[Federal Register Volume 74, Number 46 (Wednesday, March 11, 2009)]
[Notices]
[Pages 10630-10632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-5203]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59519; File No. SR--FINRA-2009-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the
Definition of TRACE-Eligible Security To Include Securities Eligible
for Public Sale and Additional Securities That Are Restricted
Securities
March 5, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 11, 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. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 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 6710(a), the definition of
``TRACE-eligible security,'' to broaden the definition by deleting (i)
the requirement that a debt security be registered under the Securities
Act of 1933 (``Securities Act''); \3\ and (ii) with respect to
``restricted securities'' as that term is defined in Securities Act
Rule 144(a)(3),\4\ the requirement that such securities be issued
pursuant to Securities Act Section 4(2) \5\ prior to being resold under
Securities Act Rule 144A.\6\
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\3\ 15 U.S.C. 77a et seq.
\4\ 17 CFR 230.144(a)(3).
\5\ 15 U.S.C. 77d(2).
\6\ 17 CFR 230.144A.
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The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to amend Rule 6710(a), the definition of ``TRACE-
eligible security,'' to eliminate two aspects of the requirement
therein 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.'' The proposed
rule change eliminates
[[Page 10631]]
the requirement that a TRACE-eligible security be registered under the
Securities Act,\7\ thus including more corporate debt securities, and
restates and broadens the provision applicable to ``restricted
securities'' as defined in Securities Act Rule 144(a)(3),\8\ to include
any ``restricted security'' sold pursuant to Securities Act Rule
144A.\9\
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\7\ 15 U.S.C. 77a et seq.
\8\ Securities Act Rule 144(a)(3) (17 CFR 230.144(a)(3)) defines
``restricted securities'' as:
(i) Securities acquired directly or indirectly from the issuer,
or from an affiliate of the issuer, in a transaction or a chain of
transactions not involving any public offering; (ii) Securities
acquired from the issuer that are subject to the resale limitations
of Sec. 230.502(d) under Regulation D or Sec. 230.701(c); (iii)
Securities acquired in a transaction or chain of transactions
meeting the requirements of Sec. 230.144A; (iv) Securities acquired
from the issuer in a transaction subject to the conditions of
Regulation CE (Sec. 230.1001); (v) * * * ; (vi) Securities acquired
in a transaction made under Sec. 230.801 in the same extent and
proportion that the securities held by the security holder of the
class with respect to which the rights offering was made were, as of
the record date for the rights offering, ``restricted securities''
within the meaning of this paragraph (a)(3); (vii) Securities
acquired in a transaction made under Sec. 230.802 to the same
extent and proportion that the securities that were tendered or
exchanged in the exchange offer or business combination were
``restricted securities'' within the meaning of this paragraph
(a)(3); and (viii) Securities acquired from the issuer in a
transaction subject to an exemption under section 4(6) (15 U.S.C.
77d(6)) of the Act.
\9\ 17 CFR 230.144A. The proposed rule change does not affect
the exclusions currently in the definition of ``TRACE-eligible
security,'' which are: (i) Debt issued by a government-sponsored
entity; and (ii) debt that is a mortgage-backed or asset-backed
security, a collateralized mortgage obligation, or a money market
instrument having a maturity at issuance of one year or less.
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Debt Securities Eligible for Public Sale
The current definition of ``TRACE-eligible security'' in Rule
6710(a) was adopted in 2002 and has not been amended. Generally, the
definition is sufficiently broad to require the reporting of, and
provide price transparency for, a substantial portion of corporate
bonds that are eligible for public sale (i.e., they are freely tradable
because they are not ``restricted securities'' as defined in Securities
Act Rule 144(a)(3)).\10\ 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. In many cases, the securities that are not subject to
TRACE are ``exempted securities'' under Section 3 of the Securities
Act.\11\ For example, transactions in corporate debt securities that
are issued subject to the jurisdiction and approval of a court of
competent jurisdiction in insolvency matters may be eligible for public
sale and not reported to TRACE because they are not registered under
the Securities Act.\12\ In addition, among others, debt securities
issued as part of an issuer exchange offer effected pursuant to
Securities Act Section 3(a)(9) \13\ and those issued by a bank or other
financial institutions under Securities Act Section 3(a)(2) \14\ (or
another subparagraph of the section) generally are not subject to TRACE
reporting and dissemination for this reason.
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\10\ 17 CFR 230.144(a)(3).
\11\ 15 U.S.C. 77c.
\12\ 15 U.S.C. 77a et seq. If an insolvent corporation is
reorganized under Chapter 11 of the U.S. Bankruptcy Code, frequently
new debt securities are 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, e.g., U.S. Bankruptcy
Code, 11 U.S.C. 101 et seq.
\13\ 15 U.S.C. 77c(a)(9). For example, an issuer may exchange an
issue of debt securities that are registered under the Securities
Act (and subject to both TRACE reporting and dissemination) for a
new security that is not registered in reliance upon Securities Act
Section 3(a)(9) (15 U.S.C. 77c(a)(9)), which permits such exchanges
without registration of the new security. Although the exchanged
security was TRACE-eligible, the new security is not because it is
not registered as required in Rule 6710(a).
\14\ 15 U.S.C. 77c(a)(2).
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FINRA proposes to amend Rule 6710(a) to remove the unnecessary
limitation on the scope of the definition of TRACE-eligible security by
deleting the phrase ``(1) registered under the Securities Act'' from
the definition. Eliminating the registration requirement will permit
TRACE to capture transaction information for all debt securities that
are eligible for public sale (and that otherwise meet the standards for
TRACE eligibility).\15\ FINRA will increase price transparency in such
corporate bonds, which FINRA believes is important because many
securities that are not registered but are eligible for public sale are
being purchased and sold by all market participants, including retail
investors. Further, 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.\16\ Thus, transactions in
corporate bonds that are eligible for public sale (and that otherwise
meet the standards for TRACE eligibility) will be included in the audit
trail to enhance the surveillance of the corporate bond market.\17\ In
this regard, FINRA's transaction reporting rules apply generally to any
equity security that is eligible for public sale and do not consider
registration as a factor. FINRA believes that including debt securities
that are eligible for public sale as TRACE-eligible securities is vital
to its mandate to regulate the market to promote market integrity and
to protect investors.
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\15\ To be a TRACE-eligible security, a security must also be
U.S. dollar denominated, depository eligible and issued by a U.S.
and/or foreign private issuer. The credit rating (or lack of a
rating) of a security does not impact TRACE eligibility.
\16\ 15 U.S.C. 77a et seq.
\17\ FINRA is aware that as a result of these amendments certain
``TRACE-eligible securities'' may not be subject to the notice and
informational requirements of Rule 6760, and as a result initially
may not be included in the TRACE Issue Master. As noted in FINRA's
Trade Reporting Notice, dated February 22, 2008, if a firm has a
reporting obligation under Rule 6730 in a TRACE-eligible security
that is not included in the TRACE Issue Master, the firm must notify
FINRA immediately and provide the CUSIP and other information
necessary for FINRA to update the TRACE Issue Master and enable the
firm to promptly report the transaction to TRACE and comply with its
obligations under Rule 6730.
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Rule 144A Transactions
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,'' as
defined in Securities Act Rule 144(a)(3),\18\ sold to ``qualified
institutional buyers'' (``QIBs''), as defined in Securities Act Rule
144A(a)(1),\19\ in transactions effected pursuant to Rule 144A (``Rule
144A transactions'').\20\ Although FINRA believes that a significant
number of ``restricted securities'' that are sold in Rule 144A\21\
transactions are preceded by an offering that is exempt under
Securities Act Section 4(2),\22\ the limitation in the definition
excludes other Rule 144A\23\ transactions that should be included in
the TRACE audit trail.
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\18\ 17 CFR 230.144(a)(3).
\19\ 17 CFR 230.144A(a)(1).
\20\ 17 CFR 230.144A.
\21\ 17 CFR 230.144A.
\22\ 15 U.S.C. 77d(2).
\23\ 17 CFR 230.144A.
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FINRA proposes to amend Rule 6710(a) to eliminate the requirement
regarding Securities Act Section 4(2) \24\ in the defined term, TRACE-
eligible security. The proposed amendment would include as TRACE
eligible a ``'restricted security' as defined in Securities Act Rule
144(a)(3)'' \25\ if it is ``sold pursuant to Securities Act Rule
144A.'' \26\
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\24\ 15 U.S.C. 77d(2).
\25\ 17 CFR 230.144(a)(3).
\26\ 17 CFR 230.144A.
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FINRA believes that there is no compelling reason to exclude
corporate debt securities sold in a Rule 144A \27\ transaction from the
definition of TRACE-eligible security simply because such corporate
debt securities are issued or offered under other exemptive
[[Page 10632]]
provisions of the Securities Act.\28\ For example, in a global
offering, some debt securities may be issued as part of a foreign
tranche pursuant to Regulation S.\29\ Under the proposed amendment,
U.S. resales of securities from that tranche effected as Rule 144A \30\
transactions would be required to be reported to TRACE. The proposed
amendment regarding Rule 144A \31\ transactions will allow FINRA to
obtain a more complete audit trail of Rule 144A \32\ transactions in
corporate bonds. This additional transaction data will enhance the
regulatory surveillance of the corporate bond market as a whole.\33\
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\27\ 17 CFR 230.144A.
\28\ 15 U.S.C. 77a et seq.
\29\ 17 CFR 230.901-905.
\30\ 17 CFR 230.144A.
\31\ 17 CFR 230.144A.
\32\ 17 CFR 230.144A.
\33\ Currently, as provided in Rule 6750, FINRA does not
disseminate Securities Act Rule 144A transactions, and FINRA does
not propose to amend Rule 6750. See e-mail from Sharon Zackula,
Associate Vice President and Associate General Counsel, FINRA, to
Geoffrey Pemble, Special Counsel, Division of Trading and Markets,
Commission, dated March 4, 2009.
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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 30 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,\34\ 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
provide FINRA with heightened capabilities to regulate and conduct
surveillance in the corporate debt securities markets, enhance market
transparency and protect investors and other market participants by
including in TRACE certain corporate debt securities that currently are
traded in the same markets in which TRACE-eligible securities are
traded by the same market participants and investors.
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\34\ 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 would impose
any burden on competition that is not necessary or appropriate in
furtherance of 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 [email protected]. Please include
File Number 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 April 1, 2009.\35\
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
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\35\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-5203 Filed 3-10-09; 8:45 am]
BILLING CODE 8011-01-P