as an agency cross (such that neither Member B nor Member C is
identified on the tape report), then Member A would be required to
submit two non-tape reports to identify Members B and C. In these
examples, Member A can satisfy its reporting obligation under the
proposed rule change by submitting a clearing-only report, if necessary
to clear the offsetting leg(s) of the transaction through a FINRA
Facility. However, if the parties do not need to clear the offsetting
leg(s) of the transaction through a FINRA Facility, then Member A would
be required to submit a non-tape, non-clearing report(s). Additionally,
if Member A is required to submit a non-tape report to comply with
applicable riskless principal reporting requirements under FINRA rules
\10\ and such report identifies Member B, then Member A would have no
separate reporting obligation under the proposed rule change.
---------------------------------------------------------------------------
\10\ If an OTC riskless principal transaction is not reported to
FINRA in a single tape report properly marked as riskless principal,
then two separate reports must be submitted: (1) A tape report to
reflect the initial leg of the transaction and (2) a non-tape report
to reflect the offsetting, ``riskless'' leg of the transaction, with
the correct capacity of riskless principal. See NASD Rules
4632(d)(3)(B), 4632A(e)(1)(C)(ii), 4632C(d)(3)(B), 4632E(d)(3)(B)
and 6620(d)(3)(B).
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The proposed reporting requirement would only apply to the member
that has the responsibility under FINRA rules to report the trade to
FINRA (i.e., the ``executing party'' in a trade between two members, as
discussed above). For example, where Member A, as agent on behalf of
Member B, and Member C execute an OTC trade, and Member C has the
obligation to report the trade to FINRA, Member A would not be required
under the proposed rule change to submit a non-tape report to indicate
that it was acting on behalf of Member B.
However, the proposed rule change expressly would not negate or
modify the requirements for reporting riskless principal transactions
under FINRA rules. Thus, drawing on the example in the paragraph above,
if Member A is acting as riskless principal (as opposed to agent) on
behalf of Member B, Member A currently is required to submit a non-tape
report to reflect the offsetting leg of the transaction under FINRA
riskless principal rules, if the tape report does not properly reflect
Member A's capacity as riskless principal.\11\ This requirement would
not change under the proposed rule change. Additionally, the proposed
rule change would not change the reporting requirements applicable to
riskless principal transactions with a customer.
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\11\ If Member A's capacity is properly marked as riskless
principal on the tape report, Member A would not be required to
submit a non-tape report to FINRA.
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FINRA notes that the proposed reporting requirement would not apply
to transactions that are executed on and reported through an exchange.
Today, where the initial leg of a riskless principal or agency
transaction is executed on an exchange, members are not required to
report either leg of the transaction to FINRA. The initial leg of the
transaction is reported through the exchange (and therefore must not be
reported to FINRA), and members have the option of submitting a non-
tape (typically, a clearing-only) report to FINRA for the offsetting
leg of the transaction. Pursuant to the proposed rule change, members
would continue to have the option of submitting a non-tape report for
riskless principal and agency transactions where the initial leg is
executed on an exchange; however, there would continue to be no
obligation to submit a non-tape report for such trades. Thus, for
example, where Member A, as agent or riskless principal on behalf of
Member B, executes a trade on an exchange, the trade will be reported
to the tape by the exchange and, under the proposed rule change, Member
A would not be required to submit a non-tape report to FINRA to
indicate that it was acting on behalf of Member B. However, Member A
would be permitted to submit a clearing-only report to clear the
offsetting leg of the transaction between Member A and Member B through
a FINRA Facility.\12\
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\12\ See FINRA Regulatory Notice 07-38 (August 2007).
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To clarify the scope and application of the proposed reporting
requirement, FINRA is proposing to include several examples in the
proposed rule text. FINRA notes that these examples are not intended to
represent all possible trade reporting scenarios under the proposed
rule change. Additionally, consistent with the definition of ``riskless
principal'' in other FINRA rules applicable to OTC equity trade
reporting, FINRA is proposing to amend the definition of ``riskless
principal transaction'' in NASD Rule 6910 to clarify that a member may
act in a riskless principal capacity on behalf of another broker-dealer
as well as a customer.\13\
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\13\ FINRA also is proposing a technical change to insert
paragraph headings for ease of reference in NASD Rules 4632(d),
4632A(e)(1), 4632C(d), 4632E(d), 6620(d) and 6920(d).
---------------------------------------------------------------------------
Finally, FINRA notes that because members would be submitting non-
tape reports, the 90-second reporting requirement under FINRA trade
reporting rules would not apply. Thus, members generally would have
until the end of the day on trade date to submit the requisite non-tape
reports.\14\
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\14\ In certain circumstances, however, members must submit non-
tape reports contemporaneously with trade execution, e.g., to
qualify for the exemption from the requirements of IM-2110-2
(Trading Ahead of Customer Limit Order) for riskless principal
transactions.
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FINRA believes that the proposed rule change would enhance FINRA
staff's ability to create a complete and accurate audit trail and
assist in the automated surveillance of various customer protection and
market integrity rules.
Many members today submit clearing-only reports to FINRA in
instances where the proposed reporting requirement would apply, e.g.,
if a member needs to clear the offsetting leg of an agency transaction
through a FINRA Facility or if a member elects under FINRA rules to
report an OTC riskless principal trade in related tape and non-tape
reports. Thus, for some
[[Page 22189]]
members, the proposed rule change may not require any changes to
current reporting practices and systems. For other members, however,
the proposed rule change would require systems changes, e.g., if a
member does not need to clear the offsetting leg of an agency
transaction through a FINRA Facility. Additionally, where a member
reports a riskless principal transaction to FINRA in a single properly
marked tape report, a non-tape report would be required under the
proposed rule change if the member is acting on behalf of another
member.
FINRA will announce the operative date of the proposed rule change
on its website. In recognition of the technological changes that the
proposed rule change will require, the operative date will be (1) at
least 90 days following Commission approval for transactions executed
on ATSs, including electronic communications networks; and (2) at least
180 days following Commission approval with respect to all other
transactions. FINRA believes that a shorter implementation period is
appropriate for ATSs because, as noted above, most ATSs currently are
the reporting party for transactions executed on the ATS and some
voluntarily submit non-tape reports to reflect all FINRA members that
are parties to a trade.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\15\ which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change to amend
the trade reporting structure will result in more accurate and timely
trade reporting and thus enhance market transparency. Additionally,
FINRA believes that the proposed rule change to require the submission
of non-tape reports to identify other members for agency and riskless
principal transactions will promote a more complete and accurate audit
trail.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
In September 2007, FINRA published Regulatory Notice 07-46
(``Notice'') soliciting comment on a proposal to adopt a simpler and
more uniform trade reporting structure. Nine comment letters were
received in response to the Notice.\16\
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\16\ See Letters from Liquidnet, Inc., to Office of the
Corporate Secretary, FINRA, dated October 26, 2007 (``Liquidnet'');
Archipelago Trading Services, Inc., to Barbara Z. Sweeney, Office of
the Corporate Secretary, FINRA, dated November 6, 2007
(``ArcaEdge''); Financial Information Forum, to Barbara Z. Sweeney,
Office of the Corporate Secretary, FINRA, dated November 8, 2007
(``FIF''); Pipeline Trading Systems LLC, to Barbara Z. Sweeney,
Office of the Corporate Secretary, FINRA, dated November 12, 2007
(``Pipeline''); Automated Trading Desk, LLC, to Barbara Z. Sweeney,
Office of the Corporate Secretary, FINRA, dated November 12, 2007
(``ATD''); TD AMERITRADE, Inc., to Barbara Z. Sweeney, Office of the
Corporate Secretary, FINRA, dated November 15, 2007 (``TD
AMERITRADE''); UBS Securities LLC, to Barbara Z. Sweeney, Office of
the Corporate Secretary, FINRA, dated November 15, 2007 (``UBS'');
The Securities Industry and Financial Markets Association, Barbara
Z. Sweeney, Office of the Corporate Secretary, FINRA, dated November
16, 2007 (``SIFMA''); and BNY ConvergEx Execution Solutions LLC,
Charles Schwab & Co., Inc., National Financial Services LLC and
Pershing LLC, to Barbara Z. Sweeney, Office of the Corporate
Secretary, FINRA, dated November 30, 2007 (``BNY'').
---------------------------------------------------------------------------
All of the commenters support the adoption of a new trade reporting
structure, asserting that the current structure can be confusing and
create delays and reporting errors. Seven of the nine commenters
support the proposed executing party reporting structure, asserting
that this structure is the most logical and efficient approach.\17\
These commenters assert that the executing party knows the material
terms and details of the transaction, as well as any Order Protection
Rule exceptions or exemptions that apply to the trade,\18\ and thus is
in the best position to report in a timely manner \19\ and to correct
reporting errors.\20\ In addition, several commenters note that
industry practice is for executing parties to trade report; most
executing parties already have established systems to trade report and
many firms have entered give-up agreements to replicate the executing
party reporting structure.\21\
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\17\ FIF, Pipeline, ATD, TD AMERITRADE, UBS, SIFMA and BNY.
\18\ FIF, ATD, UBS and SIFMA.
\19\ Pipeline and UBS.
\20\ ATD.
\21\ ATD, TD AMERITRADE and BNY.
---------------------------------------------------------------------------
One commenter states that it is unclear whether the advantages of
Qualified Service Representative (QSR) agreements would remain under
the proposed executing party reporting structure and strongly urges
that any changes continue to keep the QSR process intact.\22\ FINRA
notes that a QSR agreement is a National Securities Clearing
Corporation agreement and, for FINRA purposes, merely establishes that
one party can send a trade to clearing on behalf of the other party. A
give up agreement still is required for a member to report trade
information to a FINRA Facility on behalf of another member, even if
the parties have a QSR agreement in effect.\23\ This proposed rule
change would not change the QSR process or member obligations with
respect to give up agreements.
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\22\ TD AMERITRADE.
\23\ See NASD Member Alert: Notice to All TRF, ADF and Other
NASD Facility Participants Regarding AGU and QSR Relationships
(January 25, 2007).
---------------------------------------------------------------------------
In the Notice, FINRA specifically requested comment on how
``executing party'' should be defined. The commenters generally suggest
that the ``executing party'' should be defined as the party that
receives the order electronically for execution, does not subsequently
re-route the order, and agrees to execute the trade, or in other words,
the broker that is the ``final recipient'' and determines the
price.\24\ One commenter states that in the electronic marketplace, the
identity of the order entry broker generally will be readily apparent
based on which party is initiating or seeking an execution, and the
executing party's identity will be equally apparent based on which
party is receiving the order for execution.\25\ This commenter provides
the following example: A displays a limit order to sell 100 shares at
$10. B routes an order to buy 100 shares against A's displayed order.
In this example, it is clear that A is the executing broker and B is
the order entry broker; B initiated and sought out an execution against
A's displayed limit order.\26\ As discussed above, FINRA is proposing
to define ``executing party'' substantially as proposed by these
commenters.
---------------------------------------------------------------------------
\24\ FIF, ATD, UBS, SIFMA and BNY.
\25\ ATD.
\26\ ATD.
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In instances of telephone orders, three commenters believe that the
same approach should be followed (i.e., the executing party is the
``answering'' or ``receiving'' or ``responding'' broker), unless the
parties agree to the contrary.\27\ One commenter believes that in the
case of telephone trades, the sell-side member should be the reporting
party,\28\ while another commenter
[[Page 22190]]
asserts that the current trade reporting structure should apply in such
instances.\29\ Additionally, one commenter asserts that the executing
party may not be clear when a member requests a quote from another
member, receives a quote and then agrees to trade at the quoted price,
and suggests that the member responding to the request for a quote
(i.e., the price-making firm) should be deemed the executing party.\30\
As discussed above, FINRA is proposing to require that where it may be
difficult to determine which member satisfies the definition of
``executing party,'' such as telephone and other manually negotiated
trades, the member representing the sell-side report, unless the
parties agree otherwise. Several commenters note that in today's
market, the number of telephone negotiated trades is relatively small
compared to the number of trades involving the routing of electronic
orders, and thus the instances where it would not be clear which member
is the executing party should be limited.\31\ In the words of one
commenter, ``[a]ll but a tiny fraction of orders in the current
marketplace are routed electronically'' and as such, ``in the vast
majority of transactions, there is no doubt about which entity is the
Executing Broker.'' \32\
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\27\ ATD, SIFMA and BNY.
\28\ FIF.
\29\ UBS.
\30\ BNY.
\31\ UBS, SIFMA and BNY.
\32\ BNY.
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Two commenters support a sell-side reporting structure, whereby the
member representing the sell-side would report a trade between
members.\33\ One commenter asserts that in all cases, it would be clear
which party is selling and which party is buying, but the distinction
between the executing party and introducing broker could be unclear in
certain cases.\34\ FINRA disagrees and believes that where Member A, an
introducing broker, routes an order for handling and/or execution to
Member B, and Member B does not re-route the order and executes the
trade, it is clear that Member B is the executing party. This commenter
also asserts that in a trade between two brokers, the selling broker
should be the reporting party, but the brokers should have full
flexibility to override this default rule and designate the buyer as
the reporting party.\35\ FINRA believes that the determination of which
member has the trade reporting obligation should not be subject to
agreement between the parties, except in limited circumstances as
discussed above, as that approach would result in confusion and
possible under or double reporting. FINRA notes, however, that members
can enter into give up agreements under FINRA rules, whereby one member
can trade report on behalf of the other member, while the member with
the reporting obligation under FINRA rules remains responsible for
trades submitted on its behalf.
---------------------------------------------------------------------------
\33\ Liquidnet and ArcaEdge.
\34\ Liquidnet.
\35\ Liquidnet.
---------------------------------------------------------------------------
The second commenter supports sell-side reporting in light of the
problems with the current market maker-based reporting structure,
noting that these problems are compounded in the context of ATS trades,
where non-subscribers may not recognize that the reporting
responsibility lies with the ATS.\36\ As discussed above, under the
proposed executing party structure, it would be clear that an ATS has
the reporting responsibility where the trade is executed on the ATS.
---------------------------------------------------------------------------
\36\ ArcaEdge.
---------------------------------------------------------------------------
The commenters opposing the sell-side reporting structure assert
that this approach would be less efficient and could increase the rate
of unreported or inaccurately reported trades.\37\ These commenters
further assert that a sell-side broker that is not also the executing
party will not have access to necessary information, such as exceptions
and exemptions under the Order Protection Rule, may not be able to
easily obtain this information and will not be able to independently
verify this information.\38\ Additionally, another commenter asserts
that while an originating broker would be the seller if its sale were
executed by the first broker to whom it routed its orders, frequently
re-routed orders could make it difficult to determine which party has
the reporting responsibility under a sell-side structure.\39\
Furthermore, the commenters assert that a sell-side reporting structure
would be costly because it would require members that currently do not
trade report to implement trade reporting systems.\40\ FINRA agrees
with these commenters, and as discussed above, is proposing to adopt
the executing party trade reporting structure.
---------------------------------------------------------------------------
\37\ FIF, Pipeline and BNY.
\38\ FIF, SIFMA and BNY.
\39\ Pipeline.
\40\ TD AMERITRADE and BNY.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 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 FINRA consents, the Commission will:
(A) By order approve 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2008-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2008-011. This
file number should be included on the subject line if e-mail 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 inspection
and copying 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 the 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
[[Page 22191]]
available publicly. All submissions should refer to File Number SR-
FINRA-2008-011 and should be submitted on or before May 15, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E8-8872 Filed 4-23-08; 8:45 am]
BILLING CODE 8010-01-P
