
[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53560-53566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16886]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98047; File No. SR-FINRA-2022-031]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA 
Rules 6151 (Disclosure of Order Routing Information for NMS Securities) 
and 6470 (Disclosure of Order Routing Information for OTC Equity 
Securities)

August 2, 2023.

I. Introduction

    On November 16, 2022, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require members to (i) publish 
order routing reports for orders in OTC Equity Securities,\3\ and (ii) 
submit their order routing reports for both OTC Equity Securities and 
NMS securities \4\ to FINRA for publication on the FINRA website. The 
proposed rule change was published for comment in the Federal Register 
on December 6, 2022.\5\ On January 18, 2023, pursuant to Section 
19(b)(2) of the Exchange Act,\6\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\7\ On March 3, 2023, 
the Commission instituted proceedings to determine whether to approve 
or disapprove the proposed rule change.\8\ On May 31,

[[Page 53561]]

2023, the Commission designated a longer period for Commission action 
on proceedings to determine whether to approve or disapprove the 
proposed rule change.\9\ The Commission received comment letters on the 
proposed rule change and responses from FINRA.\10\ This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ FINRA Rule 6420(f) defines an ``OTC Equity Security'' as any 
equity security that is not an NMS stock, other than a Restricted 
Equity Security. FINRA Rule 6420(k) defines a ``Restricted Equity 
Security'' as any equity security that meets the definition of 
``restricted security'' as contained in Rule 144(a)(3) under the 
Securities Act of 1933. ``NMS stock'' means any NMS security other 
than an option. See 17 CFR 242.600(b)(55).
    \4\ ``NMS securities'' include any security or class of 
securities for which transaction reports are collected, processed, 
and made available to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
listed options. See 17 CFR 242.600(b)(54).
    \5\ See Securities Exchange Act Release No. 96415 (November 30, 
2022), 87 FR 74672 (``Notice'').
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 96699, 88 FR 4260 
(January 24, 2023).
    \8\ See Securities Exchange Act Release No. 97039, 88 FR 14653 
(March 9, 2023).
    \9\ See Securities Exchange Act Release No. 97629, 88 FR 37112 
(June 6, 2023).
    \10\ All comments received by the Commission on the proposed 
rule change are available at: https://www.sec.gov/comments/sr-finra-2022-031/srfinra2022031.htm.
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II. Summary of the Proposed Rule Change

    As FINRA states in the Notice, Rule 606(a) of Regulation National 
Market System (``Regulation NMS'') requires broker-dealers to publicly 
disclose specified information about their order routing practices for 
NMS securities.\11\ In 2018, the Commission amended SEC Rule 606(a) to 
enhance required disclosures from broker-dealers about their order 
routing practices for NMS securities, including enhanced disclosures 
for non-directed orders in NMS stocks that are submitted on a ``held'' 
basis in order to better allow ``customers--and retail investors in 
particular--that submit orders to their broker-dealers [to] be better 
able to assess the quality of order handling services provided by their 
broker-dealers'' and to allow customers to determine ``whether their 
broker-dealers are effectively managing potential conflicts of 
interest.'' \12\
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    \11\ 17 CFR 242.606(a) (``SEC Rule 606(a)''). See also Notice, 
supra note 5, at 74672.
    \12\ See Securities Exchange Act Release No. 84528 (November 2, 
2018), 83 FR 58338 (November 19, 2018) (``SEC Rule 606 Adopting 
Release''). A broker-dealer must attempt to execute a ``held'' order 
immediately, while a ``not held'' order instead provides a broker-
dealer with price and time discretion. Id. at 58344. See also 
Notice, supra note 5, at 74672 n.5.
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    As described below and in more detail in the Notice, FINRA proposes 
to adopt FINRA Rule 6470 (Disclosure of Order Routing Information for 
OTC Equity Securities), which imposes disclosure requirements for OTC 
Equity Securities that are generally aligned with the requirements of 
SEC Rule 606(a) disclosures but with modifications to account for 
differences between the over-the-counter (``OTC'') markets and the 
market for NMS securities. In addition, to improve the accessibility of 
these new disclosures, as well as SEC Rule 606(a) reports, FINRA 
proposes to adopt FINRA Rule 6470(d) and FINRA Rule 6151 (Disclosure of 
Order Routing Information for NMS Securities) to require members to 
send both disclosures to FINRA for centralized publication on the FINRA 
website.
    Proposed FINRA Rule 6470 would require the publication of order 
routing disclosures for OTC Equity Securities.\13\ Specifically, 
proposed FINRA Rule 6470(a) would require every member to make publicly 
available for each calendar quarter a report on its routing of non-
directed orders in OTC Equity Securities that are submitted on a held 
basis during that quarter, broken down by calendar month, and keep such 
report posted on an internet website that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the internet website (``OTC Equity Security 
reports'').\14\ These reports would be required to be separated into 
three sections: (i) domestic OTC Equity Securities; (ii) American 
Depository Receipts and foreign ordinaries that are OTC Equity 
Securities; and (iii) Canadian-listed securities trading in the United 
States as OTC Equity Securities.\15\ In addition, proposed FINRA Rule 
6470(a) would specify that the new OTC Equity Security reports must be 
made available using the most recent versions of the XML schema and 
associated PDF renderer as published on the FINRA website,\16\ and 
proposed FINRA Rule 6470(d) would require the reports to be made 
publicly available within one month after the end of the quarter 
addressed in the report.\17\
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    \13\ See Notice, supra note 3, at 74672 n.8.
    \14\ Proposed FINRA Rule 6470 would apply to ``every member,'' 
but FINRA notes that the focus of the proposed disclosures is held 
orders from customers in OTC Equity Securities, and some members may 
not engage in any activities involving held orders from customers in 
OTC Equity Securities. See Notice, supra note 5 at 74673 n.9. If a 
member does not accept any orders in OTC Equity Securities from 
customers during a given calendar quarter (whether held or not 
held), such member would not be required to publish a report under 
Rule 6470 for that quarter. Id. Similarly, a member that accepted 
only not held orders in OTC Equity Securities from customers--but no 
held orders in OTC Equity Securities from customers--during a given 
calendar quarter would not be required to publish a report for that 
quarter. Id. Further, FINRA states that if a member accepted orders 
in OTC Equity Securities (whether held, not held, or both) only from 
other broker-dealers, but not from customers, during a given 
calendar quarter, such member would not be required to publish a 
report for that quarter. Id.
    \15\ FINRA states that to provide for consistency across member 
reports, FINRA will publish a list of the OTC Equity Security 
symbols that fall under each category, and members would be required 
to publish reports in a manner consistent with such list. See 
Notice, supra note 5, at 74673. FINRA states that it will provide 
information in the Regulatory Notice announcing the effective date 
regarding where members may access the list of OTC Equity Security 
symbols that FINRA will maintain on its website. Id. at 74674 n.11. 
FINRA also notes that these categories differ from the NMS 
securities categories required to be reported for SEC Rule 606(a) 
reports, which it believes are not relevant to the OTC market. Id.
    \16\ FINRA states that it will publish the technical 
specifications for the XML schema and associated PDF renderer on its 
website for member use in generating the new reports. See Notice, 
supra note 5, at 74673 n.12. FINRA expects that, subject to the 
differences between the SEC Rule 606(a) reports and the OTC Equity 
Security reports, the XML schema and associated PDF renderer 
published by FINRA would be substantially similar to those published 
by the SEC for the SEC Rule 606(a) reports. Id. FINRA believes this 
requirement would ensure that reports are generated and published in 
standardized machine-readable and human-readable forms, which would 
benefit investors by permitting the public to more easily analyze 
and compare the OTC Equity Security reports across members, as well 
as to more easily perform combined analysis of both SEC Rule 606(a) 
and OTC Equity Security reports. Id. at 74763.
    \17\ FINRA states that it understands that some introducing 
firms route all of their orders in OTC Equity Securities to one or 
more clearing firms for further routing to other venues for 
execution. See Notice, supra note 5 at 74673 n.10. FINRA states that 
the Commission has provided guidance that, where an introducing firm 
routes all of its covered orders to one or more clearing firms for 
further routing and execution and the clearing firm in fact makes 
the routing decision, the introducing firm generally may comply with 
the SEC Rule 606(a) order routing disclosure requirements by: (i) 
disclosing its relationship with the clearing firm(s) on its website 
that includes any payment for order flow received by the introducing 
firm, and (ii) adopting the clearing firm's disclosures by 
reference, provided that the introducing firm has examined the 
report and does not have reason to believe it materially 
misrepresents the order routing practices. Id. FINRA states that it 
intends to provide parallel guidance with respect to proposed FINRA 
Rule 6470. Id.
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    Pursuant to proposed FINRA Rule 6470(a), the new OTC Equity 
Security reports would be required to include the information specified 
in paragraphs (a)(1) through (4) of proposed FINRA Rule 6470, 
specifically:
     the percentage of total orders \18\ for the section that 
were not held orders and held orders, and the percentage of held orders 
for the section that were non-directed orders; \19\
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    \18\ FINRA states that ``total orders'' would include all orders 
from customers for the section, including both directed and non-
directed orders from customers. See Notice, supra note 5, at 74673 
n.14.
    \19\ FINRA states that for purposes of the proposed disclosures, 
a ``non-directed order'' would mean any order from a customer other 
than a directed order. See Notice, supra note 5, at 74673-74 n.15. 
FINRA further states that consistent with the definition of 
``directed order'' under Regulation NMS, a ``directed order'' would 
mean an order from a customer that the customer specifically 
instructed the member to route to a particular venue for execution. 
See id.; 17 CFR 242.600(b). FINRA notes that, similar to the 
definition of ``customer'' under SEC Rule 600(b)(23) of Regulation 
NMS, a ``customer'' is defined under FINRA rules to exclude a broker 
or dealer. See FINRA Rule 0160(b)(4). Orders from other broker-
dealers would therefore be excluded from the proposed disclosures. 
See Notice, supra note 5, at 74673-74 n.15.
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     the identity of the ten venues to which the largest number 
of total non-directed held orders for the section were

[[Page 53562]]

routed for execution \20\ and of any venue to which five percent or 
more of non-directed held orders for the section were routed for 
execution, and the percentage of total non-directed held orders for the 
section routed to the venue; \21\
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    \20\ FINRA states that, consistent with the Commission's 
approach to SEC Rule 606(a), a ``venue'' would be defined broadly to 
cover any market center or any other person or entity to which a 
member routes orders for execution. See Notice, supra note 5, at 
74674 n.16. Accordingly, for purposes of proposed FINRA Rule 6470, 
where an alternative trading system (``ATS'') offers both automatic 
order execution and order delivery functionality, the ATS should be 
identified as the venue only when the ATS provides order execution. 
Conversely, for purposes of proposed FINRA Rule 6470, in cases where 
the ATS instead provides order delivery, the separate market center 
to which the orders are delivered--e.g., a market maker or other 
ATS--should be identified as the venue where the order was routed 
for execution. Id.
    \21\ Proposed FINRA Rule 6470(b) would provide that a member is 
not required to identify execution venues that received less than 5% 
of non-directed held orders for a section of the member's OTC Equity 
Security report, provided that the member has identified the top 
execution venues that in the aggregate received at least 90% of the 
member's total non-directed held orders for the section. FINRA 
states that this provision is consistent with exemptive relief that 
the Commission has provided with respect to SEC Rule 606(a) reports. 
See Notice, supra note 5, at 74674 n.17.
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     for each identified venue, the net aggregate amount of any 
payment for order flow received, payment from any profit-sharing 
relationship received, transaction fees paid, and transaction rebates 
received, both as a total dollar amount and per order, for all non-
directed held orders for the section; and
     a discussion of the material aspects of the member's 
relationship with each identified venue, including, without limitation, 
a description of any arrangement for payment for order flow and any 
profit-sharing relationship and a description of any terms of such 
arrangements, written or oral, that may influence a member's order 
routing decision including, among other things: (i) incentives for 
equaling or exceeding an agreed upon order flow volume threshold, such 
as additional payments or a higher rate of payment; disincentives for 
failing to meet an agreed upon minimum order flow threshold, such as 
lower payments or the requirement to pay a fee; (ii) volume-based 
tiered payment schedules; and (iii) agreements regarding the minimum 
amount of order flow that the member would send to a venue.\22\
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    \22\ FINRA states that the types of arrangements referenced 
above are not an exhaustive list of terms of payment for order flow 
arrangements or profit-sharing relationships that may influence a 
broker-dealer's order routing decision that would be required to be 
disclosed. See Notice, supra note 5, at 74674 n.18. For example, if 
a broker-dealer receives a discount on executions in other 
securities or some other advantage in directing order flow in a 
specific security to a venue, or if a broker-dealer receives equity 
rights in a venue in exchange for directing order flow there, then 
all terms of those arrangements would also be required to be 
disclosed. Id. Similarly, if a broker-dealer receives variable 
payments or discounts based on order types and the number of orders 
sent to a venue, such arrangements would be required to be 
disclosed. Id. However, FINRA notes that these are only examples, 
and a member would be required to disclose any other material 
aspects of its relationship with each identified venue regardless of 
whether a particular example is listed in the proposed rule text or 
otherwise discussed in this proposed rule change. Id.
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    To make both the existing SEC Rule 606(a) reports and the new OTC 
Equity Security reports more accessible for regulators, investors and 
others seeking to analyze and compare the data, FINRA is proposing to 
require that members provide the reports to FINRA for central 
publication on the FINRA website. Proposed FINRA Rule 6151 would 
require every member that is required to publish a SEC Rule 606(a) 
report to provide the report to FINRA, in a manner prescribed by FINRA, 
within the same time and in the same formats that such report is 
required to be made publicly available pursuant to SEC Rule 606(a). In 
combination with proposed FINRA Rule 6470(d), which would require 
members to provide the OTC Equity Security report to FINRA within one 
month after the end of the quarter addressed in the report in such a 
manner as may be prescribed by FINRA, FINRA would be able to publish 
both SEC Rule 606(a) and OTC Equity Security reports on its public 
website, free of charge and without usage restrictions.\23\
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    \23\ See Notice, supra note 5, at 74674-75. FINRA states that 
the SEC has provided guidance that introducing firms may comply with 
SEC Rule 606(a) by incorporating their clearing firm(s)'s reports in 
specified circumstances, and FINRA intends to provide similar 
guidance with respect to the OTC Equity Security reports required 
under proposed FINRA Rule 6470. Id. at 74675 n.25. To facilitate 
centralized access to the reports, such introducing firms must 
provide FINRA with a list of their clearing firm(s) and the 
hyperlink to the web page where they disclose their clearing firm 
relationship(s) and adopt the clearing firm(s)'s reports by 
reference. Id. Each introducing firm relying on this guidance would 
be required to provide this information to FINRA upon implementation 
of the proposed rule change and to update FINRA if the information 
previously provided changes. Id. This information will enable FINRA 
to provide investors with relevant information for all firms, 
including introducing firms incorporating clearing firm reports by 
reference, on FINRA's website. Id.
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    FINRA states that it undertook an ``economic impact assessment'' to 
analyze the potential economic impacts of the proposed rule change, 
including potential costs, benefits, and distributional and competitive 
effects, relative to the current baseline.\24\ In this analysis, FINRA 
analyzed the number of firms quoting, executing trades and routing 
orders in OTC Equity Securities over specific time periods, as well as 
the number of symbols traded per firm and average dollar volume of 
trading per symbol and per firm. In addition, FINRA published the 
proposed rule change in Regulatory Notice 21-35 (October 2021) and 
received five comments in response.\25\ FINRA provided these comments, 
as well as a summary of these comments and its responses in its filing 
with the Commission.\26\
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    \24\ See Notice, supra note 5, at 74675-78.
    \25\ Comments received by FINRA are available on FINRA's website 
at https://www.finra.org/rules-guidance/notices/21-35#comments.
    \26\ See Notice, supra note 5, at 74678-80.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to a national securities 
association.\27\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\28\ which requires, among other things, that the association's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest, and that the rules are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78o-3(b)(6).
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    The Commission received two comment letters that were broadly 
supportive of the proposed rule change and greater transparency 
regarding the routing of orders in OTC Equity Securities in 
general.\29\ Another commenter submitted three comment letters, and was 
supportive of some aspects of the proposal, but expressed concerns 
about and opposed other aspects of the proposal, as discussed 
below.\30\
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    \29\ See letters to Vanessa Countryman, Secretary, Commission, 
from G.P., dated November 30, 2022; and from Daniel Lambden, dated 
December 5, 2022.
    \30\ See letters to Vanessa Countryman, Secretary, Commission, 
from Howard Meyerson, Managing Director, Financial Information 
Forum, dated December 20, 2022 (``FIF Letter''), dated February 3, 
2023 (``FIF Letter II''), and dated April 13, 2023 (``FIF Letter 
III''). The commenter is supportive of some aspects of the proposal, 
including: FINRA's proposal to maintain the same quarterly reporting 
timeframe for OTC Equity Security reports as applies for SEC Rule 
606(a) reporting; FINRA's chosen OTC Equity Security reporting 
categories; FINRA's assertion that it will publish and maintain a 
file of which symbols are included in each OTC Equity Security 
category and make this file accessible to all industry members 
without charge; FINRA's approach of not requiring the OTC Equity 
Security reports to be broken out by order type; FINRA's proposal to 
require reporting of payments per executed order rather than per 
share; FINRA's decision to limit the OTC Equity Security reports to 
non-directed held orders; and proposed FINRA Rule 6470(b) which 
would provide a limited exception to venue reporting requirements in 
proposed FINRA Rule 6470(a)(2). See FIF Letter at 7-9. The commenter 
and FINRA both state that the proposal to require reporting of 
payments per executed order rather than per share is consistent with 
current industry practice for OTC Equity Securities. See id.; 
Notice, supra note 5, at 74674.

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[[Page 53563]]

A. Disclosure in the Routing Firm Scenario

    Among other things, proposed FINRA Rule 6470(a) requires a member 
to disclose the identity of the ten venues to which the largest number 
of total non-directed held orders for the section were routed for 
execution and of any venue to which five percent or more of non-
directed held orders for the section were routed for execution.\31\ The 
commenter states that it opposes this aspect of the proposal because 
the proposed FINRA rule, like SEC Rule 606(a), would require a 
reporting firm that receives and routes customer orders to a second 
firm (``routing firm'') that does not execute customer orders but 
routes those orders to other venues for execution (``routing firm 
scenario''), to disclose the venue to which the routing firm routes the 
customer orders for execution.\32\ The commenter states that this 
requires the reporting firm to report the net fees paid and rebates 
received between the routing firm and the execution venue in the OTC 
Equity Security report tables (i.e., the disclosures required by 
proposed FINRA Rule 6470(a)(3)) and material aspects disclosures (i.e., 
the disclosures required by proposed FINRA Rule 6470(a)(4)).\33\ The 
commenter states that the proposed FINRA rule, like SEC Rule 606(a), 
does not require the reporting of the net fees paid or rebates received 
between the reporting firm and the routing firm in the OTC Equity 
Security report tables.\34\
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    \31\ See proposed FINRA Rule 6470(a)(2).
    \32\ See FIF Letter at 2. The commenter describes what it 
believes is a ``highly problematic `look-through' approach'' used by 
the Commission in its application of SEC Rule 606(a) and its 
predecessor rule, Rule 11Ac1-6, to the routing firm scenario. See 
id. at 2; and FIF Letter III at 4-5. The commenter states that this 
``look-through'' approach was not included in the text of Rule 
606(a) nor discussed in the 2018 amendments to Rule 606(a) 
reporting. The Commission highlights that the requirement in SEC 
Rule 606(a) to report the venues to which orders were routed ``for 
execution'' has been in place since Rule 11Ac1-6 was originally 
adopted in 2000. In the Rule 11Ac1-6 adopting release, the 
Commission stated that ``[t]he term `venue' is intended to be 
interpreted broadly to cover `market centers' within the meaning of 
Rule 11Ac1-5(a)(14), as well as any other person or entity to which 
a broker routes non-directed orders for execution. Consequently, the 
term excludes an entity that is used merely as a vehicle to route an 
order to a venue selected by the broker-dealer.'' (emphasis in the 
original). See Securities Exchange Act Release No. 43590 (November 
17, 2000), 65 FR 75414, 75427 n.63 (December 1, 2000).
    \33\ See FIF Letter at 2. See also proposed FINRA Rule 
6470(a)(3) and (4).
    \34\ See FIF Letter at 2. See also proposed FINRA Rule 
6470(a)(3).
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    The commenter states that this approach obscures relevant 
information from retail customers because, to understand the financial 
inducements faced by a reporting firm, the relevant information is the 
payment between the reporting firm and the routing firm. The commenter 
also states that this results in reported data that is not comparable 
across broker-dealers.\35\ In addition, the commenter states that the 
approach results in reporting of arrangements that are not relevant to 
investors and results in relevant and important information being 
excluded from the reports.\36\ The commenter also states that this 
approach requires firms to report on financial arrangements to which 
they might not be a party, that the rules do not impose any obligation 
on the routing firm to provide data to the reporting firm, and a 
reporting firm cannot effectively validate the data received from 
routing firms, particularly in situations where a foreign routing firm 
routes to a foreign execution venue.\37\ The commenter further states 
that the rule filing does not explicitly discuss the costs for this 
reporting.\38\ The commenter also suggests that if FINRA adopts this 
reporting, then proposed FINRA Rule 6470 should be revised to address 
the routing firm scenario, because the proposed rule does not 
accurately describe what firms are required to report.\39\
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    \35\ See id. at 3-4.
    \36\ See FIF Letter III at 3-5. In FIF Letter III, the commenter 
sets forth a scenario of order routing reporting under SEC Rule 
606(a) that inaccurately reflects the requirements of such rule. In 
the scenario, FIF incorrectly assumes reporting is based on the 
number of orders routed by the reporting broker-dealer instead of 
the number of orders received by the reporting broker-dealer from 
the customer as required by SEC Rule 606(a). See id. at 4-5; see 
also letter to Vanessa Countryman, Secretary, Commission, from 
Robert McNamee, Vice President & Associate General Counsel, FINRA, 
dated June 23, 2023 (``FINRA Letter II'') at 3 n.12.
    \37\ See FIF Letter at 5.
    \38\ See id. at 5.
    \39\ See id. at 6; FIF Letter III at 6.
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    FINRA believes that the proposal is clear concerning the execution 
venue reporting requirement.\40\ FINRA states that, as is the case with 
SEC Rule 606(a), the plain language of proposed Rule 6470(a)(2) 
requires disclosure of venues to which orders ``were routed for 
execution.'' \41\ FINRA highlights that, consistent with SEC Rule 
606(a), the purpose of its proposed disclosures is to provide 
information about members' order routing practices and potential 
conflicts of interest related to execution venues and, therefore, FINRA 
believes that the same types of venues should be covered by its new OTC 
Equity Security reports as are covered by SEC Rule 606(a) reports.\42\ 
FINRA also states that members already have experience with SEC Rule 
606(a) and may be able to utilize existing systems and arrangements 
with routing firms to provide the disclosures, and that aligning the 
scope of the SEC Rule 606(a) and OTC Equity Security reports may also 
reduce potential investor confusion that could arise with similar 
reports that do not provide information about the same types of 
venues.\43\
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    \40\ See letter to Vanessa Countryman, Secretary, Commission, 
from Robert McNamee, Associate General Counsel, FINRA, dated March 
29, 2023 (``FINRA Letter'') at 5 and FINRA Letter II at 2-4.
    \41\ See FINRA Letter at 5. FINRA also states that, if a member 
routes to another broker-dealer that does not itself execute orders, 
that receiving broker-dealer would not be an execution venue under 
the text of the proposed rule. See id. Additionally, FINRA has 
undertaken an economic impact assessment that analyzed, among other 
things, the potential costs and benefits of the proposal as 
described in the filing, which clearly contemplates disclosure of 
execution venues rather than routing brokers. See id. FINRA's 
assessment of costs is based on its experience with order routing 
reporting and adequately describes the costs of producing the 
report.
    \42\ See FINRA Letter at 4.
    \43\ See id.
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    FINRA states that it is appropriate to require reporting firms to 
provide information on the routing firm's arrangements with execution 
venues because reporting firms are responsible for their order handling 
choices, and FINRA believes that it is reasonable to require reporting 
firms to obtain and disclose the required information from broker-
dealers they choose to use as their routing firms, including where a 
routing firm or an execution venue is located abroad.\44\ In addition, 
FINRA states that ``requiring disclosure of execution venues would make 
the reports more easily comparable across reporting firms, as the 
reports would all include information about the financial inducements 
that may influence a member's decision to route to

[[Page 53564]]

destinations where the order may be executed by the recipient venue.'' 
\45\
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    \44\ See id.
    \45\ See id. While the financial inducements between a reporting 
firm and a routing firm are not disclosed pursuant to proposed FINRA 
Rule 6470(a)(3), FINRA states that, consistent with SEC Rule 606(a), 
such information may be disclosed in the report's discussion of the 
material aspects of the member's relationship with an execution 
venue pursuant to proposed FINRA Rule 6470(a)(4). See id. at 4-5 
n.14; see also FINRA Letter II at 4.
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    Proposed FINRA Rule 6470, like SEC Rule 606(a), requires the 
routing report to cover venues to which orders are ``routed for 
execution.'' \46\ If a routing firm does not execute orders, then it 
cannot be the venue to which orders were ``routed for execution,'' and 
thus the obligation of the reporting firm is to report the relevant 
information for the execution venues to which the routing firm routes 
orders to for execution.\47\ In response to comments challenging 
reporting based on the venue to which orders are routed for execution, 
specifically that the proposed rule is not clear and does not result in 
comparable data, the Commission agrees with FINRA that requiring the 
OTC Equity Security report to cover venues to which orders are ``routed 
for execution'' would ensure that the reports include information about 
the financial inducements that may influence a member's decision to 
route to destinations where the order may be executed by the recipient 
venue (whether routing orders itself or through an agent routing 
firm).\48\ It is reasonable and appropriate that the scope of 
disclosures required by proposed FINRA Rule 6470(a) aligns with the 
scope of the requirements of SEC Rule 606(a) by requiring the reports 
to include information for venues to which orders are ``routed for 
execution,'' which would ensure consistency across such reports. In 
addition, proposed FINRA Rule 6470 clearly and adequately addresses the 
application of the rule to the routing firm scenario raised by the 
commenter. The Commission also agrees with FINRA that requiring 
disclosure of execution venues would make the reports more easily 
comparable across reporting firms, as the reports would all include 
information about the financial inducements that may influence a 
member's decision to route to destinations where the order may be 
executed by the recipient venue. In response to comments raising cost 
concerns, FINRA has undertaken an economic impact assessment that 
analyzed, among other things, the potential costs and benefits of the 
proposal that was based on its experience with order routing reporting.
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    \46\ 17 CFR 242.606(a)(2); proposed FINRA Rule 6470(a)(2).
    \47\ See supra notes 20-21 and accompanying text.
    \48\ The Commission disagrees with commenter concerns that this 
approach obscures relevant information from retail customers, 
because, to the extent that a reporting firm receives financial 
inducements from a routing firm when routing orders to an execution 
venue, such financial inducements may be reported pursuant to FINRA 
Rule 6470(a) as material aspects of the routing firm's relationship 
with the execution venue. See Notice, supra note 5, at 74674 n.18.
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B. OTC Equities With a Limited Number of Available Execution Venues

    The commenter states that there are a significant number of OTC 
stocks that have a limited number of available execution venues (in 
many cases, only one or two market centers), and states that there is a 
potential risk that investors viewing the report for these stocks would 
see a high percentage of order flow being routed to one or two venues 
without appropriate context of the limited choices available to the 
reporting firm and that some firms with lower trading volume in OTC 
Equity Securities could have routing relationships with a limited 
number of market makers.\49\ The commenter suggests that FINRA should 
identify this as a factor for investors to consider when reviewing a 
member's OTC Equity Security report.\50\ FINRA responds that, while the 
OTC Equity Securities market differs from the NMS securities market in 
the number of available execution venues, it intends to, as 
appropriate, provide members, investors, and others with information 
and otherwise engage in investor education efforts about the purpose, 
content, and potential limitation of the reports.\51\ In addition, 
FINRA states that members could also provide additional explanatory 
context regarding their OTC Equity Security reports, provided that such 
information is accurate, not misleading, and otherwise complies with 
other applicable SEC and FINRA requirements.\52\
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    \49\ See FIF Letter at 8.
    \50\ See id.
    \51\ See FINRA Letter at 6.
    \52\ See id.
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    The Commission believes that the proposed OTC Equity Security 
reports are appropriately designed to provide valuable information to 
customers and others regarding a FINRA member's order routing practices 
in OTC Equity Securities, which may elicit questions regarding such 
practices, including when a high percentage of order flow is being 
routed to a small number of venues. Among other things, the proposed 
OTC Equity Security reports should help facilitate and inform customer 
dialogues with their broker-dealers about the broker-dealers' order 
routing practices in OTC Equity Securities. For example, if a customer 
has questions about the number of execution venues or frequency of use 
of an execution venue, the customer should discuss those questions with 
their reporting broker. In those conversations, or through other means, 
the reporting broker could also provide additional explanatory context 
regarding their OTC Equity Security reports, provided that such 
information is accurate, not misleading, and otherwise complies with 
other applicable SEC and FINRA requirements.\53\
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    \53\ See id. In addition, as described above, FINRA has stated 
that as appropriate, it intends to provide members, investors, and 
others with information and otherwise engage in investor education 
efforts about the purpose, content, and potential limitation of the 
reports. See id.
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C. Use of Consolidated Audit Trail (``CAT'') Data

    The commenter also states that FINRA should consider whether 
certain categories of data that firms are required to report in the OTC 
Equity Security reports could be obtained by FINRA from the CAT.\54\ In 
the filing, FINRA states that it is not proposing to use CAT data 
because of restrictions on the use of CAT data, and because FINRA 
believes the most efficient and comprehensive means of providing the 
data included in the OTC Equity Security order routing disclosures is 
for members to generate the reports directly.\55\ FINRA also states 
that not all of the data required in the reports is also reported to 
CAT.\56\ The Commission agrees with FINRA that the most efficient and 
comprehensive means of obtaining the data included in the OTC Equity 
Security report is from members directly. The CAT does not contain all 
of the data required on the OTC Equity Security reports, while FINRA 
members with reporting obligations under the new rule will have the 
means of collecting and reporting the required data.
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    \54\ FIF Letter at 6. The CAT is operated pursuant a national 
market system plan approved by the Commission pursuant to Section 
11A of the Exchange Act and the rules and regulations thereunder. 
See Securities Exchange Act Release No. 79318 (November 15, 2016), 
81 FR 84696 (November 23, 2016).
    \55\ See Notice, supra note 5, at 74678-79.
    \56\ See FINRA Letter at 3.
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D. Implementation and Comment Period

    The commenter also raises concerns about implementation of the 
proposal, stating that it is important to ensure that industry members 
will have sufficient time to properly implement the planned

[[Page 53565]]

reporting changes.\57\ The commenter also states that the rule filing 
does not provide clear guidance on reporting scenarios relating to 
trading on OTC Link ATS and raises several hypothetical situations 
where it believes OTC Link ATS should be reported as the execution 
venue, as opposed to where the execution actually took place.\58\ In 
the proposal, FINRA states that it intends to engage with members and 
other interested parties prior to implementation of the proposed rule 
change, including specifically to discuss order routing disclosures in 
scenarios involving OTC Link ATS, as well as provide guidance as 
appropriate on other interpretative questions.\59\ FINRA also provided 
responses to the specific scenarios the commenter provided 
demonstrating why the execution venue and not OTC Link ATS should be 
reported under the proposed rules.\60\ FINRA reiterates that, for 
purposes of the proposed disclosures for OTC Equity Securities, a 
``venue'' would be defined broadly to cover any market center or any 
other person or entity to which a member routes for execution, and 
consequently would exclude an entity that is used merely as a vehicle 
to route an order to a venue selected by the broker-dealer.\61\ Thus, 
FINRA states that, for purposes of proposed Rule 6470, where an 
alternative trading system (``ATS'') offers both automatic order 
execution and order delivery functionality, the ATS should be 
identified as the venue only when the ATS provides order execution.\62\ 
FINRA believes identification of the ATS in these circumstances is 
appropriate because the ATS is the venue where the order was routed 
``for execution,'' consistent with SEC Rule 606(a).\63\ FINRA also 
believes that, for purposes of proposed Rule 6470, in cases where the 
ATS instead provides order delivery, the separate market center to 
which the orders are delivered--e.g., a market maker or other ATS--
should be identified as the venue where the order was routed for 
execution.\64\
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    \57\ FIF Letter at 9-10. The commenter specifically requests 
that any implementation timetable should run from the date that 
FINRA publishes technical specifications, schemas, interpretive FAQs 
and other applicable documentation. Id. at 9.
    \58\ FIF Letter at 6 and FIF Letter II at 2-4.
    \59\ See Notice, supra note 5, at 74680. See also FINRA Letter 
at 7-8, stating that FINRA recognizes that members will require 
sufficient time to implement the new disclosure requirements, 
intends to provide an appropriate amount of time for implementation 
of the proposal, will work with the industry to publish technical 
specifications appropriately in advance of the implementation date, 
and will also publish interpretive guidance to the extent needed--
including on routing scenarios unique to certain platforms in the 
OTC Equity Security market--with sufficient time allowed for 
implementation.
    \60\ See FINRA Letter II at 6-8.
    \61\ See id. at 6.
    \62\ Id.
    \63\ Id.
    \64\ Id.
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    The Commission believes that FINRA's statements with respect to 
implementation are reasonable and appropriate. As stated above, FINRA 
recognizes that members will require sufficient time to implement the 
new disclosure requirements, intends to provide an appropriate amount 
of time for implementation of the proposal, will work with the industry 
to publish technical specifications appropriately in advance of the 
implementation date, and will also publish interpretive guidance to the 
extent needed--including on routing scenarios unique to certain 
platforms in the OTC Equity Security market--with sufficient time 
allowed for implementation. In addition, FINRA has stated that it will 
announce the effective date of the proposed rule change in a Regulatory 
Notice and the effective date will be no later than 365 days following 
publication of the Regulatory Notice.\65\ Also, some broker-dealers 
will have familiarity and the ability to more easily produce OTC Equity 
Security reports due to experience in producing SEC Rule 606(a) reports 
for NMS securities, making the implementation reasonable and 
appropriate.
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    \65\ See Notice, supra note 5, at 74675.
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    Moreover, the commenter expresses concern that there was not 
sufficient time to comment on this proposal.\66\ The Commission, 
however, published the proposal for comment; designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings; instituted proceedings; 
and extended its time to act on the proposal,\67\ during which time the 
commenter submitted three comment letters. Accordingly, there has been 
sufficient opportunity for comment on the proposal.
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    \66\ See FIF Letter at 10.
    \67\ See supra notes 7-9 and accompanying text.
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E. Centralized Hosting of Order Routing Disclosures

    The commenter states that its members support centralized 
publication of SEC Rule 606(a) reports and the OTC Equity Security 
reports by FINRA, but states that if FINRA will publish these reports 
that firms should no longer be required to separately publish these 
reports on their own websites, and instead firms should be required to 
provide a link from its public website to the applicable section of the 
FINRA website.\68\ The commenter also suggests that FINRA create a 
database with structured firm routing report data that can be accessed 
through automated queries.\69\ FINRA confirms that a member would 
satisfy the proposed requirement to publish the new OTC Equity Security 
reports on the member's website by including a link from its own 
website to the FINRA web page hosting centralized publication of OTC 
Equity Security reports.\70\ With respect to the commenter's 
recommendation that FINRA create a structured database that users may 
query, FINRA states that it is not contemplating such a database 
currently but will continue to consider ways to facilitate investor 
access to, and the usefulness of, the OTC Equity Security reports.\71\ 
In addition, FINRA states in the proposal that it intends to engage in 
investor education efforts regarding the purpose, content, and 
potential limitations of the disclosures.\72\
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    \68\ FIF Letter at 7.
    \69\ Id.
    \70\ See FINRA Letter at 2.
    \71\ Id.
    \72\ See Notice, supra note 5, at 74675 n.23.
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    SEC Rule 606(a) reports are required to be made publicly available 
within one month after the end of the quarter addressed in the report 
pursuant to Commission rule and such requirement is not affected by 
this proposal.\73\ With respect to OTC Equity Security reports required 
by proposed FINRA Rule 6470, it is reasonable for the OTC Equity 
Security reports to be required to be disclosed publicly in a similar 
manner to SEC Rule 606(a) reports. These proposed changes are 
reasonably designed to make order routing disclosures more accessible 
to investors and other relevant stakeholders. Consolidating order 
routing reports onto a single website could assist market participants, 
investors and the public to more easily compare order routing 
disclosures and practices across different firms and observe changes in 
routing behaviors over time.\74\
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    \73\ 17 CFR 242.606(a).
    \74\ At the time it adopted amendments to SEC Rule 606 in 2018, 
the Commission declined to require a centralized repository for SEC 
Rule 606(a) reports, although it stated that a centralized 
repository could help facilitate the goal of enabling customers to 
more readily and meaningfully assess broker-dealers' order handling 
practices. See SEC Rule 606 Adopting Release, supra note 12, at 
58377-78 for the Commission's rationale for not adopting that 
requirement. Here, FINRA has determined that it is appropriate to 
centralize its members' SEC Rule 606(a) and OTC Equity Security 
reports to make the reports more accessible for regulators, 
investors, and others seeking to analyze and compare the data.

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[[Page 53566]]

F. Symbol Categorization File

    The commenter supports FINRA's proposal to publish and maintain a 
file of which symbols are included in each OTC Equity Security category 
without charge, but recommends making this file available prior to the 
first day of each quarter for use in the upcoming quarter.\75\ The 
commenter states that requiring daily updates to the list would 
significantly increase the reporting burden without material impact on 
aggregating data for the quarter.\76\ Consistent with the commenter's 
request, FINRA confirms that it will make the symbol categorization 
file available prior to the first day of each calendar quarter for use 
during the entirety of the following quarter.\77\ The Commission 
believes that publishing and maintaining a symbol categorization file, 
which will be available prior to the first day of each quarter, is 
appropriate and would ease members' reporting burden.
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    \75\ FIF Letter at 7.
    \76\ See id.
    \77\ FINRA Letter at 2.
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G. Categorization of Held and Not Held Orders

    The commenter supports FINRA's proposal to limit the OTC Equity 
Security disclosures to non-directed held orders, but requests guidance 
on the proposed requirement to report the percentage of not held and 
held orders as a percentage of all orders.\78\ FINRA responds that it 
believes that all orders are either held or not held because a firm 
either has price and time discretion to execute the order, or it does 
not.\79\ The Commission agrees with FINRA, and has discussed the 
difference between held and not held orders and their separate 
reporting requirements under Rule 606 of Regulation NMS.\80\
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    \78\ See FIF Letter at 8.
    \79\ See FINRA Letter at 6, also stating that consistent with 
SEC guidance regarding the categorization of held and not held 
orders for purposes of SEC Rule 606(a), orders should be categorized 
as held or not held for purposes of the OTC Equity Security 
disclosures based on whether the customer reasonably expects the 
firm to attempt to execute its order immediately or instead 
reasonably expects the firm to use its price and time discretion to 
execute the order. FINRA Letter at 6 n.19, citing SEC Division of 
Trading and Markets, Responses to Frequently Asked Questions 
Concerning Rule 606 of Regulation NMS, Questions 15.01 through 
15.04. The Commission notes that these FAQs represent the views of 
the staff of the Division of Trading and Markets. They are not a 
rule, regulation, or statement of Commission. The Commission has 
neither approved nor disapproved their content. These FAQs, like all 
staff statements, have no legal force or effect: they do not alter 
or amend applicable law, and they create no new or additional 
obligations for any person.
    \80\ See SEC Rule 606 Adopting Release, supra note 12, at 58340-
41 and 58372.
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    Overall, the proposed requirements relating to the disclosure of 
order routing information for OTC Equity Securities are reasonably 
designed to assist customers in evaluating the quality of the order 
routing services of their broker-dealers and how well their broker-
dealers manage potential conflicts of interest with execution venues. 
Customers would be better able to assess indirect and previously 
unobservable costs of trading OTC Equity Securities, including, among 
other things, payment for order flow and transaction fees paid less 
rebates, which should allow customers to assess the performance of its 
broker-dealer(s) and be better informed in making choices among firms. 
The similarities in reporting requirements between proposed FINRA Rule 
6470(a) and SEC Rule 606(a) should reduce the burden of reporting for 
broker-dealers that already produce SEC Rule 606(a) reports, and the 
proposed differences in reporting requirements for OTC Equity 
Securities under proposed FINRA Rule 6470(a) and SEC Rule 606(a) 
reports for NMS securities are reasonable and appropriate due to 
differences in the nature of OTC Equity Securities and the markets in 
which they trade.\81\
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    \81\ See Notice, supra note 5, at 74674 (describing the 
differences in reporting requirements for OTC Equity Securities 
under proposed FINRA Rule 6470(a) and SEC Rule 606(a) reports for 
NMS securities).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) \82\ of the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities association.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\83\ that the proposed rule change (SR-FINRA-2022-031) be, 
and hereby is, approved.
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    \83\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
---------------------------------------------------------------------------

    \84\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16886 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P


