Document ID: SEC-2009-0534-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Expand TRACE To Include Agency Debt Securities and Primary Market Transactions
Posted Date: 2009-04-16T04:00Z

[Federal Register: April 16, 2009 (Volume 74, Number 72)]
[Notices]               
[Page 17709-17716]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ap09-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59733; File No. SR-FINRA-2009-010]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Expand TRACE To Include Agency Debt Securities and 
Primary Market Transactions

April 8, 2009.
    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 March 18, 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. On 
April 8, 2009, FINRA submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was a partial amendment that: (i) Revised 
the definition of ``Asset-backed security'' set forth in the purpose 
section to accurately reflect the proposed rule text; (ii) amended 
the definition of ``TRACE-eligible security'' in both the purpose 
section and the rule text to remove a parenthetical that was 
inadvertently included in the original proposal; and (iii) made 
minor technical edits to the purposed rule text.
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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 the FINRA Rule 6700 Series (except for 
Rules 6720 and 6740) and FINRA Rule 7730 as follows:
    (1) In Rule 6710, to amend the defined terms (A) ``TRACE-eligible 
security'' in paragraph (a) to include securities issued or guaranteed 
by an agency or a government-sponsored enterprise (except securities 
issued by the U.S.

[[Page 17710]]

Treasury) as TRACE-eligible debt securities under the Rule 6700 Series 
(the Trade Reporting and Compliance Engine (``TRACE'') rules), to 
delete certain criteria for TRACE-eligibility, and to restate the 
definition, including incorporating technical changes; (B) ``Reportable 
TRACE transaction'' in paragraph (c) to include primary market 
transactions as reportable to TRACE and to incorporate technical 
changes; and (C) ``Investment Grade'' in paragraph (h) and ``Non-
Investment Grade'' in paragraph (i) to classify unrated Agency debt 
securities, as defined herein, as Investment Grade securities for 
purposes of dissemination and to incorporate technical changes;
    (2) in Rule 6710, to add the defined terms, ``Agency,'' ``Agency 
debt security,'' ``Asset-backed security,'' ``Government-sponsored 
enterprise,'' ``Money market instrument,'' ``U.S. Treasury security,'' 
``List or fixed offering price transaction'' and ``Takedown 
transaction,'' as respectively, new paragraphs (k) through (r);
    (3) in Rule 6710, to make technical changes to the defined terms, 
``Trade Reporting and Compliance Engine,'' ``Time of execution,'' 
``Party to the transaction,'' ``TRACE Participant,'' ``Introducing 
Broker,'' and ``Split-rated,'' in respectively, paragraphs (b), (d), 
(e), (f), (g) and (j);
    (4) in Rule 6730, to establish end-of-day reporting requirements 
for primary market transactions that are List or fixed offering price 
transactions and Takedown transactions, to require indicators in 
transaction reports to distinguish secondary market transactions from 
primary market transactions and to further distinguish primary market 
transactions that are List or fixed offering price transactions and 
Takedown transactions from those that are not, and to incorporate other 
technical changes;
    (5) in Rule 6750, to provide that transaction information for List 
or fixed offering price transactions and Takedown transactions will not 
be disseminated, and to incorporate other technical changes;
    (6) in Rule 6760, to modify the information and notification 
requirements for newly issued TRACE-eligible securities to provide for 
more timely notice from members to FINRA and to incorporate technical 
and clarifying changes; and
    (7) in Rule 7730, to establish reporting and market data fees for 
Agency debt securities transactions and primary market transactions at 
the same rates in effect for corporate bonds, to provide an exception 
for certain primary market transactions, and to incorporate technical 
changes.
    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

I. Introduction

    FINRA believes that TRACE has had a positive impact on the 
corporate bond market and proposes to expand the scope of securities 
reportable to TRACE to increase transparency, enhance investor 
protection and foster market integrity across a larger portion of the 
debt market. For debt securities that currently are TRACE-eligible, 
TRACE has contributed to better pricing, more precise valuations and 
reduced investor costs. In addition, TRACE data has enhanced 
surveillance of the corporate bond market.
    The proposed rule change will expand TRACE to include Agency debt 
securities, as defined herein, and primary market transactions. FINRA 
proposes to add such securities to provide additional transparency and 
to foster the development of improvements observed in corporate bonds--
improved pricing, narrower bid-ask spreads, reduced investor costs, and 
more precise valuations--across a broader portion of the debt market. 
Also, FINRA believes that the proposed expansion of TRACE, including 
certain primary market transactions that will not be disseminated, will 
enhance market surveillance. Many bonds have an intense period of 
trading during the primary offering and shortly thereafter, and the 
reporting of such transactions will permit FINRA to obtain information, 
observe patterns of trading, and otherwise engage in more in-depth 
surveillance of the debt market.
    The proposed rule change amends FINRA Rule 6700 Series (except for 
Rules 6720 and 6740) and FINRA Rule 7730. The amendments to FINRA Rule 
6700 Series add to TRACE securities that are issued or guaranteed by a 
Government-sponsored enterprise or a U.S. government agency (except the 
U.S. Department of the Treasury or Asset-backed securities issued or 
guaranteed by an Agency or a Government-sponsored enterprise) 
(collectively ``Agency debt securities'') and primary market 
transactions. Certain primary market transactions that are defined as 
List or fixed offering price transactions and Takedown transactions 
will be subject to more flexible end-of-day reporting requirements, 
will not be disseminated, and will not be subject to reporting fees, if 
timely and accurately reported.
    In connection with the proposed expansion, FINRA amends the defined 
term ``TRACE-eligible security'' in Rule 6710(a) to add Agency debt 
securities as TRACE-eligible securities, to delete certain criteria, 
and to restate the definition to clarify its scope and the exceptions. 
In addition, FINRA proposes amendments to other defined terms in Rule 
6710, the most important of which are the amendments to the term 
``Reportable TRACE transaction'' to permit reporting of primary market 
transactions to TRACE and their dissemination. Also, FINRA proposes to 
add several defined terms to Rule 6710 that are related to the 
incorporation of Agency debt securities and primary market transactions 
in TRACE. Finally, FINRA will amend various currently defined terms in 
Rule 6710 to incorporate minor technical, stylistic or conforming 
changes.
    The proposed rule change includes amendments to Rule 6730, Rule 
6750 and Rule 6760. Rule 6730 contains reporting requirements and Rule 
6750 addresses the dissemination of transaction information and the 
exceptions thereto. Rule 6760 requires members to provide notice to 
FINRA of new TRACE-eligible securities. In Rule 6730 and Rule 6750, 
generally, the proposed amendments address issues raised by the 
inclusion of primary market transactions. Certain primary market 
transactions--List or fixed offering price transactions and Takedown 
transactions--will be subject to end-of-day reporting under amended 
Rule 6730 and not subject to dissemination under amended Rule 6750. The 
proposed amendments to Rule 6760 incorporate changes in the 
notification requirements and the notification deadlines to facilitate

[[Page 17711]]

members' timely reporting of TRACE-eligible securities.
    Regarding market data fees, FINRA will distinguish TRACE 
transaction data as data sets for organizational purposes only, one 
comprised solely of corporate bond transaction information (the 
``Corporate Bonds Data Set'') and a second comprised solely of Agency 
debt securities transaction information (``Agency Data Set''). The fee 
schedule currently in effect in Rule 7730 also will apply to Agency 
debt securities transactions and primary market transactions. However, 
members will not be charged a reporting fee when reporting a List or 
fixed offering price transaction or a Takedown transaction on a timely 
and accurate basis.
    In addition to the amendments discussed above, the proposed rule 
change includes additional proposed technical or clarifying amendments 
to FINRA Rule 6700 Series (except for Rules 6720 and 6740) and FINRA 
Rule 7730.

II. Agency Debt Securities

A. ``TRACE-Eligible Security'' and Related Rule 6710 Amendments

    Under Rule 6710(a), a ``TRACE-eligible security'' is a U.S. dollar 
denominated bond, note or other debt instrument that is issued by a 
U.S. or foreign private issuer. The definition also requires that the 
debt security be registered under the Securities Act (or issued 
pursuant to Section 4(2) and purchased or sold in a transaction in 
compliance with Securities Act Rule 144A transaction (``Rule 144A 
transaction'')); depository eligible under NASD Rule 11310(d); and 
Investment Grade or Non-Investment Grade as defined, respectively, in 
Rules 6710(h) and 6710(i).\4\
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    \4\ On February 11, 2009, FINRA filed SR-FINRA-2009-004 to amend 
the definition of ``TRACE-eligible security'' to eliminate the 
requirement that a TRACE-eligible security be registered under the 
Securities Act. In addition, FINRA also proposed to eliminate, with 
respect to transactions in TRACE-eligible securities effected under 
Securities Act Rule 144A, the requirement that such securities be 
initially issued under Securities Act Section 4(2). See Securities 
Exchange Act Release No. 59519 (March 5, 2009), 74 FR 10630 (March 
11, 2009) (notice requesting comment on SR-FINRA-2009-004).
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    U.S. Treasury securities, foreign sovereign debt and securities 
issued by U.S. government agencies or similar entities, such as 
government corporations, are not TRACE-eligible securities. In 
addition, the defined term expressly excludes securities that are 
issued by a government-sponsored enterprise, or are asset-backed 
securities, mortgage-backed securities, collateralized mortgage 
obligations and money market instruments that at issuance have a 
maturity of one year or less.
    FINRA proposes to amend and restate the definition of ``TRACE-
eligible security'' in Rule 6710(a). The most significant amendment 
expands the definition to include ``Agency debt securities'' as defined 
below as TRACE-eligible securities. In addition, FINRA proposes to 
delete two criteria in the defined term as discussed below.
1. Amendments to ``TRACE-Eligible Security'' To Include Agency Debt 
Securities
    FINRA proposes to expand the scope of the defined term, ``TRACE-
eligible security'' to include Agency debt securities. Specifically, 
restated Rule 6710(a) will include a debt security that ``is U.S. 
dollar denominated and issued or guaranteed by an Agency as defined in 
paragraph (k) or a Government-sponsored enterprise as defined in 
paragraph (n)'' as a TRACE-eligible security. The proposed inclusion of 
Agency debt securities as ``TRACE-eligible securities'' does not 
require that such securities be registered under the Securities Act or 
issued pursuant to Securities Act Section 4(2) and purchased and sold 
pursuant to Rule 144A.
    In connection with this amendment, FINRA also proposes to add the 
following defined terms to Rule 6710: ``Agency debt security,'' 
``Agency,'' ``Asset-backed security,'' ``Government-sponsored 
enterprise,'' and ``U.S. Treasury security.''
    The proposed term ``Agency debt security'' is used to refer, 
collectively, to two types of securities that will be TRACE-eligible 
securities. ``Agency debt security'' as defined in proposed Rule 
6710(l) means:

a debt security (i) issued or guaranteed by an Agency as defined in 
paragraph (k); or (ii) issued or guaranteed by a Government-
sponsored enterprise as defined in paragraph (n). The term excludes 
a U.S. Treasury security as defined in paragraph (p) and an Asset-
backed security as defined in paragraph (m) where an Agency or a 
Government-sponsored enterprise is the sponsor of the trust or other 
entity that issues the Asset-backed security, or is the guarantor of 
the Asset-backed security.

    The two issuers (or guarantors) referenced in the term ``Agency 
debt securities'' are ``Agencies'' and ``Government-sponsored 
enterprises.'' Under proposed Rule 6710(n), `` `Government-sponsored 
enterprise' (`GSE') has the same meaning as defined in 2 U.S.C. 
622(8).'' \5\ Some of the most well-known GSEs include the Federal 
National Mortgage Association (``Fannie Mae'' or ``FNMA''), the Federal 
Home Loan Mortgage Corporation (``FHLMC'' or ``Freddie Mac'') and the 
various Federal Home Loan Banks. For purposes of the TRACE rules, 
securities issued or guaranteed by GSEs are included under the 
collective term, ``Agency debt securities'' although technically GSEs 
are instrumentalities of the U.S. government, and not agencies.
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    \5\ The term ``government-sponsored enterprise'' is defined in 2 
U.S.C. 622(8) as: a corporate entity created by a law of the United 
States that--
    (A) (i) has a Federal charter authorized by law;
    (ii) is privately owned, as evidenced by capital stock owned by 
private entities or individuals;
    (iii) is under the direction of a board of directors, a majority 
of which is elected by private owners;
    (iv) is a financial institution with power to--
    (I) make loans or loan guarantees for limited purposes such as 
to provide credit for specific borrowers or one sector; and
    (II) raise funds by borrowing (which does not carry the full 
faith and credit of the Federal Government) or to guarantee the debt 
of others in unlimited amounts; and
    (B) (i) does not exercise powers that are reserved to the 
Government as sovereign (such as the power to tax or to regulate 
interstate commerce);
    (ii) does not have the power to commit the Government 
financially (but it may be a recipient of a loan guarantee 
commitment made by the Government); and
    (iii) has employees whose salaries and expenses are paid by the 
enterprise and are not Federal employees subject to title 5.
    Congress defined GSEs for purposes of the budgetary treatment of 
such entities in the Omnibus Reconciliation Act of 1990, Pub. L. No. 
101-508, 104 Stat. 1388, 607; 2 U.S.C. 622(8).
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    The collective term, ``Agency debt security,'' also includes 
securities issued or guaranteed by an Agency. For purposes of the TRACE 
rules, under proposed Rule 6710(k), ``Agency'' means: a U.S. 
``executive agency'' \6\ as

[[Page 17712]]

defined in 5 U.S.C. 105 that is authorized to issue debt directly or 
through a related entity, such as a government corporation, or to 
guarantee the repayment of principal and/or interest of a debt security 
issued by another. The term excludes the U.S. Department of the 
Treasury (``Treasury'') in the exercise of its authority to issue U.S. 
Treasury securities as defined in paragraph (p). Two examples of such 
Agencies are the Commodity Credit Corporation and the Export-Import 
Bank of the United States (issuing debt securities through its 
affiliate, the Private Export Funding Corporation, or ``PEFCO'').
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    \6\ 5 U.S.C. 105 defines ``executive agency'' as:
    For purposes of this title (5 U.S.C. 101 et seq.) ``Executive 
agency'' means an Executive department, a Government corporation, 
and an independent establishment.
    ``Executive department'' is defined in U.S.C. 101 as any of the 
major agencies or departments (e.g., The Department of State, the 
Department of the Treasury, the Department of Homeland Security, 
etc. The Secretaries of such agencies comprise the President's 
Cabinet). ``Government Corporation'' is defined in 5 U.S.C. 103 as 
``a corporation owned or controlled by the Government of the United 
States. * * *'' (e.g., the Pension Benefit Guaranty Corporation is a 
wholly owned government corporation). ``Independent establishment'' 
is defined in 5 U.S.C. 104 as (1) an establishment in the executive 
branch (other than the United States Postal Service or the Postal 
Regulatory Commission) which is not an Executive department, 
military department, Government corporation, or part thereof, or 
part of an independent establishment; and (2) the General Accounting 
Office.'' (e.g., the Federal Reserve Banks are independent 
establishments).
    (The Departments of the Army, Navy and Air Force, which are 
defined as military departments, are not executive agencies, 5 
U.S.C. 102.)
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    As noted previously, TRACE currently does not include U.S. Treasury 
securities, and this is not changed by the proposal to add Agency debt 
securities to TRACE. For purposes of TRACE, the defined term, 
``Agency,'' ``excludes the U.S. Treasury (`Treasury') in the exercise 
of its authority to issue U.S. Treasury securities * * * .'' In 
addition, the defined term, ``Agency debt security,'' specifically 
excludes U.S. Treasury securities.
    Certain Asset-backed securities are the second type of security 
that is excluded explicitly from the definition of Agency debt 
security. For purposes of TRACE, under proposed Rule 6710(l), Agency 
debt securities do not include Asset-backed securities ``where an 
Agency or a Government-sponsored enterprise is the sponsor of the trust 
or other entity that issues the Asset-backed security, or is the 
guarantor of the Asset-backed security.'' Instead, such a security is 
included as an ``Asset-backed security'' as defined in proposed Rule 
6710(m).\7\
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    \7\ The exclusion of such securities from the term ``Agency debt 
security'' is consistent with the current limitations in the 
definition of TRACE-eligible security, which excludes mortgage-
backed, and asset-backed securities, and collateralized mortgage 
obligations.
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    For purposes of TRACE, ``Asset-backed security'' is defined 
broadly. Proposed Rule 6710(m) defines ``Asset-backed security'' to 
mean:

asset-backed security as used in Securities Act Regulation AB, 
Section 1101(c), and other debt securities that are structured 
securities, synthetic asset-backed securities and/or instruments 
involving or based on the securitization of mortgages or other 
credits or assets. The term includes but is not limited to mortgage-
backed securities, collateralized mortgage obligations, 
collateralized debt obligations, collateralized bond obligations, 
collateralized debt obligations of asset-backed securities and 
collateralized debt obligations of collateralized debt obligations.
2. Other Amendments to ``TRACE-Eligible Security''
    FINRA also proposes two amendments to Rule 6710(a), the definition 
of TRACE-eligible security, which are not specifically related to the 
expansion of TRACE to include Agency debt securities. Currently, the 
definition of a ``TRACE-eligible security'' includes criteria that such 
securities be ``Investment Grade or Non-Investment Grade'' and 
``depository eligible securities under NASD Rule 11310(d).'' When TRACE 
became effective in 2002, the reference to the credit quality in Rule 
6710(a) made clear that TRACE applied to debt securities of any credit 
quality in contrast to the FIPS system, which TRACE replaced.\8\ Under 
FIPS, members were required to report limited transaction information 
for transactions in Non-Investment Grade securities only. FINRA 
proposes to delete ``Investment Grade or Non-Investment Grade'' in Rule 
6710(a) because it is no longer needed to clarify the scope of TRACE.
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    \8\ FIPS stands for Fixed Income Pricing System. The FIPS rules 
were rescinded and the FIPS system was dismantled shortly after 
TRACE began.
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    FINRA also required that TRACE-eligible securities be ``depository 
eligible securities under NASD Rule 11310(d)'' when TRACE was 
implemented to assure that such securities would have CUSIPs to 
identify them clearly and easily within the TRACE system. Operational 
enhancements now permit FINRA to receive, store and retrieve 
transaction information for securities that are not assigned CUSIPs. 
FINRA proposes to delete the unnecessary criterion in Rule 6710(a), 
which will permit FINRA to capture information on the few securities 
that are not assigned CUSIPs, but otherwise meet TRACE eligibility 
standards.
    FINRA proposes to restate the definition of ``TRACE-eligible 
security'' to incorporate all the changes discussed above and certain 
technical amendments. Among other things, FINRA proposes to delete the 
definition of a money market instrument, which is embedded in the term, 
``TRACE-eligible security,'' and add it as a separately defined term in 
new proposed Rule 6710(o) for stylistic consistency. The meaning of the 
term does not change. Proposed Rule 6710(a), as amended, will read as 
follows:

    ``TRACE-eligible security'' means a debt security that is U.S. 
dollar-denominated, issued by a United States (``U.S.'') or foreign 
private issuer, and either registered under the Securities Act or 
issued pursuant to Section 4(2) of the Securities Act and purchased 
or sold pursuant to Securities Act Rule 144A; or is a debt security 
that is U.S. dollar denominated and issued or guaranteed by an 
Agency as defined in paragraph (k) or a Government-sponsored 
enterprise as defined in paragraph (n). ``TRACE-eligible security'' 
does not include a debt security that is:
    (1) Issued by a foreign sovereign or is a U.S. Treasury security 
as defined in paragraph (p);
    (2) A restricted security as defined in Securities Act Rule 
144(a)(3), except a restricted security that is issued pursuant to 
Section 4(2) of the Securities Act and purchased or sold in a 
transaction that is effected under Securities Act Rule 144A;
    (3) A Money market instrument as defined in paragraph (o); or
    (4) An Asset-backed security as defined in paragraph (m).\9\
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    \9\ Additional proposed amendments to Rule 6710 are discussed, 
infra, at II.B., ``Reporting and Dissemination'' (regarding 
dissemination protocols), III. ``Primary Market Transactions'' 
(regarding primary market transactions), and IV. ``Other Changes'' 
(regarding technical amendments).
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B. Reporting and Dissemination

    Rule 6730 contains the reporting requirements, including 
information that must be reported, deadlines for timely reporting, 
certain reporting modifiers and exceptions to the reporting 
requirement. Agency debt securities will be subject to the reporting 
requirements currently set forth in Rule 6730. Under Rule 6730, members 
will be required to report transactions in Agency debt securities 
within 15 minutes of execution of the transactions, subject to the 
standard exceptions currently set forth in the Rule.\10\
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    \10\ Rule 6730(a)(1) through (4) provide exceptions to the 15-
minute reporting requirement if a member executes a transaction 
while the TRACE system is closed or less than 15 minutes before the 
TRACE system will close.
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    Information on transactions in Agency debt securities will be 
disseminated by FINRA immediately upon receipt of transaction reports, 
which is the current requirement for corporate bond transactions under 
Rule 6750, subject to one exception for Securities Act Rule 144A 
transactions.\11\ In addition, FINRA will continue to apply the current 
protocols that determine how volume information is disseminated.\12\
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    \11\ Under Rule 6750, FINRA does not disseminate transactions in 
TRACE-eligible securities that are Securities Act Rule 144A 
transactions.
    \12\ Under the protocols: (1) For Investment Grade transactions 
in sizes less than or equal to $5 million (by par value), actual 
volume is disseminated; and in sizes exceeding $5 million, a ``$5 
million+'' capped volume indicator is disseminated; and, (2) for 
Non-Investment Grade transactions in sizes less than or equal to $1 
million, actual volume is disseminated; and in sizes exceeding $1 
million, a ``$1 million+'' capped volume indicator is disseminated.
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    However, FINRA proposes to amend the defined term, ``Investment 
Grade,''

[[Page 17713]]

in Rule 6710(h) to treat unrated Agency debt securities as Investment 
Grade securities for purposes of the above-referenced dissemination 
protocols. FINRA also proposes conforming amendments regarding the 
treatment of such unrated securities in the term, ``Non-Investment 
Grade,'' as defined in Rule 6710(i), and technical, stylistic 
amendments in both provisions. Specifically, in Rule 6710(h), FINRA 
proposes to add a final sentence and amend the penultimate sentence, 
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both as set forth below to provide:

    If a TRACE-eligible security is unrated, FINRA may classify the 
TRACE-eligible security as an Investment Grade security. FINRA will 
classify an unrated Agency debt security as defined in paragraph (l) 
as an Investment Grade security for purposes of the dissemination of 
transaction volume.

    The other proposed change to Rule 6710(h) is a technical, stylistic 
amendment to the first sentence, changing the first clause from, ``The 
term `Investment Grade' shall mean a TRACE-eligible security that, * * 
*'' to `` `Investment Grade' means a TRACE-eligible security that, * * 
* .''
    The proposed amendments to the defined term, ``Non-Investment 
Grade,'' will cross-reference in Rule 6710(i) the amendment regarding 
the treatment of unrated Agency debt securities proposed to Rule 
6710(h). Also, FINRA proposes: (i) to make technical stylistic 
amendments to the first clause of Rule 6710(i) similar to such 
amendments to be incorporated in Rule 6710(h) as described above; and 
(ii) to delete certain detailed rule text in Rule 6710(i) that is no 
longer necessary.\13\
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    \13\ FINRA proposes to delete text in Rule 6710(i) that was used 
to classify certain Non-Investment Grade corporate bonds to 
determine when dissemination of transaction information would occur. 
The text is no longer necessary because transaction information on 
such bonds began to be disseminated several years ago. FINRA 
proposes to delete the following rule text, including the footnote 
text set forth in the second paragraph below:
    and further classify it as being in one of the generic rating 
categories below the four highest such categories. If FINRA does not 
have sufficient information to make a judgment regarding the 
classification of an unrated TRACE-eligible security, for purposes 
of TRACE, FINRA will classify the TRACE-eligible security as having 
been rated B (or the equivalent rating of one or more NRSROs).
    ``B'' is a rating of Standard & Poor's, a division of the 
McGraw-Hill Companies, Inc. (``S&P''). S&P is a nationally 
recognized statistical rating organization. S&P's ratings are 
proprietary to S&P and are protected by copyright and other 
intellectual property laws. S&P's licenses ratings to FINRA. Ratings 
may not be copied or otherwise reproduced, repackaged, further 
transmitted, transferred, disseminated, redistributed or resold, or 
stored for subsequent use for any such purpose in whole or in part, 
in any form or manner or by any means whatsoever, by any person 
without S&P's prior written consent.
    As amended, FINRA Rule 6710(i) will provide:
    ``Non-Investment Grade'' means a TRACE-eligible security that, 
if rated by only one NRSRO, is rated lower than one of the four 
highest generic rating categories; or if rated by more than one 
NRSRO, is rated lower than one of the four highest generic rating 
categories by all or a majority of such NRSROs. Except as provided 
in paragraph (h), if a TRACE-eligible security is unrated, for 
purposes of TRACE, FINRA may otherwise classify the TRACE-eligible 
security as a Non-Investment Grade security.
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    FINRA recognizes that extending TRACE reporting to Agency debt 
securities may result in certain trading desks having to report 
transactions to TRACE for the first time. As has been the case since 
TRACE inception, FINRA plans to implement TRACE reporting requirements 
and dissemination of Agency debt securities in a deliberate, yet 
efficient manner. FINRA has worked regularly with, and will continue to 
work with, broker-dealers and third party vendors to ensure effective 
and efficient TRACE implementation.

III. Primary Market Transactions

    Currently, broker-dealers are required to report only secondary 
market transactions to TRACE. To provide a more comprehensive audit 
trail, FINRA proposes amendments to FINRA Rule 6700 Series to require 
broker-dealers to report all primary market transactions and designate 
such transactions with an identifier. FINRA proposes that all primary 
market transactions be reported because, for many bonds, the most 
active period of trading occurs during the primary offering and 
immediately afterward. To improve market surveillance of the debt 
markets, FINRA proposes that TRACE be expanded to include such 
transactions.

A. Amendments To Add Primary Market Transactions

    FINRA proposes two rule amendments that will require members to 
report primary market transactions to TRACE. FINRA proposes to amend 
Rule 6710(c) to delete the words ``secondary market'' in the defined 
term ``Reportable TRACE transaction'' and make technical conforming 
amendments. Deleting the words ``secondary market'' in Rule 6710(c) 
will delete the limitation that currently does not allow the reporting 
of primary market transactions.
    The other proposed amendments to Rule 6710(c) will: (i) Incorporate 
technical and stylistic changes to the first clause of Rule 6710(c); 
\14\ and (ii) conform a phrase in Rule 6710(c) with Rule 6730(e) by 
deleting the phrase, ``transactions exempt from reporting'' and 
substituting ``transactions that are not reported.'' \15\
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    \14\ In Rule 6710(c), the first phrase, ``The term `reportable 
TRACE transaction' shall mean * * *'' will be amended to read, 
```Reportable TRACE transaction' means. * * *''
    \15\ As amended, Rule 6710(c) will provide: `` `Reportable TRACE 
transaction' means any transaction in a TRACE-eligible security 
except transactions that are not reported as specified in Rule 
6730(e).''
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    An amendment to Rule 6730(e)(1) is also required to include primary 
market transactions in TRACE. FINRA proposes to amend paragraph (1) of 
Rule 6730(e) to delete the current exclusion from reporting for 
``[T]ransactions that are part of a primary distribution by an 
issuer.''

B. Reporting Requirements

    Members will be required to report primary market transactions, 
except primary market transactions that are ``List or fixed offering 
price transactions'' and ``Takedown transactions,'' within 15 minutes 
of the time of execution, in accordance with Rule 6730(a).\16\ However, 
FINRA proposes to liberalize the reporting requirements for List or 
fixed offering price transactions and Takedown transactions.
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    \16\ As noted, supra, at n. 9, exceptions to 15-minute reporting 
are provided in Rule 6730(a)(1) through (4) for trades that occur 
outside of TRACE system hours or immediately prior to its closing.
---------------------------------------------------------------------------

    List or fixed offering price transaction and Takedown transaction 
refer to two types of sale transactions that may occur during a primary 
offering: those executed at a previously fixed price, from a broker-
dealer acting as an underwriter to a purchaser; and certain sale 
transactions among certain market professionals involved in the 
placement of the offered securities. For purposes of the TRACE rules, 
such transactions must occur on the first day of the offering.
    The terms ``List or fixed offering price transaction'' and 
``Takedown transaction'' are defined for purposes of TRACE in, 
respectively, proposed Rule 6710(q) and (r). ``List or fixed offering 
price transaction'' is defined in Rule 6710(q) to mean:

a primary market sale transaction sold on the first day of trading 
of a new issue: (i) by a sole underwriter, syndicate manager, 
syndicate member or selling group member at the published or stated 
list or fixed offering price, or (ii) in the case of a primary 
market sale transaction effected pursuant to Securities Act Rule 
144A, by an initial purchaser, syndicate manager, syndicate member 
or selling group member at the published or stated fixed offering 
price.

    ``Takedown transaction'' is defined in Rule 6710(r) to mean:

a primary market sale transaction sold on the first day of trading 
of a new issue: (i) by a sole underwriter or syndicate manager to a 
syndicate or selling group member at a

[[Page 17714]]

discount from the published or stated list or fixed offering price, 
or (ii) in the case of a primary market sale transaction effected 
pursuant to Securities Act Rule 144A, by an initial purchaser or 
syndicate manager to a syndicate or selling group member at a 
discount from the published or stated fixed offering price.

    Under proposed Rule 6730(a)(5), members executing such List or 
fixed offering price transactions or Takedown transactions will have 
until the end of the business day--until the TRACE system closes--to 
report such transactions. If a primary offering prices after 5:00 p.m. 
Eastern Time and thereafter broker-dealers execute transactions that 
qualify as List or fixed offering price transactions or Takedown 
transactions, broker-dealers will have until the end of the next 
business day to report such transactions under Rule 6730(a)(5)(B)(i). 
In addition, if broker-dealers execute transactions that are List or 
fixed offering price transactions or Takedown transactions at any time 
outside of the TRACE system hours, broker-dealers will have until the 
close of the TRACE system on the next business day to report such 
transactions under Rule 6730(a)(5)(B)(ii) and (iii).\17\
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    \17\ Under proposed Rule 6730(a)(5)(B)(iii), the reporting 
requirements for List or fixed price offering transactions or 
Takedown transactions that a broker-dealer executes on a Saturday, 
Sunday, or a federal or religious holiday when the TRACE system is 
closed include specific information requirements and have certain 
parallels to the reporting requirements for transactions reported 
under Rule 6730(a)(4).
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    Price discovery is the most significant reason underlying the TRACE 
requirement for the reporting of transactions within 15 minutes of 
execution and thereafter, the immediate dissemination of such 
information. FINRA proposes to liberalize the reporting requirements 
for List or fixed offering price transactions and Takedown 
transactions, because, in most cases, the prices of such transactions 
will be the same, or subject to only minor differences based on the 
underwriting structure, and will not contribute meaningfully to price 
discovery. FINRA proposes end-of-day reporting for the two types of 
primary market transactions because FINRA does not believe that price 
transparency will be adversely affected. Moreover, the proposed end-of-
day requirement will provide broker-dealers operational flexibility and 
will ease compliance burdens, particularly during the implementation of 
the proposed changes.\18\
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    \18\ The proposed amendments will harmonize substantially the 
TRACE reporting rules with current requirements under Municipal 
Securities Rulemaking Board (``MSRB'') Rule G-14 for reporting 
primary market transactions in municipal securities, and should 
reduce operational burdens to firms. For primary market 
transactions, as with Agency debt securities, FINRA will work with 
broker-dealers and third party vendors to ensure effective and cost 
efficient implementation.
---------------------------------------------------------------------------

    All other primary market transactions, such as those that are 
effected at prices other than a fixed (or list) offering price and 
those that are effected at a fixed price other than on the first day of 
new issue trading, will be subject to the 15-minute reporting 
requirements and the exceptions thereto currently set forth in Rule 
6730(a)(1) through (4).
    Currently, the TRACE data collected for surveillance, review, and 
research contains information on secondary market transactions only. 
With the inclusion of primary market transaction data, FINRA will 
require broker-dealers to assign one of three indicators in their trade 
reports under proposed subparagraph (D) of Rule 6730(d)(4). The 
indicators will distinguish primary market transactions from secondary 
market transactions and further distinguish List or fixed offering 
price transactions and Takedown transactions from other primary market 
transactions.

C. Dissemination

    Generally, dissemination of transaction information for primary 
market transactions will be implemented at the same time FINRA 
implements reporting of such transactions. Dissemination will occur 
immediately upon receipt of transaction reports in primary market 
transactions as provided in Rule 6750(a), with one exception. Proposed 
Rule 6750(b)(2) provides that primary market transactions that are List 
or fixed offering price transactions or Takedown transactions will not 
be disseminated. FINRA will study the reported data for these primary 
market transactions for a period of time after reporting begins and, at 
a later date, determine if dissemination of the information is 
appropriate, and if appropriate, develop a dissemination strategy.
    In contrast, primary market transactions that are not List or fixed 
offering price transactions or Takedown transactions will be 
disseminated as soon as primary market transaction reporting begins. 
These transactions, such as certain ``at-the-market'' transactions, 
provide transparency about current market pricing that is otherwise not 
available to the public and many market participants.

IV. Other Changes

A. FINRA Rule 6760

    Currently, Rule 6760 requires members to notify FINRA regarding 
securities that are about to be offered in a primary offering if such 
securities are TRACE-eligible. In most cases, members must notify FINRA 
Operations by 5 p.m. Eastern Time on the business day before an 
offering begins, although for some types of offerings, the deadlines 
currently extend to 5 p.m. of the business day following the first 
offer date. FINRA must have this information in the TRACE system to 
facilitate timely transaction reporting by all members that have 
effected transactions in a newly issued TRACE-eligible security.
    FINRA proposes to amend the notice and information requirements in 
Rule 6760 to facilitate members' timely reporting of TRACE-eligible 
securities in both primary and secondary market transactions. Under 
Rule 6760(b), a broker-dealer providing notice will be required to 
include ``the time the new issue is priced,'' among other information 
requirements. In addition, the amendment requires that the information 
be provided ``prior to the commencement of primary market 
transactions.'' The amendment also recognizes that FINRA may require 
information not specifically listed in Rule 6760(b) if, among other 
things, a security will not be assigned a CUSIP.
    FINRA also proposes a series of minor clarifying changes to the 
Rule. The proposed amendments require that the notice be provided to 
FINRA Operations by the managing underwriter, or if a managing 
underwriter is not appointed, an underwriter, or, if there are no 
underwriters, an initial purchaser. When multiple underwriters or 
initial purchasers participate in the offering and there is no lead, 
all are liable under Rule 6760 to provide notice to FINRA Operations, 
but the parties may agree to submit a single notice. Also, the proposed 
rule change includes amendments to delete the word ``secondary'' in the 
first line of paragraph Rule 6760 (a)(1), delete references to ``TRACE 
Operations Center'' in the rule and substitute the term ``FINRA 
Operations,'' and amend the rule title to read, ``Obligation To Provide 
Notice.''

B. Technical and Conforming Amendments

    FINRA also proposes several minor technical, stylistic, or 
conforming changes as follows. In Rule 6710, in the first paragraph, 
after the sentence, ``The terms used in this Rule 6700 Series shall 
have the same meaning as those defined in the FINRA By-Laws and rules 
unless otherwise specified.,'' FINRA will add the following sentence: 
``For the purposes of this Rule 6700 Series, the

[[Page 17715]]

following terms have the following meaning:''
    In Rule 6710, in paragraphs (b), (d), (e), (f), (g) and (j), which 
set forth various defined terms, FINRA proposes to incorporate 
conforming technical and stylistic changes to the first line of text of 
each defined term. The amendments to each defined term reflect the 
stylistic changes shown as follows for Rule 6710(b). The initial phrase 
of Rule 6710(b), which provides, ``The term `Trade Reporting and 
Compliance Engine' or `TRACE' shall mean * * *'' will be amended to 
read, `` `Trade Reporting and Compliance Engine' or `TRACE' means. * * 
*'' \19\
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    \19\ As noted above, FINRA proposes to incorporate the same 
technical and stylistic changes to paragraphs (d), (e), (f), (g) and 
(j) of Rule 6710. The initial phrase of Rule 6710(d), which 
provides, ``The term `time of execution' for a transaction in a 
TRACE-eligible security shall be * * *'' will be amended to read, `` 
`Time of execution' for a transaction in a TRACE-eligible security 
means. * * *'' The initial phrase of Rule 6710(e), which provides, 
``The term `party to a transaction' shall mean * * *'' will be 
amended to read, `` `Party to a transaction' means. * * *'' The 
initial phrase of Rule 6710(f), which provides, ``The term `TRACE 
Participant' shall mean * * *'' will be amended to read, `` `TRACE 
Participant' means. * * *'' The initial phrase of Rule 6710(g) will 
be amended to read, ``The term `Introducing Broker' shall mean * * 
*'' will be amended to read, `` `Introducing Broker' means. * * *'' 
The initial phrase of Rule 6710(j), which provides, ``The term 
`split-rated' shall mean * * *'' will be amended to read, `` `Split-
rated' means. * * *''
    As discussed previously, FINRA proposes the same technical and 
stylistic amendments to paragrahs (c), (h) and (i) of Rule 6710.
---------------------------------------------------------------------------

    In Rule 6710(e), the phrase, ``[F]or purposes of this Rule,'' will 
be deleted. In Rule 6730(a), FINRA will add a new first sentence 
providing, ``Each member that is a party to a transaction in a TRACE-
eligible security must report the transaction.'' Other minor technical 
changes are also proposed in the same paragraph, including clarifying 
the term ``TRACE system hours.'' \20\ Paragraphs (5) and (6) of Rule 
6730(a) are renumbered as paragraphs (6) and (7), and, in paragraph 
(7), a cross reference to new paragraph (a)(5) is added. Also, in Rule 
6750, FINRA proposes minor technical changes to paragraph (b), 
including revising the header by deleting ``Securities Act Rule 144A 
Transactions'' and substituting the new header, ``Transaction 
Information Not Disseminated.''
---------------------------------------------------------------------------

    \20\ As amended, Rule 6730(a) will provide:
    Each member that is a Party to a transaction in a TRACE-eligible 
security must report the transaction. A member must report 
transaction information within 15 minutes of the time of execution, 
except as otherwise provided below, or the transaction report will 
be ``late.'' The member must transmit the report to TRACE during the 
hours the TRACE system is open, which are 8 a.m. Eastern Time 
through 6:29:59 p.m. Eastern Time, unless otherwise announced by 
FINRA (``TRACE system hours''). Specific trade reporting obligations 
during a 24-hour cycle are set forth below.
---------------------------------------------------------------------------

IV. Fees

    FINRA proposes to amend Rule 7730 to establish reporting and market 
data fees for Agency debt securities transactions and primary market 
transactions. Generally, the fees proposed for Agency debt securities 
are equivalent to the fees charged for corporate bonds. Primary market 
transactions, whether in corporate bonds or Agency debt securities, 
will be subject to the same reporting fees currently in effect, with 
one exception.
    FINRA proposes not to charge a reporting fee for the timely and 
accurate reporting of primary market transactions that are List or 
fixed offering price transactions or Takedown transactions as provided 
in amendments to Rule 7730(b)(1). However, the fees that are currently 
in effect for late reports and corrections will apply to such 
transactions. Eliminating the standard reporting fee for such 
transactions should reduce the cost of compliance for firms as they 
implement changes to report such transactions.
    FINRA will distinguish TRACE transaction data as two data sets, one 
comprised solely of corporate bond transaction information (the 
``Corporate Bonds Data Set'') and a second data set comprised solely of 
Agency debt securities transaction information (``Agency Data Set'') 
for organizational purposes only. Market data fees will be charged for 
each Data Set, as provided in amended Rule 7730(c)(1)(A), (B) and 
(C).\21\ Each Data Set will include the relevant transaction data, 
including primary market transactions in such securities, provided that 
the primary market transactions are subject to dissemination.\22\
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    \21\ Such proposed changes will be incorporated in Rule 
7730(c)(1)(A), the Bond Trade Dissemination Service (``BTDS'') 
Professional Real-Time Data Display Fee; Rule 7730(c)(1)(B), the 
Vendor Real-Time Data Feed Fee and Snapshot Real-Time TRACE Data 
Fee; and Rule 7730(c)(1)(C), the Vendor Real-Time Data Feed Fee (for 
certain Tax-Exempt Organizations).
    \22\ By definition, market data does not include information on 
transactions that are required to be reported but are not subject to 
dissemination. Currently, Securities Act Rule 144A transactions are 
accorded this treatment and under the proposed rule change, primary 
market transactions that are List or fixed offering price 
transactions and Takedown transactions also will not be 
disseminated, and, thus, will not be included in data packages.
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    Generally, the proposed fees for the Agency Data Set will be set at 
the same rates currently in effect for corporate bond market data (to 
be sold in the future as the Corporate Bonds Data Set). For example, in 
Rule 7730(c)(1)(B), the current Vendor Real-Time Data Feed Fee is $1500 
per month for receipt of continuous Real-Time TRACE transaction data 
for internal, non-display use for corporate bonds for persons or 
organizations other than qualifying Tax-Exempt Organizations. FINRA 
proposes to charge $1500 per month for the same data package for the 
Agency Data Set. A vendor that desires to obtain a real-time data feed 
for both Data Sets will pay $3,000 per month ($1500 for the Corporate 
Bonds Data Set and $1500 for the Agency Data Set).
    One ``System Related Fee,'' for ``Web Browser Access,'' as set 
forth in FINRA Rule 7730(a)(1), provides access for reporting, but also 
includes an embedded charge for access to market data. FINRA proposes 
to amend the ``Web Browser Access'' fee in FINRA Rule 7730(a)(1) to set 
one fee for professionals that want a reporting system plus access to 
one Data Set and a second, higher fee for those desiring a reporting 
system plus access to both Data Sets.
    FINRA proposes to continue its policy to provide Non-Professionals 
access at no charge to all or any portion of any data, whether from one 
or both Data Sets, under proposed amendments to Rule 7730(c)(2).
    Finally, FINRA also proposes minor technical and clarifying 
amendments to Rule 7730.
    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 180 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,\23\ 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 and Section 15(A)(b)(5) of the Act,\24\ which requires, 
among other things, that FINRA rules provide for the equitable 
allocation of reasonable dues, fees and other charges among members and 
issuers and other persons using any facility or system that FINRA 
operates or controls in that: (i) The proposed rule change will 
increase transparency in the debt market

[[Page 17716]]

significantly, will enhance the ability of institutional investors, 
retail investors and broker-dealers to compare and negotiate prices in 
Agency debt securities transactions, and will enhance FINRA's 
surveillance of the debt market in connection with primary market 
transactions and Agency debt securities generally; and (ii) the 
proposed fee proposal provides for reporting and market data fees that 
are reasonable and mirror the fees currently in effect for corporate 
bonds, and provides for the equitable allocation of such fees and 
charges among members and other professional market participants, 
qualifying Tax-Exempt Organizations and public data consumers.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78o-3(b)(6).
    \24\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

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

    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-2009-010 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-2009-010. 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 the filing will also 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 No. SR-FINRA-2009-010 and should be 
submitted on or before May 7, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8656 Filed 4-15-09; 8:45 am]

BILLING CODE 8010-01-P