82 FR 10835 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval 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 82, Issue 30 (February 15, 2017)

Page Range		10835-10837
FR Document		2017-02998

Federal Register, Volume 82 Issue 30 (Wednesday, February 15, 2017)

[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)]
[Notices]
[Pages 10835-10837]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2017-02998]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80004; File No. SR-FINRA-2016-047]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval 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

February 9, 2017.

I. Introduction

On December 14, 2016, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to conform its rules to an amendment proposed by
the Commission to Rule 15c6-1(a) under the Act 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'').\3\ The proposed rule change was published for
comment in the Federal Register on December 28, 2016.\4\ The Commission
received three comment letters on the proposed rule change.\5\ This
order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 78962 (Sep. 28,
2016), 81 FR 69240 (Oct. 5, 2016) (Amendment to Securities
Transaction Settlement Cycle) (File No. S7-22-16) (T+2 Proposing
Release'').
\4\ See Securities Exchange Act Release No. 79648 (Dec. 21,
2016), 81 FR 95705.
\5\ See Letters to Brent J. Fields, Secretary, Commission from
Mike Nicholas, Chief Executive Officer, Bond Dealers of America
(``BDA''), dated Jan. 18, 2017 (``BDA Letter''), Manisha Kimmel,
Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated
Jan. 19, 2017, and Thomas F. Price, Managing Director, Operations,
Technology & BCP, Securities Industry and Financial Markets
Association (``SIFMA''), dated Jan. 19, 2017 (``SIFMA Letter '').
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II. Description of the Proposal

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 Rule 15c6-1(a) under the Act that
would shorten the standard settlement cycle for most broker-dealer
transactions from T+3 to T+2.
FINRA 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.
FINRA Rule 11140(b)(1) concerns the determination of normal ex-
dividend and ex-warrants dates for certain types of dividends and
distributions. Currently, with respect to cash dividends or
distributions, or stock dividends, and the issuance or distribution of
warrants, which are less than 25% of the value of the subject security,
if the definitive information is received sufficiently in advance of
the record date, the date designated as the ``ex-dividend date'' is 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 day. Under the proposal, the ``ex-dividend date''
would be the first business day preceding the record date if the record
date falls on a business day, or the second 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 Rule 11150(a) concerns the determination of normal ex-
interest dates for certain types of transactions. Currently, all
transactions, except ``cash'' transactions, in bonds or similar
evidences of indebtedness which are traded ``flat'' 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, and
on the third business day preceding the date on which an interest
payment is to be made if no record date has been fixed. Under the
proposal, these transactions would be ``ex-interest'' on the first
business day preceding the record date if the record date falls on a
business day, on the second business day preceding the record date if
the record date falls on a day other than a business day, and on the
second business day preceding the date on which an interest payment is
to be made if no record date has been fixed.
FINRA Rules 11210(c) and (d) set forth ``DK'' procedures using
``Don't Know Notices'' and other forms of notices, respectively.\6\
FINRA Rule 11210(c) currently provides that, when a party to a
transaction sends a comparison or confirmation of a trade, 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, the party may use the procedures set forth in the
rule. FINRA proposes to shorten the ``four business days'' time period
to one business day. FINRA Rule 11210(c)(2)(A) currently provides that
a contra-member has four business days after the ``Don't Know Notice''
is received to either confirm or DK the transaction in accordance with
FINRA Rule 11210(c)(2)(B) or (C). FINRA proposes to shorten the ``four
business days'' time period to two business days.\7\ FINRA Rule
11210(c)(3) currently provides that if the confirming member does not
receive a response from the contra-member by the close of four business
days after receipt by the confirming member the fourth copy of

[[Page 10836]]

the ``Don't Know Notice'' if delivered by messenger, or the post office
receipt if delivered by mail, such shall constitute a DK and the
confirming member shall have no further liability for the trade. FINRA
proposes to shorten the ``four business days'' time period to two
business days.
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\6\ FINRA Rule 11210 does not apply to transactions that clear
through the National Securities Clearing Corporation or other
clearing organizations registered under the Act. See FINRA Rule
11210(a)(4).
\7\ FINRA also proposes to make non-substantive, formatting
changes to cross-references to reflect FINRA Manual style
convention.
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FINRA proposes similar changes to FINRA Rule 11210(d). FINRA Rule
11210(d) currently provides that, when a party to a transaction sends a
comparison or confirmation of a trade, 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 date of the transaction, the
party may use the procedures set forth in the rule. FINRA proposes to
shorten the ``four business days'' time period to one business day.
FINRA Rule 11210(d)(5) currently provides that if the confirming member
does not receive a response in the form of a notice from the contra-
member by the close of four business days after receipt of the
confirming member's notice, such shall constitute a DK and the
confirming member shall have no further liability. FINRA proposes to
shorten the ``four business days'' time period to two business days.
FINRA Rule 11320 prescribes delivery dates for various types of
transactions. FINRA Rule 11320(b) currently provides that in connection
with a transaction ``regular way,'' delivery is made at the office of
the purchaser on, but not before, the third business day following the
date of the transaction. Under the proposal, delivery would be required
to be made on, but not before, the second business day following the
date of the transaction. FINRA Rule 11320(c) currently provides in part
that, in connection with a transaction ``seller's option,'' delivery
may be made by the seller on any business day after the third business
day following the date of transaction and prior to the expiration of
the option, provided the seller delivers at the office of the
purchaser, on a business day preceding the day of delivery, written
notice of intention to deliver. Under the proposal, delivery may be
made by the seller on any business day after the second business day
following the date of the transaction and prior to expiration of the
option.
FINRA Rule 11620 governs the computation of interest. FINRA Rule
11620(a) currently provides in part that, in the settlement of
contracts in interest-paying securities other than for ``cash,'' there
shall be added to the dollar price interest at the rate specified in
the security, which shall be computed up to but not including the third
business day following the date of the transaction. Under the proposal,
the interest would be computed up to but not including the second
business day following the date of the transaction.\8\
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\8\ FINRA also proposes to capitalize certain words in the title
of FINRA Rule 11620(a).
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FINRA 11810(j)(1)(A) sets forth the circumstances under which a
receiving member may deliver a Liability Notice to the delivering
member as an alternative to the close-out procedures set forth in FINRA
11810(b)-(h). Currently, when the parties to a contract are not both
participants in a registered clearing agency that has an automated
service for notifying a failing party of the liability that will be
attendant to a failure to deliver, the notice must be issued using
written or comparable electronic media having immediate receipt
capabilities ``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. Under the proposal, the notice must be
``sent 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'' in order to obtain the protection provided by the rule.
FINRA Rule 11860(a) concerns various procedures regarding collect
on delivery (``COD'') or payment on delivery orders. 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.
FINRA represents that it will announce the effective date of the
proposed rule change in an Equity Regulatory Alert, 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 Rule 15c6-1(a) under the Act.\9\
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\9\ See supra note 3.
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III. Discussion and Commission's Findings

After careful review of the proposed rule change and the comments,
the Commission finds that the proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities association.\10\ Specifically,
the Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Act,\11\ which requires that the rules of a
national securities association be designed, among other things, 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, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and to protect
investors and the public interest. As noted above, the Commission
received three comment letters on the proposed rule change.\12\ All
comment letters express support for Commission approval of the proposed
rule change.\13\
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\10\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78o-3(b)(6).
\12\ See supra note 5.
\13\ One of the commenters requests guidance from FINRA with
respect to FINRA Rule 11210(c) to permit the use of electronic means
to communicate DK notices. The commenter notes that, currently,
FINRA Rule 11210(c)(1) requires that such notices be sent ``by
certified mail, return receipt requested, or messenger.'' See SIFMA
Letter, at 3. The Commission notes that this request is beyond the
scope of the current proposed rule change. However, the Commission
notes that FINRA could work with the commenter and other market
participants to determine whether changes to the communication
methods specified in FINRA Rule 11210(c) would be appropriate. One
commenter expressed concern with how the proposed amendments to Rule
15c6-1(a) may affect Reg. T. The Commission notes that this comment
pertains to the Commission's proposed rule and not directly to the
proposal. See BDA Letter.
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The Commission notes that the proposal would amend FINRA rules to
conform to the amendment that the Commission has proposed to Rule 15c6-
1(a) under the Act \14\ and support a move to a T+2 standard settlement
cycle. In the T+2 Proposing Release the Commission stated its
preliminary belief that shortening the standard settlement cycle from
T+3 to T+2 will result in a reduction of credit, market, and liquidity
risk,\15\ and as a result a reduction in systemic risk for U.S. market
participants.\16\ The Commission also notes that it has not yet adopted
the proposed amendment to Rule 15c6-1(a),

[[Page 10837]]

and that FINRA has, accordingly, not proposed to make its amended rules
effective at present. Instead, FINRA has proposed to announce the
effective date of the proposed rule change in an Equity Regulatory
Alert. The Commission expects that the effective date of the proposed
rule change would correspond with the compliance date of any amendment
to Rule 15c6-1(a) under the Act that is adopted by the Commission. The
Commission notes that, in October 2014, Depository Trust and Clearing
Corporation (``DTCC''), in collaboration with the Investment Company
Institute, SIFMA, and other market participants, formed an Industry
Steering Group (``ISC'') and an industry working group to facilitate
the transition to a T+2 settlement cycle for U.S. trades in equities,
corporate and municipal bonds, and unit investment trusts.\17\ The ISC
has identified September 5, 2017, as the target date for the transition
to a T+2 settlement cycle to occur.\18\
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\14\ See supra note 3.
\15\ Credit risk refers to the risk that the credit quality of
one party to a transaction will deteriorate to the extent that it is
unable to fulfill its obligations to its counterparty on settlement
date. Market risk refers to the risk that the value of securities
bought and sold will change between trade execution and settlement
such that the completion of the trade would result in a financial
loss. Liquidity risk describes the risk that an entity will be
unable to meet financial obligations on time due to an inability to
deliver funds or securities in the form required though it may
possess sufficient financial resources in other forms. See T+2
Proposing Release, supra note 3, 81 FR at 69241 n. 3.
\16\ See id., 81 FR at 69241.
\17\ See Press Release, DTCC, Industry Steering Committee and
Working Group Formed to Drive Implementation of T+2 in the U.S.
(Oct. 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
\18\ See Press Release, ISC, US T+2 ISC Recommends Move to
Shorter Settlement Cycle On September 5, 2017 (Mar. 7, 2016), http://www.ust2.com/pdfs/T2-ISC-recommends-shorter-settlement-030716.pdf.
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For the reasons noted above, the Commission finds that the proposal
is consistent with the requirements of the Act and would foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and protect investors and the public interest.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-FINRA-2016-047), be and
hereby is, approved.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02998 Filed 2-14-17; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices 10837

and that FINRA has, accordingly, not SECURITIES AND EXCHANGE The transaction closed on June 30,
proposed to make its amended rules COMMISSION 2016.6 Nasdaq, Inc. is also the ultimate
effective at present. Instead, FINRA has parent of NASDAQ BX, Inc. (‘‘BX’’), The
[Release No. 34–79994; File No. SR–ISE–
proposed to announce the effective date NASDAQ Stock Market LLC (‘‘Nasdaq’’),
2016–27]
of the proposed rule change in an Equity and NASDAQ PHLX LLC (‘‘Phlx’’ and,
Regulatory Alert. The Commission Self-Regulatory Organizations; together with Nasdaq and BX, the
expects that the effective date of the International Securities Exchange, ‘‘Nasdaq Exchanges’’).7 Nasdaq, Inc. is
proposed rule change would correspond LLC; Order Granting Approval of also the ultimate parent of NES,8 a
with the compliance date of any Proposed Rule Change, as Modified by broker-dealer that is a member, and
Amendment No. 1 Thereto, To Amend affiliate, of each of the Nasdaq
amendment to Rule 15c6–1(a) under the
the Exchange’s Rules Regarding Exchanges.9 As a result of this
Act that is adopted by the Commission.
Routing of Orders, Cancellation of transaction, the ISE Exchanges and the
The Commission notes that, in October Nasdaq Exchanges became affiliates,10
2014, Depository Trust and Clearing Orders, and Handling of Error
Positions, and Permit Nasdaq and NES became an affiliate of the ISE
Corporation (‘‘DTCC’’), in collaboration Exchanges.11
with the Investment Company Institute, Execution Services, LLC To Become
The Exchange has now proposed a
SIFMA, and other market participants, an Affiliated Member of the Exchange
rule change to amend its rules relating
formed an Industry Steering Group To Perform Certain Routing and Other
to order routing, cancellation of orders,
(‘‘ISC’’) and an industry working group Functions
and handling of error positions, and to
to facilitate the transition to a T+2 February 9, 2017. permit NES to become a Member of the
settlement cycle for U.S. trades in Exchange to perform certain routing and
I. Introduction other functions. ISE’s proposed rules are
equities, corporate and municipal
bonds, and unit investment trusts.17 The On December 9, 2016, the similar to rules of Phlx,12 as well as the
ISC has identified September 5, 2017, as International Securities Exchange, LLC other Nasdaq Exchanges.13 Specifically,
the target date for the transition to a T+2 (‘‘ISE’’ or ‘‘Exchange’’) filed with the and as described in more detail below,
settlement cycle to occur.18 Securities and Exchange Commission the Exchange proposed to: (1) Route
(‘‘Commission’’), pursuant to Section outbound orders in options listed and
For the reasons noted above, the 19(b)(1) of the Securities Exchange Act open for trading on the Exchange’s
Commission finds that the proposal is of 1934 (‘‘Act’’) 1 and Rule 19b–4 system to away markets through NES,
consistent with the requirements of the thereunder,2 a proposed rule change either directly or through a third-party
Act and would foster cooperation and related to the routing of orders, routing broker-dealer; (2) permit the
coordination with persons engaged in cancellation of orders, and handling of Exchange to receive inbound orders in
regulating, clearing, settling, processing error positions. The proposed rule options routed through NES from the
information with respect to, and change would also permit Nasdaq Affiliated Exchanges, pursuant to
facilitating transactions in securities, Execution Services, LLC (‘‘NES’’) to
remove impediments to and perfect the become an affiliated Member 3 of the ISE–2016–11; SR–ISE Gemini–2016–05; SR–ISE
mechanism of a free and open market Exchange to perform certain routing and Mercury–2016–10) (order approving Nasdaq, Inc.’s
acquisition of ISE, ISE Gemini, and ISE Mercury)
and a national market system, and other functions. On December 20, 2016, (‘‘Nasdaq Acquisition Order’’).
protect investors and the public interest. the Exchange filed Amendment No. 1 to 6 See http://ir.nasdaq.com/

the proposed rule change, which releasedetail.cfm?releaseid=977785 (Nasdaq press
IV. Conclusion amended and replaced the original release announcing completion of its acquisition).
7 See Nasdaq Acquisition Order, supra note 5, at

It is therefore ordered, pursuant to filing in its entirety. The proposed rule 41611.
Section 19(b)(2) of the Act,19 that the change, as modified by Amendment No. 8 See Securities Exchange Act Release No. 69233

proposed rule change (SR–FINRA– 1, was published for comment in the (March 25, 2013), 78 FR 19352 (March 29, 2013)
Federal Register on December 29, (SR–NASDAQ–2013–028) (order approving a
2016–047), be and hereby is, approved. proposed rule change to make permanent a pilot
2016.4 The Commission received no program to permit Nasdaq to accept inbound orders
For the Commission, by the Division of comments on the proposed rule change. routed by NES from the BX Equities market and
Trading and Markets, pursuant to delegated This order grants approval of the PSX) at 19352 n.6 and accompanying text (‘‘BX
authority.20 proposed rule change, as modified by Equity Routing Approval’’). See also ISE Notice,
supra note 4, at 96093.
Eduardo A. Aleman, Amendment No. 1. 9 See Securities Exchange Act Release Nos. 79661
Assistant Secretary. II. Background (December 22, 2016), 81 FR 96100 (December 29,
[FR Doc. 2017–02998 Filed 2–14–17; 8:45 am] 2016) (SR–BX–2016–068) at 96100; 79662
On June 21, 2016, the Commission (December 22, 2016), 81 FR 96087 (December 29,
BILLING CODE 8011–01–P
approved a proposed rule change 2016) (SR–NASDAQ–2016–169) at 96087; and
relating to a corporate transaction in 79660 (December 22, 2016), 81 FR 96060 (December
29, 2016) (SR–Phlx–2016–120) at 96061. See also
which Nasdaq, Inc. would become the ISE Notice, supra note 4, at 96093.
ultimate parent of ISE, ISE Gemini, LLC 10 See Nasdaq Acquisition Order, supra note 5, at

(‘‘ISE Gemini’’), and ISE Mercury, LLC 41611 n.8. The Nasdaq Exchanges, together with
17 See Press Release, DTCC, Industry Steering
(‘‘ISE Mercury’’ and, together with ISE ISE Gemini and ISE Mercury, are referred to herein
Committee and Working Group Formed to Drive as ISE’s ‘‘Affiliated Exchanges.’’
and ISE Gemini, the ‘‘ISE Exchanges’’).5
Implementation of T+2 in the U.S. (Oct. 2014), 11 See generally ISE Notice, supra note 4, at 96093

http://www.dtcc.com/news/2014/october/16/ (discussing that NES is a broker-dealer owned and
mstockstill on DSK3G9T082PROD with NOTICES

1 15 U.S.C. 78s(b)(1).
ust2.aspx. operated by Nasdaq, Inc. and affiliated with ISE and
2 17 CFR 240.19b–4.
18 See Press Release, ISC, US T+2 ISC the Affiliated Exchanges).
3 A ‘‘Member’’ is an organization that has been 12 See ISE Notice, supra note 4, at 96093, 96094–
Recommends Move to Shorter Settlement Cycle On
approved to exercise certain trading rights on the 96096. See also Phlx Rules 985(c)(2), 1080(m)(ii),
September 5, 2017 (Mar. 7, 2016), http:// Exchange. See ISE Rule 100(a)(23). (iii), and (v).
www.ust2.com/pdfs/T2-ISC-recommends-shorter- 4 See Securities Exchange Act Release No. 79665 13 See Nasdaq Rule 2160(c) and Nasdaq Options
settlement-030716.pdf. (December 22, 2016), 81 FR 96092 (‘‘ISE Notice’’). Rules, Chapter VI, Section 11(d)–(g); and BX Rule
19 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 78119 2140(c) and BX Options Rules, Chapter VI, Section
20 17 CFR 200.30–3(a)(12). (June 21, 2016), 81 FR 41611 (June 27, 2016) (SR– 11(d)–(g).

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Document Created: 2017-02-15 00:54:53
Document Modified: 2017-02-15 00:54:53

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		82 FR 10835