Document ID: SEC-2009-0554-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval to Proposed Rule Change, as Modified by Amendment No. 1, To Expand the Definition of "TRACE-Eligible Security"
Posted Date: 2009-04-21T04:00Z

[Federal Register: April 21, 2009 (Volume 74, Number 75)]
[Notices]               
[Page 18271-18273]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ap09-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59768; File No. SR-FINRA-2009-004]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval to Proposed Rule Change, as Modified by Amendment 
No. 1, To Expand the Definition of ``TRACE-Eligible Security''

April 14, 2009.

I. Introduction

    On February 11, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a the National Association of Securities Dealers, 
Inc. (``NASD'')) 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 expand the definition of ``TRACE-eligible 
security'' in FINRA Rule 6710(a). The proposed rule change was 
published for comment in the Federal Register on March 11, 2009.\3\ The 
Commission received two comments on the proposal.\4\ On April 9, 2009, 
FINRA filed Amendment No. 1 to the proposed rule change, in which FINRA 
also responded to the comments.\5\ The Commission is publishing this 
notice and order to solicit comments on Amendment No. 1 and to approve 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 59519 (March 5, 2009), 
74 FR 10630 (``Notice'').
    \4\ See letter from Beth N. Lowson, The Nelson Law Firm, LLC, to 
Elizabeth M. Murphy, Secretary, Commission, dated March 31, 2009 
(``Nelson Letter''); letter from Sean C. Davy, Managing Director, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Elizabeth M. Murphy, Secretary, Commission, dated March 31, 2009 
(``SIFMA Letter'').
    \5\ See infra Section III.
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II. Description of the Proposed Rule Change

    The current definition of ``TRACE-eligible security'' in Rule 
6710(a) was adopted in 2002 and has not been amended. FINRA generally 
believes that this definition is sufficiently broad to require the 
reporting of, and provide price transparency for, a substantial portion 
of corporate debt securities that are eligible for public sale. 
However, FINRA has identified several situations where corporate debt 
securities that are eligible for public sale in the secondary market 
are trading without TRACE price transparency. According to FINRA, such 
securities are in many cases ``exempted securities'' under Section 3 of 
the Securities Act.\6\ For example, debt securities that are issued 
subject to the jurisdiction and approval of a court of competent 
jurisdiction in insolvency matters might be eligible for public sale 
but not TRACE-eligible because they are not registered under the 
Securities Act.\7\ In addition, debt securities issued as part of an 
issuer exchange offer effected pursuant to Section 3(a)(9) of the 
Securities Act \8\ and those issued by a bank or other financial 
institutions under Section 3(a)(2) of the Securities Act \9\ generally 
are not subject to TRACE reporting and dissemination for this reason.
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    \6\ 15 U.S.C. 77c.
    \7\ According to FINRA, if an insolvent corporation is 
reorganized under Chapter 11 of the U.S. Bankruptcy Code, new debt 
securities are often issued. The issuance is subject to the approval 
of the trustee and the securities are not required to be registered 
under the Securities Act. See 11 U.S.C. 101 et seq.
    \8\ 15 U.S.C. 77c(a)(9). For example, an issuer may exchange an 
issue of corporate debt securities that are registered under the 
Securities Act (and subject to both TRACE reporting and 
dissemination) for new securities that are not registered in 
reliance upon Section 3(a)(9), which permits such exchanges without 
registration of the new securities. Although the exchanged security 
was TRACE-eligible, the new security is not because it is not 
registered, as required by existing FINRA Rule 6710(a).
    \9\ 15 U.S.C. 77c(a)(2).
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    Therefore, FINRA has proposed to amend Rule 6710(a), the definition 
of ``TRACE-eligible security,'' by eliminating the requirement that 
such securities be ``(1) registered under the Securities Act; or (2) 
issued pursuant to Section 4(2) of the Securities Act and purchased or 
sold pursuant to Securities Act Rule 144A.'' This change would expand 
TRACE eligibility to include additional corporate debt securities that 
are eligible for public sale, and may have participation by retail 
investors. Moreover, FINRA notes that its obligation to conduct 
surveillance in the corporate bond market is not limited to 
transactions in securities that are registered under the Securities 
Act, and that its equity trade reporting rules generally apply to any 
equity securities eligible for public sale and do not consider 
registration a factor. FINRA believes that expanding TRACE eligibility 
in this manner ``is vital to its mandate to regulate the market, to 
promote market integrity and to protect investors.'' \10\
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    \10\ Notice, 74 FR at 10631.
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    FINRA also has proposed to add the phrase ``and, if a `restricted 
security' as defined in Securities Act Rule 144(a)(3)'' in place of the 
deleted language discussed in the preceding paragraph. Thus, if a 
security were a restricted security, it would be TRACE-eligible if it 
were sold pursuant to Rule 144A under the Securities Act \11\ (assuming 
it meets the other requirements for TRACE eligibility). The current 
definition of TRACE-eligible security requires transaction reporting 
for some but not all of the large market in corporate debt securities 
that are restricted securities and sold to qualified institutional 
buyers (``QIBs'') \12\ in transactions effected pursuant to Rule 144A. 
Although a significant number of restricted securities sold in Rule 
144A transactions are preceded by an offering that is exempt under 
Section 4(2) of the Securities Act, the limitation in the current 
definition excludes other Rule 144A transactions that FINRA believes 
should be reported. Consequently,

[[Page 18272]]

FINRA proposed to amend Rule 6710(a) to include as TRACE eligible a 
restricted security if it is ``sold pursuant to Securities Act Rule 
144A.''
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    \11\ 17 CFR 230.144A.
    \12\ See 17 CFR 230.144A(a)(1) (defining QIB).
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III. Summary of Comments and Amendment No. 1

    The Commission received two comments on the proposed rule 
change.\13\ One commenter expressed general support for FINRA's efforts 
to broaden the range of securities that are subject to TRACE reporting 
and thus to increase price transparency in the corporate bond market 
generally. In addition, the commenter argued that the TRACE rules 
should be amended to eliminate from FINRA's dissemination protocols the 
``volume caps'' used when disseminating information on transactions 
above a certain size.\14\ FINRA declined to respond to that comment 
because it is not related to the proposed rule change.
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    \13\ See supra note 4.
    \14\ See Nelson Letter at 1.
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    Another commenter argued that FINRA has ``not provided any 
direction or clarity regarding the operational requirements'' of 
reporting certain Regulation S \15\ transactions that have not been 
assigned a CUSIP number. The commenter also expressed concerns that 
firms have not been able to assess the system changes necessary to 
comply with the proposed rule change, and therefore are unable to 
comment on what would be an appropriate implementation timeline.\16\ In 
addition, the commenter suggested that FINRA consider implementing a 
process for obtaining identifier information for securities (such as 
many Regulation S securities) for which no identifying information has 
previously been reported under FINRA Rule 6760, and requested that 
FINRA provide firms a reasonable grace period to report transactions in 
such securities.\17\
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    \15\ 17 CFR 230.901-905.
    \16\ See SIFMA Letter at 1.
    \17\ See id. at 2.
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    In response, FINRA stated that the proposed rule change does not 
require members to report bona fide off-shore Regulation S transactions 
to TRACE. If a security that is the subject of a Regulation S offering 
were subsequently part of a U.S. transaction that is required to be 
reported to TRACE, such securities generally would be assigned CUSIPs. 
FINRA stated, however, that it would provide guidance on reporting 
obligations if certain TRACE-eligible securities had for some reason 
not been assigned a CUSIP number. Finally, FINRA stated that it would 
establish an effective date that will provide firms sufficient time to 
make any minor operational enhancements needed to report these types of 
transactions.\18\
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    \18\ See Amendment No. 1 at 4.
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    FINRA also responded to the commenter's request for a grace period 
to report transactions in securities offered under Regulation S and 
other securities that a member finds are not in the TRACE system at the 
time the member is required to report a transaction. FINRA responded 
that members that are a party to a transaction in a TRACE-eligible 
security are required to report the transaction, and if the CUSIP for a 
TRACE-eligible security is not in the TRACE system, a member must 
notify FINRA Operations promptly, provide the CUSIP and other 
identifying information, and thereafter report the member's 
transaction. FINRA stated that it takes into account a delay in 
reporting that may occur if a member, upon trying to report a 
transaction, determines that the member first must notify FINRA 
Operations and provide the CUSIP and other identifying information for 
the security to be added to TRACE. Rather than supporting the proposed 
grace period, FINRA advises members to maintain a record of any 
notifications the member provides to FINRA Operations, which FINRA 
would view as a mitigating factor in reviewing the transaction 
report(s) in such security of members providing notification. FINRA 
further suggested that, where there has been prompt notification and 
reporting of a security as soon as possible after the security is 
included in TRACE, FINRA generally would not include such trades in any 
regulatory inquiry directed to the firm and that, generally, it would 
be unlikely for such late trades to form the factual basis for formal 
or informal action, absent other regulatory concerns or violations.\19\
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    \19\ FINRA noted, however, that providing notification to FINRA 
Operations would not be viewed as a mitigating factor or 
circumstance during any review of late trade reports, if FINRA 
determines that the member was obligated under Rule 6760 to provide 
notice to FINRA Operations at or prior to the initial issuance of 
the TRACE-eligible security. See Amendment No. 1 at 4.
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    Also in Amendment No. 1, FINRA deleted certain language from its 
Form 19b-4 wherein it discussed the purpose of the proposed rule 
change.\20\ These revisions are non-substantive and do not affect the 
proposed rule text.
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    \20\ See id. at 5.
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IV. Discussion

    After carefully considering the proposal and the comments 
submitted, 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.\21\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\22\ 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. The Commission does not believe that 
the comments raise any issue that would preclude approval of the 
proposal.
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    \21\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that it is reasonable and consistent with 
the Act for FINRA to broaden the definition of ``TRACE-eligible 
security'' in the manner set forth in the proposal. The larger universe 
of transactions in corporate debt securities that are subject to TRACE 
reporting should result in greater transparency for market participants 
and the public. Including in the audit trail additional corporate debt 
securities that are eligible for public sale (and that otherwise meet 
the standards for TRACE eligibility) should enhance FINRA's 
surveillance efforts, as FINRA's obligation to conduct surveillance in 
the corporate bond market is not limited to transactions in securities 
that are registered under the Securities Act.
    In addition, the Commission believes that amending the definition 
of ``TRACE-eligible security'' in Rule 6710(a) to include all 
restricted securities sold pursuant to Rule 144A, rather than only 
those preceded by an offering exempt pursuant to Securities Act Section 
4(2), is a reasonable expansion of TRACE reporting. The additional 
transaction data will allow FINRA to obtain a more complete audit trail 
of transactions in corporate debt securities.
    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1 thereto, before the thirtieth 
day after the date of publication of notice of filing of Amendment No. 
1 in the Federal Register. Amendment No. 1 makes only minor non-
substantive changes to the proposal, which otherwise was subject to a 
full comment period. Therefore, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act, to approve the proposal, 
as modified by Amendment No. 1, on an accelerated basis.

[[Page 18273]]

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 No. SR-FINRA-2009-004 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-2009-004. 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-2009-004 and should be 
submitted on or before May 12, 2009.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (File No. SR-FINRA-2009-004), as 
modified by Amendment No. 1 thereto, be, and hereby is, approved on an 
accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-9059 Filed 4-20-09; 8:45 am]

BILLING CODE 8010-01-P