Regulation of Inter-dealer Quotation Systems
On November 8, 2021, FINRA ceased operation of the OTC Bulletin Board (OTCBB)—a FINRA-operated inter-dealer quotation system—and deleted the OTCBB-related rules from the FINRA rulebook.
• FINRA Regulatory Notice 21-38 (October 25, 2021): FINRA Announces Closure of the OTC Bulletin Board
Compliance with SEC Rule 15c2-11
FINRA adopted amendments to Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11) in light of the SEC amendments to SEC Rule 15c2-11. As amended, Rule 6432 will require a qualified inter-dealer quotation system to submit a modified Form 211 filing to FINRA in connection with each initial information review, and a daily security file to FINRA containing summary information for all securities quoted on its system on each day that it makes a publicly available determination permitted under SEC Rule 15c2-11, among other amendments. The amendments to Rule 6432 became effective on September 28, 2021, in line with the compliance date for the amendments to SEC Rule 15c2-11.
• FINRA Regulatory Notice 21-33 (September 28, 2021): FINRA Adopts Amendments to Rule 6432 Regarding Compliance with the Information Requirements of SEC Rule 15c2-11
Regulation of Inter-dealer Quotation Systems
FINRA has adopted new Rule 6439 (Requirements for Member Inter-Dealer Quotation Systems), which implements additional requirements for firms that operate systems that regularly disseminate the quotations of identified broker-dealers in OTC Equity Securities (each an “inter-dealer quotation system” or “IDQS”). Rule 6439 will become effective on October 1, 2021, except for paragraph (d)(1)(B), which relates to the collection of order-level information. The effective date for this paragraph will be announced at a later date to better coordinate, and avoid regulatory duplication, with reporting obligations to the Consolidated Audit Trail (CAT) under Rule 6830 (Industry Member Data Reporting).
FINRA also is deleting the Rule 6500 Series and other rules related to the OTC Bulletin Board (OTCBB) – a FINRA-operated inter-dealer quotation system – and ceasing its operation. The permanent closure of the OTCBB will not occur prior to October 1, 2021. FINRA will announce the effective date of the deletion of the OTCBB-related rules and its closure in a separate communication.
• FINRA Regulatory Notice 21-28 (August 6, 2021): FINRA Adopts Rule 6439 Governing the Operation of Inter-Dealer Quotation Systems and Announces Closure of the OTC Bulletin Board
Best Execution and Payment for Order Flow
FINRA issued this Notice to remind member firms of longstanding Securities and Exchange Commission (SEC) and FINRA rules and guidance concerning best execution and payment for order flow, which the SEC has defined very broadly to refer to a wide range of practices including monetary payments and discounts, rebates, or other fee reductions or credits. Under these rules and guidance, member firms may not let payment for order flow interfere with their duty of best execution
• FINRA Regulatory Notice 21-23 (June 23, 2021): FINRA Reminds Firms of Requirements Concerning Best Execution and Payment for Order Flow
Customer Order Handling, Margin and Liquidity
FINRA issued this Notice to remind member firms of their obligations during extreme market conditions with respect to handling customer orders, maintaining appropriate margin requirements and effectively managing their liquidity.
• FINRA Regulatory Notice 21-12 (March 18, 2021): FINRA Reminds Member Firms of Their Obligations Regarding Customer Order Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions
Amendments to NYSE Rule 7.12 Concerning the Resumption of Trading Following a Level 3 Market-Wide Circuit Breaker
Upon feedback from industry participants, the Exchange has been working with other national securities exchanges and FINRA to establish a standardized approach for resuming trading in all NMS Stocks following a Level 3 halt. The proposed approach would allow for the opening of all securities the next trading day after a Level 3 halt as a regular trading day, and is designed to ensure that Level 3 MWCB events are handled in a more consistent manner that is transparent for market participants. As proposed, a Level 3 halt would end at the end of the trading day on which it is declared. This proposed change would allow for next-day trading to resume in all NMS Stocks no differently from any other trading day. In other words, an exchange could resume trading in any security when it first begins trading under its rules and would not need to wait for the primary listing market to re-open trading in a security before it could start trading such security. Accordingly, under the proposal, the Exchange could begin trading all UTP Securities at the beginning of the Exchange’s Early Trading Session at 7:00 a.m. ET, regardless of whether the primary listing markets for those securities have actually opened.
• Securities Exchange Act Release No. 34-88402 (March 17, 2020), 85 FR 16436 (March 23, 2020) (File No. SR-NYSE-2020-20): Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Amending Rule 7.12 Concerning the Resumption of Trade Following a Level 3 Market-Wide Circuit Breaker Halt
Publication or Submission of Quotes Without Specific Information
The SEC adopted amendments to Rule 15c2-11 under the Securities Exchange Act of 1934, which governs the publication of quotations for securities in a quotation medium other than a national securities exchange, i.e., over-the-counter (“OTC”) securities. The amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by, among other things: requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market; narrowing reliance on certain exceptions from the Rule’s requirements, including the piggyback exception; adding new exceptions for the quotations of securities that may be less susceptible to fraud and manipulation; removing obsolete provisions; adding new definitions; and making technical amendments. The effective date was December 28, 2020.
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds
The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), SEC, and Commodity Futures Trading Commission (CFTC) are adopting amendments to the regulations implementing section 13 of the Bank Holding Company Act (BHCA Act). Section 13 contains certain restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. These final amendments are intended to improve and streamline the regulations implementing section 13 of the BHC Act by modifying and clarifying requirements related to the covered fund provisions of the rules.
The effective date for amendatory instructions 1 through 14 (OCC), 16 through 29 (Board), 31 through 44 (FDIC), and 46 through 58 (CFTC) is January 1, 2020; the effective date for amendatory instructions 60 through 73 (SEC) is January 13, 2020; and the effective date for the addition of appendices Z at amendatory instructions 15 (OCC), 30 (Board), and 45 (FDIC) is January 1, 2020, through December 31, 2020, except for amendatory instruction 74 (SEC), which is effective January 13, 2020, through December 31, 2020.
• SEC Release No. BHCA-9 (June 25, 2020), 85 FR 46422 (July 31, 2020): Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Final Rule)
• SEC Release No. BHCA-7 (September 18, 2019), 84 FR 61974 (November 14, 2019): Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Final Rule)