Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to Quotation Requirements for Unlisted Equity Securities and Deletion of the Rules Related to the OTC Bulletin Board Service, 41339-41345 [2014-16501]
Download as PDF
<![CDATA[
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
All Trading Permit Holders that submit
orders into an AIM or FLEX AIM
auction are still subject to the same
requirements. In addition, the Exchange
does not believe the proposed rule
changes will impose any burden on
intermarket competition, as they merely
extend the duration of an existing pilot
programs, which are available to all
market participants through Trading
Permit Holders. AIM and FLEX AIM
will continue to function in the same
manner as they currently function for an
extended period of time.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
mstockstill on DSK4VPTVN1PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(ii) of the Act 13 and Rule
19b–4(f)(6) 14 thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
date of the filing. However, pursuant to
Rule 19b–4(f)(6)(iii), the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange requested that the
Commission waive the 30-day operative
delay. The Exchange noted that waiver
will permit the AIM and FLEX AIM
pilot programs 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, as it
will allow the pilot programs to
continue uninterrupted, thereby
avoiding any potential investor
confusion that could result from a
temporary interruption in the pilot
13 15
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s 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.
14 17
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
programs. Further, the Commission
notes that because the filing was
submitted for immediate effectiveness
on July 1, 2014, the fact that the current
pilot programs do not expire until July
18, 2014 will afford interested parties
the opportunity to comment on the
proposal before the Exchange requires it
to become operative. For this reason, the
Commission designates the proposed
rule change to be operative on July 18,
2014.15
At any time within 60 days of the
filing of the 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.16
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–
CBOE–2014–054 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2014–054. 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
15 For purposes only of waiving the operative
delay, the Commission has considered the proposed
rule’s impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
16 15 U.S.C. 78s(b)(3)(C).
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
41339
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 such
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–CBOE–
2014–054 and should be submitted on
or before August 5, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–16496 Filed 7–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72575; File No. SR–FINRA–
2014–030]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change Relating to
Quotation Requirements for Unlisted
Equity Securities and Deletion of the
Rules Related to the OTC Bulletin
Board Service
July 9, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 27,
2014, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
FINRA is proposing amendments
regarding quotation requirements for
unlisted equity securities and deleting
the rules related to the OTC Bulletin
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\15JYN1.SGM
15JYN1
41340
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
Board Service (‘‘OTCBB’’ or ‘‘Service’’)
and ceasing its operation.
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, on the Commission’s
Web site at https://www.sec.gov, 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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA is proposing a rule change to:
(1) Adopt rules governing the treatment
of quotations in OTC equity securities 3
by member inter-dealer quotation
systems,4 and addressing fair and nondiscriminatory access to such systems;
(2) require member inter-dealer
quotation systems to provide FINRA
with a written description of quotationrelated data products offered and related
pricing information, including fees,
rebates, discounts and cross-product
pricing incentives; (3) expand the
reporting requirements related to
quotation information in OTC equity
securities; and (4) delete the Rule 6500
Series and related rules and cease
operation of the OTCBB.
Background
FINRA’s statutory mandate under
Section 15A of the Act includes, among
other things, that FINRA’s rules must
govern the form and content of
quotations relating to securities sold
over the counter.5 In furtherance of this
mandate, FINRA has adopted rules that
mstockstill on DSK4VPTVN1PROD with NOTICES
3 FINRA
Rule 6420(f) defines ‘‘OTC equity
security’’ as any equity security that is not an ‘‘NMS
stock’’ as that term is defined in Rule 600(b)(47) of
SEC Regulation NMS; provided, however, that the
term ‘‘OTC equity security’’ shall not include any
Restricted Equity Security.
4 FINRA Rule 6420(c) defines ‘‘inter-dealer
quotation system’’ as any system of general
circulation to brokers or dealers which regularly
disseminates quotations of identified brokers or
dealers.
5 See 15 U.S.C. 78o–3.
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
are designed to: (1) Produce fair and
informative quotations; (2) prevent
fictitious or misleading quotations; and
(3) promote orderly procedures for
collecting, distributing, and publishing
quotations.6 In particular, FINRA’s Rule
6400 Series (Quoting and Trading in
OTC Equity Securities), among other
things, provides a regulatory framework
governing the form and content of
quotations in OTC equity securities and,
together with other FINRA rules,
including rules in the Rule 5200 Series
(Quotation and Trading Obligations and
Practices), specifies provisions directed
toward the mandate set forth in Section
15A(b)(11) of the Act (collectively
referred to as the ‘‘Quotation
Governance Rules’’). FINRA also
operates the OTCBB and has established
the Rule 6500 Series, which governs the
operation and use of the OTCBB.
Current Regulatory Framework for
Governing Quotations
FINRA’s Quotation Governance Rules
generally prescribe limitations around
the conduct of members that publish
quotations in OTC equity securities,
including quotations displayed on interdealer quotation systems. While these
rules apply to member quotation
activities, they generally do not include
rules specifically directed to the
member inter-dealer quotation systems
on or through which such quotation
activity may take place. For example,
FINRA Rule 6432 (Compliance with the
Information Requirements of SEA Rule
15c2–11) generally provides that
members may not initiate or resume
quotations in any quotation medium
unless the member files a Form 211
with FINRA and complies with SEA
Rule 15c2–11 (Initiation or resumption
of quotations without specific
information). Thus, the filing of a Form
211 with FINRA by a member, and
FINRA’s review thereof, helps ensure
that, prior to publishing a quotation in
an OTC equity security (or submitting a
quotation for publication), members
must have in their records the
documents and information specified in
SEA Rule 15c2–11 and have a
reasonable basis for believing that the
relevant information is accurate and that
6 Section 15A(b)(11) of the Act provides: ‘‘The
rules of the association include provisions
governing the form and content of quotations
relating to securities sold otherwise than on a
national securities exchange which may be
distributed or published by any member or person
associated with a member, and the persons to
whom such quotations may be supplied. Such rules
relating to quotations shall be designed to produce
fair and informative quotations, to prevent fictitious
or misleading quotations, and to promote orderly
procedures for collecting, distributing, and
publishing quotations.’’ See 15 U.S.C. 78o–3(b)(11).
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
the sources of the information are
reliable.7
In 2010, the SEC approved four new
FINRA rules governing quotation
activity generally by prescribing
additional requirements for members
entering quotations on inter-dealer
quotation systems in OTC equity
securities: (1) Rule 6434 (Minimum
Pricing Increment for OTC Equity
Securities); (2) Rule 6437 (Prohibition
from Locking or Crossing Quotations in
OTC Equity Securities); (3) Rule 6450
(Restrictions on Access Fees); and (4)
Rule 6460 (Display of Customer Limit
Orders).8 These rules, known as the
‘‘NMS-Principled Rules,’’ extended to
the over-the-counter market certain
protections previously applicable only
to exchange-listed securities, and were
adopted to enhance market quality and
investor protection in the over-thecounter marketplace.
The NMS-Principled Rules,
respectively, generally: (1) Provide that
members may not display, rank, or
accept a bid or offer, an order, or an
indication of interest in an OTC equity
security priced greater than or equal to
$1.00 in an increment less than a penny
and, for OTC equity securities priced
under $1.00, an increment less than
$0.0001; (2) require members to
implement policies and procedures to
reasonably avoid displaying, or
engaging in a pattern or practice of
displaying, locking or crossing
quotations in any OTC equity security
within an inter-dealer quotation system;
(3) prohibit members from imposing
non-subscriber access or posttransaction fees against published
quotations in any OTC equity security
that exceed or accumulate to more than
the limits set forth in the rule; 9 and (4)
7 SEA Rule 15c2–11(a) generally provides that,
‘‘[a]s a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts or
practices, it shall be unlawful for a broker or dealer
to publish any quotation for a security or, directly
or indirectly, to submit any such quotation for
publication, in any quotation medium . . . unless
such broker or dealer has in its records the
documents and information required [under this
rule], and, based upon a review of the [required]
information . . . has a reasonable basis under the
circumstances for believing that the [required]
information is accurate in all material respects, and
that the sources of the [required] information are
reliable.’’
8 See Securities Exchange Act Release No. 62359
(June 22, 2010), 75 FR 37488 (June 29, 2010) (Order
Approving File No. SR–FINRA–2009–054) (the
‘‘NMS-Principled Rules’’).
9 Rule 6450 (a) and (b) provide that access fees are
limited to (a) $0.003 per share, if the published
quotation is priced equal to or greater than $1.00;
or (b) the lesser of 0.3% of the published quotation
price on a per share basis or 30% of the minimum
pricing increment under Rule 6434 (Minimum
Pricing Increment for OTC Equity Securities)
relevant to the display of the quotation on a per
E:\FR\FM\15JYN1.SGM
15JYN1
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
require member OTC market makers
displaying priced quotations in an OTC
equity security on an inter-dealer
quotation system to publish
immediately a customer limit order that
improves the OTC market maker’s
priced quotation (or that is equal to the
OTC market maker’s priced quotation at
the BBO but increases the OTC market
maker’s posted size by more than a de
minimis amount), subject to enumerated
exceptions.
FINRA’s current Quotation
Governance Rules also prescribe the
minimum share size applicable to
members’ quotations in OTC equity
securities displayed on an inter-dealer
quotation system. Specifically, Rule
6433 (Minimum Pricing Increment for
OTC Equity Securities) generally
provides that every member entering
quotations in any inter-dealer quotation
system must enter and honor those
quotations for at least the minimum
sizes defined in the rule.10 The
currently applicable quotation
minimums are as follows:
Price
(bid or offer)
0.0001–0.0999 ..........................
0.10–0.1999 ..............................
0.20–0.5099 ..............................
0.51–0.9999 ..............................
1.00–174.99 ..............................
175.00+ .....................................
Minimum
quote size
10,000
5,000
2,500
1,000
100
1
mstockstill on DSK4VPTVN1PROD with NOTICES
The current rule, which was revised as
a pilot in November 2012, amended the
tier sizes to, among other things,
simplify the tier structure and facilitate
the display of customer limit orders
pursuant to Rule 6460.
The FINRA Rule 5200 Series also
includes rules that govern members’
quotation activity in OTC equity
securities. For example, Rule 5210
(Publication of Transactions and
Quotations) provides, among other
things, that members are prohibited
from publishing or circulating (or
causing to be published or circulated)
any notice or communication of any
kind which purports to quote the bid
price or asked price for any security,
unless such member believes that such
quotation represents a bona fide bid for,
or offer of, such security (i.e., the
share basis if the published quotation is less than
$1.00.
10 Depending upon the price level of the
quotation, a different minimum size can apply to
each side of the market being quoted by the member
in a given security. Recently, on November 5, 2013,
FINRA extended the pilot for an additional year
until November 14, 2014. See Securities Exchange
Act Release No. 70839 (November 8, 2013), 78 FR
68893 (November 15, 2013) (Notice of Filing and
Immediate Effectiveness of File No. SR–FINRA–
2013–049).
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
‘‘fictitious quotation’’ prohibition). In
addition, Rule 5220 (Offers at Stated
Prices) generally prohibits members
from making an offer to buy from or sell
to any person any security at a stated
price unless such member is prepared to
purchase or sell, as the case may be, at
such price and under such conditions as
are stated at the time of such offer to
buy or sell (i.e., the ‘‘firm quote’’
requirement).
Proposed Requirements for Member
Inter-Dealer Quotation Systems
As described above, FINRA’s existing
Quotation Governance Rules explicitly
regulate the activities of OTC market
makers 11 and other members that
display quotations on inter-dealer
quotation systems, but generally do not
directly provide quotation governance
standards for the member inter-dealer
quotation systems itself on or through
which such quotations are displayed.
Given the significant role of inter-dealer
quotation systems in the over-thecounter markets in terms of both
quotation transparency and resultant
trading activity, FINRA believes it is
appropriate to adopt new rules directly
tailored to such systems to ensure they
have in place minimum standards
regarding the treatment of quotations
received and governing fair access.
Consistent with the goals and objectives
of Section 17B of the Act 12 regarding
the facilitation of widespread
dissemination of reliable and accurate
quotation information in penny stocks,
FINRA is proposing to complement the
existing framework governing the form
and content of quotations. FINRA is
proposing to require that a member
inter-dealer quotation system: (1) Adopt
and provide to FINRA written policies
and procedures relating to the collection
and dissemination of quotation
information in OTC equity securities, (2)
establish and provide to FINRA fair and
non-discriminatory written standards
for granting access to quoting and
trading on its system, and (3) provide to
FINRA for regulatory purposes a written
description of each quotation-related
data product offered by such member
11 FINRA Rule 6420(g) defines ‘‘OTC Market
Maker’’ as a member of FINRA that holds itself out
as a market maker by entering proprietary
quotations or indications of interest for a particular
OTC equity security in any inter-dealer quotation
system, including any system that the SEC has
qualified pursuant to Section 17B of the Act. A
member is an OTC market maker only in those OTC
equity securities in which it displays market
making interest via an inter-dealer quotation
system.
12 See 15 U.S.C. 78q–2. Section 17B was enacted
by Congress as part of the Securities Enforcement
Remedies and Penny Stock Reform Act of 1990
(‘‘Penny Stock Act’’). Pub. L. No. 101–429, 104 Stat.
931 (1990).
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
41341
inter-dealer quotation system and
related pricing information, including
fees, rebates, discounts and crossproduct pricing incentives.13
Proposed Quotation Collection and
Dissemination Policies and Procedures
Requirement
FINRA is proposing a new rule to
require that a member inter-dealer
quotation system (whether or not also
an alternative trading system or ‘‘ATS’’
as defined by Rule 300(a) of SEC
Regulation ATS) that permits quotation
updates on a real-time basis establish,
maintain and enforce fair and
reasonable written policies and
procedures relating to the collection and
dissemination of quotation information
in OTC equity securities on or through
its system. Such policies and
procedures must ensure that quotations
received are treated fairly and
consistently, including by establishing
fair and non-discretionary methods
under which quotations are prioritized
and displayed and such standards must
be fully disclosed to subscribers. For
example, a member inter-dealer
quotation system would be required to
address its methodology for ranking
quotations, including at a minimum,
addressing factors such as price
(including any applicable quote access
fee), size, time, capacity and type of
quotation (such as unpriced quotes and
bid/offer wanted quotations). The
member inter-dealer quotation system
also would be required to include any
other factors relevant to the ranking and
display of quotations (e.g., reserve sizes,
quotation updates, treatment of closed
quotations, and quotation information
imported from other systems).
FINRA believes that requiring
member inter-dealer quotation systems
to establish fair and reasonable written
policies and procedures and provide
such procedures to FINRA will, among
other things, further promote orderly
procedures for collecting, distributing,
and publishing quotations submitted to
inter-dealer quotation systems in
securities traded over the counter.
FINRA also is proposing that a member
inter-dealer quotation system provide
FINRA with a copy of its written
policies and procedures relating to the
collection and dissemination of
quotation information, and any material
updates, modifications and revisions
thereto, within five business days
following the member’s establishment of
the written policy or procedure or
13 As further discussed below, a member also
would be required to provide FINRA with any
changes to these required submissions within five
business days.
E:\FR\FM\15JYN1.SGM
15JYN1
41342
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
implementation of the material
change.14
Proposed Written Standards Governing
System Access Requirement
FINRA is proposing that a member
inter-dealer quotation system establish
fair and non-discriminatory written
standards for granting access to quoting
and trading on the system that do not
unreasonably prohibit or limit any
person in respect to access to services
offered by such inter-dealer quotation
system.15 This proposed requirement is
consistent with the ‘‘fair access’’
requirements of Regulation ATS but
would apply to quoting and trading in
all OTC equity securities on the member
inter-dealer quotation system,
irrespective of the percentage of average
daily volume that such inter-dealer
quotation system had in the security.16
FINRA believes that these proposed
amendments are necessary and
appropriate to further the mandates of
Section 15A of the Act.
Further, the proposed rule would
require that a member inter-dealer
quotation system provide FINRA with a
copy of its written standards for
granting access to quoting and trading
on its system and any material updates,
modifications and revisions thereto
within five business days following: (a)
The date of the member’s establishment
of the written standard, and (b) the date
of the material update, modification or
revision to the written standard.
mstockstill on DSK4VPTVN1PROD with NOTICES
Proposed Quotation-Related Data
Product and Pricing Provision
Requirement
FINRA is proposing to require a
member inter-dealer quotation system to
provide FINRA with a written
description of each quotation-related
data product offered by such member
inter-dealer quotation system and
14 A member that is an inter-dealer quotation
system at the time of the effective date of this
proposed rule change would provide the required
information upon the effective date and, thereafter,
any material update, modification or revision
thereto must be provided to FINRA within five
business days of its implementation.
15 FINRA proposes that a member inter-dealer
quotation system also must make and keep records
of all grants of access including (for all subscribers)
the reasons for granting such access and all denials
or limitations of access and reasons (for each
applicant) for denying or limiting access. A policy
prohibiting or limiting access to services offered by
the member inter-dealer quotation system due to
non-payment by a subscriber would not be
prohibited under the proposed rule.
16 Regulation ATS’s ‘‘fair access’’ requirements
apply with respect to securities where the ATS’s
trading accounted for 5% or more of the reported
average daily trading volume (ADTV) in the
security. The proposal would apply the fair access
standards with respect to all securities quoted on
the inter-dealer quotation system (not just those
meeting the minimum 5% (or other) threshold).
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
Proposed Amendments to the Quotation
Recording and Reporting Requirements
FINRA Rule 6431 (Recording of
Quotation Information) was
implemented in 2003 to provide FINRA
with access to quotation data displayed
on non-SRO sponsored and nonmember systems so that FINRA could
assess member compliance with
applicable rules and regulations and,
when necessary, to reconstruct market
activity.17 FINRA is proposing to update
and expand the rule to better reflect the
current quoting structure of the OTC
equity market. First, FINRA is proposing
to expand the scope of the rule beyond
quotations displayed on an inter-dealer
quotation system by OTC market makers
to include quotations displayed by any
FINRA member, including ATSs. Since
the initial adoption of this rule, quoting
in OTC equity securities by ATSs and
other members that are not OTC market
makers has increased and FINRA
believes Rule 6431’s recording and
reporting requirements should apply
equally to all such quotes displayed on
inter-dealer quotation systems.
Second, FINRA is proposing minor
amendments to the items of information
required to be recorded and reported
under the rule. Specifically, the new
rule would require the following items
of quotation information:
(1) MPID of quoting member (the
current rule asks for ‘‘submitting firm’’);
(2) Inter-dealer quotation system (the
current rule asks members to specify the
inter-dealer quotation system or
‘‘medium’’);
(3) Date of quotation (the current rule
asks for ‘‘trade date’’);
(4) Time quotation displayed
(expressed in hours, minutes, seconds
and milliseconds if the reporting
member’s system captures time in
milliseconds) (the current rule asks for
time expressed in hours, minutes and
seconds, but not milliseconds);
(5) Security name and symbol (FINRA
is not proposing amendments to this
item of information);
(6) Bid and bid quotation size (if
applicable) (FINRA is not proposing
amendments to this item of
information);
(7) Offer and offer quotation size (if
applicable) (FINRA is not proposing
amendments to this item of
information);
(8) Prevailing Inside Bid (FINRA is
not proposing amendments to this item
of information); and
(9) Prevailing Inside Offer (FINRA is
not proposing amendments to this item
of information).
Finally, at the time of the adoption of
this rule, FINRA had determined not to
apply the requirements to inter-dealer
quotation systems that were FINRA
members and, rather, to obtain
quotation information directly from the
FINRA member as needed pursuant to
Rule 8210. However, since the adoption
of the rule, the primary inter-dealer
quotation system from which FINRA
receives quotation information (as
reporting agent on behalf of member
firms) has become a FINRA member
firm and, therefore, FINRA believes the
exception for quotations displayed on
systems operated by a FINRA member
no longer should apply.18 Instead, the
proposed rule would directly require
member inter-dealer quotation systems
to report each attributed quotation
displayed on the system by a brokerdealer. In the event that a FINRA
member displays a quotation on a nonmember inter-dealer quotation system,
the member must record and report to
FINRA the required information
regarding the quotations displayed by
such member.
FINRA believes that these
amendments to the quotation recording
and reporting requirements simplify and
streamline the process of obtaining
quotation information for regulatory
purposes by directly requiring that
member inter-dealer quotation systems
report subscribing members’ quotation
17 See Securities Exchange Act Release No. 47587
(March 27, 2003), 68 FR 16328 (April 3, 2003)
(Order Approving File No. SR–NASD–2000–042).
See also Notice to Members 03–28 (June 2003).
18 FINRA has continued to receive quotation
information on a weekly basis following the interdealer quotation system becoming a FINRA
member.
related pricing information, including
fees, rebates, discounts and crossproduct pricing incentives, and any
changes thereto, within five business
days following: (a) The date of the
establishment of the quotation-related
data product or date of any change
thereto (including discontinuance of the
offering of the quotation-related data
product), and (b) the date of the
establishment of the quotation-related
data product price, including a fee,
rebate, discount and cross-product
pricing incentive, or change thereto.
FINRA believes that the proposed
changes described above will facilitate
the objectives of the Act, including
Section 17B of the Act, by helping
ensure that disseminated quotations are
reliable and accurate and will provide
FINRA with useful information to
ensure compliance with FINRA rules
and to monitor the widespread
availability of quotation information to
investors and market participants
through non-SRO sources.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
E:\FR\FM\15JYN1.SGM
15JYN1
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
Proposed Deletion of OTCBB-Related
Rules
Finally, FINRA is proposing to delete
the FINRA Rule 6500 Series, which
governs the operation of the OTC
Bulletin Board Service and cease
operation of the OTCBB. FINRA
previously proposed to delete the
OTCBB rules and discontinue operation
of the Service as part of a separate rule
filing, the ‘‘QCF Proposal.’’ 21 As
discussed in the QCF Proposal, the level
of transparency in OTC equity securities
facilitated by the operation of the
OTCBB has been declining significantly
for years as other quotation venues have
emerged. In fact, since the filing of the
QCF Proposal on November 6, 2009, the
amount of quotation information widely
available to investors relying on OTCBB
BBO data has further declined and has
become negligible. Thus, FINRA
believes that the remaining OTCBB
information being disseminated to
investors is so incomplete as to be
potentially misleading with respect to
the current pricing in these securities.
For example, of the approximately
10,000 OTC equity securities quoted
over the counter on the largest interdealer quotation system, less than 10%
of those issues also are eligible to be
quoted on OTCBB.22 In addition, less
than twelve securities out of the 10,000
OTC equity securities are quoted solely
on OTCBB. Furthermore, based upon a
sample of 20 days in 2013, the OTCBB
only disseminated an average of 27
computed BBOs, which means that
OTCBB BBO quotation information was
available through Level 1 on less than
0.3% of the 10,000 OTC equity security
symbols.23
Therefore, FINRA does not believe
that the discontinuance of the OTCBB as
an inter-dealer quotation system will
have an appreciable impact on issuers,
investors or member firms.24 For the
same reasons, FINRA does not believe
that the OTCBB, in its current form and
with current levels of participation,
furthers the goals and objectives of
Section 17B of the Act 25 and, therefore,
does not meet the characteristics of a
system described in Section 17B of the
Act regarding the widespread
dissemination of reliable and accurate
quotation information with respect to
‘‘penny stocks.’’ 26 However, FINRA
notes that, since the inception of the
OTCBB, non-self-regulatory
organization (‘‘SRO’’) entities have
increased their participation in the
collection and dissemination of
quotation information in OTC equity
securities, including for those OTC
equity securities meeting the definition
of ‘‘penny stock,’’ and have made such
quotation information available to
investors and market participants. Thus,
FINRA believes that discontinuance of
the OTCBB as an inter-dealer quotation
system will not have an appreciable
impact on the current level of quotation
transparency for OTC equity securities.
In addition, the proposed rule change is
intended to facilitate the widespread
availability of reliable and accurate
quotation information through non-SRO
sources.
Importantly, FINRA will continue to
centralize last sale transaction reporting
through the FINRA OTC Reporting
Facility (‘‘ORF’’) and, therefore, will
19 Currently the reporting obligation is imposed
on the quoting member itself, though, in practice,
quoting members have used the inter-dealer
quotation system to which their quotation is
submitted and displayed as reporting agent for
purposes of meeting the Rule 6431 reporting
obligation.
20 A ‘‘reporting agent’’ is a third party that enters
into any agreement with a member pursuant to
which such third party agrees to fulfill such
member’s obligations under Rule 6431.
21 See Securities Exchange Act Release No. 60999
(November 13, 2009), 74 FR 61183 (November 23,
2009) (Notice of Filing of File No. SR–FINRA–
2009–077). FINRA intends to withdraw the
currently pending QCF Proposal if the instant
proposed rule change is approved by the
Commission.
22 Of the over 10,000 symbols quoted over the
counter, as of December 17, 2013, 836 symbols were
eligible to be quoted on the OTCBB, and we
estimate that less than a dozen of those issues were
being quoted solely on the OTCBB.
23 During the week of December 2nd, there were
a total of 14 symbols for which an OTCBB BBO was
calculated and disseminated.
24 As part of the QCF Proposal, FINRA notes that
no concerns were raised by commenters with
respect to the portion of the QCF Proposal that
would have deleted the OTCBB rules and
discontinued operation of the Service.
25 Section 17B of the Act provides, among other
things, that the Commission shall facilitate the
widespread dissemination of reliable and accurate
last sale and quotation information with respect to
penny stocks.
26 Under SEC Rule 3a51–1, ‘‘penny stock’’ is
defined to, among other things, exclude securities
that have a price of five dollars or more as
determined either on a per transaction basis or, in
the absence of a transaction, on the basis of the
inside bid quotation for the security displayed on
an automated quotation system that has the
characteristics set forth in Section 17B(b)(2) of the
Act or any other system that is designated by the
Commission. See 17 CFR 240.3a51–1.
mstockstill on DSK4VPTVN1PROD with NOTICES
information to FINRA.19 Thus,
individual quoting members no longer
are required to report or arrange to have
reported to FINRA the items of
quotation information specified in the
rule, unless such member is displaying
a quotation on a non-member interdealer quotation system. The rule would
continue to permit the use of a reporting
agent by either a member inter-dealer
quotation system or a member
displaying a quotation on a non-member
inter-dealer quotation system.20
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
41343
continue to operate a system that
collects and disseminates transaction
information on, and provides
widespread dissemination of reliable
and accurate last sale information with
respect to, OTC equity securities,
including penny stocks.27 Thus, the
objectives of Section 17B of the Act
relating to the provision of price and
volume information to investors and
market participants will continue to be
satisfied through FINRA’s operation of
the ORF.
As was the case with the QCF
Proposal, in advance of the
discontinuance of the OTCBB, FINRA
will take steps to ensure a smooth
transition for issuers and members.
Specifically, FINRA will publicize
announcements through the FINRA.org
and OTCBB.com Web sites; directly
contact active OTCBB market makers;
notify and educate the few remaining
OTCBB-only issuers; and email dually
quoted issuers about the cessation of
quoting on the OTCBB. Thereafter,
FINRA will continue to assess the
widespread availability of quotation
transparency to investors and market
participants through non-SRO sources
on a regular basis. If the availability of
quotation information to investors
significantly declines, FINRA will
revisit and, if necessary, file a proposed
rule change to establish an SROoperated inter-dealer quotation system
(or other measure) to facilitate the type
of widespread quotation transparency
described in Section 17B of the Act.28
FINRA discussed the concepts
described in this proposed rule change
with several of FINRA’s industry
advisory committees in developing its
approach. The committees supported
the proposed amendments and did not
believe that compliance with the
proposal would be burdensome for
firms.
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 60 days following
Commission approval. The effective
date will be no later than 180 days
following Commission approval.
27 FINRA members are required to report
substantially all trades in OTC equity securities to
ORF within 10 seconds of execution and FINRA
widely disseminates this transaction information in
real-time.
28 Should FINRA determine it is necessary to
recommence the operation of a system to facilitate
quotation transparency, FINRA also would revisit at
that time the necessity of the proposals described
herein requiring inter-dealer quotation systems to
provide FINRA specified policies and procedures,
written standards, quotation-related data product
descriptions and related pricing information.
E:\FR\FM\15JYN1.SGM
15JYN1
mstockstill on DSK4VPTVN1PROD with NOTICES
41344
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,29 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed amendments will promote just
and equitable principles of trade by
helping ensure that subscribers (and
potential subscribers) are afforded fair
and non-discriminatory access to the
quotation system of a member-interdealer quotation system, and that the
standards required for access be fully
disclosed. In addition, the proposed
provision requiring a member interdealer quotation system to provide
FINRA with a copy of such written
standards (and material updates,
modifications and revisions thereto)
within five business days is consistent
with Section 15A(b)(6) of the Act in that
it furthers FINRA’s ability to review for
compliance with the underlying
provisions requiring fair access to the
member’s system.
FINRA also believes that the proposed
rule change is consistent with the
provisions of Section 15A(b)(11) of the
Act.30 Section 15A(b)(11) requires that
the rules of the association include
provisions governing the form and
content of quotations relating to
securities sold otherwise than on a
national securities exchange which may
be distributed or published by any
member or person associated with a
member, and the persons to whom such
quotations may be supplied.31
Specifically, FINRA believes that the
proposed amendment requiring
member-inter-dealer quotation systems
to adopt policies and procedures
addressing the collection and
dissemination of quotations in OTC
equity securities is consistent with
Section 15A(b)(11) of the Act in that the
amendments further govern the form
and content of quotations relating to
securities sold otherwise than on a
national securities exchange which may
be distributed or published by any
member or person associated with a
member, and the persons to whom such
quotations may be supplied.32
FINRA also believes that the proposed
new rules for member inter-dealer
quotation systems requiring them to
establish, maintain and enforce fair and
29 15
U.S.C. 78o–3(b)(6).
U.S.C. 78o–3(b)(11).
31 See 15 U.S.C. 78o–3(b)(11).
32 See 15 U.S.C. 78o–3(b)(11).
30 15
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
reasonable written policies and
procedures relating to the collection and
dissemination of quotations in OTC
equity securities on or through their
systems, and to ensure that such
quotations are treated fairly and
consistently, are consistent with the Act
by promoting orderly procedures for
collecting, distributing, and publishing
quotations. Similarly, the proposed
provision requiring a member interdealer quotation system to provide
FINRA with a copy of such written
policies and procedures (and any
material updates, modifications and
revisions thereto) within five business
days is consistent with Section
15A(b)(11) of the Act in that it provides
FINRA with timely notification of
material changes to the member’s
quotation collection and dissemination
policies and procedures, which
facilitates FINRA’s ability to perform its
oversight functions in this area.
FINRA believes that the proposed
amendments to the quotation recording
and reporting requirements of Rule 6431
streamline, clarify and simplify the
items of information and process for
reporting quotation data to FINRA for
regulatory purposes, such as for use in
conducting reviews of over-the-counter
market activity and surveillance of
member conduct, consistent with
FINRA’s statutory mandate under the
Act.33
FINRA also believes that the proposed
rule change will protect investors and
the public interest by discontinuing the
dissemination of potentially incomplete,
inaccurate and misleading best bid and
offer quotation data in OTC equity
securities, as discussed above, by
deleting the OTCBB rules and
discontinuing operation of the Service.
Further, FINRA believes that the
proposed rule change is consistent with
Section 17B of the Act.34 Section 17B
was enacted by Congress as part of the
Penny Stock Act, which was designed to
remedy inefficiencies and address
regulatory concerns caused by the lack
of reliable market information on penny
stocks traded over the counter and, in
connection with this initiative, the
Commission designated the OTCBB as a
Qualifying Electronic Quotation System
(‘‘QEQS’’) for purposes of the penny
stock rules.35
15 U.S.C. 78o–3.
15 U.S.C. 78q–2.
35 See Securities Exchange Act Release No. 30608
(April 20, 1992), 57 FR 18004 (April 28, 1992)
(‘‘Penny Stock Release’’) (adopting seven rules (the
‘‘penny stock rules’’) under the Act requiring
broker-dealers engaging in certain transactions in
low-priced, over the counter securities to provide
customers with specified information).
PO 00000
33 See
34 See
Frm 00099
Fmt 4703
Sfmt 4703
Due to the decline of OTCBB, as
discussed previously, FINRA is
concerned that OTCBB is no longer a
reliable source of complete quotation
information for OTC equity securities
and, therefore, operation of the Service
no longer furthers the purposes of
Section 17B of the Act. However, FINRA
believes that discontinuing
dissemination of potentially incomplete
and misleading quotation information
from the marketplace by ceasing
operation of the OTCBB, coupled with
the proposed changes to improve the
governance of inter-dealer quotation
systems on or through which quotations
in OTC equity securities are displayed,
best serves and promotes the goals of
Section 17B of the Act with respect to
the widespread availability of quotation
information in penny stocks. In
addition, to the extent necessary, FINRA
requests that the Commission consider
granting an exemption from Section 17B
of the Exchange Act in connection with
its consideration of this proposed rule
change.
Finally, the proposed requirement
that a member inter-dealer quotation
system provide FINRA with a written
description of each quotation-related
data product it offers and related pricing
information, including fees, rebates,
discounts and cross-product pricing
incentives (and any changes thereto)
within five business days, provides
FINRA with useful information to
ensure compliance with FINRA rules
and to monitor the widespread
availability of quotation information to
investors and market participants
through non-SRO sources, and to
determine whether proposing the
reestablishment of an SRO-operated
inter-dealer quotation system (or other
measure) to facilitate the type of
quotation transparency described in
Section 17B of the Act, is necessary. The
FINRA ORF continues to provide for the
reporting of the volume of penny stock
transactions, including comprehensive
last sale reporting and dissemination,
consistent with Section 17B of the Act.
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. The
proposed amendments to require a
member inter-dealer quotation system to
establish fair and non-discriminatory
written standards for granting access to
quoting and trading would apply to all
members meeting the Rule 6420
definition of ‘‘inter-dealer quotation
system,’’ and therefore do not
E:\FR\FM\15JYN1.SGM
15JYN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Notices
disparately impose requirements on
similarly situated members.
In addition, the proposed
amendments to require a member interdealer quotation system to establish,
maintain and enforce fair and
reasonable written policies and
procedures relating to the collection and
dissemination of quotations in OTC
equity securities are important to
facilitate an orderly environment
around quotation activity in OTC equity
securities. Furthermore, the proposal
provides for a ‘‘policies and
procedures’’ approach and, therefore,
affords all members within its scope a
degree of flexibility in implementing
measures to comply with the proposed
rule.
FINRA also does not believe that the
proposed requirement that members
provide copies of the aforementioned
written policies, procedures and
standards (and material updates,
modifications and revisions thereto)
results in an unwarranted burden on
competition because the member interdealer quotation system would be
permitted to proceed with the
implementation of desired changes to its
written policies, procedures and
standards, as long as it notifies FINRA
within five business days following the
implementation of the changes.
The proposal requiring a member
inter-dealer quotation system to provide
FINRA with a written description of
each quotation-related data product
offered by such member and related
pricing information, including fees,
rebates, discounts and cross-product
pricing incentives (and any changes
thereto) within five business days is
essential to FINRA’s ongoing monitoring
of the widespread availability of
quotation information on OTC equity
securities. FINRA also does not believe
that this requirement imposes an
unwarranted burden on competition
because the proposed rule would permit
the member inter-dealer quotation
system to launch a new quotationrelated data product or related price (or
change an existing data product or
related price) without delay, followed
by timely notification to FINRA. This
proposed amendment would apply to
all members meeting the Rule 6420
definition of ‘‘inter-dealer quotation
system,’’ and therefore would not
disparately impose requirements on
similarly situated members.
The proposed clarification and
streamlining of the quotation recording
and reporting requirements are minor
and generally consistent with current
practice; therefore, FINRA anticipates
that members would need to make very
few changes to comply with the revised
VerDate Mar<15>2010
17:46 Jul 14, 2014
Jkt 232001
regime. Thus, any burden associated
with the rule change is negligible and its
impact on competition nonexistent.
Finally, FINRA does not believe that the
proposed deletion of the OTCBB-related
rules and the discontinuance of the
operation of the Service would impose
any burden on competition because the
Service currently operates as a
transparency utility and, therefore, its
closure would not burden competition
and in no way would hinder the ability
of new competitors to enter the market.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Not applicable.
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
will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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–2014–030 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2014–030. 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
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
41345
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
a.m. and 3 p.m. Copies of such 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 available publicly. All
submissions should refer to File
Number SR–FINRA–2014–030 and
should be submitted on or before
August 5, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–16501 Filed 7–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[File No. 500–1]
In The Matter of Cynk Technology
Corp.; Order of Suspension of Trading
July 11, 2014.
It appears to the Securities and
Exchange Commission that the public
interest and the protection of investors
require a suspension of trading in the
securities of Cynk Technology Corp.
(‘‘Cynk’’) because of concerns regarding
the accuracy and adequacy of
information in the marketplace and
potentially manipulative transactions in
Cynk’s common stock. Cynk is a Nevada
corporation with a business address in
Belize City, Belize and its common
stock is quoted on the OTC Link
(previously ‘‘Pink Sheets’’) operated by
OTC Markets Group, Inc. (‘‘OTC Link)
under the ticker symbol CYNK.
36 17
E:\FR\FM\15JYN1.SGM
CFR 200.30–3(a)(12).
15JYN1
]]>Agencies
[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Notices]
[Pages 41339-41345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16501]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72575; File No. SR-FINRA-2014-030]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Quotation Requirements for Unlisted Equity Securities and Deletion of
the Rules Related to the OTC Bulletin Board Service
July 9, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 27, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
FINRA is proposing amendments regarding quotation requirements for
unlisted equity securities and deleting the rules related to the OTC
Bulletin
[[Page 41340]]
Board Service (``OTCBB'' or ``Service'') and ceasing its operation.
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, on the
Commission's Web site at https://www.sec.gov, 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing a rule change to: (1) Adopt rules governing the
treatment of quotations in OTC equity securities \3\ by member inter-
dealer quotation systems,\4\ and addressing fair and non-discriminatory
access to such systems; (2) require member inter-dealer quotation
systems to provide FINRA with a written description of quotation-
related data products offered and related pricing information,
including fees, rebates, discounts and cross-product pricing
incentives; (3) expand the reporting requirements related to quotation
information in OTC equity securities; and (4) delete the Rule 6500
Series and related rules and cease operation of the OTCBB.
---------------------------------------------------------------------------
\3\ FINRA Rule 6420(f) defines ``OTC equity security'' as any
equity security that is not an ``NMS stock'' as that term is defined
in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that
the term ``OTC equity security'' shall not include any Restricted
Equity Security.
\4\ FINRA Rule 6420(c) defines ``inter-dealer quotation system''
as any system of general circulation to brokers or dealers which
regularly disseminates quotations of identified brokers or dealers.
---------------------------------------------------------------------------
Background
FINRA's statutory mandate under Section 15A of the Act includes,
among other things, that FINRA's rules must govern the form and content
of quotations relating to securities sold over the counter.\5\ In
furtherance of this mandate, FINRA has adopted rules that are designed
to: (1) Produce fair and informative quotations; (2) prevent fictitious
or misleading quotations; and (3) promote orderly procedures for
collecting, distributing, and publishing quotations.\6\ In particular,
FINRA's Rule 6400 Series (Quoting and Trading in OTC Equity
Securities), among other things, provides a regulatory framework
governing the form and content of quotations in OTC equity securities
and, together with other FINRA rules, including rules in the Rule 5200
Series (Quotation and Trading Obligations and Practices), specifies
provisions directed toward the mandate set forth in Section 15A(b)(11)
of the Act (collectively referred to as the ``Quotation Governance
Rules''). FINRA also operates the OTCBB and has established the Rule
6500 Series, which governs the operation and use of the OTCBB.
---------------------------------------------------------------------------
\5\ See 15 U.S.C. 78o-3.
\6\ Section 15A(b)(11) of the Act provides: ``The rules of the
association include provisions governing the form and content of
quotations relating to securities sold otherwise than on a national
securities exchange which may be distributed or published by any
member or person associated with a member, and the persons to whom
such quotations may be supplied. Such rules relating to quotations
shall be designed to produce fair and informative quotations, to
prevent fictitious or misleading quotations, and to promote orderly
procedures for collecting, distributing, and publishing
quotations.'' See 15 U.S.C. 78o-3(b)(11).
---------------------------------------------------------------------------
Current Regulatory Framework for Governing Quotations
FINRA's Quotation Governance Rules generally prescribe limitations
around the conduct of members that publish quotations in OTC equity
securities, including quotations displayed on inter-dealer quotation
systems. While these rules apply to member quotation activities, they
generally do not include rules specifically directed to the member
inter-dealer quotation systems on or through which such quotation
activity may take place. For example, FINRA Rule 6432 (Compliance with
the Information Requirements of SEA Rule 15c2-11) generally provides
that members may not initiate or resume quotations in any quotation
medium unless the member files a Form 211 with FINRA and complies with
SEA Rule 15c2-11 (Initiation or resumption of quotations without
specific information). Thus, the filing of a Form 211 with FINRA by a
member, and FINRA's review thereof, helps ensure that, prior to
publishing a quotation in an OTC equity security (or submitting a
quotation for publication), members must have in their records the
documents and information specified in SEA Rule 15c2-11 and have a
reasonable basis for believing that the relevant information is
accurate and that the sources of the information are reliable.\7\
---------------------------------------------------------------------------
\7\ SEA Rule 15c2-11(a) generally provides that, ``[a]s a means
reasonably designed to prevent fraudulent, deceptive, or
manipulative acts or practices, it shall be unlawful for a broker or
dealer to publish any quotation for a security or, directly or
indirectly, to submit any such quotation for publication, in any
quotation medium . . . unless such broker or dealer has in its
records the documents and information required [under this rule],
and, based upon a review of the [required] information . . . has a
reasonable basis under the circumstances for believing that the
[required] information is accurate in all material respects, and
that the sources of the [required] information are reliable.''
---------------------------------------------------------------------------
In 2010, the SEC approved four new FINRA rules governing quotation
activity generally by prescribing additional requirements for members
entering quotations on inter-dealer quotation systems in OTC equity
securities: (1) Rule 6434 (Minimum Pricing Increment for OTC Equity
Securities); (2) Rule 6437 (Prohibition from Locking or Crossing
Quotations in OTC Equity Securities); (3) Rule 6450 (Restrictions on
Access Fees); and (4) Rule 6460 (Display of Customer Limit Orders).\8\
These rules, known as the ``NMS-Principled Rules,'' extended to the
over-the-counter market certain protections previously applicable only
to exchange-listed securities, and were adopted to enhance market
quality and investor protection in the over-the-counter marketplace.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 62359 (June 22,
2010), 75 FR 37488 (June 29, 2010) (Order Approving File No. SR-
FINRA-2009-054) (the ``NMS-Principled Rules'').
---------------------------------------------------------------------------
The NMS-Principled Rules, respectively, generally: (1) Provide that
members may not display, rank, or accept a bid or offer, an order, or
an indication of interest in an OTC equity security priced greater than
or equal to $1.00 in an increment less than a penny and, for OTC equity
securities priced under $1.00, an increment less than $0.0001; (2)
require members to implement policies and procedures to reasonably
avoid displaying, or engaging in a pattern or practice of displaying,
locking or crossing quotations in any OTC equity security within an
inter-dealer quotation system; (3) prohibit members from imposing non-
subscriber access or post-transaction fees against published quotations
in any OTC equity security that exceed or accumulate to more than the
limits set forth in the rule; \9\ and (4)
[[Page 41341]]
require member OTC market makers displaying priced quotations in an OTC
equity security on an inter-dealer quotation system to publish
immediately a customer limit order that improves the OTC market maker's
priced quotation (or that is equal to the OTC market maker's priced
quotation at the BBO but increases the OTC market maker's posted size
by more than a de minimis amount), subject to enumerated exceptions.
---------------------------------------------------------------------------
\9\ Rule 6450 (a) and (b) provide that access fees are limited
to (a) $0.003 per share, if the published quotation is priced equal
to or greater than $1.00; or (b) the lesser of 0.3% of the published
quotation price on a per share basis or 30% of the minimum pricing
increment under Rule 6434 (Minimum Pricing Increment for OTC Equity
Securities) relevant to the display of the quotation on a per share
basis if the published quotation is less than $1.00.
---------------------------------------------------------------------------
FINRA's current Quotation Governance Rules also prescribe the
minimum share size applicable to members' quotations in OTC equity
securities displayed on an inter-dealer quotation system. Specifically,
Rule 6433 (Minimum Pricing Increment for OTC Equity Securities)
generally provides that every member entering quotations in any inter-
dealer quotation system must enter and honor those quotations for at
least the minimum sizes defined in the rule.\10\ The currently
applicable quotation minimums are as follows:
---------------------------------------------------------------------------
\10\ Depending upon the price level of the quotation, a
different minimum size can apply to each side of the market being
quoted by the member in a given security. Recently, on November 5,
2013, FINRA extended the pilot for an additional year until November
14, 2014. See Securities Exchange Act Release No. 70839 (November 8,
2013), 78 FR 68893 (November 15, 2013) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2013-049).
------------------------------------------------------------------------
Minimum
Price (bid or offer) quote size
------------------------------------------------------------------------
0.0001-0.0999.............................................. 10,000
0.10-0.1999................................................ 5,000
0.20-0.5099................................................ 2,500
0.51-0.9999................................................ 1,000
1.00-174.99................................................ 100
175.00+.................................................... 1
------------------------------------------------------------------------
The current rule, which was revised as a pilot in November 2012,
amended the tier sizes to, among other things, simplify the tier
structure and facilitate the display of customer limit orders pursuant
to Rule 6460.
The FINRA Rule 5200 Series also includes rules that govern members'
quotation activity in OTC equity securities. For example, Rule 5210
(Publication of Transactions and Quotations) provides, among other
things, that members are prohibited from publishing or circulating (or
causing to be published or circulated) any notice or communication of
any kind which purports to quote the bid price or asked price for any
security, unless such member believes that such quotation represents a
bona fide bid for, or offer of, such security (i.e., the ``fictitious
quotation'' prohibition). In addition, Rule 5220 (Offers at Stated
Prices) generally prohibits members from making an offer to buy from or
sell to any person any security at a stated price unless such member is
prepared to purchase or sell, as the case may be, at such price and
under such conditions as are stated at the time of such offer to buy or
sell (i.e., the ``firm quote'' requirement).
Proposed Requirements for Member Inter-Dealer Quotation Systems
As described above, FINRA's existing Quotation Governance Rules
explicitly regulate the activities of OTC market makers \11\ and other
members that display quotations on inter-dealer quotation systems, but
generally do not directly provide quotation governance standards for
the member inter-dealer quotation systems itself on or through which
such quotations are displayed. Given the significant role of inter-
dealer quotation systems in the over-the-counter markets in terms of
both quotation transparency and resultant trading activity, FINRA
believes it is appropriate to adopt new rules directly tailored to such
systems to ensure they have in place minimum standards regarding the
treatment of quotations received and governing fair access. Consistent
with the goals and objectives of Section 17B of the Act \12\ regarding
the facilitation of widespread dissemination of reliable and accurate
quotation information in penny stocks, FINRA is proposing to complement
the existing framework governing the form and content of quotations.
FINRA is proposing to require that a member inter-dealer quotation
system: (1) Adopt and provide to FINRA written policies and procedures
relating to the collection and dissemination of quotation information
in OTC equity securities, (2) establish and provide to FINRA fair and
non-discriminatory written standards for granting access to quoting and
trading on its system, and (3) provide to FINRA for regulatory purposes
a written description of each quotation-related data product offered by
such member inter-dealer quotation system and related pricing
information, including fees, rebates, discounts and cross-product
pricing incentives.\13\
---------------------------------------------------------------------------
\11\ FINRA Rule 6420(g) defines ``OTC Market Maker'' as a member
of FINRA that holds itself out as a market maker by entering
proprietary quotations or indications of interest for a particular
OTC equity security in any inter-dealer quotation system, including
any system that the SEC has qualified pursuant to Section 17B of the
Act. A member is an OTC market maker only in those OTC equity
securities in which it displays market making interest via an inter-
dealer quotation system.
\12\ See 15 U.S.C. 78q-2. Section 17B was enacted by Congress as
part of the Securities Enforcement Remedies and Penny Stock Reform
Act of 1990 (``Penny Stock Act''). Pub. L. No. 101-429, 104 Stat.
931 (1990).
\13\ As further discussed below, a member also would be required
to provide FINRA with any changes to these required submissions
within five business days.
---------------------------------------------------------------------------
Proposed Quotation Collection and Dissemination Policies and Procedures
Requirement
FINRA is proposing a new rule to require that a member inter-dealer
quotation system (whether or not also an alternative trading system or
``ATS'' as defined by Rule 300(a) of SEC Regulation ATS) that permits
quotation updates on a real-time basis establish, maintain and enforce
fair and reasonable written policies and procedures relating to the
collection and dissemination of quotation information in OTC equity
securities on or through its system. Such policies and procedures must
ensure that quotations received are treated fairly and consistently,
including by establishing fair and non-discretionary methods under
which quotations are prioritized and displayed and such standards must
be fully disclosed to subscribers. For example, a member inter-dealer
quotation system would be required to address its methodology for
ranking quotations, including at a minimum, addressing factors such as
price (including any applicable quote access fee), size, time, capacity
and type of quotation (such as unpriced quotes and bid/offer wanted
quotations). The member inter-dealer quotation system also would be
required to include any other factors relevant to the ranking and
display of quotations (e.g., reserve sizes, quotation updates,
treatment of closed quotations, and quotation information imported from
other systems).
FINRA believes that requiring member inter-dealer quotation systems
to establish fair and reasonable written policies and procedures and
provide such procedures to FINRA will, among other things, further
promote orderly procedures for collecting, distributing, and publishing
quotations submitted to inter-dealer quotation systems in securities
traded over the counter. FINRA also is proposing that a member inter-
dealer quotation system provide FINRA with a copy of its written
policies and procedures relating to the collection and dissemination of
quotation information, and any material updates, modifications and
revisions thereto, within five business days following the member's
establishment of the written policy or procedure or
[[Page 41342]]
implementation of the material change.\14\
---------------------------------------------------------------------------
\14\ A member that is an inter-dealer quotation system at the
time of the effective date of this proposed rule change would
provide the required information upon the effective date and,
thereafter, any material update, modification or revision thereto
must be provided to FINRA within five business days of its
implementation.
---------------------------------------------------------------------------
Proposed Written Standards Governing System Access Requirement
FINRA is proposing that a member inter-dealer quotation system
establish fair and non-discriminatory written standards for granting
access to quoting and trading on the system that do not unreasonably
prohibit or limit any person in respect to access to services offered
by such inter-dealer quotation system.\15\ This proposed requirement is
consistent with the ``fair access'' requirements of Regulation ATS but
would apply to quoting and trading in all OTC equity securities on the
member inter-dealer quotation system, irrespective of the percentage of
average daily volume that such inter-dealer quotation system had in the
security.\16\ FINRA believes that these proposed amendments are
necessary and appropriate to further the mandates of Section 15A of the
Act.
---------------------------------------------------------------------------
\15\ FINRA proposes that a member inter-dealer quotation system
also must make and keep records of all grants of access including
(for all subscribers) the reasons for granting such access and all
denials or limitations of access and reasons (for each applicant)
for denying or limiting access. A policy prohibiting or limiting
access to services offered by the member inter-dealer quotation
system due to non-payment by a subscriber would not be prohibited
under the proposed rule.
\16\ Regulation ATS's ``fair access'' requirements apply with
respect to securities where the ATS's trading accounted for 5% or
more of the reported average daily trading volume (ADTV) in the
security. The proposal would apply the fair access standards with
respect to all securities quoted on the inter-dealer quotation
system (not just those meeting the minimum 5% (or other) threshold).
---------------------------------------------------------------------------
Further, the proposed rule would require that a member inter-dealer
quotation system provide FINRA with a copy of its written standards for
granting access to quoting and trading on its system and any material
updates, modifications and revisions thereto within five business days
following: (a) The date of the member's establishment of the written
standard, and (b) the date of the material update, modification or
revision to the written standard.
Proposed Quotation-Related Data Product and Pricing Provision
Requirement
FINRA is proposing to require a member inter-dealer quotation
system to provide FINRA with a written description of each quotation-
related data product offered by such member inter-dealer quotation
system and related pricing information, including fees, rebates,
discounts and cross-product pricing incentives, and any changes
thereto, within five business days following: (a) The date of the
establishment of the quotation-related data product or date of any
change thereto (including discontinuance of the offering of the
quotation-related data product), and (b) the date of the establishment
of the quotation-related data product price, including a fee, rebate,
discount and cross-product pricing incentive, or change thereto.
FINRA believes that the proposed changes described above will
facilitate the objectives of the Act, including Section 17B of the Act,
by helping ensure that disseminated quotations are reliable and
accurate and will provide FINRA with useful information to ensure
compliance with FINRA rules and to monitor the widespread availability
of quotation information to investors and market participants through
non-SRO sources.
Proposed Amendments to the Quotation Recording and Reporting
Requirements
FINRA Rule 6431 (Recording of Quotation Information) was
implemented in 2003 to provide FINRA with access to quotation data
displayed on non-SRO sponsored and non-member systems so that FINRA
could assess member compliance with applicable rules and regulations
and, when necessary, to reconstruct market activity.\17\ FINRA is
proposing to update and expand the rule to better reflect the current
quoting structure of the OTC equity market. First, FINRA is proposing
to expand the scope of the rule beyond quotations displayed on an
inter-dealer quotation system by OTC market makers to include
quotations displayed by any FINRA member, including ATSs. Since the
initial adoption of this rule, quoting in OTC equity securities by ATSs
and other members that are not OTC market makers has increased and
FINRA believes Rule 6431's recording and reporting requirements should
apply equally to all such quotes displayed on inter-dealer quotation
systems.
---------------------------------------------------------------------------
\17\ See Securities Exchange Act Release No. 47587 (March 27,
2003), 68 FR 16328 (April 3, 2003) (Order Approving File No. SR-
NASD-2000-042). See also Notice to Members 03-28 (June 2003).
---------------------------------------------------------------------------
Second, FINRA is proposing minor amendments to the items of
information required to be recorded and reported under the rule.
Specifically, the new rule would require the following items of
quotation information:
(1) MPID of quoting member (the current rule asks for ``submitting
firm'');
(2) Inter-dealer quotation system (the current rule asks members to
specify the inter-dealer quotation system or ``medium'');
(3) Date of quotation (the current rule asks for ``trade date'');
(4) Time quotation displayed (expressed in hours, minutes, seconds
and milliseconds if the reporting member's system captures time in
milliseconds) (the current rule asks for time expressed in hours,
minutes and seconds, but not milliseconds);
(5) Security name and symbol (FINRA is not proposing amendments to
this item of information);
(6) Bid and bid quotation size (if applicable) (FINRA is not
proposing amendments to this item of information);
(7) Offer and offer quotation size (if applicable) (FINRA is not
proposing amendments to this item of information);
(8) Prevailing Inside Bid (FINRA is not proposing amendments to
this item of information); and
(9) Prevailing Inside Offer (FINRA is not proposing amendments to
this item of information).
Finally, at the time of the adoption of this rule, FINRA had
determined not to apply the requirements to inter-dealer quotation
systems that were FINRA members and, rather, to obtain quotation
information directly from the FINRA member as needed pursuant to Rule
8210. However, since the adoption of the rule, the primary inter-dealer
quotation system from which FINRA receives quotation information (as
reporting agent on behalf of member firms) has become a FINRA member
firm and, therefore, FINRA believes the exception for quotations
displayed on systems operated by a FINRA member no longer should
apply.\18\ Instead, the proposed rule would directly require member
inter-dealer quotation systems to report each attributed quotation
displayed on the system by a broker-dealer. In the event that a FINRA
member displays a quotation on a non-member inter-dealer quotation
system, the member must record and report to FINRA the required
information regarding the quotations displayed by such member.
---------------------------------------------------------------------------
\18\ FINRA has continued to receive quotation information on a
weekly basis following the inter-dealer quotation system becoming a
FINRA member.
---------------------------------------------------------------------------
FINRA believes that these amendments to the quotation recording and
reporting requirements simplify and streamline the process of obtaining
quotation information for regulatory purposes by directly requiring
that member inter-dealer quotation systems report subscribing members'
quotation
[[Page 41343]]
information to FINRA.\19\ Thus, individual quoting members no longer
are required to report or arrange to have reported to FINRA the items
of quotation information specified in the rule, unless such member is
displaying a quotation on a non-member inter-dealer quotation system.
The rule would continue to permit the use of a reporting agent by
either a member inter-dealer quotation system or a member displaying a
quotation on a non-member inter-dealer quotation system.\20\
---------------------------------------------------------------------------
\19\ Currently the reporting obligation is imposed on the
quoting member itself, though, in practice, quoting members have
used the inter-dealer quotation system to which their quotation is
submitted and displayed as reporting agent for purposes of meeting
the Rule 6431 reporting obligation.
\20\ A ``reporting agent'' is a third party that enters into any
agreement with a member pursuant to which such third party agrees to
fulfill such member's obligations under Rule 6431.
---------------------------------------------------------------------------
Proposed Deletion of OTCBB-Related Rules
Finally, FINRA is proposing to delete the FINRA Rule 6500 Series,
which governs the operation of the OTC Bulletin Board Service and cease
operation of the OTCBB. FINRA previously proposed to delete the OTCBB
rules and discontinue operation of the Service as part of a separate
rule filing, the ``QCF Proposal.'' \21\ As discussed in the QCF
Proposal, the level of transparency in OTC equity securities
facilitated by the operation of the OTCBB has been declining
significantly for years as other quotation venues have emerged. In
fact, since the filing of the QCF Proposal on November 6, 2009, the
amount of quotation information widely available to investors relying
on OTCBB BBO data has further declined and has become negligible. Thus,
FINRA believes that the remaining OTCBB information being disseminated
to investors is so incomplete as to be potentially misleading with
respect to the current pricing in these securities.
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 60999 (November 13,
2009), 74 FR 61183 (November 23, 2009) (Notice of Filing of File No.
SR-FINRA-2009-077). FINRA intends to withdraw the currently pending
QCF Proposal if the instant proposed rule change is approved by the
Commission.
---------------------------------------------------------------------------
For example, of the approximately 10,000 OTC equity securities
quoted over the counter on the largest inter-dealer quotation system,
less than 10% of those issues also are eligible to be quoted on
OTCBB.\22\ In addition, less than twelve securities out of the 10,000
OTC equity securities are quoted solely on OTCBB. Furthermore, based
upon a sample of 20 days in 2013, the OTCBB only disseminated an
average of 27 computed BBOs, which means that OTCBB BBO quotation
information was available through Level 1 on less than 0.3% of the
10,000 OTC equity security symbols.\23\
---------------------------------------------------------------------------
\22\ Of the over 10,000 symbols quoted over the counter, as of
December 17, 2013, 836 symbols were eligible to be quoted on the
OTCBB, and we estimate that less than a dozen of those issues were
being quoted solely on the OTCBB.
\23\ During the week of December 2nd, there were a total of 14
symbols for which an OTCBB BBO was calculated and disseminated.
---------------------------------------------------------------------------
Therefore, FINRA does not believe that the discontinuance of the
OTCBB as an inter-dealer quotation system will have an appreciable
impact on issuers, investors or member firms.\24\ For the same reasons,
FINRA does not believe that the OTCBB, in its current form and with
current levels of participation, furthers the goals and objectives of
Section 17B of the Act \25\ and, therefore, does not meet the
characteristics of a system described in Section 17B of the Act
regarding the widespread dissemination of reliable and accurate
quotation information with respect to ``penny stocks.'' \26\ However,
FINRA notes that, since the inception of the OTCBB, non-self-regulatory
organization (``SRO'') entities have increased their participation in
the collection and dissemination of quotation information in OTC equity
securities, including for those OTC equity securities meeting the
definition of ``penny stock,'' and have made such quotation information
available to investors and market participants. Thus, FINRA believes
that discontinuance of the OTCBB as an inter-dealer quotation system
will not have an appreciable impact on the current level of quotation
transparency for OTC equity securities. In addition, the proposed rule
change is intended to facilitate the widespread availability of
reliable and accurate quotation information through non-SRO sources.
---------------------------------------------------------------------------
\24\ As part of the QCF Proposal, FINRA notes that no concerns
were raised by commenters with respect to the portion of the QCF
Proposal that would have deleted the OTCBB rules and discontinued
operation of the Service.
\25\ Section 17B of the Act provides, among other things, that
the Commission shall facilitate the widespread dissemination of
reliable and accurate last sale and quotation information with
respect to penny stocks.
\26\ Under SEC Rule 3a51-1, ``penny stock'' is defined to, among
other things, exclude securities that have a price of five dollars
or more as determined either on a per transaction basis or, in the
absence of a transaction, on the basis of the inside bid quotation
for the security displayed on an automated quotation system that has
the characteristics set forth in Section 17B(b)(2) of the Act or any
other system that is designated by the Commission. See 17 CFR
240.3a51-1.
---------------------------------------------------------------------------
Importantly, FINRA will continue to centralize last sale
transaction reporting through the FINRA OTC Reporting Facility
(``ORF'') and, therefore, will continue to operate a system that
collects and disseminates transaction information on, and provides
widespread dissemination of reliable and accurate last sale information
with respect to, OTC equity securities, including penny stocks.\27\
Thus, the objectives of Section 17B of the Act relating to the
provision of price and volume information to investors and market
participants will continue to be satisfied through FINRA's operation of
the ORF.
---------------------------------------------------------------------------
\27\ FINRA members are required to report substantially all
trades in OTC equity securities to ORF within 10 seconds of
execution and FINRA widely disseminates this transaction information
in real-time.
---------------------------------------------------------------------------
As was the case with the QCF Proposal, in advance of the
discontinuance of the OTCBB, FINRA will take steps to ensure a smooth
transition for issuers and members. Specifically, FINRA will publicize
announcements through the FINRA.org and OTCBB.com Web sites; directly
contact active OTCBB market makers; notify and educate the few
remaining OTCBB-only issuers; and email dually quoted issuers about the
cessation of quoting on the OTCBB. Thereafter, FINRA will continue to
assess the widespread availability of quotation transparency to
investors and market participants through non-SRO sources on a regular
basis. If the availability of quotation information to investors
significantly declines, FINRA will revisit and, if necessary, file a
proposed rule change to establish an SRO-operated inter-dealer
quotation system (or other measure) to facilitate the type of
widespread quotation transparency described in Section 17B of the
Act.\28\
---------------------------------------------------------------------------
\28\ Should FINRA determine it is necessary to recommence the
operation of a system to facilitate quotation transparency, FINRA
also would revisit at that time the necessity of the proposals
described herein requiring inter-dealer quotation systems to provide
FINRA specified policies and procedures, written standards,
quotation-related data product descriptions and related pricing
information.
---------------------------------------------------------------------------
FINRA discussed the concepts described in this proposed rule change
with several of FINRA's industry advisory committees in developing its
approach. The committees supported the proposed amendments and did not
believe that compliance with the proposal would be burdensome for
firms.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 180 days
following Commission approval.
[[Page 41344]]
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\29\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed amendments will
promote just and equitable principles of trade by helping ensure that
subscribers (and potential subscribers) are afforded fair and non-
discriminatory access to the quotation system of a member-inter-dealer
quotation system, and that the standards required for access be fully
disclosed. In addition, the proposed provision requiring a member
inter-dealer quotation system to provide FINRA with a copy of such
written standards (and material updates, modifications and revisions
thereto) within five business days is consistent with Section 15A(b)(6)
of the Act in that it furthers FINRA's ability to review for compliance
with the underlying provisions requiring fair access to the member's
system.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA also believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(11) of the Act.\30\ Section
15A(b)(11) requires that the rules of the association include
provisions governing the form and content of quotations relating to
securities sold otherwise than on a national securities exchange which
may be distributed or published by any member or person associated with
a member, and the persons to whom such quotations may be supplied.\31\
Specifically, FINRA believes that the proposed amendment requiring
member-inter-dealer quotation systems to adopt policies and procedures
addressing the collection and dissemination of quotations in OTC equity
securities is consistent with Section 15A(b)(11) of the Act in that the
amendments further govern the form and content of quotations relating
to securities sold otherwise than on a national securities exchange
which may be distributed or published by any member or person
associated with a member, and the persons to whom such quotations may
be supplied.\32\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78o-3(b)(11).
\31\ See 15 U.S.C. 78o-3(b)(11).
\32\ See 15 U.S.C. 78o-3(b)(11).
---------------------------------------------------------------------------
FINRA also believes that the proposed new rules for member inter-
dealer quotation systems requiring them to establish, maintain and
enforce fair and reasonable written policies and procedures relating to
the collection and dissemination of quotations in OTC equity securities
on or through their systems, and to ensure that such quotations are
treated fairly and consistently, are consistent with the Act by
promoting orderly procedures for collecting, distributing, and
publishing quotations. Similarly, the proposed provision requiring a
member inter-dealer quotation system to provide FINRA with a copy of
such written policies and procedures (and any material updates,
modifications and revisions thereto) within five business days is
consistent with Section 15A(b)(11) of the Act in that it provides FINRA
with timely notification of material changes to the member's quotation
collection and dissemination policies and procedures, which facilitates
FINRA's ability to perform its oversight functions in this area.
FINRA believes that the proposed amendments to the quotation
recording and reporting requirements of Rule 6431 streamline, clarify
and simplify the items of information and process for reporting
quotation data to FINRA for regulatory purposes, such as for use in
conducting reviews of over-the-counter market activity and surveillance
of member conduct, consistent with FINRA's statutory mandate under the
Act.\33\
---------------------------------------------------------------------------
\33\ See 15 U.S.C. 78o-3.
---------------------------------------------------------------------------
FINRA also believes that the proposed rule change will protect
investors and the public interest by discontinuing the dissemination of
potentially incomplete, inaccurate and misleading best bid and offer
quotation data in OTC equity securities, as discussed above, by
deleting the OTCBB rules and discontinuing operation of the Service.
Further, FINRA believes that the proposed rule change is consistent
with Section 17B of the Act.\34\ Section 17B was enacted by Congress as
part of the Penny Stock Act, which was designed to remedy
inefficiencies and address regulatory concerns caused by the lack of
reliable market information on penny stocks traded over the counter
and, in connection with this initiative, the Commission designated the
OTCBB as a Qualifying Electronic Quotation System (``QEQS'') for
purposes of the penny stock rules.\35\
---------------------------------------------------------------------------
\34\ See 15 U.S.C. 78q-2.
\35\ See Securities Exchange Act Release No. 30608 (April 20,
1992), 57 FR 18004 (April 28, 1992) (``Penny Stock Release'')
(adopting seven rules (the ``penny stock rules'') under the Act
requiring broker-dealers engaging in certain transactions in low-
priced, over the counter securities to provide customers with
specified information).
---------------------------------------------------------------------------
Due to the decline of OTCBB, as discussed previously, FINRA is
concerned that OTCBB is no longer a reliable source of complete
quotation information for OTC equity securities and, therefore,
operation of the Service no longer furthers the purposes of Section 17B
of the Act. However, FINRA believes that discontinuing dissemination of
potentially incomplete and misleading quotation information from the
marketplace by ceasing operation of the OTCBB, coupled with the
proposed changes to improve the governance of inter-dealer quotation
systems on or through which quotations in OTC equity securities are
displayed, best serves and promotes the goals of Section 17B of the Act
with respect to the widespread availability of quotation information in
penny stocks. In addition, to the extent necessary, FINRA requests that
the Commission consider granting an exemption from Section 17B of the
Exchange Act in connection with its consideration of this proposed rule
change.
Finally, the proposed requirement that a member inter-dealer
quotation system provide FINRA with a written description of each
quotation-related data product it offers and related pricing
information, including fees, rebates, discounts and cross-product
pricing incentives (and any changes thereto) within five business days,
provides FINRA with useful information to ensure compliance with FINRA
rules and to monitor the widespread availability of quotation
information to investors and market participants through non-SRO
sources, and to determine whether proposing the reestablishment of an
SRO-operated inter-dealer quotation system (or other measure) to
facilitate the type of quotation transparency described in Section 17B
of the Act, is necessary. The FINRA ORF continues to provide for the
reporting of the volume of penny stock transactions, including
comprehensive last sale reporting and dissemination, consistent with
Section 17B of the Act.
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. The proposed amendments to
require a member inter-dealer quotation system to establish fair and
non-discriminatory written standards for granting access to quoting and
trading would apply to all members meeting the Rule 6420 definition of
``inter-dealer quotation system,'' and therefore do not
[[Page 41345]]
disparately impose requirements on similarly situated members.
In addition, the proposed amendments to require a member inter-
dealer quotation system to establish, maintain and enforce fair and
reasonable written policies and procedures relating to the collection
and dissemination of quotations in OTC equity securities are important
to facilitate an orderly environment around quotation activity in OTC
equity securities. Furthermore, the proposal provides for a ``policies
and procedures'' approach and, therefore, affords all members within
its scope a degree of flexibility in implementing measures to comply
with the proposed rule.
FINRA also does not believe that the proposed requirement that
members provide copies of the aforementioned written policies,
procedures and standards (and material updates, modifications and
revisions thereto) results in an unwarranted burden on competition
because the member inter-dealer quotation system would be permitted to
proceed with the implementation of desired changes to its written
policies, procedures and standards, as long as it notifies FINRA within
five business days following the implementation of the changes.
The proposal requiring a member inter-dealer quotation system to
provide FINRA with a written description of each quotation-related data
product offered by such member and related pricing information,
including fees, rebates, discounts and cross-product pricing incentives
(and any changes thereto) within five business days is essential to
FINRA's ongoing monitoring of the widespread availability of quotation
information on OTC equity securities. FINRA also does not believe that
this requirement imposes an unwarranted burden on competition because
the proposed rule would permit the member inter-dealer quotation system
to launch a new quotation-related data product or related price (or
change an existing data product or related price) without delay,
followed by timely notification to FINRA. This proposed amendment would
apply to all members meeting the Rule 6420 definition of ``inter-dealer
quotation system,'' and therefore would not disparately impose
requirements on similarly situated members.
The proposed clarification and streamlining of the quotation
recording and reporting requirements are minor and generally consistent
with current practice; therefore, FINRA anticipates that members would
need to make very few changes to comply with the revised regime. Thus,
any burden associated with the rule change is negligible and its impact
on competition nonexistent. Finally, FINRA does not believe that the
proposed deletion of the OTCBB-related rules and the discontinuance of
the operation of the Service would impose any burden on competition
because the Service currently operates as a transparency utility and,
therefore, its closure would not burden competition and in no way would
hinder the ability of new competitors to enter the market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Not applicable.
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 will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
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-2014-030 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-030. 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
a.m. and 3 p.m. Copies of such 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 available publicly. All
submissions should refer to File Number SR-FINRA-2014-030 and should be
submitted on or before August 5, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
---------------------------------------------------------------------------
\36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16501 Filed 7-14-14; 8:45 am]
BILLING CODE 8011-01-P
