Document ID: SEC-2013-0474-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-03-12T04:00Z

[Federal Register Volume 78, Number 48 (Tuesday, March 12, 2013)]
[Notices]
[Pages 15790-15791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05570]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69037; File No. SR-FINRA-2012-052]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Require Members To Report to TRACE the ``Factor'' in Limited Instances 
Involving Asset-Backed Security Transactions

March 5, 2013.

I. Introduction

    On November 29, 2012, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to require FINRA members to report to the Trade 
Reporting and Compliance Engine (``TRACE'') the Factor used to 
determine the size (volume) of each transaction in an Asset-Backed 
Security ``(ABS'') (except ABS traded To Be Announced (``TBA'')), in 
the limited instances when members effect such transactions as agent 
and charge a commission.\3\ The proposed rule change was published for 
comment in the Federal Register on December 18, 2012.\4\ The Commission 
received one comment on the proposal and a response to the comment from 
FINRA.\5\ On January 30, 2013, the Commission extended to March 18, 
2013 the time period in which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether the proposed rule change should be disapproved.\6\ 
This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The terms ``Asset-Backed Security,'' ``To Be Announced,'' 
and ``Factor'' are defined in FINRA Rules 6710(m), (u), and (w), 
respectively.
    \4\ See Securities Exchange Act Release No. 68414 (December 12, 
2012), 77 FR 74896 (``Notice'').
    \5\ See comment from Mark Sokolow, dated December 18, 2012 
(``Sokolow Comment''); see also response letter from Kathryn Moore, 
Assistant General Counsel, FINRA, to Elizabeth M. Murphy, Secretary, 
Commission, dated January 11, 2013 (``FINRA Letter'').
    \6\ See Securities Exchange Act Release No. 68768 (January 30, 
2013), 78 FR 8216 (February 5, 2013).
---------------------------------------------------------------------------

II. Description of the Proposal

    FINRA utilizes TRACE to collect from its members and publicly 
disseminate information on secondary over-the-counter transactions in 
corporate debt securities and Agency Debt Securities \7\ and certain 
primary market transactions. FINRA also utilizes TRACE to collect 
information on ABS transactions but, until recently, FINRA's rules did 
not provide for the dissemination of such information publicly.\8\ Last 
year, however, FINRA amended its rules to provide for public 
dissemination of information regarding, among other things, certain ABS 
traded in Specified Pool Transactions.\9\ FINRA has

[[Page 15791]]

proposed the instant rule change to prepare for such dissemination, 
which has not yet become effective, as well as to prepare for any 
future dissemination of additional ABS market segments.\10\
---------------------------------------------------------------------------

    \7\ The term ``Agency Debt Security'' is defined in FINRA Rule 
6710(l).
    \8\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010) (approving SR-FINRA-2009-065).
    \9\ See Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (approving SR-FINRA-2012-042). 
The term ``Specified Pool Transaction'' is defined in FINRA Rule 
6710(x).
    \10\ See Notice, 77 FR at 74896.
---------------------------------------------------------------------------

    Specifically, FINRA has proposed to amend FINRA Rule 6730(d)(2) to 
require a member to report to TRACE the Factor in the limited instances 
when the member effects a transaction in an ABS (except a TBA 
transaction) as agent and charges a commission.\11\ Under FINRA's 
current transaction reporting rules, for a transaction in an ABS that 
is backed by mortgages or other assets that amortize over the life of 
the security, instead of reporting the size of the transaction by 
reporting the total par or principal value, a member must report two 
items from which the size is calculable: (1) The original face value of 
the ABS, which is the size at issuance; and (2) the Factor, but only if 
the Factor used to execute the transaction is not the most current 
Factor that is publicly available at the Time of Execution \12\ (a 
``non-conforming Factor'').\13\ As a result of the proposed rule 
change, when an ABS transaction (except for a TBA transaction) is 
executed in an agency capacity with a commission charged, the FINRA 
member would be required to report the Factor regardless of whether it 
is the most current Factor publicly available at the Time of Execution 
or is a non-conforming Factor.\14\ In addition, FINRA has proposed 
supplementary material to make clear that the requirement to report the 
Factor will apply to every ABS transaction (except for a TBA 
transaction) executed in an agency capacity with a commission charged, 
including the small number of transactions in non-amortizing ABS.\15\
---------------------------------------------------------------------------

    \11\ See proposed Rule 6730(d)(2)(B)(iv); see also Notice, 77 FR 
at 74896. FINRA stated that only a small number of ABS transactions 
are executed on an agency basis with a commission charged; ABS are 
traded mostly on a principal basis. See id.
    \12\ The term ``Time of Execution'' is defined in FINRA Rule 
6710(d).
    \13\ See FINRA Rules 6730(c)(2) and (d)(2); see also Notice, 77 
FR at 74896. When a member uses the most current Factor that is 
publicly available at the Time of Execution of the transaction, the 
member currently is not required to report the Factor. Instead, the 
TRACE system incorporates the most current Factor publicly available 
at the Time of Execution. FINRA receives such information from 
commercial data vendors. See Notice, 77 FR at 74896 n.7.
    \14\ See proposed Rule 6730(d)(2)(B)(iv); see also Notice, 77 FR 
at 74897.
    \15\ See proposed supplementary material .01 to Rule 6730(d)(2); 
see also Notice, 77 FR at 74897. For transactions in non-amortizing 
ABS, a member would be required to report 1.0 as the Factor. See id. 
at 74897 n.11.
---------------------------------------------------------------------------

    FINRA has also proposed technical amendments to reorganize the 
current size reporting requirements in FINRA Rule 6730(d)(2) and to 
make them consistent with proposed Rule 6730(d)(2)(B)(iv).\16\
---------------------------------------------------------------------------

    \16\ See proposed Rules 6730(d)(2)(A)-(2)(B)(iv).
---------------------------------------------------------------------------

    FINRA stated that it 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, and that the effective date 
will be no later than 270 days following publication of the Regulatory 
Notice.\17\
---------------------------------------------------------------------------

    \17\ See Notice, 77 FR at 74897.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\18\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\19\ which 
requires, among other things, that FINRA rules 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.
---------------------------------------------------------------------------

    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    In approving the original TRACE rules, the Commission stated that 
price transparency plays a fundamental role in promoting fairness and 
efficiency of U.S. capital markets.\20\ FINRA believes that the 
proposed rule change would promote price transparency provided by TRACE 
for ABS transactions executed in an agency capacity with a commission 
charged.\21\ When an ABS transaction is executed in an agency capacity 
with a commission charged, the TRACE system must take the Factor, as 
well as other information, into account when calculating the 
disseminated price of the transaction.\22\ Currently, all components of 
the formula that would be used to calculate a disseminated price in an 
agency ABS transaction, except the Factor, are reported by a member 
effecting the transaction.\23\ FINRA represented that requiring that 
the Factor also be reported would ensure the accuracy of the 
disseminated price for an agency ABS transaction because the TRACE 
system would rely exclusively upon information reported by the members 
that are parties to such a transaction in calculating the transaction's 
disseminated price.\24\ The Commission believes that the proposal is 
reasonably designed to promote the accuracy of the disseminated price 
data for agency ABS transactions and to further the goal of increasing 
price transparency in the ABS market.
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131, 8136 (January 29, 2001).
    \21\ See Notice, 77 FR at 74897.
    \22\ See id. at 74896-97.
    \23\ See id. at 74897.
    \24\ See id.
---------------------------------------------------------------------------

    The commenter suggested that the proposed rule change would add an 
administrative burden to the industry.\25\ FINRA responded that the 
proposed rule change is necessary and appropriate, and noted that it 
would be narrowly tailored to apply to the very limited number of ABS 
transactions where a member trades in an agency capacity and charges a 
commission.\26\ FINRA also noted that the accuracy of the price 
transparency provided by TRACE assists all market participants in 
determining the quality of their executions and firms in complying with 
their regulatory obligations.\27\ The Commission believes that the 
commenter has not raised any issue that would preclude approval of the 
proposal.
---------------------------------------------------------------------------

    \25\ See Sokolow Comment.
    \26\ See FINRA Letter at 2.
    \27\ See id.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-FINRA-2012-052) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05570 Filed 3-11-13; 8:45 am]
BILLING CODE 8011-01-P