80 FR 34727 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Exemptions From the Order Audit Trail System Recording and Reporting Requirements

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 116 (June 17, 2015)

[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34727-34729]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-14833]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75160; File No. SR-FINRA-2015-016]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Exemptions From the Order Audit Trail 
System Recording and Reporting Requirements

June 11, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 10, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 7470 to extend for four years 
FINRA's ability to exempt certain members from the recording and 
reporting requirements of the Order Audit Trail System (``OATS'') Rules 
(``OATS Rules'') for manual orders received by the member.
    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
* * * * *
7470. Exemption to the Order Recording and Data Transmission 
Requirements
    (a) through (b) No Change.
    (c) This Rule shall be in effect until July 10, 2019[2015].
* * * * *

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
    The OATS Rules impose obligations on FINRA members to record in 
electronic form and report to FINRA on a daily basis certain 
information with respect to orders originated, received, transmitted, 
modified, canceled, or executed by members relating to OTC equity 
securities and NMS stocks. OATS captures this order information and 
integrates it with quote and transaction information to create a time-
sequenced record of orders, quotes, and transactions. This information 
is then used by FINRA staff to conduct surveillance and investigations 
of member firms for violations of FINRA rules and federal securities 
laws and regulations.
    On September 28, 2005, the SEC approved amendments to the OATS 
Rules that, among other things, gave FINRA the authority to grant 
exemptive relief from the OATS reporting requirements for manual 
orders.\4\ In 2006, FINRA's exemptive authority was expanded to include 
the authority to exempt manual orders received by members from the OATS 
recording requirements.\5\ Under Rule 7470, at a minimum, members must 
meet the following criteria to be eligible to request an exemption from 
the OATS recording and reporting requirements for manual orders: (1) 
the member and current control affiliates and associated persons of the 
member have not been subject within the last five years to any final 
disciplinary action, and within the last ten years to any disciplinary 
action involving fraud; (2) the member has annual revenues of less than 
$2 million; (3) the member does not conduct any market making 
activities in any security subject to the OATS Rules; (4) the member 
does not execute principal transactions with its customers (with 
limited exceptions for principal transactions executed pursuant to 
error corrections); and (5) the member does not conduct clearing or 
carrying activities for other firms.\6\ An exemption granted by FINRA 
pursuant to Rule 7470 is for a maximum of two years; however, a member 
that continues to meet the criteria may request subsequent exemptions 
at or prior to the expiration of a grant of exemptive relief.\7\
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    \4\ See Securities Exchange Act Release No. 52521 (September 28, 
2005), 70 FR 57909 (October 4, 2005).
    \5\ See Securities Exchange Act Release No. 53580 (March 30, 
2006), 71 FR 17529 (April 6, 2006). In 2006, the exemptive provision 
was also relocated from NASD Rule 6955(d) to NASD Rule 6958. As of 
December 15, 2008, NASD Rule 6958 was renumbered as FINRA Rule 7470. 
See FINRA Regulatory Notice 08-57 (October 2008).
    \6\ See Rule 7470(a).
    \7\ See Rule 7470(b).
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    Rule 7470 also includes a sunset provision. As initially adopted, 
the exemptive provision expired as of July 10, 2011, which was five 
years from the original effective date of the rule.\8\ In 2011, FINRA 
filed a proposed rule change to extend the sunset provision until July 
10, 2015, noting that FINRA adopted this exemptive authority so that it 
would have the ability to grant relief to members that meet certain 
criteria in situations where, for example, the reporting of order 
information would be unduly burdensome for the member or where 
temporary relief from the OATS Rules, in the form of additional time to 
achieve compliance, would permit the members to avoid unnecessary 
expense or hardship.\9\ FINRA noted that these concerns continued to be 
present for many firms and concluded it was appropriate to allow firms 
that have received an exemption from OATS to continue to rely on their 
current exemption (or request an additional two-year exemption) until 
the scope and

[[Page 34728]]

application of the SEC's consolidated audit trail was determined.\10\
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    \8\ See Securities Exchange Act Release No. 52521 (September 28, 
2005), 70 FR 57909 (October 4, 2005).
    \9\ See Securities Exchange Act Release No. 64717 (June 21, 
2011), 76 FR 37384 (June 27, 2011).
    \10\ The SEC proposed Rule 613 under Regulation NMS regarding 
the consolidated audit trail on May 26, 2010. See Securities 
Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 
2010).
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    On July 18, 2012, the SEC adopted Rule 613 under Regulation NMS, 
which requires FINRA and the national securities exchanges (``SROs'') 
to jointly file an NMS plan to govern the creation, implementation, and 
maintenance of a consolidated audit trail and central repository.\11\ 
The SROs initially filed the NMS plan required by Rule 613 on September 
30, 2014, and, on February 27, 2015, filed a subsequent NMS plan to 
amend and restate the original plan filed the previous September (``CAT 
NMS Plan'').\12\ Under Rule 613 and the CAT NMS Plan, all broker-
dealers that are members of FINRA or a national securities exchange 
must report order information to the central repository; small broker-
dealers must report the required information no later than three years 
following the SEC's approval of the CAT NMS Plan, and all other broker-
dealers must report the required information no later than two years 
following the SEC's approval.\13\
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    \11\ See 17 CFR 242.613(a); see also Securities Exchange Act 
Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012).
    \12\ Although the SEC has not yet published the CAT NMS Plan for 
public comment, the CAT NMS Plan submitted by the SROs is available 
on the SROs' Web site at www.catnmsplan.com.
    \13\ See 17 CFR 242.613(a)(3)(v), (vi). Small broker-dealers are 
those that qualify as small broker-dealers as defined in 17 CFR 
240.0-10(c).
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    FINRA believes that extending the sunset provision in Rule 7470 for 
an additional four years is appropriate given the current state of the 
consolidated audit trail. If the CAT NMS Plan is published and approved 
by the SEC within the next year,\14\ all of those FINRA member firms 
currently reporting to OATS or relying on an exemption from OATS 
reporting will be reporting to the consolidated audit trail within four 
years, provided the SEC does not extend the implementation timeline 
laid out in Rule 613(a) or exempt some firms from reporting to the 
consolidated audit trail. If the SEC does not approve the CAT NMS Plan 
within the next year, FINRA still believes it is appropriate to extend 
the sunset provision in Rule 7470 so that those firms relying on the 
exemption may continue to do so provided they meet the criteria to 
qualify. FINRA believes that the proposed rule change will enable FINRA 
to exempt manual orders received by certain small firms from the OATS 
Rules and avoid imposing potentially unnecessary expense or hardship on 
those firms that qualify for the exemption. FINRA is not proposing any 
substantive changes to the criteria necessary for firms to qualify for 
an exemption because FINRA believes that the criteria continue to 
ensure that only those firms with limited revenue, no recent final 
disciplinary actions, and limited business models will be eligible.
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    \14\ Once an NMS plan is published for public comment, the SEC 
has a maximum of 180 days to approve the plan with such changes or 
subject to such conditions as the SEC may deem necessary or 
appropriate. See 17 CFR 242.608(b)(2).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be July 10, 2015.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ 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 exempt manual orders received by certain small firms 
from the OATS Rules and avoid imposing potentially unnecessary expense 
or hardship on those firms that qualify for the exemption. FINRA 
believes that the proposed rule change is particularly appropriate 
given the current state of the development of the consolidated audit 
trail which, unless amended, will require these small firms to report 
order information to the central repository created pursuant to Rule 
613. If the CAT NMS Plan is approved, these small firms can then devote 
resources to any applicable reporting obligations under Rule 613 and 
the CAT NMS Plan rather than reporting manual order information to OATS 
for a brief period of time in the interim.
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    \15\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. As noted above, FINRA believes 
that the proposed rule change will enable FINRA to exempt manual orders 
received by certain small firms from the OATS Rules and avoid imposing 
potentially unnecessary expense or hardship on those firms that qualify 
for the exemption. FINRA notes that the compliance burden on these 
firms would also potentially be imposed for only a short period of time 
as these firms will also be required to develop a means to report order 
information to the central repository of the consolidated audit trail 
if the SEC approves the CAT NMS Plan.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2015-016 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-2015-016. This 
file

[[Page 34729]]

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 will also 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-2015-016 and should be 
submitted on or before July 8, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-14833 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P