Document ID: SEC-2012-2081-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-12-18T05:00Z

[Federal Register Volume 77, Number 243 (Tuesday, December 18, 2012)]
[Notices]
[Pages 74896-74898]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30378]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68414; File No. SR-FINRA-2012-052]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Require 
Members To Report the Factor to TRACE in Asset-Backed Security 
Transactions (Except an Asset-Backed Security Traded TBA), in the 
Limited Instances When Members Effect Such Transactions as Agent and 
Charge a Commission

December 12, 2012.
    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 November 29, 2012, the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6730(d)(2) to require a 
member to report to Trade Reporting and Compliance Engine (TRACE) the 
Factor used to determine the size (volume) of each transaction in an 
Asset-Backed Security (except an Asset-Backed Security traded To Be 
Announced), in the limited instances when members effect such 
transactions as agent and charge a commission.
    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
    In general, Asset-Backed Securities (``ABS'') \3\ are traded on a 
principal basis and only a small number of ABS transactions are traded 
on an agency basis and charge a commission.\4\ In the limited instances 
when a member executes an ABS transaction (except an ABS traded To Be 
Announced (a ``TBA transaction'')) in an agency capacity and charges a 
commission, FINRA proposes to require members to report the Factor \5\ 
as discussed below.
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    \3\ See FINRA Rule 6710(m) for the definition of Asset-Backed 
Security.
    \4\ From May 2011, when TRACE began receiving reports on ABS, to 
the present, whether measured by par value or number of 
transactions, transactions, in ABS that are executed in an agency 
capacity and subject to a commission represent only approximately 
one percent of all ABS transactions.
    \5\ See FINRA Rule 6710(w) for the definition of FACTOR.
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    Currently, under FINRA Rule 6730(c)(2) and Rule 6730(d)(2), a 
member is required to report the size of TRACE-Eligible Securities,\6\ 
including certain ABS, by reporting the total par or principal value of 
the debt securities traded. However, in a transaction in an ABS that is 
backed by mortgages or other assets that amortize over the life of the 
security (an ``amortizing ABS''), instead of reporting the total par or 
principal value, a member reports 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 of such transaction (a ``non-
conforming Factor'').\7\
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    \6\ See FINRA Rule 6710(w) for the definition of TRACE-Eligible 
Security.
    \7\ When a member uses the most current Factor that is publicly 
available at the time of execution of the transaction, the member is 
not required to report the Factor. Instead, the TRACE system 
incorporates the most current Factor publicly available at the Time 
of Execution of the transaction. FINRA receives such information 
from commercial data vendors.
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    A Factor is the decimal value that represents the proportion of (1) 
the principal value (or face value) of the pool of assets underlying an 
amortizing ABS remaining at the time of the execution of a transaction 
(typically referred to as ``remaining principal balance'' or ``RPB'') 
to (2) the original face value of the ABS. Such Factors are published 
monthly by federal agencies or government-sponsored enterprises for ABS 
that are issued or guaranteed by them. Factors for other ABS generally 
are consolidated by certain commercial vendors that obtain them from 
servicers.
    FINRA proposes to amend FINRA Rule 6730(d)(2) to require a member 
to report the Factor to TRACE for every transaction in an ABS (except 
TBA transactions) in the limited instances when the member effects that 
transaction as agent and charges a commission. The amendment is 
proposed to prepare for the dissemination of Specified Pool 
Transactions, and transactions in additional ABS market segments, if 
such transactions subsequently are disseminated under Rule 6750 in the 
future.\8\ The proposed rule change is necessary to ensure the accuracy 
of the disseminated price of an ABS transaction, which, if traded on an 
agency basis and subject to a commission charge, is calculated using 
the Factor, the price and other information reported by a member that 
is a party to the transaction.
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    \8\ FINRA proposes the dissemination of certain Specified Pool 
Transactions in SR-FINRA-2012-042, which was approved recently by 
the SEC but is not yet effective. See Securities Exchange Act 
Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) 
(SEC Order Approving File No. SR-FINRA-2012-042 regarding a proposal 
to disseminate Agency Pass-Through Mortgage-Backed Securities traded 
in Specified Pool Transactions and SBA-Backed ABS traded TBA and in 
Specified Pool Transactions). The effective date of the amendments 
in SR-FINRA-2012-042 will be announced in a Regulatory Notice.
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    Though very few ABS transactions are executed in an agency capacity 
with a commission charged, when done so the TRACE system must calculate 
the disseminated price (or all-in price) based on the reported price, 
which is reported as a percentage of the RPB (e.g., 97), and add the 
proportionate amount of commission. However, the commission is reported 
as the total gross dollar amount (e.g., $3,000.00).\9\ To account for 
the commission impact on

[[Page 74897]]

the total price paid or received by the customer, the TRACE system 
calculates the amount of commission in relation to RPB, which takes the 
Factor into account.\10\
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    \9\ FINRA Rules 6730(c)(3) and 6730(d)(1) require members to 
report the price, which must exclude the commission, and separately 
report the total dollar amount of the commission.
    \10\ The portion of the commission is calculated by dividing the 
dollar amount of the commission by the total size (which is the 
product of the original face value multiplied by the Factor). The 
resulting number is multiplied by 100.
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    Currently, all components of the formula that would be used to 
calculate a disseminated price in an ABS transaction executed as agent, 
except the Factor, are reported by a member effecting the transaction. 
The proposed amendments to Rule 6730(d)(2) would ensure the accuracy of 
the disseminated price data by relying exclusively upon information, 
including the Factor, that would be reported by the members that are 
parties to a transaction. Accordingly, FINRA proposes in FINRA Rule 
6730(d)(2)(B)(iv) that a member report the Factor in the limited 
instances when an ABS transaction is executed in an agency capacity 
with a commission charged (except for TBA transactions), regardless of 
whether such Factor is the most current Factor publicly available at 
execution or is a non-conforming Factor. In addition, FINRA proposes 
supplementary material to clarify that the requirement to report the 
Factor will apply to every ABS transaction executed in an agency 
capacity with a commission charged, including the very small number of 
transactions in non-amortizing ABS.\11\
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    \11\ FINRA recognizes that in non-amortizing ABS, such as ABS 
backed by credit card receivables, amortization does not occur, and 
thus, a Factor is not generally referenced to indicate the size of a 
transaction. However, since so few transactions are executed in 
agency capacity with commission charged, proposed FINRA Rule 
6730(d)(2)(B)(iv) would not distinguish between amortizing ABS and 
non-amortizing ABS, and would require a member to report a Factor in 
every ABS transaction (except TBA transactions) executed in agency 
capacity with a commission charged. For any such transactions in a 
non-amortizing ABS, a member would report 1.0 as the Factor.
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    FINRA also proposes to reorganize, with technical amendments, the 
current requirements to report size in FINRA Rule 6730(d)(2). First, 
the requirement to report size for transactions in securities other 
than ABS would be set forth in proposed Rule 6730(d)(2)(A) and would 
continue to require members to report the total par value or principal 
value of the security. Second, proposed FINRA Rule 6730(d)(2)(B)(i), 
(ii) and (iii) would restate current requirements regarding reporting 
size of other transactions in ABS as follows: in (B)(i), for a TBA 
transaction, a member would be required to report the original face 
value of the security; in (B)(ii), for a transaction in an amortizing 
ABS, other than a TBA transaction, a member would be required to report 
the original face value of the security and, if a member used a Factor 
to execute the transaction that was not the most current Factor 
publicly available at the Time of Execution, to report the Factor used, 
except if executed in an agency capacity and subject to the 
requirements of proposed FINRA Rule 6730(d)(2)(B)(iv) as described 
above; and in (B)(iii), for a transaction in a non-amortizing ABS, a 
member would be required to report the original face value of the 
security, except if executed in an agency capacity and subject to the 
requirements of proposed FINRA Rule 6730(d)(2)(B)(iv) as described 
above.
    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 270 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,\12\ 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 
ensure the accuracy of the price transparency provided by TRACE by 
requiring members that are party to an ABS transaction (except a TBA 
transaction) to report the Factor in the limited instances when the 
transaction is executed in agency capacity with a commission charged. 
FINRA believes the tailored reporting requirement is appropriate given 
that only approximately one percent of all ABS transactions are 
executed in agency capacity with a commission charged. FINRA believes 
that the price transparency provided by TRACE assists all market 
participants in determining the quality of their executions and member 
firms in complying with their regulatory obligations, including best 
execution obligations. In addition, accurate price transparency may 
have a positive impact on the quality of pricing for valuation 
purposes.
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    \12\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. FINRA believes that the 
proposed rule change will ensure the accuracy of the price transparency 
provided by TRACE by requiring members that are party to an ABS 
transaction (except a TBA transaction) to report the Factor in the 
limited instances when a transaction is executed in agency capacity 
with a commission charged. FINRA believes the reporting requirement is 
appropriately tailored to minimize the burden and cost of complying 
with the rule in that the proposed requirement will apply only to 
approximately one percent of all ABS transactions. In addition, the 
proposed reporting requirement applies equally to any member that 
executes such transactions.

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 45 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-052 on the subject line.

[[Page 74898]]

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-2012-052. 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 the 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-2012-052 and should be 
submitted on or before January 8, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30378 Filed 12-17-12; 8:45 a.m.]
BILLING CODE 8011-01-P