
[Federal Register Volume 76, Number 201 (Tuesday, October 18, 2011)]
[Notices]
[Pages 64406-64409]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26858]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65544; File No. SR-NYSEARCA-2011-69]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Adopting the Text 
of the FINRA Rule 7400 Series, the Order Audit Trail System (``OATS'') 
Rules, and Making Certain Conforming Changes

October 12, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 7, 2011, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the self-regulatory 
organization. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act \4\ and Rule 19b-4(f)(6) \5\ thereunder. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt the text of the FINRA Rule 7400 
Series, the Order Audit Trail System (``OATS'') Rules, and make certain 
conforming changes. The text of the proposed rule change is available 
at the Exchange, the Commission's Public Reference Room, and http://www.nyse.com.

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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt the text of the FINRA Rules 7400 
Series, the OATS Rules, and make certain conforming changes. The 
Exchange proposes this rule filing in order to harmonize its 
requirements with FINRA's requirements.\6\
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    \6\ The Exchange's affiliates, New York Stock Exchange LLC 
(``NYSE'') and NYSE Amex LLC (``NYSE Amex''), are adopting 
substantially similar requirements. See SR-NYSE-2011-49 and SR-
NYSEAmex-2011-74. As described below, the proposed rule change would 
also require ETP Holders that are not members of FINRA, which all 
meet the definition of a Proprietary Trading Firm in proposed Rule 
7410(p), to also meet certain OATS requirements.
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Background
    The Commission has recently approved amendments to the FINRA Rule 
7400 Series to extend the OATS recording and reporting requirements to 
all NMS stocks and to exclude certain firms that have limited trading 
activities.\7\ The FINRA Rule 7400 Series imposes obligations on FINRA 
members to record in electronic form and report to FINRA, on a daily 
basis, certain information with respect to orders originated, received, 
transmitted, modified, canceled, or executed by

[[Page 64407]]

members in OTC equity securities and equity securities listed and 
traded on NASDAQ. This information is used by FINRA staff to conduct 
surveillance and investigations of member firms for violations of FINRA 
rules and federal securities laws.
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    \7\ See Securities Exchange Act Release No. 63311 (November 12, 
2010), 75 FR 70757 (November 18, 2010) (SR-FINRA-2010-044) (``FINRA 
Adopting Release'').
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    By extending the OATS requirements to all NMS stocks, all NYSE, 
NYSE Amex LLC, and NYSE Arca, Inc.-listed securities will become 
subject to the OATS requirement beginning October 17, 2011. As noted by 
FINRA in its rule proposal, by capturing OATS information for all NMS 
stocks, FINRA will be able to expand its existing surveillance patterns 
to conduct more comprehensive cross-market surveillance,\8\ which is in 
furtherance of the Exchange's outsourcing of its surveillance and other 
regulatory functions to FINRA pursuant to a Regulatory Services 
Agreement.
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    \8\ Id. at 70758.
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    The Exchange currently does not require its ETP Holders to maintain 
order information pursuant to an order tracking system. However, most 
ETP Holders are also FINRA members (``Dual Members'') and thus are 
currently subject to FINRA's OATS requirements.
Proposed Rule Change
    Beginning October 17, 2011, Dual Members will become subject to the 
new FINRA OATS requirements by virtue of their status as FINRA members. 
Accordingly, by that date, Dual Members will need to update their 
existing OATS systems to accommodate all NMS stocks, including NYSE, 
NYSE Amex, and NYSE Arca-listed securities.\9\ The Exchange proposes to 
harmonize its rules with the FINRA OATS requirements. In particular, 
the Exchange's proposal to adopt the OATS requirements will not require 
Dual Members to program their OATS systems any differently than they 
are already required to do so as a result of the FINRA OATS expansion. 
Moreover, because FINRA provides regulatory services on behalf of the 
Exchange, Dual Members would only need to report OATS information to 
FINRA once, both to meet the FINRA and proposed Exchange OATS 
requirements.
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    \9\ FINRA has been actively working with all of its members, 
including Dual Members, to provide technical specifications for 
FINRA members to update their OATS systems to be compliant by the 
October 17, 2011 deadline. See e.g., http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/TechnicalSpecifications/.
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    Some ETP Holders that are not members of FINRA are already members 
of NASDAQ, which has certain OATS obligations for proprietary trading 
firms under the NASDAQ Rule 6950 Series. The proposed OATS obligations 
for such ETP Holders are substantially similar to the existing NASDAQ 
OATS requirements for the same firms.
    The Exchange proposes to adopt the text of the FINRA Rule 7400 
Series as the NYSE Arca Equities Rule 7400 Series, with certain 
changes. The Exchange believes that by adopting the OATS rules, it will 
further promote cross-market surveillance and enhance FINRA's ability 
to conduct surveillance and investigations for the Exchange under the 
Regulatory Services Agreement.
    The proposed NYSE Arca Equities Rule 7400 Series consists of NYSE 
Arca Equities Rules 7410 through 7470. Proposed NYSE Arca Equities Rule 
7410 includes certain definitions to harmonize the NYSE Arca Equities 
Rule 7400 Series with the FINRA Rule 7400 Series. Proposed NYSE Arca 
Equities Rule 7410 will include all of the definitions of FINRA Rule 
7410, with a few additions.\10\ In particular, FINRA Rule 7410(g) and 
(m) cross reference NYSE rules for the definitions of index arbitrage 
and program trading. Because the NYSE will be deleting the rules that 
include those definitions, the Exchange proposes to include the text of 
those definitions, unchanged, in proposed NYSE Arca Equities Rule 
7410(g) and (m). In addition, similar to NASDAQ Rule 6951(n), the 
Exchange proposes to add a definition of a proprietary trading firm in 
NYSE Arca Equities Rule 7410(p). Finally, for clarity, the Exchange 
proposes to add a definition of ``Exchange System,'' to mean the 
service provided by the Exchange that provides for the automated 
execution and reporting of transactions in NMS stocks.
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    \10\ The Exchange does not propose to adopt FINRA Rule 
7410(o)(2) because the Exchange does not have any ETP Holders that 
were approved as a FINRA member pursuant to NASD IM-1013-1 or NASD 
IM-1013-2, which are NASD interpretive materials applicable to NYSE 
and NYSE Amex Floor-based member organizations only.
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    Proposed NYSE Arca Equities Rule 7420 establishes the applicability 
of the rule to all ETP Holders and their associated persons \11\ and 
all executed or unexecuted orders for all NMS stocks traded on the 
Exchange.
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    \11\ The term ``Associated Person'' is defined in NYSE Arca 
Equities Rule 1.1(f) as a person who is a partner, officer, 
director, member of a limited liability company, trustee of a 
business trust, employee of an ETP Holder or any person directly or 
indirectly controlling, controlled by or under common control with 
an ETP Holder.
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    Proposed NYSE Arca Equities Rule 7430, which is substantially the 
same as FINRA Rule 7430, requires ETP Holders to synchronize and 
maintain their business clocks that are used for purposes of recording 
the date and time of any event that must be recorded pursuant to the 
NYSE Arca Equities rules with reference to a time source designated by 
the Exchange.
    Proposed NYSE Arca Equities Rule 7440, which is based on Nasdaq 
Rule 6954, incorporates the FINRA Rule 7440 order data recording 
requirements. FINRA Rule 7440 requires members to record specified 
order information, including order origination and receipt information 
and order transmittal information, in a format specified by FINRA. 
Proposed NYSE Arca Equities Rule 7440 makes clear that pursuant to NYSE 
Arca Equities Rule 0 and the Exchange's Regulatory Services Agreement 
with FINRA, FINRA will capture order information on behalf of the 
Exchange and that FINRA Rules 7420 through 7460 will be construed as 
NYSE Arca Equities Rules 7420 through 7460 for compliance purposes. As 
such, complying with FINRA Rule 7440 and submitting OATS reports to 
FINRA will meet the requirements of proposed NYSE Arca Equities Rule 
7440; Dual Members will not need to make separate submissions to the 
Exchange. Proposed NYSE Arca Equities Rule 7440 requires ETP Holders to 
assign and enter a unique order identifier to all orders that are 
electronically transmitted to the Exchange System. Dual Members already 
use such unique order identifiers when submitting orders to FINRA; 
thus, the proposed rule change would not impose new or different 
requirements than currently exist with respect to them.
    As with proposed NYSE Arca Equities Rule 7440, proposed NYSE Arca 
Equities Rule 7450 requires ETP Holders to comply with the FINRA Rule 
7450 order data transmission requirements as if FINRA Rule 7450 were 
part of the Exchange's rules. Accordingly, Dual Members who meet the 
FINRA order data submission requirements will also be meeting the 
Exchange order data transmission requirements. Similar to Nasdaq Rule 
6955, proposed NYSE Arca Equities Rule 7450 will require Proprietary 
Trading Firms to comply with the order data transmission requirements 
only when they receive a request from the Exchange, i.e., FINRA, to 
submit order information.
    Proposed NYSE Arca Equities Rule 7460, which is substantially the 
same as FINRA Rule 7460, states that a violation of the OATS Rules is a 
violation of NYSE Arca Equities Rule 2010.
    Finally, proposed NYSE Arca Equities Rule 7470 establishes the 
exemptions to the order recording and data transmission requirements 
for manual

[[Page 64408]]

orders if the exemption is consistent with the protection of investors 
and the public interest, subject to certain criteria. The exemption is 
limited to a period of two years; however, subsequent exemptions may be 
requested. This proposed rule is also substantially the same as FINRA 
Rule 7470.
    The Exchange proposes several technical changes to FINRA's OATS 
rule text. First, for consistency with Exchange rules, the Exchange 
proposes to (i) change all references from ``members'' to ``ETP 
Holders'' and from ``FINRA'' or ``NASDAQ'' to ``the Exchange,'' \12\ 
respectively, (ii) add or modify the definitions for ``Exchange 
System,'' ``Proprietary Trading Firm,'' ``Index Arbitrage,'' and 
``Program Trading,'' as described above and (iii) delete references to 
``OTC equity security,'' which do [sic] not trade at the Exchange and 
thus is a moot reference. Second, rather than adopt the full text of 
FINRA Rules 7440 and 7450, which detail the recording of order 
information and order data transmission requirements, the Exchange 
modeled its proposed Rules 7440 and 7450 on NASDAQ's Rules 6954 and 
6955, which instead cross-reference such requirements.\13\ Third, 
consistent with a recent FINRA rule filing, the Exchange has adopted 
the July 10, 2015 extension date in NYSE Arca Equities Rule 7470.\14\
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    \12\ The Exchange notes that pursuant to NYSE Arca Equities Rule 
0, references to the ``Exchange'' in its rules may also refer to 
FINRA. The Exchange will advise ETP Holders via an Information Memo 
whether a reference to the Exchange in the proposed Rule 7400 Series 
will require an ETP Holder to report directly to the Exchange or to 
FINRA on the Exchange's behalf. However, the Exchange anticipates 
that all OATS reporting will be submitted directly to FINRA, on 
behalf of the Exchange. To the extent that the Exchange or any of 
its facilities collect OATS data on behalf of ETP Holders, such 
information will be used for regulatory purposes only.
    \13\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10-131).
    \14\ See Securities Exchange Act Release No. 64717 (June 21, 
2011), 76 FR 37384 (June 27, 2011) (SR-FINRA-2011-029).
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    The Exchange proposes to implement the NYSE Arca Equities Rule 7400 
Series at the same time that FINRA implements its Rule 7400 Series 
amendments with respect to Dual Members \15\ and on January 31, 2012 
with respect to ETP Holders that are not FINRA members. The Exchange 
proposes to give additional time to such ETP Holders because most of 
them have not been subject to OATS requirements in the past and may 
need additional time to program their systems in order to comply with 
the proposed rule change.
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    \15\ FINRA has announced that it will begin to phase-in the new 
recording and reporting requirements under its Rule 7400 Series 
beginning on October 17, 2011. See SR-FINRA-2011-055. FINRA also has 
announced that members may elect to report all NMS stocks beginning 
on October 17, 2011; however, only those securities required to be 
reported within each phase will be subject to all OATS matching 
processing, with all NMS stocks being reported by November 28, 2011. 
See http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OATSReport/P124073.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\16\ in general, and 
furthers the objectives of Section 6(b)(5),\17\ in particular, in that 
it is 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 facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
Specifically, the Exchange believes that the proposed rule change 
supports the objectives of the Act by providing greater harmonization 
between NYSE Arca Equities Rules and FINRA Rules. The changes that Dual 
Members will be required to make for the FINRA OATS requirements will 
meet the requirements of the Exchange's proposed adoption of OATS. The 
Exchange further believes that the proposed rule change will promote 
cross-market surveillance and enhance FINRA's ability to conduct 
surveillance and investigations for the Exchange under the Regulatory 
Services Agreement with respect to all ETP Holders, including non-FINRA 
members. To the extent the Exchange has proposed changes that differ 
from the FINRA version of the Rules, such changes are generally 
technical in nature and do not change the substance of the proposed 
NYSE Arca Equities Rules.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6)(iii) \19\ thereunder.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6)(iii). Rule 19b-4(f)(6)(iii) requires 
a self-regulatory organization to give the Commission written notice 
of its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time, as designated by the Commission. The 
Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\21\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission is waiving the 30-day operative period.\22\ The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest as 
the waiver will allow the Exchange's OATS requirements to be in place 
on the same date as the new FINRA OATS requirements. The Commission 
notes that the FINRA OATS requirements, which will be phased-in 
beginning October 17, 2011, would already apply to Dual Members.\23\ 
Further, for the small number of ETP Holders that are not

[[Page 64409]]

FINRA members, the Exchange has represented that they have received 
ample notice of the proposed change and will be given additional time, 
until January 31, 2012, to comply with the proposed rule change. 
Finally, the Commission notes that the proposed rule change is 
consistent with FINRA and Nasdaq rules previously approved by the 
Commission. The Commission, therefore, designates the proposed rule 
change to be operative upon filing with the Commission.
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    \22\ For purposes only of waiving the operative delay of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \23\ See supra note 15.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSEARCA-2011-69 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEARCA-2011-69. This 
file number should be included on the subject line if e-mail 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEARCA-2011-69 and should be submitted on or before November 8, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26858 Filed 10-17-11; 8:45 am]
BILLING CODE 8011-01-P


