Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Amendments to the Order Audit Trail System Rules, 81551-81552 [2011-33218]

Download as PDF Federal Register / Vol. 76, No. 249 / Wednesday, December 28, 2011 / Notices 7450 to codify the specific time OATS reports must be transmitted to FINRA. information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2011–072 and should be submitted on or before January 18, 2012. (1) Customer Order Protection For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–33217 Filed 12–27–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66021; File No. SR–FINRA– 2011–063] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Amendments to the Order Audit Trail System Rules December 21, 2011. I. Introduction On October 28, 2011, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to amend its Order Audit Trail System (‘‘OATS’’) rules to require certain information be reported to OATS and to specify the time OATS reports must be transmitted to FINRA. Notice of the proposal was published for comment in the Federal Register on November 10, 2011.3 The Commission received no comments on the proposed rule change. This order approves the proposed rule change. srobinson on DSK4SPTVN1PROD with NOTICES II. Description of the Proposal FINRA is proposing to amend (i) FINRA Rules 5320 and 7440 to require that members report to OATS, information barriers put into place by the member in reliance on Supplementary Material .02 to FINRA Rule 5320; (ii) FINRA Rule 7440 to require that members report customer instructions regarding the display of a customer’s limit order in any OATSeligible security; and (iii) FINRA Rule 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 65692 (Nov. 4, 2011), 76 FR 70195. 1 15 VerDate Mar<15>2010 18:22 Dec 27, 2011 Jkt 226001 First, FINRA is proposing to require members to identify on OATS reports information barriers that the member has in place to permit the member to qualify for the No-Knowledge Exception in Supplementary Material .02 to FINRA Rule 5320. Under FINRA Rule 5320, a member that accepts and holds an order in an equity security from its own customer, or a customer of another broker-dealer, without immediately executing the order is prohibited from trading that security on the same side of the market for its own proprietary account at a price that would satisfy the customer order unless the member immediately thereafter executes the customer order up to the size and at a price that is the same as, or better, than the price at which the member traded for its proprietary account. The No-Knowledge Exception in Supplementary Material .02 to FINRA Rule 5320 provides, in part, that with respect to NMS stocks, if a firm implements and uses an effective system of internal controls—such as appropriate information barriers—that operate to prevent one trading unit from obtaining knowledge of customer orders held by a separate trading unit, those other trading units may trade in a proprietary capacity at prices that would satisfy the customer orders held by the separate, walled-off trading unit. Supplementary Material .02 to FINRA Rule 5320 also contains an additional No-Knowledge Exception for OTC equity securities. The proposed rule change would amend FINRA Rules 5320 and 7440 to require firms relying on the No-Knowledge Exception to identify the information barriers to FINRA in their OATS reports. (2) Limit Order Display FINRA Rule 7440(b)(14) requires OATS Reporting Members to identify ‘‘any request by a customer that an order not be displayed, or that a block size order be displayed, pursuant to Rule 604(b) of SEC Regulation NMS.’’ These customer requests are identified in the OATS system through a ‘‘Customer Instruction Flag’’ that indicates whether the customer has requested that the firm handle its limit order in a specified way. Because of the reference in FINRA Rule 7440(b)(14) to SEC Regulation NMS, members are only required to populate the Customer Instruction Flag when the order involves a security subject to SEC Regulation NMS. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 81551 On June 22, 2010, the Commission approved FINRA Rule 6460,4 which became effective on May 9, 2011.5 FINRA Rule 6460 generally requires OTC market makers to display a customer limit order in an OTC equity security held by the OTC market maker that is at a price that would improve the bid or offer of the OTC market maker in the security or that would represent more than a de minimis change in relation to the size associated with the OTC market maker’s bid or offer. FINRA Rule 6460(b) includes exceptions to the display requirement for OTC equity securities that mirror the exceptions in Rule 604(b) of SEC Regulation NMS.6 FINRA is proposing to require that OATS Reporting Members indicate on all OATS reports for customer limit orders, including for OTC equity securities, whether the customer has instructed the member not to display the limit order or to display a limit order of block size. As a result, OATS Reporting Members would be required to populate the Customer Instruction Flag for all limit orders, not just those involving NMS stocks. (3) Order Data Transmission Requirements FINRA Rule 7450 requires members to report order information recorded pursuant to FINRA Rule 7440. Paragraph (a) of the rule imposes the general requirement that members report applicable order information to FINRA that the member is required to record by FINRA Rule 7440. Paragraph (b) of the rule addresses the form the order data must take and the timing of order reports. Paragraph (c) concerns the use of reporting agent agreements that a member may use to allow a third party to report information to OATS on behalf of the member. The proposed rule change amends paragraph (b) of FINRA Rule 7450 to codify the specific time OATS reports must be transmitted to FINRA, which is the same time that currently is required under the OATS Reporting Technical Specifications. Under the proposed rule, all order events that occur on a particular OATS Business Day must be transmitted to FINRA by 8 a.m. Eastern Time on the calendar day following the end of the OATS Business Day. For purposes of the rule, an ‘‘OATS Business Day’’ begins at 4:00:01 p.m. Eastern Time on one market day and ends at 4:00 p.m. 4 See Securities Exchange Act Release No. 62359 (June 22, 2010), 75 FR 37488 (June 29, 2010). 5 See Regulatory Notice 10–42 (September 2010). 6 See FINRA Rule 6460(b)(2), (b)(4). E:\FR\FM\28DEN1.SGM 28DEN1 81552 Federal Register / Vol. 76, No. 249 / Wednesday, December 28, 2011 / Notices Eastern Time on the next market day.7 FINRA is retaining the exception for information that is not available by the time the report must be transmitted; in such cases, the report must be transmitted on the day that the information becomes available. The effective date of the proposed rule change will be no later than 120 days after Commission approval. III. Discussion After careful review, the Commission 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.8 In particular, the Commission finds that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,9 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 as the changes should make FINRA’s surveillance more efficient. The proposed rule change should make FINRA’s surveillance more efficient because both the existence of information barriers and the customer’s instructions regarding the display of limit orders for all OATS securities will be captured in OATS, so that such transactions will not create ‘‘false positive’’ results that FINRA must review to ensure that the transactions do not violate the rule. This should enable FINRA to focus its resources on transactions that are not permitted under the rules. The Commission believes that codifying the time by which OATS reports must be submitted should provide greater clarity to FINRA members of their reporting obligations under the rules. IV. Conclusion srobinson on DSK4SPTVN1PROD with NOTICES It is therefore ordered, pursuant to Section 19(b)(2) of the Act,10 that the 7 Thus, for example, assuming no holidays, if an order is received at 5:00 p.m. Eastern Time on Wednesday, the order event occurs on the OATS Business Day ending Thursday at 4:00 p.m. Eastern Time. Receipt of the order (and any subsequent event(s) regarding the order until Thursday at 4:00 p.m. Eastern Time) must be reported by 8:00 a.m. on Friday. Order events occurring on market days during regular market hours (i.e., before 4:00:01 p.m. Eastern Time) are reported by 8:00 a.m. Eastern Time on the following calendar day. 8 In approving this rule proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78o–3(b)(6). 10 15 U.S.C. 78s(b)(2). VerDate Mar<15>2010 18:22 Dec 27, 2011 Jkt 226001 proposed rule change (SR–FINRA– 2011–063) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–33218 Filed 12–27–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66022; File No. SR–Phlx– 2011–136] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Approving Proposed Rule Change Relating To Transfer of Exchange House Accounts December 21, 2011. I. Introduction On October 19, 2011, NASDAQ OMX PHLX LLC (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to codify current Exchange policy with respect to the transfer of Exchange house accounts. The proposed rule change was published in the Federal Register on November 8, 2011.3 The Commission received no comments on the proposal. This order approves the proposed rule change. II. Description of Proposal The Exchange proposes to adopt new Exchange Rule 912, Transfer of Accounts. The proposed rule would provide the process when an Exchange member or member organization transfers Exchange house accounts to another Exchange member or member organization. According to the Exchange, the house accounts are assigned by the Exchange’s Membership Department and are not customer accounts. Rather, these Exchange house accounts are used by Exchange members or member organizations to transact business on the Exchange. Specifically, the proposed rule would provide that transferor and transferee members or member organizations must notify the Exchange’s Membership Department in writing of the intent to transfer Exchange house account(s) in 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 65667 (November 2, 2011), 76 FR 69316. 1 15 PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 accordance with the rules prescribed by the Membership Department. Further, the transferor and transferee members or member organizations must execute and provide a Letter of Indemnity to the Exchange. According to the Exchange, the Letter of Indemnity is a standard form that the Exchange requires members to complete for transfers of Exchange house accounts. III. Commission Findings and Discussion After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act,4 and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,5 which requires, among other things, that the rules of the exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.6 The Exchange’s proposal would govern how an Exchange member or member organization would transfer Exchange house accounts. The Commission believes that the proposal clarifies to members and member organizations the process required to transfer such accounts. In requiring that members or member organizations execute a Letter of Indemnity in connection with a transfer of accounts, the proposed rule also delineates which firm has responsibility for liabilities associated with those accounts. Accordingly, the Commission finds that the proposal would promote just and equitable principles of trade and remove impediments to and perfect the mechanism of a free and open market, and is consistent with the requirements of the Act.7 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,8 that the 4 15 U.S.C. 78f. U.S.C. 78f(b)(5). 6 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 7 The Commission notes, however, that this order does not approve any prior transfer of Exchange house accounts that may have been inconsistent with the approved rules of the Exchange then in effect. 8 15 U.S.C. 78s(b)(2). 5 15 E:\FR\FM\28DEN1.SGM 28DEN1

Agencies

[Federal Register Volume 76, Number 249 (Wednesday, December 28, 2011)]
[Notices]
[Pages 81551-81552]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33218]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66021; File No. SR-FINRA-2011-063]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to 
Amendments to the Order Audit Trail System Rules

 December 21, 2011.

I. Introduction

    On October 28, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to amend its Order Audit Trail System (``OATS'') 
rules to require certain information be reported to OATS and to specify 
the time OATS reports must be transmitted to FINRA. Notice of the 
proposal was published for comment in the Federal Register on November 
10, 2011.\3\ The Commission received no comments on the proposed rule 
change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 65692 (Nov. 4, 
2011), 76 FR 70195.
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II. Description of the Proposal

    FINRA is proposing to amend (i) FINRA Rules 5320 and 7440 to 
require that members report to OATS, information barriers put into 
place by the member in reliance on Supplementary Material .02 to FINRA 
Rule 5320; (ii) FINRA Rule 7440 to require that members report customer 
instructions regarding the display of a customer's limit order in any 
OATS-eligible security; and (iii) FINRA Rule 7450 to codify the 
specific time OATS reports must be transmitted to FINRA.

(1) Customer Order Protection

    First, FINRA is proposing to require members to identify on OATS 
reports information barriers that the member has in place to permit the 
member to qualify for the No-Knowledge Exception in Supplementary 
Material .02 to FINRA Rule 5320. Under FINRA Rule 5320, a member that 
accepts and holds an order in an equity security from its own customer, 
or a customer of another broker-dealer, without immediately executing 
the order is prohibited from trading that security on the same side of 
the market for its own proprietary account at a price that would 
satisfy the customer order unless the member immediately thereafter 
executes the customer order up to the size and at a price that is the 
same as, or better, than the price at which the member traded for its 
proprietary account.
    The No-Knowledge Exception in Supplementary Material .02 to FINRA 
Rule 5320 provides, in part, that with respect to NMS stocks, if a firm 
implements and uses an effective system of internal controls--such as 
appropriate information barriers--that operate to prevent one trading 
unit from obtaining knowledge of customer orders held by a separate 
trading unit, those other trading units may trade in a proprietary 
capacity at prices that would satisfy the customer orders held by the 
separate, walled-off trading unit. Supplementary Material .02 to FINRA 
Rule 5320 also contains an additional No-Knowledge Exception for OTC 
equity securities. The proposed rule change would amend FINRA Rules 
5320 and 7440 to require firms relying on the No-Knowledge Exception to 
identify the information barriers to FINRA in their OATS reports.

(2) Limit Order Display

    FINRA Rule 7440(b)(14) requires OATS Reporting Members to identify 
``any request by a customer that an order not be displayed, or that a 
block size order be displayed, pursuant to Rule 604(b) of SEC 
Regulation NMS.'' These customer requests are identified in the OATS 
system through a ``Customer Instruction Flag'' that indicates whether 
the customer has requested that the firm handle its limit order in a 
specified way. Because of the reference in FINRA Rule 7440(b)(14) to 
SEC Regulation NMS, members are only required to populate the Customer 
Instruction Flag when the order involves a security subject to SEC 
Regulation NMS.
    On June 22, 2010, the Commission approved FINRA Rule 6460,\4\ which 
became effective on May 9, 2011.\5\ FINRA Rule 6460 generally requires 
OTC market makers to display a customer limit order in an OTC equity 
security held by the OTC market maker that is at a price that would 
improve the bid or offer of the OTC market maker in the security or 
that would represent more than a de minimis change in relation to the 
size associated with the OTC market maker's bid or offer. FINRA Rule 
6460(b) includes exceptions to the display requirement for OTC equity 
securities that mirror the exceptions in Rule 604(b) of SEC Regulation 
NMS.\6\
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    \4\ See Securities Exchange Act Release No. 62359 (June 22, 
2010), 75 FR 37488 (June 29, 2010).
    \5\ See Regulatory Notice 10-42 (September 2010).
    \6\ See FINRA Rule 6460(b)(2), (b)(4).
---------------------------------------------------------------------------

    FINRA is proposing to require that OATS Reporting Members indicate 
on all OATS reports for customer limit orders, including for OTC equity 
securities, whether the customer has instructed the member not to 
display the limit order or to display a limit order of block size. As a 
result, OATS Reporting Members would be required to populate the 
Customer Instruction Flag for all limit orders, not just those 
involving NMS stocks.

(3) Order Data Transmission Requirements

    FINRA Rule 7450 requires members to report order information 
recorded pursuant to FINRA Rule 7440. Paragraph (a) of the rule imposes 
the general requirement that members report applicable order 
information to FINRA that the member is required to record by FINRA 
Rule 7440. Paragraph (b) of the rule addresses the form the order data 
must take and the timing of order reports. Paragraph (c) concerns the 
use of reporting agent agreements that a member may use to allow a 
third party to report information to OATS on behalf of the member. The 
proposed rule change amends paragraph (b) of FINRA Rule 7450 to codify 
the specific time OATS reports must be transmitted to FINRA, which is 
the same time that currently is required under the OATS Reporting 
Technical Specifications.
    Under the proposed rule, all order events that occur on a 
particular OATS Business Day must be transmitted to FINRA by 8 a.m. 
Eastern Time on the calendar day following the end of the OATS Business 
Day. For purposes of the rule, an ``OATS Business Day'' begins at 
4:00:01 p.m. Eastern Time on one market day and ends at 4:00 p.m.

[[Page 81552]]

Eastern Time on the next market day.\7\ FINRA is retaining the 
exception for information that is not available by the time the report 
must be transmitted; in such cases, the report must be transmitted on 
the day that the information becomes available.
---------------------------------------------------------------------------

    \7\ Thus, for example, assuming no holidays, if an order is 
received at 5:00 p.m. Eastern Time on Wednesday, the order event 
occurs on the OATS Business Day ending Thursday at 4:00 p.m. Eastern 
Time. Receipt of the order (and any subsequent event(s) regarding 
the order until Thursday at 4:00 p.m. Eastern Time) must be reported 
by 8:00 a.m. on Friday. Order events occurring on market days during 
regular market hours (i.e., before 4:00:01 p.m. Eastern Time) are 
reported by 8:00 a.m. Eastern Time on the following calendar day.
---------------------------------------------------------------------------

    The effective date of the proposed rule change will be no later 
than 120 days after Commission approval.

III. Discussion

    After careful review, the Commission 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.\8\ In particular, the Commission finds that the proposed 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Act,\9\ 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 as the changes should make 
FINRA's surveillance more efficient.
---------------------------------------------------------------------------

    \8\ In approving this rule proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The proposed rule change should make FINRA's surveillance more 
efficient because both the existence of information barriers and the 
customer's instructions regarding the display of limit orders for all 
OATS securities will be captured in OATS, so that such transactions 
will not create ``false positive'' results that FINRA must review to 
ensure that the transactions do not violate the rule. This should 
enable FINRA to focus its resources on transactions that are not 
permitted under the rules. The Commission believes that codifying the 
time by which OATS reports must be submitted should provide greater 
clarity to FINRA members of their reporting obligations under the 
rules.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-FINRA-2011-063) be, and 
hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33218 Filed 12-27-11; 8:45 am]
BILLING CODE 8011-01-P