FINRA proposed for immediate effectiveness to amend FINRA Rule 7470, extending for 4 years FINRA’s ability to exempt certain members from the recording and reporting requirements of the Order Audit Trail System (“OATS”) Rules for manual orders received by the member.  The operative date will be 7/9/11. 

FINRA's Authority to Grant Exemptive Relief.  In 2005, FINRA was given permission to grant exemptive relief from the OATS reporting requirements for manual orders.  FINRA’s exemptive authority was expanded the following year to include the authority to exempt manual orders received by members from the OATS recording requirements.  At a minimum, under FINRA Rule 7470, members must meet
the following criteria to be eligible to request an exemption from the OATS recording and reporting requirements for manual orders:

• the member and current control affiliates and associated persons of the member have not been subject within the last 5 years to any final disciplinary action, and within the last 10 years to any disciplinary action involving fraud;
• the member has annual revenues of less than $2 million;
• the member does not conduct any market making activities in any security subject to the OATS Rules;
• the member does not execute principal transactions with its customers (with limited exceptions for principal transactions executed pursuant to error corrections);  and
• the member does not conduct clearing or carrying activities for other firms.

An exemption granted by FINRA pursuant to Rule 7470 is for a maximum of 2 years;  however, a member that continues to meet the criteria may request subsequent exemptions at or prior to the expiration of a grant of exemptive relief.  Rule 7470 includes a sunset provision and consequently, is set to expire as of July 10, 2011.

Purpose of Exemptive Authority.   To grant relief to members that meet certain criteria in situations where, for example, the reporting of order information would be unduly burdensome for the member or where temporary relief from the rules, in the form of additional time to achieve compliance, would permit the members to avoid unnecessary expense or hardship.  FINRA believes these concerns continue and, thus, FINRA is extending it's ability to grant exemptive relief for an additional 4 years. 

In addition, as part of the its recent proposal to create a consolidated audit trail across SRO's, the SEC is evaluating, among other things, the impact of consolidated audit trail requirements on smaller member firms.  FINRA believes it's appropriate to allow firms that have received an exemption from OATS to continue to rely on their current exemption (or request an additional 2-year exemption) until the scope and application of the SEC’s consolidated audit trail is determined. 

FINRA is not proposing any substantive changes to the criteria necessary for firms to qualify for an exemption because FINRA believes that the criteria continue to ensure that only those firms with limited revenue, no recent final disciplinary actions, and limited business models will be eligible for exemptions.  [FINRA Rule Filing 11-29, 6/14/11]