81 FR 95705 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rules To Conform to the Commission's Proposed Amendment to Commission Rule 15c6-1(a) and the Industry-Led Initiative To Shorten the Standard Settlement Cycle for Most Broker-Dealer Transactions From T+3 to T+2

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 249 (December 28, 2016)

Page Range		95705-95710
FR Document		2016-31308
Federal Register, Volume 81 Issue 249 (Wednesday, December 28, 2016)
[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Notices]
[Pages 95705-95710]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-31308]



[[Page 95705]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79648; File No. SR-FINRA-2016-047]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rules To Conform to the Commission's Proposed Amendment to 
Commission Rule 15c6-1(a) and the Industry-Led Initiative To Shorten 
the Standard Settlement Cycle for Most Broker-Dealer Transactions From 
T+3 to T+2

December 21, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 14, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 FINRA Rules 2341 (Investment Company 
Securities), 11140 (Transactions in Securities ``Ex-Dividend,'' ``Ex-
Rights'' or ``Ex-Warrants''), 11150 (Transactions ``Ex-Interest'' in 
Bonds Which Are Dealt in ``Flat''), 11210 (Sent by Each Party), 11320 
(Dates of Delivery), 11620 (Computation of Interest), 11810 (Buy-In 
Procedures and Requirements), and 11860 (COD Orders) to conform to the 
Commission's proposed amendment to SEA Rule 15c6-1(a) to shorten the 
standard settlement cycle for most broker-dealer transactions from 
three business days after the trade date (``T+3'') to two business days 
after the trade date (``T+2'') and the industry-led initiative to 
shorten the settlement cycle from T+3 to T+2.\3\
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    \3\ See Securities Exchange Act Release No. 78962 (September 28, 
2016), 81 FR 69240 (October 5, 2016) (Amendment to Securities 
Transaction Settlement Cycle) (File No. S7-22-16) (``SEC Proposing 
Release'').
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    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
SEC Proposing Release
    On September 28, 2016, the Commission proposed amending SEA Rule 
15c6-1(a) to shorten the standard settlement cycle for most broker-
dealer transactions from T+3 to T+2 on the basis that the shorter 
settlement cycle would reduce the risks that arise from the value and 
number of unsettled securities transactions prior to the completion of 
settlement, including credit, market, and liquidity risk directly faced 
by U.S. market participants. The proposed rule amendment was published 
for comment in the Federal Register on October 5, 2016.\4\
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    \4\ See supra note 3.
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Background
    In 1995, the standard U.S. trade settlement cycle for equities, 
municipal and corporate bonds, and unit investment trusts, and 
financial instruments composed of these products was shortened from 
five business days after the trade date (``T+5'') to T+3.\5\ 
Accordingly, FINRA and other self-regulatory organizations (``SROs'') 
amended their respective rules to conform to the T+3 settlement 
cycle.\6\ Since that time, the SEC and the financial services industry 
have continued to explore the idea of shortening the settlement cycle 
even further.\7\
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    \5\ In 1993, the Commission adopted SEA Rule 15c6-1 which became 
effective in 1995. See Securities Exchange Act Release Nos. 33023 
(October 6, 1993), 58 FR 52891 (October 13, 1993) and 34952 
(November 9, 1994), 59 FR 59137 (November 16, 1994). SEA Rule 15c6-
1(a) provides, in relevant part, that ``a broker or dealer shall not 
effect or enter into a contract for the purchase or sale of a 
security (other than an exempted security, government security, 
municipal security, commercial paper, bankers' acceptances, or 
commercial bills) that provides for payment of funds and delivery of 
securities later than the third business day after the date of the 
contract unless otherwise expressly agreed to by the parties at the 
time of the transaction.'' 17 CFR 240.15c6-1(a). Although not 
covered by SEA Rule 15c6-1, in 1995, the Commission approved the 
Municipal Securities Rulemaking Board's rule change requiring 
transactions in municipal securities to settle by T+3. See 
Securities Exchange Act Release No. 35427 (February 28, 1995), 60 FR 
12798 (March 8, 1995) (Order Approving File No. SR-MSRB-94-10).
    \6\ See, e.g., Securities Exchange Act Release No. 35507 (March 
17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File No. 
SR-NASD-94-56); Securities Exchange Act Release No. 35506 (March 17, 
1995), 60 FR 15618 (March 24, 1995) (Order Approving File No. SR-
NYSE-94-40); and Securities Exchange Act Release No. 35553 (March 
31, 1995), 60 FR 18161 (April 10, 1995) (Order Approving File No. 
SR-Amex-94-57).
    \7\ See, e.g., Securities Industry Association (``SIA''), ``SIA 
T+1 Business Case Final Report'' (July 2000); Concept Release: 
Securities Transactions Settlement, Securities Exchange Act Release 
No. 49405 (March 11, 2004), 69 FR 12922 (March 18, 2004); and 
Depository Trust & Clearing Corporation, ``Proposal to Launch a New 
Cost-Benefit Analysis on Shortening the Settlement Cycle'' (December 
2011).
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    In April 2014, the Depository Trust & Clearing Corporation 
(``DTCC'') published its formal recommendation to shorten the standard 
U.S. trade settlement cycle to T+2 and announced that it would partner 
with market participants and industry organizations to devise the 
necessary approach and timelines to achieve T+2.\8\
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    \8\ See DTCC, ``DTCC Recommends Shortening the U.S. Trade 
Settlement Cycle'' (April 2014).
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    In an effort to improve the overall efficiency of the U.S. 
settlement system by reducing the attendant risks in T+3 settlement of 
securities transactions, and to align U.S. markets with other major 
global markets that have already moved to T+2, DTCC, in collaboration 
with the financial services industry, formed an Industry Steering 
Committee (``ISC'') and an industry working group and sub-working 
groups to facilitate the move to T+2.\9\ In June 2015, the ISC 
published a White Paper outlining the activities and proposed time 
frames that would be required to move to T+2 in the U.S.\10\ 
Concurrently, the Securities Industry and Financial Markets Association 
(``SIFMA'') and the Investment Company Institute (``ICI'') jointly 
submitted a letter to SEC Chair White, expressing support of the 
financial services industry's efforts to shorten the settlement cycle 
and identifying SEA Rule 15c6-1(a) and several SRO rules that they 
believed would require amendments for an

[[Page 95706]]

effective transition to T+2.\11\ In March 2016, the ISC announced the 
industry target date of September 5, 2017 for the transition to a T+2 
settlement cycle to occur.\12\
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    \9\ The ISC includes, among other participants, DTCC, the 
Securities Industry and Financial Markets Association and the 
Investment Company Institute.
    \10\ See ``Shortening the Settlement Cycle: The Move to T+2'' 
(June 18, 2015).
    \11\ See Letter from ICI and SIFMA to Mary Jo White, Chair, SEC, 
dated June 18, 2015. See also Letter from Mary Jo White, Chair, SEC, 
to Kenneth E. Bentsen, Jr., President and CEO, SIFMA, and Paul 
Schott Stevens, President and CEO, ICI, dated September 16, 2015 
(expressing her strong support for industry efforts to shorten the 
trade settlement cycle to T+2 and commitment to developing a 
proposal to amend SEA Rule 15c6-1(a) to require standard settlement 
no later than T+2).
    \12\ See ISC Media Alert: ``US T+2 ISC Recommends Move to 
Shorter Settlement Cycle On September 5, 2017'' (March 7, 2016).
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Proposed Rule Change
    In light of the SEC Proposing Release that would amend SEA Rule 
15c6-1(a) to require standard settlement no later than T+2 and similar 
proposals from other SROs,\13\ FINRA is proposing changes to its rules 
pertaining to securities settlement by, among other things, amending 
the definition of ``regular way'' settlement as occurring on T+2. SEA 
Rule 15c6-1(a) currently establishes standard settlement as occurring 
no later than T+3 for all securities, other than an exempted security, 
government security, municipal security, commercial paper, bankers' 
acceptances, or commercial bills.\14\ FINRA is proposing changes to 
rules pertaining to securities settlement to support the industry-led 
initiative to shorten the standard settlement cycle to two business 
days. Most of the rules that FINRA has identified for these changes are 
successors to provisions under the legacy NASD Rules of Fair Practice 
and NASD Uniform Practice Code (``UPC'') that were amended when the 
Commission adopted SEA Rule 15c6-1(a), which established T+3 as the 
standard settlement cycle.\15\ As such, FINRA is proposing to amend 
FINRA Rules 2341 (Investment Company Securities), 11140 (Transactions 
in Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''), 11150 
(Transactions ``Ex-Interest'' in Bonds Which Are Dealt in ``Flat''), 
11320 (Dates of Delivery), 11620 (Computation of Interest), and 11860 
(COD Orders). In addition, FINRA is proposing to amend FINRA Rules 
11210 (Sent by Each Party) and 11810 (Buy-In Procedures and 
Requirements) to conform provisions, where appropriate, to the T+2 
settlement cycle.\16\
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    \13\ See, e.g., Securities Exchange Act Release No. 77744 (April 
29, 2016), 81 FR 26851 (May 4, 2016) (Order Approving File No. SR-
MSRB-2016-04).
    \14\ See supra note 5.
    \15\ The legacy NASD rules that were changed to conform to the 
move from T+5 to T+3 included Section 26 (Investment Companies) of 
the Rules of Fair Practice, and Section 5 (Transactions in 
Securities ``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants''), 
Section 6 (Transactions ``Ex-Interest'' in Bonds Which Are Dealt in 
``Flat''), Section 12 (Dates of Delivery), Section 46 (Computation 
of Interest) and Section 64 (Acceptance and Settlement of COD 
Orders) of the UPC. See Securities Exchange Act Release No. 35507 
(March 17, 1995), 60 FR 15616 (March 24, 1995) (Order Approving File 
No. SR-NASD-94-56). See also Notice to Members 95-36 (May 1995) 
(enumerating the various sections under the NASD Rules of Fair 
Practice and UPC that were amended to implement T+3 settlement for 
securities transactions).
    \16\ FINRA Rules 11210 and 11810 are successors to legacy NASD 
UPC Sections 9 (Sent by Each Party) and 59 (``Buying-in''), 
respectively, which remained unchanged during the transition from 
T+5 to T+3. See supra note 15.
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    The details of the proposed rule change are described below.
(A) FINRA Rule 2341 (Investment Company Securities) \17\
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    \17\ In June 2016, legacy NASD Rule 2830 (Investment Company 
Securities) was adopted as FINRA Rule 2341 in the consolidated FINRA 
rulebook without any substantive changes. See Securities Exchange 
Act Release No. 78130 (June 22, 2016), 81 FR 42016 (June 28, 2016) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2016-019).
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    Rule 2341(m) requires members, including underwriters, that engage 
in direct retail transactions for investment company shares to transmit 
payments received from customers for the purchase of investment company 
shares to the payee by the end of the third business day after receipt 
of a customer's order to purchase the shares, or by the end of one 
business day after receipt of a customer's payment for the shares, 
whichever is later. FINRA is proposing to amend Rule 2341(m) to change 
the three-business day transmittal requirement to two business days, 
while retaining the one-business day alternative.
(B) FINRA Rule 11140 (Transactions in Securities ``Ex-Dividend,'' ``Ex-
Rights'' or ``Ex-Warrants'')
    Rule 11140(b)(1) provides that for dividends or distributions, and 
the issuance or distribution of warrants, that are less than 25 percent 
of the value of the subject security, if definitive information is 
received sufficiently in advance of the record date, the date 
designated as the ``ex-dividend date'' shall be the second business day 
preceding the record date if the record date falls on a business day, 
or the third business day preceding the record date if the record date 
falls on a day designated by FINRA's UPC Committee as a non-delivery 
date. FINRA is proposing to shorten the time frames in Rule 11140(b)(1) 
by one business day.
(C) FINRA Rule 11150 (``Ex-Interest'' in Bonds Which Are Dealt in 
``Flat'')
    Rule 11150(a) prescribes the manner for establishing ``ex-interest 
dates'' for transactions in bonds or other similar evidences of 
indebtedness which are traded ``flat.'' Such transactions are ``ex-
interest'' on the second business day preceding the record date if the 
record date falls on a business day, on the third business day 
preceding the record date if the record date falls on a day other than 
a business day, or on the third business day preceding the date on 
which an interest payment is to be made if no record date has been 
fixed. FINRA is proposing to shorten the time frames in Rule 11150(a) 
by one business day.
(D) FINRA Rule 11210 (Sent by Each Party)
    Paragraphs (c) and (d) of Rule 11210 set forth the ``Don't Know'' 
(``DK'') voluntary procedures for using ``DK Notices'' (FINRA Form No. 
101) or other forms of notices, respectively. Depending upon the notice 
used, a confirming member may follow the ``DK'' procedures when it 
sends a comparison or confirmation of a trade (other than one that 
clears through the National Securities Clearing Corporation (``NSCC'') 
or other registered clearing agency), but does not receive a comparison 
or confirmation or a signed ``DK'' from the contra-member by the close 
of four business days following the trade date of the transaction 
(``T+4''). The procedures generally provide that after T+4, the 
confirming member shall send a ``DK Notice'' (or similar notice) to the 
contra-member. The contra-member then has four business days after 
receipt of the confirming member's notice to either confirm or ``DK'' 
the transaction.
    FINRA is proposing to amend paragraphs (c) and (d) of Rule 11210 to 
provide that the ``DK'' procedures may be used by the confirming member 
if it does not receive a comparison or confirmation or signed ``DK'' 
from the contra-member by the close of one business day following the 
trade date of the transaction, rather than the current T+4.\18\ In 
addition, FINRA is proposing amendments to paragraphs (c)(2)(A), 
(c)(3), and (d)(5) of Rule 11210 to adjust

[[Page 95707]]

the time in which a contra-member has to respond to a ``DK Notice'' (or 
similar notice) from four business days after the contra-member's 
receipt of the notice to two business days. The proposed rule change 
would also make non-substantive technical changes to paragraph 
(c)(2)(A) to reflect FINRA Manual style convention.
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    \18\ As stated above, the time frames in Rule 11210 remained 
unchanged during the transition from T+5 to T+3. In light of the 
industry-led initiative to shorten the standard settlement cycle and 
the SEC Proposing Release to amend SEA Rule 15c6-1(a) to establish 
T+2 as the standard settlement for most broker-dealer transactions, 
FINRA believes that the current time frames in Rule 11210 are more 
protracted than necessary even in a T+3 environment and as such, 
FINRA is proposing to amend these time frames to reflect more 
current industry practices.
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(E) FINRA Rule 11320 (Dates of Delivery)
    Rule 11320 prescribes delivery dates for various transactions. 
Paragraph (b) states that for a ``regular way'' transaction, delivery 
must be made on, but not before, the third business day after the date 
of the transaction. FINRA is proposing to amend Rule 11320(b) to change 
the reference to third business day to second business day. Paragraph 
(c) provides that in a ``seller's option'' transaction, delivery may be 
made by the seller on any business day after the third business day 
following the date of the transaction. FINRA is proposing to amend Rule 
11320(c) to change the reference to third business day to second 
business day.
(F) FINRA Rule 11620 (Computation of Interest)
    In the settlement of contracts in interest-paying securities other 
than for cash, Rule 11620(a) requires the calculation of interest at 
the rate specified in the security up to, but not including, the third 
business day after the date of the transaction. The proposed amendment 
would shorten the time frame to the second business day. In addition, 
the proposed amendment would make non-substantive technical changes to 
the title of paragraph (a).
(G) FINRA Rule 11810 (Buy-in Procedures and Requirements)
    Rule 11810(j)(1)(A) sets forth the fail-to-deliver and liability 
notice procedures where a securities contract is for warrants, rights, 
convertible securities or other securities which have been called for 
redemption; are due to expire by their terms; are the subject of a 
tender or exchange offer; or are subject to other expiring events such 
as a record date for the underlying security and the last day on which 
the securities must be delivered or surrendered is the settlement date 
of the contract or later.\19\
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    \19\ Rule 11810(j) is the successor to legacy NASD UPC Section 
59(i) (Failure to Deliver and Liability Notice Procedures). When 
this provision was added to NASD's existing close-out procedures in 
1984, it was drafted to be similar to the liability notice 
provisions adopted by the NSCC so that members that were also 
participants in NSCC could use the same procedures for both ex-
clearing and NSCC cleared transactions, thereby simplifying members' 
back office procedures. See Securities Exchange Act Release No. 
21262 (August 22, 1984), 49 FR 34321 (August 29, 1984) (Notice of 
Filing of File No. SR-NASD-84-20). See also Securities Exchange Act 
Release No. 21406 (October 19, 1984), 49 FR 43006 (October 25, 1984) 
(Order Approving File No. SR-NASD-84-20).
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    Under Rule 11810(j)(1)(A), the receiving member delivers a 
liability notice to the owing counterparty. The liability notice sets a 
cutoff date for the delivery of the securities by the counterparty and 
provides notice to the counterparty of the liability attendant to its 
failure to deliver the securities in time. If the owing counterparty, 
or delivering member, delivers the securities in response to the 
liability notice, it has met its delivery obligation. If the delivering 
member fails to deliver the securities on the expiration date, it will 
be liable for any damages that may accrue thereby.
    Rule 11810(j)(1)(A) further provides that when both parties to a 
contract are participants in a registered clearing agency that has an 
automated liability notification service, transmission of the liability 
notice must be accomplished through such system.\20\ When the parties 
to a contract are not both participants in a registered clearing agency 
that has an automated liability notification service, such notice must 
be issued using written or comparable electronic media having immediate 
receipt capabilities not later than one business day prior to the 
latest time and the date of the offer or other event in order to obtain 
the protection provided by the Rule.\21\
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    \20\ In 2007, NYSE Rule 180 was amended to require that when the 
parties to a failed contract were both participants in a registered 
clearing agency that had an automated service for notifying a 
failing party of the liability that will be attendant to a failure 
to deliver and the contract was to be settled through the facilities 
of that registered clearing agency, the transmission of the 
liability notification must be accomplished through the use of the 
registered clearing agency's automated liability notification 
system. See Securities Exchange Act Release No. 55132 (January 19, 
2007), 72 FR 3896 (January 26, 2007) (Order Approving File No. SR-
NYSE-2006-57). FINRA followed suit and effective in 2008, Rule 
11810(j) mandated the use of an automated liability notification 
system when the parties to a contract are participants in a 
registered clearing agency that has an automated service for 
notifying a failing party of the liability that would be attendant 
to failure to deliver. See Securities Exchange Act Release No. 56972 
(December 14, 2007), 72 FR 73927 (December 28, 2007) (Order 
Approving File No. SR-NASD-2007-035). See also Regulatory Notice 08-
06 (February 2008).
    \21\ While Rule 11810 has undergone amendments over the years, 
the one-day time frame in paragraph (j) has remained unchanged. The 
one-day time frame also appears in comparable provisions of other 
SROs. See, e.g., NSCC Rules & Procedures, Procedure X (Execution of 
Buy-Ins) (Effective August 10, 2016); NYSE Rule 282.65 (Fail to 
Deliver and Liability Notice Procedures); and Nasdaq Rule IM-11810 
(Buying-in). See also infra note 30 and accompanying text.
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    Given the proposed shortened settlement cycle, FINRA is proposing 
to amend Rule 11810(j)(1)(A) in situations where both parties to a 
contract are not participants of a registered clearing agency with an 
automated notification service, by extending the time frame for 
delivery of the liability notice. Rule 11810(j)(1)(A) would be amended 
to provide that in such cases, the receiving member must send the 
liability notice to the delivering member as soon as practicable but 
not later than two hours prior to the cutoff time set forth in the 
instructions on a specific offer or other event to obtain the 
protection provided by the Rule. FINRA believes that extending the time 
given to the receiving member to transmit liability notifications will 
maintain the efficiency of the notification process while mitigating 
the possible overuse of such notifications.
    Currently, FINRA understands that the identity of the counterparty, 
or delivering member, becomes known to the receiving member by mid-day 
on the business day after trade date (``T+1''), and by that time, the 
receiving member will generally also know which transactions are 
subject to an event identified in Rule 11810(j)(1)(A) that would prompt 
the receiving member to issue a liability notice to the delivering 
member. FINRA believes that the receiving member regularly issues 
liability notices to the seller or other parties from which the 
securities involved are due when the security is subject to an event 
identified in Rule 11810(j)(1)(A) during the settlement cycle as a way 
to mitigate the risk of a potential fail-to-deliver. In the current T+3 
settlement environment, the one business day time frame gives the 
receiving member the requisite time needed to identify the parties 
involved and undertake the liability notification process.
    However, FINRA believes that the move to a T+2 settlement 
environment will create inefficiencies in the liability notification 
process under Rule 11810(j)(1)(A) when both parties to a contract are 
not participants in a registered clearing agency with an automated 
notification service. The shorter settlement cycle, with the loss of 
one-business day, would not afford the receiving member sufficient time 
to: (1) Ascertain that the securities are subject to an event listed in 
Rule 11810(j)(1)(A) during the settlement cycle; (2) identify the 
delivering member and other parties from which the securities involved 
are due; and (3) determine the likelihood that such parties may fail to 
deliver. Where the receiving member has sufficient time (e.g., one 
business day

[[Page 95708]]

after), it can transmit liability notices as needed to the right 
parties. However, as a consequence of the shortened settlement cycle, 
the receiving member would be compelled to issue liability notices 
proactively to all potentially failing parties as a matter of course to 
preserve its rights against such parties without the benefit of knowing 
which transactions would actually necessitate the delivery of such 
notice. This would create a significant increase in the volume of 
liability notices members send and receive, many of which may be 
unnecessary. Members would then have to manage this overabundance of 
liability notices, increasing the possibility of errors, which would 
adversely impact the efficiency of the process. Therefore, FINRA 
believes its proposal to extend the time for the receiving member to 
deliver a liability notice when the parties to a contract are not both 
participants in a registered clearing agency with an automated 
notification service would help alleviate the potential burden on the 
liability notification process in a T+2 settlement environment.
(H) FINRA Rule 11860 (COD Orders)
    Rule 11860(a) directs members to follow various procedures before 
accepting collect on delivery (``COD'') or payment on delivery 
(``POD'') orders. Rule 11860(a)(4)(A) states that the member must 
obtain an agreement from the customer that the customer will furnish 
instructions to the agent no later than the close of business on the 
second business day after the date of execution of the trade to which 
the confirmation relates in the case of a purchase by the customer 
where the agent is to receive the securities against payment, or COD. 
In light of the proposed shortened settlement cycle, FINRA is proposing 
to amend Rule 11860(a)(4)(A) to provide that the time period for a 
customer buying COD to furnish instructions to the agent will be no 
later than the close of business on the first business day after the 
date of execution of the trade, rather than the close of business on 
the second business day.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice, which date would correspond with the industry-led transition to 
a T+2 standard settlement, and the effective date of the Commission's 
proposed amendment to SEA Rule 15c6-1(a) to require standard settlement 
no later than T+2.

2. Statutory Basis

    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\22\ 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, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest. FINRA believes that the proposed rule change supports the 
industry-led initiative to shorten the settlement cycle to two business 
days. Moreover, the proposed rule change is consistent with the SEC's 
proposed amendment to SEA Rule 15c6-1(a) to require standard settlement 
no later than T+2. FINRA believes that the proposed rule change will 
provide the regulatory certainty to facilitate the industry-led move to 
a T+2 settlement cycle.
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    \22\ 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 makes 
changes to rules pertaining to securities settlement and is intended to 
facilitate the implementation of the industry-led transition to a T+2 
settlement cycle. Moreover, the proposed rule changes are consistent 
with the SEC's proposed amendment to SEA Rule 15c6-1(a) to require 
standard settlement no later than T+2. Accordingly, FINRA believes that 
the proposed changes do not impose any burdens on the industry in 
addition to those necessary to implement amendments to SEA Rule 15c6-
1(a) as described and enumerated in the SEC Proposing Release.\23\
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    \23\ See supra note 3.
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    These conforming changes include changes to rules that specifically 
establish the settlement cycle as well as rules that establish time 
frames based on settlement dates, including for certain post-settlement 
rights and obligations. FINRA believes that the proposed changes set 
forth in the filing are necessary to support a standard settlement 
cycle across the U.S. for secondary market transactions in equities, 
corporate and municipal bonds, unit investment trusts, and financial 
instruments composed of these products, among others.\24\ A standard 
U.S. settlement cycle for such products is critical for the operation 
of fair and orderly markets.
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    \24\ See supra note 3.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 16-09 (March 2016). Eight comments were received in response to 
the Regulatory Notice.\25\ A copy of the Regulatory Notice is attached 
as Exhibit 2a.\26\ A list of commenters is attached as Exhibit 2b and 
copies of the comment letters received in response to the Regulatory 
Notice are attached as Exhibit 2c.
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    \25\ See Letter from Michael Nicholas, Chief Executive Officer, 
Bond Dealers of America, to Marcia E. Asquith, Corporate Secretary, 
FINRA, dated April 4, 2016 (``BDA''); letter from Stephen E. Roth, 
Sutherland Asbill & Brennan LLP on behalf of the Committee of 
Annuity Insurers, to Marcia E. Asquith, Corporate Secretary, FINRA, 
dated April 4, 2016 (``CAI''); letter from Norman L. Ashkenas, Chief 
Compliance Officer, Fidelity Brokerage Services, LLC, and Richard J. 
O'Brien, Chief Compliance Officer, National Financial Services, LLC, 
to Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4, 
2016 (``Fidelity''); letter from David T. Bellaire, Executive Vice 
President and General Counsel, Financial Services Institute, to 
Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4, 2016 
(``FSI''); letter from Martin A. Burns, Chief Industry Operations 
Officer, Investment Company Institute, to Marcia E. Asquith, 
Corporate Secretary, FINRA, dated April 4, 2016 (``ICI''); letter 
from Thomas F. Price, Managing Director, Operations, Technology & 
BCP, Securities Industry and Financial Markets Association, to 
Marcia E. Asquith, Corporate Secretary, FINRA, dated April 4, 2016 
(``SIFMA'') (April 4, 2016); letter from Manisha Kimmel, Chief 
Regulatory Officer, Wealth Management, Thomson Reuters, to Marcia E. 
Asquith, Corporate Secretary, FINRA, dated April 4, 2016 (``Thomson 
Reuters''); and letter from Robert J. McCarthy, Director of 
Regulatory Policy, Wells Fargo Advisors, LLC, to Marcia E. Asquith, 
Corporate Secretary, FINRA, dated April 4, 2016 (``WFA'').
    \26\ The Commission notes that the exhibits referred to are 
attached to the filing and not to this Notice.
---------------------------------------------------------------------------

    Of the eight comment letters received, seven expressed support for 
the industry-led move to T+2 stating, among other benefits, that the 
move will align U.S. markets with international markets that already 
work in the T+2 environment, improve the overall efficiency and 
liquidity of the securities markets, and the stability of the financial 
system by reducing counterparty risk and pro-cyclical and liquidity 
demands, and decreasing clearing capital requirements.\27\ Several

[[Page 95709]]

commenters encouraged FINRA to coordinate with other regulators to make 
the necessary regulatory changes to help facilitate the move to a T+2 
standard settlement cycle \28\ with two commenters \29\ providing their 
views on the proposed amendments to two rules under the FINRA Rule 
11800 Series (Close-Out Procedures).
---------------------------------------------------------------------------

    \27\ BDA, Fidelity, FSI, ICI, SIFMA, Thomson Reuters and WFA. 
CAI did not comment on the proposed rule amendments and instead 
requested FINRA's ``acknowledgment and confirmation that insurance 
securities products, which are currently exempt from the T+3 
settlement cycle requirements, will continue to be exempt from the 
settlement cycle requirements after the timetable is shortened to 
T+2.'' The Commission has granted an exemption for transactions 
involving certain insurance contracts from the scope of SEA Rule 
15c6-1. See Securities Exchange Act Release No. 35815 (June 6, 
1995), 60 FR 30906 (June 12, 1995). FINRA notes that any 
modification or revocation of the current exemptions to SEA Rule 
15c6-1 rests with the Commission.
    \28\ Fidelity, FSI, ICI, and Thomson Reuters.
    \29\ BDA and SIFMA.
---------------------------------------------------------------------------

FINRA Rule 11810(j)--Failure To Deliver and Liability Notice Procedures
    In its comment letter, SIFMA raised a concern with the one-day time 
frame in Rule 11810(j)(1)(A), asserting that the requirement for the 
delivering member to deliver a liability notice to the receiving member 
no later than one business day prior to the latest time and the date of 
the offer or other event in order to obtain the protection provided by 
the Rule may no longer be appropriate in a T+2 environment in some 
situations such as where the delivery obligation is transferred to 
another party as a result of continuous net settlement, settlements 
outside of the NSCC, and settlements involving a third party that is 
not a FINRA member firm. SIFMA noted that NYSE Rule 180 (Failure to 
Deliver) includes a similar requirement for NYSE member firms that are 
participants in a registered clearing agency to transmit liability 
notification through an automated notification service and proposed 
amending Rule 11810(j)(1)(A) to omit the reference to a notification 
time frame, which would align with NYSE Rule 180.\30\ In the 
alternative, SIFMA proposed amending Rule 11810(j)(1)(A) to require 
that the liability notice be delivered in a ``reasonable amount of 
time'' ahead of the settlement obligation in light of facts and 
circumstances. SIFMA maintained that under either proposed amendment to 
paragraph (j), the delivering member would be liable for any damages 
caused by its failure to deliver in a timely fashion.
---------------------------------------------------------------------------

    \30\ See NYSE Rule 180 (Failure to Deliver) providing in part 
that ``[w]hen the parties to a contract are both participants in a 
registered clearing agency which has an automated service for 
notifying a failing party of the liability that will be attendant to 
a failure to deliver and that contract was to be settled through the 
facilities of said registered clearing agency, the transmission of 
the liability notification must be accomplished through use of said 
automated notification service.'' FINRA notes that NYSE Rule 180 
does not address the transmission of the liability notification for 
parties to a contract that are not both participants in a registered 
clearing agency (or non-participants). The transmission of the 
liability notification for non-participants is addressed under NYSE 
Rule 282.65 (Failure to Deliver and Liability Notice Procedures). 
See supra note 21.
---------------------------------------------------------------------------

    While FINRA did not initially propose amendments to Rule 11810 for 
the T+2 initiative,\31\ in light of SIFMA's concern regarding Rule 
11810(j)(1)(A), FINRA is proposing to amend the Rule to provide that, 
where both parties to a contract are not participants of a registered 
clearing agency with an automated notification service, the receiving 
member must send the liability notice to the delivering member as soon 
as practicable but not later than two hours prior to the cutoff time 
set forth in the instructions on a specific offer or other event to 
obtain the protection provided by the Rule.\32\
---------------------------------------------------------------------------

    \31\ See Regulatory Notice 16-09 (March 2016).
    \32\ FINRA expects similar amendments to other comparable SRO 
provisions in NYSE Rule 282.65 (Fail to Deliver and Liability Notice 
Procedures) and Nasdaq Rule IM-11810 (Buying-in), and NSCC Rules & 
Procedures, Procedure X (Execution of Buy-Ins) to address SIFMA's 
concern about the one-day notification time frame.
---------------------------------------------------------------------------

FINRA Rule 11860 (COD Orders)
    Rule 11860(a)(3) requires a member that accepts a COD or POD order 
from a customer to deliver to the customer a confirmation not later 
than the close of business on T+1. In Regulatory Notice 16-09, FINRA 
proposed shortening the confirmation delivery time frame to the close 
of business on the date of the trade (``T+0''). In its comment letter, 
BDA urged FINRA to consider leaving the requirement for delivering 
customer confirmations under Rule 11860(a)(3) unchanged and allow 
customer confirmations to continue to be sent T+1 to minimize the 
regulatory and compliance costs of the proposed amendment without 
limiting the risk-reducing benefits of the shortened settlement cycle. 
BDA asserted that shortening confirmation delivery to T+0 would be a 
tremendous undertaking for small firms that would need to commit large 
amounts of internal resources to change the systems and processes that 
are used to deliver confirmations in order to process confirmations on 
a T+0 basis.
    FINRA has considered the comment and agrees that the proposed 
change to T+0 may present significant difficulties for member firms, 
particularly small firms. Moreover, FINRA believes that the existing 
requirement to deliver customer confirmations on T+1 would still assure 
the efficient clearance and settlement of transactions in a T+2 
settlement environment. Therefore, in order to remain aligned with the 
provisions of other SROs and current industry practices, FINRA has 
determined to retain the current T+1 confirmation delivery requirement 
under Rule 11860(a)(3).\33\
---------------------------------------------------------------------------

    \33\ In Regulatory Notice 16-09, FINRA preliminarily identified 
Rule 11210(a) (Comparisons or Confirmations) to undergo an amendment 
to reflect the T+2 settlement cycle. Rule 11210(a)(1) requires each 
party to a transaction, other than a cash transaction, to send a 
Uniform Comparison or Confirmation on or before T+1. FINRA proposed 
changing the delivery time frame to T+0. While not specifically 
referenced by BDA, Rule 11210(a) would raise similar concerns. Thus, 
the time frame under Rule 11210(a)(1) for sending a Uniform 
Comparison or Confirmation would also remain unchanged at T+1.
---------------------------------------------------------------------------

Other Comments
    Several commenters conveyed the importance of testing systems and 
educating market participants and retail investors on the impacts of a 
shorter settlement cycle.\34\ BDA explained that currently, a customer 
has five business days to submit payment for purchases of securities in 
a cash account or in a margin account before a broker-dealer would 
cancel or liquidate the transaction in whole or in part.\35\ BDA 
further explained that ``[s]hortening the settlement cycle to T+2 would 
automatically reduce the timeframe before a dealer would have to 
liquidate an unpaid for transaction to T+4.'' BDA noted that shortening 
the settlement cycle by one day may negatively impact retail clients 
that still use checks, which may not be sent, received, processed, and 
cleared, within the shortened four-day window. BDA expressed that firms 
that do a large amount of retail business would need ample time to 
communicate the practical impacts on a shortened settlement cycle.
---------------------------------------------------------------------------

    \34\ BDA, FSI and WFA.
    \35\ Federal Reserve Board Regulation T governs, among other 
things, the extension of credit by broker-dealers to customers to 
pay for the purchase of securities. Regulation T provides that a 
customer has one payment period (currently five business days) to 
submit payment for purchases of securities in a cash account or in a 
margin account. 12 CFR 220.2 (Definitions), 220.4 (Margin Account) 
and 220.8 (Cash Account).
---------------------------------------------------------------------------

    FINRA recognizes that market participants will have to undergo 
systemic and procedural changes to implement the shorter payment period 
for a securities purchase as part of the ongoing transition to the T+2 
framework. As BDA acknowledged, the 2017 timeline should allow firms to 
make all the necessary changes to systems that the proposed rule will 
require. FINRA further recognizes the importance of educating retail 
investors regarding the impact of a shortened settlement cycle and is 
committed to

[[Page 95710]]

working with market participants to provide the information necessary 
to educate retail investors.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

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-2016-047 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-047. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2016-047 and should be 
submitted on or before January 18, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31308 Filed 12-27-16; 8:45 am]
BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices 95705

SECURITIES AND EXCHANGE II. Self-Regulatory Organization’s Accordingly, FINRA and other self-
COMMISSION Statement of the Purpose of, and regulatory organizations (‘‘SROs’’)
Statutory Basis for, the Proposed Rule amended their respective rules to
[Release No. 34–79648; File No. SR–FINRA– Change conform to the T+3 settlement cycle.6
2016–047]
In its filing with the Commission, Since that time, the SEC and the
Self-Regulatory Organizations; FINRA included statements concerning financial services industry have
Financial Industry Regulatory the purpose of and basis for the continued to explore the idea of
Authority, Inc.; Notice of Filing of a proposed rule change and discussed any shortening the settlement cycle even
Proposed Rule Change To Amend comments it received on the proposed further.7
FINRA Rules To Conform to the rule change. The text of these statements In April 2014, the Depository Trust &
Commission’s Proposed Amendment may be examined at the places specified Clearing Corporation (‘‘DTCC’’)
to Commission Rule 15c6–1(a) and the in Item IV below. FINRA has prepared published its formal recommendation to
Industry-Led Initiative To Shorten the summaries, set forth in sections A, B, shorten the standard U.S. trade
Standard Settlement Cycle for Most and C below, of the most significant settlement cycle to T+2 and announced
Broker-Dealer Transactions From T+3 aspects of such statements. that it would partner with market
to T+2 A. Self-Regulatory Organization’s participants and industry organizations
December 21, 2016. Statement of the Purpose of, and to devise the necessary approach and
Pursuant to Section 19(b)(1) of the Statutory Basis for, the Proposed Rule timelines to achieve T+2.8
Securities Exchange Act of 1934 Change In an effort to improve the overall
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 1. Purpose efficiency of the U.S. settlement system
notice is hereby given that on December SEC Proposing Release by reducing the attendant risks in T+3
14, 2016, Financial Industry Regulatory settlement of securities transactions,
Authority, Inc. (‘‘FINRA’’) filed with the On September 28, 2016, the and to align U.S. markets with other
Securities and Exchange Commission Commission proposed amending SEA major global markets that have already
(‘‘SEC’’ or ‘‘Commission’’) the proposed Rule 15c6–1(a) to shorten the standard moved to T+2, DTCC, in collaboration
rule change as described in Items I, II, settlement cycle for most broker-dealer with the financial services industry,
and III below, which Items have been transactions from T+3 to T+2 on the formed an Industry Steering Committee
prepared by FINRA. The Commission is basis that the shorter settlement cycle (‘‘ISC’’) and an industry working group
publishing this notice to solicit would reduce the risks that arise from and sub-working groups to facilitate the
comments on the proposed rule change the value and number of unsettled
move to T+2.9 In June 2015, the ISC
from interested persons. securities transactions prior to the
published a White Paper outlining the
completion of settlement, including
I. Self-Regulatory Organization’s activities and proposed time frames that
credit, market, and liquidity risk
Statement of the Terms of Substance of would be required to move to T+2 in the
directly faced by U.S. market
the Proposed Rule Change participants. The proposed rule U.S.10 Concurrently, the Securities
amendment was published for comment Industry and Financial Markets
FINRA is proposing to amend FINRA Association (‘‘SIFMA’’) and the
Rules 2341 (Investment Company in the Federal Register on October 5,
2016.4 Investment Company Institute (‘‘ICI’’)
Securities), 11140 (Transactions in
jointly submitted a letter to SEC Chair
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ Background White, expressing support of the
or ‘‘Ex-Warrants’’), 11150 (Transactions
In 1995, the standard U.S. trade financial services industry’s efforts to
‘‘Ex-Interest’’ in Bonds Which Are Dealt
settlement cycle for equities, municipal shorten the settlement cycle and
in ‘‘Flat’’), 11210 (Sent by Each Party),
11320 (Dates of Delivery), 11620 and corporate bonds, and unit identifying SEA Rule 15c6–1(a) and
(Computation of Interest), 11810 (Buy-In investment trusts, and financial several SRO rules that they believed
Procedures and Requirements), and instruments composed of these products would require amendments for an
11860 (COD Orders) to conform to the was shortened from five business days
Commission’s proposed amendment to after the trade date (‘‘T+5’’) to T+3.5 6 See, e.g., Securities Exchange Act Release No.

35507 (March 17, 1995), 60 FR 15616 (March 24,
SEA Rule 15c6–1(a) to shorten the 4 See 1995) (Order Approving File No. SR–NASD–94–56);
supra note 3.
standard settlement cycle for most 5 In Securities Exchange Act Release No. 35506 (March
1993, the Commission adopted SEA Rule
broker-dealer transactions from three 15c6–1 which became effective in 1995. See
17, 1995), 60 FR 15618 (March 24, 1995) (Order
business days after the trade date Approving File No. SR–NYSE–94–40); and
Securities Exchange Act Release Nos. 33023
Securities Exchange Act Release No. 35553 (March
(‘‘T+3’’) to two business days after the (October 6, 1993), 58 FR 52891 (October 13, 1993)
31, 1995), 60 FR 18161 (April 10, 1995) (Order
trade date (‘‘T+2’’) and the industry-led and 34952 (November 9, 1994), 59 FR 59137
Approving File No. SR–Amex–94–57).
(November 16, 1994). SEA Rule 15c6–1(a) provides,
initiative to shorten the settlement cycle in relevant part, that ‘‘a broker or dealer shall not
7 See, e.g., Securities Industry Association

from T+3 to T+2.3 effect or enter into a contract for the purchase or (‘‘SIA’’), ‘‘SIA T+1 Business Case Final Report’’
(July 2000); Concept Release: Securities
The text of the proposed rule change sale of a security (other than an exempted security,
Transactions Settlement, Securities Exchange Act
is available on FINRA’s Web site at government security, municipal security,
commercial paper, bankers’ acceptances, or Release No. 49405 (March 11, 2004), 69 FR 12922
http://www.finra.org, at the principal commercial bills) that provides for payment of (March 18, 2004); and Depository Trust & Clearing
office of FINRA and at the funds and delivery of securities later than the third Corporation, ‘‘Proposal to Launch a New Cost-
Benefit Analysis on Shortening the Settlement
Commission’s Public Reference Room. business day after the date of the contract unless
sradovich on DSK3GMQ082PROD with NOTICES

otherwise expressly agreed to by the parties at the Cycle’’ (December 2011).
8 See DTCC, ‘‘DTCC Recommends Shortening the
time of the transaction.’’ 17 CFR 240.15c6–1(a).
1 15 U.S.C. 78s(b)(1). U.S. Trade Settlement Cycle’’ (April 2014).
Although not covered by SEA Rule 15c6–1, in 1995,
2 17 CFR 240.19b–4. 9 The ISC includes, among other participants,
the Commission approved the Municipal Securities
3 See Securities Exchange Act Release No. 78962 Rulemaking Board’s rule change requiring DTCC, the Securities Industry and Financial
(September 28, 2016), 81 FR 69240 (October 5, transactions in municipal securities to settle by Markets Association and the Investment Company
2016) (Amendment to Securities Transaction T+3. See Securities Exchange Act Release No. Institute.
Settlement Cycle) (File No. S7–22–16) (‘‘SEC 35427 (February 28, 1995), 60 FR 12798 (March 8, 10 See ‘‘Shortening the Settlement Cycle: The

Proposing Release’’). 1995) (Order Approving File No. SR–MSRB–94–10). Move to T+2’’ (June 18, 2015).

VerDate Sep<11>2014 18:54 Dec 27, 2016 Jkt 241001 PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 E:\FR\FM\28DEN1.SGM 28DEN1
Document Created: 2016-12-28 02:17:03
Document Modified: 2016-12-28 02:17:03
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 95705