80 FR 65838 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Reporting of OTC Transactions in Exchange-Traded Managed Fund Shares (NextShares) to FINRA

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 207 (October 27, 2015)

[Federal Register Volume 80, Number 207 (Tuesday, October 27, 2015)]
[Notices]
[Pages 65838-65841]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-27225]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76213; File No. SR-FINRA-2015-043]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Reporting of OTC Transactions in 
Exchange-Traded Managed Fund Shares (NextShares) to FINRA

October 21, 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 October 15, 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 the 
Substance of the Proposed Rule Change

    FINRA is proposing to adopt Rule 6184 (Transactions in Exchange-
Traded Managed Fund Shares (``NextShares'')) relating to the reporting 
of over-the-counter (``OTC'') transactions in exchange-traded managed 
fund shares, which have been approved by the SEC for listing and 
trading on the Nasdaq Stock Market LLC (``Nasdaq''). Exchange-traded 
managed fund shares are referred to under Nasdaq rules and herein as 
``NextShares.''
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
Background
    In November 2014, the SEC approved a proposed rule change filed by 
Nasdaq to adopt Nasdaq Rule 5745 governing the listing and trading of 
NextShares.\4\ As described more fully in Nasdaq's filing, NextShares 
will trade in the secondary market using a new trading protocol called 
``NAV-Based Trading.'' In NAV-Based Trading, all bids, offers and 
execution prices will be expressed as a premium or discount (which may 
be zero) to the fund's next-determined net asset value per share 
(``NAV''), e.g., NAV-$0.01 or NAV+$0.01. A NextShares Fund's NAV will 
be determined each business day after the close of trading. All trades 
will be binding at the time of execution, with the transaction prices 
contingent upon the determination of the NAV at the end of the trading 
day.\5\ Pursuant to Nasdaq Rule 5745, trading in NextShares is limited 
to Nasdaq's Regular Market Session through 4:00 p.m.\6\
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    \4\ See Securities Exchange Act Release No. 73562 (November 7, 
2014), 79 FR 68309 (November 14, 2014) (Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of File No. 
SR-NASDAQ-2014-020). In SR-NASDAQ-2014-020, Nasdaq used the terms 
``ETMF'' and ``ETMF Shares.'' On October 13, 2015, Nasdaq filed a 
proposed rule change to amend Nasdaq Rule 5745 to replace these 
terms with ``NextShares Fund'' and ``NextShares,'' respectively. See 
SR-NASDAQ-2015-121, available at nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2015/SR-NASDAQ-2015-121.pdf.
    \5\ Thus, because in NAV-Based Trading, prices of executed 
trades are not determined until the reference NAV is calculated, 
buyers and sellers of NextShares will not know the final value of 
their purchases and sales until the end of the trading day.
    \6\ As explained in SR-NASDAQ-2014-020, Nasdaq Rule 4120(b)(4) 
defines ``Regular Market Session'' as the trading session from 9:30 
a.m. to 4:00 p.m. or 4:15 p.m.; NextShares will trade until 4:00 
p.m.
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    In its filing with the SEC, Nasdaq explained that, because existing 
order transmission and processing systems commonly used by exchanges 
and firms are generally not designed to accommodate pricing 
arrangements such as NAV-Based Trading, the prices of NextShares trades 
and quotes will be represented intraday using a ``proxy price'' format. 
In proxy price format, a NextShares Fund's next-determined NAV will be 
represented as 100.00. A premium or discount of a stated amount to the 
next-determined NAV will be represented by the same increment or 
decrement from 100, e.g., NAV-$0.01 will be represented as 99.99, and 
NAV+$0.01 will be represented as 100.01. Nasdaq will report intraday 
bids, offers and trades for NextShares in real-time to the consolidated 
tape using the proxy price format. However, the trade will not clear 
and settle at the price expressed in the proxy price format. After a 
NextShares Fund's NAV has been calculated at the end of the trading 
day, Nasdaq will price each

[[Page 65839]]

trade executed on the exchange at the NAV (plus or minus any premium or 
discount) and will send the final pricing information to the National 
Securities Clearing Corporation (``NSCC'') for clearance and 
settlement.
    Under Nasdaq Rule 5745, the Intraday Indicative Value (``IIV'') of 
a NextShares Fund is the estimated intraday value of a fund share based 
on current information regarding the value of the securities and other 
assets held by the fund. Nasdaq's rule requires that IIVs for each 
NextShares Fund be widely disseminated by one or more major market data 
vendors at intervals of not more than 15 minutes throughout Nasdaq's 
Regular Market Session.
    On July 21, 2015, the SEC approved Nasdaq's filing proposing to 
list and trade the shares of 18 NextShares Funds, each of which is 
registered as an open-end investment company.\7\ Nasdaq recently 
announced that it has completed systems development to support the 
listing and trading of NextShares and will announce the exact listing 
and trading date soon.\8\ As noted above, it is anticipated that this 
date will be on or about February 1, 2016.
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    \7\ See Securities Exchange Act Release No. 75499 (July 21, 
2015), 80 FR 44406 (July 27, 2015) (Order Approving File No. SR-
NASDAQ-2015-036).
    \8\ See Equity Trader Alert #2015-144: Nasdaq Completes 
Proprietary Platform Development to Support NextShares ETMFs 
(September 14, 2015), available at www.nasdaqtrader.com/TraderNews.aspx?id=ETA2015-144. In its announcement, Nasdaq 
indicated that the initial product listing and introduction is 
subject to FINRA, DTCC and broker-dealer readiness.
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Proposed FINRA Rule 6184
    Because NextShares are NMS stocks, FINRA, as the self-regulatory 
organization (``SRO'') with responsibility for the OTC market, must 
support OTC trading in NextShares, and FINRA members that trade 
NextShares OTC will be required to report such transactions to FINRA. 
Thus, existing trade reporting requirements applicable to OTC 
transactions in NMS stocks will apply to OTC transactions in 
NextShares, including, for example, the requirement to report the trade 
as soon as practicable, but no later than 10 seconds, following 
execution.\9\
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    \9\ See, e.g., Rules 6282(a) and 6380A(a).
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    Pursuant to paragraph (a) of proposed Rule 6184, members that 
execute secondary market transactions in NextShares OTC must report 
such transactions for public dissemination or regulatory purposes to 
the FINRA/Nasdaq Trade Reporting Facility (``FINRA/Nasdaq TRF'') or the 
Alternative Display Facility (``ADF'') in accordance with the proposed 
Rule and the rules applicable to the trade reporting facility used by 
the reporting member.\10\ NYSE, as the Business Member under its TRF 
Limited Liability Company agreement with FINRA, has determined that the 
FINRA/NYSE Trade Reporting Facility will not support the reporting of 
these transactions at this time. In addition, pursuant to paragraph 
(d)(1) of proposed Rule 6184, OTC transactions in NextShares can only 
be designated for submission by FINRA to NSCC for clearance and 
settlement through the FINRA/Nasdaq TRF; otherwise, members that 
execute such transactions must have an alternative means of clearing 
(e.g., via direct Qualified Special Representative or ``QSR'' 
submission to NSCC).\11\
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    \10\ See, e.g., the Rule 6200 and 7100 Series applicable to the 
ADF and the Rule 6300A and 7200A Series applicable to the FINRA/
Nasdaq TRF.
    \11\ The ADF will not support the clearing of such transactions 
at this time.
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    Given the unique nature of NAV-Based Trading, FINRA is proposing 
the following specific requirements for reporting OTC transactions in 
NextShares to FINRA under proposed Rule 6184. First, as noted above, 
Nasdaq Rule 5745 limits trading in NextShares to Nasdaq's Regular 
Market Session. Accordingly, pursuant to paragraph (b) of proposed Rule 
6184, trades in NextShares reported with an execution time outside of 
Regular Market Session hours will be rejected by the FINRA trade 
reporting facility.
    Second, pursuant to paragraph (c) of the proposed Rule, except as 
otherwise expressly provided, members must use the above-described 
proxy price format on all reports of transactions in NextShares 
submitted to FINRA, including all tape and non-tape reports, intraday 
clearing reports, as/of reports and reports of reversals.
    Third, pursuant to paragraph (d)(2)(A) of the proposed Rule, 
members that report transactions in NextShares for submission by the 
FINRA/Nasdaq TRF to NSCC for clearance and settlement must submit two 
clearing reports: (1) The member must submit a clearing report intraday 
in the proxy price format in accordance with paragraph (c); \12\ and 
(2) following publication of the NextShares Fund's NAV at the end of 
the day, the member also must submit a ``Clearing Copy'' report to 
reflect the final NAV-based trade price, in accordance with the 
following requirements set forth in paragraph (d)(2)(B) of the proposed 
Rule.
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    \12\ Members must not wait until the NAV is published to submit 
transactions for clearing, because, as explained below and in the 
proposed Supplementary Material, all clearing submissions will be 
sent intraday to NSCC for risk management purposes.
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    First, the Clearing Copy report must be submitted before the close 
of the FINRA/Nasdaq TRF on the same day as submission of the 
transaction in the proxy price format to ensure that the transaction is 
included in NSCC's end of day processing. Second, consistent with 
current FINRA rules,\13\ a Clearing Copy report should only be 
submitted to the FINRA/Nasdaq TRF if the transaction was originally 
reported to the FINRA/Nasdaq TRF in the proxy price format. In other 
words, a member cannot report a trade for dissemination purposes to the 
ADF and for clearing purposes to the FINRA/Nasdaq TRF. Third, the 
Clearing Copy report must contain (1) the unique indicator specified by 
FINRA to denote a Clearing Copy report, and (2) the control number of 
the original trade report assigned by the FINRA/Nasdaq TRF. Such 
information will allow FINRA to link the Clearing Copy report to the 
associated trade report in the proxy price format. Fourth, members are 
expressly prohibited from aggregating multiple OTC transactions in 
NextShares in a single Clearing Copy report. In other words, members 
must submit a separate Clearing Copy report for each transaction 
originally reported in the proxy price format. Fifth, the proposed Rule 
clarifies that following submission of the Clearing Copy report, the 
member is not required to cancel the initial clearing submission for 
the same transaction in the proxy price format.
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    \13\ See, e.g., Rule 7230A(i).
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    Finally, pursuant to paragraph (d)(2)(C) of the proposed Rule, 
clearing reports for the purpose of transferring a position related to 
a previously executed trade, such as step-outs,\14\ must reflect the 
final NAV-based trade price, if submitted after publication of the NAV. 
In this instance, two clearing reports would not be required, and 
members would submit only a single clearing report (which would not be 
a Clearing Copy report) at the final trade price.
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    \14\ A step-out allows a member firm to allocate all or part of 
a client's position from a previously executed trade to the client's 
account at another broker-dealer. In other words, a step-out 
functions as a client's position transfer, rather than a trade; 
there is no exchange of shares and funds and no change in beneficial 
ownership. See, e.g., Trade Reporting FAQ 301.1, available at 
www.finra.org/industry/trade-reporting-faq#301.
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    The proposed Supplementary Material provides additional guidance 
for members on reporting in the proxy price format, as well as the 
process for the submission of OTC transactions in NextShares to NSCC 
intraday before the final trade price is known. Specifically, in 
accordance with NSCC requirements, the FINRA/Nasdaq TRF will calculate

[[Page 65840]]

the contract price of the trade based on the last published IIV and 
submit the transaction in real-time to NSCC for purposes of intraday 
risk management. The transaction will not clear and settle at the IIV-
based price, but instead at the final NAV-based trade price submitted 
by the reporting member in accordance with paragraph (d)(2)(B) 
described above.
    The proposed Supplementary Material also clarifies that members 
that clear directly at NSCC (and do not elect to have the FINRA/Nasdaq 
TRF submit trades on their behalf for clearance and settlement) must 
provide final pricing information for their executed trades to NSCC 
after the NAV is published, in accordance with NSCC requirements. FINRA 
will not do so on behalf of the member.
    FINRA notes that the staff discussed the proposed trade reporting 
requirements with two of its industry advisory committees, which 
generally indicated that the proposed approach to OTC trade reporting 
was reasonable. Committee members also acknowledged that firms would be 
required to make some systems changes for both trading and trade 
reporting purposes due to the unique nature of the NAV-Based Trading 
protocol. While some committee members indicated that they may not 
accept customer orders in NextShares due to the complexity of the 
product, other members felt that if there was customer demand, they 
would have to support trading in NextShares. However, FINRA notes that 
firms would not necessarily have to execute trades OTC, but could route 
to an exchange or another FINRA member for execution, and in that 
instance, would not be responsible for reporting the trade to FINRA.
    As noted in Item 2 of this filing, FINRA has filed the proposed 
rule change for immediate effectiveness and proposes that the operative 
date will be the date announced by Nasdaq for commencement of listing 
and trading of NextShares on the Nasdaq exchange under Nasdaq rules, 
which is currently anticipated to be on or about February 1, 2016. 
FINRA believes that the FINRA/Nasdaq TRF and members alike will have 
sufficient time to make and test the necessary systems changes to 
ensure systems readiness by the operative date.\15\
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    \15\ FINRA notes that currently there are no participants on the 
ADF, and FINRA does not anticipate there being an active ADF 
participant by the current NextShares implementation date of 
February 1, 2016, given the steps and timeframes required for the 
on-boarding of a new ADF participant. See, e.g., Securities Exchange 
Act Release No. 71407 (January 27, 2014), 79 FR 5472 (January 31, 
2014) (Order Approving File No. SR-FINRA-2013-031 relating to 
participation on the ADF).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ 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 is 
consistent with the Act because it requires that OTC transactions in 
NextShares, which are NMS stocks approved by the Commission, be 
reported to FINRA, in furtherance of FINRA's obligations as the SRO 
with responsibility for the OTC market. The proposed rule change will 
ensure that OTC transactions in NextShares are reported to FINRA in a 
uniform manner, consistent with current trade reporting rules 
applicable to OTC transactions in other NMS stocks. Among other things, 
the proposed rule change will ensure that trade data relating to OTC 
transactions in NextShares is disseminated to the consolidated tape and 
incorporated in FINRA's audit trail, and will facilitate the clearance 
and settlement of OTC transactions in NextShares.
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    \16\ 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.
    The proposed rule change proposes specific trade reporting 
requirements for OTC transactions in NextShares, which are NMS stocks 
that have been approved and determined by the Commission to be 
consistent with the requirements of the Exchange Act.\17\ FINRA 
believes that the proposed rule change will have no impact on many 
members. As an initial matter, on average, only several hundred firms 
execute and report OTC equity trades to FINRA on a regular basis.\18\ 
Many firms, including smaller firms, route their order flow to another 
firm, e.g., their clearing firm, for execution, and as the routing 
firm, they do not have the trade reporting obligation. Thus, the 
universe of FINRA members that report OTC trades today is a small 
fraction of overall FINRA members.\19\ Moreover, members will not be 
required to trade in NextShares and could elect not to accept a 
customer order for NextShares. Alternatively, firms could route orders 
for NextShares to the Nasdaq exchange or another FINRA member for 
execution and reporting.
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    \17\ In approving SR-NASDAQ-2014-020, the Commission stated that 
it considered the proposed rule's impact on efficiency, competition 
and capital formation. See 79 FR at 68315, fn 72.
    \18\ FINRA trade reporting rules require that for transactions 
between members, the ``executing party'' report the trade to FINRA. 
For transactions between a member and a non-member or customer, the 
member must report the trade. ``Executing party'' is defined under 
FINRA rules as the member that receives an order for handling or 
execution or is presented an order against its quote, does not 
subsequently re-route the order, and executes the transaction.
    \19\ FINRA notes that in its filings, Nasdaq did not provide an 
estimate of the number of firms that would be likely to trade 
NextShares on the exchange or the anticipated trading volume in 
NextShares. Accordingly, FINRA has no benchmark on which to base any 
reasonable estimates of the likely number of FINRA members that may 
elect to execute OTC transactions in NextShares (and would therefore 
be required to report those transactions pursuant to this proposed 
rule change) or the likely OTC volume in these products.
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    Nonetheless, members that choose to execute OTC transactions in 
NextShares will need to make systems changes to comply with the 
proposed amendments, including coding changes to accommodate the 
submission of Clearing Copy reports for firms that elect to clear 
through the FINRA/Nasdaq TRF. In addition, firms will need to adopt 
policies and procedures relating to the trading and reporting of such 
transactions. Firms will incur costs to implement and test these 
changes. While these costs may vary by firm (depending, for example, on 
the level of sophistication of a firm's technology and trading and 
reporting platforms), as noted above, firms will not be required to 
trade in NextShares. Therefore, each firm can determine for itself 
whether the costs of implementing the changes necessary to support OTC 
trading in NextShares are warranted. Additionally, as noted above, two 
of FINRA's industry advisory committees indicated that they believe the 
proposed trade reporting requirements are reasonable. As such, FINRA 
does not believe that the proposed rule change would impose significant 
or differential costs on similarly situated firms.

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

[[Page 65841]]

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 \20\ and Rule 19b-4(f)(6) thereunder.\21\ FINRA 
believes that the filing is appropriately designated as ``non-
controversial'' because the proposed rule change would adopt trade 
reporting requirements for OTC transactions in NextShares, which have 
been approved by the Commission for listing and trading on the Nasdaq 
exchange. FINRA believes that the proposed rule change proposes 
reasonable trade reporting requirements for OTC transactions in these 
securities and that firms would not find compliance with such 
requirements to be burdensome. Moreover, the proposed requirements 
would apply only to members that choose to trade NextShares OTC. As 
such, each firm can determine for itself whether the costs of 
implementing the changes necessary to support OTC trading in NextShares 
are warranted.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 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-2015-043 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-2015-043. 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 offices 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-2015-043, and should 
be submitted on or before November 17, 2015.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Brent J. Fields,
Secretary.
[FR Doc. 2015-27225 Filed 10-26-15; 8:45 am]
BILLING CODE 8011-01-P