FINRA proposed requirements for members to produce quarterly order routing disclosure reports for OTC equity securities executed on a held basis. The proposed reports would be similar to those that are mandatory for National Market System stocks pursuant to Rule  606(a) of Regulation NMS ("Quarterly Report on Order Routing").

The proposed reports would have to be (i) broken out by calendar month, (ii) published within a month following quarter end and (iii) accessible in "a standardized format to be determined by FINRA." The proposed reports would be organized into the distinct sections as to (i) domestic OTC equity securities, (ii) American Depository Receipts and foreign ordinaries that are OTC equity securities, and (iii) Canadian-listed securities trading in the United States as OTC equity securities.

For each of the three sections, the proposed reports would be required to include the following disclosures:

  • the percentage of total non-directed orders;
  • the ten venues to which the largest amount of total non-directed orders were routed for execution;
  • any venues to which five or more percent of non-directed orders were routed for execution, as well as the specific percentage;
  • for each of the aforementioned venues, the total dollar amount and per order amount of (i) the net aggregate payment for order flow, (ii) any payment from a profit-sharing relationship and (iii) transaction fees paid and rebates received; and
  • any material facet of a member's relationship with a venue, and an explanation for any payment for order flow arrangement or profit-sharing relationship that might affect a member's order routing decision.

In addition to the proposed disclosure requirements, FINRA requested comment on potentially imposing more of the SEC's requirements applicable to listed securities under Regulation NMS on the trading of OTC securities that are not part of the National Market System.

Comments on the proposal must be received by December 6, 2021.

Commentary Steven Lofchie

The proposed rule change, combined with FINRA's statement that it expects to import further elements of Regulation NMS into the requirements applicable to the trading of OTC securities, and the recent SEC revisions to SEA Rule 15c2-11 ("Initiation or resumption of quotations without specific information"), indicate that firms involved in the trading of OTC securities should be prepared to dedicate significantly more technology and compliance resources to the business.  See also FINRA Adopts Amendments to Filing Requirements for Quotations of Non-Exchange-Listed Securities.

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