
[Federal Register Volume 81, Number 37 (Thursday, February 25, 2016)]
[Notices]
[Pages 9545-9550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03941]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77180; File No. SR-FINRA-2016-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rules 7410 (Definitions) and 7440 (Recording of Order 
Information)

February 19, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 11, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rules 7410 and 7440 to require 
FINRA members to identify on their Order Audit Trail System (``OATS'') 
reports the identity of certain broker-dealers that are not FINRA 
members when the member has received an order from such a broker-
dealer.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.

* * * * *

7000. CLEARING, TRANSACTION AND ORDER DATA REQUIREMENTS, AND FACILITY 
CHARGES

* * * * *

7400. ORDER AUDIT TRAIL SYSTEM

* * * * *

7410. Definitions

    (a) through (o) No Change.
    (p) ``SRO-assigned identifier'' shall mean a unique identifier 
assigned to a broker or dealer by a national securities exchange or 
national securities association for use by such broker or dealer when 
accessing the exchange or a facility of the association.

* * * * *

7440. Recording of Order Information

    (a) No Change.
    (b) Order Origination and Receipt
    Unless otherwise indicated, the following order information must be 
recorded under this Rule when an order is received or originated. For 
purposes of this Rule, the order origination or receipt time is the 
time the order is received from the customer.
    (1) through (17) No Change.
    (18) the type of account, i.e., retail, wholesale, employee, 
proprietary, or any other type of account designated by FINRA, for 
which the order is submitted; [and]
    (19) when the Reporting Member receives an order from a U.S.-
registered broker-dealer that is not a member, or from a non-U.S.-
registered broker-dealer that is not a member but has received an SRO-
assigned identifier for purposes of accessing a FINRA facility pursuant 
to Rule 7220A or 7320, identification of such broker-dealer by 
providing an SRO-assigned identifier assigned to the broker-dealer or 
the number assigned to the broker-dealer in the Central Registration 
Depository system; and
    (20) if the member is relying on the exception provided in Rule 
5320.02 with respect to the order, the unique identification of any 
appropriate information barriers in place at the department within the 
member where the order was received or originated.
    (c) through (d) No Change.
* * * * *

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
    FINRA is proposing an amendment to Rule 7440 of the OATS rules to 
require FINRA members subject to the OATS rules (``Reporting Members'') 
to specifically identify two types of non-FINRA-member broker-dealers 
(``Non-Member Firms'') as part of the OATS report when they receive 
orders from

[[Page 9546]]

these firms.\3\ Under the proposed rule change, Reporting Members 
receiving an order from either a U.S.-registered broker-dealer that is 
not a FINRA member or a broker-dealer that is not registered in the 
U.S. but has received an SRO-assigned identifier \4\ in order to access 
certain FINRA trade reporting facilities (each a ``Reportable Non-
Member'') must identify the broker-dealer when reporting receipt of the 
order to OATS.\5\ Pursuant to the proposed rule change, and as 
described below, Reporting Members receiving an order from or routing 
an order to a Non-Member Firm would therefore report one of the 
following: The Non-Member Firm's Central Registration Depository 
(``CRD[supreg]'') number; an SRO-assigned identifier assigned to the 
Non-Member Firm; or, for a Non-Member Firm that does not have a CRD 
number or SRO-assigned identifier (e.g., a foreign broker-dealer), a 
value indicating that the Non-Member Firm has no CRD number or SRO-
assigned identifier. Reporting this information will allow FINRA to 
obtain the identity of Reportable Non-Members directly from the OATS 
report.
---------------------------------------------------------------------------

    \3\ FINRA Rule 7410(o) defines a Reporting Member as ``a member 
that receives or originates an order and has an obligation to report 
information under Rules 7440 and 7450.'' The rule also contains 
exceptions from the rule. See FINRA Rule 7410(o)(1) and (2).
    \4\ FINRA is proposing to define an ``SRO-assigned identifier'' 
in Rule 7410 as ``a unique identifier assigned to a broker or dealer 
by a national securities exchange or national securities association 
for use by such broker or dealer when accessing the exchange or a 
facility of the association.'' For purposes of the definition, the 
identifier is ``unique'' provided the identifier assigned by the 
exchange or association is used to identify only a single broker-
dealer.
    \5\ Certain broker-dealers registered in Canada, but not in the 
U.S., have SRO-assigned identifiers so that they can access FINRA 
trade reporting facilities pursuant to FINRA Rule 7220A or 7320.
---------------------------------------------------------------------------

    A Reporting Member receiving an order from a Reportable Non-Member 
would include on its OATS report either the SRO-assigned identifier 
(e.g., a market participant identifier (``MPID'') assigned by a 
national securities exchange) or the Reportable Non-Member's CRD 
number.\6\ The proposed rule change does not mandate which identifier 
Reporting Members must use; thus, Reporting Members may use either an 
existing SRO-assigned identifier or a CRD number on their OATS reports 
to identify the Reportable Non-Member. If a Reportable Non-Member does 
not have an SRO-assigned identifier that is available to FINRA, the 
Reporting Member receiving the order would be required to report the 
CRD number of the Reportable Non-Member.\7\ Similarly, for a non-U.S.-
registered broker-dealer that has an SRO-assigned identifier in order 
to access a FINRA trade reporting facility pursuant to Rule 7220A or 
7320 but does not have a CRD number, the Reporting Member receiving the 
order would be required to report the SRO-assigned identifier for the 
broker-dealer.
---------------------------------------------------------------------------

    \6\ To register as a broker-dealer and have a CRD number, firms 
are required to file a Form BD with CRD. See 17 CFR 240.15b1-1(b). 
Consequently, all U.S.-registered broker-dealers have a CRD number. 
Currently, all U.S.-registered broker-dealers also have at least one 
SRO-assigned identifier that is available to FINRA.
    \7\ Because non-U.S. broker-dealers generally do not have SRO-
assigned identifiers or CRD numbers, the proposed rule change would 
not require specific identification of non-U.S. broker-dealers when 
those firms do not have SRO-assigned identifiers or CRD numbers. In 
these cases, FINRA intends to permit a value whereby the Reporting 
Member would indicate the order was received from a non-U.S. broker-
dealer without a CRD number or SRO-assigned identifier.
---------------------------------------------------------------------------

    FINRA is filing the proposed rule change to enhance its market 
surveillance efforts, both under its own SRO license and pursuant to 
its Regulatory Service Agreements (``RSAs'') with multiple national 
securities exchanges, by being able to identify more Non-Member Firm 
trading activity across exchanges and in the over-the-counter market 
through trades that are reported to a FINRA trade reporting 
facility.\8\ Through OATS, FINRA is currently able to identify in 
detail the order and trading activity of FINRA member broker-dealers 
across market centers. Using data provided by the exchanges as well as 
CRD numbers, FINRA is also able to identify in detail the trading 
activities of Non-Member Firms and aggregate these firms' activities 
across RSA client exchanges.\9\ Although Reporting Members report 
orders they receive from, or route to, Non-Member Firms, these reports 
do not always contain the identity of the Non-Member Firm from whom the 
order was received, or to whom it was routed.\10\ FINRA cannot, 
therefore, currently identify in detail Non-Member Firm activity in the 
over-the-counter market, or Non-Member Firm sponsored access activity, 
since Reporting Members are not required to report to OATS the identity 
of Non-Member Firms. Consequently, FINRA is not able to consistently 
identify Non-Member Firm activity and does not have a complete view of 
such activities across all exchanges and over-the-counter market 
centers. As the Commission recently noted when it proposed amendments 
to SEA Rule 15b9-1,\11\ ``FINRA's ability to perform comprehensive 
market surveillance, especially for violations of Commission rules, as 
well as its ability to understand and reconstruct activity in the off-
exchange market generally, is limited because [Non-Member Firms] are 
not consistently identified in trade reports to the TRFs or the ADF, 
and their order activity is not captured by OATS.'' \12\
---------------------------------------------------------------------------

    \8\ FINRA obtains exchange data pursuant to RSAs it has signed 
with certain client exchanges. Under the current RSAs with national 
securities exchanges, FINRA conducts comprehensive surveillance 
across more than 99% of the market for U.S. listed equities by share 
and trade volume.
    \9\ This is accomplished by using exchange-assigned identifiers 
that are mapped to the firm's CRD number. FINRA has access to all 
SRO-assigned equity identifiers with the exception of those assigned 
by the Chicago Stock Exchange. Under the proposed rule change, FINRA 
would thus be able to use any of these SRO-assigned identifiers or a 
CRD number to obtain the identity of the Non-Member Firm on OATS 
reports. A FINRA member that provides sponsored access to a Non-
Member Firm has an OATS reporting obligation for each order sent to 
a national securities exchange pursuant to any such agreement. In 
this scenario, the FINRA member must report a New Order and a Route 
Report to the applicable exchange reflecting that the order was 
received from a Non-Member Firm. See OATS FAQ C77.
    \10\ Although some Reporting Members voluntarily provide the 
MPID of a Non-Member Firm if one exists, the OATS rules do not 
require that the identity of the Non-Member Firm be reported.
    \11\ 17 CFR 240.15b9-1.
    \12\ See Securities Exchange Act Release No. 74581 (March 25, 
2015), 80 FR 18036, 18043 (April 2, 2015).
---------------------------------------------------------------------------

    In addition to amending Rule 7440 to require the identification of 
Reportable Non-Members from which an order is received, FINRA is also 
planning to update the OATS Reporting Technical Specifications to 
require that OATS reports specifically identify a Reportable Non-Member 
to which an order is routed. Rule 7440(c)(6)(I) requires that, for 
orders routed from a member to a non-FINRA-member, including both non-
FINRA-member broker-dealers and national securities exchanges, the 
identity of the non-FINRA member to which the order was routed be 
reported. Although the OATS Reporting Technical Specifications 
currently require that OATS reports include a specific identifier for 
each national securities exchange to which an order is routed, only a 
generic identifier for Non-Member Firms is required.\13\ Consequently, 
the identity of the specific Non-Member Firm to which an order is 
routed is not required under the current OATS Reporting Technical 
Specifications. To address this gap and to conform the reporting of 
orders received from and orders routed to Non-Member Firms, in addition 
to the proposed rule change, FINRA intends to update the OATS Reporting 
Technical Specifications to require that Reporting Members provide 
either an SRO-assigned identifier or CRD number

[[Page 9547]]

when routing an order to a Reportable Non-Member.\14\
---------------------------------------------------------------------------

    \13\ See OATS Reporting Technical Specifications, at 4-4, and A-
4 to A-5 (October 12, 2015 ed.).
    \14\ As noted above, in the case of a non-U.S. broker-dealer 
that does not have a CRD number or an SRO-assigned identifier, FINRA 
will provide an indicator for ``non-U.S. broker-dealer'' for use in 
the destination code field (for routes to a non-member broker-
dealer) and as a member type code (for orders received from a non-
member broker-dealer).
---------------------------------------------------------------------------

    The proposed rule change, along with the changes to the OATS 
Reporting Technical Specifications, will significantly improve FINRA's 
ability to support cross-market surveillance and monitor over-the-
counter trading activity. Reporting Members receive a substantial 
amount of order flow from Non-Member Firms, particularly in connection 
with alternative trading system (``ATS'') activity, and this proposed 
rule change will enable FINRA to identify the activities of Reportable 
Non-Members, thereby increasing its cross-market surveillance 
capabilities.\15\
---------------------------------------------------------------------------

    \15\ For example, in the fourth quarter of 2014, over 33% of 
orders reported to OATS were reported as being received from a Non-
Member Firm. Of particular note, over 45% of ATS orders were 
received from a Non-Member Firm. In addition, during that quarter 
approximately 13% of sponsored access orders were received from a 
Non-Member Firm.
---------------------------------------------------------------------------

    FINRA notes that although the data required by the proposed rule 
change may ultimately be captured as part of the Consolidated Audit 
Trail (``CAT''), the implementation of the CAT is likely several years 
away, as the national market system plan filed by the SROs still must 
be published by the Commission for public notice and comment, approved 
by the SEC, and, if approved, ultimately implemented pursuant to a 
multi-year timeline.\16\ FINRA strongly believes that gaps in OATS data 
must be addressed in the near-term, after weighing the burdens to firms 
and the necessity of the change, to ensure an effective audit trail. 
FINRA believes the specific identification of Reportable Non-Members is 
critical to enhance FINRA's cross-market surveillance and monitoring of 
the over-the-counter market and believes these changes to the OATS 
requirements should not be delayed due to the potential future 
implementation of the CAT.\17\
---------------------------------------------------------------------------

    \16\ SEC Rule 613, which sets forth the requirements for the 
CAT, does not require all broker-dealers to report order information 
to the CAT until three years after the CAT plan is approved. See 17 
CFR 242.613(a)(vi). The SROs charged with submitting the CAT plan 
filed an initial plan with the Commission on September 30, 2014, an 
amended and restated plan on February 27, 2015, and further 
amendments on December 23, 2015; however, the Commission has not yet 
published the CAT plan in the Federal Register for public comment. 
Pursuant to the plan submitted by the SROs, once the CAT is fully 
implemented, FINRA intends to sunset the OATS rules.
    \17\ FINRA notes that, under SEC Rule 613, all U.S.-registered 
broker-dealers are subject to the CAT reporting requirements. See 17 
CFR 242.613(c)(2). Consequently, if the CAT plan submitted by the 
SROs is approved, firms will need to specifically identify each 
broker-dealer from which an order is received or to which an order 
is routed.
---------------------------------------------------------------------------

    In addition to the CAT, the proposed rule change could also be 
affected by any amendments to SEA Rule 15b9-1.\18\ Section 15(b)(8) of 
the Act requires that a registered broker-dealer be a member of a 
national securities association unless the broker-dealer effects 
transactions in securities solely on a national securities exchange of 
which it is a member.\19\ SEA Rule 15b9-1 provides an exemption to the 
membership requirement in Section 15(b)(8) if a broker-dealer (i) is a 
member of a national securities exchange, (ii) carries no customer 
accounts, and (iii) has annual gross income derived from purchases and 
sales of securities otherwise than on a national securities exchange of 
which it is a member in an amount no greater than $1,000.\20\
---------------------------------------------------------------------------

    \18\ 17 CFR 240.15b9-1.
    \19\ 15 U.S.C. 78o(b)(8). FINRA is currently the only registered 
national securities association.
    \20\ 17 CFR 240.15b9-1. The $1,000 gross income limitation does 
not apply to income derived from transactions for the dealer's own 
account with or through another registered broker or dealer. Thus, 
for example, income derived from over-the-counter trades through an 
alternative trading system does not count toward the $1,000 
threshold.
---------------------------------------------------------------------------

    On March 25, 2015, the SEC proposed amendments to SEA Rule 15b9-1 
that would significantly narrow the exemption from association 
membership by replacing the $1,000 gross income provision in the rule 
with a provision that exempts from association membership exchange 
member broker-dealers that operate on the floor of an exchange to the 
extent they effect transactions off-exchange solely for the purpose of 
hedging the risks of their floor-based activities.\21\ If adopted, the 
amendments generally would require a proprietary trading firm (i.e., a 
firm that carries no customer accounts and, instead, trades solely for 
its own account(s)) relying on the current exemption to become a FINRA 
member if the firm continues to engage in over-the-counter trading or 
trading on an exchange of which it is not a member.
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 74581 (March 25, 
2015), 80 FR 18036, 18045-46 (April 2, 2015).
---------------------------------------------------------------------------

    If this, or a substantially similar, amendment to SEA Rule 15b9-1 
were adopted by the SEC, it is likely that many firms that are not 
currently FINRA members would become FINRA members and, as a result, 
would be identified on OATS reports in addition to submitting OATS 
reports themselves. Even if amendments to SEA Rule 15b9-1 are adopted, 
there would likely still be some firms that do not become FINRA 
members, and the timeline for compliance with any potential amendments 
to SEA Rule 15b9-1, could be substantial. Consequently, FINRA believes 
that the proposed rule change is necessary regardless of the pending 
proposed amendments to SEA Rule 15b9-1 and would remain necessary even 
if amendments are subsequently adopted by the SEC.
    Although this proposed rule change will require Reporting Members 
to submit an additional data field when submitting an OATS report for 
an order received from a Reportable Non-Member, FINRA does not believe 
that the proposed rule change will have a significant operational 
impact on Reporting Members or their reporting practices.\22\ Because 
identifiers already have been assigned to Reportable Non-Members, are 
generally readily ascertainable by Reporting Members, and OATS will 
accept submission of any of these identifiers already in use, FINRA 
anticipates that the expense associated with reporting this additional 
data will be minimal. FINRA also notes that some Reporting Members 
already provide identifiers on their OATS reports for orders received 
from Non-Member Firms.\23\ Finally, if a Reportable Non-Member is a 
member of multiple SROs or has multiple SRO-assigned identifiers, the 
Reporting Member could use any of those identifiers to fulfill its 
reporting obligation in addition to a CRD number. As noted below, FINRA 
also intends to provide a list of Reportable Non-Members' CRD numbers 
for Reporting Members to use to aid in implementing the proposed rule 
change.
---------------------------------------------------------------------------

    \22\ FINRA also does not anticipate that the change to the OATS 
Reporting Technical Specifications to require that Reporting Members 
report a unique identifier when routing an order to a Non-Member 
Firm will significantly impact Reporting Members' reporting 
practices, as only a relatively small amount of order flow is 
typically routed from members to Non-Member Firms. In the fourth 
quarter of 2014, only 1.16% of all routes reported to OATS were 
reported as being routed to a Non-Member Firm.
    \23\ In the fourth quarter of 2014, ATSs reported the SRO-
assigned identifiers of seventeen Non-Member Firms that submitted 
approximately 12.45 billion orders to those ATSs.
---------------------------------------------------------------------------

    As noted in Item 2 of this filing, if the Commission approves the 
proposed rule change, FINRA will announce the effective date of the 
proposed rule no later than 60 days following Commission approval. The 
effective date will be no later than 120 days following Commission 
approval.

[[Page 9548]]

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\24\ 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. FINRA believes that the proposed rule change will 
enable FINRA to better identify a Reportable Non-Member's trading 
activity across exchanges and in the over-the-counter market through 
trades that are reported to a FINRA facility, which will significantly 
enhance FINRA's cross-market surveillance efforts pursuant to its RSAs 
with multiple national securities exchanges and carry out its 
surveillance obligations for the over-the-counter market under its own 
SRO license. As noted above, FINRA members receive a substantial amount 
of order flow from Non-Member Firms, particularly in connection with 
ATS and sponsored access activity, and the proposed rule change will 
enable FINRA to identify the activities of Reportable Non-Members, 
thereby increasing its cross-market surveillance capabilities. Improved 
surveillance capabilities help detect and deter fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and protect investors and the public interest.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

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

Economic Impact Assessment

1. Regulatory Need
    As discussed above, under the current rules, Reporting Members 
report orders they receive from, or route to, Non-Member Firms but 
these reports do not always contain the identity of the Non-Member 
Firm. As a result, FINRA cannot consistently identify Non-Member Firm 
activity and cannot see a complete view of such activities across all 
exchanges and over-the-counter market centers. The proposed rule change 
will address these current gaps in order reporting by requiring 
Reporting Members to identify Reportable Non-Members in their OATS 
reports. Reporting this information will allow FINRA to obtain the 
identity of the Reportable Non-Member directly from the OATS data, 
thereby improving FINRA's ability to perform comprehensive market 
surveillance and increasing investor protection.
2. Economic Impacts
    The proposed rule change would impact Reporting Members that report 
orders received from, or routed to, Reportable Non-Members. As a 
baseline, FINRA estimates that, in the fourth quarter of 2014, 
approximately 175 Reporting Members received orders from Non-Member 
Firms and approximately 215 Reporting Members routed orders to Non-
Member Firms. As discussed above, FINRA estimates that over 33% of the 
total OATS orders in the fourth quarter of 2014 were reported as being 
received from a Non-Member Firm. Non-Member Firm orders accounted for a 
higher proportion (over 45%) of ATS orders. In addition, during that 
quarter approximately 13% of sponsored access orders were received from 
a Non-Member Firm. Reporting Members currently report orders received 
from or routed to Non-Member Firms but are not required to specifically 
identify these firms in their OATS reports. The proposed rule change 
would require the Reporting Members to identify Reportable Non-Members 
and submit an SRO-assigned identifier or the CRD number of these firms.
(i) Anticipated Benefits
    The proposed rule change would enhance FINRA's cross-market and 
over-the-counter surveillance efforts by allowing FINRA to identify 
more Non-Member Firm trading activity across exchanges and the over-
the-counter market. As discussed above, FINRA members receive a 
substantial amount of order flow from Non-Member Firms, particularly in 
connection with ATS activity. The proposed rule change will enable 
FINRA to identify these activities from Reportable Non-Members, thereby 
significantly improving FINRA's ability to support cross-market 
surveillance and monitor over-the-counter trading activity.
(ii) Anticipated Costs
    As a result of the proposed rule change, Reporting Members that are 
not already identifying Reportable Non-Members in their OATS reports 
will incur certain implementation costs and on-going compliance costs 
associated with identifying Reportable Non-Members and submitting 
identifiers on their OATS reports.
    FINRA anticipates that the costs associated with identifying 
Reportable Non-Members will likely be minimal because identifiers have 
already been assigned to Reportable Non-Members and these identifiers 
are generally readily available to the Reporting Member that is 
receiving orders from or routing orders to Reportable Non-Members. In 
addition, the proposed rule change would provide Reporting Members with 
the option to report either the CRD number or the SRO assigned 
identifier, thereby allowing them to submit the identifiers that are 
already in use.\25\ Moreover, FINRA intends to provide a list of CRD 
numbers to assist further in implementing the new requirements for 
those firms that are not already identifying Reportable Non-Members on 
their OATS reports, thereby further reducing the burden to ascertain 
appropriate identifiers for Reportable Non-Members.
---------------------------------------------------------------------------

    \25\ Reporting Members would, therefore, have flexibility in 
determining which identifiers to submit, which is intended to reduce 
costs for these firms by allowing them to choose the most cost 
effective option.
---------------------------------------------------------------------------

    FINRA recognizes that some Reporting Members may need to update 
their reporting systems and would incur certain costs associated with 
system analysis, coding, and testing in order to submit the required 
identifiers on their OATS reports. However, based on the provision of 
the list of identifiers by FINRA, the current volume of OATS Reports 
already submitted with Non-Member Firm information, and the Staff's 
experience with previous changes to the OATS requirements requiring 
similar modification to OATS reporting (i.e., modifications requiring 
new values for existing fields), FINRA believes that significant coding 
and development would not be required and that the costs referenced 
above would likely be minimal. Based on OATS data for the fourth 
quarter of 2014, FINRA estimates that approximately 23% of Reporting 
Members that receive orders from Non-Member Firms already identify 
these firms on their OATS reports and approximately 12% of Reporting 
Members that route orders to Non-Member Firms identify these firms on 
their OATS reports.\26\
---------------------------------------------------------------------------

    \26\ FINRA notes that a number of these Reporting Members 
identify Non-Member Firms on some, but not all, orders whereas 
others do so on all orders. For example, in the fourth quarter of 
2014, of the 39 Reporting Members that receive orders from Non-
Member Firms and identify them on their OATS report, 28 identify 
Non-Member Firms on some and 11 identify them on all orders.
---------------------------------------------------------------------------

3. Alternatives
    In considering the best way to meet its regulatory objectives, 
FINRA considered certain alternatives to particular features

[[Page 9549]]

of this proposal, including alternative identifiers that could be used 
to identify Reportable Non-Members. For example, one FINRA committee 
member suggested that FINRA consider leveraging use of a Legal Entity 
Identifier (``LEI'') for identifying Reportable Non-Members. FINRA does 
not believe that use of a LEI would be feasible at this time 
considering that the LEI is not universally in use. As a result, FINRA 
did not propose the use of LEI in the OATS reports for identifying 
Reportable Non-Members.

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

    The proposed rule change, in addition to another proposal involving 
ATS order reporting, was published for comment in Regulatory Notice 14-
51 (November 2014).\27\ Five comments were received in response to the 
Regulatory Notice; \28\ however, only four of the comment letters 
addressed the proposed rule change.\29\ A copy of Regulatory Notice 14-
51 is attached as Exhibit 2a.\30\ A list of comment letters received in 
response to Regulatory Notice 14-51 is attached as Exhibit 2b, and 
copies of the four comment letters that addressed the proposed rule 
change are attached as Exhibit 2c. Of the four comment letters received 
that addressed the proposed rule change, KCG and SIFMA were in favor of 
the proposed rule change, Liquidnet did not support or oppose the 
proposed rule change but asked for interpretive guidance on the 
application of the proposed rule change to non-U.S. broker-dealers, and 
FIF was generally opposed.
---------------------------------------------------------------------------

    \27\ The ATS order reporting proposal described in Regulatory 
Notice 14-51 is not reflected in the current proposed rule change; 
consequently, comments on that proposal are not addressed.
    \28\ See Letter from Manisha Kimmel, Managing Director, 
Financial Information Forum, to Marcia E. Asquith, Secretary, FINRA, 
dated February 20, 2015 (``FIF''); Letter from John A. McCarthy, 
General Counsel, KCG Holdings, Inc., to Marcia E. Asquith, 
Secretary, FINRA, dated February. 20, 2015 (``KCG''); Letter from 
Howard Meyerson, General Counsel, Liquidnet Inc., to Marcia E. 
Asquith, Secretary, FINRA, dated February 20, 2015 (``Liquidnet''); 
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, to Marcia E. Asquith, Secretary, FINRA, dated February 
24, 2015 (``SIFMA''); and Letter from Mark Holder, Managing 
Director, UBS Securities LLC, to Marcia E. Asquith, Secretary, 
FINRA, dated February 26, 2015 (``UBS'').
    \29\ The UBS Letter addressed only the ATS order reporting 
proposal in the Regulatory Notice and did not address the proposed 
rule change.
    \30\ The Commission notes that the exhibits referred to (2a, 2b, 
and 2c) are exhibits to the proposed rule change, not to this 
Notice.
---------------------------------------------------------------------------

    Liquidnet and SIFMA requested that FINRA provide guidance on the 
application of the proposed rule change to non-U.S. broker-dealers that 
do not have either SRO-assigned identifiers or CRD numbers.
    As noted above, FINRA has amended the proposed rule language from 
that in Regulatory Notice 14-51 to clarify that the specific 
identification of Non-Member Firms applies only to U.S.-registered 
broker-dealers that have SRO-assigned identifiers or CRD numbers as 
well as Canadian broker-dealers who have been assigned SRO identifiers 
for purposes of accessing a FINRA trade reporting facility pursuant to 
Rule 7220A or 7320. FINRA will provide an indicator for ``non-U.S. 
broker-dealer'' for use in the destination code field (for routes to a 
non-member broker-dealer) and as a member type code (for orders 
received from a non-member broker-dealer) so that Reporting Members can 
reflect routes to or from a non-U.S. broker-dealer that does not have a 
CRD number or an SRO-assigned identifier.
    FIF noted that using SRO-assigned identifiers would be preferable 
to using CRD numbers and suggested that FINRA provide a list of 
allowable identifiers. KCG requested that FINRA develop a list of 
identifiers that OATS reporting firms could rely upon to identify non-
member broker-dealers and suggested that only those identifiers 
appearing on the list be required to be reported when dealing with non-
member broker-dealers.
    In response to these comments, FINRA intends to develop and publish 
on its Web site a list of acceptable CRD numbers for Reporting Members 
to use to meet their OATS reporting obligations. FINRA does not, 
however, intend that only those identifiers appearing on the list would 
be acceptable values. For example, Canadian broker-dealers that have 
been issued MPIDs to access FINRA trade reporting facilities pursuant 
to Rule 7220A or Rule 7320 do not have CRD numbers; thus, Reporting 
Members receiving orders from or routing orders to such firms would be 
required to use the Canadian firm's MPID on their OATS reports. 
Finally, FIF noted that the issue of identifying Non-Member Firms will 
be addressed upon the implementation of the CAT and suggested that 
FINRA not take interim measures to improve OATS but ``work diligently 
with the other SROs towards driving CAT forward.''
    FINRA does not view these undertakings as mutually exclusive. While 
FINRA is working diligently with other SROs to develop and implement 
the CAT, FINRA also believes that reasonable changes to OATS should 
still be made to ensure existing audit trails can be enhanced. As noted 
above, the full implementation of the CAT is likely still years away. 
FINRA strongly believes that gaps in OATS data must be addressed in the 
near-term, after weighing the burdens to firms and the necessity of the 
change, to ensure an effective audit trail. As set forth above, FINRA 
has concluded that the identification of Reportable Non-Members is 
important to enhance FINRA's cross-market surveillance and believes 
these modest changes to the OATS requirements should not be delayed due 
to the potential future implementation of the CAT. Although this 
proposed rule change will require some Reporting Members to submit more 
specific data when submitting an OATS report for an order received from 
a Reportable Non-Member, FINRA does not believe that this change will 
have a significant operational impact on Reporting Members or their 
reporting practices because identifiers already have been assigned to 
the Reportable Non-Members, are generally readily ascertainable by the 
Reporting Member that is receiving orders from or routing orders to the 
Reportable Non-Member, and OATS will accept submission of any of these 
identifiers already in use. As noted above, FINRA intends to provide a 
list of CRD numbers to assist further in implementing the new 
requirements for those Reporting Members that are not already 
identifying Reportable Non-Members on their OATS reports.

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:

[[Page 9550]]

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 Number SR-FINRA-2016-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-006. 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 Number SR-FINRA-2016-006 and should be 
submitted on or before March 17, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-03941 Filed 2-24-16; 8:45 am]
 BILLING CODE 8011-01-P


