[Federal Register Volume 80, Number 152 (Friday, August 7, 2015)]
[Notices]
[Pages 47546-47550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75588; File No. SR-FINRA-2015-026]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change to Require 
an Indicator When a TRACE Report Does Not Reflect a Commission or Mark-
Up/Mark-Down

August 3, 2015.
    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 July 20, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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\ 17 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 (Transaction Reporting) 
to require an indicator when the TRACE report does not reflect a 
commission or mark-up/mark-down.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.\3\
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    \3\ The text of the proposed rule change reflects rule text 
approved by the SEC in SR-FINRA-2014-050, but which does not become 
effective until November 2, 2015. See Securities Exchange Act 
Release No. 74482 (March 11, 2015); 80 FR 13940 (March 17, 2015) 
(Order Approving File No. SR-FINRA-2014-050).
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* * * * *

6000. Quotation and Transaction Reporting Facilities

* * * * *

6700. Trade Reporting and Compliance Engine (Trace)

* * * * *

6730. Transaction Reporting

    (a) through (b) No Change.
    (c) Transaction Information To Be Reported.

[[Page 47547]]

    Each TRACE trade report shall contain the following information:
    (1) through (10) No Change.
    (11) The commission (total dollar amount), if applicable;
    (12) through (13) No Change.
    (d) Procedures for Reporting Price, Capacity, Volume.
    (1) Price.
    For principal transactions, report the price, which must include 
the mark-up or mark-down. (However, if a price field is not available, 
report the contract amount and, if applicable, the accrued interest.) 
For agency transactions, report the price, which must exclude the 
commission. (However, if a price field is not available, report the 
contract amount and, if applicable, the accrued interest.) Report the 
total dollar amount of the commission if one is assessed on the 
transaction. Notwithstanding the foregoing, a member is not required to 
include a commission, mark-up or mark-down where one is not assessed on 
a trade-by-trade basis at the time of the transaction or where the 
amount is not known at the time the trade report is due. In all cases, 
a member must use the No Remuneration indicator as provided in 
paragraph (d)(4)(F) where a trade report does not reflect either a 
commission, mark-up or mark-down.
    (2) through (3) No Change.
    (4) Modifiers; Indicators.
    Members shall append the applicable trade report modifiers or 
indicators as specified by FINRA to all transaction reports.
    (A) through (E) No Change.
    (F) No Remuneration Indicator.
    Where a trade report does not reflect either a commission, mark-up 
or mark-down, select the No Remuneration indicator.
    (e) through (f) No Change.
       Supplementary Material:
    .01 through .02 No Change.
* * * * *

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 Rule 6730 (Transaction Reporting) sets forth the requirements 
applicable to members reporting transactions in TRACE-Eligible 
Securities,\4\ and provides the specific items of information that must 
be included in a TRACE trade report. Among other things, Rules 6730(c) 
and (d) require that firms report the commission (total dollar amount) 
separately on the TRACE trade report for agency transactions. FINRA 
then combines the dollar amount that is reported as the commission with 
the amount that is reported in the price field, and disseminates to the 
market this aggregate amount as the transaction's price. For principal 
transactions, Rule 6730(d)(1) provides that firms must report a price 
that includes the mark-up/mark-down, and FINRA disseminates this price 
to the market. The goal of these reporting requirements is to enable 
FINRA to provide investors and market participants with pricing 
information that better reflects comparable prices for principal and 
agency trades in a TRACE-Eligible Security.
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    \4\ Rule 6710 generally defines a ``TRACE-Eligible Security'' 
as: (1) A debt security that is U.S. dollar-denominated and issued 
by a U.S. or foreign private issuer (and, if a ``restricted 
security'' as defined in Securities Act Rule 144(a)(3), sold 
pursuant to Securities Act Rule 144A); or (2) a debt security that 
is U.S. dollar-denominated and issued or guaranteed by an ``Agency'' 
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise'' 
as defined in Rule 6710(n). Most transactions reported to TRACE are 
publicly disseminated immediately upon receipt of a transaction 
report.
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    FINRA is proposing that firms identify those transactions for which 
a commission or mark-up/mark-down is not reflected in a TRACE trade 
report because the firm does not charge or does not know the amount of 
the commission or mark-up/mark-down at the time of TRACE reporting. For 
example, some firms may assess a charge that is not transaction-based, 
such as in the case of a ``fee-based account'' where remuneration is 
based upon assets under management (and individual commissions or mark-
ups/mark-downs are not charged).\5\ As a result, when the price of the 
transaction is publicly disseminated, there currently is no indication 
to the public that the price is not inclusive of a commission or mark-
up/mark-down.
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    \5\ Another example of a fee structure that is not transaction-
based is where an ATS charges subscribers a fixed fee for unlimited 
trading each month. The ATS could then execute trades either as 
principal, by acting as an intermediary in all subscriber trades, or 
on an agency basis, by providing the system through which 
subscribers' trades are executed.
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    By way of further example, some firms charge a commission or mark-
up/mark-down, but may not know the exact amount of that commission or 
mark-up/mark-down at the time the TRACE transaction report is required 
to be submitted because of their remuneration structure (e.g., a firm 
may not calculate a mark-up for a transaction on a trade-by-trade 
basis, but will, nonetheless, ultimately assess transaction 
remuneration pursuant to a monthly volume-based schedule). As a result, 
the firm will not know the commission or mark-up/mark-down at the time 
of TRACE reporting.\6\
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    \6\ As a practical matter, it is difficult for firms to comply 
with the current TRACE rules for these types of volume-based mark-
up/mark-down arrangements, since firms are unable to report 
accurately all the required information related to the transaction 
on a timely basis and would need to submit a cancel and replace to 
update the pricing information. In some cases, this information may 
not be known until the end of the month. Under the proposal, members 
would not be required to reflect a mark-up/mark-down or commission 
in a TRACE trade report where the charge is not known at the time of 
the transaction, but would be required to report the proposed 
identifier.
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    FINRA therefore proposes to require firms to identify such trades, 
and FINRA will flag these disseminated transactions as not being 
inclusive of remuneration.\7\ As is the case now, the disseminated 
TRACE feed will not explicitly distinguish between agency and principal 
transactions, and the no-remuneration flag will apply to both principal 
and agency transactions. FINRA believes that pricing information 
disseminated today may be incomplete and, in some cases, misleading 
given that disseminated prices on transactions that do not include 
remuneration are not distinguished from transactions that do include a 
commission or mark-up/mark-down. FINRA believes that the proposal will 
provide more meaningful pricing transparency through TRACE by 
identifying those transactions where no commission or mark-up/mark-down 
was charged or known at the time of TRACE reporting, while not 
inhibiting possible firm remuneration arrangements, particularly if 
these arrangements benefit customers.
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    \7\ In addition, if a firm does not charge any remuneration 
associated with the trade (in any form), they would be required to 
identify the trade as one for which no remuneration was assessed to 
the transaction. FINRA notes that the MSRB has similarly proposed to 
require members to report an indicator that would be disseminated to 
identify transactions that do not include a dealer compensation 
component. See MSRB Regulatory Notice 2014-14 (August 13, 2014).
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    FINRA also believes that this proposal will enhance its regulatory 
audit trail

[[Page 47548]]

and surveillance patterns. With this additional level of detail, 
surveillance patterns should yield fewer false positives regarding 
mark-up and best execution surveillance, reduce regulatory inquiries, 
and provide greater focus for FINRA's regulatory efforts. For example, 
without this designation, FINRA's surveillance patterns for best 
execution may generate an alert for transactions whose prices reflect a 
commission or a mark-up as being outliers compared to transactions 
whose prices do not reflect a charge.
    FINRA discussed the proposal with advisory committees in developing 
its approach. These parties were supportive of the proposal, believing 
that it would improve the value of information for TRACE-Eligible 
Securities that is submitted to FINRA, and, by extension, to investors 
and market participants. With regards to effort involved in affecting 
the change, committee members did not express any particular concerns 
with respect to the operational impacts or costs of the proposal. 
However, as to facilitate planning and scheduling, firms specifically 
requested that sufficient lead-time be provided when determining the 
effective date of the rule. Further discussions with firms that would 
be directly impacted by the proposal also indicated that the proposal 
would be beneficial to market participants, and that the necessary 
technological changes would not be unduly burdensome given an adequate 
implementation timeframe.
    If the Commission approves the proposed rule change, the proposed 
rule change shall be effective upon Commission approval. The 
implementation date will be May 23, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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 15A(b)(9) of the Act,\9\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that this proposal is consistent with the Act 
because the additional identifier will enhance its regulatory audit 
trail and surveillance patterns. With this additional level of detail, 
surveillance patterns should yield fewer false positives regarding 
mark-up and best execution surveillance, reduce regulatory inquiries, 
and provide greater focus for FINRA's regulatory efforts. For example, 
without this designation, FINRA's surveillance patterns for best 
execution may generate an alert for transactions whose prices reflect a 
commission or a mark-up as being outliers compared to transactions 
whose prices do not reflect a charge. FINRA also believes that the 
proposal will improve the information value of TRACE reports as 
investors and other market participants will receive additional 
information regarding pricing information for TRACE-Eligible 
Securities. Finally, FINRA believes that this proposal would permit 
firms additional flexibility in structuring their fee arrangements with 
investors, which may provide cost benefits to such investors.

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 notes that the proposed 
rule change is designed to assist FINRA in meeting its regulatory 
obligations by enhancing its audit trail and surveillance patterns. 
While this proposal will require members to meet the proposed reporting 
obligation, ensure that they can properly ascertain transactions that 
require the new identifier, and update their compliance procedures and 
reporting protocols accordingly, FINRA notes that this proposal will 
apply uniformly to firms that report transactions in TRACE-Eligible 
Securities. FINRA also believes that this proposal will allow firms 
more flexibility in designing their fee structures.
    As set forth above, FINRA has undertaken an economic impact 
assessment to further analyze, among other things, the need for the 
proposed rulemaking and the economic impacts of the proposed 
rulemaking. As discussed above, FINRA does not believe that the 
compliance costs associated with the proposal would be unduly 
burdensome given an adequate implementation timeframe.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the need for the proposed rulemaking, the 
regulatory objective of the rulemaking, the economic baseline of 
analysis, and the economic impacts.
(a) Need for the Rule
    FINRA believes that pricing information disseminated today may be 
incomplete and, in some cases, misleading given that disseminated 
prices on transactions that do not include remuneration are not 
distinguished from transactions that do include a commission or mark-
up/mark-down.
(b) Regulatory Objective
    FINRA believes that the proposal will provide more meaningful 
pricing transparency through TRACE by identifying those transactions 
where no commission or mark-up/mark-down was charged or known at the 
time of TRACE reporting, while not inhibiting possible firm fee 
remuneration arrangements, particularly if these fee arrangements 
benefit customers. FINRA also believes that the additional identifier 
will enhance its regulatory audit trail and surveillance patterns, 
because it will require the firm to affirmatively report this 
information related to the commission or mark-up/mark-down and will 
enable FINRA to more efficiently separate out no-remuneration trades 
for purposes of surveillance, analysis, and dissemination.
(c) Economic Baseline
    The staff analyzed corporate bond transactions reported to TRACE in 
Q3 2013.\10\ Transactions where the broker-dealer acts in an agency 
capacity are reported to TRACE with a separate field for commission. 
FINRA can therefore accurately identify agency-capacity transactions 
reported without a commission.\11\ In contrast, for transactions where 
the broker-dealer acts in a principal capacity, the mark-up or mark-
down is included in the reported price. It was necessary for the staff 
to pair a broker-dealer's buy and

[[Page 47549]]

sell principal-capacity transactions of equal sizes in a given security 
on a given day to estimate the mark-ups or mark-downs on the customer 
transactions.\12\
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    \10\ For purposes of this analysis, FINRA used data reported to 
TRACE (not the TRACE-disseminated data). Although the TRACE-
disseminated data includes a flag (Y or blank) that identifies 
whether a commission is included in the disseminated price, the data 
does not specify in what capacity the dealer acted in the 
transaction. As such, an agency transaction without a commission, 
e.g., the commission flag is blank, would look the same on the 
TRACE-disseminated data as a principal transaction with or without a 
mark-up/mark-down.
    Corporate bond transactions represented approximately 73% of all 
transactions reported to TRACE in 2013.
    \11\ Although FINRA is currently able to accurately identify 
agency-capacity transactions that are reported without a commission, 
this process requires FINRA to match trades where the commission 
field is blank with trades where the dealer acted as agent. With the 
no-remuneration flag, the firm will be required to affirmatively 
report this information related to the commission or mark-up/mark-
down, and FINRA will be able to more efficiently identify such 
trades.
    \12\ FINRA recognizes that any pairing methodology adopted 
requires assumptions as part of that methodology. Further, there is 
not a unique set of assumptions that reasonable parties might all 
choose to adopt if they were to go through a similar exercise. As a 
result, FINRA provides results of this methodology as part of the 
baseline in order to inform the discussion of potential regulatory 
impacts.
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    During Q3 2013, the daily average number of agency-capacity 
transactions in corporate bonds was 9,100.\13\ Approximately 55% of 
agency-capacity transactions in corporate bonds were customer 
transactions. Based on the data, the staff estimated that approximately 
85% of Investment Grade corporate bond customer transactions where the 
broker-dealer acted in an agency capacity were reported without a 
commission. For Non-Investment Grade and unrated corporate bonds, the 
proportions were 74% and 92%, respectively. Such transactions may have 
been executed for fee-based accounts or other accounts where firm 
remuneration was not determined on a per-transaction basis. For the 
agency-capacity customer transactions reported with commissions, the 
table below summarizes the average commission charged for agency-
capacity customer buy and customer sell transactions in Investment 
Grade, Non-Investment Grade and Unrated securities over the quarter.
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    \13\ This excludes List or Fixed Offering Price Transactions, as 
defined in FINRA Rule 6710(q), and Takedown Transactions as defined 
in FINRA Rule 6710(r).

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                                                                   Average commission (in basis points)
                                                        --------------------------------------------------------
                                                                              Non-Investment
                                                          Investment grade        grade             Unrated
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Customer Buy...........................................                 18                 21                 21
Customer Sell..........................................                 21                 20                 32
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    During Q3 2013, the daily average number of principal-capacity 
transactions in corporate bonds was just under 48,000.\14\ 
Approximately 45% of principal-capacity transactions in corporate bonds 
were customer transactions. Using the previously described pairing 
methodology, the staff estimated that 19% of these customer 
transactions were reported to have been executed without a mark-up or 
mark-down. For the principal-capacity customer transactions estimated 
to include mark-ups or mark-downs, the table below summarizes the 
estimated average remuneration charged for principal-capacity customer 
buy and customer sell transactions in Investment Grade, Non-Investment 
Grade and Unrated securities in the quarter.
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    \14\ This excludes List or Fixed Offering Price Transactions, as 
defined in FINRA Rule 6710(q), and Takedown Transactions as defined 
in FINRA Rule 6710(r).

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                                                               Average mark-up/mark-down (in basis points)
                                                        --------------------------------------------------------
                                                                              Non-investment
                                                          Investment grade        grade             Unrated
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Customer Buy...........................................                 75                 66                 73
Customer Sell..........................................                 50                 78                 60
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(d) Economic Impacts
    FINRA believes that the proposal will enable market participants, 
including investors relying on TRACE for valuation information, to 
better understand the prevailing market prices by being able to 
distinguish between transactions that include remuneration and those 
that do not. As discussed above, FINRA further believes that the 
additional identifier will enhance its regulatory audit trail and 
surveillance patterns. With this additional level of detail, 
surveillance patterns should yield fewer false positives regarding 
mark-up and best execution surveillance, reduce regulatory inquiries, 
and provide greater focus for FINRA's regulatory efforts. For example, 
without this designation, FINRA's surveillance patterns for best 
execution may generate an alert for transactions whose prices reflect a 
commission or a mark-up as being outliers compared to transactions 
whose prices do not reflect a charge.
    The proposal will require member firms to meet the proposed 
reporting obligation, ensure that they can properly ascertain 
transactions that require the new identifier, and update their 
compliance procedures and reporting protocols accordingly. Member firms 
would also need to make technological changes to their systems to 
include the identifier. Based on discussions with advisory committees 
and member firms, FINRA does not believe that the compliance costs 
associated with the proposal would be unduly burdensome given an 
adequate implementation timeframe.

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.

[[Page 47550]]

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 [email protected]. Please include 
File Number SR-FINRA-2015-026 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-026. 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-2015-026 and should be 
submitted on or before August 28, 2015.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19381 Filed 8-6-15; 8:45 am]
BILLING CODE 8011-01-P