Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change To Adopt FINRA Rules 6151 (Disclosure of Order Routing Information for NMS Securities) and 6470 (Disclosure of Order Routing Information for OTC Equity Securities), 14653-14657 [2023-04786]
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Federal Register / Vol. 88, No. 46 / Thursday, March 9, 2023 / Notices
ddrumheller on DSK120RN23PROD with NOTICES1
Commission meeting. [Note: Pursuant to
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Friday, April 7, 2023
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1:00 p.m.–6:00 p.m.: Preparation of
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representatives of the nuclear industry.
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Dated: March 6, 2023.
Russell E. Chazell,
Federal Advisory Committee Management
Officer, Office of the Secretary.
[FR Doc. 2023–04847 Filed 3–8–23; 8:45 am]
BILLING CODE 7590–01–P
POSTAL SERVICE
Product Change—Priority Mail, FirstClass Package Service & Parcel Select
Negotiated Service Agreement
Postal ServiceTM.
ACTION: Notice.
AGENCY:
The Postal Service gives
notice of filing a request with the Postal
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domestic shipping services contract to
the list of Negotiated Service
SUMMARY:
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14653
Agreements in the Mail Classification
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DATES: Date of required notice: March 9,
2023.
FOR FURTHER INFORMATION CONTACT:
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SUPPLEMENTARY INFORMATION: The
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2023, it filed with the Postal Regulatory
Commission a Request of the United
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Mail, First-Class Package Service &
Parcel Select Contract 7 to Competitive
Product List. Documents are available at
www.prc.gov, Docket Nos. MC2023–116,
CP2023–119.
Sarah Sullivan,
Attorney, Ethics & Legal Compliance.
[FR Doc. 2023–04826 Filed 3–8–23; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97039; File No. SR–FINRA–
2022–031]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule
Change To Adopt FINRA Rules 6151
(Disclosure of Order Routing
Information for NMS Securities) and
6470 (Disclosure of Order Routing
Information for OTC Equity Securities)
March 3, 2023.
On November 16, 2022, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
require members to (i) publish order
routing reports for orders in OTC Equity
Securities, and (ii) submit their order
routing reports for both OTC Equity
Securities and NMS Securities to FINRA
for publication on the FINRA website.
The proposed rule change was
published for comment in the Federal
Register on December 6, 2022.3 On
January 18, 2023, the Commission
extended the time period within which
to approve, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 96415
(November 30, 2022), 87 FR 74672 (‘‘Notice’’).
2 17
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Federal Register / Vol. 88, No. 46 / Thursday, March 9, 2023 / Notices
disapprove the proposed rule change to
March 6, 2023.4 The Commission
received four comment letters on the
proposed rule change, one of which was
received after the Extension.5 Under
Section 19(b)(3)(C) of the Exchange
Act,6 the Commission is hereby
instituting proceedings to determine
whether to approve or disapprove File
Number SR–FINRA–2022–031.
I. Summary of the Proposed Rule
Change and Comments Received
ddrumheller on DSK120RN23PROD with NOTICES1
In 2018, the Commission amended
SEC Rule 606(a) of Regulation NMS,7 to
enhance required disclosures from
broker-dealers about their order routing
practices for NMS Securities,8 including
enhanced disclosures for non-directed
orders in NMS stocks that are submitted
on a ‘‘held’’ basis in order to better
allow ‘‘customers—and retail investors
in particular—that submit orders to
their broker-dealers [to] be better able to
assess the quality of order handling
services provided by their brokerdealers’’ and to allow customers to
determine ‘‘whether their broker-dealers
are effectively managing potential
conflicts of interest.’’ 9
As described in more detail in the
Notice, FINRA proposes to adopt FINRA
Rule 6470 (Disclosure of Order Routing
Information for NMS Securities), which
imposes disclosure requirements for
unlisted stocks that are generally
aligned with the requirements of SEC
Rule 606(a) disclosures, but with
modifications to account for differences
between the over-the-counter (‘‘OTC’’)
markets and the market for NMS
Securities. In addition, to improve the
accessibility of these new disclosures, as
well as SEC Rule 606(a) reports, FINRA
proposes to adopt FINRA Rule 6151
(Disclosure of Order Routing
Information for OTC Equity Securities)
to require members to submit their order
routing reports for NMS Securities to
4 See Securities Exchange Act Release No. 96699,
88 FR 4260 (January 24, 2023) (‘‘Extension’’).
5 All comments received by the Commission on
the proposed rule change are available at: https://
www.sec.gov/comments/sr-finra-2022-031/
srfinra2022031.htm.
6 15 U.S.C. 78s(b)(3)(C).
7 17 CFR 242.606(a).
8 ‘‘NMS Securities’’ include any security or class
of securities for which transaction reports are
collected, processed, and made available to an
effective transaction reporting plan, or an effective
national market system plan for reporting
transactions in listed options. See 17 CFR
242.600(b).
9 See Securities Exchange Act Release No. 84528,
58423 (November 2, 2018), 83 FR 58338 (November
19, 2018). A broker-dealer must attempt to execute
a ‘‘held’’ order immediately, while a ‘‘not held’’
order instead provides a broker-dealer with price
and time discretion. Id. at 58344. See also Notice,
supra note 3, at 74672 n.5.
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FINRA for centralized publication on
the FINRA website.
Proposed FINRA Rule 6470, entitled
‘‘Disclosure of Order Routing
Information for OTC Equity Securities,’’
would require the publication of order
routing disclosures for OTC Equity
Securities.10 Specifically, FINRA Rule
6470(a) would require every member to
make publicly available for each
calendar quarter a report on its routing
of non-directed orders in OTC Equity
Securities that are submitted on a held
basis during that quarter, broken down
by calendar month, and keep such
report posted on an internet website that
is free and readily accessible to the
public for a period of three years from
the initial date of posting on the internet
website (‘‘OTC Equity Security
reports’’).11 These reports would be
required to be separated into three
sections: (i) domestic OTC Equity
Securities; (ii) American Depository
Receipts (‘‘ADRs’’) and foreign
ordinaries that are OTC Equity
Securities; and (iii) Canadian-listed
securities trading in the United States as
OTC Equity Securities.12 In addition,
FINRA Rule 6470(a) would specify that
the new OTC Equity Security reports
10 See Notice, supra note 3, at 74672 n.8. FINRA
Rule 6420(f) defines an ‘‘OTC Equity Security’’ as
any equity security that is not an NMS stock, other
than a Restricted Equity Security. FINRA Rule
6420(k) defines a ‘‘Restricted Equity Security’’ as
any equity security that meets the definition of
‘‘restricted security’’ as contained in Securities Act
Rule 144(a)(3).
11 Proposed FINRA Rule 6470 would apply to
‘‘every member,’’ but FINRA notes that the focus of
the proposed disclosures is held orders from
customers in OTC Equity Securities, and some
members may not engage in any activities involving
held orders from customers in OTC Equity
Securities. See Notice, supra note 3, at 74673 n.9.
If a member does not accept any orders in OTC
Equity Securities from customers during a given
calendar quarter (whether held or not held), such
member would not be required to publish a report
under Rule 6470 for that quarter. Id. Similarly, a
member that accepted only not held orders in OTC
Equity Securities from customers—but no held
orders in OTC Equity Securities from customers—
during a given calendar quarter would not be
required to publish a report for that quarter. Id.
Further, FINRA states that if a member accepted
orders in OTC Equity Securities (whether held, not
held, or both) only from other broker-dealers, but
not from customers, during a given calendar
quarter, such member would not be required to
publish a report for that quarter. Id.
12 FINRA states that to provide for consistency
across member reports, FINRA will publish a list of
the OTC Equity Security symbols that fall under
each category, and members would be required to
publish reports in a manner consistent with such
list. See Notice, supra note 3, at 74673. FINRA
states that it will provide information in the
Regulatory Notice announcing the effective date
regarding where members may access the list of
OTC Equity Security symbols that FINRA will
maintain on its website. Id. at 74674 n.11. FINRA
also notes that these categories differ from the NMS
Securities required to be reported for SEC Rule
606(a) reports, which it believes is not relevant to
the OTC market. Id.
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must be made available using the most
recent versions of the XML schema and
associated PDF renderer as published on
the FINRA website,13 and FINRA Rule
6470(d) would require the reports to be
made publicly available within one
month after the end of the quarter
addressed in the report.14
Pursuant to FINRA Rule 6470(a), the
new OTC Equity Security reports would
be required to include the information
specified in paragraphs (a)(1) through
(4) of proposed FINRA Rule 6470,
specifically:
• the percentage of total orders 15 for
the section that were not held orders
and held orders, and the percentage of
held orders for the section that were
non-directed orders; 16
13 FINRA states that it will publish the technical
specifications for the XML schema and associated
PDF renderer on its website for member use in
generating the new reports. See Notice, supra note
3, at 74673 n.12. FINRA expects that, subject to the
differences between the SEC Rule 606(a) reports
and the OTC Equity Security reports, the XML
schema and associated PDF renderer published by
FINRA would be substantially similar to those
published by the SEC for the SEC Rule 606(a)
reports. Id. FINRA believes this requirement would
ensure that reports are generated and published in
standardized machine-readable and humanreadable forms, which would benefit investors by
permitting the public to more easily analyze and
compare the OTC Equity Security reports across
members, as well as to more easily perform
combined analysis of both SEC Rule 606(a) and
OTC Equity Security reports. Id. at 74763.
14 FINRA states that it understands that some
introducing firms route all of their orders in OTC
Equity Securities to one or more clearing firms for
further routing to other venues for execution. See
Notice, supra note 3 at 74673 n.10. FINRA states
that the Commission has provided guidance that,
where an introducing firm routes all of its covered
orders to one or more clearing firms for further
routing and execution and the clearing firm in fact
makes the routing decision, the introducing firm
generally may comply with the order routing
disclosure requirements by: (i) disclosing its
relationship with the clearing firm(s) on its website
that includes any payment for order flow received
by the introducing firm, and (ii) adopting the
clearing firm’s disclosures by reference, provided
that the introducing firm has examined the report
and does not have reason to believe it materially
misrepresents the order routing practices. Id.
FINRA states that it intends to provide parallel
guidance with respect to proposed FINRA Rule
6470. Id.
15 FINRA states that ‘‘total orders’’ would include
all orders from customers for the section, including
both directed and non-directed orders from
customers. See Notice, supra note 3, at 74673 n.14.
16 FINRA states that for purposes of the proposed
disclosures, a ‘‘non-directed order’’ would mean
any order from a customer other than a directed
order. See Notice, supra note 3, at 74673–74 n.15.
FINRA further states that consistent with the
definition of ‘‘directed order’’ under Regulation
NMS, a ‘‘directed order’’ would mean an order from
a customer that the customer specifically instructed
the member to route to a particular venue for
execution. See id.; 17 CFR 242.600(b). FINRA notes
that, similar to the definition of ‘‘customer’’ under
SEC Rule 600(b)(23) of Regulation NMS, a
‘‘customer’’ is defined under FINRA rules to
exclude a broker or dealer. See FINRA Rule
0160(b)(4). Orders from other broker-dealers would
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• the identity of the ten venues to
which the largest number of total nondirected held orders for the section were
routed for execution 17 and of any venue
to which five percent or more of nondirected held orders for the section were
routed for execution, and the percentage
of total non-directed held orders for the
section routed to the venue; 18
• for each identified venue, the net
aggregate amount of any payment for
order flow received, payment from any
profit-sharing relationship received,
transaction fees paid, and transaction
rebates received, both as a total dollar
amount and per order, for all nondirected held orders for the section; and
• a discussion of the material aspects
of the member’s relationship with each
identified venue, including, without
limitation, a description of any
arrangement for payment for order flow
and any profit-sharing relationship and
a description of any terms of such
arrangements, written or oral, that may
influence a member’s order routing
decision including, among other things:
(i) incentives for equaling or exceeding
an agreed upon order flow volume
threshold, such as additional payments
or a higher rate of payment;
disincentives for failing to meet an
agreed upon minimum order flow
threshold, such as lower payments or
the requirement to pay a fee; (ii)
volume-based tiered payment
schedules; and (iii) agreements
regarding the minimum amount of order
flow that the member would send to a
venue.19
therefore be excluded from the proposed
disclosures. See Notice, supra note 3, at 74673–74
n.15.
17 FINRA states that, consistent with the SEC’s
approach to SEC Rule 606(a), a ‘‘venue’’ would be
defined broadly to cover any market center or any
other person or entity to which a member routes
orders for execution. See Notice, supra note 3, at
74674 n.16. Accordingly, for purposes of proposed
FINRA Rule 6470, where an alternative trading
system (‘‘ATS’’) offers both automatic order
execution and order delivery functionality, the ATS
should be identified as the venue only when the
ATS provides order execution. Conversely, for
purposes of proposed FINRA Rule 6470, in cases
where the ATS instead provides order delivery, the
separate market center to which the orders are
delivered—e.g., a market maker or other ATS—
should be identified as the venue where the order
was routed for execution. Id.
18 Proposed FINRA Rule 6470(b) would provide
that a member is not required to identify execution
venues that received less than 5% of non-directed
held orders for a section of the member’s OTC
Equity Securities report, provided that the member
has identified the top execution venues that in the
aggregate received at least 90% of the member’s
total non-directed held orders for the section.
FINRA states that this provision is consistent with
exemptive relief that the Commission has provided
with respect to SEC Rule 606(a) reports. See Notice,
supra note 3, at 74674 n.17.
19 FINRA states that the types of arrangements
referenced above are not an exhaustive list of terms
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To make both the existing SEC Rule
606(a) reports and the new OTC Equity
Security reports more accessible for
regulators, investors and others seeking
to analyze and compare the data, FINRA
is proposing to require that members
provide the reports to FINRA for central
publication on the FINRA website.
Proposed FINRA Rule 6151 would
require every member that is required to
publish a report pursuant to SEC Rule
606(a) of Regulation NMS to provide the
report to FINRA, in a manner prescribed
by FINRA, within the same time and in
the same formats that such report is
required to be made publicly available
pursuant to SEC Rule 606(a). In
combination with proposed FINRA Rule
6470(d), which would require members
to provide the report required by
paragraph (a) of FINRA Rule 6470
within one month after the end of the
quarter addressed in the report in such
a manner as may be prescribed by
FINRA, FINRA would be able to publish
both SEC Rule 606(a) and OTC Equity
Security reports on its public website,
free of charge and without usage
restrictions.20
FINRA states that it undertook an
‘‘economic impact assessment’’ to
of payment for order flow arrangements or profitsharing relationships that may influence a brokerdealer’s order routing decision that would be
required to be disclosed. See Notice, supra note 3,
at 74674 n.18. For example, if a broker-dealer
receives a discount on executions in other securities
or some other advantage in directing order flow in
a specific security to a venue, or if a broker-dealer
receives equity rights in a venue in exchange for
directing order flow there, then all terms of those
arrangements would also be required to be
disclosed. Id. Similarly, if a broker-dealer receives
variable payments or discounts based on order
types and the number of orders sent to a venue,
such arrangements would be required to be
disclosed. Id. However, FINRA notes that these are
only examples, and a member would be required to
disclose any other material aspects of its
relationship with each identified venue regardless
of whether a particular example is listed in the
proposed rule text or otherwise discussed in this
proposed rule change. Id.
20 See Notice, supra note 3, at 74674–75. FINRA
states that the SEC has provided guidance that
introducing firms may comply with SEC Rule
606(a) by incorporating their clearing firm(s) reports
in specified circumstances, and FINRA intends to
provide similar guidance with respect to the OTC
Equity Security reports required under proposed
FINRA Rule 6470. Id. at 74675 n.25. To facilitate
centralized access to the reports, such introducing
firms must provide FINRA with a list of their
clearing firm(s) and the hyperlink to the web page
where they disclose their clearing firm
relationship(s) and adopt the clearing firm(s)’s
reports by reference. Id. Each introducing firm
relying on this guidance would be required to
provide this information to FINRA upon
implementation of the proposed rule change and to
update FINRA if the information previously
provided changes. Id. This information will enable
FINRA to provide investors with relevant
information for all firms, including introducing
firms incorporating clearing firm reports by
reference, on FINRA’s website. Id.
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14655
analyze the potential economic impacts
of the proposed rule change, including
potential costs, benefits, and
distributional and competitive effects,
relative to the current baseline.21 In this
analysis, FINRA analyzed the number of
firms quoting, executing trades and
routing orders in OTC Equity Securities
over specific time periods, as well as the
number of symbols traded per firm and
average dollar volume of trading per
symbol and per firm. In addition,
FINRA published the proposed rule
change in Regulatory Notice 21–35
(October 2021) and received five
comments in response.22 FINRA
provided these comments, as well as a
summary of these comments and its
responses in its filing with the
Commission.23
FINRA argues in support of its
proposal that the proposed requirement
for members to publish order routing
disclosures for OTC Equity Securities,
similar to what is available under SEC
rules for NMS Securities, would provide
valuable information for investors and
other market participants, academics,
regulators and others regarding order
routing practices in the OTC market,
thereby enhancing the protection of
investors and the public interest.24 In
particular, FINRA believes that these
new disclosures will enable investors to
better assess the quality of their brokerdealers’ order handling services for
these securities, provide more
information on the financial incentives
that may affect their broker-dealers’
routing decisions, and allow clearing
firm(s)’s reports by reference.25 FINRA
states that this information will enable
FINRA to provide investors with
relevant information for all firms which
would allow investors to better evaluate
whether their broker-dealers are
effectively managing potential conflicts
of interest.26 FINRA also argues that the
proposed requirements for members to
send their disclosure reports for both
NMS Securities and OTC Equity
Securities to FINRA for centralized
publication on the FINRA website will
make this important information more
accessible for regulators, investors,
academics and others seeking to analyze
and compare the data, particularly
across firms, and would facilitate the
21 See
Notice, supra note 3, at 74675–78.
received by FINRA are available on
FINRA’s website at https://www.finra.org/rulesguidance/notices/21-35#comments.
23 See Notice, supra note 3, at 74678–80.
24 See Notice, supra n. 3 at 74675.
25 See id.
26 See id.
22 Comments
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ability of FINRA and the SEC to review
the data for regulatory purposes.27
The Commission received two
comment letters that were broadly
supportive of the proposed rule change
and greater transparency on routing of
orders in generally.28 One commenter
submitted two letters and was
supportive of some aspects of the rule
proposal,29 but expressed concerns
about and opposed other aspects of the
proposal.30
That commenter states that the
proposed FINRA rule, like SEC Rule
606(a), applies when a reporting firm
receives and routes a customer order to
a second firm, and the second firm
(‘‘routing firm’’) can route the order to
various execution venues but itself
cannot execute the order (‘‘routing firm
scenario’’). The commenter also states
that this requires the reporting firm to
report the net fees paid or received
between the routing firm and the venue
in the SEC Rule 606(a) tables or FINRA’s
OTC Equity Security Routing Public
Report as applicable, and material
aspects disclosures.31 The commenter
notes that the proposed FINRA rule, like
SEC Rule 606(a), does not require the
reporting of the net fees paid or received
between the reporting broker-dealer and
the routing broker in the OTC Equity
Security Routing Public Report tables.32
The commenter argues that this
approach obscures relevant information
from retail customers, because, to
27 See
id.
letters to Vanessa Countryman, Secretary,
Commission, from G.P., dated November 30, 2022
(‘‘GP Letter’’); Daniel Lambden, dated December 5,
2022 (‘‘Lambden Letter’’).
29 FIF is supportive of some aspects of the rule
proposal, including: FINRA’s proposal to maintain
the same quarterly reporting timeframe for OTC
Equity Security reports as applies for SEC Rule
606(a) reporting; FINRA’s chosen OTC equity
security reporting categories; FINRA’s assertion that
it will publish and maintain a file of which symbols
are included in each OTC equity category and make
this file accessible to all industry members without
charge (FIF further recommends that the symbol file
be made available to industry members prior to the
first day of each quarter, because requiring industry
members to process daily updates to a reportable
symbol list would significantly increase the
reporting burden for firms); FINRA’s approach of
not requiring the OTC Equity Security reports to be
broken out by order type; FINRA’s proposal to
require reporting of payments per executed order
rather than per share; FINRA’s decision to limit the
OTC Equity Security reports to non-directed held
orders; and proposed FINRA Rule 6470(b) which
would provide a limited exception to venue
reporting requirements in proposed FINRA Rule
6470(a)(2). See FIF Letter at 7–9.
30 See FIF Letter and letter to Vanessa
Countryman, Secretary, Commission, from Howard
Meyerson, Managing Director, Financial
Information Forum, dated December 20, 2022 (‘‘FIF
Letter’’) and dated February 3, 2023 (‘‘FIF Letter
II’’).
31 See FIF Letter at 2.
32 See id.
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28 See
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understand the financial inducements
faced by a reporting firm, the relevant
information is the payments between
the reporting firm and the routing
firm.33 The commenter also argues that
this results in reported data that is not
comparable across broker-dealers.34 The
commenter also states that this
approach requires firms to report on
financial arrangements to which they
might not be a party, that the rules do
not impose any obligation on the
routing firm to provide this data to the
reporting firm, and a reporting firm
cannot effectively validate the data
relating to routing firm scenarios.35 The
commenter further states that the rule
filing does not explicitly discuss the
costs for such reporting.36 The
commenter further suggests that if
FINRA adopts this reporting, FINRA
Rule 6470 should be revised to address
the routing scenario.37 The commenter
also states this reporting scenario
should not apply for routes to foreign
routing firms.
The commenter argues that there are
a significant number of OTC stocks that
have a limited number of available
execution venues or only have one or
two market makers, and that there is a
potential risk that investors viewing the
report for these stocks would see a high
percentage of order flow being routed to
one or two venues without appropriate
context of the limited choices available
to the reporting firm, and that some
firms with lower trading volume in OTC
equities could have routing
relationships with a limited number of
market makers.38 The commenter
suggests that FINRA should identify this
as a factor for investors to consider
when reviewing a broker-dealer’s OTC
Equity Security report.39 The
commenter also states that FINRA
should consider whether certain
categories of data that firms are required
to report in the OTC Equity Security
reports could be obtained by FINRA
from the consolidated audit trail
(‘‘CAT’’).40 The commenter further
states that the rule filing does not
provide clear guidance on reporting
scenarios relating to trading on OTC
Link ATS and raises several
33 See
id.
id. at 3–4.
35 See id. at 5.
36 See id. at 5.
37 See id. at 6.
38 See id.
39 See id.
40 FIF Letter at 6. The CAT is operated pursuant
a national market system plan approved by the
Commission pursuant to Section 11A of the
Exchange Act and the rules and regulations
thereunder. See Securities Exchange Act Release
No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23,
2016).
34 See
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
hypothetical situations where it believes
OTC Link ATS should be reported as
the execution venue, as opposed to
where the execution actually took
place.41
The commenter also raises concerns
about implementation of the proposal
and argues that a longer implementation
period is appropriate to ensure that
industry members will have sufficient
time to properly implement the planned
reporting changes.42 The commenter
states that it supports centralized
publication of SEC Rule 606(a) reports
and the OTC routing reports, but argues
that if FINRA will publish these reports
that firms should no longer be required
to separately publish these reports on
their own websites, and instead firms
should be required to provide a link
from its public website to the applicable
section of the FINRA website.43
II. Proceedings To Determine Whether
To Approve or Disapprove SR–FINRA–
2022–031 and Grounds for Disapproval
Under Consideration
The Commission hereby institutes
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act 44 to
determine whether the proposed rule
change should be approved or
disapproved. Institution of proceedings
is appropriate at this time in view of the
legal and policy issues raised by the
proposal. Institution of proceedings
does not indicate that the Commission
has reached any conclusions with
respect to any of the issues involved.
Rather, the Commission seeks and
encourages interested persons to
provide additional comment on the
proposed rule change to inform the
Commission’s analysis of whether to
approve or disapprove the proposed
rule change.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act,45 the Commission is
41 FIF
Letter at 6 and FIF Letter II at 2–4.
also states that the Commission has not
provided market participants an adequate period of
time to comment on the rule proposal. FIF Letter
at 9–10. FIF requests that any implementation
timetable should run from the date that FINRA
publishes technical specifications, schemas,
interpretive FAQs and other applicable
documentation. Id. at 9.
43 FIF Letter at 7. FIF also recommends that
FINRA consider creating a database with structured
firm routing report data that industry members and
other market participants could access through
automated queries. Id.
44 15 U.S.C. 78s(b)(2)(B).
45 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the
Exchange Act also provides that proceedings to
determine whether to disapprove a proposed rule
change must be concluded within 180 days of the
date of publication of notice of the filing of the
proposed rule change. See id. The time for
conclusion of the proceedings may be extended for
up to 60 days if the Commission finds good cause
for such extension and publishes its reasons for so
42 FIF
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Federal Register / Vol. 88, No. 46 / Thursday, March 9, 2023 / Notices
providing notice of the grounds for
possible disapproval under
consideration. As described above,
FINRA has proposed to require
members to publish order routing
reports for orders in OTC Equity
Securities, and submit their order
routing reports for both OTC Equity
Securities and NMS Securities to FINRA
for publication on the FINRA website.
The Commission is instituting
proceedings to allow for additional
analysis of, and input from commenters
with respect to, the consistency of the
proposal with the Section 15A(b)(6) of
the Exchange Act,46 which requires,
among other things, that FINRA rules
must be designed to prevent fraudulent
and manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest.
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III. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written view of interested
persons concerning whether the
proposal is consistent with Section
15A(b)(6) or any other provision of the
Exchange Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.47
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by March 30, 2023. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by April 13, 2023.
The Commission asks that
commenters address the sufficiency of
finding, or if the self-regulatory organization
consents to the longer period. See id.
46 15 U.S.C. 78o–3(b)(6).
47 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
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FINRA’s statements in support of the
proposal and any other issues raised by
the proposed rule change under the
Exchange Act. In this regard, the
Commission seeks commenters’ views
regarding the application of the
proposed rule in the routing firm
scenario.
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–2022–031 on the subject line.
14657
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–04786 Filed 3–8–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97042; File No. SR–
CboeEDGX–2023–016]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule
Paper Comments
March 3, 2023.
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 1,
2023, Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
All submissions should refer to File
Number SR–FINRA–2022–031. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (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 website 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. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2022–031 should be submitted on or
before March 30, 2023. Rebuttal
comments should be submitted by April
13, 2023.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) proposes to
amend its Fee Schedule. The text of the
proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/)
[sic], at the Exchange’s Office of the
Secretary, 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, 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
48 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 88, Number 46 (Thursday, March 9, 2023)]
[Notices]
[Pages 14653-14657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04786]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97039; File No. SR-FINRA-2022-031]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule Change To Adopt FINRA Rules 6151
(Disclosure of Order Routing Information for NMS Securities) and 6470
(Disclosure of Order Routing Information for OTC Equity Securities)
March 3, 2023.
On November 16, 2022, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to require members to (i) publish
order routing reports for orders in OTC Equity Securities, and (ii)
submit their order routing reports for both OTC Equity Securities and
NMS Securities to FINRA for publication on the FINRA website. The
proposed rule change was published for comment in the Federal Register
on December 6, 2022.\3\ On January 18, 2023, the Commission extended
the time period within which to approve, disapprove the proposed rule
change, or institute proceedings to determine whether to approve or
[[Page 14654]]
disapprove the proposed rule change to March 6, 2023.\4\ The Commission
received four comment letters on the proposed rule change, one of which
was received after the Extension.\5\ Under Section 19(b)(3)(C) of the
Exchange Act,\6\ the Commission is hereby instituting proceedings to
determine whether to approve or disapprove File Number SR-FINRA-2022-
031.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 96415 (November 30,
2022), 87 FR 74672 (``Notice'').
\4\ See Securities Exchange Act Release No. 96699, 88 FR 4260
(January 24, 2023) (``Extension'').
\5\ All comments received by the Commission on the proposed rule
change are available at: https://www.sec.gov/comments/sr-finra-2022-031/srfinra2022031.htm.
\6\ 15 U.S.C. 78s(b)(3)(C).
---------------------------------------------------------------------------
I. Summary of the Proposed Rule Change and Comments Received
In 2018, the Commission amended SEC Rule 606(a) of Regulation
NMS,\7\ to enhance required disclosures from broker-dealers about their
order routing practices for NMS Securities,\8\ including enhanced
disclosures for non-directed orders in NMS stocks that are submitted on
a ``held'' basis in order to better allow ``customers--and retail
investors in particular--that submit orders to their broker-dealers
[to] be better able to assess the quality of order handling services
provided by their broker-dealers'' and to allow customers to determine
``whether their broker-dealers are effectively managing potential
conflicts of interest.'' \9\
---------------------------------------------------------------------------
\7\ 17 CFR 242.606(a).
\8\ ``NMS Securities'' include any security or class of
securities for which transaction reports are collected, processed,
and made available to an effective transaction reporting plan, or an
effective national market system plan for reporting transactions in
listed options. See 17 CFR 242.600(b).
\9\ See Securities Exchange Act Release No. 84528, 58423
(November 2, 2018), 83 FR 58338 (November 19, 2018). A broker-dealer
must attempt to execute a ``held'' order immediately, while a ``not
held'' order instead provides a broker-dealer with price and time
discretion. Id. at 58344. See also Notice, supra note 3, at 74672
n.5.
---------------------------------------------------------------------------
As described in more detail in the Notice, FINRA proposes to adopt
FINRA Rule 6470 (Disclosure of Order Routing Information for NMS
Securities), which imposes disclosure requirements for unlisted stocks
that are generally aligned with the requirements of SEC Rule 606(a)
disclosures, but with modifications to account for differences between
the over-the-counter (``OTC'') markets and the market for NMS
Securities. In addition, to improve the accessibility of these new
disclosures, as well as SEC Rule 606(a) reports, FINRA proposes to
adopt FINRA Rule 6151 (Disclosure of Order Routing Information for OTC
Equity Securities) to require members to submit their order routing
reports for NMS Securities to FINRA for centralized publication on the
FINRA website.
Proposed FINRA Rule 6470, entitled ``Disclosure of Order Routing
Information for OTC Equity Securities,'' would require the publication
of order routing disclosures for OTC Equity Securities.\10\
Specifically, FINRA Rule 6470(a) would require every member to make
publicly available for each calendar quarter a report on its routing of
non-directed orders in OTC Equity Securities that are submitted on a
held basis during that quarter, broken down by calendar month, and keep
such report posted on an internet website that is free and readily
accessible to the public for a period of three years from the initial
date of posting on the internet website (``OTC Equity Security
reports'').\11\ These reports would be required to be separated into
three sections: (i) domestic OTC Equity Securities; (ii) American
Depository Receipts (``ADRs'') and foreign ordinaries that are OTC
Equity Securities; and (iii) Canadian-listed securities trading in the
United States as OTC Equity Securities.\12\ In addition, FINRA Rule
6470(a) would specify that the new OTC Equity Security reports must be
made available using the most recent versions of the XML schema and
associated PDF renderer as published on the FINRA website,\13\ and
FINRA Rule 6470(d) would require the reports to be made publicly
available within one month after the end of the quarter addressed in
the report.\14\
---------------------------------------------------------------------------
\10\ See Notice, supra note 3, at 74672 n.8. FINRA Rule 6420(f)
defines an ``OTC Equity Security'' as any equity security that is
not an NMS stock, other than a Restricted Equity Security. FINRA
Rule 6420(k) defines a ``Restricted Equity Security'' as any equity
security that meets the definition of ``restricted security'' as
contained in Securities Act Rule 144(a)(3).
\11\ Proposed FINRA Rule 6470 would apply to ``every member,''
but FINRA notes that the focus of the proposed disclosures is held
orders from customers in OTC Equity Securities, and some members may
not engage in any activities involving held orders from customers in
OTC Equity Securities. See Notice, supra note 3, at 74673 n.9. If a
member does not accept any orders in OTC Equity Securities from
customers during a given calendar quarter (whether held or not
held), such member would not be required to publish a report under
Rule 6470 for that quarter. Id. Similarly, a member that accepted
only not held orders in OTC Equity Securities from customers--but no
held orders in OTC Equity Securities from customers--during a given
calendar quarter would not be required to publish a report for that
quarter. Id. Further, FINRA states that if a member accepted orders
in OTC Equity Securities (whether held, not held, or both) only from
other broker-dealers, but not from customers, during a given
calendar quarter, such member would not be required to publish a
report for that quarter. Id.
\12\ FINRA states that to provide for consistency across member
reports, FINRA will publish a list of the OTC Equity Security
symbols that fall under each category, and members would be required
to publish reports in a manner consistent with such list. See
Notice, supra note 3, at 74673. FINRA states that it will provide
information in the Regulatory Notice announcing the effective date
regarding where members may access the list of OTC Equity Security
symbols that FINRA will maintain on its website. Id. at 74674 n.11.
FINRA also notes that these categories differ from the NMS
Securities required to be reported for SEC Rule 606(a) reports,
which it believes is not relevant to the OTC market. Id.
\13\ FINRA states that it will publish the technical
specifications for the XML schema and associated PDF renderer on its
website for member use in generating the new reports. See Notice,
supra note 3, at 74673 n.12. FINRA expects that, subject to the
differences between the SEC Rule 606(a) reports and the OTC Equity
Security reports, the XML schema and associated PDF renderer
published by FINRA would be substantially similar to those published
by the SEC for the SEC Rule 606(a) reports. Id. FINRA believes this
requirement would ensure that reports are generated and published in
standardized machine-readable and human-readable forms, which would
benefit investors by permitting the public to more easily analyze
and compare the OTC Equity Security reports across members, as well
as to more easily perform combined analysis of both SEC Rule 606(a)
and OTC Equity Security reports. Id. at 74763.
\14\ FINRA states that it understands that some introducing
firms route all of their orders in OTC Equity Securities to one or
more clearing firms for further routing to other venues for
execution. See Notice, supra note 3 at 74673 n.10. FINRA states that
the Commission has provided guidance that, where an introducing firm
routes all of its covered orders to one or more clearing firms for
further routing and execution and the clearing firm in fact makes
the routing decision, the introducing firm generally may comply with
the order routing disclosure requirements by: (i) disclosing its
relationship with the clearing firm(s) on its website that includes
any payment for order flow received by the introducing firm, and
(ii) adopting the clearing firm's disclosures by reference, provided
that the introducing firm has examined the report and does not have
reason to believe it materially misrepresents the order routing
practices. Id. FINRA states that it intends to provide parallel
guidance with respect to proposed FINRA Rule 6470. Id.
---------------------------------------------------------------------------
Pursuant to FINRA Rule 6470(a), the new OTC Equity Security reports
would be required to include the information specified in paragraphs
(a)(1) through (4) of proposed FINRA Rule 6470, specifically:
the percentage of total orders \15\ for the section that
were not held orders and held orders, and the percentage of held orders
for the section that were non-directed orders; \16\
---------------------------------------------------------------------------
\15\ FINRA states that ``total orders'' would include all orders
from customers for the section, including both directed and non-
directed orders from customers. See Notice, supra note 3, at 74673
n.14.
\16\ FINRA states that for purposes of the proposed disclosures,
a ``non-directed order'' would mean any order from a customer other
than a directed order. See Notice, supra note 3, at 74673-74 n.15.
FINRA further states that consistent with the definition of
``directed order'' under Regulation NMS, a ``directed order'' would
mean an order from a customer that the customer specifically
instructed the member to route to a particular venue for execution.
See id.; 17 CFR 242.600(b). FINRA notes that, similar to the
definition of ``customer'' under SEC Rule 600(b)(23) of Regulation
NMS, a ``customer'' is defined under FINRA rules to exclude a broker
or dealer. See FINRA Rule 0160(b)(4). Orders from other broker-
dealers would therefore be excluded from the proposed disclosures.
See Notice, supra note 3, at 74673-74 n.15.
---------------------------------------------------------------------------
[[Page 14655]]
the identity of the ten venues to which the largest number
of total non-directed held orders for the section were routed for
execution \17\ and of any venue to which five percent or more of non-
directed held orders for the section were routed for execution, and the
percentage of total non-directed held orders for the section routed to
the venue; \18\
---------------------------------------------------------------------------
\17\ FINRA states that, consistent with the SEC's approach to
SEC Rule 606(a), a ``venue'' would be defined broadly to cover any
market center or any other person or entity to which a member routes
orders for execution. See Notice, supra note 3, at 74674 n.16.
Accordingly, for purposes of proposed FINRA Rule 6470, where an
alternative trading system (``ATS'') offers both automatic order
execution and order delivery functionality, the ATS should be
identified as the venue only when the ATS provides order execution.
Conversely, for purposes of proposed FINRA Rule 6470, in cases where
the ATS instead provides order delivery, the separate market center
to which the orders are delivered--e.g., a market maker or other
ATS--should be identified as the venue where the order was routed
for execution. Id.
\18\ Proposed FINRA Rule 6470(b) would provide that a member is
not required to identify execution venues that received less than 5%
of non-directed held orders for a section of the member's OTC Equity
Securities report, provided that the member has identified the top
execution venues that in the aggregate received at least 90% of the
member's total non-directed held orders for the section. FINRA
states that this provision is consistent with exemptive relief that
the Commission has provided with respect to SEC Rule 606(a) reports.
See Notice, supra note 3, at 74674 n.17.
---------------------------------------------------------------------------
for each identified venue, the net aggregate amount of any
payment for order flow received, payment from any profit-sharing
relationship received, transaction fees paid, and transaction rebates
received, both as a total dollar amount and per order, for all non-
directed held orders for the section; and
a discussion of the material aspects of the member's
relationship with each identified venue, including, without limitation,
a description of any arrangement for payment for order flow and any
profit-sharing relationship and a description of any terms of such
arrangements, written or oral, that may influence a member's order
routing decision including, among other things: (i) incentives for
equaling or exceeding an agreed upon order flow volume threshold, such
as additional payments or a higher rate of payment; disincentives for
failing to meet an agreed upon minimum order flow threshold, such as
lower payments or the requirement to pay a fee; (ii) volume-based
tiered payment schedules; and (iii) agreements regarding the minimum
amount of order flow that the member would send to a venue.\19\
---------------------------------------------------------------------------
\19\ FINRA states that the types of arrangements referenced
above are not an exhaustive list of terms of payment for order flow
arrangements or profit-sharing relationships that may influence a
broker-dealer's order routing decision that would be required to be
disclosed. See Notice, supra note 3, at 74674 n.18. For example, if
a broker-dealer receives a discount on executions in other
securities or some other advantage in directing order flow in a
specific security to a venue, or if a broker-dealer receives equity
rights in a venue in exchange for directing order flow there, then
all terms of those arrangements would also be required to be
disclosed. Id. Similarly, if a broker-dealer receives variable
payments or discounts based on order types and the number of orders
sent to a venue, such arrangements would be required to be
disclosed. Id. However, FINRA notes that these are only examples,
and a member would be required to disclose any other material
aspects of its relationship with each identified venue regardless of
whether a particular example is listed in the proposed rule text or
otherwise discussed in this proposed rule change. Id.
---------------------------------------------------------------------------
To make both the existing SEC Rule 606(a) reports and the new OTC
Equity Security reports more accessible for regulators, investors and
others seeking to analyze and compare the data, FINRA is proposing to
require that members provide the reports to FINRA for central
publication on the FINRA website. Proposed FINRA Rule 6151 would
require every member that is required to publish a report pursuant to
SEC Rule 606(a) of Regulation NMS to provide the report to FINRA, in a
manner prescribed by FINRA, within the same time and in the same
formats that such report is required to be made publicly available
pursuant to SEC Rule 606(a). In combination with proposed FINRA Rule
6470(d), which would require members to provide the report required by
paragraph (a) of FINRA Rule 6470 within one month after the end of the
quarter addressed in the report in such a manner as may be prescribed
by FINRA, FINRA would be able to publish both SEC Rule 606(a) and OTC
Equity Security reports on its public website, free of charge and
without usage restrictions.\20\
---------------------------------------------------------------------------
\20\ See Notice, supra note 3, at 74674-75. FINRA states that
the SEC has provided guidance that introducing firms may comply with
SEC Rule 606(a) by incorporating their clearing firm(s) reports in
specified circumstances, and FINRA intends to provide similar
guidance with respect to the OTC Equity Security reports required
under proposed FINRA Rule 6470. Id. at 74675 n.25. To facilitate
centralized access to the reports, such introducing firms must
provide FINRA with a list of their clearing firm(s) and the
hyperlink to the web page where they disclose their clearing firm
relationship(s) and adopt the clearing firm(s)'s reports by
reference. Id. Each introducing firm relying on this guidance would
be required to provide this information to FINRA upon implementation
of the proposed rule change and to update FINRA if the information
previously provided changes. Id. This information will enable FINRA
to provide investors with relevant information for all firms,
including introducing firms incorporating clearing firm reports by
reference, on FINRA's website. Id.
---------------------------------------------------------------------------
FINRA states that it undertook an ``economic impact assessment'' to
analyze the potential economic impacts of the proposed rule change,
including potential costs, benefits, and distributional and competitive
effects, relative to the current baseline.\21\ In this analysis, FINRA
analyzed the number of firms quoting, executing trades and routing
orders in OTC Equity Securities over specific time periods, as well as
the number of symbols traded per firm and average dollar volume of
trading per symbol and per firm. In addition, FINRA published the
proposed rule change in Regulatory Notice 21-35 (October 2021) and
received five comments in response.\22\ FINRA provided these comments,
as well as a summary of these comments and its responses in its filing
with the Commission.\23\
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\21\ See Notice, supra note 3, at 74675-78.
\22\ Comments received by FINRA are available on FINRA's website
at https://www.finra.org/rules-guidance/notices/21-35#comments.
\23\ See Notice, supra note 3, at 74678-80.
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FINRA argues in support of its proposal that the proposed
requirement for members to publish order routing disclosures for OTC
Equity Securities, similar to what is available under SEC rules for NMS
Securities, would provide valuable information for investors and other
market participants, academics, regulators and others regarding order
routing practices in the OTC market, thereby enhancing the protection
of investors and the public interest.\24\ In particular, FINRA believes
that these new disclosures will enable investors to better assess the
quality of their broker-dealers' order handling services for these
securities, provide more information on the financial incentives that
may affect their broker-dealers' routing decisions, and allow clearing
firm(s)'s reports by reference.\25\ FINRA states that this information
will enable FINRA to provide investors with relevant information for
all firms which would allow investors to better evaluate whether their
broker-dealers are effectively managing potential conflicts of
interest.\26\ FINRA also argues that the proposed requirements for
members to send their disclosure reports for both NMS Securities and
OTC Equity Securities to FINRA for centralized publication on the FINRA
website will make this important information more accessible for
regulators, investors, academics and others seeking to analyze and
compare the data, particularly across firms, and would facilitate the
[[Page 14656]]
ability of FINRA and the SEC to review the data for regulatory
purposes.\27\
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\24\ See Notice, supra n. 3 at 74675.
\25\ See id.
\26\ See id.
\27\ See id.
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The Commission received two comment letters that were broadly
supportive of the proposed rule change and greater transparency on
routing of orders in generally.\28\ One commenter submitted two letters
and was supportive of some aspects of the rule proposal,\29\ but
expressed concerns about and opposed other aspects of the proposal.\30\
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\28\ See letters to Vanessa Countryman, Secretary, Commission,
from G.P., dated November 30, 2022 (``GP Letter''); Daniel Lambden,
dated December 5, 2022 (``Lambden Letter'').
\29\ FIF is supportive of some aspects of the rule proposal,
including: FINRA's proposal to maintain the same quarterly reporting
timeframe for OTC Equity Security reports as applies for SEC Rule
606(a) reporting; FINRA's chosen OTC equity security reporting
categories; FINRA's assertion that it will publish and maintain a
file of which symbols are included in each OTC equity category and
make this file accessible to all industry members without charge
(FIF further recommends that the symbol file be made available to
industry members prior to the first day of each quarter, because
requiring industry members to process daily updates to a reportable
symbol list would significantly increase the reporting burden for
firms); FINRA's approach of not requiring the OTC Equity Security
reports to be broken out by order type; FINRA's proposal to require
reporting of payments per executed order rather than per share;
FINRA's decision to limit the OTC Equity Security reports to non-
directed held orders; and proposed FINRA Rule 6470(b) which would
provide a limited exception to venue reporting requirements in
proposed FINRA Rule 6470(a)(2). See FIF Letter at 7-9.
\30\ See FIF Letter and letter to Vanessa Countryman, Secretary,
Commission, from Howard Meyerson, Managing Director, Financial
Information Forum, dated December 20, 2022 (``FIF Letter'') and
dated February 3, 2023 (``FIF Letter II'').
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That commenter states that the proposed FINRA rule, like SEC Rule
606(a), applies when a reporting firm receives and routes a customer
order to a second firm, and the second firm (``routing firm'') can
route the order to various execution venues but itself cannot execute
the order (``routing firm scenario''). The commenter also states that
this requires the reporting firm to report the net fees paid or
received between the routing firm and the venue in the SEC Rule 606(a)
tables or FINRA's OTC Equity Security Routing Public Report as
applicable, and material aspects disclosures.\31\ The commenter notes
that the proposed FINRA rule, like SEC Rule 606(a), does not require
the reporting of the net fees paid or received between the reporting
broker-dealer and the routing broker in the OTC Equity Security Routing
Public Report tables.\32\ The commenter argues that this approach
obscures relevant information from retail customers, because, to
understand the financial inducements faced by a reporting firm, the
relevant information is the payments between the reporting firm and the
routing firm.\33\ The commenter also argues that this results in
reported data that is not comparable across broker-dealers.\34\ The
commenter also states that this approach requires firms to report on
financial arrangements to which they might not be a party, that the
rules do not impose any obligation on the routing firm to provide this
data to the reporting firm, and a reporting firm cannot effectively
validate the data relating to routing firm scenarios.\35\ The commenter
further states that the rule filing does not explicitly discuss the
costs for such reporting.\36\ The commenter further suggests that if
FINRA adopts this reporting, FINRA Rule 6470 should be revised to
address the routing scenario.\37\ The commenter also states this
reporting scenario should not apply for routes to foreign routing
firms.
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\31\ See FIF Letter at 2.
\32\ See id.
\33\ See id.
\34\ See id. at 3-4.
\35\ See id. at 5.
\36\ See id. at 5.
\37\ See id. at 6.
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The commenter argues that there are a significant number of OTC
stocks that have a limited number of available execution venues or only
have one or two market makers, and that there is a potential risk that
investors viewing the report for these stocks would see a high
percentage of order flow being routed to one or two venues without
appropriate context of the limited choices available to the reporting
firm, and that some firms with lower trading volume in OTC equities
could have routing relationships with a limited number of market
makers.\38\ The commenter suggests that FINRA should identify this as a
factor for investors to consider when reviewing a broker-dealer's OTC
Equity Security report.\39\ The commenter also states that FINRA should
consider whether certain categories of data that firms are required to
report in the OTC Equity Security reports could be obtained by FINRA
from the consolidated audit trail (``CAT'').\40\ The commenter further
states that the rule filing does not provide clear guidance on
reporting scenarios relating to trading on OTC Link ATS and raises
several hypothetical situations where it believes OTC Link ATS should
be reported as the execution venue, as opposed to where the execution
actually took place.\41\
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\38\ See id.
\39\ See id.
\40\ FIF Letter at 6. The CAT is operated pursuant a national
market system plan approved by the Commission pursuant to Section
11A of the Exchange Act and the rules and regulations thereunder.
See Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR
84696 (Nov. 23, 2016).
\41\ FIF Letter at 6 and FIF Letter II at 2-4.
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The commenter also raises concerns about implementation of the
proposal and argues that a longer implementation period is appropriate
to ensure that industry members will have sufficient time to properly
implement the planned reporting changes.\42\ The commenter states that
it supports centralized publication of SEC Rule 606(a) reports and the
OTC routing reports, but argues that if FINRA will publish these
reports that firms should no longer be required to separately publish
these reports on their own websites, and instead firms should be
required to provide a link from its public website to the applicable
section of the FINRA website.\43\
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\42\ FIF also states that the Commission has not provided market
participants an adequate period of time to comment on the rule
proposal. FIF Letter at 9-10. FIF requests that any implementation
timetable should run from the date that FINRA publishes technical
specifications, schemas, interpretive FAQs and other applicable
documentation. Id. at 9.
\43\ FIF Letter at 7. FIF also recommends that FINRA consider
creating a database with structured firm routing report data that
industry members and other market participants could access through
automated queries. Id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2022-031 and Grounds for Disapproval Under Consideration
The Commission hereby institutes proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \44\ to determine whether the proposed
rule change should be approved or disapproved. Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposal. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change to inform the Commission's analysis of whether to
approve or disapprove the proposed rule change.
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\44\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\45\ the
Commission is
[[Page 14657]]
providing notice of the grounds for possible disapproval under
consideration. As described above, FINRA has proposed to require
members to publish order routing reports for orders in OTC Equity
Securities, and submit their order routing reports for both OTC Equity
Securities and NMS Securities to FINRA for publication on the FINRA
website. The Commission is instituting proceedings to allow for
additional analysis of, and input from commenters with respect to, the
consistency of the proposal with the Section 15A(b)(6) of the Exchange
Act,\46\ which requires, among other things, that FINRA rules must be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
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\45\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Exchange
Act also provides that proceedings to determine whether to
disapprove a proposed rule change must be concluded within 180 days
of the date of publication of notice of the filing of the proposed
rule change. See id. The time for conclusion of the proceedings may
be extended for up to 60 days if the Commission finds good cause for
such extension and publishes its reasons for so finding, or if the
self-regulatory organization consents to the longer period. See id.
\46\ 15 U.S.C. 78o-3(b)(6).
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III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
view of interested persons concerning whether the proposal is
consistent with Section 15A(b)(6) or any other provision of the
Exchange Act, or the rules and regulations thereunder. Although there
do not appear to be any issues relevant to approval or disapproval that
would be facilitated by an oral presentation of views, data, and
arguments, the Commission will consider, pursuant to Rule 19b-4, any
request for an opportunity to make an oral presentation.\47\
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\47\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by March 30, 2023. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 13,
2023.
The Commission asks that commenters address the sufficiency of
FINRA's statements in support of the proposal and any other issues
raised by the proposed rule change under the Exchange Act. In this
regard, the Commission seeks commenters' views regarding the
application of the proposed rule in the routing firm scenario.
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 [email protected]. Please include
File Number SR-FINRA-2022-031 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-2022-031. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2022-031 should be submitted on or
before March 30, 2023. Rebuttal comments should be submitted by April
13, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-04786 Filed 3-8-23; 8:45 am]
BILLING CODE 8011-01-P
