[Federal Register Volume 75, Number 39 (Monday, March 1, 2010)]
[Notices]
[Pages 9262-9265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4067]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61566; File No. SR-FINRA-2009-065]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To Require the Reporting of Transactions in 
Asset-Backed Securities to TRACE

February 22, 2010.

I. Introduction

    On October 1, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to designate asset-backed 
securities, mortgage-backed securities, and other similar securities 
(collectively, ``Asset-Backed Securities'') as eligible for the Trade 
Reporting and Compliance Engine (``TRACE''), and to establish 
reporting, fee, and other requirements relating to such securities. The 
proposed rule change was published for comment in the Federal Register 
on October 28, 2009.\3\ The Commission received four comments in 
response to the proposal.\4\ On December 22, 2009, FINRA responded to 
the comments \5\ and on January 19, 2010, FINRA filed Amendment No. 1 
to the proposal.\6\ The Commission is publishing this notice and order 
to solicit comments on Amendment No. 1 and to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60860 (October 21, 
2009), 74 FR 55600 (``Notice'').
    \4\ See infra note 13.
    \5\ See letter from Sharon Zackula, Associate Vice President and 
Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary, 
Commission, dated December 22, 2009 (``FINRA Letter'').
    \6\ See infra Section III.
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II. Description of the Proposal

    FINRA utilizes TRACE to collect from its members and publicly 
disseminate information on secondary over-the-counter transactions in 
corporate debt securities and, pursuant to a recent rule change to the 
Rule 6700 Series,\7\ Agency Debt Securities and certain primary market 
transactions. In this proposal, FINRA has proposed to expand TRACE to 
include the reporting (but not public dissemination) of Asset-Backed 
Securities. Specifically, the proposed rule change would:
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    \7\ See Securities Exchange Act Release No. 60726 (September 28, 
2009), 74 FR 50991 (October 2, 2009) (approving SR-FINRA-2009-010).
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    (1) In Rule 6710, amend the defined terms (a) ``TRACE-Eligible 
Security'' to include Asset-Backed Securities; (b) ``Reportable TRACE 
Transaction'' to include specific requirements regarding certain Asset-
Backed Securities; (c) ``Agency Debt Security'' to incorporate new 
defined terms; (d) ``TRACE System Hours'' to transfer the defined term 
from Rule 6730(a) to Rule 6710(bb); and (e) ``Asset-Backed Security'' 
to clarify that the definition included a residual tranche of an Asset-
Backed Security; \8\
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    \8\ See Amendment No. 1, infra Section III.
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    (2) To Rule 6710, add the defined terms, ``Sponsor,'' ``Issuing 
Entity,'' ``TBA,'' ``Agency Pass-Through Mortgage-Backed Security,'' 
``Factor,'' ``Specified Pool Transaction,'' ``Stipulation 
Transaction,'' ``Dollar Roll,'' and ``Remaining Principal Balance'';
    (3) Amend the definitions of ``List or Fixed Offering Price 
Transaction'' and ``Takedown Transaction'' in Rule 6710(q) and Rule 
6710(r), respectively, to exclude from those defined terms transactions 
in any type of Asset-Backed Security;
    (4) In Rule 6710(y), amend the defined term ``Stipulation 
Transaction'' to delete the condition relating to the settlement of 
transactions not in conformity with certain uniform practices 
established as ``good delivery'';
    (5) In Rule 6710(w), amend the defined term ``Factor''; \9\
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    \9\ See id.
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    (6) In Rule 6730, require the reporting of Asset-Backed Securities 
transactions;
    (7) In Rule 6730(a)(6)(A), and for a six-month pilot period, 
establish the reporting period for Asset-Backed Securities transactions 
to no later than T + 1 during TRACE System Hours;\10\
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    \10\ See id.
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    (8) In Rule 6730(d)(1), amend the requirement that a member input a 
commission stated in points per bond, and instead require reporting of 
the total dollar amount of a commission;
    (9) In Rule 6730(d)(2), modify the manner that a member reports the 
Factor to require a member to report the Factor only if the Factor used 
is not the current most publicly available Factor for the Asset-Backed 
Security;
    (10) In Rule 6730(d)(4)(B), add subparagraphs (i) and (ii) and, in 
subparagraph (ii), require members to report, for all transactions in 
Asset-Backed Securities, the actual date of settlement and indicate if 
the transaction will or will not settle ``regular way'';\11\
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    \11\ See id.
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    (11) In Rule 6750, provide that information on a transaction in a 
TRACE-Eligible Security that is an Asset-Backed Security will not be 
disseminated;
    (12) In Rule 6760, require a member that is a Sponsor or an Issuing 
Entity of an Asset-Backed Security to provide the required notice to 
FINRA, and modify the notification requirements to accept a mortgage 
pool number in certain circumstances;
    (13) In Rule 7730, establish reporting fees for transactions in 
Asset-Backed Securities that are TRACE-Eligible Securities at the same 
rates in effect for transactions in corporate debt securities;\12\ and
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    \12\ See id.
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    (14) In Rule 6700 Series, incorporate certain technical, 
administrative, and clarifying changes.

[[Page 9263]]

III. Summary of Comments and Amendment No. 1

    The Commission received four comments on the proposed rule 
change,\13\ all of which generally supported the proposal.\14\
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    \13\ See letter from Beth N. Lowson, The Nelson Law Firm, LLC, 
dated November 13, 2009 (``Nelson Letter''); letter from Willard 
Stein, Ph.D., CFA, dated November 15, 2009 (``Stein Letter''); 
letter from John Hogue, Associate Portfolio Manager, Alexandria 
Capital Management Inc., dated November 17, 2009 (``Hogue Letter''); 
and letter from George P. Miller, Executive Director, American 
Securitization Forum and Randolph C. Snook, Senior Managing Director 
and Executive Vice President, Securities Industry and Financial 
Markets Association, dated November 18, 2009 (``SIFMA-ASF Letter'') 
(collectively, the ``Comment Letters'').
    \14\ See Nelson Letter (expressing strong support for increased 
price transparency); Stein Letter (supporting FINRA's proposal to 
designate Asset-Backed Securities as TRACE-eligible); Hogue Letter 
(stating that adding Asset-Backed Securities to the TRACE systems is 
a positive development); SIFMA-ASF Letter (stating that improvements 
to the transparency of structured finance products and markets are a 
necessary component to broad-based economic recovery).
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    However, two commenters argued that FINRA's proposal did not go far 
enough, and recommended that FINRA also disseminate information about 
transactions in Asset-Backed Securities.\15\ In contrast, a third 
commenter supported FINRA's decision not to disseminate such 
information at the present time, and urged FINRA to study data 
collected on Asset-Backed Securities before making any determination 
regarding dissemination.\16\ FINRA agreed with the third commenter and 
stated that the information on Asset-Backed Securities transactions 
should be collected and analyzed before it makes a decision regarding 
dissemination. FINRA added that, if it determines that the trading data 
provide a reasonable basis to seek dissemination of transaction 
information on Asset-Backed Securities, market participants and the 
public would have an opportunity to comment on a proposed rule change 
at that time.\17\
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    \15\ See Stein Letter; Nelson Letter.
    \16\ See SIFMA-ASF Letter at 2-3, 11-12.
    \17\ See FINRA Letter at 3-4.
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    Two commenters expressed concern about FINRA's proposal to allow 
reports to be made by the close of business on the date of trade 
(``T''), and for transactions executed after 5 p.m. Eastern Time 
(``ET''), to the close of business on T+1.\18\ One of those commenters 
stated that the addition of Asset-Backed Securities to the TRACE system 
is a positive development, but questioned the usefulness of data that 
is not reported until T+1.\19\ A third commenter requested that FINRA 
extend the proposed reporting period for Asset-Backed Securities to the 
close of business on T+1 for all transactions, given the operational 
complexity of reporting such securities.\20\ FINRA responded by 
proposing, in Amendment No. 1, for a six-month pilot period, to extend 
the reporting period for all transactions in Asset-Backed Securities to 
no later than T+1 during TRACE system hours.\21\ Upon expiration of the 
pilot program, the reporting requirements would revert to the period 
originally proposed.\22\ FINRA also stated that, because the data are 
not subject to dissemination, allowing addition time for the reporting 
of Asset-Backed Securities transactions does not impact 
transparency.\23\
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    \18\ See Stein Letter; Hogue Letter. FINRA Rule 6730(a) 
currently provides that all transactions in TRACE-Eligible 
Securities must be reported within 15 minutes of the time of 
execution, with certain exceptions for trades executed during non-
TRACE System Hours. Rule 6730(a)(1) through (4) provides exceptions 
to the standard 15-minute reporting requirement if a member executes 
a transaction after or before TRACE System Hours or less than 15 
minutes before the TRACE system closes.
    \19\ See Hogue Letter.
    \20\ See SIFMA-ASF Letter at 6.
    \21\ See Amendment No. 1; FINRA Letter at 2-3.
    \22\ Rule 6730(a)(5) allows for an extended reporting period 
(until T+1) for ``List or Fixed Offering Price Transaction'' and 
``Takedown Transactions.'' In this proposal, FINRA excluded Asset-
Backed Securities from the definitions of List or Fixed Offering 
Price Transaction and Takedown Transaction. Therefore, upon the 
expiration of the pilot period, such transactions in Asset-Backed 
Securities would be required to be reported in accordance with the 
original proposal--i.e., by the close of business on the date of 
trade (``T''), and for transactions executed after 5 p.m. ET, to the 
close of business on T+1. In contrast, any other List or Fixed 
Offering Price Transactions and Takedown Transactions would continue 
to be subject to T+1 reporting under Rule 6730(a)(5).
    \23\ See FINRA Letter at 2.
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    One comment letter, submitted jointly by the American 
Securitization Forum and the Securities Industry and Financial Markets 
Association (``SIFMA-ASF''), raised a number of operational and 
technical issues. SIFMA-ASF noted, for example, that many Asset-Backed 
Securities do not have CUSIP numbers, and questioned how members could 
meet their reporting obligations for such securities.\24\ In response, 
FINRA stated that it is working to develop a process for the efficient 
and timely identification of such securities and to provide a non-CUSIP 
security identifier when necessary.\25\ Additionally, SIFMA-ASF 
requested that FINRA update and maintain the TRACE Issue Master File 
with information for all available Asset-Backed Securities, including 
Factor information in the TRACE system, prior to implementing its 
proposed rule change.\26\ In response, FINRA agreed that, to facilitate 
and reduce reporting and notification burdens to its members, it will 
obtain security information to update the TRACE Issue Master file prior 
to implementation of reporting requirements.\27\
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    \24\ See SIFMA-ASF Letter at 5.
    \25\ See FINRA Letter at 6.
    \26\ See SIFMA-ASF Letter at 9-10.
    \27\ See FINRA Letter at 8.
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    SIFMA-ASF suggested that FINRA modify the proposed requirement that 
a member report the specific Factor used to price an Asset-Backed 
Security transaction, recommending instead that FINRA obtain and 
maintain Factor information from master data files that are 
commercially available.\28\ FINRA agreed with this comment and amended 
the proposal accordingly, and also proposed to add a sentence 
clarifying a member's reporting obligation for Asset-Backed Securities 
that are not priced using a Factor.
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    \28\ See SIFMA-ASF Letter at 3-6.
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    In the initial filing, FINRA proposed amendments regarding 
reporting the days to settlement. Specifically, FINRA proposed that: 
(1) For a transaction in an Agency Pass-Through Mortgage-Backed 
Security, no settlement-related indicator or modifier stating the 
number of days to settlement would be required in the transaction 
report if the settlement would be done in conformity with the uniform 
practices established as ``good delivery'' for such transactions on the 
next occurring monthly settlement date for such securities; and (2) for 
all other Asset-Backed Securities transactions, including transactions 
in Agency Pass-Through Mortgage-Backed Securities transactions not 
included in (1) above, members would report the number of days to 
settlement (e.g., ``.s45,'' for a settlement scheduled to occur 45 days 
following execution). SIFMA-ASF suggested that FINRA amend these 
provisions to require members to report the actual date of settlement 
for all transactions in Asset-Backed Securities, rather than modifiers 
such as ``regular way'' or ``.sNN.'' FINRA agreed with this comment\29\ 
and proposed new rule text in Amendment No. 1 to effect this change.
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    \29\ See FINRA Letter at 6.
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    SIFMA-ASF further requested that FINRA phase in compliance for the 
new reporting requirements, making secondary market trades in Asset-
Backed Securities reportable first, followed by primary market trades 
after six months.\30\ FINRA disagreed with this suggestion and stated 
that, if it delayed implementation of the requirement for primary 
market reporting, it would not

[[Page 9264]]

be aware of Asset-Backed Securities sold into the market during that 
period. FINRA further stated that its approach eliminates the 
implementation issue associated with determining if a transaction is a 
primary or secondary market transaction.\31\
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    \30\ See SIFMA-ASF Letter at 10.
    \31\ See FINRA Letter at 7.
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    Additionally, SIFMA-ASF requested that FINRA follow the approach 
where changes to several fields in customer transaction are separately 
classified as ``amendments'' rather than ``late trades'' to avoid 
penalizing broker-dealers for facilitating legitimate modifications to 
customer transactions that may occur in the normal course of business 
or that are the result of factors beyond their control.\32\ In 
response, FINRA stated that amended transaction reports are generally 
not required when modifications occur relating to delivery of assets or 
collateral or to settlement of a transaction.\33\ SIFMA-ASF further 
asked that FINRA consider the additional costs to members for complying 
with the new reporting requirements and suggested eliminating the fees 
for modifying TRACE transaction reports.\34\ FINRA responded that it is 
premature to consider any fee adjustments, as FINRA may incur greater 
costs in overseeing the market in light of the new data generated by 
reporting of transactions in Asset-Backed Securities.\35\
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    \32\ See SIFMA-ASF Letter at 7.
    \33\ See FINRA Letter at 8.
    \34\ See SIFMA-ASF Letter at 11.
    \35\ See FINRA Letter at 9.
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    In Amendment No. 1, FINRA also made certain changes to the proposed 
rule text independent of any issues raised by commenters. FINRA 
determined that neither Rule 6730(a)(5) \36\ nor the fee relief in Rule 
7730(b)(1)(C) should apply to new issue Asset-Backed Securities, and in 
Amendment No. 1, FINRA proposed changes to certain rule text to effect 
this determination. Specifically, in Amendment No. 1, FINRA amended the 
definitions ``List or Fixed Offering Price Transaction'' in proposed 
Rule 6710(q) and ``Takedown Transaction'' in proposed Rule 6710(r) to 
exclude from such defined terms transactions in any type of Asset-
Backed Security. As a result of this change, members will be required 
to pay reporting fees for all primary market transactions in Asset-
Backed Securities, as no new issue transactions in Asset-Backed 
Securities would be eligible for the fee relief set forth in Rule 
7730(b)(1)(C), which applies only to transactions that are a ``List or 
Fixed Offering Price Transaction'' or a ``Takedown Transaction.''
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    \36\ See supra note 22.
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    Rule 6730(d)(1) currently requires a member to report a commission 
stated in points per bond. However, recognizing that many Asset-Backed 
Securities do not have par or principal values of $1,000, FINRA is 
proposing in Amendment No. 1 to amend Rule 6730(d)(1) to require 
members to input the total dollar amount of a commission when reporting 
a transaction in an Asset-Backed Security, rather than stating the 
commission in points per bond.
    Amendment No. 1 also would delete references to uniform practices 
established as ``good delivery'' in the defined terms ``TBA'' in Rule 
6710(u) and ``Stipulation Transaction'' in Rule 6710(y), and revise the 
defined term ``Factor'' in Rule 6710(w). Also in Amendment No. 1, FINRA 
proposed to incorporate certain non-substantive, technical, clarifying, 
and formatting amendments in the Rule 6700 series and in Rule 7730.
    Finally, FINRA modified certain aspects of the proposed rule change 
to account for changes in the TRACE rules that had been approved 
recently by the Commission.\37\ FINRA also represented in Amendment No. 
1 that, if the Commission approves SR-FINRA-2009-065, as amended, it 
undertakes not to not make this proposal effective until the rule 
changes from the two intervening filings have become effective.
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    \37\ See Securities Exchange Act Release No. 60726 (September 
28, 2009), 74 FR 50991 (October 2, 2009) (approving SR-FINRA-2009-
010); FINRA Regulatory Notice 09-57 (September 2009) (stating that 
the rule text of SR-FINRA-2009-010 becomes effective March 1, 2010); 
Securities Exchange Act Release No. 61012 (November 16, 2009), 74 FR 
61189 (November 23, 2009) (approving SR-FINRA-2007-006). FINRA will 
publish a Regulatory Notice announcing the effective date of SR-
FINRA-2007-006, which shall be a day shortly following the effective 
date of SR-FINRA-2009-010.
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IV. Discussion

    After carefully considering the proposal and the comments 
submitted, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\38\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\39\ which 
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. The Commission does not believe that 
the comments raise any issue that would preclude approval of the 
proposal.
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    \38\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \39\ 15 U.S.C. 78o-3(b)(6).
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    Prior to TRACE's implementation, the NASD (FINRA's predecessor) did 
not have routine access to comprehensive transaction information for 
the over-the-counter corporate bond market, even though the NASD bore 
responsibility for surveilling and regulating that market. In 
originally approving TRACE, the Commission stated that obtaining such 
information to better conduct market surveillance was a fundamental 
means of promoting fairness and confidence in U.S. capital markets.\40\ 
Similarly, with respect to the over-the-counter market for Asset-Backed 
Securities, FINRA currently does not possess the comprehensive 
transaction information that would help it carry out its statutory 
duties to regulate this market. The Commission believes, therefore, 
that it is reasonable and consistent with the Act for FINRA to expand 
TRACE to designate Asset-Backed Securities as TRACE-Eligible 
Securities, and to establish reporting, fee, and other requirements 
relating to such securities in the manner set forth in the proposal. 
Expanding TRACE to include Asset-Backed Securities is reasonably 
designed to help FINRA fulfill its mandate in Section 15A(b)(6) of the 
Act \41\ 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.
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    \40\ See Securities Exchange Act Release No. 43873 (January 23, 
2001) 66 FR 8131, 8136 (January 29, 2001).
    \41\ 15 U.S.C. 78o-3(b)(6).
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    The Commission acknowledges the potential for firms covered by 
these new reporting requirements to incur certain compliance burdens. 
However, the Commission believes that any such burdens are justified by 
the overall benefits of regulators having access to more comprehensive 
trade information in the fixed income markets. The Commission notes 
that FINRA has proposed, for a six-month pilot period, a T+1 reporting 
period for Asset-Backed Securities, rather than a same-day reporting 
period as originally proposed.\42\ The Commission believes that this 
modification is reasonably designed to ease the compliance burdens on 
those affected by the proposal without significantly compromising 
FINRA's ability to obtain

[[Page 9265]]

comprehensive transaction information regarding the market for Asset-
Backed Securities.
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    \42\ See Amendment No. 1.
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    The Commission notes that FINRA has not proposed to publicly 
disseminate any transaction information relating to Asset-Backed 
Securities at this time. FINRA believes that information on Asset-
Backed Securities transactions should be collected and analyzed before 
making any decision regarding the utility of such information for 
transparency purposes or the consequences of dissemination on this 
market. FINRA has stated that, after a period of study, it would file a 
proposed rule change if it determined that its study of the trading 
data provides a reasonable basis to seek dissemination of transaction 
information on Asset-Backed Securities. The Commission has historically 
been supportive of efforts to improve post-trade transparency in the 
fixed income markets and encourages FINRA to carry out that study.
    The Commission further finds that the proposed fees set forth in 
Rule 7730 for the reporting of transactions in Asset-Backed Securities 
are consistent with Section 15A(b)(5) of the Act,\43\ which requires, 
among other things, that FINRA rules provide for the equitable 
allocation of reasonable dues, fees, and other charges among members 
and issuers and other persons using any facility or system that FINRA 
operates or controls.\44\
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    \43\ 15 U.S.C. 78o-3(b)(5).
    \44\ The Commission notes that, because transaction information 
regarding Asset-Backed Securities will not be disseminated, FINRA 
has not proposed any market data fees for this information at this 
time.
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V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\45\ for approving the proposed rule change, as modified by 
Amendment No. 1 thereto, prior to the 30th day after the date of 
publication of the amended proposal in the Federal Register. The 
changes proposed in Amendment No. 1 are minor and technical in nature 
or are designed to respond to specific concerns raised by commenters. 
Accordingly, the Commission finds that good cause exists to approve the 
proposal, as modified by Amendment No. 1, on an accelerated basis.
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    \45\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments:

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#2c5e594049014f4341414942585f6c5f494f024b435a"><span class="__cf_email__" data-cfemail="4230372e276f212d2f2f272c3631023127216c252d34">[email protected]</span></a>. Please include 
File Number SR-FINRA-2009-065 on the subject line.

Paper Comments:

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-065. 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 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 a.m. and 3 p.m. Copies of the filing will also be 
available for inspection and copying at the principal office of FINRA. 
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 No. SR-FINRA-2009-065 
and should be submitted on or before March 22, 2010.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\46\ that the proposed rule change (SR-FINRA-2009-065), as modified 
by Amendment No.1, be, and hereby is, approved on an accelerated basis.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
Florence E. Harmon,
Deputy Secretary.
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    \47\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-4067 Filed 2-26-10; 8:45 am]
BILLING CODE 8011-01-P


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