[Federal Register Volume 75, Number 84 (Monday, May 3, 2010)]
[Notices]
[Pages 23316-23318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10252]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61979; File No. SR-FINRA-2010-003]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, Relating to Trade Reporting of OTC Equity
Securities and Restricted Equity Securities
April 23, 2010.
I. Introduction
On January 15, 2010, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to trade reporting of
OTC Equity Securities and certain restricted equity securities. On
February 5, 2010, FINRA filed Amendment No. 1 to the proposed rule
change. The proposed rule change, as modified by Amendment No. 1, was
published for comment in the Federal Register on February 19, 2010.\3\
The Commission received no comment letters on the proposed rule change.
On March 25, 2010, FINRA filed Amendment No. 2 to the proposed rule
change.\4\ Because Amendment No. 2 is technical in nature, the
Commission is not publishing it for comment. This order approves the
proposed rule change, as modified by Amendment Nos. 1 and 2.
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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. 61510 (February 5,
2010), 75 FR 7530 (``Notice'').
\4\ Amendment No. 2 reflects changes to FINRA Rule 6635 that
were made in SR-FINRA-2010-002, which was filed with the Commission
for immediate effectiveness on January 14, 2010. See Securities
Exchange Act Release No. 61427 (January 27, 2010), 75 FR 5834
(February 4, 2010).
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Background
In 1990, the SEC adopted Rule 144A (``SEC Rule 144A'') under the
Securities Act of 1933 \5\ (``Securities Act'') to establish a safe
harbor for the private resale of ``restricted securities'' to
``qualified institutional buyers'' (``QIBs'').\6\ At the same time,
FINRA (formerly known as the National Association of Securities
Dealers, Inc. (``NASD'')) created the PORTAL Market to serve as a
system for quoting, trading, and reporting trades in certain designated
restricted securities that were eligible for resale under SEC Rule 144A
(``PORTAL securities'').\7\ In September 2008, the NASDAQ Stock Market
(``NASDAQ'') ceased the operation of the PORTAL Market.\8\ NASDAQ
explained in its rule filing that it is taking a minority stake in a
consortium that will control and operate a new electronic platform for
handling transactions in SEC Rule 144A-eligible securities.\9\ In
October 2009, NASDAQ filed a proposed rule change with the Commission
for immediate effectiveness terminating NASDAQ's PORTAL security
designation process and removing rules related to the PORTAL Market
from its rulebook.\10\ As a result, NASDAQ no longer accepts new
applications for debt or equity securities seeking PORTAL
designation.\11\
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\5\ 17 CFR 230.144A.
\6\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR
17933 (April 30, 1990). For the purpose of SEC Rule 144A, a QIB is
generally defined as any institution acting for its own account, or
for the accounts of other QIBs, that in the aggregate owns and
invests on a discretionary basis at least $100 million in securities
of issuers that are not affiliated with the institution.
\7\ See Securities Exchange Act Release No. 27956 (April 27,
1990), 55 FR 18781 (May 4, 1990).
\8\ See Securities Exchange Act Release No. 58638 (September 24,
2008), 73 FR 57188 (October 1, 2008). As part of the separation of
NASDAQ from FINRA, certain functionality relating to PORTAL,
including the qualification and designation of PORTAL securities,
became part of NASDAQ's rules and were eliminated from the NASD
rules. See Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006).
\9\ In addition to NASDAQ ceasing operation of the PORTAL
Market, the Commission has also approved the deletion of the
Depository Trust Company (``DTC'') requirement that a SEC Rule 144A
security, other than investment grade securities, be included in an
``SRO Rule 144A System'' in order to be eligible for DTC's deposit,
book-entry delivery, and other depository services. See Securities
Exchange Act Release No. 59384 (February 11, 2009), 74 FR 7941
(February 20, 2009). The PORTAL Market was the only ``SRO Rule 144A
System.'' Id.
\10\ Securities Exchange Act Release No. 60991 (November 12,
2009), 74 FR 60006 (November 19, 2009).
\11\ See id. NASDAQ noted in the filing that nothing in the
proposal was ``intended to impact securities previously designated
as PORTAL securities or alter any existing regulatory obligation
applicable to such securities, including, but not limited to, any
trade reporting obligation imposed by any self-regulatory
organization.'' Id.
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In the instant rule proposal, FINRA has proposed to delete certain
PORTAL rules from its rulebook, amend certain other rules to address
gaps that elimination of such PORTAL rules would create, amend certain
definitions to create consistent use of terminology in FINRA rules, and
make certain other clarifying changes.
III. Description of the Proposal
Current FINRA Rule 6610 requires that members report transactions
in ``OTC Equity Securities'' to the OTC
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Reporting Facility (``ORF'').\12\ Under the current definitions in Rule
6420, ``restricted securities,'' as defined by SEC Rule 144(a)(3), and
securities designated in the PORTAL Market are carved out of the ORF
reporting requirement.\13\ Transaction reporting for certain of these
securities to the ORF--specifically, restricted equity securities that
are designated for inclusion in the PORTAL Market--is instead required
by FINRA Rule 6633(a).\14\
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\12\ See FINRA Rule 6610.
\13\ See FINRA Rule 6420(c) and (d).
\14\ See FINRA Rule 6633(a). See also, Notice, supra note 3.
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In light of the recent elimination of NASDAQ's PORTAL rules, FINRA
has proposed to eliminate certain of its PORTAL rules.\15\ However,
because FINRA has determined that elimination of the PORTAL rules that
govern transaction reporting would create a gap in the transaction
reporting requirements for SEC Rule 144A securities, FINRA proposed to
amend FINRA Rule 6622, to ensure that all equity securities that are
``restricted securities'' under Rule 144(a)(3); \16\ and that are
traded pursuant to SEC Rule 144A, will continue to be reported to the
ORF. Under the proposal, transactions in all restricted equity
securities effected pursuant to Commission Rule 144A would generally be
required to be reported to the ORF no later than 8 p.m. Eastern Time
without interruption.\17\ Transactions in restricted equity securities
effected pursuant to Commission Rule 144A and executed between 8 p.m.
and midnight would be required to be reported the following business
day (T+1) by 8 p.m.
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\15\ FINRA Rule 6633(a). The proposed rule change is limited in
scope to equity securities and would not affect the Trade Reporting
and Compliance Engine Service (``TRACE'') or the reporting
requirements with respect to transactions in debt securities. See
Notice supra note 3. In addition to the reporting rules, current
FINRA Rule 6635 specifies which FINRA rules are and are not
applicable to transactions and business activities relating to
PORTAL securities. Under the proposal FINRA will retain FINRA Rule
6635 as FINRA Rule 6630 to maintain the status quo with respect to
the application of FINRA rules to those securities designated as
PORTAL securities prior to October 26, 2009.
\16\ See 17 CFR 230.144.
\17\ See Notice supra note 3, explaining that the ORF reporting
session deadline is 8:00 p.m.
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In addition, FINRA proposed to amend the definition of ``OTC Equity
Security'' in Rule 6420 to delete the reference to securities that
``qualify for real-time trade reporting'' and, instead, to define the
term as any equity security that is not an ``NMS stock'' as defined by
the Commission in Regulation NMS.\18\ The proposed rule change also
would eliminate the defined term ``non-exchange-listed security'' from
Rule 6420.\19\ The effect of these changes is that any security or
class of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan will be excluded from the definition of ``OTC Equity
Security'' in Rule 6420.
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\18\ Rule 600 of Regulation NMS defines ``NMS stock'' as any NMS
security other than an option. ``NMS security'' is defined as ``any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options.'' See 17 CFR
242.600(b)(46), 242.600(b)(47).
\19\ FINRA Rule 6440 (Submission of SEA Rule 15c2-11 Information
on Non-Exchange-Listed Securities) and NASD Rule 2320(f), which is
often referred to as the Three Quote Rule, use the term ``non-
exchange-listed security.'' Because the proposed rule change deletes
the term ``non-exchange-listed security'' from Rule 6420, the
proposed rule change also amends FINRA Rule 6440 and NASD Rule
2320(f) to define the term for purposes of those rules. The proposed
definition in each rule is identical to the definition as it
appeared in FINRA Rule 6420. Consequently, there is no change in the
application of either rule as a result of the proposed rule change.
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Further, the proposal would amend the ORF rules to address
explicitly transactions in OTC Equity Securities that are executed on
an exchange. FINRA's trade reporting rules historically have been
limited to only trades executed ``otherwise than on an exchange.'' \20\
As explained in the Notice, the FINRA/NASDAQ TRF Rules, the FINRA/NYSE
TRF Rules, and the ADF Rules all include an exception from the
reporting obligations for transactions reported on or through an
exchange.\21\ These rules collectively provide for the submission of
trade reports to FINRA for transactions in NMS stocks only if the
transaction is executed over-the-counter. FINRA Rule 6622, which
governs the submission of transaction reports to the ORF for
transactions in OTC Equity Securities, does not include a similar
exception for transactions in otherwise eligible securities that are
reported on or through an exchange.\22\ Thus, FINRA proposed to amend
Rule 6622 to include an explicit exception for transactions in OTC
Equity Securities reported on or through an exchange, and to amend Rule
6420(k) and Rule 6610 to clarify further that transactions in OTC
Equity Securities must be reported to the ORF where such transactions
are executed otherwise than on or through an exchange.
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\20\ See, e.g., FINRA Rule 6100, 6200, and 6300 Series.
\21\ See FINRA Rules 6282(i)(1)(C), 6380A(e)(1)(C),
6380B(e)(1)(C).
\22\ The ORF Rules do include an exception for transactions in
foreign equity securities when the transaction is executed on and
reported to a foreign securities exchange or the transaction is
executed over-the-counter in a foreign country and is reported to
the regulator of securities markets for that country. See FINRA Rule
6622(g).
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FINRA also proposed to conform the definition of ``OTC equity
security'' in Rule 7410 of the OATS rules to the proposed definition in
Rule 6420 and explained that the proposed change will not result in any
change to the scope of securities required to be reported to OATS.
FINRA similarly proposed to eliminate the separate definition of ``OTC
Equity Security'' in FINRA Rule 4560 (Short-Interest Reporting),\23\
explaining that the proposal would ``exclude from the short-interest
record keeping and reporting requirements all restricted equity
securities, such that equity securities that are currently PORTAL
securities would continue to be excepted from the record keeping and
reporting requirements as well as any other restricted equity
securities.'' \24\
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\23\ In Amendment No. 1, FINRA stated as follows: ``The proposed
rule change eliminates the separate definition of ``OTC Equity
Security'' in FINRA Rule 4560 (Short-Interest Reporting). Currently,
the PORTAL Rules carve out PORTAL securities from the record keeping
and reporting requirements of Rule 4560. See Rule 6635(d).
Consistent with this existing exclusion for PORTAL securities, FINRA
is proposing to amend Rule 4560 to exclude from the short-interest
record keeping and reporting requirements all restricted equity
securities, such that equity securities that are currently PORTAL
securities would continue to be excepted from the record keeping and
reporting requirements as well as any other restricted equity
securities.''
\24\ See Amendment No. 1.
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As stated in the Notice, FINRA represented that it will announce
the effective date of the proposed rule change in a Regulatory Notice
to be published no later than 60 days following Commission approval.
The effective date will be 30 days following publication of the
Regulatory Notice announcing Commission approval.
IV. Discussion and Commission's Findings
The Commission has reviewed carefully the proposed rule change and
finds that the proposal is consistent with the Act and the rules and
regulations thereunder applicable to a national securities association,
including the provisions of Section 15A(b)(6) of the Act,\25\ which
requires, among other things, that FINRA rules be designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
transactions in securities, and, in
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general, to protect investors and the public interest.\26\
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\25\ 15 U.S.C. 78o-3(b)(6).
\26\ 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).
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The proposed rule change is intended to address the cessation of
the PORTAL market and clarify the scope of the ORF Rules, as well as
make conforming changes to other FINRA Rules. The Commission believes
that the proposed rule change is reasonably designed to ensure that
FINRA will continue to receive important transaction information with
respect to securities that are traded over-the-counter. In addition,
the Commission believes that the amended definition ``OTC Equity
Security,'' the standardization of that definition throughout FINRA
rules and FINRA's other proposed changes will close gaps and add
clarity with respect to the application of specified FINRA rules to
certain securities.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-FINRA-2010-003), as modified by
Amendment Nos. 1 and 2, be, and it hereby is, approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10252 Filed 4-30-10; 8:45 am]
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