Interpretive Letter to William D. Edick, Pickard and Djinis LLP
March 26, 2010
Mr. William D. Edick
Pickard and Djinis LLP
1990 M St., NW
Washington, DC 20036
Re: OATS Reporting Obligations
Dear Mr. Edick:
This is in response to your letter dated November 2, 2009, as supplemented by a telephone conversation with FINRA staff, in which you request interpretive guidance on behalf of Thomson Reuters BETA Systems ("BETA"), a division of Thomson Reuters, regarding the recording and reporting obligations under the FINRA Rule 7400 Series (the "OATS Rules"). Specifically, you ask whether a FINRA member firm using the BETA Average Price System ("BETA AP System") developed by BETA would be required to submit an Execution Report or Route Reports to FINRA when the firm handles customer orders in OATS-eligible securities on an average price basis. FINRA staff believes that use of the BETA AP System for agency transactions confirmed to the customer on an average price basis, as described below, would result in a firm submitting one or more Route Reports to FINRA, as applicable, rather than an Execution Report, to comply with the reporting obligations in the OATS Rules.
Based upon your letter, as supplemented by a telephone conversation with FINRA staff on December 3, 2009, we understand the facts to be as follows. BETA enters into agreements with FINRA member firms pursuant to which, among other services, BETA agrees to submit the firms' OATS reports to FINRA. One of the features offered by BETA is the BETA AP System, which allows a customer to monitor executions and view a running average price on a real-time basis. The BETA AP System is optional, and the average price functionality is activated at the customer account level. The end customers using the BETA AP System are generally retail customers, and the orders entered into the BETA AP System are automated orders (i.e., there is no broker discretion and no "working" of orders).
When the BETA AP System functionality is used, the customer's account ledger provides a real-time picture of the order status at all times (i.e., the customer's account ledger reflects how many shares have been executed and the average price of the multiple executions for each order). In addition, the firm can provide the customer with the information for each individual transaction that is included in the average price calculation in real time. Even though the customer may monitor executions as they occur, the customer receives a single confirmation, which indicates the final average price of all executions.
If the average price functionality is used for a customer's account, an order that receives multiple executions would be processed by the BETA AP System as follows:
- The customer's order is entered into the BETA AP System. At all times, the customer's order is tracked strictly to the customer's account, and all order records reflect the customer account number (i.e., the order is never identified with a firm owned or controlled account number).
- The order is posted to the order databases and simultaneously sent out for execution.
- The executions will simultaneously post to the customer's ledger account and be tracked by a firm database used solely for back-office processing.1 The executions are coded using only the customer's account number and at no time are identified with a firm owned or controlled account number.
- The customer's account ledger, which is available to the customer, will contain a single entry for the order reflecting the average price of all executions for the order that is updated in real time to reflect executions as they happen.
- The individual executions are posted in real time to the customer account in an on-line record, and a complete history can be provided to the customer upon request.
- The broker-dealer's database is used after the order is filled to calculate the average price of the transactions and generate the single customer confirmation.
- At the end of the day, all executions post to the order file status report and are posted by the customer account number.
- At settlement, the shares are placed directly into the customer's account and are never held in a firm owned or controlled account.
You have asked whether a firm handling, as agent, a customer order in an OATS-eligible security on an average price basis using the BETA AP System would be required to submit multiple Route Reports or a single Execution Report to FINRA if the order is handled as described above.
The OATS Rules generally require member firms to record and report certain order information for orders in Nasdaq-listed and over-the-counter equity securities. Among other things, FINRA Rule 7440 requires members to record information concerning order receipt, order transmittal (including transmission of an order to another department within the firm, another FINRA member, an Electronic Communications Network, and a non-FINRA member), and order execution. FINRA provides additional resources for member firms to rely on in complying with their recording and reporting obligations under the OATS Rules. These resources, which include The OATS Reporting Technical Specifications, "Frequently Asked Questions" ("FAQs") regarding the OATS Rules, and OATS Reports, provide more specific guidance and examples regarding the recording and reporting requirements in the OATS Rules.
On April 29, 2009, FINRA issued an OATS Report that, among other things, provided guidance on reporting agency average price executions to OATS.2 In addition, FINRA has issued an OATS FAQ (FAQ C62) on reporting requirements when handling agency orders on an average price basis. Pursuant to that guidance, members are generally required to show receipt and execution of a customer order by reporting a New Order Report and a single Execution Report (rather than Route Reports) to OATS when handling an agency order on an average price basis when the following three conditions are met: (1) the customer specifically requests the order to be worked on an average price basis; (2) individual street side executions go into a firm owned/controlled allocation account used for all customer orders worked by the firm; and (3) the customer is given a single fill/execution from the average price allocation account at the average price.
FINRA staff does not believe that agency orders in which the customer receives a single confirmation at an average price, when handled as set forth above using the BETA AP System, meet the three conditions set forth in the applicable OATS guidance. Consequently, firms using the BETA AP System to handle agency orders that are confirmed to the customer on an average price basis would submit one or more Route Reports to OATS for the order rather than a single Execution Report.3
We trust that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved. In addition, you should be aware that any changes in the facts as you have described them will require further consideration and may cause us to reach a different conclusion.
Brant K. Brown
Mari-Anne Pisarri (Pickard and Djinis LLP)
1. If there is a single execution for an order, it is posted directly to the customer's account ledger.
2. The April 29, 2009 OATS Report superseded any contrary guidance provided in Section VI of Notice to Members 01-85 as well as the June 22, 2005 OATS Report regarding agency orders.
3. The number of Route Reports submitted would be determined by whether the firm routed the entire order or split the order into multiple pieces for execution. See, e.g., OATS Reporting Technical Specifications §4.4.10 (ed. Jan. 10, 2010).