FINRA Alert! OPEN FOR COMMENT: proposed rule change to require members to (i) publish order routing reports for orders in OTC Equity Securities, and (ii) submit their order routing reports for both OTC Equity Securities and NMS Securities to FINRA
Source: https://public-inspection.federalregister.gov/2023-04786.pdf
Background:
On November 16, 2022, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”), 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, and (ii) submit their order routing reports for both OTC Equity Securities and NMS Securities to FINRA for publication on the FINRA website.
This sounds an awful lot like Dave Lauer, with the commenter raising points that can be used for your own comment:
- That commenter states that the proposed FINRA rule, like SEC Rule 606(a), applies when a reporting firm receives and routes a customer order to a second firm, and the second firm (“routing firm”) can route the order to various execution venues but itself cannot execute the order (“routing firm scenario”). The commenter also states that this requires the reporting firm to report the net fees paid or received between the routing firm and the venue in the SEC Rule 606(a) tables or FINRA’s OTC Equity Security Routing Public Report as applicable, and material aspects disclosures.31
- The commenter notes that the proposed FINRA rule, like SEC Rule 606(a), does not require the reporting of the net fees paid or received between the reporting broker-dealer and the routing broker in the OTC Equity Security Routing Public Report tables.32
- The commenter argues 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 payments between the reporting firm and the routing firm.33
- The commenter also argues that this results in reported data that is not comparable across broker-dealers.34 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 this data to the reporting firm, and a reporting firm cannot effectively validate the data relating to routing firm scenarios.35 The commenter further states that the rule filing does not explicitly discuss the costs for such reporting.36 The commenter further suggests that if FINRA adopts this reporting, FINRA Rule 6470 should be revised to address the routing scenario.37
- The commenter also states this reporting scenario should not apply for routes to foreign routing firms. The commenter argues that there are a significant number of OTC stocks that have a limited number of available execution venues or only have one or two market makers, and 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 equities could have routing relationships with a limited number of market makers.38 The commenter suggests that FINRA should identify this as a factor for investors to consider when reviewing a broker-dealer’s OTC Equity Security report.39
- 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 consolidated audit trail (“CAT”).40 The commenter further 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.41
- The commenter also raises concerns about implementation of the proposal and argues that a longer implementation period is appropriate to ensure that industry members will have sufficient time to properly implement the planned reporting changes.42 The commenter states that it supports centralized publication of SEC Rule 606(a) reports and the OTC routing reports, but argues 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.
Comments may be submitted by any of the following methods:
All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.
Electronic comments:
• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or
• Send an email to [email protected]. Please include File Number SR-FINRA2022-031 on the subject line.
Paper comments:
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2022-031. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2022-031 should be submitted on or before [INSERT DATE 21 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]. Rebuttal comments should be submitted by [INSERT DATE 35 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
