
[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Notices]
[Pages 79966-79969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32191]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76677; File No. SR-FINRA-2015-055]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Provide FINRA with Authority To Grant 
Exemptions from TRACE Reporting Requirements for Certain ATS 
Transactions

December 17, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 8, 2015, 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 and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to adopt new FINRA Rule 6732 to provide FINRA 
with authority to exempt certain transactions by a member alternative 
trading system (``ATS'') that meet specified criteria from the 
transaction reporting obligations under FINRA Rule 6730. In addition, 
FINRA is proposing a conforming change to FINRA Rule 9610 to specify 
that FINRA has exemptive authority under proposed Rule 6732.
    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 and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    Rule 6730 (Transaction Reporting) generally requires that each 
FINRA member that is a party to a transaction in a TRACE-Eligible 
Security \4\ report the transaction to TRACE within the period of time 
prescribed in the rule. ``Party to a transaction'' means an introducing 
broker-dealer, if any, an executing broker-dealer or a customer.\5\ 
Thus, in transactions in a TRACE-Eligible Security between members, 
each member is a party to the transaction and is required to report the 
transaction. An ATS is a party to a transaction in a TRACE-Eligible 
Security occurring through its system and has a TRACE transaction 
reporting obligation, unless an exception or exemption applies.\6\
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    \4\ Rule 6710(a) provides that a ``TRACE-Eligible Security'' is 
a debt security that is United States dollar-denominated and issued 
by a U.S. or foreign private issuer, and, if a ``restricted 
security'' as defined in Securities Act Rule 144(a)(3), sold 
pursuant to Securities Act Rule 144A; or is a debt security that is 
U.S. dollar-denominated and issued or guaranteed by an Agency as 
defined in paragraph (k) or a Government-Sponsored Enterprise as 
defined in paragraph (n). ``TRACE-Eligible Security'' does not 
include a debt security that is: issued by a foreign sovereign, a 
U.S. Treasury Security as defined in paragraph (p), or a Money 
Market Instrument as defined in paragraph (o).
    \5\ ``Customer'' includes a broker-dealer that is not a FINRA 
member.
    \6\ See Regulatory Notice 14-53 (November 2014) (FINRA Reminds 
ATSs and ATS Subscribers of Their Trade Reporting Obligations in 
TRACE-Eligible Securities).
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    On February 28, 2012, FINRA adopted Rule 6731 (Exemption from Trade 
Reporting Obligation for Certain Alternative Trading Systems) to 
provide FINRA with authority to exempt ATSs from TRACE trade reporting 
obligations under certain circumstances; specifically, where the ATS 
demonstrates that: member subscribers are fully disclosed to one 
another at all times on the ATS; the system does not permit automatic 
execution (and a member subscriber must take affirmative steps beyond 
the submission of an order to agree to a trade with another member 
subscriber); the trade does not pass through any ATS account (and the 
ATS does not in any way hold itself out to be a party to the trade); 
and the ATS does not exchange TRACE-Eligible Securities or funds on 
behalf of the member subscribers or take either side of the trade for 
clearing or settlement purposes (including, but not limited to, at DTC 
or otherwise), or in any other way insert itself into the trade.\7\ In 
addition, trades on the ATS must be between subscribers that are both 
FINRA members. Where a Rule 6731 exemption is granted, the ATS is not 
deemed a party to the transactions occurring through its system for 
purposes of trade reporting requirements.\8\
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    \7\ See Securities Exchange Act Release No. 66513 (March 5, 
2012), 77 FR 14454 (March 9, 2012) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2012-016) (``Rule 6731 
Proposal'').
    \8\ FINRA stated in the Rule 6731 Proposal that an ATS that 
satisfies all the conditions of the proposal has a more limited 
involvement in the trade execution than the member subscribers and, 
therefore, the exemption from trade reporting is appropriate. As a 
condition to the proposed [sic] Rule 6731 exemption, the ATS and its 
member subscribers must acknowledge and agree in writing that the 
ATS is not deemed a party to the trade for purposes of trade 
reporting, and that trades shall be reported to FINRA in accordance 
with Rule 6730 by each member subscriber that satisfies the 
definition of ``party to a transaction,'' as defined in Rule 6710.

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[[Page 79967]]

    FINRA believes it is appropriate to propose a rule change to 
provide FINRA with authority to exempt trades on ATSs not otherwise 
falling within the exemption in Rule 6731 from the Rule 6730 trade 
reporting obligations. Pursuant to the proposed exemption, an ATS would 
not be required to report exempted transactions occurring on the ATS to 
TRACE, but rather, would be permitted to provide to FINRA on a monthly 
basis, or such other basis as prescribed by FINRA, data relating to 
each exempted trade occurring on the ATS. Each side of a trade for 
which an ATS is exempted from TRACE reporting pursuant to the proposal 
must be reported by a member (other than the ATS) that meets the 
definition of a ``Party to a Transaction'' identifying a contra-party 
(other than the ATS).
    The proposal would permit FINRA to exempt a member ATS from 
reporting trades where: (a) The trade is between FINRA members, (b) the 
trade does not pass through any ATS account; (c) the ATS does not 
exchange TRACE-Eligible Securities or funds on behalf of the 
subscribers or take either side of the trade for clearing or settlement 
purposes (including, but not limited to, at DTC or otherwise), or in 
any other way insert itself into the trade; and (d) the ATS has entered 
into a written agreement with each member that is a ``Party to a 
Transaction'' with respect to any trade for which the ATS is exempted 
under this Rule, specifying that trades must be reported by such party 
pursuant to Rule 6730(c)(13) identifying the trade as having occurred 
on the ATS (using the ATS's separate MPID obtained in compliance with 
Rule 6720(c)).\9\
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    \9\ An ATS granted an exemption pursuant to the proposal would 
continue to be deemed a ``party'' to the transactions covered by the 
exemption, and would be required to remit to FINRA a transaction 
reporting fee. Specifically, member ATSs will be assessed a 
transaction reporting fee for each exempted transaction occurring 
through its system. Such fee will be assessed to the ATS once per 
exempt transaction, and will be calculated based upon the fee 
schedule set forth in Rule 7730(b)(1) for each exempt sell 
transaction.
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    Unlike the exemption provided for under Rule 6731 (where, if 
granted, all transactions occurring on the ATS are exempted from TRACE 
reporting), proposed Rule 6732 would provide FINRA authority to grant 
exemptions only for transactions that meet the enumerated criteria, 
which provides a greater degree of flexibility to member ATSs seeking 
an exemption. In addition, the proposed exemption omits two of the 
conditions required for relief under Rule 6731--specifically, that 
member subscribers must be fully disclosed to one another at all times 
on the ATS, and that the system does not permit automatic execution and 
a member subscriber must take affirmative steps beyond the submission 
of an order to agree to a trade with another member subscriber. Thus, 
proposed Rule 6732 contemplates that an ATS may have a greater degree 
of involvement in exempted trades than contemplated by existing Rule 
6731.\10\
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    \10\ Where an ATS has been granted an exemption under the 
proposed rule, the member subscribers will be assessed the Trading 
Activity Fee under FINRA By-Laws, Schedule A, Section 1. The ATS 
will not be assessed such fees with respect to any exempted trade.
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    In lieu of reporting through TRACE, proposed Rule 6732 would 
include a similar requirement to that contained in Rule 6731 in that it 
would require the periodic reporting of transaction information by any 
member ATS granted relief. Specifically, under the proposed exemption, 
an ATS would be required to provide FINRA with data relating to each 
exempted trade that occurred on its system (on a monthly basis or such 
other basis as prescribed by FINRA). FINRA will publish the required 
items of trade data information, the frequency of the reporting 
requirement, if different than monthly, and mode of transmission in a 
separate Regulatory Notice.\11\
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    \11\ As is the case with Rule 6731, proposed Rule 6732 also 
provides that an ATS's failure to report required data to FINRA 
pursuant to Rule 6732, in addition to constituting a violation of 
FINRA rules, will result in revocation of any exemption granted 
pursuant to proposed Rule 6732. Similar to Rule 6731, volume in 
exempted trades occurring through the ATS would be considered volume 
of the ATS for purposes of, among other things, the recordkeeping 
requirements of Rule 302 of SEC Regulation ATS and determining 
whether the ATS triggers the Fair Access requirements under Rule 
301(b)(5) of Regulation ATS or the Capacity, Integrity and Security 
of Automated Systems requirements of Rule 301(b)(6) of Regulation 
ATS, as applicable. See Rule 6731; see also 17 CFR 242.300-303.
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    FINRA believes that the proposed rule change will simplify 
compliance for member ATSs and other members. Specifically, where an 
ATS does not exchange TRACE-Eligible Securities or funds on behalf of 
the subscribers, take either side of the trade for clearing or 
settlement purposes (including, but not limited to, at DTC or 
otherwise), or in any other way insert itself into the trade, and where 
the trade does not pass through any ATS account, the proposal provides 
FINRA with authority to allow ATSs (and member subscribers) to 
streamline their trade reporting practices.
    In some cases, member subscribers trading on an ATS may prefer to 
program their back-end systems automatically to clear against the 
contra-party identified on TRACE trade reports. Thus, reporting against 
the contra-party member subscriber, rather than the ATS, would simplify 
clearance and settlement for such members. However, because, under 
FINRA rules, an ATS generally is deemed a party to each trade occurring 
through its system, Rule 6730 currently precludes member subscribers 
from reflecting a party other than the ATS on TRACE trade reports, even 
where the ATS has not inserted itself into the trade.
    For example, today, where a member (BD 1) sells a TRACE-Eligible 
Security to another member (BD 2) through an ATS, Rule 6730 generally 
requires BD 1 to report a sale to the ATS and the ATS to report a buy 
from BD 1. The ATS also must report the corresponding sale to BD 2, and 
BD 2 must report its buy from the ATS.\12\ Pursuant to the proposed 
exemption, where granted, an ATS would not be required to report the 
transactions with BD 1 and BD 2 to TRACE. In addition, BD 1 would be 
required to report to TRACE a sale to BD 2, identifying the trade as 
having occurred on the ATS, and BD 2 would be required to report to 
TRACE a buy from BD 1, identifying the trade as having occurred on the 
ATS on its TRACE report.
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    \12\ In transactions between members, FINRA disseminates only 
the sale transaction.
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    Therefore, FINRA believes that the proposed rule change will 
simplify compliance for these member ATSs and their member subscribers 
without compromising public transparency in exempted trades, because 
the exempted transaction will continue to be trade reported by members 
and disseminated in accordance with existing rules.\13\ In addition, 
the requirement that any ATS granted an exemption pursuant to proposed 
Rule 6732 enter into a written agreement with each member that is a 
``Party to a Transaction'' with respect to exempted trades, ensures 
that reporting members are aware that the ATS has been granted a Rule 
6732 exemption and that exempted trades on the ATS are subject to 
different reporting requirements, specifically, that the reporting 
member identify a party other than the ATS as its contra-party and 
identify the ATS on which the trade had occurred in its TRACE reports.
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    \13\ FINRA also is proposing a conforming change to Rule 9610 to 
add proposed Rule 6732 to the list of rules pursuant to which FINRA 
has exemptive authority.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date of the proposed rule change will 
be July 18, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions

[[Page 79968]]

of Section 15A(b)(6) of the Act,\14\ 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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    \14\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change will simplify 
compliance for certain ATSs and their member subscribers by permitting 
subscribers to trade report with the party against which it will clear 
the trade. The proposal also accommodates a broader range of ATS 
models. FINRA also notes that public transparency with respect to 
exempted trades will not be compromised because such transactions will 
continue to be trade reported by members and disseminated in accordance 
with existing rules.

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. Any ATS that meets the criteria 
set forth in the proposed rule may apply for the exemption with respect 
to eligible transactions occurring on its platform. In addition, 
irrespective of an ATS's model or whether the ATS is granted an 
exemption pursuant to this proposal, all ATSs that are a ``party to a 
transaction'' must continue to pay transaction reporting fees with 
respect to Rule 6732 exempted transactions. As stated above, any ATS 
granted a Rule 6732 exemption would continue to be deemed a ``party'' 
to the transactions covered by the exemption, and would be required to 
remit to FINRA a transaction reporting fee based on the fee schedule 
set forth in Rule 7730(b)(1) for each exempted sell transaction 
occurring through the ATS.
Economic Impact Assessment
Need for the Rule
    As discussed above, an ATS is a party to a transaction in TRACE-
eligible securities occurring on that ATS. As such, an ATS is 
responsible to report the transaction to FINRA as provided in Rule 
6730, unless an exception or exemption applies.
    FINRA recognizes that there are different business models for the 
way an ATS may facilitate trading on its platform, and the functional 
role of the ATS may differ in each of these models. For instance FINRA 
is aware that some ATS's do not pass TRACE-eligible securities or funds 
through their own accounts as part of an execution. In instances where 
the functional activities of the ATS are more limited with respect to a 
transaction, FINRA believes that the ATS, while still party to the 
transaction, may benefit from a streamlined reporting regime without 
reducing public transparency.
Economic Baseline
    By FINRA rule today, all ATSs are parties to transactions in TRACE-
eligible securities occurring on the ATS and are subject to TRACE 
reporting. Rule 6731 provides FINRA authority to exempt an ATS from 
Rule 6730 TRACE transaction reporting requirements where an ATS meets 
the conditions in Rule 6731 described above. Thus, an ATS that does not 
meet the conditions of Rule 6731 is required to report transactions 
occurring on the ATS to TRACE in accordance with FINRA rules.
Economic Impacts
    FINRA estimates that only a small number of ATSs would be eligible 
to seek the exemption based on staff understanding of their current 
business models, although the proposed exemption would be available to 
any current or future ATS that would meet the requirements. Member 
subscribers who execute trades on an ATS that seeks and is granted the 
proposed exemption also may be impacted. FINRA does not have a reliable 
estimate for the number of transactions that might be eligible for the 
exemption.
Benefits of the Rule
    Any ATS that meets the qualifications proposed in this rule may 
request exemption from FINRA. Where granted, the ATS would presumably 
reduce its compliance costs by shifting from contemporaneous reporting 
of transactions to TRACE in TRACE-eligible securities to periodic 
reporting.
Costs of the Rule
    An ATS that seeks and is granted an exemption under this proposed 
rule may incur costs to modify its systems, and must update its 
policies and procedures to reflect reporting consistent with the 
periodic regime. Each ATS may determine independently whether or not it 
seeks to obtain the exemption, and thus, it is likely that an ATS would 
only seek this exemption where it was less costly than meeting its 
current reporting requirements.
    FINRA understands that a commenter to a related filing indicated 
that transactions in TRACE-eligible securities occurring on some ATSs 
are ``given up'' to the broker-dealer counterparties for TRACE 
reporting.\15\ Notwithstanding this comment, the reporting obligations 
to the ATS remain, so any costs to an ATS associated with this proposal 
should be measured from the baseline of that obligation.
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    \15\ See Securities Exchange Act Release No. 71341 (January 17, 
2014), 79 FR 4213 at 4217 (January 24, 2014) (Order Approving File 
No. SR-FINRA-2013-042).
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    Where an ATS seeks and is granted the exemption, member subscribers 
who transact through the ATS also may incur costs associated with 
reporting the additional information to FINRA that identifies the ATS 
where the trade occurred. These costs may include additional 
programming and testing along with updating policies and procedures. 
FINRA notes, however, that member subscribers may determine where to 
seek executions and would not have to incur the related costs if they 
choose to send orders elsewhere for execution.
    Both member subscribers and ATSs may incur additional costs 
associated with creating and maintaining a written agreement with 
respect to the reporting of any trades for which the ATS is exempted 
under the proposed rule.
Related Economic Impacts
    FINRA also considered the potential impacts of the proposed rule on 
investors and other parties that might rely on TRACE reporting. As 
proposed, the rule would not negatively impact FINRA's ability to 
monitor securities markets. The proposed rule would not substantively 
reduce the information collected by FINRA on TRACE-eligible securities 
transactions occurring on an ATS. Member subscribers maintain their 
obligation to report transactions on the ATS to TRACE within the time 
prescribed by FINRA rules. The additional information collected 
pursuant to the exemption under the rule would enhance FINRA's ability 
to identify all exempted trades occurring on an individual ATS. 
Further, the exemption would not impact the quality and completeness of 
the information made generally available through TRACE, since TRACE 
reporting obligations continue to apply to the member subscribers 
transacting on the ATS.
Alternatives Considered
    The primary alternative considered was to continue to have ATS 
[sic] with business models meeting the proposed exemptive criteria 
continue to report as they do today. However, FINRA concluded that the 
proposed exemption

[[Page 79969]]

is a reasonable approach that may simplify compliance for some members 
without degrading the quality and completeness of information available 
to FINRA and the public.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
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. 
FINRA has satisfied this requirement.
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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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2015-055 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 No. SR-FINRA-2015-055. 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-2015-055, and should be 
submitted on or before January 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-32191 Filed 12-22-15; 8:45 am]
BILLING CODE 8011-01-P


