Notice2023-16886
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA Rules 6151 (Disclosure of Order Routing Information for NMS Securities) and 6470 (Disclosure of Order Routing Information for OTC Equity Securities)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 8, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 151 (Tuesday, August 8, 2023)</title>
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[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53560-53566]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-16886]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98047; File No. SR-FINRA-2022-031]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA
Rules 6151 (Disclosure of Order Routing Information for NMS Securities)
and 6470 (Disclosure of Order Routing Information for OTC Equity
Securities)
August 2, 2023.
I. Introduction
On November 16, 2022, the 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to require members to (i) publish
order routing reports for orders in OTC Equity Securities,\3\ and (ii)
submit their order routing reports for both OTC Equity Securities and
NMS securities \4\ to FINRA for publication on the FINRA website. The
proposed rule change was published for comment in the Federal Register
on December 6, 2022.\5\ On January 18, 2023, pursuant to Section
19(b)(2) of the Exchange Act,\6\ the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\7\ On March 3, 2023,
the Commission instituted proceedings to determine whether to approve
or disapprove the proposed rule change.\8\ On May 31,
[[Page 53561]]
2023, the Commission designated a longer period for Commission action
on proceedings to determine whether to approve or disapprove the
proposed rule change.\9\ The Commission received comment letters on the
proposed rule change and responses from FINRA.\10\ 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\ FINRA Rule 6420(f) defines an ``OTC Equity Security'' as any
equity security that is not an NMS stock, other than a Restricted
Equity Security. FINRA Rule 6420(k) defines a ``Restricted Equity
Security'' as any equity security that meets the definition of
``restricted security'' as contained in Rule 144(a)(3) under the
Securities Act of 1933. ``NMS stock'' means any NMS security other
than an option. See 17 CFR 242.600(b)(55).
\4\ ``NMS securities'' include any security or class of
securities for which transaction reports are collected, processed,
and made available 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)(54).
\5\ See Securities Exchange Act Release No. 96415 (November 30,
2022), 87 FR 74672 (``Notice'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 96699, 88 FR 4260
(January 24, 2023).
\8\ See Securities Exchange Act Release No. 97039, 88 FR 14653
(March 9, 2023).
\9\ See Securities Exchange Act Release No. 97629, 88 FR 37112
(June 6, 2023).
\10\ All comments received by the Commission on the proposed
rule change are available at: <a href="https://www.sec.gov/comments/sr-finra-2022-031/srfinra2022031.htm">https://www.sec.gov/comments/sr-finra-2022-031/srfinra2022031.htm</a>.
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II. Summary of the Proposed Rule Change
As FINRA states in the Notice, Rule 606(a) of Regulation National
Market System (``Regulation NMS'') requires broker-dealers to publicly
disclose specified information about their order routing practices for
NMS securities.\11\ In 2018, the Commission amended SEC Rule 606(a) to
enhance required disclosures from broker-dealers about their order
routing practices for NMS securities, including enhanced disclosures
for non-directed orders in NMS stocks that are submitted on a ``held''
basis in order to better allow ``customers--and retail investors in
particular--that submit orders to their broker-dealers [to] be better
able to assess the quality of order handling services provided by their
broker-dealers'' and to allow customers to determine ``whether their
broker-dealers are effectively managing potential conflicts of
interest.'' \12\
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\11\ 17 CFR 242.606(a) (``SEC Rule 606(a)''). See also Notice,
supra note 5, at 74672.
\12\ See Securities Exchange Act Release No. 84528 (November 2,
2018), 83 FR 58338 (November 19, 2018) (``SEC Rule 606 Adopting
Release''). A broker-dealer must attempt to execute a ``held'' order
immediately, while a ``not held'' order instead provides a broker-
dealer with price and time discretion. Id. at 58344. See also
Notice, supra note 5, at 74672 n.5.
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As described below and in more detail in the Notice, FINRA proposes
to adopt FINRA Rule 6470 (Disclosure of Order Routing Information for
OTC Equity Securities), which imposes disclosure requirements for OTC
Equity Securities that are generally aligned with the requirements of
SEC Rule 606(a) disclosures but with modifications to account for
differences between the over-the-counter (``OTC'') markets and the
market for NMS securities. In addition, to improve the accessibility of
these new disclosures, as well as SEC Rule 606(a) reports, FINRA
proposes to adopt FINRA Rule 6470(d) and FINRA Rule 6151 (Disclosure of
Order Routing Information for NMS Securities) to require members to
send both disclosures to FINRA for centralized publication on the FINRA
website.
Proposed FINRA Rule 6470 would require the publication of order
routing disclosures for OTC Equity Securities.\13\ Specifically,
proposed FINRA Rule 6470(a) would require every member to make publicly
available for each calendar quarter a report on its routing of non-
directed orders in OTC Equity Securities that are submitted on a held
basis during that quarter, broken down by calendar month, and keep such
report posted on an internet website that is free and readily
accessible to the public for a period of three years from the initial
date of posting on the internet website (``OTC Equity Security
reports'').\14\ These reports would be required to be separated into
three sections: (i) domestic OTC Equity Securities; (ii) American
Depository Receipts and foreign ordinaries that are OTC Equity
Securities; and (iii) Canadian-listed securities trading in the United
States as OTC Equity Securities.\15\ In addition, proposed FINRA Rule
6470(a) would specify that the new OTC Equity Security reports must be
made available using the most recent versions of the XML schema and
associated PDF renderer as published on the FINRA website,\16\ and
proposed FINRA Rule 6470(d) would require the reports to be made
publicly available within one month after the end of the quarter
addressed in the report.\17\
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\13\ See Notice, supra note 3, at 74672 n.8.
\14\ Proposed FINRA Rule 6470 would apply to ``every member,''
but FINRA notes that the focus of the proposed disclosures is held
orders from customers in OTC Equity Securities, and some members may
not engage in any activities involving held orders from customers in
OTC Equity Securities. See Notice, supra note 5 at 74673 n.9. If a
member does not accept any orders in OTC Equity Securities from
customers during a given calendar quarter (whether held or not
held), such member would not be required to publish a report under
Rule 6470 for that quarter. Id. Similarly, a member that accepted
only not held orders in OTC Equity Securities from customers--but no
held orders in OTC Equity Securities from customers--during a given
calendar quarter would not be required to publish a report for that
quarter. Id. Further, FINRA states that if a member accepted orders
in OTC Equity Securities (whether held, not held, or both) only from
other broker-dealers, but not from customers, during a given
calendar quarter, such member would not be required to publish a
report for that quarter. Id.
\15\ FINRA states that to provide for consistency across member
reports, FINRA will publish a list of the OTC Equity Security
symbols that fall under each category, and members would be required
to publish reports in a manner consistent with such list. See
Notice, supra note 5, at 74673. FINRA states that it will provide
information in the Regulatory Notice announcing the effective date
regarding where members may access the list of OTC Equity Security
symbols that FINRA will maintain on its website. Id. at 74674 n.11.
FINRA also notes that these categories differ from the NMS
securities categories required to be reported for SEC Rule 606(a)
reports, which it believes are not relevant to the OTC market. Id.
\16\ FINRA states that it will publish the technical
specifications for the XML schema and associated PDF renderer on its
website for member use in generating the new reports. See Notice,
supra note 5, at 74673 n.12. FINRA expects that, subject to the
differences between the SEC Rule 606(a) reports and the OTC Equity
Security reports, the XML schema and associated PDF renderer
published by FINRA would be substantially similar to those published
by the SEC for the SEC Rule 606(a) reports. Id. FINRA believes this
requirement would ensure that reports are generated and published in
standardized machine-readable and human-readable forms, which would
benefit investors by permitting the public to more easily analyze
and compare the OTC Equity Security reports across members, as well
as to more easily perform combined analysis of both SEC Rule 606(a)
and OTC Equity Security reports. Id. at 74763.
\17\ FINRA states that it understands that some introducing
firms route all of their orders in OTC Equity Securities to one or
more clearing firms for further routing to other venues for
execution. See Notice, supra note 5 at 74673 n.10. FINRA states that
the Commission has provided guidance that, where an introducing firm
routes all of its covered orders to one or more clearing firms for
further routing and execution and the clearing firm in fact makes
the routing decision, the introducing firm generally may comply with
the SEC Rule 606(a) order routing disclosure requirements by: (i)
disclosing its relationship with the clearing firm(s) on its website
that includes any payment for order flow received by the introducing
firm, and (ii) adopting the clearing firm's disclosures by
reference, provided that the introducing firm has examined the
report and does not have reason to believe it materially
misrepresents the order routing practices. Id. FINRA states that it
intends to provide parallel guidance with respect to proposed FINRA
Rule 6470. Id.
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Pursuant to proposed FINRA Rule 6470(a), the new OTC Equity
Security reports would be required to include the information specified
in paragraphs (a)(1) through (4) of proposed FINRA Rule 6470,
specifically:
<bullet> the percentage of total orders \18\ for the section that
were not held orders and held orders, and the percentage of held orders
for the section that were non-directed orders; \19\
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\18\ FINRA states that ``total orders'' would include all orders
from customers for the section, including both directed and non-
directed orders from customers. See Notice, supra note 5, at 74673
n.14.
\19\ FINRA states that for purposes of the proposed disclosures,
a ``non-directed order'' would mean any order from a customer other
than a directed order. See Notice, supra note 5, at 74673-74 n.15.
FINRA further states that consistent with the definition of
``directed order'' under Regulation NMS, a ``directed order'' would
mean an order from a customer that the customer specifically
instructed the member to route to a particular venue for execution.
See id.; 17 CFR 242.600(b). FINRA notes that, similar to the
definition of ``customer'' under SEC Rule 600(b)(23) of Regulation
NMS, a ``customer'' is defined under FINRA rules to exclude a broker
or dealer. See FINRA Rule 0160(b)(4). Orders from other broker-
dealers would therefore be excluded from the proposed disclosures.
See Notice, supra note 5, at 74673-74 n.15.
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<bullet> the identity of the ten venues to which the largest number
of total non-directed held orders for the section were
[[Page 53562]]
routed for execution \20\ and of any venue to which five percent or
more of non-directed held orders for the section were routed for
execution, and the percentage of total non-directed held orders for the
section routed to the venue; \21\
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\20\ FINRA states that, consistent with the Commission's
approach to SEC Rule 606(a), a ``venue'' would be defined broadly to
cover any market center or any other person or entity to which a
member routes orders for execution. See Notice, supra note 5, at
74674 n.16. Accordingly, for purposes of proposed FINRA Rule 6470,
where an alternative trading system (``ATS'') offers both automatic
order execution and order delivery functionality, the ATS should be
identified as the venue only when the ATS provides order execution.
Conversely, for purposes of proposed FINRA Rule 6470, in cases where
the ATS instead provides order delivery, the separate market center
to which the orders are delivered--e.g., a market maker or other
ATS--should be identified as the venue where the order was routed
for execution. Id.
\21\ Proposed FINRA Rule 6470(b) would provide that a member is
not required to identify execution venues that received less than 5%
of non-directed held orders for a section of the member's OTC Equity
Security report, provided that the member has identified the top
execution venues that in the aggregate received at least 90% of the
member's total non-directed held orders for the section. FINRA
states that this provision is consistent with exemptive relief that
the Commission has provided with respect to SEC Rule 606(a) reports.
See Notice, supra note 5, at 74674 n.17.
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<bullet> for each identified venue, the net aggregate amount of any
payment for order flow received, payment from any profit-sharing
relationship received, transaction fees paid, and transaction rebates
received, both as a total dollar amount and per order, for all non-
directed held orders for the section; and
<bullet> a discussion of the material aspects of the member's
relationship with each identified venue, including, without limitation,
a description of any arrangement for payment for order flow and any
profit-sharing relationship and a description of any terms of such
arrangements, written or oral, that may influence a member's order
routing decision including, among other things: (i) incentives for
equaling or exceeding an agreed upon order flow volume threshold, such
as additional payments or a higher rate of payment; disincentives for
failing to meet an agreed upon minimum order flow threshold, such as
lower payments or the requirement to pay a fee; (ii) volume-based
tiered payment schedules; and (iii) agreements regarding the minimum
amount of order flow that the member would send to a venue.\22\
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\22\ FINRA states that the types of arrangements referenced
above are not an exhaustive list of terms of payment for order flow
arrangements or profit-sharing relationships that may influence a
broker-dealer's order routing decision that would be required to be
disclosed. See Notice, supra note 5, at 74674 n.18. For example, if
a broker-dealer receives a discount on executions in other
securities or some other advantage in directing order flow in a
specific security to a venue, or if a broker-dealer receives equity
rights in a venue in exchange for directing order flow there, then
all terms of those arrangements would also be required to be
disclosed. Id. Similarly, if a broker-dealer receives variable
payments or discounts based on order types and the number of orders
sent to a venue, such arrangements would be required to be
disclosed. Id. However, FINRA notes that these are only examples,
and a member would be required to disclose any other material
aspects of its relationship with each identified venue regardless of
whether a particular example is listed in the proposed rule text or
otherwise discussed in this proposed rule change. Id.
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To make both the existing SEC Rule 606(a) reports and the new OTC
Equity Security reports more accessible for regulators, investors and
others seeking to analyze and compare the data, FINRA is proposing to
require that members provide the reports to FINRA for central
publication on the FINRA website. Proposed FINRA Rule 6151 would
require every member that is required to publish a SEC Rule 606(a)
report to provide the report to FINRA, in a manner prescribed by FINRA,
within the same time and in the same formats that such report is
required to be made publicly available pursuant to SEC Rule 606(a). In
combination with proposed FINRA Rule 6470(d), which would require
members to provide the OTC Equity Security report to FINRA within one
month after the end of the quarter addressed in the report in such a
manner as may be prescribed by FINRA, FINRA would be able to publish
both SEC Rule 606(a) and OTC Equity Security reports on its public
website, free of charge and without usage restrictions.\23\
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\23\ See Notice, supra note 5, at 74674-75. FINRA states that
the SEC has provided guidance that introducing firms may comply with
SEC Rule 606(a) by incorporating their clearing firm(s)'s reports in
specified circumstances, and FINRA intends to provide similar
guidance with respect to the OTC Equity Security reports required
under proposed FINRA Rule 6470. Id. at 74675 n.25. To facilitate
centralized access to the reports, such introducing firms must
provide FINRA with a list of their clearing firm(s) and the
hyperlink to the web page where they disclose their clearing firm
relationship(s) and adopt the clearing firm(s)'s reports by
reference. Id. Each introducing firm relying on this guidance would
be required to provide this information to FINRA upon implementation
of the proposed rule change and to update FINRA if the information
previously provided changes. Id. This information will enable FINRA
to provide investors with relevant information for all firms,
including introducing firms incorporating clearing firm reports by
reference, on FINRA's website. Id.
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FINRA states that it undertook an ``economic impact assessment'' to
analyze the potential economic impacts of the proposed rule change,
including potential costs, benefits, and distributional and competitive
effects, relative to the current baseline.\24\ In this analysis, FINRA
analyzed the number of firms quoting, executing trades and routing
orders in OTC Equity Securities over specific time periods, as well as
the number of symbols traded per firm and average dollar volume of
trading per symbol and per firm. In addition, FINRA published the
proposed rule change in Regulatory Notice 21-35 (October 2021) and
received five comments in response.\25\ FINRA provided these comments,
as well as a summary of these comments and its responses in its filing
with the Commission.\26\
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\24\ See Notice, supra note 5, at 74675-78.
\25\ Comments received by FINRA are available on FINRA's website
at <a href="https://www.finra.org/rules-guidance/notices/21-35#comments">https://www.finra.org/rules-guidance/notices/21-35#comments</a>.
\26\ See Notice, supra note 5, at 74678-80.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to a national securities
association.\27\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\28\ which requires, among other things, that the association's
rules be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest, and that the rules are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\27\ 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).
\28\ 15 U.S.C. 78o-3(b)(6).
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The Commission received two comment letters that were broadly
supportive of the proposed rule change and greater transparency
regarding the routing of orders in OTC Equity Securities in
general.\29\ Another commenter submitted three comment letters, and was
supportive of some aspects of the proposal, but expressed concerns
about and opposed other aspects of the proposal, as discussed
below.\30\
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\29\ See letters to Vanessa Countryman, Secretary, Commission,
from G.P., dated November 30, 2022; and from Daniel Lambden, dated
December 5, 2022.
\30\ See letters to Vanessa Countryman, Secretary, Commission,
from Howard Meyerson, Managing Director, Financial Information
Forum, dated December 20, 2022 (``FIF Letter''), dated February 3,
2023 (``FIF Letter II''), and dated April 13, 2023 (``FIF Letter
III''). The commenter is supportive of some aspects of the proposal,
including: FINRA's proposal to maintain the same quarterly reporting
timeframe for OTC Equity Security reports as applies for SEC Rule
606(a) reporting; FINRA's chosen OTC Equity Security reporting
categories; FINRA's assertion that it will publish and maintain a
file of which symbols are included in each OTC Equity Security
category and make this file accessible to all industry members
without charge; FINRA's approach of not requiring the OTC Equity
Security reports to be broken out by order type; FINRA's proposal to
require reporting of payments per executed order rather than per
share; FINRA's decision to limit the OTC Equity Security reports to
non-directed held orders; and proposed FINRA Rule 6470(b) which
would provide a limited exception to venue reporting requirements in
proposed FINRA Rule 6470(a)(2). See FIF Letter at 7-9. The commenter
and FINRA both state that the proposal to require reporting of
payments per executed order rather than per share is consistent with
current industry practice for OTC Equity Securities. See id.;
Notice, supra note 5, at 74674.
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[[Page 53563]]
A. Disclosure in the Routing Firm Scenario
Among other things, proposed FINRA Rule 6470(a) requires a member
to disclose the identity of the ten venues to which the largest number
of total non-directed held orders for the section were routed for
execution and of any venue to which five percent or more of non-
directed held orders for the section were routed for execution.\31\ The
commenter states that it opposes this aspect of the proposal because
the proposed FINRA rule, like SEC Rule 606(a), would require a
reporting firm that receives and routes customer orders to a second
firm (``routing firm'') that does not execute customer orders but
routes those orders to other venues for execution (``routing firm
scenario''), to disclose the venue to which the routing firm routes the
customer orders for execution.\32\ The commenter states that this
requires the reporting firm to report the net fees paid and rebates
received between the routing firm and the execution venue in the OTC
Equity Security report tables (i.e., the disclosures required by
proposed FINRA Rule 6470(a)(3)) and material aspects disclosures (i.e.,
the disclosures required by proposed FINRA Rule 6470(a)(4)).\33\ The
commenter states that the proposed FINRA rule, like SEC Rule 606(a),
does not require the reporting of the net fees paid or rebates received
between the reporting firm and the routing firm in the OTC Equity
Security report tables.\34\
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\31\ See proposed FINRA Rule 6470(a)(2).
\32\ See FIF Letter at 2. The commenter describes what it
believes is a ``highly problematic `look-through' approach'' used by
the Commission in its application of SEC Rule 606(a) and its
predecessor rule, Rule 11Ac1-6, to the routing firm scenario. See
id. at 2; and FIF Letter III at 4-5. The commenter states that this
``look-through'' approach was not included in the text of Rule
606(a) nor discussed in the 2018 amendments to Rule 606(a)
reporting. The Commission highlights that the requirement in SEC
Rule 606(a) to report the venues to which orders were routed ``for
execution'' has been in place since Rule 11Ac1-6 was originally
adopted in 2000. In the Rule 11Ac1-6 adopting release, the
Commission stated that ``[t]he term `venue' is intended to be
interpreted broadly to cover `market centers' within the meaning of
Rule 11Ac1-5(a)(14), as well as any other person or entity to which
a broker routes non-directed orders for execution. Consequently, the
term excludes an entity that is used merely as a vehicle to route an
order to a venue selected by the broker-dealer.'' (emphasis in the
original). See Securities Exchange Act Release No. 43590 (November
17, 2000), 65 FR 75414, 75427 n.63 (December 1, 2000).
\33\ See FIF Letter at 2. See also proposed FINRA Rule
6470(a)(3) and (4).
\34\ See FIF Letter at 2. See also proposed FINRA Rule
6470(a)(3).
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The commenter states that this approach obscures relevant
information from retail customers because, to understand the financial
inducements faced by a reporting firm, the relevant information is the
payment between the reporting firm and the routing firm. The commenter
also states that this results in reported data that is not comparable
across broker-dealers.\35\ In addition, the commenter states that the
approach results in reporting of arrangements that are not relevant to
investors and results in relevant and important information being
excluded from the reports.\36\ The commenter also states that this
approach requires firms to report on financial arrangements to which
they might not be a party, that the rules do not impose any obligation
on the routing firm to provide data to the reporting firm, and a
reporting firm cannot effectively validate the data received from
routing firms, particularly in situations where a foreign routing firm
routes to a foreign execution venue.\37\ The commenter further states
that the rule filing does not explicitly discuss the costs for this
reporting.\38\ The commenter also suggests that if FINRA adopts this
reporting, then proposed FINRA Rule 6470 should be revised to address
the routing firm scenario, because the proposed rule does not
accurately describe what firms are required to report.\39\
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\35\ See id. at 3-4.
\36\ See FIF Letter III at 3-5. In FIF Letter III, the commenter
sets forth a scenario of order routing reporting under SEC Rule
606(a) that inaccurately reflects the requirements of such rule. In
the scenario, FIF incorrectly assumes reporting is based on the
number of orders routed by the reporting broker-dealer instead of
the number of orders received by the reporting broker-dealer from
the customer as required by SEC Rule 606(a). See id. at 4-5; see
also letter to Vanessa Countryman, Secretary, Commission, from
Robert McNamee, Vice President & Associate General Counsel, FINRA,
dated June 23, 2023 (``FINRA Letter II'') at 3 n.12.
\37\ See FIF Letter at 5.
\38\ See id. at 5.
\39\ See id. at 6; FIF Letter III at 6.
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FINRA believes that the proposal is clear concerning the execution
venue reporting requirement.\40\ FINRA states that, as is the case with
SEC Rule 606(a), the plain language of proposed Rule 6470(a)(2)
requires disclosure of venues to which orders ``were routed for
execution.'' \41\ FINRA highlights that, consistent with SEC Rule
606(a), the purpose of its proposed disclosures is to provide
information about members' order routing practices and potential
conflicts of interest related to execution venues and, therefore, FINRA
believes that the same types of venues should be covered by its new OTC
Equity Security reports as are covered by SEC Rule 606(a) reports.\42\
FINRA also states that members already have experience with SEC Rule
606(a) and may be able to utilize existing systems and arrangements
with routing firms to provide the disclosures, and that aligning the
scope of the SEC Rule 606(a) and OTC Equity Security reports may also
reduce potential investor confusion that could arise with similar
reports that do not provide information about the same types of
venues.\43\
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\40\ See letter to Vanessa Countryman, Secretary, Commission,
from Robert McNamee, Associate General Counsel, FINRA, dated March
29, 2023 (``FINRA Letter'') at 5 and FINRA Letter II at 2-4.
\41\ See FINRA Letter at 5. FINRA also states that, if a member
routes to another broker-dealer that does not itself execute orders,
that receiving broker-dealer would not be an execution venue under
the text of the proposed rule. See id. Additionally, FINRA has
undertaken an economic impact assessment that analyzed, among other
things, the potential costs and benefits of the proposal as
described in the filing, which clearly contemplates disclosure of
execution venues rather than routing brokers. See id. FINRA's
assessment of costs is based on its experience with order routing
reporting and adequately describes the costs of producing the
report.
\42\ See FINRA Letter at 4.
\43\ See id.
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FINRA states that it is appropriate to require reporting firms to
provide information on the routing firm's arrangements with execution
venues because reporting firms are responsible for their order handling
choices, and FINRA believes that it is reasonable to require reporting
firms to obtain and disclose the required information from broker-
dealers they choose to use as their routing firms, including where a
routing firm or an execution venue is located abroad.\44\ In addition,
FINRA states that ``requiring disclosure of execution venues would make
the reports more easily comparable across reporting firms, as the
reports would all include information about the financial inducements
that may influence a member's decision to route to
[[Page 53564]]
destinations where the order may be executed by the recipient venue.''
\45\
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\44\ See id.
\45\ See id. While the financial inducements between a reporting
firm and a routing firm are not disclosed pursuant to proposed FINRA
Rule 6470(a)(3), FINRA states that, consistent with SEC Rule 606(a),
such information may be disclosed in the report's discussion of the
material aspects of the member's relationship with an execution
venue pursuant to proposed FINRA Rule 6470(a)(4). See id. at 4-5
n.14; see also FINRA Letter II at 4.
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Proposed FINRA Rule 6470, like SEC Rule 606(a), requires the
routing report to cover venues to which orders are ``routed for
execution.'' \46\ If a routing firm does not execute orders, then it
cannot be the venue to which orders were ``routed for execution,'' and
thus the obligation of the reporting firm is to report the relevant
information for the execution venues to which the routing firm routes
orders to for execution.\47\ In response to comments challenging
reporting based on the venue to which orders are routed for execution,
specifically that the proposed rule is not clear and does not result in
comparable data, the Commission agrees with FINRA that requiring the
OTC Equity Security report to cover venues to which orders are ``routed
for execution'' would ensure that the reports include information about
the financial inducements that may influence a member's decision to
route to destinations where the order may be executed by the recipient
venue (whether routing orders itself or through an agent routing
firm).\48\ It is reasonable and appropriate that the scope of
disclosures required by proposed FINRA Rule 6470(a) aligns with the
scope of the requirements of SEC Rule 606(a) by requiring the reports
to include information for venues to which orders are ``routed for
execution,'' which would ensure consistency across such reports. In
addition, proposed FINRA Rule 6470 clearly and adequately addresses the
application of the rule to the routing firm scenario raised by the
commenter. The Commission also agrees with FINRA that requiring
disclosure of execution venues would make the reports more easily
comparable across reporting firms, as the reports would all include
information about the financial inducements that may influence a
member's decision to route to destinations where the order may be
executed by the recipient venue. In response to comments raising cost
concerns, FINRA has undertaken an economic impact assessment that
analyzed, among other things, the potential costs and benefits of the
proposal that was based on its experience with order routing reporting.
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\46\ 17 CFR 242.606(a)(2); proposed FINRA Rule 6470(a)(2).
\47\ See supra notes 20-21 and accompanying text.
\48\ The Commission disagrees with commenter concerns that this
approach obscures relevant information from retail customers,
because, to the extent that a reporting firm receives financial
inducements from a routing firm when routing orders to an execution
venue, such financial inducements may be reported pursuant to FINRA
Rule 6470(a) as material aspects of the routing firm's relationship
with the execution venue. See Notice, supra note 5, at 74674 n.18.
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B. OTC Equities With a Limited Number of Available Execution Venues
The commenter states that there are a significant number of OTC
stocks that have a limited number of available execution venues (in
many cases, only one or two market centers), and states that there is a
potential risk that investors viewing the report for these stocks would
see a high percentage of order flow being routed to one or two venues
without appropriate context of the limited choices available to the
reporting firm and that some firms with lower trading volume in OTC
Equity Securities could have routing relationships with a limited
number of market makers.\49\ The commenter suggests that FINRA should
identify this as a factor for investors to consider when reviewing a
member's OTC Equity Security report.\50\ FINRA responds that, while the
OTC Equity Securities market differs from the NMS securities market in
the number of available execution venues, it intends to, as
appropriate, provide members, investors, and others with information
and otherwise engage in investor education efforts about the purpose,
content, and potential limitation of the reports.\51\ In addition,
FINRA states that members could also provide additional explanatory
context regarding their OTC Equity Security reports, provided that such
information is accurate, not misleading, and otherwise complies with
other applicable SEC and FINRA requirements.\52\
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\49\ See FIF Letter at 8.
\50\ See id.
\51\ See FINRA Letter at 6.
\52\ See id.
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The Commission believes that the proposed OTC Equity Security
reports are appropriately designed to provide valuable information to
customers and others regarding a FINRA member's order routing practices
in OTC Equity Securities, which may elicit questions regarding such
practices, including when a high percentage of order flow is being
routed to a small number of venues. Among other things, the proposed
OTC Equity Security reports should help facilitate and inform customer
dialogues with their broker-dealers about the broker-dealers' order
routing practices in OTC Equity Securities. For example, if a customer
has questions about the number of execution venues or frequency of use
of an execution venue, the customer should discuss those questions with
their reporting broker. In those conversations, or through other means,
the reporting broker could also provide additional explanatory context
regarding their OTC Equity Security reports, provided that such
information is accurate, not misleading, and otherwise complies with
other applicable SEC and FINRA requirements.\53\
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\53\ See id. In addition, as described above, FINRA has stated
that as appropriate, it intends to provide members, investors, and
others with information and otherwise engage in investor education
efforts about the purpose, content, and potential limitation of the
reports. See id.
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C. Use of Consolidated Audit Trail (``CAT'') Data
The commenter also states that FINRA should consider whether
certain categories of data that firms are required to report in the OTC
Equity Security reports could be obtained by FINRA from the CAT.\54\ In
the filing, FINRA states that it is not proposing to use CAT data
because of restrictions on the use of CAT data, and because FINRA
believes the most efficient and comprehensive means of providing the
data included in the OTC Equity Security order routing disclosures is
for members to generate the reports directly.\55\ FINRA also states
that not all of the data required in the reports is also reported to
CAT.\56\ The Commission agrees with FINRA that the most efficient and
comprehensive means of obtaining the data included in the OTC Equity
Security report is from members directly. The CAT does not contain all
of the data required on the OTC Equity Security reports, while FINRA
members with reporting obligations under the new rule will have the
means of collecting and reporting the required data.
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\54\ FIF Letter at 6. The CAT is operated pursuant a national
market system plan approved by the Commission pursuant to Section
11A of the Exchange Act and the rules and regulations thereunder.
See Securities Exchange Act Release No. 79318 (November 15, 2016),
81 FR 84696 (November 23, 2016).
\55\ See Notice, supra note 5, at 74678-79.
\56\ See FINRA Letter at 3.
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D. Implementation and Comment Period
The commenter also raises concerns about implementation of the
proposal, stating that it is important to ensure that industry members
will have sufficient time to properly implement the planned
[[Page 53565]]
reporting changes.\57\ The commenter also states that the rule filing
does not provide clear guidance on reporting scenarios relating to
trading on OTC Link ATS and raises several hypothetical situations
where it believes OTC Link ATS should be reported as the execution
venue, as opposed to where the execution actually took place.\58\ In
the proposal, FINRA states that it intends to engage with members and
other interested parties prior to implementation of the proposed rule
change, including specifically to discuss order routing disclosures in
scenarios involving OTC Link ATS, as well as provide guidance as
appropriate on other interpretative questions.\59\ FINRA also provided
responses to the specific scenarios the commenter provided
demonstrating why the execution venue and not OTC Link ATS should be
reported under the proposed rules.\60\ FINRA reiterates that, for
purposes of the proposed disclosures for OTC Equity Securities, a
``venue'' would be defined broadly to cover any market center or any
other person or entity to which a member routes for execution, and
consequently would exclude an entity that is used merely as a vehicle
to route an order to a venue selected by the broker-dealer.\61\ Thus,
FINRA states that, for purposes of proposed Rule 6470, where an
alternative trading system (``ATS'') offers both automatic order
execution and order delivery functionality, the ATS should be
identified as the venue only when the ATS provides order execution.\62\
FINRA believes identification of the ATS in these circumstances is
appropriate because the ATS is the venue where the order was routed
``for execution,'' consistent with SEC Rule 606(a).\63\ FINRA also
believes that, for purposes of proposed Rule 6470, in cases where the
ATS instead provides order delivery, the separate market center to
which the orders are delivered--e.g., a market maker or other ATS--
should be identified as the venue where the order was routed for
execution.\64\
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\57\ FIF Letter at 9-10. The commenter specifically requests
that any implementation timetable should run from the date that
FINRA publishes technical specifications, schemas, interpretive FAQs
and other applicable documentation. Id. at 9.
\58\ FIF Letter at 6 and FIF Letter II at 2-4.
\59\ See Notice, supra note 5, at 74680. See also FINRA Letter
at 7-8, stating that FINRA recognizes that members will require
sufficient time to implement the new disclosure requirements,
intends to provide an appropriate amount of time for implementation
of the proposal, will work with the industry to publish technical
specifications appropriately in advance of the implementation date,
and will also publish interpretive guidance to the extent needed--
including on routing scenarios unique to certain platforms in the
OTC Equity Security market--with sufficient time allowed for
implementation.
\60\ See FINRA Letter II at 6-8.
\61\ See id. at 6.
\62\ Id.
\63\ Id.
\64\ Id.
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The Commission believes that FINRA's statements with respect to
implementation are reasonable and appropriate. As stated above, FINRA
recognizes that members will require sufficient time to implement the
new disclosure requirements, intends to provide an appropriate amount
of time for implementation of the proposal, will work with the industry
to publish technical specifications appropriately in advance of the
implementation date, and will also publish interpretive guidance to the
extent needed--including on routing scenarios unique to certain
platforms in the OTC Equity Security market--with sufficient time
allowed for implementation. In addition, FINRA has stated that it will
announce the effective date of the proposed rule change in a Regulatory
Notice and the effective date will be no later than 365 days following
publication of the Regulatory Notice.\65\ Also, some broker-dealers
will have familiarity and the ability to more easily produce OTC Equity
Security reports due to experience in producing SEC Rule 606(a) reports
for NMS securities, making the implementation reasonable and
appropriate.
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\65\ See Notice, supra note 5, at 74675.
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Moreover, the commenter expresses concern that there was not
sufficient time to comment on this proposal.\66\ The Commission,
however, published the proposal for comment; designated a longer period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings; instituted proceedings;
and extended its time to act on the proposal,\67\ during which time the
commenter submitted three comment letters. Accordingly, there has been
sufficient opportunity for comment on the proposal.
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\66\ See FIF Letter at 10.
\67\ See supra notes 7-9 and accompanying text.
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E. Centralized Hosting of Order Routing Disclosures
The commenter states that its members support centralized
publication of SEC Rule 606(a) reports and the OTC Equity Security
reports by FINRA, but states that if FINRA will publish these reports
that firms should no longer be required to separately publish these
reports on their own websites, and instead firms should be required to
provide a link from its public website to the applicable section of the
FINRA website.\68\ The commenter also suggests that FINRA create a
database with structured firm routing report data that can be accessed
through automated queries.\69\ FINRA confirms that a member would
satisfy the proposed requirement to publish the new OTC Equity Security
reports on the member's website by including a link from its own
website to the FINRA web page hosting centralized publication of OTC
Equity Security reports.\70\ With respect to the commenter's
recommendation that FINRA create a structured database that users may
query, FINRA states that it is not contemplating such a database
currently but will continue to consider ways to facilitate investor
access to, and the usefulness of, the OTC Equity Security reports.\71\
In addition, FINRA states in the proposal that it intends to engage in
investor education efforts regarding the purpose, content, and
potential limitations of the disclosures.\72\
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\68\ FIF Letter at 7.
\69\ Id.
\70\ See FINRA Letter at 2.
\71\ Id.
\72\ See Notice, supra note 5, at 74675 n.23.
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SEC Rule 606(a) reports are required to be made publicly available
within one month after the end of the quarter addressed in the report
pursuant to Commission rule and such requirement is not affected by
this proposal.\73\ With respect to OTC Equity Security reports required
by proposed FINRA Rule 6470, it is reasonable for the OTC Equity
Security reports to be required to be disclosed publicly in a similar
manner to SEC Rule 606(a) reports. These proposed changes are
reasonably designed to make order routing disclosures more accessible
to investors and other relevant stakeholders. Consolidating order
routing reports onto a single website could assist market participants,
investors and the public to more easily compare order routing
disclosures and practices across different firms and observe changes in
routing behaviors over time.\74\
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\73\ 17 CFR 242.606(a).
\74\ At the time it adopted amendments to SEC Rule 606 in 2018,
the Commission declined to require a centralized repository for SEC
Rule 606(a) reports, although it stated that a centralized
repository could help facilitate the goal of enabling customers to
more readily and meaningfully assess broker-dealers' order handling
practices. See SEC Rule 606 Adopting Release, supra note 12, at
58377-78 for the Commission's rationale for not adopting that
requirement. Here, FINRA has determined that it is appropriate to
centralize its members' SEC Rule 606(a) and OTC Equity Security
reports to make the reports more accessible for regulators,
investors, and others seeking to analyze and compare the data.
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[[Page 53566]]
F. Symbol Categorization File
The commenter supports FINRA's proposal to publish and maintain a
file of which symbols are included in each OTC Equity Security category
without charge, but recommends making this file available prior to the
first day of each quarter for use in the upcoming quarter.\75\ The
commenter states that requiring daily updates to the list would
significantly increase the reporting burden without material impact on
aggregating data for the quarter.\76\ Consistent with the commenter's
request, FINRA confirms that it will make the symbol categorization
file available prior to the first day of each calendar quarter for use
during the entirety of the following quarter.\77\ The Commission
believes that publishing and maintaining a symbol categorization file,
which will be available prior to the first day of each quarter, is
appropriate and would ease members' reporting burden.
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\75\ FIF Letter at 7.
\76\ See id.
\77\ FINRA Letter at 2.
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G. Categorization of Held and Not Held Orders
The commenter supports FINRA's proposal to limit the OTC Equity
Security disclosures to non-directed held orders, but requests guidance
on the proposed requirement to report the percentage of not held and
held orders as a percentage of all orders.\78\ FINRA responds that it
believes that all orders are either held or not held because a firm
either has price and time discretion to execute the order, or it does
not.\79\ The Commission agrees with FINRA, and has discussed the
difference between held and not held orders and their separate
reporting requirements under Rule 606 of Regulation NMS.\80\
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\78\ See FIF Letter at 8.
\79\ See FINRA Letter at 6, also stating that consistent with
SEC guidance regarding the categorization of held and not held
orders for purposes of SEC Rule 606(a), orders should be categorized
as held or not held for purposes of the OTC Equity Security
disclosures based on whether the customer reasonably expects the
firm to attempt to execute its order immediately or instead
reasonably expects the firm to use its price and time discretion to
execute the order. FINRA Letter at 6 n.19, citing SEC Division of
Trading and Markets, Responses to Frequently Asked Questions
Concerning Rule 606 of Regulation NMS, Questions 15.01 through
15.04. The Commission notes that these FAQs represent the views of
the staff of the Division of Trading and Markets. They are not a
rule, regulation, or statement of Commission. The Commission has
neither approved nor disapproved their content. These FAQs, like all
staff statements, have no legal force or effect: they do not alter
or amend applicable law, and they create no new or additional
obligations for any person.
\80\ See SEC Rule 606 Adopting Release, supra note 12, at 58340-
41 and 58372.
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Overall, the proposed requirements relating to the disclosure of
order routing information for OTC Equity Securities are reasonably
designed to assist customers in evaluating the quality of the order
routing services of their broker-dealers and how well their broker-
dealers manage potential conflicts of interest with execution venues.
Customers would be better able to assess indirect and previously
unobservable costs of trading OTC Equity Securities, including, among
other things, payment for order flow and transaction fees paid less
rebates, which should allow customers to assess the performance of its
broker-dealer(s) and be better informed in making choices among firms.
The similarities in reporting requirements between proposed FINRA Rule
6470(a) and SEC Rule 606(a) should reduce the burden of reporting for
broker-dealers that already produce SEC Rule 606(a) reports, and the
proposed differences in reporting requirements for OTC Equity
Securities under proposed FINRA Rule 6470(a) and SEC Rule 606(a)
reports for NMS securities are reasonable and appropriate due to
differences in the nature of OTC Equity Securities and the markets in
which they trade.\81\
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\81\ See Notice, supra note 5, at 74674 (describing the
differences in reporting requirements for OTC Equity Securities
under proposed FINRA Rule 6470(a) and SEC Rule 606(a) reports for
NMS securities).
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For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) \82\ of the Exchange
Act and the rules and regulations thereunder applicable to a national
securities association.
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\82\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\83\ that the proposed rule change (SR-FINRA-2022-031) be,
and hereby is, approved.
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\83\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\84\
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\84\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16886 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on August 8, 2023.
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