Document ID: SEC-2009-0328-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-03-11T04:00Z

[Federal Register: March 11, 2009 (Volume 74, Number 46)]
[Notices]               
[Page 10630-10632]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr09-153]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59519; File No. SR--FINRA-2009-004]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
Definition of TRACE-Eligible Security To Include Securities Eligible 
for Public Sale and Additional Securities That Are Restricted 
Securities

March 5, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 11, 2009, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ U.S.C. 78s(b)(1).
    \2\ CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6710(a), the definition of 
``TRACE-eligible security,'' to broaden the definition by deleting (i) 
the requirement that a debt security be registered under the Securities 
Act of 1933 (``Securities Act''); \3\ and (ii) with respect to 
``restricted securities'' as that term is defined in Securities Act 
Rule 144(a)(3),\4\ the requirement that such securities be issued 
pursuant to Securities Act Section 4(2) \5\ prior to being resold under 
Securities Act Rule 144A.\6\
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    \3\ 15 U.S.C. 77a et seq.
    \4\ 17 CFR 230.144(a)(3).
    \5\ 15 U.S.C. 77d(2).
    \6\ 17 CFR 230.144A.
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA proposes to amend Rule 6710(a), the definition of ``TRACE-
eligible security,'' to eliminate two aspects of the requirement 
therein that such securities be ``(1) registered under the Securities 
Act; or (2) issued pursuant to Section 4(2) of the Securities Act and 
purchased or sold pursuant to Securities Act Rule 144A.'' The proposed 
rule change eliminates

[[Page 10631]]

the requirement that a TRACE-eligible security be registered under the 
Securities Act,\7\ thus including more corporate debt securities, and 
restates and broadens the provision applicable to ``restricted 
securities'' as defined in Securities Act Rule 144(a)(3),\8\ to include 
any ``restricted security'' sold pursuant to Securities Act Rule 
144A.\9\
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    \7\ 15 U.S.C. 77a et seq.
    \8\ Securities Act Rule 144(a)(3) (17 CFR 230.144(a)(3)) defines 
``restricted securities'' as:
    (i) Securities acquired directly or indirectly from the issuer, 
or from an affiliate of the issuer, in a transaction or a chain of 
transactions not involving any public offering; (ii) Securities 
acquired from the issuer that are subject to the resale limitations 
of Sec.  230.502(d) under Regulation D or Sec.  230.701(c); (iii) 
Securities acquired in a transaction or chain of transactions 
meeting the requirements of Sec.  230.144A; (iv) Securities acquired 
from the issuer in a transaction subject to the conditions of 
Regulation CE (Sec.  230.1001); (v) * * * ; (vi) Securities acquired 
in a transaction made under Sec.  230.801 in the same extent and 
proportion that the securities held by the security holder of the 
class with respect to which the rights offering was made were, as of 
the record date for the rights offering, ``restricted securities'' 
within the meaning of this paragraph (a)(3); (vii) Securities 
acquired in a transaction made under Sec.  230.802 to the same 
extent and proportion that the securities that were tendered or 
exchanged in the exchange offer or business combination were 
``restricted securities'' within the meaning of this paragraph 
(a)(3); and (viii) Securities acquired from the issuer in a 
transaction subject to an exemption under section 4(6) (15 U.S.C. 
77d(6)) of the Act.
    \9\ 17 CFR 230.144A. The proposed rule change does not affect 
the exclusions currently in the definition of ``TRACE-eligible 
security,'' which are: (i) Debt issued by a government-sponsored 
entity; and (ii) debt that is a mortgage-backed or asset-backed 
security, a collateralized mortgage obligation, or a money market 
instrument having a maturity at issuance of one year or less.
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Debt Securities Eligible for Public Sale

    The current definition of ``TRACE-eligible security'' in Rule 
6710(a) was adopted in 2002 and has not been amended. Generally, the 
definition is sufficiently broad to require the reporting of, and 
provide price transparency for, a substantial portion of corporate 
bonds that are eligible for public sale (i.e., they are freely tradable 
because they are not ``restricted securities'' as defined in Securities 
Act Rule 144(a)(3)).\10\ However, FINRA has identified several 
situations where corporate debt securities that are eligible for public 
sale in the secondary market are trading without TRACE price 
transparency. In many cases, the securities that are not subject to 
TRACE are ``exempted securities'' under Section 3 of the Securities 
Act.\11\ For example, transactions in corporate debt securities that 
are issued subject to the jurisdiction and approval of a court of 
competent jurisdiction in insolvency matters may be eligible for public 
sale and not reported to TRACE because they are not registered under 
the Securities Act.\12\ In addition, among others, debt securities 
issued as part of an issuer exchange offer effected pursuant to 
Securities Act Section 3(a)(9) \13\ and those issued by a bank or other 
financial institutions under Securities Act Section 3(a)(2) \14\ (or 
another subparagraph of the section) generally are not subject to TRACE 
reporting and dissemination for this reason.
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    \10\ 17 CFR 230.144(a)(3).
    \11\ 15 U.S.C. 77c.
    \12\ 15 U.S.C. 77a et seq. If an insolvent corporation is 
reorganized under Chapter 11 of the U.S. Bankruptcy Code, frequently 
new debt securities are issued. The issuance is subject to the 
approval of the trustee and the securities are not required to be 
registered under the Securities Act. See, e.g., U.S. Bankruptcy 
Code, 11 U.S.C. 101 et seq.
    \13\ 15 U.S.C. 77c(a)(9). For example, an issuer may exchange an 
issue of debt securities that are registered under the Securities 
Act (and subject to both TRACE reporting and dissemination) for a 
new security that is not registered in reliance upon Securities Act 
Section 3(a)(9) (15 U.S.C. 77c(a)(9)), which permits such exchanges 
without registration of the new security. Although the exchanged 
security was TRACE-eligible, the new security is not because it is 
not registered as required in Rule 6710(a).
    \14\ 15 U.S.C. 77c(a)(2).
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    FINRA proposes to amend Rule 6710(a) to remove the unnecessary 
limitation on the scope of the definition of TRACE-eligible security by 
deleting the phrase ``(1) registered under the Securities Act'' from 
the definition. Eliminating the registration requirement will permit 
TRACE to capture transaction information for all debt securities that 
are eligible for public sale (and that otherwise meet the standards for 
TRACE eligibility).\15\ FINRA will increase price transparency in such 
corporate bonds, which FINRA believes is important because many 
securities that are not registered but are eligible for public sale are 
being purchased and sold by all market participants, including retail 
investors. Further, FINRA's obligation to conduct surveillance in the 
corporate bond market is not limited to transactions in securities that 
are registered under the Securities Act.\16\ Thus, transactions in 
corporate bonds that are eligible for public sale (and that otherwise 
meet the standards for TRACE eligibility) will be included in the audit 
trail to enhance the surveillance of the corporate bond market.\17\ In 
this regard, FINRA's transaction reporting rules apply generally to any 
equity security that is eligible for public sale and do not consider 
registration as a factor. FINRA believes that including debt securities 
that are eligible for public sale as TRACE-eligible securities is vital 
to its mandate to regulate the market to promote market integrity and 
to protect investors.
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    \15\ To be a TRACE-eligible security, a security must also be 
U.S. dollar denominated, depository eligible and issued by a U.S. 
and/or foreign private issuer. The credit rating (or lack of a 
rating) of a security does not impact TRACE eligibility.
    \16\ 15 U.S.C. 77a et seq.
    \17\ FINRA is aware that as a result of these amendments certain 
``TRACE-eligible securities'' may not be subject to the notice and 
informational requirements of Rule 6760, and as a result initially 
may not be included in the TRACE Issue Master. As noted in FINRA's 
Trade Reporting Notice, dated February 22, 2008, if a firm has a 
reporting obligation under Rule 6730 in a TRACE-eligible security 
that is not included in the TRACE Issue Master, the firm must notify 
FINRA immediately and provide the CUSIP and other information 
necessary for FINRA to update the TRACE Issue Master and enable the 
firm to promptly report the transaction to TRACE and comply with its 
obligations under Rule 6730.
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Rule 144A Transactions

    The current definition of TRACE-eligible security requires 
transaction reporting for some but not all of the large market in 
corporate debt securities that are ``restricted securities,'' as 
defined in Securities Act Rule 144(a)(3),\18\ sold to ``qualified 
institutional buyers'' (``QIBs''), as defined in Securities Act Rule 
144A(a)(1),\19\ in transactions effected pursuant to Rule 144A (``Rule 
144A transactions'').\20\ Although FINRA believes that a significant 
number of ``restricted securities'' that are sold in Rule 144A\21\ 
transactions are preceded by an offering that is exempt under 
Securities Act Section 4(2),\22\ the limitation in the definition 
excludes other Rule 144A\23\ transactions that should be included in 
the TRACE audit trail.
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    \18\ 17 CFR 230.144(a)(3).
    \19\ 17 CFR 230.144A(a)(1).
    \20\ 17 CFR 230.144A.
    \21\ 17 CFR 230.144A.
    \22\ 15 U.S.C. 77d(2).
    \23\ 17 CFR 230.144A.
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    FINRA proposes to amend Rule 6710(a) to eliminate the requirement 
regarding Securities Act Section 4(2) \24\ in the defined term, TRACE-
eligible security. The proposed amendment would include as TRACE 
eligible a ``'restricted security' as defined in Securities Act Rule 
144(a)(3)'' \25\ if it is ``sold pursuant to Securities Act Rule 
144A.'' \26\
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    \24\ 15 U.S.C. 77d(2).
    \25\ 17 CFR 230.144(a)(3).
    \26\ 17 CFR 230.144A.
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    FINRA believes that there is no compelling reason to exclude 
corporate debt securities sold in a Rule 144A \27\ transaction from the 
definition of TRACE-eligible security simply because such corporate 
debt securities are issued or offered under other exemptive

[[Page 10632]]

provisions of the Securities Act.\28\ For example, in a global 
offering, some debt securities may be issued as part of a foreign 
tranche pursuant to Regulation S.\29\ Under the proposed amendment, 
U.S. resales of securities from that tranche effected as Rule 144A \30\ 
transactions would be required to be reported to TRACE. The proposed 
amendment regarding Rule 144A \31\ transactions will allow FINRA to 
obtain a more complete audit trail of Rule 144A \32\ transactions in 
corporate bonds. This additional transaction data will enhance the 
regulatory surveillance of the corporate bond market as a whole.\33\
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    \27\ 17 CFR 230.144A.
    \28\ 15 U.S.C. 77a et seq.
    \29\ 17 CFR 230.901-905.
    \30\ 17 CFR 230.144A.
    \31\ 17 CFR 230.144A.
    \32\ 17 CFR 230.144A.
    \33\ Currently, as provided in Rule 6750, FINRA does not 
disseminate Securities Act Rule 144A transactions, and FINRA does 
not propose to amend Rule 6750. See e-mail from Sharon Zackula, 
Associate Vice President and Associate General Counsel, FINRA, to 
Geoffrey Pemble, Special Counsel, Division of Trading and Markets, 
Commission, dated March 4, 2009.
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 30 days 
following publication of the Regulatory Notice announcing Commission 
approval.

2. Statutory Basis

    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\34\ 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. FINRA believes that the proposed rule change will 
provide FINRA with heightened capabilities to regulate and conduct 
surveillance in the corporate debt securities markets, enhance market 
transparency and protect investors and other market participants by 
including in TRACE certain corporate debt securities that currently are 
traded in the same markets in which TRACE-eligible securities are 
traded by the same market participants and investors.
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    \34\ 15 U.S.C. 78o-3(b)(6).
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B.Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-004 on the subject line.

Paper Comments

     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-2009-004. 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 inspection 
and copying 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 such filing also will 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 Number SR-FINRA-2009-004 and should be 
submitted on or before April 1, 2009.\35\

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
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    \35\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-5203 Filed 3-10-09; 8:45 am]

BILLING CODE 8011-01-P