Interpretive Letter to Mr. Julian Rainero, Bracewell & Giuliani LLP
Application of the OATS Rules to directed orders for certain foreign equity securities.
May 28, 2008
Mr. Julian Rainero
Bracewell & Giuliani LLP
1177 Avenue of the Americas
New York, NY 10036-2714
Re: NASD Rule 6952
Dear Mr. Rainero:
This is in response to your letter dated March 4, 2008, in which you request interpretive guidance on behalf of Pershing LLC ("Pershing"), a FINRA member, regarding the recording and reporting obligations under NASD Rules 6950 through 6958 (the "OATS Rules"), as recently amended, with respect to directed orders for certain foreign equity securities.
Based upon your letter, we understand the facts to be as follows. Pershing is a registered broker-dealer and a member of FINRA subject to the OATS Rules. Most of the orders that Pershing receives come from correspondents and other FINRA member firms ("Routing Firms") who are themselves subject to the OATS Rules. On occasion, Routing Firms will send orders to Pershing that are directed to foreign markets and that cannot be executed, in whole or in part, in the U.S. Pershing then sends these orders to foreign broker-dealers for execution. You have asked whether, in this scenario, the Routing Firms are subject to the recording and reporting requirements of the OATS Rules in connection with orders routed to Pershing that are directed to a foreign market and cannot be executed, in whole or in part, in the U.S., regardless of whether the orders are executed prior to the OATS submission deadline.
NASD Rule 6952(d) provides that orders for foreign equity securities that are OTC equity securities need only be recorded and reported to OATS if the resulting execution is subject to the FINRA trade reporting requirements in NASD Rule 6620.1 Under NASD Rule 6620(g), a transaction in a foreign equity security need not be reported to the OTC Reporting Facility if the transaction is executed on and reported to a foreign securities exchange or if the transaction is executed over the counter in a foreign country and is reported to the regulator of securities markets for that country.
In the rule filing adopting NASD Rule 6952(d), FINRA provided two examples to illustrate how the provision would be interpreted.2 In the second example, which forms the basis of your inquiry, FINRA stated that if a member firm receives an order in the U.S. symbol for a foreign equity security that trades in the U.S. and abroad and is uncertain whether the order will be executed in the U.S. or in the foreign market, the member should report receipt of the order to OATS if the order is not executed before the time that OATS data is due on the date the order is received. After the order is executed, the firm would then report to OATS either an execution (if the order was executed and trade reported in the U.S.) or a route (if the order was executed and trade reported abroad), as applicable. This example was intended to address those situations where member firms are unsure whether the execution of an order will give rise to a trade reporting obligation under NASD Rule 6620. Because of time differences between markets and other variables, members may face a situation where the OATS reporting deadline is reached before the member executes a trade and knows whether the trade is subject to the reporting requirements in NASD Rule 6620.3 FINRA stated that, when faced with that uncertainty, members should report receipt of the order as though the order would be executed in whole or in part in the U.S.
In prior interpretive guidance regarding OATS obligations for orders involving foreign equity securities, the FINRA staff stated that an order that is directed by a customer to a foreign market and that, by its terms, cannot be executed in whole or in part in the U.S., would not fall within the second example set forth by FINRA in its rule filing, and therefore would not be required to be reported to OATS.4 The staff stated that the example provided in the rule filing was intended to address only those instances where a firm is uncertain whether the trade will be reported in the U.S. Consequently, FINRA staff concluded that the receipt of a directed order that will not result in an execution, in whole or in part, in the U.S. would not fall within the example.5
In your letter, you state that, pursuant to the interpretive guidance described above, Pershing would not be required to submit information to OATS when it receives an order from a Routing Firm that is directed to a foreign market and cannot be executed, in whole or in part, in the U.S. You state that the Routing Firms, like Pershing, should similarly not be required to report the receipt of the order to OATS because the order cannot result in an execution that is required to be reported pursuant to NASD Rule 6620. You note that, if a Routing Firm reported the order to OATS, FINRA would be left with unmatched OATS data because Pershing would not be required to report its receipt of the order.
FINRA staff agrees that, based upon the facts in your letter, Routing Firms would not be subject to the OATS recording and reporting requirements with respect to orders routed to Pershing that are directed to a foreign market and cannot be executed, in whole or in part, in the U.S. and would not be subject to the trade reporting requirements of NASD Rule 6620, even if the order is not executed prior to the OATS submission deadline.
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
Associate General Counsel
cc: Gary K. Liebowitz, Director, FINRA District 9B
1 On October 10, 2006, the Securities and Exchange Commission ("SEC") approved extending the OATS recording and reporting requirements to include orders for "OTC equity securities." See Securities Exchange Act Release No. 54585 (Oct. 10, 2006), 71 Fed. Reg. 61112 (Oct. 17, 2006) (order approving SR-NASD-2005-101). NASD Rule 6951 defines an "OTC equity security" as "any equity security that: (1) is not listed on a national securities exchange; or (2) is listed on one or more regional stock exchanges and does not qualify for dissemination of transaction reports via the facilities of the Consolidated Tape." On September 28, 2007, the SEC approved further amendments to the OATS Rules to provide that orders for foreign equity securities that are OTC equity securities need only be recorded and reported to OATS if the resulting execution is subject to the FINRA trade reporting requirements in NASD Rule 6620. See Securities Exchange Act Release No. 56573 (Sept. 28, 2007), 72 Fed. Reg. 56816 (Oct. 4, 2007) (order approving SR-FINRA-2007-001). Both of these amendments became effective on February 4, 2008. See Securities Exchange Act Release No. 56573 (Sept. 28, 2007), 72 Fed. Reg. 56816 (Oct. 4, 2007) (order approving SR-FINRA-2007-001); Securities Exchange Act Release No. 55440 (Mar. 9, 2007), 72 Fed. Reg. 12852 (Mar. 19, 2007) (order approving SR-NASD-2007-019).
2 See Securities Exchange Act Release No. 56573 (Sept. 28, 2007), 72 Fed. Reg. 56816 (Oct. 4, 2007) (order approving SR-FINRA-2007-001).
3 Unlike trade reporting, which occurs post-execution, information regarding order events that occur during an OATS business day must be reported to OATS by 5:00 a.m. Eastern time the following calendar day. An OATS business day begins at 16:00:01 Eastern time on one market day and ends at 16:00:00 the next market day. See NASD Rule 6955; OATS Reporting Technical Specifications at 8-1 (Nov. 19, 2007).
4 See Letter from Brant K. Brown, Associate General Counsel, FINRA to Julian Rainero, Bracewell & Giuliani (Dec. 19, 2007), available at http://www.finra.org/RulesRegulation/PublicationsGuidance/InterpretiveLetters/.
5 The staff noted that if the trade is executed in a foreign market but must be reported in the U.S. because the trade is not reported to a foreign exchange or a foreign securities regulator, the firm would be required to comply with the OATS recording and reporting obligations with respect to that order. OATS obligations are triggered by the trade report, not the execution venue.