
[Federal Register Volume 78, Number 29 (Tuesday, February 12, 2013)]
[Notices]
[Pages 9963-9966]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68842; File No. SR-FINRA-2013-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Require 
Members To Report OTC Equity Transactions as Soon As Practicable, But 
No Later Than 10 Seconds, Following Execution

February 6, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 1, 2013, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA trade reporting rules to require 
that members report over-the-counter (``OTC'') transactions in NMS 
stocks and OTC Equity Securities,\3\ and cancellations of such 
transactions, to FINRA as soon as practicable, but no later than 10 
seconds, following execution (or cancellation, as applicable).
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    \3\ OTC transactions in NMS stocks, as defined in SEC Rule 
600(b) of Regulation NMS, are reported through the Alternative 
Display Facility (``ADF'') or a Trade Reporting Facility (``TRF''), 
and transactions in ``OTC Equity Securities,'' as defined in FINRA 
Rule 6420 (i.e., non-NMS stocks such as OTC Bulletin Board and OTC 
Market securities), are reported through the OTC Reporting Facility 
(``ORF''). The ADF, TRFs and ORF are collectively referred to herein 
as the ``FINRA Facilities.''
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    FINRA trade reporting rules require that members report OTC 
transactions in NMS stocks and OTC Equity Securities that are executed 
during the hours that the FINRA Facilities are open within 30 seconds 
of execution.\4\ In addition, members must report the cancellation of a 
trade within 30 seconds of the time of cancellation if the trade is 
both executed and cancelled on the same day during normal market 
hours.\5\ Under current FINRA guidance, members are expected to report 
transactions as soon as practicable and should not withhold trade 
reports, e.g., by programming their systems to delay reporting until 
the last permissible second.\6\
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    \4\ See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and 
6622(a).
     The TRFs and ORF are open between 8:00 a.m. and 8:00 p.m., and 
the ADF is open between 8:00 a.m. and 6:30 p.m.
    \5\ See, e.g., FINRA Rules 6282(j)(2)(A), 6380A(g)(2)(A), 
6380B(f)(2)(A) and 6622(f)(2)(A).
     Members must report all cancellations of previously reported 
trades to FINRA; however, where the trade is executed or canceled 
outside of normal market hours, the 30-second requirement does not 
apply to the reporting of the cancellation.
    \6\ See Regulatory Notice 10-24 (April 2010).
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    FINRA is proposing to amend its trade reporting rules to require 
members to report OTC trades in NMS stocks and OTC Equity Securities as 
soon as practicable, but no later than 10 seconds, following execution 
and to report trade cancellations as soon as practicable, but no later 
than 10 seconds, after the time of cancellation.\7\ Under the proposed 
rule change, all transactions not reported within 10 seconds will be 
marked late (unless expressly subject to a different reporting 
requirement \8\ or excluded from the trade reporting rules altogether). 
FINRA understands that there will be isolated instances where a member 
is unable to report trades within the time period prescribed by rule, 
and FINRA will continue to look for a pattern and practice \9\ of 
unexcused late trade reporting before taking action against a member. 
Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when 
there are ``repeated reports of executions submitted after the required 
time period without reasonable justification or exceptional 
circumstances.'' The rules also provide that ``[e]xceptional 
circumstances will be determined on a case-by-case basis and may 
include instances of system failure by a member or service bureau, or 
unusual market conditions, such as extreme volatility in a security, or 
in the market as a whole.''
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    \7\ FINRA also is proposing conforming changes to replace the 
reference to 30 seconds with 10 seconds in the rules relating to the 
reporting of stop stock and ``prior reference price'' transactions. 
See FINRA Rules 6282(a)(4), 6380A(a)(5), 6380B(a)(5) and 6622(a)(5).
    \8\ For example, the proposed rule change will not amend the 
reporting requirements applicable to transactions in Restricted 
Equity Securities, as defined in Rule 6420, effected under 
Securities Act Rule 144A, which transactions currently are not 
subject to the 30-second reporting requirement. See Rule 6622(a)(3).
    \9\ The Commission notes that FINRA Rules refer to ``a pattern 
or practice.'' See, e.g., FINRA Rule 6282 (emphasis added).
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    FINRA also is proposing to adopt Supplementary Material to clarify 
the requirement that members report trades and trade cancellations ``as 
soon as

[[Page 9964]]

practicable.'' Specifically, the proposed Supplementary Material 
provides that members must adopt policies and procedures reasonably 
designed to comply with this requirement and must implement systems 
that commence the trade reporting process without delay upon execution 
(or cancellation, as applicable). Where a member has such reasonably 
designed policies, procedures and systems in place, the member 
generally will not be viewed as violating the ``as soon as 
practicable'' requirement because of delays in trade reporting that are 
due to external factors where the member does not purposely intend to 
delay the reporting of the trade. The proposed Supplementary Material 
also expressly prohibits members from purposely withholding trade 
reports, e.g., by programming their systems to delay reporting until 
the last permissible second. FINRA notes that members that engage in a 
pattern and practice \10\ of unexcused late reporting (i.e., reporting 
later than 10 seconds after execution) may be charged with violating 
FINRA rules, notwithstanding that they have policies and procedures 
that contemplate commencing the trade reporting process without delay.
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    \10\ Id.
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    Timely reporting has become even more critical with the 
implementation of the Single Stock Circuit Breaker trading pause rules 
and the upcoming implementation of the NMS Plan to Address 
Extraordinary Market Volatility (or ``Limit Up/Limit Down'') this year. 
For example, the price bands under Limit Up/Limit Down will be a 
certain percentage away from a ``reference price,'' which is generally 
the average price of regular way, last-sale eligible trades for a 
security over the immediately preceding five-minute period. All regular 
way, last sale eligible trades reported within the time frame 
prescribed by rule (i.e., that are not reported late) will be included 
in the calculation of the reference price.\11\ Given how quickly the 
price for a security can change, a trade executed and reported in 30 
seconds potentially may no longer reflect the current market and could 
improperly impact the calculation of reference prices or, at an 
extreme, trigger a single stock circuit breaker (which will remain in 
effect for certain NMS stocks during the phased implementation of Limit 
Up/Limit Down). In addition, trade reports received 30 seconds after 
execution are more likely to appear to market participants as 
violations of Limit Up/Limit Down (i.e., executions outside of the 
price bands), as well as the Regulation NMS Order Protection Rule 
(i.e., trading at a price worse than the best displayed bid or offer, 
commonly referred to as a ``trade-through'').\12\ Even though the vast 
majority of OTC trades are reported within 10 seconds today,\13\ market 
participants have no certainty whether a particular trade reflects the 
immediate current market. This is because today, when FINRA 
disseminates OTC trades to the consolidated ``tapes,'' \14\ it does not 
distinguish between a trade reported one second after execution and a 
trade reported 30 seconds after execution, as both are considered 
timely under FINRA rules.
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    \11\ By its terms, Limit Up/Limit Down will be implemented on a 
one-year pilot basis in two phases. Phase I is currently scheduled 
to begin on April 8, 2013 in select NMS stocks. Although the 
proposed rule change, if approved, will not be in place at the 
commencement of Phase I, FINRA believes it ultimately will be 
beneficial to the operation of Limit Up/Limit Down.
    \12\ For example, if a trade is not disseminated until 30 
seconds after execution, the best displayed market could have 
changed dramatically between the time of execution and ultimate 
dissemination of the trade, giving the appearance of a trade-through 
of the then-current market.
    \13\ For example, during the period of July 9 through July 13, 
2012, 99.96% of last-sale eligible trades were reported within 10 
seconds of execution (with a breakdown of 99.97% of OTC trades in 
NMS stocks and 99.04% of OTC trades in OTC Equity Securities).
    \14\ Trades reported for public dissemination purposes are 
transmitted to three ``tapes'' based on the listing venue of the 
security: New York Stock Exchange securities (Tape A), NYSE Arca, 
NYSE MKT and other regional exchange securities (Tape B), and Nasdaq 
Stock Market securities (Tape C). Tape A and Tape B are governed by 
the Consolidated Tape Association Plan (CTA Plan) and Tape C is 
governed by the Nasdaq Unlisted Trading Privileges Plan (UTP Plan).
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    FINRA believes that reducing the reporting time and codifying 
current guidance requiring that members report trades as soon as 
practicable and not hold back trade reports is necessary to promote 
consistent and timely reporting by all members. In addition, FINRA 
believes that the proposed rule change will help ensure that members 
are attentive to transaction reporting standards.
    FINRA believes that very few members would be unable to comply with 
the proposed rule change today. For the one-week period cited in 
footnote 11 herein, 288 member firms reported one or more OTC trades to 
FINRA. Of these firms, only 12 were unable to report any of their 
trades within 10 seconds. Of the 25,251,098 last sale eligible trades 
reported during this period, the total number of trades reported by 
these 12 firms was 21 (0.0000831% of the total number of trades). In 
addition, there were only 22 member firms that were unable to report at 
least 50% of their last sale eligible trades within 10 seconds (this 
number includes the 12 firms mentioned above). The total number of 
trades reported by these 22 firms was 899 (0.0035602% of the total 
number of trades). FINRA contacted more than half of the 22 firms to 
discuss their trade reporting protocols and the potential impact that 
the proposed rule change might have on them. The majority of the firms 
that FINRA spoke to indicated that their business model is not to 
execute and report trades, but instead to route most of their orders to 
other firms for execution,\15\ while a few other firms indicated that, 
as a more general matter, they do not trade equities very frequently. 
Accordingly, FINRA believes that the burden of the proposed rule change 
should be minimal, particularly since, as noted above, FINRA looks to a 
pattern and practice \16\ of late trade reporting and typically does 
not charge a member for isolated instances of late reporting.
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    \15\ FINRA notes that members, particularly smaller members, 
that route their orders to another member for handling or execution 
do not have the trade reporting obligation under FINRA rules. For 
transactions between members, the ``executing party'' (which is 
defined as the member that receives an order for handling or 
execution or is presented an order against its quote, does not 
subsequently re-route the order, and executes the transaction) has 
the obligation to report the trade to FINRA. See Rules 6282(b), 
6380A(b), 6380B(b) and 6622(b); see also Regulatory Notice 09-08 
(January 2009).
    \16\ See, supra note 9.
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    FINRA originally considered a requirement that members report 
transactions ``immediately,'' but no later than 10 seconds, following 
execution. FINRA staff discussed the proposed rule change with several 
of its industry advisory committees in developing its approach. While 
these committees were generally supportive of the proposal, they 
indicated the need for (1) a sufficient implementation period so that 
members can make any necessary systems changes (as noted above, FINRA 
is proposing a 120 to 180 day implementation period following 
Commission approval); (2) revision of the standard from ``immediately'' 
to ``as soon as practicable'' and a request to provide additional 
clarity on the interpretation and application of the ``as soon as 
practicable'' requirement (FINRA further clarified this as part of the 
proposed Supplementary Material); and (3) additional guidance for 
situations where delays could result from queuing of data into the 
FINRA Facilities (given that the vast majority of trades today are 
reported within 10 seconds, FINRA does not believe that the proposed 
rule change will cause any queuing issues into the FINRA

[[Page 9965]]

Facilities). Finally, the committees asked for guidance on how the rule 
would apply to late reporting during periods of market stress, e.g., 
high volatility days such as the Russell index rebalancing, where 
compliance rates could be impacted. As noted above, extraordinary 
market volatility is taken into consideration currently, and would 
continue to be considered under the proposed reporting time frame, in 
determining whether exceptional circumstances exist to excuse late 
trade reporting. FINRA also notes that its staff reviewed members' 
compliance rates on the date of Russell index rebalancing in 2012 and 
determined that there was no appreciable decrease in the percentage of 
trades reported within 10 seconds of execution on that day.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice. As discussed above, a small number of members 
currently are unable to report trades within 10 seconds and may need to 
make systems changes to comply with the proposed rule change. While the 
vast majority of members have automated their trade reporting systems 
and are already reporting within the proposed time frame, even these 
members may need to make programming adjustments (e.g., to modify the 
trigger for appending the late modifier, as required under FINRA rules, 
from 30 seconds to 10 seconds after execution of the trade). To allow 
sufficient time to make the necessary systems changes, FINRA is 
proposing that the implementation date will be between 120 and 180 days 
following the date of Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\17\ 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. For the reasons discussed above, FINRA believes that 
the proposed rule change will enhance market transparency and price 
discovery, promote more consistent trade reporting by members and 
facilitate implementation and further the goals of the Single Stock 
Circuit Breaker trading pause rules and the NMS Plan to Address 
Extraordinary Market Volatility.
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    \17\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes the vast 
majority of firms that engage in equities transactions have automated 
their trade reporting systems so that the proposed rule change will not 
have an economic impact.\18\ Furthermore, FINRA believes that the 
proposed rule change will not have a competitive impact on smaller 
members that may rarely have a trade reporting obligation, given the 
policies and procedures approach to determining compliance with the 
``as soon as practicable'' requirement, and the pattern and practice 
\19\ nature of FINRA's late trade reporting surveillance and 
enforcement. While smaller members will be expected to adopt policies 
and procedures that contemplate reporting any trades for which they 
have the reporting obligation as soon as practicable, their infrequent 
instances of trade reporting likely would never rise to the level of a 
pattern and practice \20\ of late reporting.
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    \18\ This is supported by a review of member trade reporting 
statistics. As previously noted, during the period of July 9 through 
July 13, 2012, 99.96% of last-sale eligible trades were reported 
within 10 seconds of execution. For that same period, 99.71% and 
94.31% of trades were reported within 5 seconds and 2 seconds of 
execution, respectively.
    \19\ See, supra note 9.
    \20\ Id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-FINRA-2013-013 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 No. SR-FINRA-2013-013. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-FINRA-2013-013 and should be 
submitted on or before March 5, 2013.
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    \21\ 17 CFR 200.30-3(a)(12).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03101 Filed 2-11-13; 8:45 am]
BILLING CODE 8011-01-P


