Document ID: SEC-2009-0514-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of ProposedRule Change Relating to Trade Reporting Transfers of Proprietary Securities Positions in Connection With Certain Corporate Control Transactions
Posted Date: 2009-04-14T04:00Z

[Federal Register: April 14, 2009 (Volume 74, Number 70)]
[Notices]               
[Page 17271-17273]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14ap09-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59713; File No. SR-FINRA-2009-024]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Trade Reporting Transfers of 
Proprietary Securities Positions in Connection With Certain Corporate 
Control Transactions

April 6, 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 April 3, 2009, 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. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under Section 19(b)(3)(A) of the Act \3\ 
and paragraph (f)(6) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. The Commission 
is publishing this notice to solicit comments 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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 trade reporting rules to codify 
the reporting requirements applicable to over-the-counter (``OTC'') 
transfers of proprietary positions in debt and equity securities 
between a member and another member or non-member broker-dealer 
effected in connection with certain corporate control transactions.
    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 trade reporting rules require that OTC transactions in debt 
and equity securities be reported to FINRA unless they qualify for an 
express exception under the rules.\5\ For purposes of the trade 
reporting rules, a ``trade'' or ``transaction'' entails a beneficial 
change of ownership of securities between parties (e.g., a purchase or 
sale of securities) in which a FINRA member participates.\6\ As a 
general matter, when members report trades to a FINRA trade reporting 
facility, FINRA facilitates the public dissemination of the trade 
information and/or assesses regulatory transaction fees.\7\
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    \5\ See Rules 6282, 6380A, 6380B, 6622 and 6730.
    \6\ See Trade Reporting Frequently Asked Questions, FAQ 100.4, 
available at http://www.finra.org/Industry/Regulation/Guidance/
P038942.
    \7\ Certain trades are reported to FINRA, but not for 
publication purposes (referred to as ``non-tape reports''). For 
example, FINRA rules require members to submit non-tape reports for 
transactions that are effected upon the exercise of an OTC option or 
for ``away from the market sales'' (e.g., a gift between two 
parties). The non-tape reports are used for audit trail and 
regulatory fee assessment purposes only and are not reported to the 
appropriate exclusive Securities Information Processor (``SIP'') for 
public dissemination. See Rules 6282(i)(2) and 7130(c) (relating to 
the Alternative Display Facility); 6380A(e)(2) and 7230A(g) 
(relating to the FINRA/Nasdaq Trade Reporting Facility); 6380B(e)(2) 
and 7230B(f) (relating to the FINRA/NYSE Trade Reporting Facility); 
and 6622(e)(2) and 7330(g) (relating to the OTC Reporting Facility).
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    Occasionally, broker-dealers may transfer proprietary securities 
positions, along with other assets, in connection with corporate 
control transactions such as mergers and acquisitions. Such transfers 
are ``trades'' or ``transactions'' because they result in a change of 
beneficial ownership, but unlike the typical securities transaction, 
they are not driven by a trading or investment strategy (e.g., a desire 
to exit a position or lock in a profit) relating to a particular 
security position. Rather, the transfers are in furtherance of the 
consolidation of the broker-dealers' separate sales and proprietary 
trading businesses. Additionally, the securities that are transferred 
typically are assigned a value, such as the closing price of the 
security on a date certain, solely for purposes of effectuating the 
transfer.
    As such, FINRA believes that public dissemination of such transfers 
would not provide meaningful price discovery information to the market. 
To the contrary, dissemination could confuse investors and other market 
participants, particularly where the positions being transferred are 
substantial. Public dissemination of significant and perhaps unusual 
trading activity could give the false impression of investor interest, 
market participant transactions and significant price discovery 
activities, and the volume reports could skew a variety of trading 
activity indicators.\8\
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    \8\ Similarly, FINRA amended its trade reporting rules to 
clarify that in the limited circumstance where securities are 
transferred pursuant to an asset purchase agreement (``APA''), such 
transfer does not have to be reported if (1) the APA is subject to 
the jurisdiction and approval of a court of competent jurisdiction 
in insolvency matters; and (2) the purchase price under the APA is 
not based on, and cannot be adjusted to reflect, the current market 
prices of the securities on or following the effective date of the 
APA. FINRA believes that transfers effected pursuant to an APA under 
these circumstances are not trade reportable events and that 
reporting and dissemination of these transfers would not provide 
meaningful price discovery information to the market. See Securities 
Exchange Act Release No. 59126 (December 19, 2008), 73 FR 79948 
(December 30, 2008) (notice of filing and immediate effectiveness of 
SR-FINRA-2008-060).
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    Accordingly, FINRA is proposing to amend its trade reporting rules 
to clarify

[[Page 17272]]

that members are not required to report to FINRA for purposes of 
publication transfers of proprietary securities positions between a 
member and another member or non-member broker-dealer where the 
transfer (1) is effected in connection with a merger of one broker-
dealer with the other broker-dealer or a direct or indirect acquisition 
of one broker-dealer by the other broker-dealer or the other broker-
dealer's parent company and (2) is not in furtherance of a trading or 
investment strategy. However, while such transfers are not reportable 
for publication purposes, they nonetheless must be reported to FINRA 
for purposes of assessing applicable regulatory transaction fees 
pursuant to Section 3 of Schedule A to the FINRA By-Laws \9\ and/or 
trading activity fees under Section 1(b) of Schedule A to the FINRA By-
Laws.\10\
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    \9\ Pursuant to Section 31 of the Act, FINRA and the national 
securities exchanges are required to pay transaction fees and 
assessments to the SEC that are designed to recover the costs 
related to the government's supervision and regulation of the 
securities markets and securities professionals. FINRA obtains its 
Section 31 fees and assessments from its membership, in accordance 
with Section 3 of Schedule A to the FINRA By-Laws.
    \10\ The trading activity fee is used by FINRA solely to fund 
its member regulatory activities, including the supervision and 
regulation of members through examinations, financial monitoring, 
policy, rulemaking, interpretive and enforcement activities. See 
Section 1(a) of Schedule A to the FINRA By-Laws.
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    Specifically, with respect to equity securities, FINRA is proposing 
to amend Rule 6282(i)(2) and paragraph (e)(2) of Rules 6380A, 6380B and 
6622, which provisions identify the transactions that are not required 
to be reported for publication, but must be reported for regulatory fee 
assessment purposes. FINRA also is proposing corresponding amendments 
to Rules 7130(c), 7230A(g), 7230B(f) and 7330(g), which provisions set 
forth the specific reporting requirements for trades reported for 
regulatory transaction fee assessment purposes. With respect to debt 
securities, FINRA is proposing to amend Rule 6750(b), which identifies 
the transactions in TRACE-eligible securities that are reported, but 
not disseminated.
    The distinguishing factor is whether the position transfer is being 
effected as part of an overall sale and the consolidation of the 
broker-dealers' separate proprietary trading businesses (in which case 
it would fall within the proposed exception) rather than being driven 
by a trading or investment strategy (in which case it would not fall 
within the exception). For example, as a result of a corporate control 
transaction, a member, Firm 1, acquires all of the assets of another 
member (or non-member broker-dealer), Firm 2, or Firm 1's parent 
company acquires Firm 2, such that Firm 1 and Firm 2 become wholly 
owned by the same parent company. In connection with the corporate 
control transaction, Firm 1 and Firm 2 consolidate their separate sales 
and trading businesses onto a single platform and, along with the 
migration of sales and trading personnel, clients and systems and 
technology, Firm 2's proprietary positions are transferred to Firm 1. 
In this instance, the transfer from Firm 2 to Firm 1 would fall within 
the proposed exception and would not be reportable for publication 
purposes, but must be reported for regulatory purposes.
    By way of further example, a member, Firm 1 and another member (or 
non-member broker-dealer), Firm 2, currently are wholly owned by the 
same parent company and operate separately. Firm 1 owns 100,000 shares 
of ABCD security and the value of ABCD has increased substantially 
since Firm 1 purchased the shares. As part of an investment strategy, 
Firm 1 sells the shares to Firm 2. In this instance, the sale from Firm 
1 to Firm 2 would not fall within the proposed exception and must be 
reported for publication purposes.
    The proposed rule change would expressly limit the exception to 
transfers between two members or between a member and a non-member 
broker-dealer that are effected in connection with a merger of one 
broker-dealer with the other broker-dealer or a direct or indirect 
acquisition of one broker-dealer by the other broker-dealer or the 
other broker-dealer's parent company. FINRA notes that these corporate 
control transactions are among the changes in a member's ownership or 
control that would trigger the notice requirements and membership 
application process under FINRA rules.\11\ Thus, the proposed exception 
generally would apply where the merger or acquisition would require the 
member to submit notice and/or an application under FINRA rules. 
However, because FINRA membership application rules are broader than 
the scope of the proposed trade reporting exception, FINRA is 
clarifying that the proposed exception will not be considered satisfied 
merely because a member has submitted an application or notice under 
FINRA membership rules.
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    \11\ See NASD Rule 1017(a)(1) and (2). See also, Incorporated 
NYSE Rule 312.
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    Pursuant to the proposed rule change, members will be required to 
report in the manner prescribed by FINRA to designate that the reports 
are submitted for regulatory and not publication purposes.\12\ Members 
generally should report to FINRA on the same day as the ultimate 
transfer of the positions on their books and records, unless later 
reporting is warranted under specific circumstances.\13\
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    \12\ FINRA will publish a Notice setting forth the specific 
reporting requirements applicable to the proposed exception. Members 
also should refer to the applicable technical specifications for the 
FINRA facility to which they are reporting trades.
    \13\ FINRA expects that in most instances, if members cannot 
report on the same day that the transfers are reflected on their 
books and records (for example, if the transfers take place after 
the close of the FINRA trade reporting facilities), members will 
report no later than the following business day (T+1). However, 
FINRA recognizes that for some transfers, manual processing may be 
required or other operational issues may arise.
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    In addition, members will be required to provide FINRA at least 
three business days advance written notice of their intent to use this 
exception, including the basis for their determination that the 
transfer meets the terms of the exception. FINRA notes that while the 
advance notice requirement is not intended to establish a protocol for 
prior approval by FINRA, it may help reduce the potential for improper 
use of the proposed exception. Advance written notice to FINRA shall 
not constitute an estoppel as to FINRA or bind FINRA in any subsequent 
administrative, civil or disciplinary proceeding with respect to a 
member's use of the proposed exception. In other words, advance notice 
to FINRA should not be taken to mean that FINRA approved the 
transaction as properly qualifying under the terms of the exception. A 
member relying on the proposed exception must ensure that the transfer 
satisfies the terms of the exception.
    Finally, FINRA is proposing certain technical, non-substantive 
changes to these rules. First, FINRA is proposing to reorganize Rules 
7130(c), 7230A(g), 7230B(f) and 7330(g), and to delete the references 
to the ``.RA'' and ``.RX'' modifiers in the rules.\14\ Second, FINRA is 
proposing to change the heading of paragraph (b) of Rule 6750 to 
``Transaction Information Not Disseminated,'' and to create new 
numbered subparagraphs for the transactions that are reported to the

[[Page 17273]]

Trade Reporting and Compliance Engine (``TRACE''), but not 
disseminated.
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    \14\ This is consistent with Rules 6282, 6380A and 6380B, which 
no longer refer to specific labels (e.g., ``.PRP'' or ``.W'') for 
the trade report modifiers that members are required to use when 
reporting trades to FINRA. Rather, the rules identify the types of 
transactions that must have a unique modifier associated with them 
and such modifiers are labeled in the facility's technical 
specifications rather than in the rules.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date of the proposed rule change will be 
30 days after the date of filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ 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' trade reporting obligations, enhance market 
transparency and protect investors and other market participants by 
ensuring that transfers that do not contribute to market price 
discovery and could confuse market participants are not disseminated.
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    \15\ 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.

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

    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 \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 may summarily abrogate 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.

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-2009-024 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-2009-024. 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-2009-024 and should be 
submitted on or before May 5, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-8417 Filed 4-13-09; 8:45 am]

BILLING CODE 8010-01-P