Document ID: SEC-2008-0543-0001
Agency: sec
Document Type: Notice
Title: Order Exempting Non-Convertible Preferred Securities From Rule 611(a), etc.
Posted Date: 2008-04-09T04:00Z

[Federal Register: April 9, 2008 (Volume 73, Number 69)]
[Notices]               
[Page 19270-19271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ap08-91]                         

[[Page 19270]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57621]

 
Order Exempting Non-Convertible Preferred Securities from Rule 
611(a) of Regulation NMS under the Securities Exchange Act of 1934

April 4, 2008.

I. Introduction

    Pursuant to Rule 611(d) \1\ of Regulation NMS \2\ under the 
Securities Exchange Act of 1934 (``Exchange Act''), the Securities and 
Exchange Commission (``Commission''), by order, may exempt from the 
provisions of Rule 611 of Regulation NMS (``Rule 611'' or ``Rule''), 
either unconditionally or on specified terms and conditions, any 
person, security, transaction, quotation, or order, or any class or 
classes of persons, securities, quotations, or orders, if the 
Commission determines that such exemption is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors.\3\ As discussed below, the Commission is exempting non-
convertible preferred securities from Rule 611(a) of Regulation NMS.
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    \1\ 17 CFR 242.611(d).
    \2\ 17 CFR 242.600 et seq.
    \3\ See also 15 U.S.C. 78mm(a)(1) (providing general authority 
for Commission to grant exemptions from provisions of Exchange Act 
and rules thereunder).
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II. Background

    The Commission adopted Regulation NMS in June 2005.\4\ Rule 611 
addresses intermarket trade-throughs of displayed quotations in NMS 
stocks. Rule 611(a)(1) requires a trading center to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to prevent trade-throughs on that trading center of 
protected quotations in NMS stocks that do not fall within an exception 
set forth in the Rule.
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    \4\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005) (``Regulation NMS Adopting Release'').
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    The Securities Industry and Financial Markets Association 
(``SIFMA'') has requested that the Commission exempt non-convertible 
preferred securities from Rule 611(a).\5\ According to the SIFMA 
Exemption Request, Rule 611 applies to certain non-convertible 
preferred securities that meet the definition of ``NMS stock.'' \6\ NMS 
stock is defined as any security or class of securities, other than 
options, for which transaction reports are collected, processed, and 
made available pursuant to an effective transaction reporting plan.\7\ 
The SIFMA Exemption Request notes that some non-convertible preferred 
securities fall within the definition of an NMS stock because 
transaction reports for those non-convertible preferred securities are 
collected, processed, and made available pursuant to the CTA/CQ Plans 
\8\ and the Nasdaq UTP Plan.\9\
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    \5\ Letter to Nancy M. Morris, Secretary, Commission, from Ira 
D. Hammerman, Senior Managing Director and General Counsel, SIFMA, 
dated August 16, 2007 (``SIFMA Exemption Request'').
    \6\ Id. at 2.
    \7\ Rule 600(b)(46) and (47) of Regulation NMS.
    \8\ See Section VII(a) of the CTA Plan and I(j) of the CQ Plan. 
The CTA Plan and CQ Plan are available at http://www.nysedata.com.
    \9\ See Section III(B) of the Nasdaq UTP Plan; Nasdaq Rule 
4200(a)(26) and (28); and see, e.g., Nasdaq Rules 4420(k); 4450(h); 
4310(c)(4); and 4310(c)(6)(B). The Nasdaq UTP Plan is available at 
http://www.utpdata.com.
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    The SIFMA Exemption Request states that non-convertible preferred 
securities are priced like, and trade like, fixed income instruments, 
not common stocks.\10\ In addition, the SIFMA Exemption Request notes 
that, as a general matter, fixed income securities currently do not 
fall within the definition of NMS stock. The SIFMA Exemption Request 
states that, in light of the similarity between non-convertible 
preferred securities and fixed income securities, and the many 
differences between non-convertible preferred securities and common 
stocks, Rule 611 should not apply to non-convertible preferred 
securities.
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    \10\ SIFMA Exemption Request at 2.
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    The SIFMA Exemption Request states that, in contrast to common 
stocks, the primary purpose for investing in a non-convertible 
preferred security is the purchase of an income stream, rather than to 
benefit from fluctuations in the price of the security.\11\ Unlike 
common stocks, most non-convertible preferred securities trade based on 
yields, which, in turn, move in tandem with the yields of benchmark 
fixed income securities, such as Treasury securities. The SIFMA 
Exemption Request states that unless there is a credit event with 
respect to an issuer, the prices of non-convertible preferred 
securities have no correlation to price movements of an issuer's common 
stock. Consequently, the SIFMA Exemption Request states that non-
convertible preferred securities generally are viewed as fixed income 
instruments by investors and securities firms.
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    \11\ Id.
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    The SIFMA Exemption Request states that, in light of their fixed 
income characteristics and use as an alternative to straight debt 
securities, non-convertible preferred securities often trade on the 
fixed income desks of broker-dealers, not their equity desks.\12\ The 
SIFMA Exemption Request states that, given that Rule 611 does not apply 
to all non-convertible preferred securities nor generally to fixed 
income instruments, broker-dealers would need to make costly and time-
consuming changes to their fixed income trading platforms to 
accommodate both traditional debt trading and the requirements of Rule 
611, including the intermarket sweep order functionality.\13\ The SIFMA 
Exemption Request states that moving the trading of non-convertible 
preferred securities that are NMS stocks to equity trading systems 
(which are Rule 611-compliant) would interfere with the presentation of 
fixed income investment choices to clients and trading synergies gained 
by trading non-convertible preferred securities with other like 
securities (i.e., debt).
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    \12\ Id. at 3.
    \13\ See Rule 611(b)(6) and Rule 600(b)(30) of Regulation NMS 
(providing intermarket sweep order exception from Rule 611).
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    The SIFMA Exemption Request notes that the Commission, on several 
occasions, has recognized the differences between common stocks and 
non-convertible preferred securities.\14\ For example, the Commission 
granted an exemption for non-convertible preferred securities from the 
requirement in Exchange Act Rule 11Ac1-1 (now Rule 602 of Regulation 
NMS--the ``Quote Rule'') that a member of an association that acts in 
the capacity of an over-the-counter market maker must provide to its 
association continuous two-sided quotations for any exchange-traded 
security in which that market maker, during the most recent calendar 
quarter, comprised more than 1% of the aggregate trading volume for 
such security as reported in the consolidated system.\15\ The SIFMA 
Exemption Request states that the Commission provided the exemption 
based on representations regarding the trading activities of the 
requesting firms and the trading patterns of preferred stock.\16\ 
Specifically, the requesting firms represented
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    \14\ SIFMA Exemption Request at 3.
    \15\ See Rule 602(b) and Rule 600(b)(73) of Regulation NMS; 
letter from Richard R. Lindsey, Director, Division of Market 
Regulation, Commission, to Roger D. Blanc, Willkie, Farr & 
Gallagher, Re: Exemption from, and Temporary No-Action Position 
Under, the Order Execution Rules for Trading in Preferred 
Securities, dated July 31, 1997 (``Blanc Letter'').
    \16\ Blanc Letter at 3.

    that preferred stock shares many of the characteristics of debt 
securities, which are exempt from the Order Execution Rules. In 
particular, [they] noted that prices for

[[Page 19271]]

preferred stock are generally based on yield, which in turn is based 
on prevailing interest rates in the debt markets, as well as 
perceived credit quality of the issuer and any special features of 
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the particular preferred stock.\17\

    \17\ Id.

    The SIFMA Exemption Request states that, because the Commission did 
not apply the Quote Rule to debt securities, and preferred stock trades 
like debt securities, the Commission exempted preferred stock from the 
Quote Rule. In addition, the SIFMA Exemption Request notes that the 
Commission also excepted ``non-participatory preferred stocks'' from 
the definition of NMS stock for the purposes of Regulation ATS.\18\ As 
a result, the order display and execution access provisions of 
Regulation ATS \19\ do not apply to non-participatory preferred 
securities.
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    \18\ SIFMA Exemption Request at 4.
    \19\ 17 CFR 242.301(b)(3).
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III. Discussion

    The Commission has decided to exempt non-convertible preferred 
securities from Rule 611(a). Non-convertible preferred securities have 
characteristics analogous to fixed income instruments. Given these 
characteristics, non-convertible preferred securities typically are 
priced based on yield and trade more like fixed income instruments than 
like common stocks. Due to these similarities to fixed income 
instruments, non-convertible preferred securities often are handled by 
the fixed income desks of broker-dealers rather than equity desks. As a 
general matter, fixed income instruments are not NMS stocks and not 
subject to Rule 611. Therefore, the systems of fixed income desks of 
broker-dealers are not designed to comply with Rule 611. In addition, 
if broker-dealers were to shift trading of non-convertible preferred 
securities to their equity desks, which have systems designed to comply 
with Rule 611, investors would be less able to benefit from the 
experience of broker-dealer personnel with expertise in trading in debt 
and debt-like securities. In sum, the exemption will promote efficiency 
because the benefits of applying Rule 611(a) to non-convertible 
preferred securities would not justify the additional costs of 
compliance, including broker-dealer costs to program systems to comply 
with Rule 611.
    The Commission notes that it has previously recognized the 
similarities between non-convertible preferred securities and fixed 
income instruments, and, in doing so, has treated non-convertible 
preferred securities differently than common stock. In 1997, the 
Commission exempted non-convertible preferred securities from certain 
requirements in the Quote Rule due to the similarity of its trading 
patterns with debt securities.\20\ In addition, the Commission excepted 
``non-participatory preferred stocks'' from the definition of NMS stock 
in Regulation ATS.\21\ The Commission believes that its decision to 
exempt non-convertible preferred securities from Rule 611(a) is 
consistent with its prior actions.
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    \20\ See Blanc Letter.
    \21\ 17 CFR 242.300(d) and (g).
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    The Commission also believes that the exemption for non-convertible 
preferred securities is consistent with the protection of investors in 
such securities. The exemption applies solely to Rule 611(a). 
Transactions in non-convertible preferred securities will remain 
subject to all other applicable regulatory requirements.
    For the foregoing reasons, the Commission finds that granting the 
foregoing exemption is necessary and appropriate in the public 
interest, and is consistent with the protection of investors.

IV. Conclusion

    It is hereby ordered, pursuant to Rule 611(d) of Regulation NMS, 
that non-convertible preferred securities are exempted from Rule 611(a) 
of Regulation NMS.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(82).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-7445 Filed 4-8-08; 8:45 am]

BILLING CODE 8011-01-P