Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to Participation on the Alternative Display Facility, 46652-46656 [2013-18470]
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Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices
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All submissions should refer to File
Number S7–966. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed plan that
are filed with the Commission, and all
written communications relating to the
proposed plan between the Commission
and any person, other than those that
may be withheld from the public in
accordance with the provisions of 5
U.S.C. 552, will be available for Web
site viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE., Washington, DC
20549, on official business days
between the hours of 10:00 a.m. and
3:00 p.m. Copies of the plan also will be
available for inspection and copying at
the principal offices of FINRA and
Topaz. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number S7–966 and should be
submitted on or before August 22, 2013.
V. Discussion
The Commission continues to believe
that the proposed plan is an
achievement in cooperation among the
SRO participants. The Plan, as
amended, will reduce unnecessary
regulatory duplication by allocating to
the designated SRO the responsibility
for certain options-related sales practice
matters that would otherwise be
performed by multiple SROs. The plan
promotes efficiency by reducing costs to
firms that are members of more than one
of the SRO participants. In addition,
because the SRO participants coordinate
their regulatory functions in accordance
with the plan, the plan promotes, and
will continue to promote, investor
protection.
Under paragraph (c) of Rule 17d–2,
the Commission may, after appropriate
notice and comment, declare a plan, or
any part of a plan, effective. In this
instance, the Commission believes that
appropriate notice and comment can
take place after the proposed
amendment is effective. The primary
purpose of the amendment is to add
Topaz as an SRO participant. By
declaring it effective today, the
amended Plan can become effective and
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be implemented without undue delay.20
The Commission notes that the prior
version of this plan immediately prior to
this proposed amendment was
published for comment and the
Commission did not receive any
comments thereon.21 Furthermore, the
Commission does not believe that the
amendment to the plan raises any new
regulatory issues that the Commission
has not previously considered.
VI. Conclusion
This order gives effect to the amended
Plan submitted to the Commission that
is contained in File No. S7–966.
It is therefore ordered, pursuant to
Section 17(d) of the Act, that the Plan,
as amended by and between FINRA and
Topaz, filed with the Commission
pursuant to Rule 17d–2 on June 21,
2013 is hereby approved and declared
effective.
It is further ordered that those SRO
participants that are not the DOEA as to
a particular common member are
relieved of those regulatory
responsibilities allocated to the common
member’s DOEA under the amended
Plan to the extent of such allocation.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–18477 Filed 7–31–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70048; File No. SR–FINRA–
2013–031]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change Relating to
Participation on the Alternative Display
Facility
July 26, 2013.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on July 18,
2013, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
20 On July 26, 2013, the Commission granted
Topaz’s application for registration as a national
securities exchange. See Securities Exchange Act
Release No. 70050 (July 26, 2013) (File No. 10–209).
21 See supra note 19 (citing to Securities
Exchange Act Release No. 68363).
22 17 CFR 200.30–3(a)(34).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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(the ‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the self-regulatory organization. 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 FINRA
Rules 6271 and 6272 regarding the
requirements for members seeking
registration as FINRA Alternative
Display Facility (‘‘ADF’’) Market
Participants.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
(1) ADF Background
The ADF is a quotation collection and
trade reporting facility. It provides ADF
Market Participants (i.e., ADF-registered
market makers or electronic
communications networks (‘‘ECNs’’)) 4
the ability to post quotations or display
orders in NMS stocks and provides all
member firms that participate in the
ADF the ability to view quotations and
report transactions in NMS stocks to the
Securities Information Processors
(‘‘SIPs’’) for consolidation and
dissemination of data to vendors and
ADF Market Participants. In addition,
the ADF delivers real-time data to
FINRA for regulatory purposes,
including enforcement of requirements
imposed by Regulation NMS.5
The ADF was initially approved by
the Commission on July 24, 2002, in
4 See
5 See
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FINRA Rule 6220(a)(3).
17 CFR 242.600.
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connection with the SEC’s approval of
SuperMontage and Nasdaq’s registration
as a national securities exchange.6 At
that time, the ADF was approved for
Nasdaq-listed securities for a ninemonth pilot period to provide FINRA
members with an alternative to the
Nasdaq systems for reporting quotations
and transactions in Nasdaq UTP Plan
securities. On September 28, 2006, the
SEC approved amendments to extend
the ADF’s functionality to all NMS
stocks.7 The ADF was approved on a
permanent basis for NMS stocks on
January 26, 2007.8
(2) Current ADF Registration
Requirements
Similar to rules applicable to
exchange market makers, ADF Market
Participants (i.e., either Registered
Reporting ADF Market Makers or
Registered Reporting ADF ECNs) 9 must
register as ADF market makers or ECNs
before making a market or displaying
orders on the ADF.10 Members are
required to register as ADF Market
Participants by applying to FINRA,
which includes certifying the member’s
good standing with FINRA and
demonstrating compliance with the net
capital and other financial
responsibility provisions of the Act.11
Before displaying quotations or orders
on the ADF, ADF Trading Centers 12
must also execute and comply with a
Certification Record to certify the ADF
Trading Center’s compliance efforts
with its obligations under Regulation
NMS.13
(3) Status of the ADF and Other FINRA
Transparency Facilities
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Since the ADF was launched in 2002,
no member has registered with FINRA
as a Registered Reporting ADF Market
Maker, and there have been four
members that, at various points in time,
were registered as Registered Reporting
6 See Securities Exchange Act Release No. 46249
(July 24, 2002), 67 FR 49822 (July 31, 2002); see also
NASD Notice to Members 02–45 (August 2002).
7 See Securities Exchange Act Release No. 54537
(September 28, 2006), 71 FR 59173 (October 6,
2006); see also NASD Notice to Members 06–67
(November 2006).
8 See Securities Exchange Act Release No. 55181
(January 26, 2007), 72 FR 5093 (February 2, 2007).
9 See FINRA Rule 6220(a)(3), (12), (13).
10 See FINRA Rule 6271.
11 See FINRA Rule 6271(b).
12 An ‘‘ADF Trading Center’’ is a Registered
Reporting ADF Market Maker or Registered
Reporting ADF ECN that is a ‘‘Trading Center,’’ as
defined in Rule 600(b)(78) of SEC Regulation NMS,
and that is certified to display its quotations or
orders through the ADF. See FINRA Rule
6220(a)(4); see also 17 CFR 242.600(b)(87).
13 See FINRA Rules 6220(a)(5), 6250(a)(7); NASD
Notice to Members 06–67 (November 2006); see also
SR–NASD–2006–091, Exhibit 3.
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ADF ECNs.14 Since the second quarter
of 2010, there have been no ADF Market
Participants.
Beginning in 2011, FINRA began the
process of updating and migrating all of
its transparency facilities (including the
FINRA Trade Reporting Facilities, the
Trade Reporting and Compliance Engine
(‘‘TRACE’’), and the ADF) off of
independent technology platforms and
onto a new, single, updated technology
platform known as the Multi Product
Platform (‘‘MPP’’).15 Due to the
enormous scope of this project, FINRA
was required to prioritize and migrate
each facility sequentially. Because there
have been no ADF Market Participants
since March of 2010, the migration of
the ADF onto MPP was scheduled to be
undertaken last, which would result in
the new ADF base platform being
migrated to MPP and ready for
onboarding of a new ADF Market
Participant no sooner than mid-2014.
However, even after the ADF is migrated
to MPP, FINRA will only have the ADF
base infrastructure completed; further
specific build-outs, estimated to take
approximately six months, are necessary
to accommodate an individual ADF
Market Participant seeking to quote on
or report trades to the ADF. To
determine the specific build-outs
necessary to support a new ADF Market
Participant, a member would need to
provide FINRA with estimated volume
projections of quotation and trade
reporting activity that would flow
through the ADF.
Recently, several members have
approached FINRA to discuss the
possibility of becoming an ADF Market
Participant, and some have asked
whether the migration of the ADF to
MPP could be accelerated. As discussed
more fully below, the timeframe to bring
the new ADF base infrastructure live
can be accelerated in the MPP rollout
schedule. However, to do so necessarily
means delaying the migration of other
FINRA facilities onto MPP, reallocating
resources, shifting scheduling, and
implementing ADF-specific
enhancements and hosting in the new
technology environment—all of which
impose significant costs on FINRA,
including prolonging the substantially
higher expenses associated with the
legacy OTC Equity Trade Reporting
14 The four former Registered Reporting ADF
ECNs are: (i) LavaFlow, (ii) Instinet, (iii) Track Data
Securities Corp, and (iv) Direct Edge. See
www.finra.org/Industry/Compliance/
MarketTransparency/ADF/Participants/.
15 FINRA’s TRACE facility for reporting
transactions in fixed-income securities has been
migrated to MPP. See Regulatory Notice 11–53
(November 2011). The FINRA/NYSE TRF was
migrated onto MPP as of October 1, 2012.
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Facility (‘‘ORF’’) infrastructure (i.e.,
legacy ORF support costs are
significantly higher than the expected
costs of supporting the ORF in the new
MPP technology environment).
In addition to the costs of accelerating
the migration of the ADF onto MPP,
bringing the new ADF base
infrastructure live in the MPP
technology environment to
accommodate an ADF Market
Participant will impose significant
direct costs on FINRA related to
building and testing the new ADF
component on the MPP infrastructure
and also related to paying for SIP
capacity usage allocations. Consuming
real time data feeds for ADF system
price validation and other purposes will
impose additional costs. General staff
labor, support, and testing will impose
related costs on FINRA as well. In
aggregate, the MPP component resequencing necessary to accommodate
ADF acceleration and the costs
associated with bringing the ADF base
infrastructure live will conservatively
cost FINRA in excess of $3 million.
If the ADF MPP launch is accelerated,
FINRA believes an ADF Market
Participant could be live on the ADF by
the end of 2013. If the ADF MPP launch
is not accelerated, FINRA intends to
have the ADF base infrastructure
prepared for a participant by mid-2014,
and a participant could be live on the
ADF at the earliest six months after the
base layer functionality is complete (i.e.,
approximately late 2014 or early 2015).
(4) Proposed Amendments to the ADF
Rules
The proposed rule change would
consolidate into a single rule (FINRA
Rule 6271) the existing requirements
that a member must meet to register as
an ADF Market Participant and
introduce new requirements that
potential ADF Market Participants must
meet to participate on the ADF. These
new requirements are intended to
mitigate the substantial financial risks to
FINRA, discussed above, of accelerating
the migration of the ADF onto MPP or
of building out the ADF base platform
to accommodate an ADF Market
Participant.
As amended by the proposed rule
change, FINRA Rule 6271 would specify
that a member seeking registration as an
ADF Market Participant must (i) file an
application with FINRA, (ii) execute the
Certification Record, and (iii) execute a
Participant Agreement. Rule 6271(a)(1)
would require a potential ADF Market
Participant to file an application with
FINRA in which the member:
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• Specifies whether the member is
seeking registration in Nasdaq and/or
CQS securities;
• Certifies the member’s good
standing with FINRA;
• Demonstrates compliance with the
net capital and other financial
responsibility provisions of the
Exchange Act;
• Provides FINRA with reasonable
monthly projections of the volume of
data that the member anticipates
submitting to the ADF;
• Agrees to submit the ADF Deposit
Amount 16 in five equal installments
into an escrow account at a bank
mutually acceptable to the member and
FINRA on a timetable as agreed to by
the member and FINRA;
• Agrees that failing to submit quotes
and report trades to the ADF for a term
of two years will result in the forfeiture
of some or all of the ADF Deposit
Amount;
• Agrees that failing to submit 75% of
both its quote and trade volume in NMS
stocks will result in the forfeiture of
some or all of the ADF Deposit Amount;
and
• Agrees to the other ADF Deposit
Terms, which are the same for all
members and are described below.
The first three requirements of the
application, which specify whether the
member is seeking registration in
Nasdaq and/or CQS securities, certify
the member’s good standing with
FINRA, and demonstrate compliance
with the net capital and other financial
responsibility provisions of the Act, are
the same as the requirements currently
in Rule 6271(b). Members who are
Trading Centers, as defined in Rule
600(b)(78) of SEC Regulation NMS,17 are
also currently required to execute and
comply with an ADF Certification
Record, in which the member agrees,
among other things, to abide by the
requirements of Regulation NMS.18 The
proposed rule change would add this
existing requirement into Rule 6271 so
that all registration requirements are
located in a single rule.19
The proposed rule change would add
several new requirements into the
application that members must
complete to become ADF Market
Participants. The new provisions
require that a member seeking to
16 As described more fully below, the ADF
Deposit Amount is $250,000; however, the amount
will be increased to $500,000 under certain
circumstances.
17 17 CFR 242.600(b)(78).
18 See FINRA Rules 6220(a)(5), 6250(a)(7).
19 The proposed rule change also moves the
provision requiring registration in order to
participate on the ADF from Rule 6271 to Rule 6272
with no substantive change.
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become an ADF Market Participant: (i)
Provide FINRA with reasonable
monthly projections of the volume of
data that the member anticipates
submitting to the ADF; (ii) agree to
submit the ADF Deposit Amount in five
equal installments into an escrow
account at a bank mutually acceptable
to the member and FINRA on a
timetable as agreed to by the member
and FINRA; (iii) agree that failing to
submit quotes and report trades to the
ADF for a two-year period will result in
the forfeiture of some or all of the ADF
Deposit Amount; (iv) agree that failing
to submit 75% of the member’s trade
and quote volume in NMS stocks to the
ADF will result in the forfeiture of some
or all of the ADF Deposit Amount; and
(v) agree to the other ADF Deposit
Terms set forth in the rule.
The new provisions are intended to
ensure that FINRA can recover a portion
of the costs associated with accelerating
the migration of the ADF to MPP and
bringing a new ADF Market Participant
onto the ADF if the ADF Market
Participant fails to participate on the
ADF as anticipated. As noted above,
FINRA is currently in the process of
creating a new ADF platform as part of
its efforts to migrate all FINRA facilities
onto MPP. Under the current timeframe,
the ADF base infrastructure is
scheduled to be available on the new
platform by no sooner than mid-2014;
however, it is possible for FINRA to
rearrange the scheduling priority and
have the ADF available for new ADF
Market Participants potentially as early
as late-2013. As described above,
altering the timetable imposes
significant costs on FINRA associated
with delaying the retirement of other
products, diverting effort and resources
from the current MPP roll-out schedule,
and delaying the termination of other
product legacy fee structures. Moreover,
as noted above, even after the base
infrastructure for the ADF is otherwise
completed, the transition of an ADF
Market Participant onto the MPP
infrastructure will impose substantial
development costs and staff effort costs
on FINRA. The new provisions set out
in the proposed rule change are
intended to ensure that FINRA will be
able to recover a portion of the costs
incurred as a result of accommodating a
member’s request to accelerate the
migration of the ADF to MPP or
building out the ADF platform to
accommodate the member’s volume
projections should the member fail to
participate on the ADF as anticipated.
Pursuant to the proposed rule change,
potential ADF Market Participants must
provide FINRA with reasonable
monthly projections of the volume of
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data that the member anticipates
submitting to the ADF. In addition, the
potential ADF Market Participant must
agree to quote on and report trades to
the ADF for a two-year term and to
submit at least 75% of both its quote
and trade volume to the ADF. If the ADF
Market Participant fails to meet one of
these obligations, it will forfeit some or
all of the ADF Deposit Amount. These
requirements serve two primary
purposes: (1) They provide FINRA the
information necessary to ensure the
ADF can accommodate the volume of
data the member anticipates submitting
to the ADF and (2) they establish the
basis upon which FINRA will be
safeguarded by ensuring that the
potential ADF Market Participant will
bear some of the financial responsibility
should FINRA undertake the efforts and
incur the costs necessary to bring the
ADF Market Participant onto the ADF,
only to have the ADF Market Participant
fail to participate at all or at the level
agreed to.
To ensure the volume commitments
are met, the proposed rule change
requires potential ADF Market
Participants to agree to submit an ‘‘ADF
Deposit Amount’’ in five equal
installments into an escrow account at
a bank mutually acceptable to the
member and FINRA on a timetable as
agreed to by the member and FINRA.
The proposed rule change defines the
‘‘ADF Deposit Amount’’ as $500,000 if
the member requests that FINRA
accelerate the ADF migration or if the
member begins quoting on or reporting
trades to the ADF within 90 calendar
days after an ADF Market Participant
that requested acceleration of the ADF
migration begins quoting on or reporting
trades to the ADF. For all other ADF
Participants, the ADF Deposit Amount
is $250,000.
FINRA is proposing to establish the
two separate levels of the ADF Deposit
Amount referenced above in order to
reflect the differing costs FINRA will
incur under either of two scenarios.
Because FINRA will incur significantly
higher costs if the migration of the ADF
is accelerated at a member’s request,
FINRA has proposed an ADF Deposit
Amount of $500,000 should the member
request such acceleration. Additionally,
to ensure that ADF Market Participants
benefitting from an acceleration of the
ADF onto MPP are treated equally,
FINRA proposes to charge $500,000 to
any member that begins quoting on or
reporting trades to the ADF within
ninety (90) days after an existing ADF
Market Participant that requested
acceleration of the ADF migration
begins quoting on or reporting trades to
the ADF. FINRA believes that this
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amount, which, as noted above, is
substantially lower than the actual costs
FINRA will incur by amending the
current MPP migration schedule reflects
an appropriate balance between
ensuring that FINRA is able to recover
a portion of the costs associated with an
accelerated migration while not
representing a significant financial
barrier to participation on the ADF,
particularly since members can
potentially recover 100% of the ADF
Deposit Amount over the two-year term
and up to 80% of the ADF Deposit
Amount in the first quarter of their
participation on the ADF through the
credit structure for market data revenue
described below. Moreover, FINRA
believes that permitting potential
participants to earn back the entire
deposit amount is more equitable than
charging potential ADF Market
Participants a one-time payment
without the ability to recover some, or
all, of the amount.
The proposed rule change would
reduce the ADF Deposit Amount to
$250,000 if the member has not
requested an accelerated migration or
does not become an ADF Market
Participant within 90 days after another
ADF Market Participant that had
requested acceleration (i.e., paid an
escrow amount of $500,000) begins
quoting on or reporting trades to the
ADF. The lower amount reflects the fact
that the costs to FINRA are significantly
reduced under these circumstances
because the ADF base platform will
have already been migrated to MPP.
However, although reduced, FINRA
anticipates such costs will still be
significantly higher than the $250,000
deposit amount in such a scenario based
on costs related to possible additional
hardware and software deployments,
paying for SIP capacity usage
allocations, and costs related to general
staff labor, support and testing.
FINRA notes that the ADF Deposit
Amount will be the same for any
member seeking to become an ADF
Market Participant, regardless of the
member’s overall anticipated quotation
and trading volume. Because the costs
incurred by FINRA to migrate the ADF
and to build it out do not vary
significantly as a result of the volume of
the ADF Market Participant’s trading
activity, FINRA believes it is fair and
equitable to require each prospective
ADF Market Participant to submit the
same amount into escrow.
The proposed rule change includes
several required terms for the handling
of the ADF Deposit Amount (referred to
as ‘‘ADF Deposit Terms’’), including the
methods for ADF Market Participants to
recover some or all of the ADF Deposit
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Amount as a result of meeting its
participation commitments (or due to
FINRA’s inability to meet its
obligations) and methods for FINRA to
receive the funds if commitments are
not met. The proposed rule change
retains some flexibility in the precise
terms of any agreements between FINRA
and potential ADF Market Participants
to ensure that any unique circumstances
can be addressed by permitting de
minimis additions or qualifications to
the ADF Deposit Terms, provided both
FINRA and the member agree to those
additions or qualifications.
The proposed rule change includes a
means for ADF Market Participants to
earn back the ADF Deposit Amount.
Specifically, the proposed rule change
provides that for every $1.00 received
by FINRA from the National Market
System (‘‘NMS’’) SIP data plans
associated with ADF activity
attributable, as determined in FINRA’s
sole discretion, to the member’s trading
activity on the ADF, the member shall
receive $0.50 out of the escrow account.
Thus, in essence, an ADF Market
Participant will recover an amount
equal to one-half of the SIP market data
revenue generated by the ADF Market
Participant’s trading activity on the
ADF. The ADF Market Participant’s
recovery would be paid on a quarterly
basis after FINRA has received its
quarterly disbursement from the NMS
SIP data plans.20 This provides for a
reasonable opportunity for FINRA to
recover some of its costs of resequencing the MPP rollout by virtue of
the SIP market data revenue split.
In addition, the proposed rule change
provides that the ADF Market
Participant is only entitled to receive an
amount up to 80% of the ADF Deposit
Amount pursuant to this provision and
is not entitled to the remaining 20% of
the ADF Deposit Amount until the end
of the two-year term, assuming its
trading activity has earned the requisite
market data revenue from the SIPs. To
the extent that the ADF Market
Participant opts to stop participating on
the ADF before the end of the two-year
term or stop meeting its volume
commitment before the end of the twoyear term (i.e., chooses to quote or trade
through another trading venue), it
would be free to do so but could
potentially forfeit some or all of the
remaining ADF Deposit Amount.
If FINRA does not make the ADF
available within nine months of an ADF
Market Participant’s first deposit of the
20 Charges or credits as a result of SIP audit
recoveries, which typically are de minimis as
compared to the overall revenue paid, would not be
included in the calculation.
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46655
ADF Deposit Amount into the escrow
account, one-fifth of the ADF Deposit
Amount will be released from such
escrow account to the ADF Market
Participant. An additional one-fifth of
the initial ADF Deposit Amount will be
released to the ADF Market Participant
every month thereafter that FINRA has
not made the ADF available, until all
funds have been released from such
escrow account.
The proposed rule change also
includes provisions designed to protect
FINRA if a member requests that the
ADF be migrated to MPP on an
accelerated basis or if FINRA undertakes
efforts to build out the system to
support the member, and in either
instance, the member fails to
participate. The proposed rule change
provides that one-fifth of the ADF
Deposit Amount shall be released to
FINRA if, in any calendar month
beginning with the fourth calendar
month following certification of the
ADF Market Participant to quote on or
report trades to the ADF, the ADF
Market Participant fails to submit 75%
of the member’s quoting and trade
reporting activity to the ADF. In
addition, if a member is sold (other than
a sale to an entity that would otherwise
meet the FINRA qualifications as an
ADF Market Participant), goes out of
business, otherwise does not meet its
obligations, or fails to complete the
process for becoming an ADF Market
Participant, the member will forfeit the
ADF Deposit Amount, or any lesser
amount remaining in the escrow
account, and all funds will be released
from such escrow account to FINRA.
Finally, the proposed rule change
would make clear that a member would
become an ADF Market Participant only
after (i) the member received a notice of
approval from FINRA that its
application was accepted, (ii) the
member executed the Certification
Record, and (iii) FINRA executed the
Participant Agreement.
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 30 days following
Commission approval. The effective
date will be no later than 30 days
following publication of the Regulatory
Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,21 which
requires, among other things, that
FINRA rules must be designed to
21 15
E:\FR\FM\01AUN1.SGM
U.S.C. 78o–3(b)(6).
01AUN1
46656
Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices
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 and Section 15A(b)(5) of
the Act,22 which requires, among other
things, that FINRA rules provide for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system that FINRA operates
or controls. FINRA believes that the
proposed rule change establishes an
equitable and transparent method for
registering members for participation on
the ADF. FINRA also believes that
requiring individual members to ensure
the recoupment of a portion of the
specific costs FINRA incurs to
accommodate their request to accelerate
the migration of the ADF or use the ADF
is a fair and equitable way to ensure that
the members responsible for those costs
are accountable should they not
participate on the ADF to the extent
anticipated.
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. FINRA
believes that members that choose to
use the ADF should bear responsibility
for costs incurred in accelerating the
ADF’s migration or in otherwise
building out the ADF. The decision to
request acceleration or to use the ADF
to display quotations or orders lies
solely with the member. Further,
members are able to recover the full
amount of their ADF Deposit Amount
by meeting the terms of the agreement.
Although a member would be required
to provide a commitment to quote on
and report trades to the ADF, it always
retains the option to leave the ADF or
choose to quote or trade through another
trading venue, but must bear certain
financial consequences associated with
that choice.
mstockstill on DSK4VPTVN1PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
22 15
U.S.C. 78o–3(b)(5).
VerDate Mar<15>2010
17:02 Jul 31, 2013
Jkt 229001
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
shall: (a) By order approve or
disapprove such proposed rule change,
or (b) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2013–031 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.
All submissions should refer to File
Number SR–FINRA–2013–031. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also 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
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2013–031 and should be submitted on
or before August 22, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–18470 Filed 7–31–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70053; File No. 4–663]
Program for Allocation of Regulatory
Responsibilities Pursuant to Rule 17d–
2; Notice of Filing of Proposed Plan for
the Allocation of Regulatory
Responsibilities Between the Financial
Industry Regulatory Authority, Inc. and
Topaz Exchange, LLC
July 26, 2013.
Pursuant to Section 17(d) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 17d–2 thereunder,2
notice is hereby given that on June 21,
2013, Topaz Exchange, LLC (‘‘Topaz’’)
and the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (together
with Topaz, the ‘‘Parties’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) a plan for the
allocation of regulatory responsibilities,
dated June 21, 2013 (‘‘17d–2 Plan’’ or
the ‘‘Plan’’). The Commission is
publishing this notice to solicit
comments on the 17d–2 Plan from
interested persons.
I. Introduction
Section 19(g)(1) of the Act,3 among
other things, requires every selfregulatory organization (‘‘SRO’’)
registered as either a national securities
exchange or national securities
association to examine for, and enforce
compliance by, its members and persons
associated with its members with the
Act, the rules and regulations
thereunder, and the SRO’s own rules,
unless the SRO is relieved of this
responsibility pursuant to Section 17(d)
or Section 19(g)(2) of the Act.4 Without
this relief, the statutory obligation of
each individual SRO could result in a
pattern of multiple examinations of
23 17
CFR 200.30–3(a)(12).
U.S.C. 78q(d).
2 17 CFR 240.17d–2.
3 15 U.S.C. 78s(g)(1).
4 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2),
respectively.
1 15
E:\FR\FM\01AUN1.SGM
01AUN1
]]>Agencies
[Federal Register Volume 78, Number 148 (Thursday, August 1, 2013)]
[Notices]
[Pages 46652-46656]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18470]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70048; File No. SR-FINRA-2013-031]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Participation on the Alternative Display Facility
July 26, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 18, 2013, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 FINRA Rules 6271 and 6272 regarding the
requirements for members seeking registration as FINRA Alternative
Display Facility (``ADF'') Market Participants.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
(1) ADF Background
The ADF is a quotation collection and trade reporting facility. It
provides ADF Market Participants (i.e., ADF-registered market makers or
electronic communications networks (``ECNs'')) \4\ the ability to post
quotations or display orders in NMS stocks and provides all member
firms that participate in the ADF the ability to view quotations and
report transactions in NMS stocks to the Securities Information
Processors (``SIPs'') for consolidation and dissemination of data to
vendors and ADF Market Participants. In addition, the ADF delivers
real-time data to FINRA for regulatory purposes, including enforcement
of requirements imposed by Regulation NMS.\5\
---------------------------------------------------------------------------
\4\ See FINRA Rule 6220(a)(3).
\5\ See 17 CFR 242.600.
---------------------------------------------------------------------------
The ADF was initially approved by the Commission on July 24, 2002,
in
[[Page 46653]]
connection with the SEC's approval of SuperMontage and Nasdaq's
registration as a national securities exchange.\6\ At that time, the
ADF was approved for Nasdaq-listed securities for a nine-month pilot
period to provide FINRA members with an alternative to the Nasdaq
systems for reporting quotations and transactions in Nasdaq UTP Plan
securities. On September 28, 2006, the SEC approved amendments to
extend the ADF's functionality to all NMS stocks.\7\ The ADF was
approved on a permanent basis for NMS stocks on January 26, 2007.\8\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 46249 (July 24,
2002), 67 FR 49822 (July 31, 2002); see also NASD Notice to Members
02-45 (August 2002).
\7\ See Securities Exchange Act Release No. 54537 (September 28,
2006), 71 FR 59173 (October 6, 2006); see also NASD Notice to
Members 06-67 (November 2006).
\8\ See Securities Exchange Act Release No. 55181 (January 26,
2007), 72 FR 5093 (February 2, 2007).
---------------------------------------------------------------------------
(2) Current ADF Registration Requirements
Similar to rules applicable to exchange market makers, ADF Market
Participants (i.e., either Registered Reporting ADF Market Makers or
Registered Reporting ADF ECNs) \9\ must register as ADF market makers
or ECNs before making a market or displaying orders on the ADF.\10\
Members are required to register as ADF Market Participants by applying
to FINRA, which includes certifying the member's good standing with
FINRA and demonstrating compliance with the net capital and other
financial responsibility provisions of the Act.\11\ Before displaying
quotations or orders on the ADF, ADF Trading Centers \12\ must also
execute and comply with a Certification Record to certify the ADF
Trading Center's compliance efforts with its obligations under
Regulation NMS.\13\
---------------------------------------------------------------------------
\9\ See FINRA Rule 6220(a)(3), (12), (13).
\10\ See FINRA Rule 6271.
\11\ See FINRA Rule 6271(b).
\12\ An ``ADF Trading Center'' is a Registered Reporting ADF
Market Maker or Registered Reporting ADF ECN that is a ``Trading
Center,'' as defined in Rule 600(b)(78) of SEC Regulation NMS, and
that is certified to display its quotations or orders through the
ADF. See FINRA Rule 6220(a)(4); see also 17 CFR 242.600(b)(87).
\13\ See FINRA Rules 6220(a)(5), 6250(a)(7); NASD Notice to
Members 06-67 (November 2006); see also SR-NASD-2006-091, Exhibit 3.
---------------------------------------------------------------------------
(3) Status of the ADF and Other FINRA Transparency Facilities
Since the ADF was launched in 2002, no member has registered with
FINRA as a Registered Reporting ADF Market Maker, and there have been
four members that, at various points in time, were registered as
Registered Reporting ADF ECNs.\14\ Since the second quarter of 2010,
there have been no ADF Market Participants.
---------------------------------------------------------------------------
\14\ The four former Registered Reporting ADF ECNs are: (i)
LavaFlow, (ii) Instinet, (iii) Track Data Securities Corp, and (iv)
Direct Edge. See www.finra.org/Industry/Compliance/MarketTransparency/ADF/Participants/.
---------------------------------------------------------------------------
Beginning in 2011, FINRA began the process of updating and
migrating all of its transparency facilities (including the FINRA Trade
Reporting Facilities, the Trade Reporting and Compliance Engine
(``TRACE''), and the ADF) off of independent technology platforms and
onto a new, single, updated technology platform known as the Multi
Product Platform (``MPP'').\15\ Due to the enormous scope of this
project, FINRA was required to prioritize and migrate each facility
sequentially. Because there have been no ADF Market Participants since
March of 2010, the migration of the ADF onto MPP was scheduled to be
undertaken last, which would result in the new ADF base platform being
migrated to MPP and ready for onboarding of a new ADF Market
Participant no sooner than mid-2014. However, even after the ADF is
migrated to MPP, FINRA will only have the ADF base infrastructure
completed; further specific build-outs, estimated to take approximately
six months, are necessary to accommodate an individual ADF Market
Participant seeking to quote on or report trades to the ADF. To
determine the specific build-outs necessary to support a new ADF Market
Participant, a member would need to provide FINRA with estimated volume
projections of quotation and trade reporting activity that would flow
through the ADF.
---------------------------------------------------------------------------
\15\ FINRA's TRACE facility for reporting transactions in fixed-
income securities has been migrated to MPP. See Regulatory Notice
11-53 (November 2011). The FINRA/NYSE TRF was migrated onto MPP as
of October 1, 2012.
---------------------------------------------------------------------------
Recently, several members have approached FINRA to discuss the
possibility of becoming an ADF Market Participant, and some have asked
whether the migration of the ADF to MPP could be accelerated. As
discussed more fully below, the timeframe to bring the new ADF base
infrastructure live can be accelerated in the MPP rollout schedule.
However, to do so necessarily means delaying the migration of other
FINRA facilities onto MPP, reallocating resources, shifting scheduling,
and implementing ADF-specific enhancements and hosting in the new
technology environment--all of which impose significant costs on FINRA,
including prolonging the substantially higher expenses associated with
the legacy OTC Equity Trade Reporting Facility (``ORF'') infrastructure
(i.e., legacy ORF support costs are significantly higher than the
expected costs of supporting the ORF in the new MPP technology
environment).
In addition to the costs of accelerating the migration of the ADF
onto MPP, bringing the new ADF base infrastructure live in the MPP
technology environment to accommodate an ADF Market Participant will
impose significant direct costs on FINRA related to building and
testing the new ADF component on the MPP infrastructure and also
related to paying for SIP capacity usage allocations. Consuming real
time data feeds for ADF system price validation and other purposes will
impose additional costs. General staff labor, support, and testing will
impose related costs on FINRA as well. In aggregate, the MPP component
re-sequencing necessary to accommodate ADF acceleration and the costs
associated with bringing the ADF base infrastructure live will
conservatively cost FINRA in excess of $3 million.
If the ADF MPP launch is accelerated, FINRA believes an ADF Market
Participant could be live on the ADF by the end of 2013. If the ADF MPP
launch is not accelerated, FINRA intends to have the ADF base
infrastructure prepared for a participant by mid-2014, and a
participant could be live on the ADF at the earliest six months after
the base layer functionality is complete (i.e., approximately late 2014
or early 2015).
(4) Proposed Amendments to the ADF Rules
The proposed rule change would consolidate into a single rule
(FINRA Rule 6271) the existing requirements that a member must meet to
register as an ADF Market Participant and introduce new requirements
that potential ADF Market Participants must meet to participate on the
ADF. These new requirements are intended to mitigate the substantial
financial risks to FINRA, discussed above, of accelerating the
migration of the ADF onto MPP or of building out the ADF base platform
to accommodate an ADF Market Participant.
As amended by the proposed rule change, FINRA Rule 6271 would
specify that a member seeking registration as an ADF Market Participant
must (i) file an application with FINRA, (ii) execute the Certification
Record, and (iii) execute a Participant Agreement. Rule 6271(a)(1)
would require a potential ADF Market Participant to file an application
with FINRA in which the member:
[[Page 46654]]
Specifies whether the member is seeking registration in
Nasdaq and/or CQS securities;
Certifies the member's good standing with FINRA;
Demonstrates compliance with the net capital and other
financial responsibility provisions of the Exchange Act;
Provides FINRA with reasonable monthly projections of the
volume of data that the member anticipates submitting to the ADF;
Agrees to submit the ADF Deposit Amount \16\ in five equal
installments into an escrow account at a bank mutually acceptable to
the member and FINRA on a timetable as agreed to by the member and
FINRA;
---------------------------------------------------------------------------
\16\ As described more fully below, the ADF Deposit Amount is
$250,000; however, the amount will be increased to $500,000 under
certain circumstances.
---------------------------------------------------------------------------
Agrees that failing to submit quotes and report trades to
the ADF for a term of two years will result in the forfeiture of some
or all of the ADF Deposit Amount;
Agrees that failing to submit 75% of both its quote and
trade volume in NMS stocks will result in the forfeiture of some or all
of the ADF Deposit Amount; and
Agrees to the other ADF Deposit Terms, which are the same
for all members and are described below.
The first three requirements of the application, which specify
whether the member is seeking registration in Nasdaq and/or CQS
securities, certify the member's good standing with FINRA, and
demonstrate compliance with the net capital and other financial
responsibility provisions of the Act, are the same as the requirements
currently in Rule 6271(b). Members who are Trading Centers, as defined
in Rule 600(b)(78) of SEC Regulation NMS,\17\ are also currently
required to execute and comply with an ADF Certification Record, in
which the member agrees, among other things, to abide by the
requirements of Regulation NMS.\18\ The proposed rule change would add
this existing requirement into Rule 6271 so that all registration
requirements are located in a single rule.\19\
---------------------------------------------------------------------------
\17\ 17 CFR 242.600(b)(78).
\18\ See FINRA Rules 6220(a)(5), 6250(a)(7).
\19\ The proposed rule change also moves the provision requiring
registration in order to participate on the ADF from Rule 6271 to
Rule 6272 with no substantive change.
---------------------------------------------------------------------------
The proposed rule change would add several new requirements into
the application that members must complete to become ADF Market
Participants. The new provisions require that a member seeking to
become an ADF Market Participant: (i) Provide FINRA with reasonable
monthly projections of the volume of data that the member anticipates
submitting to the ADF; (ii) agree to submit the ADF Deposit Amount in
five equal installments into an escrow account at a bank mutually
acceptable to the member and FINRA on a timetable as agreed to by the
member and FINRA; (iii) agree that failing to submit quotes and report
trades to the ADF for a two-year period will result in the forfeiture
of some or all of the ADF Deposit Amount; (iv) agree that failing to
submit 75% of the member's trade and quote volume in NMS stocks to the
ADF will result in the forfeiture of some or all of the ADF Deposit
Amount; and (v) agree to the other ADF Deposit Terms set forth in the
rule.
The new provisions are intended to ensure that FINRA can recover a
portion of the costs associated with accelerating the migration of the
ADF to MPP and bringing a new ADF Market Participant onto the ADF if
the ADF Market Participant fails to participate on the ADF as
anticipated. As noted above, FINRA is currently in the process of
creating a new ADF platform as part of its efforts to migrate all FINRA
facilities onto MPP. Under the current timeframe, the ADF base
infrastructure is scheduled to be available on the new platform by no
sooner than mid-2014; however, it is possible for FINRA to rearrange
the scheduling priority and have the ADF available for new ADF Market
Participants potentially as early as late-2013. As described above,
altering the timetable imposes significant costs on FINRA associated
with delaying the retirement of other products, diverting effort and
resources from the current MPP roll-out schedule, and delaying the
termination of other product legacy fee structures. Moreover, as noted
above, even after the base infrastructure for the ADF is otherwise
completed, the transition of an ADF Market Participant onto the MPP
infrastructure will impose substantial development costs and staff
effort costs on FINRA. The new provisions set out in the proposed rule
change are intended to ensure that FINRA will be able to recover a
portion of the costs incurred as a result of accommodating a member's
request to accelerate the migration of the ADF to MPP or building out
the ADF platform to accommodate the member's volume projections should
the member fail to participate on the ADF as anticipated.
Pursuant to the proposed rule change, potential ADF Market
Participants must provide FINRA with reasonable monthly projections of
the volume of data that the member anticipates submitting to the ADF.
In addition, the potential ADF Market Participant must agree to quote
on and report trades to the ADF for a two-year term and to submit at
least 75% of both its quote and trade volume to the ADF. If the ADF
Market Participant fails to meet one of these obligations, it will
forfeit some or all of the ADF Deposit Amount. These requirements serve
two primary purposes: (1) They provide FINRA the information necessary
to ensure the ADF can accommodate the volume of data the member
anticipates submitting to the ADF and (2) they establish the basis upon
which FINRA will be safeguarded by ensuring that the potential ADF
Market Participant will bear some of the financial responsibility
should FINRA undertake the efforts and incur the costs necessary to
bring the ADF Market Participant onto the ADF, only to have the ADF
Market Participant fail to participate at all or at the level agreed
to.
To ensure the volume commitments are met, the proposed rule change
requires potential ADF Market Participants to agree to submit an ``ADF
Deposit Amount'' in five equal installments into an escrow account at a
bank mutually acceptable to the member and FINRA on a timetable as
agreed to by the member and FINRA. The proposed rule change defines the
``ADF Deposit Amount'' as $500,000 if the member requests that FINRA
accelerate the ADF migration or if the member begins quoting on or
reporting trades to the ADF within 90 calendar days after an ADF Market
Participant that requested acceleration of the ADF migration begins
quoting on or reporting trades to the ADF. For all other ADF
Participants, the ADF Deposit Amount is $250,000.
FINRA is proposing to establish the two separate levels of the ADF
Deposit Amount referenced above in order to reflect the differing costs
FINRA will incur under either of two scenarios. Because FINRA will
incur significantly higher costs if the migration of the ADF is
accelerated at a member's request, FINRA has proposed an ADF Deposit
Amount of $500,000 should the member request such acceleration.
Additionally, to ensure that ADF Market Participants benefitting from
an acceleration of the ADF onto MPP are treated equally, FINRA proposes
to charge $500,000 to any member that begins quoting on or reporting
trades to the ADF within ninety (90) days after an existing ADF Market
Participant that requested acceleration of the ADF migration begins
quoting on or reporting trades to the ADF. FINRA believes that this
[[Page 46655]]
amount, which, as noted above, is substantially lower than the actual
costs FINRA will incur by amending the current MPP migration schedule
reflects an appropriate balance between ensuring that FINRA is able to
recover a portion of the costs associated with an accelerated migration
while not representing a significant financial barrier to participation
on the ADF, particularly since members can potentially recover 100% of
the ADF Deposit Amount over the two-year term and up to 80% of the ADF
Deposit Amount in the first quarter of their participation on the ADF
through the credit structure for market data revenue described below.
Moreover, FINRA believes that permitting potential participants to earn
back the entire deposit amount is more equitable than charging
potential ADF Market Participants a one-time payment without the
ability to recover some, or all, of the amount.
The proposed rule change would reduce the ADF Deposit Amount to
$250,000 if the member has not requested an accelerated migration or
does not become an ADF Market Participant within 90 days after another
ADF Market Participant that had requested acceleration (i.e., paid an
escrow amount of $500,000) begins quoting on or reporting trades to the
ADF. The lower amount reflects the fact that the costs to FINRA are
significantly reduced under these circumstances because the ADF base
platform will have already been migrated to MPP. However, although
reduced, FINRA anticipates such costs will still be significantly
higher than the $250,000 deposit amount in such a scenario based on
costs related to possible additional hardware and software deployments,
paying for SIP capacity usage allocations, and costs related to general
staff labor, support and testing.
FINRA notes that the ADF Deposit Amount will be the same for any
member seeking to become an ADF Market Participant, regardless of the
member's overall anticipated quotation and trading volume. Because the
costs incurred by FINRA to migrate the ADF and to build it out do not
vary significantly as a result of the volume of the ADF Market
Participant's trading activity, FINRA believes it is fair and equitable
to require each prospective ADF Market Participant to submit the same
amount into escrow.
The proposed rule change includes several required terms for the
handling of the ADF Deposit Amount (referred to as ``ADF Deposit
Terms''), including the methods for ADF Market Participants to recover
some or all of the ADF Deposit Amount as a result of meeting its
participation commitments (or due to FINRA's inability to meet its
obligations) and methods for FINRA to receive the funds if commitments
are not met. The proposed rule change retains some flexibility in the
precise terms of any agreements between FINRA and potential ADF Market
Participants to ensure that any unique circumstances can be addressed
by permitting de minimis additions or qualifications to the ADF Deposit
Terms, provided both FINRA and the member agree to those additions or
qualifications.
The proposed rule change includes a means for ADF Market
Participants to earn back the ADF Deposit Amount. Specifically, the
proposed rule change provides that for every $1.00 received by FINRA
from the National Market System (``NMS'') SIP data plans associated
with ADF activity attributable, as determined in FINRA's sole
discretion, to the member's trading activity on the ADF, the member
shall receive $0.50 out of the escrow account. Thus, in essence, an ADF
Market Participant will recover an amount equal to one-half of the SIP
market data revenue generated by the ADF Market Participant's trading
activity on the ADF. The ADF Market Participant's recovery would be
paid on a quarterly basis after FINRA has received its quarterly
disbursement from the NMS SIP data plans.\20\ This provides for a
reasonable opportunity for FINRA to recover some of its costs of re-
sequencing the MPP rollout by virtue of the SIP market data revenue
split.
---------------------------------------------------------------------------
\20\ Charges or credits as a result of SIP audit recoveries,
which typically are de minimis as compared to the overall revenue
paid, would not be included in the calculation.
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In addition, the proposed rule change provides that the ADF Market
Participant is only entitled to receive an amount up to 80% of the ADF
Deposit Amount pursuant to this provision and is not entitled to the
remaining 20% of the ADF Deposit Amount until the end of the two-year
term, assuming its trading activity has earned the requisite market
data revenue from the SIPs. To the extent that the ADF Market
Participant opts to stop participating on the ADF before the end of the
two-year term or stop meeting its volume commitment before the end of
the two-year term (i.e., chooses to quote or trade through another
trading venue), it would be free to do so but could potentially forfeit
some or all of the remaining ADF Deposit Amount.
If FINRA does not make the ADF available within nine months of an
ADF Market Participant's first deposit of the ADF Deposit Amount into
the escrow account, one-fifth of the ADF Deposit Amount will be
released from such escrow account to the ADF Market Participant. An
additional one-fifth of the initial ADF Deposit Amount will be released
to the ADF Market Participant every month thereafter that FINRA has not
made the ADF available, until all funds have been released from such
escrow account.
The proposed rule change also includes provisions designed to
protect FINRA if a member requests that the ADF be migrated to MPP on
an accelerated basis or if FINRA undertakes efforts to build out the
system to support the member, and in either instance, the member fails
to participate. The proposed rule change provides that one-fifth of the
ADF Deposit Amount shall be released to FINRA if, in any calendar month
beginning with the fourth calendar month following certification of the
ADF Market Participant to quote on or report trades to the ADF, the ADF
Market Participant fails to submit 75% of the member's quoting and
trade reporting activity to the ADF. In addition, if a member is sold
(other than a sale to an entity that would otherwise meet the FINRA
qualifications as an ADF Market Participant), goes out of business,
otherwise does not meet its obligations, or fails to complete the
process for becoming an ADF Market Participant, the member will forfeit
the ADF Deposit Amount, or any lesser amount remaining in the escrow
account, and all funds will be released from such escrow account to
FINRA.
Finally, the proposed rule change would make clear that a member
would become an ADF Market Participant only after (i) the member
received a notice of approval from FINRA that its application was
accepted, (ii) the member executed the Certification Record, and (iii)
FINRA executed the Participant Agreement.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 30 days following
Commission approval. The effective date will be no later than 30 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\21\ which requires, among
other things, that FINRA rules must be designed to
[[Page 46656]]
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 and Section 15A(b)(5) of the Act,\22\
which requires, among other things, that FINRA rules provide for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility or system that
FINRA operates or controls. FINRA believes that the proposed rule
change establishes an equitable and transparent method for registering
members for participation on the ADF. FINRA also believes that
requiring individual members to ensure the recoupment of a portion of
the specific costs FINRA incurs to accommodate their request to
accelerate the migration of the ADF or use the ADF is a fair and
equitable way to ensure that the members responsible for those costs
are accountable should they not participate on the ADF to the extent
anticipated.
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\21\ 15 U.S.C. 78o-3(b)(6).
\22\ 15 U.S.C. 78o-3(b)(5).
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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. FINRA believes that members
that choose to use the ADF should bear responsibility for costs
incurred in accelerating the ADF's migration or in otherwise building
out the ADF. The decision to request acceleration or to use the ADF to
display quotations or orders lies solely with the member. Further,
members are able to recover the full amount of their ADF Deposit Amount
by meeting the terms of the agreement. Although a member would be
required to provide a commitment to quote on and report trades to the
ADF, it always retains the option to leave the ADF or choose to quote
or trade through another trading venue, but must bear certain financial
consequences associated with that choice.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission shall:
(a) By order approve or disapprove such proposed rule change, or (b)
institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2013-031 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.
All submissions should refer to File Number SR-FINRA-2013-031. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2013-031 and should be
submitted on or before August 22, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18470 Filed 7-31-13; 8:45 am]
BILLING CODE 8011-01-P
