Document ID: SEC-2007-1500-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-11-01T04:00Z

[Federal Register: November 1, 2007 (Volume 72, Number 211)]
[Notices]               
[Page 61924-61925]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no07-92]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56709; File No. SR-FINRA-2007-007]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Exempt From TRACE Reporting Transactions in TRACE-Eligible Securities 
Resulting From Certain Derivative-Related Transactions

 October 26, 2007.
    On August 10, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to exempt from reporting to the Trade Reporting 
and Compliance Engine (``TRACE'') transactions in TRACE-eligible 
securities resulting from the exercise or settlement of an option or a 
similar instrument, or the termination or settlement of a credit 
default swap (``CDS''), other types of swap, or a similar instrument 
(collectively, ``Derivative-Related Transactions'').\3\ The Commission 
published the proposed rule change for comment in the Federal Register 
on September 21, 2007.\4\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD''s Certificate of Incorporation 
to reflect its name change to Financial Industry Regulatory 
Authority Inc., or FINRA, in connection with the consolidation of 
the member firm regulatory functions of NASD and NYSE Regulation, 
Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007), 
72 FR 42190 (August 1, 2007).
    \4\ See Securities Exchange Act Release No. 56439 (September 13, 
2007), 72 FR 54087.
---------------------------------------------------------------------------

    As described above, FINRA proposed to amend its Rules to exempt 
transactions in TRACE-eligible securities \5\ that are Derivative-
Related

[[Page 61925]]

Transactions from the TRACE reporting requirements.\6\ FINRA believes 
that Derivative-Related Transactions should be exempt from TRACE 
reporting requirements because the information regarding price (and 
yield) being reported to FINRA and disseminated to the public does not 
reflect a currently negotiated transaction price. Further, FINRA 
believes that reporting and dissemination of certain Derivative-Related 
Transactions does not foster price discovery and may contribute to 
investor confusion, which FINRA believes is consistent with previously 
recognized rationale for exempting certain transactions from trade 
reporting and dissemination. FINRA noted in its proposal that, 
historically, purchases and sales of equity securities that occurred as 
a result of the exercise of an over-the-counter option were subject to 
a similar exemption and were not required to be reported to FINRA.\7\
---------------------------------------------------------------------------

    \5\ See NASD Rule 6210 for definition of ``TRACE-eligible 
security.''
    \6\ The TRACE reporting requirement does not exist in connection 
with any cash-settled derivative, even if the derivative relates to 
one or several securities that are TRACE-eligible securities.
    \7\ But see Securities Exchange Act Release No. 53977 (June 12, 
2006), 71 FR 34976 (June 16, 2006) (requiring members to report 
equity trades resulting from the exercise of a physically settled 
option for purposes of fee calculation, but not for transparency 
purposes).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities association.\8\ 
In particular, the Commission believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that FINRA rules be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. FINRA's 
proposal will relieve its members of the administrative burdens of 
reporting transactions in TRACE-eligible securities resulting from 
Derivative-Related Transactions. The Commission agrees with FINRA that 
requiring members to report such transactions does little to enhance 
market transparency, because the price of the TRACE-eligible security 
in this case has been previously negotiated and does not reflect the 
present market value. The Commission notes that it previously has 
approved similar proposals that exclude from trade reporting 
obligations ``transactions effected upon the exercise of an option or 
any other right to acquire securities at a preestablished consideration 
unrelated to the current market.'' \10\
---------------------------------------------------------------------------

    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ See Securities Exchange Act Release No. 30569 (April 10, 
1992), 57 FR 13396, n.5 (April 16, 1992) (SR-NASD-91-50).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-FINRA-2007-007), be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-21498 Filed 10-31-07; 8:45 am]

BILLING CODE 8011-01-P