October 7, 2014.
On June 27, 2014, 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 ” or “Act”) 
and Rule 19b-4 thereunder,
a proposed rule change to adopt rules relating to quotation requirements for over-the-counter (“OTC”) equity securities and to delete the rules relating to the OTC Bulletin Board Service (“OTCBB” or “Service”) and thus cease its operation. The proposed rule change was published for comment in the Federal Register on July 15, 2014.
The Commission received one comment letter on the proposed rule change.
This order institutes proceedings under Section 19(b)(2)(B) of the Act 
to determine whether to approve or disapprove the proposed rule change.
Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to the proposed rule change, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as discussed below, the Commission seeks additional input from interested parties on the proposed rule change.
II. Description of the Proposed Rule Change
As described more fully in the Notice, FINRA proposed to adopt rules: (1) Governing the treatment of quotations in OTC equity securities 
by member inter-dealer quotation systems,
and addressing fair and non-discriminatory access to such systems; (2) requiring member inter-dealer quotation systems to provide FINRA with a written description of quotation-related data products offered and related pricing information, including fees, rebates, discounts and cross-product pricing incentives; (3) expanding the reporting requirements related to quotation information in OTC equity securities; and (4) deleting the Rule 6500 Series and related rules and thereby ceasing operation of the OTCBB.
A. Current Regulatory Framework for Governing Quotations
FINRA, under the statutory mandate of Section 15A of the Act,
has previously adopted rules governing the form and content of quotations relating to securities sold OTC, including rules designed to: (1) Produce fair and informative quotations; (2) prevent fictitious or misleading quotations; and (3) promote orderly procedures for collecting, distributing, and publishing quotations.
FINRA's Rule 6400 Series (Quoting and Trading in OTC Equity Securities), among other things, provides a regulatory framework governing the form and content of quotations in OTC equity securities and, together with other FINRA rules, including rules in the Rule 5200 Series (Quotation and Trading Obligations and Practices), specifies provisions directed toward the mandate set forth in Section 15A(b)(11) of the Act (collectively referred to as the “Quotation Governance Rules”). FINRA also operates the OTCBB and has established the Rule 6500 Series, which governs the operation and use of the OTCBB.
FINRA's Quotation Governance Rules generally prescribe limitations around the conduct of members that publish quotations in OTC equity securities, including quotations displayed on inter-dealer quotation systems. While these rules apply to member quotation activities, they generally do not include rules specifically directed to the member inter-dealer quotation systems on or through which such quotation activity may take place. For example, FINRA Rule 6432 (Compliance with the Information Requirements of Exchange Act Rule 15c2-11) generally provides that members may not initiate or resume quotations in any quotation medium unless the member files Form 211 with FINRA and complies with Exchange Act Rule 15c2-11 (Initiation or resumption of quotations without specific information).
In 2010, the Commission approved four FINRA rules governing quotation activity generally by prescribing additional requirements for members entering quotations on inter-dealer quotation systems in OTC equity securities: (1) Rule 6434 (Minimum Pricing Increment for OTC Equity Securities); (2) Rule 6437 (Prohibition Start Printed Page 61678from Locking or Crossing Quotations in OTC Equity Securities); (3) Rule 6450 (Restrictions on Access Fees); and (4) Rule 6460 (Display of Customer Limit Orders) (“2010 OTC Regulatory Enhancement Rules”) 
These rules extended to the OTC equity market certain protections previously applicable only to exchange-listed securities, and were adopted to enhance quality and investor protection in the OTC equity market.
In addition, FINRA's current Quotation Governance Rules also prescribe the minimum share size applicable to members' quotations in OTC equity securities displayed on an inter-dealer quotation system.
The FINRA Rule 5200 Series also includes rules that govern members' quotation activity in OTC equity securities.
B. Proposed Requirements for Member Inter-Dealer Quotation Systems
Although FINRA's existing Quotation Governance Rules explicitly regulate the activities of OTC market makers 
and other members that display quotations on inter-dealer quotation systems, FINRA's rules generally do not directly provide quotation governance standards for the member inter-dealer quotation systems itself on or through which such quotations are displayed. FINRA is proposing to complement the existing framework governing the form and content of quotations by amending FINRA Rule 6431 to require that a member inter-dealer quotation system: (1) Adopt and provide to FINRA written policies and procedures relating to the collection and dissemination of quotation information in OTC equity securities, (2) establish and provide to FINRA fair and non-discriminatory written standards for granting access to quoting and trading on its system, and (3) provide to FINRA for regulatory purposes a written description of each quotation-related data product offered by such member inter-dealer quotation system and related pricing information, including fees, rebates, discounts and cross-product pricing incentives.
FINRA believes that the foregoing proposal is consistent with the goals and objectives of Section 17B of the Act 
regarding the facilitation of widespread dissemination of reliable and accurate quotation information in penny stocks.
a. Proposed Quotation Collection and Dissemination Policies and Procedures Requirement
Under the proposed revisions to FINRA Rule 6431, FINRA would require that a member inter-dealer quotation system (whether or not also an alternative trading system or “ATS” as defined by Exchange Act Rule 300(a) 
of Regulation ATS) that permits quotation updates on a real-time basis establish, maintain and enforce fair and reasonable written policies and procedures relating to the collection and dissemination of quotation information in OTC equity securities on or through its system. Such policies and procedures are intended to ensure that quotations received are treated fairly and consistently, including by establishing fair and non-discretionary methods under which quotations are prioritized and displayed and such standards must be fully disclosed to subscribers. For example, a member inter-dealer quotation system would be required to address its methodology for ranking quotations, including at a minimum, addressing factors such as price (including any applicable quote access fee), size, time, capacity and type of quotation (such as unpriced quotes and bid/offer wanted quotations).
FINRA also is proposing that a member inter-dealer quotation system provide FINRA with a copy of its written policies and procedures relating to the collection and dissemination of quotation information, and any material updates, modifications and revisions thereto, within five business days following the member's establishment of the written policy or procedure or implementation of the material change.
b. Proposed Written Standards Governing System Access Requirement
FINRA is proposing that a member inter-dealer quotation system establish fair and non-discriminatory written standards for granting access to quoting and trading on the system that do not unreasonably prohibit or limit any person in respect to access to services offered by such inter-dealer quotation Start Printed Page 61679system.
FINRA believes that this proposed requirement is consistent with the “fair access” requirements of Regulation ATS under the Exchange Act 
but would apply to quoting and trading in all OTC equity securities on the member inter-dealer quotation system, irrespective of the percentage of average daily volume that such inter-dealer quotation system had in the security.
Further, the proposed rule would require that a member inter-dealer quotation system provide FINRA with a copy of its written standards for granting access to quoting and trading on its system and any material updates, modifications and revisions thereto within five business days following: (a) The date of the member's establishment of the written standard; and (b) the date of the material update, modification or revision to the written standard. FINRA believes that these proposed amendments are necessary and appropriate to further the mandates of Section 15A of the Act.
c. Proposed Quotation-Related Data Product and Pricing Provision Requirement
FINRA is proposing to require a member inter-dealer quotation system to provide FINRA with a written description of each quotation-related data product offered by such member inter-dealer quotation system and related pricing information, including fees, rebates, discounts and cross-product pricing incentives, and any changes thereto, within five business days following: (a) The date of the establishment of the quotation-related data product or date of any change thereto (including discontinuance of the offering of the quotation-related data product); and (b) the date of the establishment of the quotation-related data product price, including a fee, rebate, discount and cross-product pricing incentive, or change thereto. FINRA believes that the proposed changes described above will facilitate the objectives of the Act, including Section 17B, by helping ensure that disseminated quotations are reliable and accurate and will provide FINRA with useful information to ensure compliance with FINRA rules and to monitor the widespread availability of quotation information to investors and market participants through sources that are not self-regulatory organizations (“SROs”).
d. Proposed Amendments to the Quotation Recording and Reporting Requirements
FINRA Rule 6431 (Recording of Quotation Information) was implemented in 2003 to provide FINRA with access to quotation data displayed on non-SRO sponsored and non-member systems so that FINRA could assess member compliance with applicable rules and regulations and, when necessary, to reconstruct market activity.
FINRA is proposing to update and expand the rule to reflect the current quoting structure of the OTC equity market.
In addition, FINRA is proposing minor amendments to the items of information required to be recorded and reported under the rule.
When it adopted FINRA Rule 6431, FINRA determined not to apply the requirements to inter-dealer quotation systems that were FINRA members and, rather, to obtain quotation information directly from the FINRA member as needed pursuant to FINRA Rule 8210. However, since that time, the primary inter-dealer quotation system from which FINRA receives quotation information (as reporting agent on behalf of member firms) has become a FINRA member firm and, therefore, FINRA believes that the exception for quotations displayed on systems operated by a FINRA member no longer should apply.
The proposed rule would require member inter-dealer quotation systems to report each attributed quotation displayed on the system by a broker-dealer. In the event that a FINRA member displays a quotation on a non-member inter-dealer quotation system, the member must record and report to FINRA the required information regarding the quotations displayed by such member.
FINRA believes that these amendments to the quotation recording and reporting requirements would simplify and streamline the process of obtaining quotation information for regulatory purposes by directly requiring that member inter-dealer quotation systems report subscribing members' quotation information to FINRA.
Individual quoting members no will longer be required to report or arrange to have reported to FINRA the items of quotation information specified in the rule, unless such member is displaying a quotation on a non-member inter-dealer quotation system. The rule would continue to permit the use of a reporting agent by either a member inter-dealer quotation system or a member displaying a quotation on a non-member inter-dealer quotation system.
C. Proposed Deletion of OTCBB-Related Rules
FINRA is proposing to delete the FINRA Rule 6500 Series, which governs the operation of the OTC Bulletin Board Service and cease operation of the OTCBB. FINRA previously proposed to delete the OTCBB rules and discontinue operation of the Service as part of a separate rule filing to establish a quotation consolidation facility, the “QCF Proposal.” 
In the QCF Proposal, FINRA stated that the level of transparency in OTC equity securities facilitated by the operation of the OTCBB has been declining significantly Start Printed Page 61680for years as other quotation venues have emerged. FINRA believes that, since the filing of the QCF Proposal on November 6, 2009, the amount of quotation information widely available to investors relying on OTCBB Best Bid or Offer (“BBO”) data has further declined and has become negligible. FINRA believes that the remaining OTCBB information being disseminated to investors is so incomplete as to be potentially misleading with respect to the current pricing in these securities.
FINRA stated that it does not believe that the discontinuance of the OTCBB as an inter-dealer quotation system will have an appreciable impact on issuers, investors or member firms.
FINRA does not believe that the OTCBB, in its current form and with current levels of participation, furthers the goals and objectives of Section 17B of the Act 
and, therefore, does not meet the characteristics of a system described in Section 17B of the Act regarding the widespread dissemination of reliable and accurate quotation information with respect to “penny stocks.” 
However, FINRA notes that, since the inception of the OTCBB, non-SRO entities have increased their participation in the collection and dissemination of quotation information in OTC equity securities, including for those OTC equity securities meeting the definition of “penny stock,” and have made such quotation information available to investors and market participants. Thus, FINRA believes that discontinuance of the OTCBB as an inter-dealer quotation system will not have an appreciable impact on the current level of quotation transparency for OTC equity securities.
In addition, FINRA noted that the proposed rule change is intended to facilitate the widespread availability of reliable and accurate quotation information through non-SRO sources.
FINRA stated that it will continue to centralize last sale transaction reporting through the FINRA OTC Reporting Facility (“ORF”) and, therefore, will continue to operate a system that collects and disseminates transaction information on, and provides widespread dissemination of reliable and accurate last sale information with respect to, OTC equity securities, including penny stocks.
Thus, FINRA believes that the objectives of Section 17B of the Act relating to the provision of price and volume information to investors and market participants will continue to be satisfied through FINRA's operation of the ORF.
FINRA stated that it will continue to assess the widespread availability of quotation transparency to investors and market participants through non-SRO sources on a regular basis. If the availability of quotation information to investors significantly declines, FINRA has committed to revisit and, if necessary, file a proposed rule change to establish an SRO-operated inter-dealer quotation system (or other measure) to facilitate the type of widespread quotation transparency described in Section 17B of the Act.
FINRA noted that it will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 180 days following Commission approval.
III. Comment Letter Received
The Commission received one comment letter.
The commenter stated that it strongly supports the proposal.
The commenter believed that the proposal would enable the efficient operation of inter-dealer quotation systems for OTC equity securities while ensuring fair and non-discriminatory access to those systems and would thereby strengthen the trading market for OTC equity securities.
The commenter stated that the proposed rules governing conduct, fair access and data would provide the necessary equal access for FINRA member broker-dealers without creating unnecessary burden on the commenter's inter-dealer quotation system or other qualifying inter-dealer quotation systems.
The commenter believed that the proposal would enhance FINRA's oversight of quotes in OTC equity securities by applying targeted regulations to qualifying inter-dealer quotation systems.
The commenter supported FINRA's goal to ensure fair access to quoting, trading and market data for OTC equity securities.
The commenter agreed with the approach of extending fair access requirements to include policies and procedures relating to fair and consistent treatment of quotes received and welcomed the additional oversight to be provided by FINRA in this area, which the commenter believes would build investor confidence and market integrity.
The commenter also believed that the requirement to provide FINRA a written description of all data products would ensure a baseline of reliable, accurate information available to all investors and the proposal's minimal amendments to existing information recording and reporting requirements likewise would improve the data available to FINRA, while shifting the reporting responsibility to the qualifying inter-dealer quotation system handling the applicable quotes.
The commenter stated that FINRA's discontinuing operation of the OTCBB, in conjunction with FINRA's expanded oversight of qualifying inter-dealer Start Printed Page 61681quotation systems, would help eliminate investor and issuer confusion, while promoting the goals underlying Section 17B of the Act.
The commenter noted that much has changed over the past quarter century since the enactment of Section 17B of the Act.
The commenter agreed with FINRA that the OTCBB no longer fulfills the Section 17B mandate,
while the private sector has produced systems, such as the commenter's own inter-dealer quotation system, that meet the information needs of investors, regulators and other market participants, and are regulated by FINRA and the Commission.
IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-2014-030
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 
to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings appears appropriate at this time in view of the legal and policy issues raised by the proposal. As noted above, institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the proposed rule change and provide the Commission with arguments to support the Commission's analysis whether to approve or disapprove the proposed rule change.
Pursuant to Section 19(b)(2)(B) of the Act,
the Commission is providing notice of the grounds for disapproval under consideration. In particular, Section 15A(b)(6) of the Act,
requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. In addition, Section 15A(b)(11) of the Act,
requires, among other that's, that FINRA rules include provisions governing the form and content of quotations relating to securities sold otherwise than on a national securities exchange which may be distributed or published by any member or person associated with a member, and the persons to whom such quotations may be supplied. Further, Section 17B of the Act 
provides, among other things, that the Commission shall facilitate the widespread dissemination of reliable and accurate last sale and quotation information with respect to penny stocks.
The Commission believes FINRA's proposed rule change raises questions as to whether it is consistent with the requirements of Sections 15A(b)(6), 15A(b)(11), and 17B of the Act.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is inconsistent with Sections 15A(b)(6), 15A(b)(11), and 17B or any other provision of the Act, or the rules and regulation thereunder.
Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.
Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule change should be disapproved by November 4, 2014. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by November 18, 2014.
Comments may be submitted by any of the following methods:
- Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-030. This file number should be included on the subject line if email 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 Web site (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 Web site 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 the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2014-030 and should be submitted on or before November 4, 2014. Rebuttal comments should be submitted by November 18, 2014.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2014-24302 Filed 10-10-14; 8:45 am]
BILLING CODE 8011-01-P