Document ID: SEC-2012-1204-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-07-26T04:00Z

[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Notices]
[Pages 43885-43887]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67427; File No. SR-FINRA-2012-034]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Amend TRACE Reporting Rules Relating to 
Transfers of TRACE-Eligible Securities To Create or Redeem Instruments 
Such as ETFs

July 12, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 11, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change, as described in Items I, II, 
and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comment on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 6730(e) to expressly exclude 
from the Trade Reporting and Compliance Engine (``TRACE'') trade 
reporting requirements transfers of TRACE-Eligible Securities for the 
sole purpose of creating or redeeming instruments such as exchange-
traded funds (``ETFs'').
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under the Rule 6700 Series (the TRACE rules), members are required 
to report transactions in debt securities that are TRACE-Eligible 
Securities as defined in Rule 6710(a) to FINRA unless they fall within 
an express exception listed in Rule 6730(e). Certain transactions and 
transfers are not reported to FINRA (e.g., trades executed and reported 
through an exchange and transfers made pursuant to an asset purchase 
agreement that has been approved by a bankruptcy court). Members must 
have policies and procedures and internal controls in place to 
determine whether a transaction qualifies for an exception under the 
TRACE rules.
    FINRA proposes to amend Rule 6730(e) to provide that transfers of 
TRACE-Eligible Securities for the sole purpose of creating or redeeming 
an instrument that evidences ownership or otherwise tracks the 
underlying securities transferred, such as an ETF, shall be excluded 
expressly from the TRACE reporting requirements. The proposed amendment 
to Rule 6730(e) is similar to an exclusion for such

[[Page 43886]]

transfers in equity securities incorporated in FINRA equity trade 
reporting rules in 2011.\4\
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    \4\ See Securities Exchange Act Release No. 65025 (August 3, 
2011), 76 FR 48937 (August 9, 2011) (SEC order approving SR-FINRA-
2011-027, amending FINRA Rules 6282(i)(1), 6380A(e)(1), 6380B (e)(1) 
and 6622(e)(1)) and Regulatory Notice 11-40 (August 2011) (2011 
Equity Trade Reporting Filing). The proposed rule change also 
codifies interpretive guidance that was published in 2003 regarding 
transfers of TRACE-Eligible Securities for such purposes. See Letter 
dated March 18, 2003, to Alice Yau, Vice President, Compliance, J.P. 
Morgan Securities from Sharon Zackula, Office of General Counsel, 
FINRA (f/k/a the National Association of Securities Dealers).
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    For example, a member broker-dealer that is an ``authorized 
participant'' of an ETF on behalf of a customer transfers TRACE-
Eligible Securities to an ETF and in return receives ETF creation 
units. Under the proposed rule change, the transfers of the TRACE-
Eligible Securities from the broker-dealer to the ETF would not be 
reported to TRACE.\5\ (Similarly, the transfer of the ETF creation 
units to the broker-dealer would not be reported.)
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    \5\ FINRA notes that the proposed exception would apply 
irrespective of whether the member is acting as agent, principal or 
riskless principal in the creation process. Thus, if the broker-
dealer that is an authorized participant in the above example is 
acting as riskless principal on behalf of its customer, the 
immediate subsequent transfer of the ETF creation units from the 
authorized participant to its customer also would not be reportable. 
Similarly, if a broker-dealer that is an authorized participant is 
acting as riskless principal on behalf of a customer that redeems an 
ETF creation unit, neither the transfer of the ETF creation unit 
from the broker-dealer to the ETF in return for TRACE-Eligible 
Securities, nor the immediate subsequent transfer of such TRACE-
Eligible Securities to the customer would be reportable. This is 
consistent with interpretive guidance relating to the 2011 Equity 
Trade Reporting Filing. See Regulatory Notice 11-40.
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    In contrast, FINRA notes that purchases and sales of TRACE-Eligible 
Securities that are to be transferred for the purposes of creating or 
redeeming instruments such as ETFs (or a creation unit thereof) and 
subsequent purchases and sales of the ETF or a similar instrument in 
the secondary market are not subject to an exclusion. Such purchases 
and sales involving TRACE-Eligible Securities must be reported to FINRA 
in accordance with the Rule 6700 Series. Additionally, purchases and 
sales of the underlying TRACE-Eligible Securities in order to track the 
performance of an instrument such as an ETF, without actually creating 
the instrument, are reportable events and must be reported to TRACE.
    As noted in Item 2 of this filing, FINRA has filed the proposed 
rule change for immediate effectiveness. The implementation date will 
be 30 days after the date of the filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ 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 
clarify members' obligations with respect to the reporting of transfers 
of TRACE-Eligible Securities to create or redeem instruments such as 
ETFs under the Rule 6700 Series. In addition, the proposed rule change 
is consistent with an exclusion for such transfers in equity securities 
incorporated in FINRA equity trade reporting rules in 2011.
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    \6\ 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 will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act\7\ and Rule 19b-
4(f)(6) thereunder.\8\
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-034 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-2012-034. This 
file number should be included on the subject line if email 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 
10:00 a.m. and 3:00 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-2012-034 and should be 
submitted on or before August 16, 2012.

[[Page 43887]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17444 Filed 7-25-12; 8:45 am]
BILLING CODE 8011-01-P