September 2014 Board Update
FINRA Chairman and CEO Rick Ketchum is joined by lead governor Jack Brennan to review rulemaking and other issues discussed at FINRA's September Board of Governors meeting. In addition to the video, a summary of the board actions is also available.
September 19, 2014
Dear Executive Representative:
The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. A summary of the rule proposals, as approved by the Board, is included below.
As you'll see from the number of rulemaking items, we had a full docket with much of the agenda focused on high-frequency trading and equity-market transparency. The Board also authorized seeking comment on initiatives to enhance transparency and execution quality in fixed income markets. In addition, the Board acted on an updated recruitment proposal and modifications to the Gross Income Assessment (GIA) calculation methodology.
As usual, we look forward to your comments.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the September 2014 Board Meeting
Equity Trading Initiatives
ATS Order Book Information
The Board authorized the publication of a Regulatory Notice requesting comment on a proposal to require alternative trading systems (ATSs) to provide FINRA with order book information that is not currently reported by the ATS to the Order Audit Trail System (OATS), with such information to be reported to FINRA using existing OATS interfaces.
Expansion of ATS Transparency
The Board approved the publication of a Regulatory Notice to solicit comment on a proposal to expand FINRA's recently implemented transparency initiative that discloses ATS volume to publish the remaining equity volume executed over the counter (OTC). FINRA would publish each market participant's non-ATS OTC volume reported to FINRA's equity trade reporting facilities based on trades reported for dissemination purposes on which the market participant is identified as the member with the trade reporting obligation, or "executing party." Volume information would be published on the FINRA website on a two- or four-week delayed basis in accordance with the time frames specified for ATS volume publication.
The Board approved the publication of a Regulatory Notice to solicit comment on a proposal to identify over-the-counter trades in NMS stocks reported more than two seconds following trade execution as "out of sequence," and therefore not "last sale" eligible, for purposes of public dissemination, meaning that the trades would not update the last sale price disseminated by the securities information processors (SIPs). The FINRA trade reporting facilities would append a special indicator to "out of sequence" trades before sending them to the SIPs for dissemination. The current trade reporting time frame would remain unchanged, i.e., firms will continue to be required to report all OTC trades as soon as practicable, and only trades reported more than 10 seconds following execution would continue to be considered late for purposes of compliance with FINRA rules. In the Regulatory Notice, FINRA intends to solicit comment on, among other things, whether the proposal should also apply to transactions in OTC equity securities reported to FINRA's OTC Reporting Facility.
The Board authorized FINRA to publish a Regulatory Notice to solicit comment on a proposed requirement that firms synchronize their computer system business clocks to the National Institute of Standards and Technology (NIST) atomic clock within an allowable drift of between 50 to 200 milliseconds. The current requirement allows for up to one second of drift from the NIST standard. The proposal would apply to firms' business clocks that are used for purposes of recording the date and time of any event that must be recorded with reference to a time source pursuant to FINRA By-Laws or other FINRA rules. The proposal would apply only to clocks that generate electronic timestamps; it would not reduce the drift allowance for manual clocks below the current one second limit.
OATS Non-Member Reporting
The Board authorized the publication of a Regulatory Notice requesting comment on a proposal to require FINRA member firms to report the identity of non-member broker-dealers to OATS when receiving orders from such entities.
Supervision of Algorithmic Trading Strategies
The Board authorized FINRA to publish a Regulatory Notice reminding firms of their existing supervisory obligations with regard to the development and deployment of algorithmic trading strategies. The Notice will provide additional guidance to firms surrounding effective controls and practices to monitor for and prevent potential adverse impacts on the market. The Notice will outline firms' obligations in these areas as well as provide suggested supervision and control practices for firms and market participants that use algorithmic trading strategies.
Registration of Associated Persons Involved in the Preparation of Algorithmic Strategies
The Board authorized FINRA to issue a Regulatory Notice seeking comment on a proposal to establish a registration requirement for associated persons who are: (1) primarily responsible for the design, development or for directing the significant modification of an algorithmic strategy; or (2) responsible for supervising such functions. Following the Regulatory Notice process, the Board authorized FINRA to file the proposal as a rule change with the SEC.
Fixed Income Market Initiatives
Fixed Income Quotation Information
The Board authorized FINRA to publish a Regulatory Notice to solicit comment on a proposed requirement that ATSs report to FINRA for regulatory purposes information concerning the quotations they display to their general subscriber base for certain fixed income securities. Specifically, the proposal would require ATSs to report to FINRA quotation information for corporate bonds and agency debt securities. The information, which, under the proposal, would be used only by FINRA for regulatory purposes, would include the identity of the party that submitted the quotation and the price of the quotation. In the Regulatory Notice, FINRA intends to solicit comment on, among other things, whether FINRA should publicly disseminate quotation data to increase pre-trade transparency for fixed income securities.
Fixed Income Pricing Disclosure
The Board authorized the publication of a Regulatory Notice requesting comment on a proposal to require member firms to provide confirmation disclosure of pricing in same-day principal trades of retail-size, whereby member firms would disclose information relating to the price of the firm leg and the customer leg of the transaction for trades involving 100 bonds or less, where the firm and the customer legs of the transaction occur within the same trading day.
Identification of Transactions with Affiliated Entities in TRACE
The Board authorized FINRA to file with the SEC a proposal to require member firms to identify in TRACE trade reports all transactions with non-member affiliates and to separately identify when such transactions occur intra-day at the same price.
Gross Income Assessment Methodology
The Board approved a proposal for filing with the SEC that would modify the GIA pricing structure to eliminate the three-year averaging component of the assessment where a firm's prior year gross revenue does not exceed $25 million. In those circumstances, a firm's GIA would be calculated only by applying the applicable rates to those prior year revenues.
The Board authorized FINRA to publish a Regulatory Notice soliciting comment on a proposal that would require a recruiting firm to provide a FINRA-created educational communication to former retail customers of a transferring representative who are considering transferring assets to that firm. The FINRA-created communication would highlight the potential implications of transferring assets to the new firm and suggest questions the customer may want to ask to make an informed decision. Among other things, the suggested questions relate to the costs the customer may incur, investments that may not be transferrable, and financial incentives the broker is receiving that could influence his or her recommendation to transfer assets or the products or services that might be suggested to the customer at the new firm.
Securities Trader and Securities Trader Principal Registration Categories
The Board authorized FINRA to file with the SEC a proposal to adopt the Securities Trader and Securities Trader Principal registration categories. The proposal would amend NASD Rule 1032(f) (Limited Representative—Equity Trader) to replace the Equity Trader registration category with a Securities Trader registration category, and it would create the Securities Trader qualification examination to replace the current Equity Trader qualification examination. In addition, the proposal would amend NASD Rule 1022(a) (General Securities Principal) to establish a Securities Trader Principal registration category for a principal with supervisory responsibility over the securities trading activities described in NASD Rule 1032(f). The proposal would harmonize the registration requirements for representatives engaged in securities trading activities across different markets as well as for principals responsible for supervising such activities.