Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rules To Conform to the Commission's Proposed Amendment to Commission Rule 15c6-1(a) and the Industry-Led Initiative To Shorten the Standard Settlement Cycle for Most Broker-Dealer Transactions From T+3 to T+2, 95705-95710 [2016-31308]
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Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79648; File No. SR–FINRA–
2016–047]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rules To Conform to the
Commission’s Proposed Amendment
to Commission Rule 15c6–1(a) and the
Industry-Led Initiative To Shorten the
Standard Settlement Cycle for Most
Broker-Dealer Transactions From T+3
to T+2
December 21, 2016.
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 December
14, 2016, 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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rules 2341 (Investment Company
Securities), 11140 (Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’
or ‘‘Ex-Warrants’’), 11150 (Transactions
‘‘Ex-Interest’’ in Bonds Which Are Dealt
in ‘‘Flat’’), 11210 (Sent by Each Party),
11320 (Dates of Delivery), 11620
(Computation of Interest), 11810 (Buy-In
Procedures and Requirements), and
11860 (COD Orders) to conform to the
Commission’s proposed amendment to
SEA Rule 15c6–1(a) to shorten the
standard settlement cycle for most
broker-dealer transactions from three
business days after the trade date
(‘‘T+3’’) to two business days after the
trade date (‘‘T+2’’) and the industry-led
initiative to shorten the settlement cycle
from T+3 to T+2.3
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78962
(September 28, 2016), 81 FR 69240 (October 5,
2016) (Amendment to Securities Transaction
Settlement Cycle) (File No. S7–22–16) (‘‘SEC
Proposing Release’’).
2 17
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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
SEC Proposing Release
On September 28, 2016, the
Commission proposed amending SEA
Rule 15c6–1(a) to shorten the standard
settlement cycle for most broker-dealer
transactions from T+3 to T+2 on the
basis that the shorter settlement cycle
would reduce the risks that arise from
the value and number of unsettled
securities transactions prior to the
completion of settlement, including
credit, market, and liquidity risk
directly faced by U.S. market
participants. The proposed rule
amendment was published for comment
in the Federal Register on October 5,
2016.4
Background
In 1995, the standard U.S. trade
settlement cycle for equities, municipal
and corporate bonds, and unit
investment trusts, and financial
instruments composed of these products
was shortened from five business days
after the trade date (‘‘T+5’’) to T+3.5
4 See
supra note 3.
1993, the Commission adopted SEA Rule
15c6–1 which became effective in 1995. See
Securities Exchange Act Release Nos. 33023
(October 6, 1993), 58 FR 52891 (October 13, 1993)
and 34952 (November 9, 1994), 59 FR 59137
(November 16, 1994). SEA Rule 15c6–1(a) provides,
in relevant part, that ‘‘a broker or dealer shall not
effect or enter into a contract for the purchase or
sale of a security (other than an exempted security,
government security, municipal security,
commercial paper, bankers’ acceptances, or
commercial bills) that provides for payment of
funds and delivery of securities later than the third
business day after the date of the contract unless
otherwise expressly agreed to by the parties at the
time of the transaction.’’ 17 CFR 240.15c6–1(a).
Although not covered by SEA Rule 15c6–1, in 1995,
the Commission approved the Municipal Securities
Rulemaking Board’s rule change requiring
transactions in municipal securities to settle by
T+3. See Securities Exchange Act Release No.
35427 (February 28, 1995), 60 FR 12798 (March 8,
1995) (Order Approving File No. SR–MSRB–94–10).
5 In
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95705
Accordingly, FINRA and other selfregulatory organizations (‘‘SROs’’)
amended their respective rules to
conform to the T+3 settlement cycle.6
Since that time, the SEC and the
financial services industry have
continued to explore the idea of
shortening the settlement cycle even
further.7
In April 2014, the Depository Trust &
Clearing Corporation (‘‘DTCC’’)
published its formal recommendation to
shorten the standard U.S. trade
settlement cycle to T+2 and announced
that it would partner with market
participants and industry organizations
to devise the necessary approach and
timelines to achieve T+2.8
In an effort to improve the overall
efficiency of the U.S. settlement system
by reducing the attendant risks in T+3
settlement of securities transactions,
and to align U.S. markets with other
major global markets that have already
moved to T+2, DTCC, in collaboration
with the financial services industry,
formed an Industry Steering Committee
(‘‘ISC’’) and an industry working group
and sub-working groups to facilitate the
move to T+2.9 In June 2015, the ISC
published a White Paper outlining the
activities and proposed time frames that
would be required to move to T+2 in the
U.S.10 Concurrently, the Securities
Industry and Financial Markets
Association (‘‘SIFMA’’) and the
Investment Company Institute (‘‘ICI’’)
jointly submitted a letter to SEC Chair
White, expressing support of the
financial services industry’s efforts to
shorten the settlement cycle and
identifying SEA Rule 15c6–1(a) and
several SRO rules that they believed
would require amendments for an
6 See, e.g., Securities Exchange Act Release No.
35507 (March 17, 1995), 60 FR 15616 (March 24,
1995) (Order Approving File No. SR–NASD–94–56);
Securities Exchange Act Release No. 35506 (March
17, 1995), 60 FR 15618 (March 24, 1995) (Order
Approving File No. SR–NYSE–94–40); and
Securities Exchange Act Release No. 35553 (March
31, 1995), 60 FR 18161 (April 10, 1995) (Order
Approving File No. SR–Amex–94–57).
7 See, e.g., Securities Industry Association
(‘‘SIA’’), ‘‘SIA T+1 Business Case Final Report’’
(July 2000); Concept Release: Securities
Transactions Settlement, Securities Exchange Act
Release No. 49405 (March 11, 2004), 69 FR 12922
(March 18, 2004); and Depository Trust & Clearing
Corporation, ‘‘Proposal to Launch a New CostBenefit Analysis on Shortening the Settlement
Cycle’’ (December 2011).
8 See DTCC, ‘‘DTCC Recommends Shortening the
U.S. Trade Settlement Cycle’’ (April 2014).
9 The ISC includes, among other participants,
DTCC, the Securities Industry and Financial
Markets Association and the Investment Company
Institute.
10 See ‘‘Shortening the Settlement Cycle: The
Move to T+2’’ (June 18, 2015).
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effective transition to T+2.11 In March
2016, the ISC announced the industry
target date of September 5, 2017 for the
transition to a T+2 settlement cycle to
occur.12
Proposed Rule Change
In light of the SEC Proposing Release
that would amend SEA Rule 15c6–1(a)
to require standard settlement no later
than T+2 and similar proposals from
other SROs,13 FINRA is proposing
changes to its rules pertaining to
securities settlement by, among other
things, amending the definition of
‘‘regular way’’ settlement as occurring
on T+2. SEA Rule 15c6–1(a) currently
establishes standard settlement as
occurring no later than T+3 for all
securities, other than an exempted
security, government security,
municipal security, commercial paper,
bankers’ acceptances, or commercial
bills.14 FINRA is proposing changes to
rules pertaining to securities settlement
to support the industry-led initiative to
shorten the standard settlement cycle to
two business days. Most of the rules that
FINRA has identified for these changes
are successors to provisions under the
legacy NASD Rules of Fair Practice and
NASD Uniform Practice Code (‘‘UPC’’)
that were amended when the
Commission adopted SEA Rule 15c6–
1(a), which established T+3 as the
standard settlement cycle.15 As such,
FINRA is proposing to amend FINRA
Rules 2341 (Investment Company
Securities), 11140 (Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’
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11 See
Letter from ICI and SIFMA to Mary Jo
White, Chair, SEC, dated June 18, 2015. See also
Letter from Mary Jo White, Chair, SEC, to Kenneth
E. Bentsen, Jr., President and CEO, SIFMA, and
Paul Schott Stevens, President and CEO, ICI, dated
September 16, 2015 (expressing her strong support
for industry efforts to shorten the trade settlement
cycle to T+2 and commitment to developing a
proposal to amend SEA Rule 15c6–1(a) to require
standard settlement no later than T+2).
12 See ISC Media Alert: ‘‘US T+2 ISC
Recommends Move to Shorter Settlement Cycle On
September 5, 2017’’ (March 7, 2016).
13 See, e.g., Securities Exchange Act Release No.
77744 (April 29, 2016), 81 FR 26851 (May 4, 2016)
(Order Approving File No. SR–MSRB–2016–04).
14 See supra note 5.
15 The legacy NASD rules that were changed to
conform to the move from T+5 to T+3 included
Section 26 (Investment Companies) of the Rules of
Fair Practice, and Section 5 (Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ or ‘‘ExWarrants’’), Section 6 (Transactions ‘‘Ex-Interest’’ in
Bonds Which Are Dealt in ‘‘Flat’’), Section 12
(Dates of Delivery), Section 46 (Computation of
Interest) and Section 64 (Acceptance and
Settlement of COD Orders) of the UPC. See
Securities Exchange Act Release No. 35507 (March
17, 1995), 60 FR 15616 (March 24, 1995) (Order
Approving File No. SR–NASD–94–56). See also
Notice to Members 95–36 (May 1995) (enumerating
the various sections under the NASD Rules of Fair
Practice and UPC that were amended to implement
T+3 settlement for securities transactions).
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or ‘‘Ex-Warrants’’), 11150 (Transactions
‘‘Ex-Interest’’ in Bonds Which Are Dealt
in ‘‘Flat’’), 11320 (Dates of Delivery),
11620 (Computation of Interest), and
11860 (COD Orders). In addition, FINRA
is proposing to amend FINRA Rules
11210 (Sent by Each Party) and 11810
(Buy-In Procedures and Requirements)
to conform provisions, where
appropriate, to the T+2 settlement
cycle.16
The details of the proposed rule
change are described below.
(A) FINRA Rule 2341 (Investment
Company Securities) 17
Rule 2341(m) requires members,
including underwriters, that engage in
direct retail transactions for investment
company shares to transmit payments
received from customers for the
purchase of investment company shares
to the payee by the end of the third
business day after receipt of a
customer’s order to purchase the shares,
or by the end of one business day after
receipt of a customer’s payment for the
shares, whichever is later. FINRA is
proposing to amend Rule 2341(m) to
change the three-business day
transmittal requirement to two business
days, while retaining the one-business
day alternative.
(B) FINRA Rule 11140 (Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’
or ‘‘Ex-Warrants’’)
Rule 11140(b)(1) provides that for
dividends or distributions, and the
issuance or distribution of warrants, that
are less than 25 percent of the value of
the subject security, if definitive
information is received sufficiently in
advance of the record date, the date
designated as the ‘‘ex-dividend date’’
shall be the second business day
preceding the record date if the record
date falls on a business day, or the third
business day preceding the record date
if the record date falls on a day
designated by FINRA’s UPC Committee
as a non-delivery date. FINRA is
proposing to shorten the time frames in
Rule 11140(b)(1) by one business day.
16 FINRA Rules 11210 and 11810 are successors
to legacy NASD UPC Sections 9 (Sent by Each
Party) and 59 (‘‘Buying-in’’), respectively, which
remained unchanged during the transition from T+5
to T+3. See supra note 15.
17 In June 2016, legacy NASD Rule 2830
(Investment Company Securities) was adopted as
FINRA Rule 2341 in the consolidated FINRA
rulebook without any substantive changes. See
Securities Exchange Act Release No. 78130 (June
22, 2016), 81 FR 42016 (June 28, 2016) (Notice of
Filing and Immediate Effectiveness of File No. SR–
FINRA–2016–019).
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(C) FINRA Rule 11150 (‘‘Ex-Interest’’ in
Bonds Which Are Dealt in ‘‘Flat’’)
Rule 11150(a) prescribes the manner
for establishing ‘‘ex-interest dates’’ for
transactions in bonds or other similar
evidences of indebtedness which are
traded ‘‘flat.’’ Such transactions are ‘‘exinterest’’ on the second business day
preceding the record date if the record
date falls on a business day, on the third
business day preceding the record date
if the record date falls on a day other
than a business day, or on the third
business day preceding the date on
which an interest payment is to be made
if no record date has been fixed. FINRA
is proposing to shorten the time frames
in Rule 11150(a) by one business day.
(D) FINRA Rule 11210 (Sent by Each
Party)
Paragraphs (c) and (d) of Rule 11210
set forth the ‘‘Don’t Know’’ (‘‘DK’’)
voluntary procedures for using ‘‘DK
Notices’’ (FINRA Form No. 101) or other
forms of notices, respectively.
Depending upon the notice used, a
confirming member may follow the
‘‘DK’’ procedures when it sends a
comparison or confirmation of a trade
(other than one that clears through the
National Securities Clearing Corporation
(‘‘NSCC’’) or other registered clearing
agency), but does not receive a
comparison or confirmation or a signed
‘‘DK’’ from the contra-member by the
close of four business days following the
trade date of the transaction (‘‘T+4’’).
The procedures generally provide that
after T+4, the confirming member shall
send a ‘‘DK Notice’’ (or similar notice)
to the contra-member. The contramember then has four business days
after receipt of the confirming member’s
notice to either confirm or ‘‘DK’’ the
transaction.
FINRA is proposing to amend
paragraphs (c) and (d) of Rule 11210 to
provide that the ‘‘DK’’ procedures may
be used by the confirming member if it
does not receive a comparison or
confirmation or signed ‘‘DK’’ from the
contra-member by the close of one
business day following the trade date of
the transaction, rather than the current
T+4.18 In addition, FINRA is proposing
amendments to paragraphs (c)(2)(A),
(c)(3), and (d)(5) of Rule 11210 to adjust
18 As stated above, the time frames in Rule 11210
remained unchanged during the transition from T+5
to T+3. In light of the industry-led initiative to
shorten the standard settlement cycle and the SEC
Proposing Release to amend SEA Rule 15c6–1(a) to
establish T+2 as the standard settlement for most
broker-dealer transactions, FINRA believes that the
current time frames in Rule 11210 are more
protracted than necessary even in a T+3
environment and as such, FINRA is proposing to
amend these time frames to reflect more current
industry practices.
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the time in which a contra-member has
to respond to a ‘‘DK Notice’’ (or similar
notice) from four business days after the
contra-member’s receipt of the notice to
two business days. The proposed rule
change would also make nonsubstantive technical changes to
paragraph (c)(2)(A) to reflect FINRA
Manual style convention.
(E) FINRA Rule 11320 (Dates of
Delivery)
Rule 11320 prescribes delivery dates
for various transactions. Paragraph (b)
states that for a ‘‘regular way’’
transaction, delivery must be made on,
but not before, the third business day
after the date of the transaction. FINRA
is proposing to amend Rule 11320(b) to
change the reference to third business
day to second business day. Paragraph
(c) provides that in a ‘‘seller’s option’’
transaction, delivery may be made by
the seller on any business day after the
third business day following the date of
the transaction. FINRA is proposing to
amend Rule 11320(c) to change the
reference to third business day to
second business day.
(F) FINRA Rule 11620 (Computation of
Interest)
In the settlement of contracts in
interest-paying securities other than for
cash, Rule 11620(a) requires the
calculation of interest at the rate
specified in the security up to, but not
including, the third business day after
the date of the transaction. The
proposed amendment would shorten the
time frame to the second business day.
In addition, the proposed amendment
would make non-substantive technical
changes to the title of paragraph (a).
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(G) FINRA Rule 11810 (Buy-in
Procedures and Requirements)
Rule 11810(j)(1)(A) sets forth the failto-deliver and liability notice
procedures where a securities contract
is for warrants, rights, convertible
securities or other securities which have
been called for redemption; are due to
expire by their terms; are the subject of
a tender or exchange offer; or are subject
to other expiring events such as a record
date for the underlying security and the
last day on which the securities must be
delivered or surrendered is the
settlement date of the contract or later.19
19 Rule 11810(j) is the successor to legacy NASD
UPC Section 59(i) (Failure to Deliver and Liability
Notice Procedures). When this provision was added
to NASD’s existing close-out procedures in 1984, it
was drafted to be similar to the liability notice
provisions adopted by the NSCC so that members
that were also participants in NSCC could use the
same procedures for both ex-clearing and NSCC
cleared transactions, thereby simplifying members’
back office procedures. See Securities Exchange Act
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Under Rule 11810(j)(1)(A), the
receiving member delivers a liability
notice to the owing counterparty. The
liability notice sets a cutoff date for the
delivery of the securities by the
counterparty and provides notice to the
counterparty of the liability attendant to
its failure to deliver the securities in
time. If the owing counterparty, or
delivering member, delivers the
securities in response to the liability
notice, it has met its delivery obligation.
If the delivering member fails to deliver
the securities on the expiration date, it
will be liable for any damages that may
accrue thereby.
Rule 11810(j)(1)(A) further provides
that when both parties to a contract are
participants in a registered clearing
agency that has an automated liability
notification service, transmission of the
liability notice must be accomplished
through such system.20 When the
parties to a contract are not both
participants in a registered clearing
agency that has an automated liability
notification service, such notice must be
issued using written or comparable
electronic media having immediate
receipt capabilities not later than one
business day prior to the latest time and
the date of the offer or other event in
order to obtain the protection provided
by the Rule.21
Release No. 21262 (August 22, 1984), 49 FR 34321
(August 29, 1984) (Notice of Filing of File No. SR–
NASD–84–20). See also Securities Exchange Act
Release No. 21406 (October 19, 1984), 49 FR 43006
(October 25, 1984) (Order Approving File No. SR–
NASD–84–20).
20 In 2007, NYSE Rule 180 was amended to
require that when the parties to a failed contract
were both participants in a registered clearing
agency that had an automated service for notifying
a failing party of the liability that will be attendant
to a failure to deliver and the contract was to be
settled through the facilities of that registered
clearing agency, the transmission of the liability
notification must be accomplished through the use
of the registered clearing agency’s automated
liability notification system. See Securities
Exchange Act Release No. 55132 (January 19, 2007),
72 FR 3896 (January 26, 2007) (Order Approving
File No. SR–NYSE–2006–57). FINRA followed suit
and effective in 2008, Rule 11810(j) mandated the
use of an automated liability notification system
when the parties to a contract are participants in a
registered clearing agency that has an automated
service for notifying a failing party of the liability
that would be attendant to failure to deliver. See
Securities Exchange Act Release No. 56972
(December 14, 2007), 72 FR 73927 (December 28,
2007) (Order Approving File No. SR–NASD–2007–
035). See also Regulatory Notice 08–06 (February
2008).
21 While Rule 11810 has undergone amendments
over the years, the one-day time frame in paragraph
(j) has remained unchanged. The one-day time
frame also appears in comparable provisions of
other SROs. See, e.g., NSCC Rules & Procedures,
Procedure X (Execution of Buy-Ins) (Effective
August 10, 2016); NYSE Rule 282.65 (Fail to Deliver
and Liability Notice Procedures); and Nasdaq Rule
IM–11810 (Buying-in). See also infra note 30 and
accompanying text.
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Given the proposed shortened
settlement cycle, FINRA is proposing to
amend Rule 11810(j)(1)(A) in situations
where both parties to a contract are not
participants of a registered clearing
agency with an automated notification
service, by extending the time frame for
delivery of the liability notice. Rule
11810(j)(1)(A) would be amended to
provide that in such cases, the receiving
member must send the liability notice to
the delivering member as soon as
practicable but not later than two hours
prior to the cutoff time set forth in the
instructions on a specific offer or other
event to obtain the protection provided
by the Rule. FINRA believes that
extending the time given to the
receiving member to transmit liability
notifications will maintain the
efficiency of the notification process
while mitigating the possible overuse of
such notifications.
Currently, FINRA understands that
the identity of the counterparty, or
delivering member, becomes known to
the receiving member by mid-day on the
business day after trade date (‘‘T+1’’),
and by that time, the receiving member
will generally also know which
transactions are subject to an event
identified in Rule 11810(j)(1)(A) that
would prompt the receiving member to
issue a liability notice to the delivering
member. FINRA believes that the
receiving member regularly issues
liability notices to the seller or other
parties from which the securities
involved are due when the security is
subject to an event identified in Rule
11810(j)(1)(A) during the settlement
cycle as a way to mitigate the risk of a
potential fail-to-deliver. In the current
T+3 settlement environment, the one
business day time frame gives the
receiving member the requisite time
needed to identify the parties involved
and undertake the liability notification
process.
However, FINRA believes that the
move to a T+2 settlement environment
will create inefficiencies in the liability
notification process under Rule
11810(j)(1)(A) when both parties to a
contract are not participants in a
registered clearing agency with an
automated notification service. The
shorter settlement cycle, with the loss of
one-business day, would not afford the
receiving member sufficient time to: (1)
Ascertain that the securities are subject
to an event listed in Rule 11810(j)(1)(A)
during the settlement cycle; (2) identify
the delivering member and other parties
from which the securities involved are
due; and (3) determine the likelihood
that such parties may fail to deliver.
Where the receiving member has
sufficient time (e.g., one business day
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2. Statutory Basis
(H) FINRA Rule 11860 (COD Orders)
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after), it can transmit liability notices as
needed to the right parties. However, as
a consequence of the shortened
settlement cycle, the receiving member
would be compelled to issue liability
notices proactively to all potentially
failing parties as a matter of course to
preserve its rights against such parties
without the benefit of knowing which
transactions would actually necessitate
the delivery of such notice. This would
create a significant increase in the
volume of liability notices members
send and receive, many of which may
be unnecessary. Members would then
have to manage this overabundance of
liability notices, increasing the
possibility of errors, which would
adversely impact the efficiency of the
process. Therefore, FINRA believes its
proposal to extend the time for the
receiving member to deliver a liability
notice when the parties to a contract are
not both participants in a registered
clearing agency with an automated
notification service would help alleviate
the potential burden on the liability
notification process in a T+2 settlement
environment.
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 rule change makes changes to
rules pertaining to securities settlement
and is intended to facilitate the
implementation of the industry-led
transition to a T+2 settlement cycle.
Moreover, the proposed rule changes are
consistent with the SEC’s proposed
amendment to SEA Rule 15c6–1(a) to
require standard settlement no later
than T+2. Accordingly, FINRA believes
that the proposed changes do not
impose any burdens on the industry in
addition to those necessary to
implement amendments to SEA Rule
15c6–1(a) as described and enumerated
in the SEC Proposing Release.23
These conforming changes include
changes to rules that specifically
establish the settlement cycle as well as
rules that establish time frames based on
settlement dates, including for certain
post-settlement rights and obligations.
FINRA believes that the proposed
changes set forth in the filing are
necessary to support a standard
settlement cycle across the U.S. for
secondary market transactions in
equities, corporate and municipal
bonds, unit investment trusts, and
financial instruments composed of these
Rule 11860(a) directs members to
follow various procedures before
accepting collect on delivery (‘‘COD’’) or
payment on delivery (‘‘POD’’) orders.
Rule 11860(a)(4)(A) states that the
member must obtain an agreement from
the customer that the customer will
furnish instructions to the agent no later
than the close of business on the second
business day after the date of execution
of the trade to which the confirmation
relates in the case of a purchase by the
customer where the agent is to receive
the securities against payment, or COD.
In light of the proposed shortened
settlement cycle, FINRA is proposing to
amend Rule 11860(a)(4)(A) to provide
that the time period for a customer
buying COD to furnish instructions to
the agent will be no later than the close
of business on the first business day
after the date of execution of the trade,
rather than the close of business on the
second business day.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice, which date would correspond
with the industry-led transition to a T+2
standard settlement, and the effective
date of the Commission’s proposed
amendment to SEA Rule 15c6–1(a) to
require standard settlement no later
than T+2.
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FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,22 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, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, and, in general, to protect
investors and the public interest. FINRA
believes that the proposed rule change
supports the industry-led initiative to
shorten the settlement cycle to two
business days. Moreover, the proposed
rule change is consistent with the SEC’s
proposed amendment to SEA Rule
15c6–1(a) to require standard settlement
no later than T+2. FINRA believes that
the proposed rule change will provide
the regulatory certainty to facilitate the
industry-led move to a T+2 settlement
cycle.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
22 15
U.S.C. 78o–3(b)(6).
supra note 3.
23 See
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products, among others.24 A standard
U.S. settlement cycle for such products
is critical for the operation of fair and
orderly markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 16–09 (March 2016). Eight
comments were received in response to
the Regulatory Notice.25 A copy of the
Regulatory Notice is attached as Exhibit
2a.26 A list of commenters is attached as
Exhibit 2b and copies of the comment
letters received in response to the
Regulatory Notice are attached as
Exhibit 2c.
Of the eight comment letters received,
seven expressed support for the
industry-led move to T+2 stating, among
other benefits, that the move will align
U.S. markets with international markets
that already work in the T+2
environment, improve the overall
efficiency and liquidity of the securities
markets, and the stability of the
financial system by reducing
counterparty risk and pro-cyclical and
liquidity demands, and decreasing
clearing capital requirements.27 Several
24 See
supra note 3.
Letter from Michael Nicholas, Chief
Executive Officer, Bond Dealers of America, to
Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 4, 2016 (‘‘BDA’’); letter from Stephen
E. Roth, Sutherland Asbill & Brennan LLP on behalf
of the Committee of Annuity Insurers, to Marcia E.
Asquith, Corporate Secretary, FINRA, dated April 4,
2016 (‘‘CAI’’); letter from Norman L. Ashkenas,
Chief Compliance Officer, Fidelity Brokerage
Services, LLC, and Richard J. O’Brien, Chief
Compliance Officer, National Financial Services,
LLC, to Marcia E. Asquith, Corporate Secretary,
FINRA, dated April 4, 2016 (‘‘Fidelity’’); letter from
David T. Bellaire, Executive Vice President and
General Counsel, Financial Services Institute, to
Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 4, 2016 (‘‘FSI’’); letter from Martin A.
Burns, Chief Industry Operations Officer,
Investment Company Institute, to Marcia E.
Asquith, Corporate Secretary, FINRA, dated April 4,
2016 (‘‘ICI’’); letter from Thomas F. Price, Managing
Director, Operations, Technology & BCP, Securities
Industry and Financial Markets Association, to
Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 4, 2016 (‘‘SIFMA’’) (April 4, 2016);
letter from Manisha Kimmel, Chief Regulatory
Officer, Wealth Management, Thomson Reuters, to
Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 4, 2016 (‘‘Thomson Reuters’’); and letter
from Robert J. McCarthy, Director of Regulatory
Policy, Wells Fargo Advisors, LLC, to Marcia E.
Asquith, Corporate Secretary, FINRA, dated April 4,
2016 (‘‘WFA’’).
26 The Commission notes that the exhibits
referred to are attached to the filing and not to this
Notice.
27 BDA, Fidelity, FSI, ICI, SIFMA, Thomson
Reuters and WFA. CAI did not comment on the
proposed rule amendments and instead requested
FINRA’s ‘‘acknowledgment and confirmation that
insurance securities products, which are currently
exempt from the T+3 settlement cycle requirements,
25 See
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commenters encouraged FINRA to
coordinate with other regulators to make
the necessary regulatory changes to help
facilitate the move to a T+2 standard
settlement cycle 28 with two
commenters 29 providing their views on
the proposed amendments to two rules
under the FINRA Rule 11800 Series
(Close-Out Procedures).
sradovich on DSK3GMQ082PROD with NOTICES
FINRA Rule 11810(j)—Failure To
Deliver and Liability Notice Procedures
In its comment letter, SIFMA raised a
concern with the one-day time frame in
Rule 11810(j)(1)(A), asserting that the
requirement for the delivering member
to deliver a liability notice to the
receiving member no later than one
business day prior to the latest time and
the date of the offer or other event in
order to obtain the protection provided
by the Rule may no longer be
appropriate in a T+2 environment in
some situations such as where the
delivery obligation is transferred to
another party as a result of continuous
net settlement, settlements outside of
the NSCC, and settlements involving a
third party that is not a FINRA member
firm. SIFMA noted that NYSE Rule 180
(Failure to Deliver) includes a similar
requirement for NYSE member firms
that are participants in a registered
clearing agency to transmit liability
notification through an automated
notification service and proposed
amending Rule 11810(j)(1)(A) to omit
the reference to a notification time
frame, which would align with NYSE
Rule 180.30 In the alternative, SIFMA
proposed amending Rule 11810(j)(1)(A)
to require that the liability notice be
delivered in a ‘‘reasonable amount of
will continue to be exempt from the settlement
cycle requirements after the timetable is shortened
to T+2.’’ The Commission has granted an exemption
for transactions involving certain insurance
contracts from the scope of SEA Rule 15c6–1. See
Securities Exchange Act Release No. 35815 (June 6,
1995), 60 FR 30906 (June 12, 1995). FINRA notes
that any modification or revocation of the current
exemptions to SEA Rule 15c6–1 rests with the
Commission.
28 Fidelity, FSI, ICI, and Thomson Reuters.
29 BDA and SIFMA.
30 See NYSE Rule 180 (Failure to Deliver)
providing in part that ‘‘[w]hen the parties to a
contract are both participants in a registered
clearing agency which has an automated service for
notifying a failing party of the liability that will be
attendant to a failure to deliver and that contract
was to be settled through the facilities of said
registered clearing agency, the transmission of the
liability notification must be accomplished through
use of said automated notification service.’’ FINRA
notes that NYSE Rule 180 does not address the
transmission of the liability notification for parties
to a contract that are not both participants in a
registered clearing agency (or non-participants). The
transmission of the liability notification for nonparticipants is addressed under NYSE Rule 282.65
(Failure to Deliver and Liability Notice Procedures).
See supra note 21.
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time’’ ahead of the settlement obligation
in light of facts and circumstances.
SIFMA maintained that under either
proposed amendment to paragraph (j),
the delivering member would be liable
for any damages caused by its failure to
deliver in a timely fashion.
While FINRA did not initially
propose amendments to Rule 11810 for
the T+2 initiative,31 in light of SIFMA’s
concern regarding Rule 11810(j)(1)(A),
FINRA is proposing to amend the Rule
to provide that, where both parties to a
contract are not participants of a
registered clearing agency with an
automated notification service, the
receiving member must send the
liability notice to the delivering member
as soon as practicable but not later than
two hours prior to the cutoff time set
forth in the instructions on a specific
offer or other event to obtain the
protection provided by the Rule.32
FINRA Rule 11860 (COD Orders)
Rule 11860(a)(3) requires a member
that accepts a COD or POD order from
a customer to deliver to the customer a
confirmation not later than the close of
business on T+1. In Regulatory Notice
16–09, FINRA proposed shortening the
confirmation delivery time frame to the
close of business on the date of the trade
(‘‘T+0’’). In its comment letter, BDA
urged FINRA to consider leaving the
requirement for delivering customer
confirmations under Rule 11860(a)(3)
unchanged and allow customer
confirmations to continue to be sent T+1
to minimize the regulatory and
compliance costs of the proposed
amendment without limiting the riskreducing benefits of the shortened
settlement cycle. BDA asserted that
shortening confirmation delivery to T+0
would be a tremendous undertaking for
small firms that would need to commit
large amounts of internal resources to
change the systems and processes that
are used to deliver confirmations in
order to process confirmations on a T+0
basis.
FINRA has considered the comment
and agrees that the proposed change to
T+0 may present significant difficulties
for member firms, particularly small
firms. Moreover, FINRA believes that
the existing requirement to deliver
customer confirmations on T+1 would
still assure the efficient clearance and
settlement of transactions in a T+2
31 See
Regulatory Notice 16–09 (March 2016).
expects similar amendments to other
comparable SRO provisions in NYSE Rule 282.65
(Fail to Deliver and Liability Notice Procedures)
and Nasdaq Rule IM–11810 (Buying-in), and NSCC
Rules & Procedures, Procedure X (Execution of BuyIns) to address SIFMA’s concern about the one-day
notification time frame.
32 FINRA
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Fmt 4703
Sfmt 4703
95709
settlement environment. Therefore, in
order to remain aligned with the
provisions of other SROs and current
industry practices, FINRA has
determined to retain the current T+1
confirmation delivery requirement
under Rule 11860(a)(3).33
Other Comments
Several commenters conveyed the
importance of testing systems and
educating market participants and retail
investors on the impacts of a shorter
settlement cycle.34 BDA explained that
currently, a customer has five business
days to submit payment for purchases of
securities in a cash account or in a
margin account before a broker-dealer
would cancel or liquidate the
transaction in whole or in part.35 BDA
further explained that ‘‘[s]hortening the
settlement cycle to T+2 would
automatically reduce the timeframe
before a dealer would have to liquidate
an unpaid for transaction to T+4.’’ BDA
noted that shortening the settlement
cycle by one day may negatively impact
retail clients that still use checks, which
may not be sent, received, processed,
and cleared, within the shortened fourday window. BDA expressed that firms
that do a large amount of retail business
would need ample time to communicate
the practical impacts on a shortened
settlement cycle.
FINRA recognizes that market
participants will have to undergo
systemic and procedural changes to
implement the shorter payment period
for a securities purchase as part of the
ongoing transition to the T+2
framework. As BDA acknowledged, the
2017 timeline should allow firms to
make all the necessary changes to
systems that the proposed rule will
require. FINRA further recognizes the
importance of educating retail investors
regarding the impact of a shortened
settlement cycle and is committed to
33 In Regulatory Notice 16–09, FINRA
preliminarily identified Rule 11210(a)
(Comparisons or Confirmations) to undergo an
amendment to reflect the T+2 settlement cycle. Rule
11210(a)(1) requires each party to a transaction,
other than a cash transaction, to send a Uniform
Comparison or Confirmation on or before T+1.
FINRA proposed changing the delivery time frame
to T+0. While not specifically referenced by BDA,
Rule 11210(a) would raise similar concerns. Thus,
the time frame under Rule 11210(a)(1) for sending
a Uniform Comparison or Confirmation would also
remain unchanged at T+1.
34 BDA, FSI and WFA.
35 Federal Reserve Board Regulation T governs,
among other things, the extension of credit by
broker-dealers to customers to pay for the purchase
of securities. Regulation T provides that a customer
has one payment period (currently five business
days) to submit payment for purchases of securities
in a cash account or in a margin account. 12 CFR
220.2 (Definitions), 220.4 (Margin Account) and
220.8 (Cash Account).
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Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices
working with market participants to
provide the information necessary to
educate retail investors.
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.
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 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–
2016–047 and should be submitted on
or before January 18, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016–31308 Filed 12–27–16; 8:45 am]
BILLING CODE 8011–01–P
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–2016–047 on the subject line.
sradovich on DSK3GMQ082PROD with NOTICES
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:
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adjust Qualifying Tier
Thresholds and Fees and Rebates
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–2016–047. 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.,
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79644; File No. SR–
ISEGemini–2016–22]
December 21, 2016.
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 December
9, 2016, ISE Gemini, LLC (‘‘ISE Gemini’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adjust
qualifying tier thresholds and fees and
rebates under the Schedule of Fees.
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Fmt 4703
Sfmt 4703
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to adjust qualifying tier
thresholds and fees and rebates under
the Exchange’s Schedule of Fees. Each
of the proposed changes is described in
more detail below.
Qualifying Tier Thresholds
ISE Gemini currently provides
volume-based maker rebates to Market
Maker 3 and Priority Customer 4 orders
in five tiers based on a member’s
average daily volume (‘‘ADV’’) in the
following categories: (i) Total Affiliated
Member ADV,5 (ii) Priority Customer
Maker ADV,6 and (iii) Total Affiliated
Member ADV with a Minimum Priority
Customer Maker ADV, as shown in the
table below.7 In addition, the Exchange
3 The term Market Maker refers to ‘‘Competitive
Market Makers’’ and ‘‘Primary Market Makers’’
collectively.
4 A Priority Customer is a person or entity that is
not a broker/dealer in securities, and does not place
more than 390 orders in listed options per day on
average during a calendar month for its own
beneficial account(s).
5 The Total Affiliated Member ADV category
includes all volume in all symbols and order types,
including both maker and taker volume and volume
executed in the PIM, Facilitation, Solicitation, and
QCC mechanisms.
6 The Priority Customer Maker ADV category
includes all Priority Customer volume that adds
liquidity in all symbols.
7 All eligible volume from affiliated members is
aggregated in determining applicable tiers, provided
there is at least 75% common ownership between
the Members as reflected on each Member’s Form
BD, Schedule A.
The highest tier threshold attained by any method
above applies retroactively in a given month to all
eligible traded contracts and applies to all eligible
market participants.
Any day that the market is not open for the entire
trading day or the Exchange instructs members in
writing to route their orders to other markets may
be excluded from the ADV calculation; provided
that the Exchange will only remove the day for
members that would have a lower ADV with the
day included.
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]]>Agencies
[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Notices]
[Pages 95705-95710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31308]
[[Page 95705]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79648; File No. SR-FINRA-2016-047]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rules To Conform to the Commission's Proposed Amendment to
Commission Rule 15c6-1(a) and the Industry-Led Initiative To Shorten
the Standard Settlement Cycle for Most Broker-Dealer Transactions From
T+3 to T+2
December 21, 2016.
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 December 14, 2016, 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 Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rules 2341 (Investment Company
Securities), 11140 (Transactions in Securities ``Ex-Dividend,'' ``Ex-
Rights'' or ``Ex-Warrants''), 11150 (Transactions ``Ex-Interest'' in
Bonds Which Are Dealt in ``Flat''), 11210 (Sent by Each Party), 11320
(Dates of Delivery), 11620 (Computation of Interest), 11810 (Buy-In
Procedures and Requirements), and 11860 (COD Orders) to conform to the
Commission's proposed amendment to SEA Rule 15c6-1(a) to shorten the
standard settlement cycle for most broker-dealer transactions from
three business days after the trade date (``T+3'') to two business days
after the trade date (``T+2'') and the industry-led initiative to
shorten the settlement cycle from T+3 to T+2.\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 78962 (September 28,
2016), 81 FR 69240 (October 5, 2016) (Amendment to Securities
Transaction Settlement Cycle) (File No. S7-22-16) (``SEC Proposing
Release'').
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
SEC Proposing Release
On September 28, 2016, the Commission proposed amending SEA Rule
15c6-1(a) to shorten the standard settlement cycle for most broker-
dealer transactions from T+3 to T+2 on the basis that the shorter
settlement cycle would reduce the risks that arise from the value and
number of unsettled securities transactions prior to the completion of
settlement, including credit, market, and liquidity risk directly faced
by U.S. market participants. The proposed rule amendment was published
for comment in the Federal Register on October 5, 2016.\4\
---------------------------------------------------------------------------
\4\ See supra note 3.
---------------------------------------------------------------------------
Background
In 1995, the standard U.S. trade settlement cycle for equities,
municipal and corporate bonds, and unit investment trusts, and
financial instruments composed of these products was shortened from
five business days after the trade date (``T+5'') to T+3.\5\
Accordingly, FINRA and other self-regulatory organizations (``SROs'')
amended their respective rules to conform to the T+3 settlement
cycle.\6\ Since that time, the SEC and the financial services industry
have continued to explore the idea of shortening the settlement cycle
even further.\7\
---------------------------------------------------------------------------
\5\ In 1993, the Commission adopted SEA Rule 15c6-1 which became
effective in 1995. See Securities Exchange Act Release Nos. 33023
(October 6, 1993), 58 FR 52891 (October 13, 1993) and 34952
(November 9, 1994), 59 FR 59137 (November 16, 1994). SEA Rule 15c6-
1(a) provides, in relevant part, that ``a broker or dealer shall not
effect or enter into a contract for the purchase or sale of a
security (other than an exempted security, government security,
municipal security, commercial paper, bankers' acceptances, or
commercial bills) that provides for payment of funds and delivery of
securities later than the third business day after the date of the
contract unless otherwise expressly agreed to by the parties at the
time of the transaction.'' 17 CFR 240.15c6-1(a). Although not
covered by SEA Rule 15c6-1, in 1995, the Commission approved the
Municipal Securities Rulemaking Board's rule change requiring
transactions in municipal securities to settle by T+3. See
Securities Exchange Act Release No. 35427 (February 28, 1995), 60 FR
12798 (March 8, 1995) (Order Approving File No. SR-MSRB-94-10).
\6\ See, e.g., Securities Exchange Act Release No. 35507 (March
17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File No.
SR-NASD-94-56); Securities Exchange Act Release No. 35506 (March 17,
1995), 60 FR 15618 (March 24, 1995) (Order Approving File No. SR-
NYSE-94-40); and Securities Exchange Act Release No. 35553 (March
31, 1995), 60 FR 18161 (April 10, 1995) (Order Approving File No.
SR-Amex-94-57).
\7\ See, e.g., Securities Industry Association (``SIA''), ``SIA
T+1 Business Case Final Report'' (July 2000); Concept Release:
Securities Transactions Settlement, Securities Exchange Act Release
No. 49405 (March 11, 2004), 69 FR 12922 (March 18, 2004); and
Depository Trust & Clearing Corporation, ``Proposal to Launch a New
Cost-Benefit Analysis on Shortening the Settlement Cycle'' (December
2011).
---------------------------------------------------------------------------
In April 2014, the Depository Trust & Clearing Corporation
(``DTCC'') published its formal recommendation to shorten the standard
U.S. trade settlement cycle to T+2 and announced that it would partner
with market participants and industry organizations to devise the
necessary approach and timelines to achieve T+2.\8\
---------------------------------------------------------------------------
\8\ See DTCC, ``DTCC Recommends Shortening the U.S. Trade
Settlement Cycle'' (April 2014).
---------------------------------------------------------------------------
In an effort to improve the overall efficiency of the U.S.
settlement system by reducing the attendant risks in T+3 settlement of
securities transactions, and to align U.S. markets with other major
global markets that have already moved to T+2, DTCC, in collaboration
with the financial services industry, formed an Industry Steering
Committee (``ISC'') and an industry working group and sub-working
groups to facilitate the move to T+2.\9\ In June 2015, the ISC
published a White Paper outlining the activities and proposed time
frames that would be required to move to T+2 in the U.S.\10\
Concurrently, the Securities Industry and Financial Markets Association
(``SIFMA'') and the Investment Company Institute (``ICI'') jointly
submitted a letter to SEC Chair White, expressing support of the
financial services industry's efforts to shorten the settlement cycle
and identifying SEA Rule 15c6-1(a) and several SRO rules that they
believed would require amendments for an
[[Page 95706]]
effective transition to T+2.\11\ In March 2016, the ISC announced the
industry target date of September 5, 2017 for the transition to a T+2
settlement cycle to occur.\12\
---------------------------------------------------------------------------
\9\ The ISC includes, among other participants, DTCC, the
Securities Industry and Financial Markets Association and the
Investment Company Institute.
\10\ See ``Shortening the Settlement Cycle: The Move to T+2''
(June 18, 2015).
\11\ See Letter from ICI and SIFMA to Mary Jo White, Chair, SEC,
dated June 18, 2015. See also Letter from Mary Jo White, Chair, SEC,
to Kenneth E. Bentsen, Jr., President and CEO, SIFMA, and Paul
Schott Stevens, President and CEO, ICI, dated September 16, 2015
(expressing her strong support for industry efforts to shorten the
trade settlement cycle to T+2 and commitment to developing a
proposal to amend SEA Rule 15c6-1(a) to require standard settlement
no later than T+2).
\12\ See ISC Media Alert: ``US T+2 ISC Recommends Move to
Shorter Settlement Cycle On September 5, 2017'' (March 7, 2016).
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Proposed Rule Change
In light of the SEC Proposing Release that would amend SEA Rule
15c6-1(a) to require standard settlement no later than T+2 and similar
proposals from other SROs,\13\ FINRA is proposing changes to its rules
pertaining to securities settlement by, among other things, amending
the definition of ``regular way'' settlement as occurring on T+2. SEA
Rule 15c6-1(a) currently establishes standard settlement as occurring
no later than T+3 for all securities, other than an exempted security,
government security, municipal security, commercial paper, bankers'
acceptances, or commercial bills.\14\ FINRA is proposing changes to
rules pertaining to securities settlement to support the industry-led
initiative to shorten the standard settlement cycle to two business
days. Most of the rules that FINRA has identified for these changes are
successors to provisions under the legacy NASD Rules of Fair Practice
and NASD Uniform Practice Code (``UPC'') that were amended when the
Commission adopted SEA Rule 15c6-1(a), which established T+3 as the
standard settlement cycle.\15\ As such, FINRA is proposing to amend
FINRA Rules 2341 (Investment Company Securities), 11140 (Transactions
in Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''), 11150
(Transactions ``Ex-Interest'' in Bonds Which Are Dealt in ``Flat''),
11320 (Dates of Delivery), 11620 (Computation of Interest), and 11860
(COD Orders). In addition, FINRA is proposing to amend FINRA Rules
11210 (Sent by Each Party) and 11810 (Buy-In Procedures and
Requirements) to conform provisions, where appropriate, to the T+2
settlement cycle.\16\
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\13\ See, e.g., Securities Exchange Act Release No. 77744 (April
29, 2016), 81 FR 26851 (May 4, 2016) (Order Approving File No. SR-
MSRB-2016-04).
\14\ See supra note 5.
\15\ The legacy NASD rules that were changed to conform to the
move from T+5 to T+3 included Section 26 (Investment Companies) of
the Rules of Fair Practice, and Section 5 (Transactions in
Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''),
Section 6 (Transactions ``Ex-Interest'' in Bonds Which Are Dealt in
``Flat''), Section 12 (Dates of Delivery), Section 46 (Computation
of Interest) and Section 64 (Acceptance and Settlement of COD
Orders) of the UPC. See Securities Exchange Act Release No. 35507
(March 17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File
No. SR-NASD-94-56). See also Notice to Members 95-36 (May 1995)
(enumerating the various sections under the NASD Rules of Fair
Practice and UPC that were amended to implement T+3 settlement for
securities transactions).
\16\ FINRA Rules 11210 and 11810 are successors to legacy NASD
UPC Sections 9 (Sent by Each Party) and 59 (``Buying-in''),
respectively, which remained unchanged during the transition from
T+5 to T+3. See supra note 15.
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The details of the proposed rule change are described below.
(A) FINRA Rule 2341 (Investment Company Securities) \17\
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\17\ In June 2016, legacy NASD Rule 2830 (Investment Company
Securities) was adopted as FINRA Rule 2341 in the consolidated FINRA
rulebook without any substantive changes. See Securities Exchange
Act Release No. 78130 (June 22, 2016), 81 FR 42016 (June 28, 2016)
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2016-019).
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Rule 2341(m) requires members, including underwriters, that engage
in direct retail transactions for investment company shares to transmit
payments received from customers for the purchase of investment company
shares to the payee by the end of the third business day after receipt
of a customer's order to purchase the shares, or by the end of one
business day after receipt of a customer's payment for the shares,
whichever is later. FINRA is proposing to amend Rule 2341(m) to change
the three-business day transmittal requirement to two business days,
while retaining the one-business day alternative.
(B) FINRA Rule 11140 (Transactions in Securities ``Ex-Dividend,'' ``Ex-
Rights'' or ``Ex-Warrants'')
Rule 11140(b)(1) provides that for dividends or distributions, and
the issuance or distribution of warrants, that are less than 25 percent
of the value of the subject security, if definitive information is
received sufficiently in advance of the record date, the date
designated as the ``ex-dividend date'' shall be the second business day
preceding the record date if the record date falls on a business day,
or the third business day preceding the record date if the record date
falls on a day designated by FINRA's UPC Committee as a non-delivery
date. FINRA is proposing to shorten the time frames in Rule 11140(b)(1)
by one business day.
(C) FINRA Rule 11150 (``Ex-Interest'' in Bonds Which Are Dealt in
``Flat'')
Rule 11150(a) prescribes the manner for establishing ``ex-interest
dates'' for transactions in bonds or other similar evidences of
indebtedness which are traded ``flat.'' Such transactions are ``ex-
interest'' on the second business day preceding the record date if the
record date falls on a business day, on the third business day
preceding the record date if the record date falls on a day other than
a business day, or on the third business day preceding the date on
which an interest payment is to be made if no record date has been
fixed. FINRA is proposing to shorten the time frames in Rule 11150(a)
by one business day.
(D) FINRA Rule 11210 (Sent by Each Party)
Paragraphs (c) and (d) of Rule 11210 set forth the ``Don't Know''
(``DK'') voluntary procedures for using ``DK Notices'' (FINRA Form No.
101) or other forms of notices, respectively. Depending upon the notice
used, a confirming member may follow the ``DK'' procedures when it
sends a comparison or confirmation of a trade (other than one that
clears through the National Securities Clearing Corporation (``NSCC'')
or other registered clearing agency), but does not receive a comparison
or confirmation or a signed ``DK'' from the contra-member by the close
of four business days following the trade date of the transaction
(``T+4''). The procedures generally provide that after T+4, the
confirming member shall send a ``DK Notice'' (or similar notice) to the
contra-member. The contra-member then has four business days after
receipt of the confirming member's notice to either confirm or ``DK''
the transaction.
FINRA is proposing to amend paragraphs (c) and (d) of Rule 11210 to
provide that the ``DK'' procedures may be used by the confirming member
if it does not receive a comparison or confirmation or signed ``DK''
from the contra-member by the close of one business day following the
trade date of the transaction, rather than the current T+4.\18\ In
addition, FINRA is proposing amendments to paragraphs (c)(2)(A),
(c)(3), and (d)(5) of Rule 11210 to adjust
[[Page 95707]]
the time in which a contra-member has to respond to a ``DK Notice'' (or
similar notice) from four business days after the contra-member's
receipt of the notice to two business days. The proposed rule change
would also make non-substantive technical changes to paragraph
(c)(2)(A) to reflect FINRA Manual style convention.
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\18\ As stated above, the time frames in Rule 11210 remained
unchanged during the transition from T+5 to T+3. In light of the
industry-led initiative to shorten the standard settlement cycle and
the SEC Proposing Release to amend SEA Rule 15c6-1(a) to establish
T+2 as the standard settlement for most broker-dealer transactions,
FINRA believes that the current time frames in Rule 11210 are more
protracted than necessary even in a T+3 environment and as such,
FINRA is proposing to amend these time frames to reflect more
current industry practices.
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(E) FINRA Rule 11320 (Dates of Delivery)
Rule 11320 prescribes delivery dates for various transactions.
Paragraph (b) states that for a ``regular way'' transaction, delivery
must be made on, but not before, the third business day after the date
of the transaction. FINRA is proposing to amend Rule 11320(b) to change
the reference to third business day to second business day. Paragraph
(c) provides that in a ``seller's option'' transaction, delivery may be
made by the seller on any business day after the third business day
following the date of the transaction. FINRA is proposing to amend Rule
11320(c) to change the reference to third business day to second
business day.
(F) FINRA Rule 11620 (Computation of Interest)
In the settlement of contracts in interest-paying securities other
than for cash, Rule 11620(a) requires the calculation of interest at
the rate specified in the security up to, but not including, the third
business day after the date of the transaction. The proposed amendment
would shorten the time frame to the second business day. In addition,
the proposed amendment would make non-substantive technical changes to
the title of paragraph (a).
(G) FINRA Rule 11810 (Buy-in Procedures and Requirements)
Rule 11810(j)(1)(A) sets forth the fail-to-deliver and liability
notice procedures where a securities contract is for warrants, rights,
convertible securities or other securities which have been called for
redemption; are due to expire by their terms; are the subject of a
tender or exchange offer; or are subject to other expiring events such
as a record date for the underlying security and the last day on which
the securities must be delivered or surrendered is the settlement date
of the contract or later.\19\
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\19\ Rule 11810(j) is the successor to legacy NASD UPC Section
59(i) (Failure to Deliver and Liability Notice Procedures). When
this provision was added to NASD's existing close-out procedures in
1984, it was drafted to be similar to the liability notice
provisions adopted by the NSCC so that members that were also
participants in NSCC could use the same procedures for both ex-
clearing and NSCC cleared transactions, thereby simplifying members'
back office procedures. See Securities Exchange Act Release No.
21262 (August 22, 1984), 49 FR 34321 (August 29, 1984) (Notice of
Filing of File No. SR-NASD-84-20). See also Securities Exchange Act
Release No. 21406 (October 19, 1984), 49 FR 43006 (October 25, 1984)
(Order Approving File No. SR-NASD-84-20).
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Under Rule 11810(j)(1)(A), the receiving member delivers a
liability notice to the owing counterparty. The liability notice sets a
cutoff date for the delivery of the securities by the counterparty and
provides notice to the counterparty of the liability attendant to its
failure to deliver the securities in time. If the owing counterparty,
or delivering member, delivers the securities in response to the
liability notice, it has met its delivery obligation. If the delivering
member fails to deliver the securities on the expiration date, it will
be liable for any damages that may accrue thereby.
Rule 11810(j)(1)(A) further provides that when both parties to a
contract are participants in a registered clearing agency that has an
automated liability notification service, transmission of the liability
notice must be accomplished through such system.\20\ When the parties
to a contract are not both participants in a registered clearing agency
that has an automated liability notification service, such notice must
be issued using written or comparable electronic media having immediate
receipt capabilities not later than one business day prior to the
latest time and the date of the offer or other event in order to obtain
the protection provided by the Rule.\21\
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\20\ In 2007, NYSE Rule 180 was amended to require that when the
parties to a failed contract were both participants in a registered
clearing agency that had an automated service for notifying a
failing party of the liability that will be attendant to a failure
to deliver and the contract was to be settled through the facilities
of that registered clearing agency, the transmission of the
liability notification must be accomplished through the use of the
registered clearing agency's automated liability notification
system. See Securities Exchange Act Release No. 55132 (January 19,
2007), 72 FR 3896 (January 26, 2007) (Order Approving File No. SR-
NYSE-2006-57). FINRA followed suit and effective in 2008, Rule
11810(j) mandated the use of an automated liability notification
system when the parties to a contract are participants in a
registered clearing agency that has an automated service for
notifying a failing party of the liability that would be attendant
to failure to deliver. See Securities Exchange Act Release No. 56972
(December 14, 2007), 72 FR 73927 (December 28, 2007) (Order
Approving File No. SR-NASD-2007-035). See also Regulatory Notice 08-
06 (February 2008).
\21\ While Rule 11810 has undergone amendments over the years,
the one-day time frame in paragraph (j) has remained unchanged. The
one-day time frame also appears in comparable provisions of other
SROs. See, e.g., NSCC Rules & Procedures, Procedure X (Execution of
Buy-Ins) (Effective August 10, 2016); NYSE Rule 282.65 (Fail to
Deliver and Liability Notice Procedures); and Nasdaq Rule IM-11810
(Buying-in). See also infra note 30 and accompanying text.
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Given the proposed shortened settlement cycle, FINRA is proposing
to amend Rule 11810(j)(1)(A) in situations where both parties to a
contract are not participants of a registered clearing agency with an
automated notification service, by extending the time frame for
delivery of the liability notice. Rule 11810(j)(1)(A) would be amended
to provide that in such cases, the receiving member must send the
liability notice to the delivering member as soon as practicable but
not later than two hours prior to the cutoff time set forth in the
instructions on a specific offer or other event to obtain the
protection provided by the Rule. FINRA believes that extending the time
given to the receiving member to transmit liability notifications will
maintain the efficiency of the notification process while mitigating
the possible overuse of such notifications.
Currently, FINRA understands that the identity of the counterparty,
or delivering member, becomes known to the receiving member by mid-day
on the business day after trade date (``T+1''), and by that time, the
receiving member will generally also know which transactions are
subject to an event identified in Rule 11810(j)(1)(A) that would prompt
the receiving member to issue a liability notice to the delivering
member. FINRA believes that the receiving member regularly issues
liability notices to the seller or other parties from which the
securities involved are due when the security is subject to an event
identified in Rule 11810(j)(1)(A) during the settlement cycle as a way
to mitigate the risk of a potential fail-to-deliver. In the current T+3
settlement environment, the one business day time frame gives the
receiving member the requisite time needed to identify the parties
involved and undertake the liability notification process.
However, FINRA believes that the move to a T+2 settlement
environment will create inefficiencies in the liability notification
process under Rule 11810(j)(1)(A) when both parties to a contract are
not participants in a registered clearing agency with an automated
notification service. The shorter settlement cycle, with the loss of
one-business day, would not afford the receiving member sufficient time
to: (1) Ascertain that the securities are subject to an event listed in
Rule 11810(j)(1)(A) during the settlement cycle; (2) identify the
delivering member and other parties from which the securities involved
are due; and (3) determine the likelihood that such parties may fail to
deliver. Where the receiving member has sufficient time (e.g., one
business day
[[Page 95708]]
after), it can transmit liability notices as needed to the right
parties. However, as a consequence of the shortened settlement cycle,
the receiving member would be compelled to issue liability notices
proactively to all potentially failing parties as a matter of course to
preserve its rights against such parties without the benefit of knowing
which transactions would actually necessitate the delivery of such
notice. This would create a significant increase in the volume of
liability notices members send and receive, many of which may be
unnecessary. Members would then have to manage this overabundance of
liability notices, increasing the possibility of errors, which would
adversely impact the efficiency of the process. Therefore, FINRA
believes its proposal to extend the time for the receiving member to
deliver a liability notice when the parties to a contract are not both
participants in a registered clearing agency with an automated
notification service would help alleviate the potential burden on the
liability notification process in a T+2 settlement environment.
(H) FINRA Rule 11860 (COD Orders)
Rule 11860(a) directs members to follow various procedures before
accepting collect on delivery (``COD'') or payment on delivery
(``POD'') orders. Rule 11860(a)(4)(A) states that the member must
obtain an agreement from the customer that the customer will furnish
instructions to the agent no later than the close of business on the
second business day after the date of execution of the trade to which
the confirmation relates in the case of a purchase by the customer
where the agent is to receive the securities against payment, or COD.
In light of the proposed shortened settlement cycle, FINRA is proposing
to amend Rule 11860(a)(4)(A) to provide that the time period for a
customer buying COD to furnish instructions to the agent will be no
later than the close of business on the first business day after the
date of execution of the trade, rather than the close of business on
the second business day.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice, which date would correspond with the industry-led transition to
a T+2 standard settlement, and the effective date of the Commission's
proposed amendment to SEA Rule 15c6-1(a) to require standard settlement
no later than T+2.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\22\ 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, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and, in general, to protect investors and the public
interest. FINRA believes that the proposed rule change supports the
industry-led initiative to shorten the settlement cycle to two business
days. Moreover, the proposed rule change is consistent with the SEC's
proposed amendment to SEA Rule 15c6-1(a) to require standard settlement
no later than T+2. FINRA believes that the proposed rule change will
provide the regulatory certainty to facilitate the industry-led move to
a T+2 settlement cycle.
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\22\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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 rule change makes
changes to rules pertaining to securities settlement and is intended to
facilitate the implementation of the industry-led transition to a T+2
settlement cycle. Moreover, the proposed rule changes are consistent
with the SEC's proposed amendment to SEA Rule 15c6-1(a) to require
standard settlement no later than T+2. Accordingly, FINRA believes that
the proposed changes do not impose any burdens on the industry in
addition to those necessary to implement amendments to SEA Rule 15c6-
1(a) as described and enumerated in the SEC Proposing Release.\23\
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\23\ See supra note 3.
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These conforming changes include changes to rules that specifically
establish the settlement cycle as well as rules that establish time
frames based on settlement dates, including for certain post-settlement
rights and obligations. FINRA believes that the proposed changes set
forth in the filing are necessary to support a standard settlement
cycle across the U.S. for secondary market transactions in equities,
corporate and municipal bonds, unit investment trusts, and financial
instruments composed of these products, among others.\24\ A standard
U.S. settlement cycle for such products is critical for the operation
of fair and orderly markets.
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\24\ See supra note 3.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 16-09 (March 2016). Eight comments were received in response to
the Regulatory Notice.\25\ A copy of the Regulatory Notice is attached
as Exhibit 2a.\26\ A list of commenters is attached as Exhibit 2b and
copies of the comment letters received in response to the Regulatory
Notice are attached as Exhibit 2c.
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\25\ See Letter from Michael Nicholas, Chief Executive Officer,
Bond Dealers of America, to Marcia E. Asquith, Corporate Secretary,
FINRA, dated April 4, 2016 (``BDA''); letter from Stephen E. Roth,
Sutherland Asbill & Brennan LLP on behalf of the Committee of
Annuity Insurers, to Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 4, 2016 (``CAI''); letter from Norman L. Ashkenas, Chief
Compliance Officer, Fidelity Brokerage Services, LLC, and Richard J.
O'Brien, Chief Compliance Officer, National Financial Services, LLC,
to Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4,
2016 (``Fidelity''); letter from David T. Bellaire, Executive Vice
President and General Counsel, Financial Services Institute, to
Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4, 2016
(``FSI''); letter from Martin A. Burns, Chief Industry Operations
Officer, Investment Company Institute, to Marcia E. Asquith,
Corporate Secretary, FINRA, dated April 4, 2016 (``ICI''); letter
from Thomas F. Price, Managing Director, Operations, Technology &
BCP, Securities Industry and Financial Markets Association, to
Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4, 2016
(``SIFMA'') (April 4, 2016); letter from Manisha Kimmel, Chief
Regulatory Officer, Wealth Management, Thomson Reuters, to Marcia E.
Asquith, Corporate Secretary, FINRA, dated April 4, 2016 (``Thomson
Reuters''); and letter from Robert J. McCarthy, Director of
Regulatory Policy, Wells Fargo Advisors, LLC, to Marcia E. Asquith,
Corporate Secretary, FINRA, dated April 4, 2016 (``WFA'').
\26\ The Commission notes that the exhibits referred to are
attached to the filing and not to this Notice.
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Of the eight comment letters received, seven expressed support for
the industry-led move to T+2 stating, among other benefits, that the
move will align U.S. markets with international markets that already
work in the T+2 environment, improve the overall efficiency and
liquidity of the securities markets, and the stability of the financial
system by reducing counterparty risk and pro-cyclical and liquidity
demands, and decreasing clearing capital requirements.\27\ Several
[[Page 95709]]
commenters encouraged FINRA to coordinate with other regulators to make
the necessary regulatory changes to help facilitate the move to a T+2
standard settlement cycle \28\ with two commenters \29\ providing their
views on the proposed amendments to two rules under the FINRA Rule
11800 Series (Close-Out Procedures).
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\27\ BDA, Fidelity, FSI, ICI, SIFMA, Thomson Reuters and WFA.
CAI did not comment on the proposed rule amendments and instead
requested FINRA's ``acknowledgment and confirmation that insurance
securities products, which are currently exempt from the T+3
settlement cycle requirements, will continue to be exempt from the
settlement cycle requirements after the timetable is shortened to
T+2.'' The Commission has granted an exemption for transactions
involving certain insurance contracts from the scope of SEA Rule
15c6-1. See Securities Exchange Act Release No. 35815 (June 6,
1995), 60 FR 30906 (June 12, 1995). FINRA notes that any
modification or revocation of the current exemptions to SEA Rule
15c6-1 rests with the Commission.
\28\ Fidelity, FSI, ICI, and Thomson Reuters.
\29\ BDA and SIFMA.
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FINRA Rule 11810(j)--Failure To Deliver and Liability Notice Procedures
In its comment letter, SIFMA raised a concern with the one-day time
frame in Rule 11810(j)(1)(A), asserting that the requirement for the
delivering member to deliver a liability notice to the receiving member
no later than one business day prior to the latest time and the date of
the offer or other event in order to obtain the protection provided by
the Rule may no longer be appropriate in a T+2 environment in some
situations such as where the delivery obligation is transferred to
another party as a result of continuous net settlement, settlements
outside of the NSCC, and settlements involving a third party that is
not a FINRA member firm. SIFMA noted that NYSE Rule 180 (Failure to
Deliver) includes a similar requirement for NYSE member firms that are
participants in a registered clearing agency to transmit liability
notification through an automated notification service and proposed
amending Rule 11810(j)(1)(A) to omit the reference to a notification
time frame, which would align with NYSE Rule 180.\30\ In the
alternative, SIFMA proposed amending Rule 11810(j)(1)(A) to require
that the liability notice be delivered in a ``reasonable amount of
time'' ahead of the settlement obligation in light of facts and
circumstances. SIFMA maintained that under either proposed amendment to
paragraph (j), the delivering member would be liable for any damages
caused by its failure to deliver in a timely fashion.
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\30\ See NYSE Rule 180 (Failure to Deliver) providing in part
that ``[w]hen the parties to a contract are both participants in a
registered clearing agency which has an automated service for
notifying a failing party of the liability that will be attendant to
a failure to deliver and that contract was to be settled through the
facilities of said registered clearing agency, the transmission of
the liability notification must be accomplished through use of said
automated notification service.'' FINRA notes that NYSE Rule 180
does not address the transmission of the liability notification for
parties to a contract that are not both participants in a registered
clearing agency (or non-participants). The transmission of the
liability notification for non-participants is addressed under NYSE
Rule 282.65 (Failure to Deliver and Liability Notice Procedures).
See supra note 21.
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While FINRA did not initially propose amendments to Rule 11810 for
the T+2 initiative,\31\ in light of SIFMA's concern regarding Rule
11810(j)(1)(A), FINRA is proposing to amend the Rule to provide that,
where both parties to a contract are not participants of a registered
clearing agency with an automated notification service, the receiving
member must send the liability notice to the delivering member as soon
as practicable but not later than two hours prior to the cutoff time
set forth in the instructions on a specific offer or other event to
obtain the protection provided by the Rule.\32\
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\31\ See Regulatory Notice 16-09 (March 2016).
\32\ FINRA expects similar amendments to other comparable SRO
provisions in NYSE Rule 282.65 (Fail to Deliver and Liability Notice
Procedures) and Nasdaq Rule IM-11810 (Buying-in), and NSCC Rules &
Procedures, Procedure X (Execution of Buy-Ins) to address SIFMA's
concern about the one-day notification time frame.
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FINRA Rule 11860 (COD Orders)
Rule 11860(a)(3) requires a member that accepts a COD or POD order
from a customer to deliver to the customer a confirmation not later
than the close of business on T+1. In Regulatory Notice 16-09, FINRA
proposed shortening the confirmation delivery time frame to the close
of business on the date of the trade (``T+0''). In its comment letter,
BDA urged FINRA to consider leaving the requirement for delivering
customer confirmations under Rule 11860(a)(3) unchanged and allow
customer confirmations to continue to be sent T+1 to minimize the
regulatory and compliance costs of the proposed amendment without
limiting the risk-reducing benefits of the shortened settlement cycle.
BDA asserted that shortening confirmation delivery to T+0 would be a
tremendous undertaking for small firms that would need to commit large
amounts of internal resources to change the systems and processes that
are used to deliver confirmations in order to process confirmations on
a T+0 basis.
FINRA has considered the comment and agrees that the proposed
change to T+0 may present significant difficulties for member firms,
particularly small firms. Moreover, FINRA believes that the existing
requirement to deliver customer confirmations on T+1 would still assure
the efficient clearance and settlement of transactions in a T+2
settlement environment. Therefore, in order to remain aligned with the
provisions of other SROs and current industry practices, FINRA has
determined to retain the current T+1 confirmation delivery requirement
under Rule 11860(a)(3).\33\
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\33\ In Regulatory Notice 16-09, FINRA preliminarily identified
Rule 11210(a) (Comparisons or Confirmations) to undergo an amendment
to reflect the T+2 settlement cycle. Rule 11210(a)(1) requires each
party to a transaction, other than a cash transaction, to send a
Uniform Comparison or Confirmation on or before T+1. FINRA proposed
changing the delivery time frame to T+0. While not specifically
referenced by BDA, Rule 11210(a) would raise similar concerns. Thus,
the time frame under Rule 11210(a)(1) for sending a Uniform
Comparison or Confirmation would also remain unchanged at T+1.
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Other Comments
Several commenters conveyed the importance of testing systems and
educating market participants and retail investors on the impacts of a
shorter settlement cycle.\34\ BDA explained that currently, a customer
has five business days to submit payment for purchases of securities in
a cash account or in a margin account before a broker-dealer would
cancel or liquidate the transaction in whole or in part.\35\ BDA
further explained that ``[s]hortening the settlement cycle to T+2 would
automatically reduce the timeframe before a dealer would have to
liquidate an unpaid for transaction to T+4.'' BDA noted that shortening
the settlement cycle by one day may negatively impact retail clients
that still use checks, which may not be sent, received, processed, and
cleared, within the shortened four-day window. BDA expressed that firms
that do a large amount of retail business would need ample time to
communicate the practical impacts on a shortened settlement cycle.
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\34\ BDA, FSI and WFA.
\35\ Federal Reserve Board Regulation T governs, among other
things, the extension of credit by broker-dealers to customers to
pay for the purchase of securities. Regulation T provides that a
customer has one payment period (currently five business days) to
submit payment for purchases of securities in a cash account or in a
margin account. 12 CFR 220.2 (Definitions), 220.4 (Margin Account)
and 220.8 (Cash Account).
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FINRA recognizes that market participants will have to undergo
systemic and procedural changes to implement the shorter payment period
for a securities purchase as part of the ongoing transition to the T+2
framework. As BDA acknowledged, the 2017 timeline should allow firms to
make all the necessary changes to systems that the proposed rule will
require. FINRA further recognizes the importance of educating retail
investors regarding the impact of a shortened settlement cycle and is
committed to
[[Page 95710]]
working with market participants to provide the information necessary
to educate retail investors.
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-2016-047 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-2016-047. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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-2016-047 and should be
submitted on or before January 18, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31308 Filed 12-27-16; 8:45 am]
BILLING CODE 8011-01-P
