Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Relating to Wash Sale Transactions and FINRA Rule 5210 (Publication of Transactions and Quotations), 73900-73905 [2013-29257]
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Pilot Program to continue while other
SROs adopt similar provisions and
meaningful data can be compiled into a
Pilot Report.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 8 and Rule
19b–4(f)(6) thereunder.9 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 10 and Rule 19b–4(f)(6)
thereunder.11
A proposed rule change filed under
Rule 19b–4(f)(6) 12 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b4(f)(6)(iii),13 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative
immediately upon filing. The Exchange
believes that waiver of the 30-day
operative delay is appropriate and will
benefit market participants because
immediate operability will allow the
SPY Pilot Program to continue without
interruption. The Commission believes
that waiving the 30-day operative delay
is consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
8 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
10 15 U.S.C. 78s(b)(3)(A).
11 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
12 17 CFR 240.19b–4(f)(6).
13 17 CFR 240.19b–4(f)(6)(iii).
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waives the 30-day operative delay and
designates the proposal operative upon
filing.14
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 15 of the Act to
determine whether the proposed rule
change should be approved or
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–
NYSEArca–2013–130 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–NYSEArca–2013–130. 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
14 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
15 15 U.S.C. 78s(b)(2)(B).
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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 also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2013–130 and should be
submitted on or before December 30,
2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29259 Filed 12–6–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70966; File No. SR–FINRA–
2013–036]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change Relating to Wash Sale
Transactions and FINRA Rule 5210
(Publication of Transactions and
Quotations)
December 3, 2013.
I. Introduction
On August 15, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
add Supplementary Material .02 to
FINRA Rule 5210 (Publication of
Transactions and Quotations) to
emphasize that wash sale transactions
are generally non-bona fide transactions
and that members have an obligation to
have policies and procedures in place to
review their trading activity for, and
prevent, wash sale transactions. The
proposed rule change was published for
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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comment in the Federal Register on
September 4, 2013.3 The Commission
received five comment letters on the
proposed rule change.4 On October 4,
2013, the Commission extended the
time period for Commission action to
December 3, 2013.5 On December 2,
2013, FINRA submitted a response to
the comment letters 6 and filed
Amendment No. 1 to the proposed rule
change. This order institutes
proceedings under Section 19(b)(2)(B) of
the Act 7 to determine whether to
approve or disapprove the proposed
rule change as modified by Amendment
No. 1.
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II. Description of the Proposal
FINRA initially proposed to add
Supplementary Material .02 to FINRA
Rule 5210 to address members’
obligations with respect to certain
securities transactions that involve no
change in the beneficial ownership of
those securities (referred to by FINRA as
‘‘wash sales’’), that are occurring and
being disseminated to the public when
there is no fraudulent or manipulative
motivation for the trading activity at
issue.8 The proposed rule change
explains that wash sales are generally
non-bona fide transactions for purposes
of Rule 5210 and that member firms
must have policies and procedures that
are reasonably designed to review their
trading for wash sale transactions and to
prevent such transactions from taking
place. The proposed rule excludes from
3 See Securities Exchange Act Release No. 70276
(August 28, 2013), 78 FR 54502 (‘‘Notice’’).
4 See letter from Anonymous to Elizabeth M.
Murphy, Secretary, Commission, dated September
9, 2013 (‘‘Anonymous Letter’’); letter from William
A. Jacobson, Clinical Professor of Law, and Director,
Cornell Securities Law Clinic, and Jimin Lee,
Cornell University Law School, to Elizabeth M.
Murphy, Secretary, Commission, dated September
25, 2013 (‘‘Cornell Letter’’); letter from Stuart J.
Kaswell, Executive Vice President, Managing
Director and General Counsel, Managed Funds
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated September 25, 2013 (‘‘MFA
Letter’’); letter from Manisha Kimmel, Executive
Director, Financial Industry Forum, to Elizabeth M.
Murphy, Secretary, Commission, dated September
25, 2013 (‘‘FIF Letter’’); and letter from Theodore
R. Lazo, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary,
Commission, dated October 4, 2013 (‘‘SIFMA
Letter’’).
5 See Securities Exchange Act Release No. 70613
(October 4, 2013), 78 FR 62784 (October 22, 2013).
6 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Brant K. Brown, FINRA, dated
December 2, 2013 (‘‘FINRA Letter’’).
7 15 U.S.C. 78s(b)(2)(B).
8 Securities transactions that do not result in a
change of beneficial ownership of the securities and
that are undertaken for the purpose of creating or
inducing a false or misleading appearance of
activity in the securities are already prohibited by
existing securities laws and FINRA rules. See
footnote 11, infra.
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the definition of wash sale, transactions
that do not result in a change of
beneficial ownership, but that originate
from unrelated algorithms or from
separate and distinct trading strategies,
provided these transactions are not
undertaken for manipulative or other
fraudulent purposes.9 The proposed
rule also initially provided that
algorithms or trading strategies within
the most discrete unit of an effective
system of internal controls at a member
firm are presumed to be related, and
provided the following examples of the
‘‘most discrete unit of an effective
system of internal controls’’ in the text
of the rule: An aggregation unit, or
individual trading desks within an
aggregation unit separated by reasonable
information barriers, as applicable.
Even if transactions resulting in no
change of beneficial ownership were not
undertaken with fraudulent or
manipulative intent, FINRA believes
these transactions can create a
misimpression of the level of legitimate
trading interest and activity in the
security. In a number of instances,
FINRA has found that these types of
transactions can account for a material
percentage (e.g., over 5%) of the
consolidated trading volume in a
security on a particular day, which can
distort the market information that is
publicly available for that security.
FINRA states that the proposed rule
change is intended to address wash
sales occurring due to orders sent by a
single algorithm or the interaction of
multiple, related algorithms operated by
a single firm. The proposal does not
seek to prevent trading activity that
results from separate trading strategies
operating within a single firm. FINRA
explains that, in many situations, what
may seem to be wash sale activity
occurs as a result of orders that originate
from the same firm, but from separate or
distinct underlying trading strategies
(e.g., separate ‘‘desks,’’ aggregation
units, or algorithms) that have
different—and sometimes competing—
investment objectives and that
deliberately do not interact with each
other before generating orders to the
market.
FINRA states that only those firms
that engage in a pattern or practice of
effecting wash sale transactions that
result in a material percentage of the
trading volume in a particular security
9 FINRA notes that transactions that originate
from unrelated algorithms or from separate or
distinct trading strategies, trading desks, or
aggregation units that are frequent or numerous may
raise a presumption that such transactions were
undertaken with the intent that they cross and may,
therefore, be intended as manipulative or
fraudulent.
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would generally violate Rule 5210. The
proposed rule change requires
reasonable policies and procedures and
would not, therefore, apply to isolated
wash sale transactions, provided the
firm’s policies and procedures were
reasonable.10
FINRA rules and the federal securities
laws explicitly prohibit transactions in
securities that do not result in a change
of beneficial ownership of the securities
when there is a fraudulent or
manipulative purpose behind the
trading activity.11 In addition, FINRA
Rule 5210 provides that no member may
cause to be published or circulated any
report of a securities transaction unless
the member knows or has reason to
believe that the transaction was a bona
fide transaction. Supplementary
Material .01 states that ‘‘[i]t shall be
deemed inconsistent with Rules 2010
(Standards of Commercial Honor and
Principles of Trade), 2020 (Use of
Manipulative, Deceptive or Other
Fraudulent Devices) and 5210
(Publication of Transactions and
Quotations) for a member to publish or
circulate or cause to be published or
circulated, by any means whatsoever,
any report of any securities transaction
or of any purchase or sale of any
security unless such member knows or
has reason to believe that such
transaction was a bona fide transaction,
purchase or sale.’’ FINRA represents
that each FINRA member has an
existing obligation to know, or have a
basis to believe, that transactions in
which it participates are bona fide.
FINRA states that a member must
review its trading activity to determine
whether it is engaging in wash sale
transactions and make changes to
minimize their occurrence.
In response to the comments
received,12 FINRA filed Amendment
No. 1 which would amend the proposed
rule change in the following ways: (1)
By replacing the term ‘‘wash sale’’ with
‘‘self-trade;’’ (2) by clarifying that selftrades are transactions in a security
resulting from the unintentional
interaction of orders originating from
the same firm that involve no change in
the beneficial ownership of the security,
and are bona fide transactions; (3) by
clarifying that the policies and
procedures required by Rule 5210 must
be reasonably designed to review
trading activity for, and prevent, a
pattern or practice of self-trades
10 FINRA notes that the proposed rule change
would not change member firms’ existing
obligations under NASD Rule 3010 and FINRA Rule
2010 with respect to wash sales.
11 See, e.g., 15 U.S.C. 78i(a)(1); FINRA Rule
6140(b).
12 See supra note 4.
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resulting from orders originating from a
single algorithm or trading desk, or
related algorithms or trading desks; (4)
by clarifying that transactions resulting
from orders that originate from
unrelated algorithms or separate and
distinct trading strategies within the
same firm would generally be
considered bona fide self-trades; and (5)
by removing the examples from the
proposed rule text of the types of
algorithms or trading desks FINRA
would presume to be related for
purposes of Rule 5210.
III. Comment Letters
As noted above, the Commission
received five comment letters regarding
the proposed rule change 13 and FINRA
responded to the comments.14 One
comment letter supported the
proposal.15 Three comment letters
suggested modifications to the
proposal.16 One comment letter
opposed the proposal.17
The commenter who supports the
proposed rule change believes the
proposed rule will enhance the integrity
of the markets by requiring FINRA
members to prevent unintended wash
sales from being effected, which can
otherwise result in misleading volume
in a security.18 Further, the commenter
agrees that not all wash sales can be
prohibited, so it believes that the
exception in the proposed rule for wash
sale transactions resulting from
unrelated algorithms or from separate
and distinct trading strategies is
appropriate.19
The three commenters who also
support the proposed rule change, but
recommend modifications, believe that
the proposal is too restrictive in certain
respects.20 One such commenter argues
that the unintentional interaction of
orders from one or more algorithms
from a single firm should not be a
violation of Rule 5210,21 and that the
proposed rule change may create ‘‘a
chilling effect on legitimate trading.’’ 22
The commenter believes that there
should not be a presumption that
algorithms within the most discrete
trading units are related as they may
only share common oversight staff and
the same trading unit, but have different
13 See
supra note 4.
FINRA Letter, supra note 6.
15 See Cornell Letter, supra note 4.
16 See MFA Letter, FIF Letter, and SIFMA Letter,
supra note 4.
17 See Anonymous Letter, supra note 4.
18 See Cornell Letter, supra note 4, at 1.
19 See id., at 2.
20 See MFA Letter; FIF Letter; SIFMA Letter;
supra note 4.
21 See MFA Letter, supra note 4, at 1.
22 See id., at 2.
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14 See
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trading strategies.23 In its letter, FINRA
responded by stating that there should
continue to be a rebuttable presumption
that algorithms within the most discrete
unit of a firm’s internal controls are
related.24 FINRA agrees that firms
should be able to attempt to
demonstrate their compliance and rebut
such a presumption.25 By referencing
examples such as aggregation units or
information barriers, FINRA stated that
it did not intend to limit the rule to
those examples. To avoid confusion,
however, FINRA is proposing to remove
the examples.26
The commenter also requests
clarification from FINRA that algorithms
are not considered ‘‘related’’ ‘‘because
they share common infrastructure,
inputs such as market data or certain
characteristics of a security, or had
common quantitative researchers.’’ 27
The commenter recommends that the
proposed rule change make clear that
unrelated trading algorithms would not
incur liability,28 and that the proposed
rule change should be limited to
equities executed and reported in the
United States and not be applied to
transactions that are not publicly
reported.29 Finally, the commenter
supports the development by markets of
a functionality to prevent the
unintentional interaction of orders from
one or more algorithms at a single firm,
and believes that FINRA members
should take reasonable steps to prevent
such transactions from being publicly
reported.30 In its letter, FINRA
responded by stating, among other
things, that it does not believe the rule
should be limited to equity securities as
the same issues can arise in fixedincome transactions.31
Another commenter who supports
modifications to the proposal disagrees
with the presumption made in the
proposed rule that algorithms are
related if they are in the same
aggregation unit or are not separated by
information barriers within a firm.32
The commenter argues that the
23 See
id., at 3.
FINRA Letter, supra note 6, at 5.
25 See id.
26 At the same time, FINRA believes it is unlikely
that in such situations firms will be able to rebut
the presumption that algorithms are ‘‘related.’’
FINRA also clarifies that, notwithstanding a
presumption that such algorithms are ‘‘related,’’
firms are permitted to attempt to demonstrate that
two or more algorithms within the most discrete
unit of a firm’s internal controls, such as an
aggregation unit, are not ‘‘related.’’ See id.
27 See MFA Letter, supra note 4, at 3.
28 See id.
29 See MFA Letter, supra note 4, at 2.
30 See MFA Letter, supra note 4, at 3.
31 See FINRA Letter, supra note 6, at 7.
32 See FIF Letter, supra note 4, at 1.
24 See
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proposed rule would require such
algorithms to have the capability of
knowing the orders submitted by other
algorithms within the same aggregation
unit (or not separated by information
barriers) to thus prevent their orders
from crossing, which the commenter
believes would require ‘‘a substantial
development effort,’’ and could
negatively affect legitimate trading
activity.33 In addition, the commenter is
concerned with the proposed
requirement that firms have policies and
procedures in place that are reasonably
designed to review their trading activity
for, and prevent, wash sale transactions.
The commenter believes it would be a
significant challenge for firms to prevent
wash sale transactions from taking
place, and notes that current wash sale
surveillances are done on a post-trade
basis.34 The commenter argues that the
better standard would be to require
firms to monitor wash sale activity and
implement controls ‘‘where such
activity demonstrates a pattern or
practice of effecting wash sale
transactions that result in a material
percentage of the volume in a
security.’’ 35 Review of such activity
would occur on a post-trade basis. The
commenter also lists several examples
where it believes that the prevention
requirement in the proposed rule could
negatively affect legitimate trading
activity,36 such as by prohibiting an
investment advisor from placing orders
for different beneficial owners on both
sides of the market.37 FINRA responded
to this last point by noting that it does
not intend to modify the rule to remove
the word ‘‘prevent’’ as there are already
exchanges that ‘‘provide functionalities
and tools to help firms prevent selftrades.’’ 38
The third commenter also
recommends modifications to the
proposal. First, the commenter states
that the proposed rule change should
refer to ‘‘wash sales’’ as ‘‘self-trades’’
instead, as it believes that the term
‘‘wash sales’’ connotes manipulation or
fraudulent activity.39 In response to the
comment, FINRA has determined to
change the use of the term ‘‘wash sale’’
to ‘‘self-trade’’ to avoid the implication
that the types of trading activity
addressed in the supplementary
material are limited to trading that is
undertaken with manipulative intent.
FINRA defines ‘‘self-trade’’ for purposes
33 See
id., at 2.
id.
35 See id.
36 See id., at 2–3.
37 See FIF Letter, supra note 4, at 3.
38 See FINRA Letter, supra note 6, at 7.
39 See SIFMA Letter, supra note 4, at 2.
34 See
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of the rule as a transaction in a security
resulting from the unintentional
interaction of orders originating from
the same firm that involves no change
in the beneficial ownership of the
security.40
Additionally, the commenter
recommends that FINRA amend the
proposed rule change to instead require
firms to have policies and procedures to
monitor and prevent ‘‘self-trades’’ that
constitute a large amount of trading
volume in a security on a trading day.41
Further, the commenter believes that the
proposed rule text should be amended
to state that only broker-dealers that
engage in a pattern or practice of
unintentional ‘‘self-trades’’ that result in
a material amount of trading volume
would be in violation of the proposed
rule.42 The commenter urges that a firm
that engages in ‘‘self-trades’’ on isolated
trading days should not be in violation
of the proposed rule if the firm then
detects and rectifies the issue and takes
preventative measures.43 FINRA
responded to this and other commenters
who discussed the material percentage
matter by stating that it does not believe
the rule text should be limited to those
transactions that have a material effect
on the market because, in many
instances, firms will not be able to know
the ultimate effect self-trading has as it
occurs. Rather, each individual firm
should review its trading activity to
assess any self-trading in which the firm
has engaged and, where necessary, take
appropriate action to prevent a pattern
or practice of such activity from
occurring going forward.44 FINRA
reiterated its view, however, that
isolated self-trades are generally bona
fide transactions, and that it is only
when that type of trading activity
accounts for a material percentage of the
volume in a particular security that the
self-trading activity results in potential
misinformation that can adversely affect
the price discovery process.45 FINRA
stated that it is amending the proposed
rule to specifically note that firms’
obligations are to prevent a pattern or
40 See FINRA Letter, supra note 4, at 5–6. FINRA
notes, however, that the use of the term ‘‘self-trade’’
in this context does not change members’ existing
obligations with respect to the prevention of wash
sales under NASD Rule 3010 and FINRA Rule 2010.
41 The commenter suggests specifically: ‘‘policies
and procedures reasonably designed to monitor for
and prevent the otherwise unintentional
transactions that result in no change of beneficial
ownership that constitutes a material percentage of
consolidated trading volume in a subject security
on a particular day.’’ See SIFMA Letter, supra note
4, at 3.
42 See id.
43 See id.
44 See FINRA Letter, supra note 6, at 6.
45 See id.
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practice of self-trades, and not all selftrades.46
Finally, the commenter requests that
FINRA remove the broad presumption
that all algorithms and strategies within
the most discrete unit of an effective
system of internal controls are related.
According to the commenter, algorithms
within a discrete unit may be unrelated,
but may still effect unintentional ‘‘selftrades.’’ 47 The commenter believes that
the exclusion for unrelated algorithms
should be a non-exclusive safe harbor
allowing FINRA members to
‘‘demonstrate their compliance by those
means that best reflect their
organization, rather than be limited to
information barriers alone.’’ 48 In its
letter, FINRA stated that it believes that
the presumption that algorithms within
the most discrete unit of a firm’s
internal controls are related is valid, and
that firms should be permitted to
demonstrate their compliance and rebut
this presumption.49 FINRA proposed to
remove from its proposed rule text the
examples it provided of such related
algorithms and trading strategies—
specifically, those ‘‘within an
aggregation unit, or individual trading
desks within an aggregation unit
separated by reasonable information
barriers, as applicable’’ to avoid limiting
the proposed rule to those examples.50
However, FINRA believes that it is
unlikely that a firm will be able to rebut
the presumption that algorithms or
trading strategies within an aggregation
unit or individual trading desks within
an aggregation unit separated by
information barriers are in fact related.51
The commenter who opposes the
proposal questions the effectiveness of
the proposed rule change, noting that
FINRA acknowledged in the proposal
that certain wash sales cannot be
prevented without explaining why this
is the case.52 The commenter expresses
concern that FINRA would treat such
activity as acceptable when FINRA has
stated that it can result in a significant
distortion of the trading volume in a
security, which thereby misleads market
participants.53 The commenter argues
that by not prohibiting this activity, the
proposed rule change is contrary to the
public interest,54 and that firms that
consistently engage in wash sale activity
should be required to incur the cost to
prevent it, as the commenter notes that
wash sales that occur on a regular basis
are not mistakes, but the ‘‘predictable,
direct result of conduct in which the
[f]irms have chosen to engage.’’ 55 The
commenter suggests that FINRA revise
its proposed rule to prohibit multiple
algorithms within the same firm from
effecting transactions with no change of
beneficial ownership.56 Finally, the
commenter requests that FINRA explain
how it currently, and in the future, will
surveil for compliance with the
proposed rule,57 and notes that it is not
clear in the proposal how FINRA will be
able to conclude that these transactions
were not carried out with manipulative
or fraudulent intent.58
FINRA disagreed with the commenter,
stating that the proposal will ‘‘take
affirmative steps to address trading
activity that is generally permitted. . .
but that can potentially result in
misinformation in the marketplace.’’ 59
FINRA further stated that a reported
trade with a firm on both sides in not
per se illegitimate.60 FINRA then noted,
as stated in the proposal, that the
proposed rule change is not meant to
prevent all types of trading activity that
result from separate strategies operating
within a single firm.61 FINRA explained
that the proposal is meant to strike a
balance between allowing a single firm
to engage in separate trading activities
and strategies (recognizing that this may
result at times in self-trades) while
ensuring firms have policies and
procedures in place to identify and
prevent patterns and practices of selftrades that may materially distort
reported trade volume.62
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–FINRA–
2013–036 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) 63 of the Act to determine
whether the proposed rule change, as
amended, should be approved or
disapproved. Institution of such
proceedings is appropriate at this time
in view of the legal and policy issues
raised by the proposed rule change.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, as
described in greater detail below, the
46 See
55 See
47 See
56 See
id., at 6–7.
SIFMA Letter, supra note 4, at 3.
48 See id.
49 See FINRA Letter, supra note 6, at 5.
50 See id.
51 See id.
52 See Anonymous Letter, supra note 4, at 1.
53 See id., at 2.
54 See id., at 3.
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73903
id., at 2.
id.
Anonymous Letter, supra note 4, at 1.
58 See id., at 2.
59 See FINRA Letter, supra note 6, at 3.
60 See id. at 4.
61 See id.
62 See id.
63 15 U.S.C. 78s(b)(2)(B).
57 See
E:\FR\FM\09DEN1.SGM
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maindgalligan on DSK5TPTVN1PROD with NOTICES
73904
Federal Register / Vol. 78, No. 236 / Monday, December 9, 2013 / Notices
Commission seeks and encourages
interested persons to provide additional
comment on the proposed rule change,
as amended, to inform the
Commission’s analysis of whether to
approve or disapprove the proposal.
Pursuant to Section 19(b)(2)(B),64 the
Commission is providing notice of the
grounds for disapproval under
consideration. In particular, Section
15A(b)(6) 65 requires that the rules of a
registered securities association be
designed, among other things, 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.
Currently, FINRA Rule 5210 prohibits
a member from reporting a transaction
unless it believes such transaction was
bona fide, and Supplementary Material
.01 clarifies that a member should not
report a transaction unless such member
knows or has reason to believe that the
transaction is bona fide. Through the
proposed addition of Supplemental
Material .02, as amended, FINRA
appears to seek to create a presumption
that ‘‘self-trades,’’ defined as the
unintentional interaction of orders
originating from the same firm that
involve no change in the beneficial
ownership of the security, generally are
bona fide. In fact, FINRA would
expressly provide that transactions
resulting from orders that originate from
unrelated algorithms or separate and
distinct trading strategies within the
same firm would generally be
considered bona fide self-trades. FINRA
would require members to have policies
and procedures reasonably designed to
prevent a pattern or practice of selftrades resulting from orders originating
from a single or related algorithms or
trading desks. FINRA’s rationale for this
requirement is that, even if transactions
are not undertaken with fraudulent or
manipulative intent, they can create a
misimpression of the level of legitimate
trading interest and activity in a
security, and could adversely affect the
price discovery process. FINRA
expresses concern that firms will
continue to allow this type of trading to
occur rather than incur the costs
necessary to prevent it, even though
significant misinformation may be
disseminated to the marketplace.
Despite raising these serious concerns
about self-trades, however, FINRA’s
proposal would appear to provide
64 15
65 15
U.S.C. 78s(b)(2)(B).
U.S.C. 78o–3(b)(6).
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substantial flexibility with respect to the
required policies and procedures, such
that a significant number of self-trades
could continue to be publicly reported.
Although not formally part of the
proposed rule text, FINRA expresses the
view in its filing that only those firms
that engage in a pattern or practice of
effecting self-trades that result in a
material percentage of the trading
volume in a particular security would
generally violate Rule 5210. In addition,
the policies and procedures requirement
would not apply at all to orders
originating from ‘‘unrelated’’ algorithms
or ‘‘separate and distinct’’ trading
strategies, which are broad terms for
which little guidance is provided by
FINRA. Accordingly, the Commission is
concerned that the proposal may not
achieve its stated purpose of addressing
the identified problems associated with
respect to self-trades, and therefore
believes questions remain as to whether
FINRA’s proposal is consistent with the
requirements of Section 15A(b)(6) of the
Act.
In addition, the Commission notes
that FINRA filed Amendment No. 1 and
its response to comments on December
2, 2013, one day before the Commission
was required to act on the proposed rule
change. Although Amendment No. 1
seeks to address a number of concerns
expressed by commenters, the
Commission believes the institution of
proceedings is appropriate to allow the
Commission and commenters time to
assess whether the amended proposal is
consistent with the Act.
V. Procedures: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any others
they may have identified with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposed rule change is consistent with
Section 15A(b)(6) or any other provision
of the Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval which would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.66
66 Section 19(b)(2) of the Act, as amended by the
Securities Acts Amendments of 1975, Public Law
94–29, 89 Stat. 97 (1975), grants the Commission
flexibility to determine what type of proceeding—
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Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change should be
approved or disapproved by December
30, 2013. Any person who wishes to file
a rebuttal to any other person’s
submission must file that rebuttal by
January 13, 2014.
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–2013–036 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–2013–036. 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 also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking,
Housing and Urban Affairs to Accompany S. 249,
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
E:\FR\FM\09DEN1.SGM
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Federal Register / Vol. 78, No. 236 / Monday, December 9, 2013 / Notices
available publicly. All submissions
should refer to File Number SR–FINRA–
2013–036 and should be submitted on
or before December 30, 2013. Rebuttal
comments should be submitted by
January 13, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.67
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29257 Filed 12–6–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70971; File No. SR–NYSE–
2013–68]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving Proposed Rule Change
Amending Section 907.00 of the Listed
Company Manual To Expand the Suite
of Complimentary Products and
Services That Are Offered to Listed
Companies
December 3, 2013.
I. Introduction
On October 1, 2013, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) 1 of the Securities Exchange Act
of 1934 (‘‘Act’’) 2 and Rule 19b–4
thereunder,3 a proposed rule change
amending Section 907.00 of the Listed
Company Manual (‘‘Manual’’) to expand
the suite of complimentary products
and services that are offered to all listed
issuers and to certain current and newly
listed issuers. The proposed rule change
was published for comment in the
Federal Register on October 22, 2013.4
The Commission received no comments
on the proposal. This order approves the
proposed rule change.
maindgalligan on DSK5TPTVN1PROD with NOTICES
II. Description of the Proposal
The Exchange has proposed to amend
Section 907.00 of the Manual to expand
the suite of complimentary products
and services that it offers to certain
listed companies. Under current
Exchange rules, all listed issuers receive
some complimentary products and
services through NYSE Market Access
Center; however, certain tiers of
67 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 70628
(Oct. 8, 2013), 78 FR 62889 (‘‘Notice’’).
1 15
VerDate Mar<15>2010
17:03 Dec 06, 2013
Jkt 232001
currently listed issuers and newly listed
issuers receive additional products and
services. As specifically set forth in
Section 907.00 of the Manual, the
Exchange offers products and services
in the following general categories to
certain current and newly listed
companies: market surveillance, webhosting, market analytics and news
distribution. According to the NYSE, the
available products and services have
approximate commercial values ranging
from $10,000 to $45,000 annually.5 The
complimentary products and services
are offered to companies under a tiered
system based on shares issued and
outstanding for currently listed
companies, or global market value for
newly listed companies.
With respect to currently listed
companies, companies that have more
than 270 million shares issued and
outstanding (a ‘‘Tier One Company’’) are
offered (i) a choice of market
surveillance or market analytics
products and services, and (ii) webhosting products and services on a
complimentary basis. Companies that
have between 160 million and 269.9
million shares issued and outstanding (a
‘‘Tier Two Company’’) are offered a
choice of market analytics or webhosting products and services.
For newly listed companies, the
Exchange offers different product and
service options for an initial period of
two years based on such company’s
global market value. A company with a
global market value of $400 million or
more (a ‘‘Tier A Company’’) is offered (i)
a choice of market surveillance products
and services for a period of twelve
months or market analytics products
and services for a period of 24 months,
and (ii) web-hosting and news
distribution products and services for a
period of 24 months. Newly-listed
companies with a global market value of
less than $400 million (a ‘‘Tier B
Company’’) are offered web-hosting and
news distribution products and services
for a period of 24 months.
The Exchange has proposed to amend
Section 907.00 of the Manual to add
three additional categories of
complimentary products and services
that will be offered to listed companies
in the various tiers as described below.
Specifically, the Exchange proposes to
include corporate governance tools and
5 Section 907.00 of the Manual currently states
that the market surveillance products and services
have a commercial value of approximately $45,000
annually, web-hosting products and services have
a commercial value of approximately $12,000–
$16,000 annually, market analytics products and
services have a commercial value of approximately
$20,000 annually and news distribution products
and services have a commercial value of
approximately $10,000 annually.
PO 00000
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Fmt 4703
Sfmt 4703
73905
advisory services (the ‘‘Enhanced
Package’’), which the Exchange states
has a commercial value of
approximately $45,000 annually, and
corporate governance tools (the ‘‘Basic
Package’’), which the Exchange states
has a commercial value of
approximately $20,000 annually, to the
list of complimentary products and
services offered to certain listed
companies. Further, the Exchange has
proposed to offer data room services and
virtual investor relation tools,6 which
the Exchange states has a commercial
value of approximately $15,000–$20,000
annually, to the list of complimentary
products and services offered to all
listed companies. The Enhanced
Package will be offered to Tier One
Companies as a third alternative to the
market surveillance and market
analytics products they are already
offered. The Basic Package will be
offered to Tier Two Companies as a
third alternative to the market analytics
and web-hosting products they are
already offered. The Basic Package also
will be offered to Tier A Companies as
a second alternative to the market
analytics products and services that are
offered for a 24-month period. The data
room services and virtual investor
relation tools will be offered to all listed
companies on an annual basis. The
Exchange has proposed to offer these
tools through an affiliated service
provider and may engage additional
third-party providers in the future.
The Basic Package, offered to Tier
Two and Tier A Companies, will consist
of a combination of governance, risk,
compliance and board tools for
company directors and executives. In its
filing, the Exchange noted that it
expects that these tools will provide
generic, easily implemented corporate
governance advice and/or educational
tools that are applicable to a wide range
of listed companies.
The Enhanced Package, offered to Tier
One Companies, will offer the same
tools as the Basic Package but will also
include access to advisory services. In
its filing, the NYSE noted that such
advisory services may include ongoing,
periodic review of a company’s
corporate governance policies as well as
benchmarking such polices against a
company’s peer group. In support of this
change, the Exchange stated that the
6 In its filing, the NYSE explained that a data
room is a password-protected Web site used for
document storage. It is typically used to store due
diligence materials to be reviewed in connection
with transactional activity. Virtual investor
relations tools are Web sites used to present
roadshows and other investor presentations on a
short-term basis, typically in connection with a
specific transaction.
E:\FR\FM\09DEN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 236 (Monday, December 9, 2013)]
[Notices]
[Pages 73900-73905]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29257]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70966; File No. SR-FINRA-2013-036]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change Relating to Wash Sale Transactions and FINRA Rule
5210 (Publication of Transactions and Quotations)
December 3, 2013.
I. Introduction
On August 15, 2013, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission (the
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed
rule change to add Supplementary Material .02 to FINRA Rule 5210
(Publication of Transactions and Quotations) to emphasize that wash
sale transactions are generally non-bona fide transactions and that
members have an obligation to have policies and procedures in place to
review their trading activity for, and prevent, wash sale transactions.
The proposed rule change was published for
[[Page 73901]]
comment in the Federal Register on September 4, 2013.\3\ The Commission
received five comment letters on the proposed rule change.\4\ On
October 4, 2013, the Commission extended the time period for Commission
action to December 3, 2013.\5\ On December 2, 2013, FINRA submitted a
response to the comment letters \6\ and filed Amendment No. 1 to the
proposed rule change. This order institutes proceedings under Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change as modified by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70276 (August 28,
2013), 78 FR 54502 (``Notice'').
\4\ See letter from Anonymous to Elizabeth M. Murphy, Secretary,
Commission, dated September 9, 2013 (``Anonymous Letter''); letter
from William A. Jacobson, Clinical Professor of Law, and Director,
Cornell Securities Law Clinic, and Jimin Lee, Cornell University Law
School, to Elizabeth M. Murphy, Secretary, Commission, dated
September 25, 2013 (``Cornell Letter''); letter from Stuart J.
Kaswell, Executive Vice President, Managing Director and General
Counsel, Managed Funds Association, to Elizabeth M. Murphy,
Secretary, Commission, dated September 25, 2013 (``MFA Letter'');
letter from Manisha Kimmel, Executive Director, Financial Industry
Forum, to Elizabeth M. Murphy, Secretary, Commission, dated
September 25, 2013 (``FIF Letter''); and letter from Theodore R.
Lazo, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association, to Elizabeth M. Murphy,
Secretary, Commission, dated October 4, 2013 (``SIFMA Letter'').
\5\ See Securities Exchange Act Release No. 70613 (October 4,
2013), 78 FR 62784 (October 22, 2013).
\6\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Brant K. Brown, FINRA, dated December 2, 2013 (``FINRA
Letter'').
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
FINRA initially proposed to add Supplementary Material .02 to FINRA
Rule 5210 to address members' obligations with respect to certain
securities transactions that involve no change in the beneficial
ownership of those securities (referred to by FINRA as ``wash sales''),
that are occurring and being disseminated to the public when there is
no fraudulent or manipulative motivation for the trading activity at
issue.\8\ The proposed rule change explains that wash sales are
generally non-bona fide transactions for purposes of Rule 5210 and that
member firms must have policies and procedures that are reasonably
designed to review their trading for wash sale transactions and to
prevent such transactions from taking place. The proposed rule excludes
from the definition of wash sale, transactions that do not result in a
change of beneficial ownership, but that originate from unrelated
algorithms or from separate and distinct trading strategies, provided
these transactions are not undertaken for manipulative or other
fraudulent purposes.\9\ The proposed rule also initially provided that
algorithms or trading strategies within the most discrete unit of an
effective system of internal controls at a member firm are presumed to
be related, and provided the following examples of the ``most discrete
unit of an effective system of internal controls'' in the text of the
rule: An aggregation unit, or individual trading desks within an
aggregation unit separated by reasonable information barriers, as
applicable.
---------------------------------------------------------------------------
\8\ Securities transactions that do not result in a change of
beneficial ownership of the securities and that are undertaken for
the purpose of creating or inducing a false or misleading appearance
of activity in the securities are already prohibited by existing
securities laws and FINRA rules. See footnote 11, infra.
\9\ FINRA notes that transactions that originate from unrelated
algorithms or from separate or distinct trading strategies, trading
desks, or aggregation units that are frequent or numerous may raise
a presumption that such transactions were undertaken with the intent
that they cross and may, therefore, be intended as manipulative or
fraudulent.
---------------------------------------------------------------------------
Even if transactions resulting in no change of beneficial ownership
were not undertaken with fraudulent or manipulative intent, FINRA
believes these transactions can create a misimpression of the level of
legitimate trading interest and activity in the security. In a number
of instances, FINRA has found that these types of transactions can
account for a material percentage (e.g., over 5%) of the consolidated
trading volume in a security on a particular day, which can distort the
market information that is publicly available for that security.
FINRA states that the proposed rule change is intended to address
wash sales occurring due to orders sent by a single algorithm or the
interaction of multiple, related algorithms operated by a single firm.
The proposal does not seek to prevent trading activity that results
from separate trading strategies operating within a single firm. FINRA
explains that, in many situations, what may seem to be wash sale
activity occurs as a result of orders that originate from the same
firm, but from separate or distinct underlying trading strategies
(e.g., separate ``desks,'' aggregation units, or algorithms) that have
different--and sometimes competing--investment objectives and that
deliberately do not interact with each other before generating orders
to the market.
FINRA states that only those firms that engage in a pattern or
practice of effecting wash sale transactions that result in a material
percentage of the trading volume in a particular security would
generally violate Rule 5210. The proposed rule change requires
reasonable policies and procedures and would not, therefore, apply to
isolated wash sale transactions, provided the firm's policies and
procedures were reasonable.\10\
---------------------------------------------------------------------------
\10\ FINRA notes that the proposed rule change would not change
member firms' existing obligations under NASD Rule 3010 and FINRA
Rule 2010 with respect to wash sales.
---------------------------------------------------------------------------
FINRA rules and the federal securities laws explicitly prohibit
transactions in securities that do not result in a change of beneficial
ownership of the securities when there is a fraudulent or manipulative
purpose behind the trading activity.\11\ In addition, FINRA Rule 5210
provides that no member may cause to be published or circulated any
report of a securities transaction unless the member knows or has
reason to believe that the transaction was a bona fide transaction.
Supplementary Material .01 states that ``[i]t shall be deemed
inconsistent with Rules 2010 (Standards of Commercial Honor and
Principles of Trade), 2020 (Use of Manipulative, Deceptive or Other
Fraudulent Devices) and 5210 (Publication of Transactions and
Quotations) for a member to publish or circulate or cause to be
published or circulated, by any means whatsoever, any report of any
securities transaction or of any purchase or sale of any security
unless such member knows or has reason to believe that such transaction
was a bona fide transaction, purchase or sale.'' FINRA represents that
each FINRA member has an existing obligation to know, or have a basis
to believe, that transactions in which it participates are bona fide.
FINRA states that a member must review its trading activity to
determine whether it is engaging in wash sale transactions and make
changes to minimize their occurrence.
---------------------------------------------------------------------------
\11\ See, e.g., 15 U.S.C. 78i(a)(1); FINRA Rule 6140(b).
---------------------------------------------------------------------------
In response to the comments received,\12\ FINRA filed Amendment No.
1 which would amend the proposed rule change in the following ways: (1)
By replacing the term ``wash sale'' with ``self-trade;'' (2) by
clarifying that self-trades are transactions in a security resulting
from the unintentional interaction of orders originating from the same
firm that involve no change in the beneficial ownership of the
security, and are bona fide transactions; (3) by clarifying that the
policies and procedures required by Rule 5210 must be reasonably
designed to review trading activity for, and prevent, a pattern or
practice of self-trades
[[Page 73902]]
resulting from orders originating from a single algorithm or trading
desk, or related algorithms or trading desks; (4) by clarifying that
transactions resulting from orders that originate from unrelated
algorithms or separate and distinct trading strategies within the same
firm would generally be considered bona fide self-trades; and (5) by
removing the examples from the proposed rule text of the types of
algorithms or trading desks FINRA would presume to be related for
purposes of Rule 5210.
---------------------------------------------------------------------------
\12\ See supra note 4.
---------------------------------------------------------------------------
III. Comment Letters
As noted above, the Commission received five comment letters
regarding the proposed rule change \13\ and FINRA responded to the
comments.\14\ One comment letter supported the proposal.\15\ Three
comment letters suggested modifications to the proposal.\16\ One
comment letter opposed the proposal.\17\
---------------------------------------------------------------------------
\13\ See supra note 4.
\14\ See FINRA Letter, supra note 6.
\15\ See Cornell Letter, supra note 4.
\16\ See MFA Letter, FIF Letter, and SIFMA Letter, supra note 4.
\17\ See Anonymous Letter, supra note 4.
---------------------------------------------------------------------------
The commenter who supports the proposed rule change believes the
proposed rule will enhance the integrity of the markets by requiring
FINRA members to prevent unintended wash sales from being effected,
which can otherwise result in misleading volume in a security.\18\
Further, the commenter agrees that not all wash sales can be
prohibited, so it believes that the exception in the proposed rule for
wash sale transactions resulting from unrelated algorithms or from
separate and distinct trading strategies is appropriate.\19\
---------------------------------------------------------------------------
\18\ See Cornell Letter, supra note 4, at 1.
\19\ See id., at 2.
---------------------------------------------------------------------------
The three commenters who also support the proposed rule change, but
recommend modifications, believe that the proposal is too restrictive
in certain respects.\20\ One such commenter argues that the
unintentional interaction of orders from one or more algorithms from a
single firm should not be a violation of Rule 5210,\21\ and that the
proposed rule change may create ``a chilling effect on legitimate
trading.'' \22\ The commenter believes that there should not be a
presumption that algorithms within the most discrete trading units are
related as they may only share common oversight staff and the same
trading unit, but have different trading strategies.\23\ In its letter,
FINRA responded by stating that there should continue to be a
rebuttable presumption that algorithms within the most discrete unit of
a firm's internal controls are related.\24\ FINRA agrees that firms
should be able to attempt to demonstrate their compliance and rebut
such a presumption.\25\ By referencing examples such as aggregation
units or information barriers, FINRA stated that it did not intend to
limit the rule to those examples. To avoid confusion, however, FINRA is
proposing to remove the examples.\26\
---------------------------------------------------------------------------
\20\ See MFA Letter; FIF Letter; SIFMA Letter; supra note 4.
\21\ See MFA Letter, supra note 4, at 1.
\22\ See id., at 2.
\23\ See id., at 3.
\24\ See FINRA Letter, supra note 6, at 5.
\25\ See id.
\26\ At the same time, FINRA believes it is unlikely that in
such situations firms will be able to rebut the presumption that
algorithms are ``related.'' FINRA also clarifies that,
notwithstanding a presumption that such algorithms are ``related,''
firms are permitted to attempt to demonstrate that two or more
algorithms within the most discrete unit of a firm's internal
controls, such as an aggregation unit, are not ``related.'' See id.
---------------------------------------------------------------------------
The commenter also requests clarification from FINRA that
algorithms are not considered ``related'' ``because they share common
infrastructure, inputs such as market data or certain characteristics
of a security, or had common quantitative researchers.'' \27\ The
commenter recommends that the proposed rule change make clear that
unrelated trading algorithms would not incur liability,\28\ and that
the proposed rule change should be limited to equities executed and
reported in the United States and not be applied to transactions that
are not publicly reported.\29\ Finally, the commenter supports the
development by markets of a functionality to prevent the unintentional
interaction of orders from one or more algorithms at a single firm, and
believes that FINRA members should take reasonable steps to prevent
such transactions from being publicly reported.\30\ In its letter,
FINRA responded by stating, among other things, that it does not
believe the rule should be limited to equity securities as the same
issues can arise in fixed-income transactions.\31\
---------------------------------------------------------------------------
\27\ See MFA Letter, supra note 4, at 3.
\28\ See id.
\29\ See MFA Letter, supra note 4, at 2.
\30\ See MFA Letter, supra note 4, at 3.
\31\ See FINRA Letter, supra note 6, at 7.
---------------------------------------------------------------------------
Another commenter who supports modifications to the proposal
disagrees with the presumption made in the proposed rule that
algorithms are related if they are in the same aggregation unit or are
not separated by information barriers within a firm.\32\ The commenter
argues that the proposed rule would require such algorithms to have the
capability of knowing the orders submitted by other algorithms within
the same aggregation unit (or not separated by information barriers) to
thus prevent their orders from crossing, which the commenter believes
would require ``a substantial development effort,'' and could
negatively affect legitimate trading activity.\33\ In addition, the
commenter is concerned with the proposed requirement that firms have
policies and procedures in place that are reasonably designed to review
their trading activity for, and prevent, wash sale transactions. The
commenter believes it would be a significant challenge for firms to
prevent wash sale transactions from taking place, and notes that
current wash sale surveillances are done on a post-trade basis.\34\ The
commenter argues that the better standard would be to require firms to
monitor wash sale activity and implement controls ``where such activity
demonstrates a pattern or practice of effecting wash sale transactions
that result in a material percentage of the volume in a security.''
\35\ Review of such activity would occur on a post-trade basis. The
commenter also lists several examples where it believes that the
prevention requirement in the proposed rule could negatively affect
legitimate trading activity,\36\ such as by prohibiting an investment
advisor from placing orders for different beneficial owners on both
sides of the market.\37\ FINRA responded to this last point by noting
that it does not intend to modify the rule to remove the word
``prevent'' as there are already exchanges that ``provide
functionalities and tools to help firms prevent self-trades.'' \38\
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\32\ See FIF Letter, supra note 4, at 1.
\33\ See id., at 2.
\34\ See id.
\35\ See id.
\36\ See id., at 2-3.
\37\ See FIF Letter, supra note 4, at 3.
\38\ See FINRA Letter, supra note 6, at 7.
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The third commenter also recommends modifications to the proposal.
First, the commenter states that the proposed rule change should refer
to ``wash sales'' as ``self-trades'' instead, as it believes that the
term ``wash sales'' connotes manipulation or fraudulent activity.\39\
In response to the comment, FINRA has determined to change the use of
the term ``wash sale'' to ``self-trade'' to avoid the implication that
the types of trading activity addressed in the supplementary material
are limited to trading that is undertaken with manipulative intent.
FINRA defines ``self-trade'' for purposes
[[Page 73903]]
of the rule as a transaction in a security resulting from the
unintentional interaction of orders originating from the same firm that
involves no change in the beneficial ownership of the security.\40\
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\39\ See SIFMA Letter, supra note 4, at 2.
\40\ See FINRA Letter, supra note 4, at 5-6. FINRA notes,
however, that the use of the term ``self-trade'' in this context
does not change members' existing obligations with respect to the
prevention of wash sales under NASD Rule 3010 and FINRA Rule 2010.
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Additionally, the commenter recommends that FINRA amend the
proposed rule change to instead require firms to have policies and
procedures to monitor and prevent ``self-trades'' that constitute a
large amount of trading volume in a security on a trading day.\41\
Further, the commenter believes that the proposed rule text should be
amended to state that only broker-dealers that engage in a pattern or
practice of unintentional ``self-trades'' that result in a material
amount of trading volume would be in violation of the proposed
rule.\42\ The commenter urges that a firm that engages in ``self-
trades'' on isolated trading days should not be in violation of the
proposed rule if the firm then detects and rectifies the issue and
takes preventative measures.\43\ FINRA responded to this and other
commenters who discussed the material percentage matter by stating that
it does not believe the rule text should be limited to those
transactions that have a material effect on the market because, in many
instances, firms will not be able to know the ultimate effect self-
trading has as it occurs. Rather, each individual firm should review
its trading activity to assess any self-trading in which the firm has
engaged and, where necessary, take appropriate action to prevent a
pattern or practice of such activity from occurring going forward.\44\
FINRA reiterated its view, however, that isolated self-trades are
generally bona fide transactions, and that it is only when that type of
trading activity accounts for a material percentage of the volume in a
particular security that the self-trading activity results in potential
misinformation that can adversely affect the price discovery
process.\45\ FINRA stated that it is amending the proposed rule to
specifically note that firms' obligations are to prevent a pattern or
practice of self-trades, and not all self-trades.\46\
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\41\ The commenter suggests specifically: ``policies and
procedures reasonably designed to monitor for and prevent the
otherwise unintentional transactions that result in no change of
beneficial ownership that constitutes a material percentage of
consolidated trading volume in a subject security on a particular
day.'' See SIFMA Letter, supra note 4, at 3.
\42\ See id.
\43\ See id.
\44\ See FINRA Letter, supra note 6, at 6.
\45\ See id.
\46\ See id., at 6-7.
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Finally, the commenter requests that FINRA remove the broad
presumption that all algorithms and strategies within the most discrete
unit of an effective system of internal controls are related. According
to the commenter, algorithms within a discrete unit may be unrelated,
but may still effect unintentional ``self-trades.'' \47\ The commenter
believes that the exclusion for unrelated algorithms should be a non-
exclusive safe harbor allowing FINRA members to ``demonstrate their
compliance by those means that best reflect their organization, rather
than be limited to information barriers alone.'' \48\ In its letter,
FINRA stated that it believes that the presumption that algorithms
within the most discrete unit of a firm's internal controls are related
is valid, and that firms should be permitted to demonstrate their
compliance and rebut this presumption.\49\ FINRA proposed to remove
from its proposed rule text the examples it provided of such related
algorithms and trading strategies--specifically, those ``within an
aggregation unit, or individual trading desks within an aggregation
unit separated by reasonable information barriers, as applicable'' to
avoid limiting the proposed rule to those examples.\50\ However, FINRA
believes that it is unlikely that a firm will be able to rebut the
presumption that algorithms or trading strategies within an aggregation
unit or individual trading desks within an aggregation unit separated
by information barriers are in fact related.\51\
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\47\ See SIFMA Letter, supra note 4, at 3.
\48\ See id.
\49\ See FINRA Letter, supra note 6, at 5.
\50\ See id.
\51\ See id.
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The commenter who opposes the proposal questions the effectiveness
of the proposed rule change, noting that FINRA acknowledged in the
proposal that certain wash sales cannot be prevented without explaining
why this is the case.\52\ The commenter expresses concern that FINRA
would treat such activity as acceptable when FINRA has stated that it
can result in a significant distortion of the trading volume in a
security, which thereby misleads market participants.\53\ The commenter
argues that by not prohibiting this activity, the proposed rule change
is contrary to the public interest,\54\ and that firms that
consistently engage in wash sale activity should be required to incur
the cost to prevent it, as the commenter notes that wash sales that
occur on a regular basis are not mistakes, but the ``predictable,
direct result of conduct in which the [f]irms have chosen to engage.''
\55\ The commenter suggests that FINRA revise its proposed rule to
prohibit multiple algorithms within the same firm from effecting
transactions with no change of beneficial ownership.\56\ Finally, the
commenter requests that FINRA explain how it currently, and in the
future, will surveil for compliance with the proposed rule,\57\ and
notes that it is not clear in the proposal how FINRA will be able to
conclude that these transactions were not carried out with manipulative
or fraudulent intent.\58\
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\52\ See Anonymous Letter, supra note 4, at 1.
\53\ See id., at 2.
\54\ See id., at 3.
\55\ See id., at 2.
\56\ See id.
\57\ See Anonymous Letter, supra note 4, at 1.
\58\ See id., at 2.
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FINRA disagreed with the commenter, stating that the proposal will
``take affirmative steps to address trading activity that is generally
permitted. . . but that can potentially result in misinformation in the
marketplace.'' \59\ FINRA further stated that a reported trade with a
firm on both sides in not per se illegitimate.\60\ FINRA then noted, as
stated in the proposal, that the proposed rule change is not meant to
prevent all types of trading activity that result from separate
strategies operating within a single firm.\61\ FINRA explained that the
proposal is meant to strike a balance between allowing a single firm to
engage in separate trading activities and strategies (recognizing that
this may result at times in self-trades) while ensuring firms have
policies and procedures in place to identify and prevent patterns and
practices of self-trades that may materially distort reported trade
volume.\62\
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\59\ See FINRA Letter, supra note 6, at 3.
\60\ See id. at 4.
\61\ See id.
\62\ See id.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2013-036 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) \63\ of the Act to determine whether the proposed rule
change, as amended, should be approved or disapproved. Institution of
such proceedings is appropriate at this time in view of the legal and
policy issues raised by the proposed rule change. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described in greater detail below, the
[[Page 73904]]
Commission seeks and encourages interested persons to provide
additional comment on the proposed rule change, as amended, to inform
the Commission's analysis of whether to approve or disapprove the
proposal.
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\63\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B),\64\ the Commission is providing
notice of the grounds for disapproval under consideration. In
particular, Section 15A(b)(6) \65\ requires that the rules of a
registered securities association be designed, among other things, 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.
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\64\ 15 U.S.C. 78s(b)(2)(B).
\65\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Currently, FINRA Rule 5210 prohibits a member from reporting a
transaction unless it believes such transaction was bona fide, and
Supplementary Material .01 clarifies that a member should not report a
transaction unless such member knows or has reason to believe that the
transaction is bona fide. Through the proposed addition of Supplemental
Material .02, as amended, FINRA appears to seek to create a presumption
that ``self-trades,'' defined as the unintentional interaction of
orders originating from the same firm that involve no change in the
beneficial ownership of the security, generally are bona fide. In fact,
FINRA would expressly provide that transactions resulting from orders
that originate from unrelated algorithms or separate and distinct
trading strategies within the same firm would generally be considered
bona fide self-trades. FINRA would require members to have policies and
procedures reasonably designed to prevent a pattern or practice of
self-trades resulting from orders originating from a single or related
algorithms or trading desks. FINRA's rationale for this requirement is
that, even if transactions are not undertaken with fraudulent or
manipulative intent, they can create a misimpression of the level of
legitimate trading interest and activity in a security, and could
adversely affect the price discovery process. FINRA expresses concern
that firms will continue to allow this type of trading to occur rather
than incur the costs necessary to prevent it, even though significant
misinformation may be disseminated to the marketplace.
Despite raising these serious concerns about self-trades, however,
FINRA's proposal would appear to provide substantial flexibility with
respect to the required policies and procedures, such that a
significant number of self-trades could continue to be publicly
reported. Although not formally part of the proposed rule text, FINRA
expresses the view in its filing that only those firms that engage in a
pattern or practice of effecting self-trades that result in a material
percentage of the trading volume in a particular security would
generally violate Rule 5210. In addition, the policies and procedures
requirement would not apply at all to orders originating from
``unrelated'' algorithms or ``separate and distinct'' trading
strategies, which are broad terms for which little guidance is provided
by FINRA. Accordingly, the Commission is concerned that the proposal
may not achieve its stated purpose of addressing the identified
problems associated with respect to self-trades, and therefore believes
questions remain as to whether FINRA's proposal is consistent with the
requirements of Section 15A(b)(6) of the Act.
In addition, the Commission notes that FINRA filed Amendment No. 1
and its response to comments on December 2, 2013, one day before the
Commission was required to act on the proposed rule change. Although
Amendment No. 1 seeks to address a number of concerns expressed by
commenters, the Commission believes the institution of proceedings is
appropriate to allow the Commission and commenters time to assess
whether the amended proposal is consistent with the Act.
V. Procedures: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any others they may have identified
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 15A(b)(6) or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\66\
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\66\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by December 30, 2013. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 13, 2014.
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-2013-036 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-2013-036. 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 also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make
[[Page 73905]]
available publicly. All submissions should refer to File Number SR-
FINRA-2013-036 and should be submitted on or before December 30, 2013.
Rebuttal comments should be submitted by January 13, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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\67\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29257 Filed 12-6-13; 8:45 am]
BILLING CODE 8011-01-P
