Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to the Expansion of the Order Audit Trail System to All NMS Stocks, 70757-70759 [2010-29079]

Download as PDF Federal Register / Vol. 75, No. 222 / Thursday, November 18, 2010 / Notices Electronic Comments disciplinary actions imposed by the SEC. B. Self-Regulatory Organization’s Statement on Burden on Competition The MSRB 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, since it would apply equally to all municipal advisors. In particular, the MSRB believes that the amendments to Rule G–5 impose no regulatory burden on any municipal advisor because Section 15B(c) of the Act already permits the SEC to limit the activities of municipal advisors in the manner provided for in amended Rule G–5. Further, the MSRB believes that the amendment to Rule G–17 imposes no regulatory burden on any municipal advisor not necessary or appropriate in furtherance of the purposes of the Act since most municipal advisors already comport themselves in accordance with the standards of behavior required by Rule G–17 and no municipal advisor has a legitimate interest in engaging in behavior that is fraudulent or otherwise unfair. C. Self-Regulatory Organization’s Statement on Comments Received on the Proposed Rule Change by Members, Participants, or Others Written comments were neither solicited nor received on the proposed rule. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action mstockstill on DSKH9S0YB1PROD with NOTICES Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: VerDate Mar<15>2010 16:56 Nov 17, 2010 Jkt 223001 • 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–MSRB–2010–16 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. 70757 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63311; File No. SR–FINRA– 2010–044] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to the Expansion of the Order Audit Trail System to All NMS Stocks November 12, 2010. I. Introduction On August 6, 2010, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and All submissions should refer to File Exchange Commission (‘‘SEC’’ or Number SR–MSRB–2010–16. This file ‘‘Commission’’), pursuant to Section number should be included on the 19(b)(1) of the Securities Exchange Act subject line if e-mail is used. To help the of 1934 (‘‘Act’’),1 a proposed rule change Commission process and review your to amend its Order Audit Trail System comments more efficiently, please use rules to extend the recording and only one method. The Commission will reporting requirements to all NMS post all comments on the Commission’s stocks and to exclude certain firms that have limited trading activities. The Web site (https://www.sec.gov/rules/ sro.shtml). Copies of the submission, all proposed rule change was published for comment in the Federal Register on subsequent amendments, all written statements with respect to the proposed August 25, 2010.2 The Commission received three comment letters on the rule change that are filed with the proposed rule change.3 FINRA Commission, and all written responded to these comment letters in a communications relating to the letter dated October 28, 2010.4 This proposed rule change between the order approves the proposed rule Commission and any person, other than change. those that may be withheld from the public in accordance with the II. Description of Proposal provisions of 5 U.S.C. 552, will be FINRA Rules 7410 through 7470 (the available for Web site viewing and ‘‘OATS Rules’’) impose obligations on printing in the Commission’s Public FINRA members to record in electronic Reference Room, 100 F Street, NE., form and report to FINRA, on a daily Washington, DC 20549, on official basis, certain information with respect business days between the hours of to orders originated, received, 10 a.m. and 3 p.m. Copies of such filing transmitted, modified, canceled, or also will be available for inspection and executed by members in OTC equity copying at the MSRB’s offices. All securities and equity securities listed and traded on The Nasdaq Stock comments received will be posted Market, Inc. (‘‘Nasdaq’’).5 This without change; the Commission does not edit personal identifying 1 15 U.S.C. 78s(b)(1). information from submissions. You 2 See Securities Exchange Act Release No. 62739 should submit only information that (August 18, 2010), 75 FR 52380. you wish to make available publicly. All 3 See letter from Steve Allread, Equity Trader, submissions should refer to File Cutter Company, to Commission, dated September Number SR–MSRB–2010–16 and should 10, 2010 (‘‘Cutter Letter’’); letter from Joan Conley, Senior Vice President and Corporate Secretary, be submitted on or before December 9, Nasdaq OMX Group, Inc., to Elizabeth M. Murphy, 2010. Secretary, Commission, dated September 15, 2010 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.3 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–29077 Filed 11–17–10; 8:45 am] BILLING CODE 8011–01–P 3 17 PO 00000 (‘‘Nasdaq Letter’’); and letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, Commission, dated September 17, 2010 (‘‘FIF Letter’’). 4 See letter from Brant K. Brown, Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated October 28, 2010 (‘‘FINRA Response’’). 5 As amended by SR–FINRA–2010–003, FINRA Rule 7410 defines an ‘‘OTC equity security’’ for purposes of the OATS Rules as an equity security that is not an NMS stock, except that the term does not include restricted equity securities and direct CFR 200.30–3(a)(12). Frm 00086 Fmt 4703 Continued Sfmt 4703 E:\FR\FM\18NON1.SGM 18NON1 70758 Federal Register / Vol. 75, No. 222 / Thursday, November 18, 2010 / Notices information is used by FINRA staff to oversee the markets and to determine if members are complying with FINRA’s rules. FINRA is proposing to extend the OATS recording and reporting requirements to cover all NMS securities.6 FINRA is also proposing to exclude from the definition of ‘‘Reporting Member’’ 7 in FINRA Rule 7410 certain firms that became FINRA members pursuant to NASD IM–1013–1 (Membership Waive-In Process for Certain New York Stock Exchange Member Organizations), or NASD IM– 1013–2 (Membership Waive-In Process for Certain NYSE Alternext US LLC 8 Member Organizations), and the rules of the NYSE,9 and that engage in the floor activities permitted in NASD IM–1013– 1 and IM–1013–2 and receive orders through systems operated and regulated by the NYSE or NYSE Amex. mstockstill on DSKH9S0YB1PROD with NOTICES III. Discussion of Comment Letters The Commission received three comment letters on the proposed rule change and FINRA responded to these comments.10 One commenter, FIF, supported the proposal, but specified a variety of terms and provisions that it believed should be incorporated by FINRA in its expansion of OATS.11 Specifically, FIF suggested that FINRA ensure that the terms currently used in the Order Tracking System (OTS) Rules are harmonized with those used in the OATS Rule and noted, for example, that account types currently are treated differently by NYSE and FINRA. The commenter suggested using the ‘‘FIX’’ protocol to ensure standardization. FIF also requested that FINRA take into consideration that certain FINRA member firms do not have MPIDs, which are required for OATS reporting, participation programs, as those terms are defined in FINRA Rule 6420. See Securities Exchange Act Release No. 61979 (April 23, 2010), 75 FR 23316 (May 3, 2010) (Order Approving File No. SR– FINRA–2010–003). 6 Rule 600(b)(47) of Regulation NMS defines ‘‘NMS stock’’ as ‘‘any NMS security other than an option.’’ 17 CFR 242.600(b)(47). An ‘‘NMS security’’ is defined as ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.’’ 17 CFR 242.600(b)(46). 7 A ‘‘reporting member’’ is defined in FINRA Rule 7410(o) as a member that receives or originates an order and has an obligation to record and report information under Rules 7440 and 7450. 8 In March 2009, NYSE Alternext US LLC changed its name to NYSE Amex LLC (‘‘NYSE Amex’’). See Securities Exchange Act Release No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009). 9 See NYSE Rule 2. 10 See supra notes 3 and 4. 11 See FIF Letter, supra note 3. VerDate Mar<15>2010 16:56 Nov 17, 2010 Jkt 223001 and that FINRA configure OATS to accept symbols under the different Nasdaq and NYSE symbology plans. FIF suggested that FINRA enhance its capacity and processing bandwidth to accommodate the millions of additional OATS reports it would receive under the proposed rule to ensure timely processing of files and error free testing. FIF also requested that FINRA extend the deadline to submit reports due to the additional volume of reports that would be required. FIF also requested an extension of the current time frame for members to repair and resubmit OATS rejections.12 FINRA responded to these comments by stating that it is currently reviewing OATS for potential efficiencies and will consider the issues raised with respect to revising its reporting and rejection repair and resubmission deadlines, as well as capacity limitations. FINRA believes that a phased-in approach for inclusion of NMS stocks in OATS is acceptable. FIF also requested that FINRA adopt an exemption for, or provide additional time for inclusion in OATS of, convertible and non-convertible preferred stock listed on the NYSE explaining that these securities managed by firms’ Fixed Income Desks and systems and may not be easily reportable on existing platforms. FINRA responded that NYSE’s current OTS rules do not contain an exemption for preferred stock, and therefore, members are already required to capture order information for these securities. Consequentially, FINRA does not believe that preferred stock should be exempted from OATS, or that it should provide additional time for implementation of the requirement. Another commenter questioned the regulatory usage of the data that currently is required to be submitted to OATS.13 In response, FINRA explained that it currently uses OATS data to conduct surveillance and investigations of its members, and that the expansion of this data to include NMS securities traded on other exchanges would enhance FINRA’s ability to surveil its members’ trading activity across multiple markets. The third commenter, Nasdaq, argued that the timing of the OATS proposal, in light of the Commission’s proposed consolidated audit trail, is an effort by FINRA to make OATS the default consolidated audit trail choice for the industry, and submitted questions for FINRA regarding the cost, timing and 12 See 13 See PO 00000 FIF Letter, supra note 3. Allread Letter, supra note 3. Frm 00087 Fmt 4703 Sfmt 4703 use of its proposal.14 In response, FINRA stated that its proposal is not intended to replace the Commission’s consolidated audit trail proposal, and that FINRA views it instead as an effort to improve its own regulatory oversight. It recognized that the proposal may impose costs on its members, but believes that most of those affected would already have in place the OTS infrastructure, which would allow them to adopt the proposed changes quickly. IV. Commission Findings The Commission has carefully reviewed the proposed rule change, the comments received, and FINRA’s response to the comments, and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.15 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,16 which, among other things, requires that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission believes that the proposed rule change, by requiring members to record and report order information for all NMS stocks, not just those securities listed on Nasdaq or traded over-the-counter, will enhance FINRA’s market surveillance and investigative capabilities. FINRA has stated that it is currently unable to view a complete order and transaction audit trail for all over-the-counter transactions in NMS stocks; thus, the proposed expansion of surveillance to NMS stocks listed on non-Nasdaq markets should enhance FINRA’s oversight of the U.S. equity markets. The Commission believes the proposed rule change is a positive step toward a cross-market audit trail. The Commission views FINRA’s proposed expansion of OATS as an interim measure that will improve FINRA’s regulatory capabilities by broadening its oversight. The Commission notes that FINRA’s proposal will also remove redundancies, as FINRA has represented that OTS is expected to be retired by NYSE upon the expansion of OATS. Additionally, the Commission agrees that FINRA’s amendment to its definition of ‘‘Reporting Members’’ is 14 See Nasdaq Letter, supra note 3. approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 16 15 U.S.C. 78o–3(b)(6). 15 In E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 75, No. 222 / Thursday, November 18, 2010 / Notices appropriate, as it excludes from the OATS recording and reporting requirements those members who conduct a floor business through NYSE and NYSE Amex and who are currently not subject to OTS, but to the requirements of NYSE Rule 123 and NYSE Amex Equities Rule 123 (Record of Orders).17 By exempting these members from the OATS requirements, FINRA is not altering their current audit trail obligations.18 The Commission believes that FINRA’s proposed amendment to Rule 7410 is appropriate as these members would continue to be required to record and report information under NYSE Rule 123 and NYSE Amex Equities Rule 123, and would continue to be subject to FINRA regulation. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,19 that the proposed rule change (SR–FINRA– 2010–044), be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–29079 Filed 11–17–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63313; File No. SR–MSRB– 2010–14] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Amendments to Rule A–12, on Initial Fee, and Rule A–14, on Annual Fee November 12, 2010. mstockstill on DSKH9S0YB1PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 17 NYSE Rule 123 and NYSE Amex Equities Rule 123 pertain to orders or commitments or obligations to trade originated on or transmitted to the floor of each exchange. 18 These members would be subject to FINRA’s oversight, as FINRA assumed the market surveillance and enforcement functions of NYSE Regulation, Inc. in June 2010, pursuant to a multiparty regulatory services agreement with NYSE Regulation, Inc., NYSE, NYSE Amex, and NYSE Arca. See ‘‘FINRA and NYSE Euronext Complete Agreement for FINRA to Perform NYSE Regulation’s Market Oversight Functions,’’ FINRA News Release (June 14, 2010), available at https:// www.finra.org/Newsroom/NewsReleases/2010/ P121622. 19 15 U.S.C. 78s(b)(2). 20 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Mar<15>2010 16:56 Nov 17, 2010 Jkt 223001 notice is hereby given that on November 9, 2010, the Municipal Securities Rulemaking Board (‘‘Board’’ or ‘‘MSRB’’), 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 the MSRB. The MSRB has designated the proposed rule change as changing a fee applicable to municipal advisors pursuant to Section 19(b)(3)(A)(ii) of the Act,3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. 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 MSRB is filing a proposed rule change consisting of amendments to Rule A–12, on initial fee, and Rule A– 14, on annual fee, to provide for the payment to the Board by municipal advisors of initial and annual fees. The proposed rule change is effective immediately upon filing. The proposed rule change would apply to municipal advisors immediately; however, it will have a deferred compliance date of December 31, 2010. The text of the proposed rule change is available on the MSRB’s Web site at https://www.msrb.org/Rules-andInterpretations/SEC-Filings/2010Filings.aspx, at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB 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. The MSRB 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 The purpose of the proposed rule change is to provide for the assessment of reasonable fees to defray a portion of 3 15 4 17 PO 00000 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). Frm 00088 Fmt 4703 Sfmt 4703 70759 the increased costs and expenses associated with the operation and administration of the Board attributable to the Board’s regulation of municipal advisors, including an initial fee of $100 and an annual fee of $500. Except as described below, the proposed rule change applies the provisions of Rules A–12 and A–14 to municipal advisor firms in the same manner that they currently apply to brokers, dealers, and municipal securities dealers (‘‘dealers’’). Individuals will not be required to pay these fees unless they are sole proprietorships. Although the initial fee under Rule A–12 normally would be payable to the Board prior to a municipal advisor engaging in any municipal advisory activities, the proposed rule change would permit a municipal advisor firm to engage in such activities prior to January 1, 2011 so long as the initial fee is paid by January 1, 2011. Similarly, although the annual fee under Rule A–14 normally would be payable by October 31 of each fiscal year (or, for municipal advisor firms becoming subject to MSRB rules in the current fiscal year, simultaneously with the initial fee under Rule A–12), the proposed rule change would permit a municipal advisor firm to engage in such activities prior to January 1, 2011 so long as the annual fee for the current fiscal year of the Board is paid by January 1, 2011. Each firm subject to the rules of the Board shall be required to pay the initial fee only once, and the annual fee only once each fiscal year, even if a firm is both a dealer and a municipal advisor. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(J) of the Act, which provides that the Board’s rules shall: Provide that each municipal securities broker, municipal securities dealer, and municipal advisor shall pay to the Board such reasonable fees and charges as may be necessary or appropriate to defray the costs and expenses of operating and administering the Board. The $100 initial fee imposed on municipal advisors by amended Rule A–12 and the $500 annual fee imposed on municipal advisors by amended Rule A–14 are reasonable. In its filing, the MSRB noted that the annual fee is comparable to the fees that municipal advisors must pay to State regulators if they must register as investment advisers. The initial fee is less than most States impose for the initial registration of investment advisers. The revenue resulting from these fees will defray only a small portion of the cost of MSRB regulation of municipal advisors. E:\FR\FM\18NON1.SGM 18NON1

Agencies

[Federal Register Volume 75, Number 222 (Thursday, November 18, 2010)]
[Notices]
[Pages 70757-70759]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29079]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63311; File No. SR-FINRA-2010-044]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to the 
Expansion of the Order Audit Trail System to All NMS Stocks

November 12, 2010.

I. Introduction

    On August 6, 2010, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule change to 
amend its Order Audit Trail System rules to extend the recording and 
reporting requirements to all NMS stocks and to exclude certain firms 
that have limited trading activities. The proposed rule change was 
published for comment in the Federal Register on August 25, 2010.\2\ 
The Commission received three comment letters on the proposed rule 
change.\3\ FINRA responded to these comment letters in a letter dated 
October 28, 2010.\4\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 62739 (August 18, 
2010), 75 FR 52380.
    \3\ See letter from Steve Allread, Equity Trader, Cutter 
Company, to Commission, dated September 10, 2010 (``Cutter 
Letter''); letter from Joan Conley, Senior Vice President and 
Corporate Secretary, Nasdaq OMX Group, Inc., to Elizabeth M. Murphy, 
Secretary, Commission, dated September 15, 2010 (``Nasdaq Letter''); 
and letter from Manisha Kimmel, Executive Director, Financial 
Information Forum, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 17, 2010 (``FIF Letter'').
    \4\ See letter from Brant K. Brown, Associate General Counsel, 
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated October 
28, 2010 (``FINRA Response'').
---------------------------------------------------------------------------

II. Description of Proposal

    FINRA Rules 7410 through 7470 (the ``OATS Rules'') impose 
obligations on FINRA members to record in electronic form and report to 
FINRA, on a daily basis, certain information with respect to orders 
originated, received, transmitted, modified, canceled, or executed by 
members in OTC equity securities and equity securities listed and 
traded on The Nasdaq Stock Market, Inc. (``Nasdaq'').\5\ This

[[Page 70758]]

information is used by FINRA staff to oversee the markets and to 
determine if members are complying with FINRA's rules.
---------------------------------------------------------------------------

    \5\ As amended by SR-FINRA-2010-003, FINRA Rule 7410 defines an 
``OTC equity security'' for purposes of the OATS Rules as an equity 
security that is not an NMS stock, except that the term does not 
include restricted equity securities and direct participation 
programs, as those terms are defined in FINRA Rule 6420. See 
Securities Exchange Act Release No. 61979 (April 23, 2010), 75 FR 
23316 (May 3, 2010) (Order Approving File No. SR-FINRA-2010-003).
---------------------------------------------------------------------------

    FINRA is proposing to extend the OATS recording and reporting 
requirements to cover all NMS securities.\6\ FINRA is also proposing to 
exclude from the definition of ``Reporting Member'' \7\ in FINRA Rule 
7410 certain firms that became FINRA members pursuant to NASD IM-1013-1 
(Membership Waive-In Process for Certain New York Stock Exchange Member 
Organizations), or NASD IM-1013-2 (Membership Waive-In Process for 
Certain NYSE Alternext US LLC \8\ Member Organizations), and the rules 
of the NYSE,\9\ and that engage in the floor activities permitted in 
NASD IM-1013-1 and IM-1013-2 and receive orders through systems 
operated and regulated by the NYSE or NYSE Amex.
---------------------------------------------------------------------------

    \6\ Rule 600(b)(47) of Regulation NMS defines ``NMS stock'' as 
``any NMS security other than an option.'' 17 CFR 242.600(b)(47). An 
``NMS security'' is defined as ``any security or class of securities 
for which transaction reports are collected, processed, and made 
available pursuant to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
listed options.'' 17 CFR 242.600(b)(46).
    \7\ A ``reporting member'' is defined in FINRA Rule 7410(o) as a 
member that receives or originates an order and has an obligation to 
record and report information under Rules 7440 and 7450.
    \8\ In March 2009, NYSE Alternext US LLC changed its name to 
NYSE Amex LLC (``NYSE Amex''). See Securities Exchange Act Release 
No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009).
    \9\ See NYSE Rule 2.
---------------------------------------------------------------------------

III. Discussion of Comment Letters

    The Commission received three comment letters on the proposed rule 
change and FINRA responded to these comments.\10\ One commenter, FIF, 
supported the proposal, but specified a variety of terms and provisions 
that it believed should be incorporated by FINRA in its expansion of 
OATS.\11\ Specifically, FIF suggested that FINRA ensure that the terms 
currently used in the Order Tracking System (OTS) Rules are harmonized 
with those used in the OATS Rule and noted, for example, that account 
types currently are treated differently by NYSE and FINRA. The 
commenter suggested using the ``FIX'' protocol to ensure 
standardization. FIF also requested that FINRA take into consideration 
that certain FINRA member firms do not have MPIDs, which are required 
for OATS reporting, and that FINRA configure OATS to accept symbols 
under the different Nasdaq and NYSE symbology plans.
---------------------------------------------------------------------------

    \10\ See supra notes 3 and 4.
    \11\ See FIF Letter, supra note 3.
---------------------------------------------------------------------------

    FIF suggested that FINRA enhance its capacity and processing 
bandwidth to accommodate the millions of additional OATS reports it 
would receive under the proposed rule to ensure timely processing of 
files and error free testing. FIF also requested that FINRA extend the 
deadline to submit reports due to the additional volume of reports that 
would be required. FIF also requested an extension of the current time 
frame for members to repair and resubmit OATS rejections.\12\
---------------------------------------------------------------------------

    \12\ See FIF Letter, supra note 3.
---------------------------------------------------------------------------

    FINRA responded to these comments by stating that it is currently 
reviewing OATS for potential efficiencies and will consider the issues 
raised with respect to revising its reporting and rejection repair and 
resubmission deadlines, as well as capacity limitations. FINRA believes 
that a phased-in approach for inclusion of NMS stocks in OATS is 
acceptable.
    FIF also requested that FINRA adopt an exemption for, or provide 
additional time for inclusion in OATS of, convertible and non-
convertible preferred stock listed on the NYSE explaining that these 
securities managed by firms' Fixed Income Desks and systems and may not 
be easily reportable on existing platforms.
    FINRA responded that NYSE's current OTS rules do not contain an 
exemption for preferred stock, and therefore, members are already 
required to capture order information for these securities. 
Consequentially, FINRA does not believe that preferred stock should be 
exempted from OATS, or that it should provide additional time for 
implementation of the requirement.
    Another commenter questioned the regulatory usage of the data that 
currently is required to be submitted to OATS.\13\ In response, FINRA 
explained that it currently uses OATS data to conduct surveillance and 
investigations of its members, and that the expansion of this data to 
include NMS securities traded on other exchanges would enhance FINRA's 
ability to surveil its members' trading activity across multiple 
markets.
---------------------------------------------------------------------------

    \13\ See Allread Letter, supra note 3.
---------------------------------------------------------------------------

    The third commenter, Nasdaq, argued that the timing of the OATS 
proposal, in light of the Commission's proposed consolidated audit 
trail, is an effort by FINRA to make OATS the default consolidated 
audit trail choice for the industry, and submitted questions for FINRA 
regarding the cost, timing and use of its proposal.\14\ In response, 
FINRA stated that its proposal is not intended to replace the 
Commission's consolidated audit trail proposal, and that FINRA views it 
instead as an effort to improve its own regulatory oversight. It 
recognized that the proposal may impose costs on its members, but 
believes that most of those affected would already have in place the 
OTS infrastructure, which would allow them to adopt the proposed 
changes quickly.
---------------------------------------------------------------------------

    \14\ See Nasdaq Letter, supra note 3.
---------------------------------------------------------------------------

IV. Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's response to the comments, and finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association.\15\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\16\ which, among other things, requires that FINRA rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change, by requiring 
members to record and report order information for all NMS stocks, not 
just those securities listed on Nasdaq or traded over-the-counter, will 
enhance FINRA's market surveillance and investigative capabilities. 
FINRA has stated that it is currently unable to view a complete order 
and transaction audit trail for all over-the-counter transactions in 
NMS stocks; thus, the proposed expansion of surveillance to NMS stocks 
listed on non-Nasdaq markets should enhance FINRA's oversight of the 
U.S. equity markets.
    The Commission believes the proposed rule change is a positive step 
toward a cross-market audit trail. The Commission views FINRA's 
proposed expansion of OATS as an interim measure that will improve 
FINRA's regulatory capabilities by broadening its oversight. The 
Commission notes that FINRA's proposal will also remove redundancies, 
as FINRA has represented that OTS is expected to be retired by NYSE 
upon the expansion of OATS.
    Additionally, the Commission agrees that FINRA's amendment to its 
definition of ``Reporting Members'' is

[[Page 70759]]

appropriate, as it excludes from the OATS recording and reporting 
requirements those members who conduct a floor business through NYSE 
and NYSE Amex and who are currently not subject to OTS, but to the 
requirements of NYSE Rule 123 and NYSE Amex Equities Rule 123 (Record 
of Orders).\17\ By exempting these members from the OATS requirements, 
FINRA is not altering their current audit trail obligations.\18\ The 
Commission believes that FINRA's proposed amendment to Rule 7410 is 
appropriate as these members would continue to be required to record 
and report information under NYSE Rule 123 and NYSE Amex Equities Rule 
123, and would continue to be subject to FINRA regulation.
---------------------------------------------------------------------------

    \17\ NYSE Rule 123 and NYSE Amex Equities Rule 123 pertain to 
orders or commitments or obligations to trade originated on or 
transmitted to the floor of each exchange.
    \18\ These members would be subject to FINRA's oversight, as 
FINRA assumed the market surveillance and enforcement functions of 
NYSE Regulation, Inc. in June 2010, pursuant to a multi-party 
regulatory services agreement with NYSE Regulation, Inc., NYSE, NYSE 
Amex, and NYSE Arca. See ``FINRA and NYSE Euronext Complete 
Agreement for FINRA to Perform NYSE Regulation's Market Oversight 
Functions,'' FINRA News Release (June 14, 2010), available at https://www.finra.org/Newsroom/NewsReleases/2010/P121622.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2010-044), be, and 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29079 Filed 11-17-10; 8:45 am]
BILLING CODE 8011-01-P
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