[Federal Register Volume 86, Number 14 (Monday, January 25, 2021)]
[Notices]
[Pages 6922-6944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01438]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90939; File No. SR-FINRA-2019-008]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Setting Aside Action by Delegated Authority and
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To
Establish a Corporate Bond New Issue Reference Data Service
January 15, 2021.
I. Introduction
On March 27, 2019, 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 establish a new issue reference data service
for corporate bonds (``New Issue Reference Data Service'').\3\ Pursuant
to the proposal, FINRA would require that underwriters report to FINRA
a number of data elements for new issues in corporate debt securities
and FINRA would disseminate such data to the public upon receipt.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission published notice of the proposed rule change
in the Federal Register on April 8, 2019. See Exchange Act Release
No. 85488 (Apr. 2, 2019), 84 FR 13977 (``Notice''). On May 22, 2019,
the Commission designated a longer period within 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. See Exchange Act Release No. 85911, 84 FR
24839 (May 29, 2019). On July 1, 2019, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Act, 15 U.S.C.
78s(b)(2)(B), to determine whether to approve or disapprove the
proposed rule change. See Exchange Act Release No. 86256, 84 FR
32506 (Jul. 8, 2019). On October 3, 2019, FINRA filed Partial
Amendment No. 1 to the proposed rule change, which was subsequently
withdrawn on the same day due to a non-substantive administrative
error. On October 3, 2019, FINRA filed partial Amendment No. 2 to
the proposed rule change (``Amendment No. 2''). On October 4, 2019,
the Commission issued a notice of filing of Amendment No. 2 to the
proposed rule change and, pursuant to Section 19(b)(2) of the Act,
the Commission designated a longer period for Commission action on
proceedings to determine whether to disapprove the proposed rule
change. See Exchange Act Release No. 87232, 84 FR 54712 (Oct. 10,
2019).
---------------------------------------------------------------------------
On December 4, 2019, the Commission, acting through authority
delegated to the Division of Trading and Markets (``Division''),\4\
approved the proposed rule change, as modified by Amendment No. 2
(``Approval Order'').\5\
[[Page 6923]]
On December 18, 2019, Bloomberg, L.P. (``Bloomberg'' or ``Petitioner'')
filed a petition for review of the Approval Order (``Petition for
Review''). Pursuant to Commission Rule of Practice 431(e), the Approval
Order was stayed by the filing with the Commission of a notice of
intention to petition for review.\6\ On February 14, 2020, the
Commission issued a scheduling order, pursuant to Commission Rule of
Practice 431, granting the Petition for Review of the Approval Order
and providing until March 16, 2020, for any party or other person to
file a written statement in support of, or in opposition to, the
Approval Order.\7\ On March 16, 2020, FINRA submitted a written
statement in support of the Approval Order.\8\ On March 17, 2020,
Petitioner submitted a corrected written statement in opposition to the
Approval Order.\9\ On April 17, 2020, Petitioner submitted a Motion for
Leave to Adduce Additional Evidence pursuant to Rule 452 of the
Commission's Rules of Practice,\10\ attaching the declarations of Mark
Flatman and David Miao of Bloomberg, L.P.\11\ On April 24, 2020, FINRA
submitted an Opposition to the Bloomberg, L.P. Motion.\12\ On April 29,
2020, Petitioner submitted a Reply in Support of the Bloomberg, L.P.
Motion.\13\
---------------------------------------------------------------------------
\4\ 17 CFR 200.30-3(a)(12).
\5\ See Exchange Act Release No. 87656, 84 FR 67491 (Dec. 10,
2019).
\6\ 17 CFR 201.431(e). See Letter to Stephanie Dumont, Senior
Vice President and Director of Capital Markets Policy, FINRA (Dec.
12, 2019) (providing notice of receipt of notice of intention to
petition for review of delegated action and stay of order),
available at https://www.sec.gov/rules/sro/finra/2019/34-87656-acknowledgement-letter.pdf.
\7\ See Securities Exchange Act Release No. 88214, 85 FR 9887
(Feb. 20, 2020).
\8\ See FINRA's Statement in Support of Proposed Rule Change to
Establish a Corporate Bond New Issue Reference Data (``FINRA
Statement'').
\9\ See Corrected Statement of Bloomberg, L.P. in Opposition to
Approval of the Proposed Rule Change (``Petitioner Statement'').
Petitioner's original written statement in opposition to the
Approval Order was submitted on March 16, 2020. Petitioner stated
that it submitted a corrected version on March 17, 2020 in order to
correct non-substantive typographical errors and incorrect cross-
references.
\10\ 17 CFR 201.452.
\11\ See Motion of Bloomberg, L.P. for Leave to Adduce
Additional Evidence (``Petitioner Motion''). See also Declaration of
Mark Flatman and Declaration of David Miao (collectively,
``Declarations'').
\12\ See FINRA's Opposition to Motion of Bloomberg, L.P. for
Leave to Adduce Additional Evidence (``FINRA Opposition'').
\13\ See Reply of Bloomberg, L.P. in Support of its Motion for
Leave to Adduce Additional Evidence. The Commission believes that
allowing Petitioner to submit additional evidence would further the
Commission's ability to understand the arguments presented by both
parties and their relation to FINRA's proposal. Accordingly, the
Commission grants the Petitioner Motion. The Declarations are
considered below in Section III.A and Section III.C.
---------------------------------------------------------------------------
In response to the Petition for Review, the Commission has
conducted a de novo review of FINRA's proposal, giving careful
consideration to the entire record--including FINRA's amended proposal,
the Petition for Review, and all comments and statements submitted--to
determine whether the proposal is consistent with the requirements of
the Act and the rules and regulations thereunder that are applicable to
a national securities association. Under Section 19(b)(2)(C) of the
Act, the Commission must approve the proposed rule change of a self-
regulatory organization (``SRO'') if the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the applicable rules and regulations thereunder; if it does not make
such a finding, the Commission must disapprove the proposed rule
change.\14\ Additionally, under Rule 700(b)(3) of the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change.'' \15\ The description of a proposed rule change, its
purpose and operation, its effect, and a legal analysis of its
consistency with applicable requirements must all be sufficiently
detailed and specific to support an affirmative Commission finding.\16\
Any failure of a self-regulatory organization to provide the
information required by Rule 19b-4 and elicited on Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with the
Act and the rules and regulations thereunder that are applicable to the
self-regulatory organization.\17\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(2)(C).
\15\ 17 CFR 201.700(b)(3).
\16\ Id.
\17\ See id. See also 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The Commission has considered whether the proposal is consistent
with the Act, including Section 15A(b)(6) of the Act, which requires
that the rules of a national securities association be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers, to fix minimum profits, to impose any schedule or fix rates of
commissions, allowances, discounts, or other fees to be charged by its
members, or to regulate by virtue of any authority conferred by the Act
matters not related to the purposes of the Act or the administration of
the association; \18\ and Section 15A(b)(9) of the Act, which requires
that the rules of a national securities association not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78o-3(b)(6).
\19\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------
For the reasons discussed further herein, FINRA has met its burden
to show that the proposed rule change is consistent with the Act, and
this order sets aside the Approval Order and approves FINRA's proposed
rule change, as amended. In particular, the Commission concludes that
the record before the Commission demonstrates that FINRA's New Issue
Reference Data Service should promote just and equitable principles of
trade and foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in newly issued corporate bonds,
consistent with Section 15A(b)(6) of the Act. In addition, the record
demonstrates that the New Issue Reference Data Service should not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Therefore, and as explained
further below, the Commission finds the proposal consistent with
Sections 15A(b)(6) and 15A(b)(9) of the Act.
II. Summary of the Proposal
FINRA proposes to establish the New Issue Reference Data Service,
which would provide a central depository for public dissemination of
new issue corporate bond reference data. FINRA proposes to amend Rule
6760 (Obligation to Provide Notice) \20\ to require that underwriters
who are FINRA members and subject to Rule 6760 \21\ to report to FINRA
a number of
[[Page 6924]]
data elements, including some already specified by the rule, for new
issues in Corporate Debt Securities as defined in FINRA's rules.\22\
Proposed Rule 6760(b)(2) would require that, in addition to the
information required by Rule 6760(b)(1),\23\ for a new issue in a
Corporate Debt Security, excluding bonds issued by religious
organizations or for religious purposes, the following information must
be reported, if applicable: (A) The International Securities
Identification Number (ISIN); (B) the currency; (C) the issue date; (D)
the first settle date; (E) the interest accrual date; (F) the day count
description; (G) the coupon frequency; (H) the first coupon payment
date; (I) a Regulation S indicator; (J) the security type; (K) the bond
type; (L) the first coupon period type; (M) a convertible indicator;
(N) a call indicator; (O) the first call date; (P) a put indicator; (Q)
the first put date; (R) the minimum increment; (S) the minimum piece/
denomination; (T) the issuance amount; (U) the first call price; (V)
the first put price; (W) the coupon type; (X) rating (TRACE Grade); (Y)
a perpetual maturity indicator; (Z) a Payment-In-Kind (PIK) indicator;
(AA) first conversion date; (BB) first conversion ratio; (CC) spread;
(DD) reference rate; (EE) floor; and (FF) underlying entity ticker.
---------------------------------------------------------------------------
\20\ FINRA would amend the title of the Rule to ``Obligation to
Provide Notice and Dissemination of Corporate Debt Security New
Issue Reference Data.''
\21\ FINRA would amend Rule 6760(a)(1) to require that
underwriters subject to the rule report required information for the
purpose of providing market participants in the corporate debt
security markets with reliable and timely new issue reference data
to facilitate the trading and settling of these securities, in
addition to the current purpose of facilitating trade reporting and
dissemination in TRACE-Eligible Securities, as that term is defined
in Rule 6710(a).
\22\ FINRA proposes to move the definition of ``Corporate Debt
Security,'' which is currently located in FINRA Rule 2232 (Customer
Confirmations), into the TRACE Rule Series (specifically Rule 6710
(Definitions)) and to make corresponding technical edits to Rule
2232 to refer to the relocated definition in Rule 6710. In addition,
FINRA proposes to make two changes to the definition of ``Corporate
Debt Security,'' which FINRA states are technical, non-substantive
edits that reflect the original intent of the definition and are
consistent with current FINRA guidance. See Notice, at 13978, n.6.
Specifically, FINRA proposes to revise the current definition of
Corporate Debt Security to (i) clarify that the definition is
limited to TRACE-Eligible Securities, and (ii) update the definition
to exclude Securitized Products (defined in Rule 6710(m)), rather
than Asset-Backed Securities (defined in Rule 6710(cc)).
\23\ Rule 6760(b), proposed to be renumbered as Rule 6760(b)(1),
currently requires the following information to be reported to
FINRA: (A) The CUSIP number or if a CUSIP number is not available, a
similar numeric identifier (e.g., a mortgage pool number); (B) the
issuer name, or, for a Securitized Product, the names of the
Securitizers; (C) the coupon rate; (D) the maturity; (E) whether
Securities Act Rule 144A applies; (F) the time that the new issue is
priced, and, if different, the time that the first transaction in
the offering is executed; (G) a brief description of the issue
(e.g., senior subordinated note, senior note); and (H) such other
information FINRA deems necessary to properly implement the
reporting and dissemination of a TRACE-Eligible Security, or if any
of items (B) through (H) has not been determined or a CUSIP number
(or a similar numeric identifier) is not assigned or is not
available when notice must be given, such other information that
FINRA deems necessary and is sufficient to identify the security
accurately.
---------------------------------------------------------------------------
FINRA proposes to require underwriters to report all data fields
for Corporate Debt Securities, as defined in FINRA's rules, prior to
the first transaction in the security. FINRA would disseminate the
corporate bond new issue reference data collected under Rule 6760 upon
receipt.\24\ FINRA states that it will submit a separate filing to
establish fees related to the New Issue Reference Data Service at a
future date and will implement the service after those fees are
adopted.\25\
---------------------------------------------------------------------------
\24\ FINRA states that under proposed Rule 6760(d), there may be
some information collected under the rule for security
classification or other purposes that would not be disseminated.
This may include, for example, information about ratings that is
restricted by agreement. In addition, CUSIP Global Services'
(``CGS'') information would not be disseminated to subscribers that
do not have a valid license regarding use of CGS data.
\25\ See Amendment No. 2, at 4. FINRA originally proposed to
make the corporate bond new issue reference data available to any
person or organization for a fee of $250 per month for internal
purposes only, and for a fee of $6,000 per month where the data are
retransmitted or repackaged for delivery and dissemination to any
outside person or organization. See Notice, at 13979. FINRA withdrew
these proposed fees in Amendment No. 2. See supra note 3.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
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.\26\ The
Commission therefore approves the proposed rule change, as amended.
---------------------------------------------------------------------------
\26\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). Petitioner
stated that under Section 3(f) of the Act, the Commission's review
of FINRA's proposal must include an assessment of overall costs and
benefits. See Petitioner Statement, at 33. The Commission considers
costs and benefits when it reviews SRO rule filings and has done so
with respect to this proposal. The Commission addresses comments
about economic effects of the proposed rule change on efficiency,
competition, and capital formation, including the general costs and
benefits of the proposal, below in Sections III.A.3; III.B.3,
III.C.3; III.D.3; III.E.3 and III.F.3.
---------------------------------------------------------------------------
As discussed below, the Commission believes that currently there is
an inefficiency in the collection and availability of reference data
\27\ for newly issued corporate bonds and that this inefficiency
results in an information asymmetry in the market for newly issued
corporate bond reference data that can disadvantage many market
participants. While some market participants may have timely access to
reference data by virtue of receiving it directly from underwriters or
from those that obtain it from underwriters, many market participants
do not. This information asymmetry inhibits these market participants
from transacting in the secondary market for newly issued bonds,
whether through electronic trading venues, over the phone or through
other methods, at the time those bonds begin trading to the detriment
of those market participants and the market for newly issued corporate
bonds.\28\ The Commission believes it is important to make certain
reference data available to market participants in a timely,
accessible, and impartial manner, and further believes that FINRA's
proposal is reasonably designed to address this information asymmetry
to the benefit of the marketplace.
---------------------------------------------------------------------------
\27\ It is the Commission's understanding that such reference
data include issuer and issue identifiers and details, such as
maturity, coupon, par value, payment frequency, amortization
details, call schedule and convertibility, among other reference
data, which terms are required for identifying, valuing, and
settling transactions in newly issued corporate bonds. See
Recommendation, at 1.
\28\ See generally infra notes 31-42 and 89-102 accompanying
text.
---------------------------------------------------------------------------
The Commission believes the requirement for underwriters to report
the reference data fields to FINRA prior to the first transaction in
the security, coupled with FINRA's dissemination of the new issue
reference data immediately upon receipt, will allow all market
participants to have timely, basic information that is important for
the identification, valuation, and settlement of a newly issued
corporate bond in order to participate in trading in the secondary
market without delay, whether through electronic trading venues, over
the phone or through other methods. Improved reference data
transparency should promote market efficiency and fair competition and
enable broader participation by all market participants when a new
issue corporate bond begins trading, which should also promote improved
secondary market liquidity and lower costs when secondary trading
begins. In sum, the Commission believes that FINRA's proposal will
``promote just and equitable principles of trade, foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in'' newly issued corporate bonds, and ``remove
impediments to and perfect the mechanism of a free and open market''
with respect to the market in such securities, consistent with Section
15A(b)(6) of the Act. Furthermore, the Commission will monitor the
progress of the New Issue Reference Data Service and its use by market
participants and
[[Page 6925]]
consider whether further steps are necessary, including whether market
participants should report certain data to the Commission.
The Commission received a number of comment letters addressing the
proposed rule change's consistency with the Act, specifically focusing
on (1) whether information asymmetry exists in the current marketplace
for new issue reference data; (2) the requirements for information
reporting and distribution under the proposal; (3) FINRA's role as the
centralized data source; (4) the proposal's burden on underwriters; (5)
the proposal's effect on competition among reference data vendors; and
(6) the lack of information regarding fees for the New Issue Reference
Data Service.\29\ The Commission addresses each of these issues below.
---------------------------------------------------------------------------
\29\ Comments on the proposed rule change can be found at:
https://www.sec.gov/comments/sr-finra-2019-008/srfinra2019008.htm.
---------------------------------------------------------------------------
First, the Commission addresses comments regarding the
justification for the proposal and the proposal's consistency with
Section 15A(b)(6) of the Act in Sections III.A, III.B and III.C below.
The Commission believes that the record demonstrates three things
clearly: (1) There is an inefficiency in the collection and
availability of reference data that results in an information asymmetry
in the corporate bond market that can impede secondary market trading
by many market participants to their disadvantage because many market
participants, including investors, intermediaries, trading platforms,
and data vendors, do not have accurate, complete and timely access to
corporate bond new issue reference data on the day a new issue begins
trading in the secondary market; (2) the proposed New Issue Reference
Data Service is reasonably designed to address this information
asymmetry by providing reference data important for the identification,
valuation, and settlement of newly issued corporate bonds to market
participants when secondary trading begins; and (3) FINRA, as an SRO
that is subject to Commission oversight, is an appropriate entity to
provide market participants with accurate, complete, impartial and
timely access to such corporate bond new issue reference data. As
discussed further below, providing all market participants, including
data vendors, on an impartial basis with basic information concerning a
newly issued bond that market participants need in order to identify
and value corporate bonds and settle corporate bond transactions should
promote competition among market participants and improve the corporate
bond market's overall function by enabling a broader array of market
participants and service providers to engage in this market on the day
a newly issued corporate bond begins trading in the secondary market.
As a result, the Commission finds that FINRA's proposal is consistent
with Section 15A(b)(6) of the Act.
Second, the Commission addresses comments that the proposed
information required to be collected and the timing for reporting such
information under the proposal would be burdensome to underwriters in
Section III.D. As discussed below, the Commission finds that such
burdens imposed on underwriters by the proposal, including smaller
underwriters, would be limited because of such underwriters' existing
data collection and reporting practices with respect to the information
FINRA proposes to be reported. Furthermore, the Commission believes
that any burdens on underwriters are justified by the benefits of the
proposal.
Third, in Section III.E, the Commission addresses arguments raised
that the proposal is inconsistent with Section 15A(b)(9) of the Act
because it would burden competition by, among other things, reducing
competition among reference data vendors and decreasing investment and
innovation in the marketplace, ultimately leading to increased costs.
The Commission finds that the proposal will not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. As explained below, the impact on competition is uncertain.
It is possible that FINRA's proposal will have a positive impact on
competition among data vendors. Additionally, the limited set of data
proposed to be reported and disseminated should not supplant the demand
for a more comprehensive reference database with enhanced data sets
that contain additional fields that are not reported to or disseminated
by FINRA. As a result, the Commission believes any burden on
competition would both be limited and justified by the evidence in the
record demonstrating an information asymmetry that can disadvantage
many market participants due to the lack of timely access to basic
information that is important for the identification, valuation and
settlement of newly issued corporate bonds at the time a bond begins
trading in the secondary market.
Finally, in Section III.F the Commission addresses arguments raised
that (1) the Commission could not fully assess the proposal's
consistency with the Act without knowing either the proposed fees for,
or the cost to build, the New Issue Reference Data Service; (2)
separating the fee proposal into a subsequent filing allows FINRA to
avoid regulatory and public scrutiny of the proposed fees; and (3) the
Commission erred in failing to find that the proposal was consistent
with Section 15A(b)(5) of the Act. As explained below, the Commission
disagrees that it cannot adequately assess the proposal's consistency
with the Act and its economic effects without knowing the fees that
FINRA will charge for the proposed reference data service or the costs
to build such service. Furthermore, the proposed fees may be properly
filed as an immediately effective fee filing pursuant to Section 19 of
the Act and the Commission is not required to make a finding that the
proposal is consistent with Section 15A(b)(5) of the Act.
A. There is an Information Asymmetry That Exists in the Current
Marketplace for Corporate Bond New Issue Reference Data That Can
Disadvantage Many Market Participants
1. Comments on the Proposal
The Commission received several comments in support of and in
opposition to FINRA's proposal.\30\ Several commenters stated that
currently there is no uniform, universally available mechanism for
providing market participants with consistent and timely access to
reference data about corporate bonds on the day a newly issued
corporate bond
[[Page 6926]]
commences trading.\31\ One commenter noted that the current process for
underwriters to provide data is ``tedious, prone to transcription
errors, and must be repeated for every bond in which the reference data
vendor or the end user is interested.'' \32\ Commenters also stated
that currently underwriters and issuers do not provide reference data
to all market participants at the same time.\33\ One commenter stated
that new issue corporate bond terms and conditions today are often
received delayed and incomplete.\34\
---------------------------------------------------------------------------
\30\ The Commission notes that FINRA's proposal is generally
consistent with a unanimous recommendation from the SEC Fixed Income
Market Structure Advisory Committee (``FIMSAC'') made to the
Commission on October 29, 2018. See Fixed Income Market Structure
Advisory Committee Recommendation (October 29, 2018) available at
https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-corporate-bond-new-issue-reference-data-recommendation.pdf
(``Recommendation''). The FIMSAC is a federal advisory committee
formed in November 2017 to provide the Commission with diverse
perspectives on the structure and operations of the U.S. fixed
income markets, as well as advice and recommendations on matters
related to fixed income market structure. The FIMSAC's charter is
available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-charter-nov-2019.pdf. The membership includes 23
individuals representing a range of perspectives on the fixed income
markets including retail and institutional investors, corporate and
municipal issuers, trading venues, institutional dealers, a retail
dealer, a regional municipal securities dealer, a proprietary
trading firm, a data provider, academics, and SROs. For a list of
FIMSAC members, see https://www.sec.gov/spotlight/fixed-income-advisory-committee.
\31\ See Recommendation at 2; Letter from Lynn Martin, President
and COO, ICE Data Services, dated April 29, 2019 (``ICE Data
Letter''), at 1-2; Letter from Marshall Nicholson and Thomas S.
Vales, ICE Bonds dated April 29, 2019 (``ICE Bonds Letter''), at 1-
2; Letter from John Plansky, Executive Vice President and Chief
Executive Officer, Charles River Development, dated May 24, 2019
(``Charles River Letter''), at 2; and Letter from SEC Fixed Income
Market Structure Advisory Committee, dated June 11, 2019 (``FIMSAC
Letter''), at 1-2.
\32\ See Harris Letter, at 2.
\33\ See FIMSAC Letter, at 2; ICE Bonds Letter, at 2 (``Certain
electronic trading venues that are not registered as ATSs may have
access to new issuance reference data obtained from affiliated
corporate entities which process primary market trades prior to the
dissemination of the reference data.'').
\34\ See ICE Bonds Letter, at 2.
---------------------------------------------------------------------------
Commenters stated that access to reference data is necessary for
valuing, trading and settling corporate bonds.\35\ As access to this
reference data is not available to all market participants prior to the
beginning of trading in a new issue, commenters asserted that certain
market participants, including many investors, intermediaries, trading
platforms, and reference data providers, are currently at a competitive
disadvantage.\36\ One commenter stated that ``[t]he information
asymmetry which exists today adversely impacts the liquidity in the
secondary markets for the first few hours or days of trading when
significant trading occurs.'' \37\
---------------------------------------------------------------------------
\35\ See ICE Data Letter, at 2; Letter from Larry Harris, Fred
V. Keenan Chair in Finance, U.S.C. Marshall School of Business,
dated May 17, 2019 (``Harris Letter''), at 2-3; Charles River
Letter, at 2; FIMSAC Letter, at 1-2.
\36\ See ICE Data Letter, at 2; ICE Bonds Letter, at 2; FIMSAC
Letter, at 2; Harris Letter, at 2-6; Charles River Letter, at 2
(``[T]he proposed data service will enhance transparency in a manner
that benefits both buy-side investors and the financial markets as a
whole, by facilitating access to new issuance reference data for
corporate bonds. This is especially valuable to the fixed income
market, which has historically been more opaque than other more
liquid asset classes.''). See also Transcript of FIMSAC Meeting
(October 29, 2018), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-102918transcript.txt
(``FIMSAC Transcript''), Comments from Frederic Demesy, Refinitiv,
at 0078 (``[A]t the moment, we see that there are some market
anomalies where some of the vendors have access to information much
earlier than other vendors. And that creates basically competitive
advantage on certain platforms, which is in my view not ideal for
having a transparent market.'').
\37\ See ICE Bonds Letter, at 2.
---------------------------------------------------------------------------
Several commenters asserted that a centralized data reporting
requirement for new corporate bond issues would increase the efficiency
of the corporate bond market and reduce trading and research costs.\38\
One commenter stated that ``the creation of the data service will
enhance operational efficiencies for buy-side investors by ensuring
reliable, consistent and timely access to data, necessary for the
seamless trading and settlement of new issue corporate bonds'' and
``the proposed data service will help buy-side investors better manage
their risk,'' including ``the reduced need for manual entries and
overrides.'' \39\ One commenter stated that ``[t]he timely
dissemination of complete reference data will allow retail investors to
have more timely access to newly issued bonds for purchase and/or price
discovery, eliminating unnecessary information asymmetry.'' \40\
Another commenter noted that a ``centralized data reporting requirement
for such issues could benefit the industry and investors by enhancing
market transparency, potentially aiding liquidity, reducing trading
costs, and lowering the cost of capital for issuers.'' \41\ One
commenter further stated that mandated reference data collection and
dissemination promotes capital formation by lowering the costs of
valuing bonds so that prices more accurately reflect all available
information.\42\
---------------------------------------------------------------------------
\38\ See FIMSAC Letter, at 1-2; ICE Data Latter, at 2; Harris
Letter, at 2-3; Charles River Letter, at 2.
\39\ See Charles River Letter, at 2.
\40\ See ICE Bonds Letter, at 2.
\41\ See ICE Data Letter, at 2. See also Harris Letter, at
3(``[R]educing the costs of investment research will lead to more
informative prices and lower liquidity costs as more market
participants make better-informed decisions about what to buy, sell,
and hold. . . . The value of the reference data and the low costs to
the industry of requiring that they should be delivered in some
machine-readable form provide an extraordinary strong foundation for
the Commission to mandate [reference data collection and
dissemination].''); Charles River Letter, at 2 (``By providing
market participants with direct access to new issuance reference
data, the proposed service will reduce overall costs, while
permitting third party vendors to retransmit and repackage the
reference data for market participants who may opt for this service.
The proposed service also will increase the efficiency and
interoperability of the corporate bond market and help promote fair
and open competition among market participants.''). See also FIMSAC
Transcript, supra note 36, Comments from Spencer Gallagher, ICE Data
Services, at 0069-72 (``there is one area that no investment or no
level of ingenuity can solve and that is equal access to new issue
reference data at or prior to first trade execution'').
\42\ See Harris Letter, at 5.
---------------------------------------------------------------------------
On the other hand, many commenters asserted that FINRA did not
provide sufficient justification to support the need for the creation
of the New Issue Reference Data Service as required under Section
15A(b)(6) of the Act.\43\ In particular, Petitioner argued that FINRA
provided no evidence that there is a market structure problem that
requires regulatory intervention \44\ and that FINRA ``failed to
demonstrate a market failure limiting timely access to accurate data. .
. .'' \45\ Petitioner also stated that FINRA has no basis for its
theory that the market for data services is uncompetitive; \46\ that
FINRA's assertion that customers for data services are dissatisfied is
unsupported by evidence; \47\ and that FINRA has provided no evidence
that any trader or platform cannot get the information it demands, or
that lack of information is impeding trading.\48\ Petitioner further
[[Page 6927]]
stated that ``the bond-trading market is already headed in the
direction FINRA supports--without its intervention'' and that ``data
and reporting show a clear acceleration in the marketplace toward
electronic trading of new issues.'' \49\ Petitioner concluded that
``the bond markets are healthy and growing robustly using existing
market-based data services'' and that ``FINRA should not be allowed to
oust market-based providers in favor of a regulatory utility without
showing a substantial market failure.'' \50\
---------------------------------------------------------------------------
\43\ See Letter from David R. Burton, Senior Fellow in Economic
Policy, The Heritage Foundation, dated April 29, 2019 (``Heritage
Letter''), at 1-2; Letter from Tom Quaadman, Executive Vice
President, U.S. Chamber of Commerce, dated April 29, 2019 (``Chamber
Letter''), at 2; Letter from Tyler Gellasch, Executive Director,
Healthy Markets Association, dated April 29, 2019 (``Healthy Markets
Letter''), at 4-5; Letter from Greg Babyak, Global Head of
Regulatory Affairs, Bloomberg, L.P., dated April 29, 2019
(``Petitioner Letter''), at 9-10. See also Letter from Tyler
Gellasch, Executive Director, Healthy Markets Association, dated
July 29, 2019 (``Healthy Markets Letter II''), at 4-6; Letter from
Tyler Gellasch, Executive Director, Healthy Markets Association,
dated October 25, 2019 (``Healthy Markets Letter III''); Letter from
David R. Burton, Senior Fellow in Economic Policy, The Heritage
Foundation, dated July 29, 2019 (``Heritage Letter II''), at 2;
Letter from David R. Burton, Senior Fellow in Economic Policy, The
Heritage Foundation, dated October 23, 2019 (``Heritage Letter
III''), at 2; Letter from Tom Quaadman, Executive Vice President,
U.S. Chamber of Commerce, dated July 29, 2019 (``Chamber Letter
II''), at 3-4; Letter from Greg Babyak, Global Head of Regulatory
Affairs, Bloomberg L.P., dated July 1, 2019 (``Petitioner Letter
II''), at 4-7; Letter from Greg Babyak, Global Head of Regulatory
Affairs, Bloomberg L.P., dated July 29, 2019 (``Petitioner Letter
III''), at 5-8; Letter from Greg Babyak, Global Head of Regulatory
Affairs, Bloomberg L.P., dated October 24, 2019 (``Petitioner Letter
IV''), at 4; Letter from Greg Babyak, Global Head of Regulatory
Affairs, Bloomberg L.P., dated November 27, 2019 (``Petitioner
Letter V''), at 3-4; and Letter from David R. Burton, Senior Fellow
in Economic Policy, The Heritage Foundation, dated March 13, 2020
(``Heritage Letter IV'').
\44\ See Petitioner Letter, at 12-13; Petitioner Letter II at 4-
6; Petitioner Letter III at 6-7; Petitioner Letter V, at 3. See also
Petitioner Statement, at 2, (``No evidence indicates that current
methods of consensual information distribution are impeding
electronic trading.'').
\45\ See Petition for Review, at 19.
\46\ See Petitioner Statement, at 21-22. Petitioner also stated
that while the proposal asserted barriers to entry, it mentioned
only one such supposed barrier: the investment required to build a
system to manage bond data. Petitioner argued that the fact that
building a new business would require investment is not a barrier to
entry and does not make a market uncompetitive. In addition,
Petitioner stated that FINRA has not offered any evidence of the
investment required to build such a system and how that would
dissuade market entrants. See id.
\47\ See id. at 22-23.
\48\ See id., at 28. Petitioner stated that one anonymous person
told FINRA it could not get the data it wanted from its current
vendor and that FINRA has not reported any reason that the person
could not fulfill its needs with a different, competing vendor. See
id., at 28, n.19.
\49\ See Petition for Review, at 22; Petitioner Statement, at
24-28. Petitioner presented data regarding trading by alternative
trading systems (``ATSs'') on pricing day to argue that electronic
trading platforms can readily access new issue bond reference data,
and that the market for new issue corporate bonds is healthy and
already evolving in the manner that the FIMSAC desires. For example,
this commenter provided data (for new issues from March 12, 2019 to
April 11, 2019) demonstrating that ATSs arranged a trade in 43% of
the new Jumbo-sized issues, 28% of the new Benchmark-sized issues,
and 11% of medium-sized issues on the day the bond was free to
trade. See Petitioner Letter, at 12-13; Petitioner Statement, at 25,
n.15. In addition, this commenter presented evidence that over the
past year, the number of Jumbo-sized new issues that traded
electronically on the day they were priced more than doubled to 30%.
See Petitioner Letter II, at 4-6; Petitioner Letter III, at 6;
Petitioner Letter IV, at 4-5; Petitioner Statement, at 25, n.15.
This commenter stated that since FINRA proposed its effort to
standardize and centralize bond-reference data reporting,
competition in this area has only increased, citing a recent effort
by various financial institutions to streamline communications and
data among market participants by connecting underwriters and
investors. See Petitioner Letter IV, at 6. This commenter also
pointed to an analysis from Greenwich Associates that it stated
shows overall growth in ATS electronic corporate bond trading. See
Petitioner Statement, at 25. This commenter further stated that
based on data from February 2020 compiled by the commenter's market
information, in mid-2018 the percentage of first-day trades over
$250 million that were on ATSs increased to 39%, and electronic
trading of the largest issues has steadily grown from 16% to over
48%. See Petitioner Statement, at 27.
\50\ See Petitioner Statement, at 21, 24.
---------------------------------------------------------------------------
In addition, Petitioner stated that FINRA provided no evidence that
the proposal would provide market participants with more complete,
accurate, and timely data about new issues; reduce broken trades and
errors; \51\ or reduce costs or duplicated efforts.\52\ Petitioner
stated that FINRA suggests a number of hypothetical benefits that might
flow from the proposal, such as more accurate data, but that such
benefits ``are entirely speculative.'' \53\ Another commenter stated
that ``[b]efore intervening in the existing market for information and
granting itself a potentially lucrative monopoly on providing this
information to market participants, FINRA should be required to
factually demonstrate that . . . [the] benefits [of the proposal] are
so substantial and clear to overcome the strong presumption that
private actors in competitive markets are the best means of providing
goods and services.'' \54\
---------------------------------------------------------------------------
\51\ Petitioner stated that ``there appears to be plenty of time
to correct errors before they enter the settlement and clearing
process'' and presented evidence that over 91% of new issues settle
three days or more after a new issue is priced and 66% settle four
days or more after a new issue is priced. See Petitioner Letter, at
10-11.
\52\ See Petitioner Letter, at 9-14; Petitioner Letter II, at 4-
7; Petitioner Letter III, at 5-8. Petitioner stated that market
participants currently demand more reference data fields than FINRA
is proposing to collect; thus the proposal will not avoid
``duplicative efforts'' and may fragment the market. See Petitioner
Letter, at 13-14.
\53\ See Petitioner Statement, at 3, 35. See also Heritage
Letter V, at 2 (stating that FINRA has not conducted ``even the most
rudimentary cost-benefit analysis.'').
\54\ See Heritage Letter V, at 2.
---------------------------------------------------------------------------
2. FINRA Response to Comments
In its response to the petitioner, FINRA stated that its proposal
is ``designed to address a particular problem in today's market--
namely, that a number of market participants are not reasonably able to
gain access to timely, comprehensive, and accurate corporate bond new
issue reference data when the bonds begin trading.'' \55\ FINRA stated
that the record provides sufficient support for its proposal, and that
this problem is identified by the Fixed Income Market Structure
Advisory Committee (``FIMSAC''), by FINRA's own independent outreach to
a diverse set of market participants, by comments submitted in support
of the proposal,\56\ and in FINRA's data analysis.\57\
---------------------------------------------------------------------------
\55\ See FINRA Statement, at 3.
\56\ FINRA cited comment letters noting that there currently
exist issues with the availability, completeness, and timeliness of
new issue reference data; and that the current information asymmetry
with respect to such data harms liquidity, execution quality and
competition in the corporate bond market. See Letter from Alexander
Ellenberg, Associate General Counsel, FINRA, dated October 29, 2019
(``Response Letter''), at 5 (citing to Harris Letter; ICE Bonds
Letter; ICE Data Letter; Charles River Letter; and FIMSAC Letter).
See also supra notes 31-42 and accompanying text.
\57\ See FINRA Statement, at 3. See also Response Letter, at 3-
4; Notice, at 13980-83.
---------------------------------------------------------------------------
FINRA stated that the robust public record supporting the proposal
begins with the unanimous FIMSAC Recommendation.\58\ FINRA stated that
FIMSAC's Technology and Electronic Trading Subcommittee
(``Subcommittee''), which represents a cross-section of market
participants, recognized that disparities exist among reference data
vendors' access to new issue reference data depending on several
factors, including the vendors' relationship with underwriters; that
private data vendors are not obligated to provide impartial access to
key new issue reference data; and that the resulting confusion
increases transaction costs and impedes competition in the corporate
bond markets.\59\ FINRA stated that to address these concerns, the
Subcommittee recommended the establishment of a consolidated new issue
reference data service that is made available to all subscribers in a
timely fashion and recommended that FINRA operate the service and
provide subscribers with impartial and commercially reasonable access,
subject to applicable SRO regulation.\60\ FINRA stated that the
Subcommittee received strong support for the Recommendation when it was
presented for consideration by the full FIMSAC and from panelists who
supported the Recommendation.\61\ FINRA pointed to statements by
members of the FIMSAC and panelists at the FIMSAC meeting, including
two data providers and an investment management firm, to refute the
assertion that a well-functioning, competitive market currently exists
for corporate new issue reference data, as suggested by some
commenters, and to provide support that market participants bear the
costs of the current information disparity.\62\ FINRA noted that the
FIMSAC also subsequently reaffirmed the Recommendation in the FIMSAC
Letter.
---------------------------------------------------------------------------
\58\ See FINRA Statement, at 5; Response Letter, at 4-5. See
also Recommendation, supra note 30.
\59\ See FINRA Statement, at 6-7 (citing Recommendation, supra
note 30).
\60\ See FINRA Statement, at 7.
\61\ See FINRA Statement, at 8.
\62\ Specifically, FINRA pointed to (i) a statement by Richard
McVey, MarketAxess, that ``there are indeed gaps in corporate bond
fixed income reference data, both in terms of when that data are
available with different reference data providers, as well as
sometimes the accuracy;'' (ii) a statement from Spencer Gallagher,
ICE Data Services, that ``there is one area that no investment or no
level of ingenuity can solve and that is equal access to new issue
reference data at or prior to first trade execution;'' (iii)
statements from Frederic Demesy, Refinitiv, that ``at the moment, we
see that there are some market anomalies where some of the vendors
have access to information much earlier than other vendors,'' and
``that creates basically competitive advantage on certain
platforms,'' and that this disparity imposes ``higher costs for our
customers;'' and (iv) statements from Alex Sedgwick, T. Rowe Price,
noting that ``[h]istorically we have noticed cases where a new issue
does take time to get set up on some of our electronic trading
platforms, and that means that we can't necessarily go and use those
electronic trading platforms right away.'' See FINRA Statement, at
8-9; Response Letter, at 5 (each citing to FIMSAC Transcript).
---------------------------------------------------------------------------
In addition, FINRA stated that it performed its ``own independent
outreach to eleven market participants--
[[Page 6928]]
four data providers, three underwriters, two trading platforms, and two
clearing firms--and heard the same problems as identified by the
FIMSAC.'' \63\ Based on this outreach, FINRA determined that ``there is
not currently consistent collection of new issue reference data
according to established data standards, nor is there uniform
distribution of the data to market participants in a timely manner.''
\64\ FINRA stated that its outreach indicated that data vendors receive
new issue reference data through different channels at different times,
and that as a result, market participants experience problems with
trading and settling new issues of corporate bonds.\65\ For example,
FINRA stated that if a trading platform does not have essential
information about a new issue, it cannot identify the bond and set it
up on its platform to trade.\66\ FINRA noted the experience of one
trading platform that stated it could not facilitate trades in new
issues on their first day of trading because the platform's reference
data provider would only provide reference data relating to new issues
the morning after issuance.\67\ In addition, FINRA stated that if
trading platforms, trading firms, or investors receive inconsistent
reference data, there is an increased likelihood of broken trades and
reduced efficiency reconciling data for purposes of trading, clearance,
and settlement.\68\ FINRA found from its outreach that inaccurate
reference data create inconsistencies in trading and settlement and
increase transaction costs for trading platforms, clearing firms, and
electronic trading platforms.\69\
---------------------------------------------------------------------------
\63\ See FINRA Statement, at 11; Response Letter, at 4; Notice,
at 13980-81. FINRA stated that new issue reference data are
generated by underwriters, aggregated by data providers, and then
sold to various market participants for consumption, including
trading and clearing firms, electronic trading platforms, broker-
dealers and bond investors. FINRA stated that it conducted outreach
to understand this dissemination process, direct and indirect costs
imposed by the process and ways it might be improved. See Notice, at
13980.
\64\ See Response Letter, at 4.
\65\ See FINRA Statement, at 11; Response Letter, at 4; Notice,
at 13981.
\66\ See FINRA Statement, at 11.
\67\ See FINRA Statement, at 11; Response Letter, at 4; Notice,
at 13980, n.17.
\68\ See FINRA Statement, at 11-12; Notice, at 13981.
\69\ See Response Letter, at 4; Notice, at 13980.
---------------------------------------------------------------------------
In response to comments that the need for the proposal is negated
by data on the growth of electronic bond trading, FINRA argued that
such data do not mitigate the concerns that the proposal is designed to
address--namely, the lack of broadly available and accessible new issue
reference data on the first day of secondary market trading.\70\ FINRA
stated that ``electronic trading platforms may receive data and begin
trading late, while still contributing to cumulative growth'' and that
``data on the overall growth of electronic trading says nothing about
whether the rate of growth is impacted or inhibited by the costs of
limited access to reference data on the first day of trading.'' \71\
FINRA argued that the growth of electronic trading in corporate bonds
actually makes impartial access to these data even more important.\72\
---------------------------------------------------------------------------
\70\ See FINRA Statement, at 21-22.
\71\ See FINRA Statement, at 22 (emphasis in original).
\72\ See FINRA Statement, at 22.
---------------------------------------------------------------------------
In response to comments on the proposal, FINRA provided an analysis
of corporate bond transactional data reported to FINRA's Trade
Reporting and Compliance Engine (``TRACE''), which FINRA stated is
consistent with the problematic market conditions described by FIMSAC
participants and commenters, and provides additional support for the
proposal.\73\ Specifically, FINRA examined the time lapse between the
first secondary market trade reported to TRACE and the first trade
reported by ATSs for newly issued corporate bonds in 2018.\74\ FINRA
found some ATSs experienced persistent lags between the first reported
trades and first reported ATS trades, which FINRA stated suggested that
some ATSs may not be receiving reference data in a timely fashion to
allow them to set up new issues to begin trading on their
platforms.\75\ In response, however, Petitioner stated that FINRA's
analysis is flawed in that the data (i) do not show that untimely
reference data is the cause of differences in the timing of trading on
different platforms; (ii) include all new issue bonds, rather than
limiting the scope to large issues that are more likely to trade
electronically; and (iii) ignore more current data that show movement
toward electronic trading is accelerating rapidly in 2019.\76\ In
response to this commenter's objections, FINRA provided additional data
from 2019, which it stated also demonstrate that some ATSs experienced
persistent time lags before they began trading newly issued corporate
bonds.\77\
---------------------------------------------------------------------------
\73\ See Response Letter, at 6-7.
\74\ See id.
\75\ See id. See also FINRA Statement, at 22. FINRA found that
for the first day of trading in corporate bond new issues, an ATS
traded at most 3% of the 11,518 newly issued bonds, and that over
the subsequent 10 days after issuance, ATSs represented an
increasing percentage of trading. Id.
\76\ See Petitioner Letter V, at 1-2; Petitioner Statement, at
25-26.
\77\ See FINRA Statement, at 22, 30. FINRA stated that while it
recognizes the limitations of quantitative analysis given that TRACE
data cannot currently identify trades on electronic trading
platforms other than ATSs, such as trades facilitated by Petitioner,
it continues to believe that, because ATSs represent one of the
types of market participants that provided statements for the record
of their difficulty receiving timely reference data access, this ATS
analysis helps validate such qualitative evidence. See FINRA
Statement, at 23.
---------------------------------------------------------------------------
In response to comments that FINRA did not provide an estimate of
costs and benefits,\78\ FINRA stated in its Response Letter that it
provided a detailed analysis of the proposal's anticipated costs and
benefits in its proposal.\79\ FINRA stated that it included an
``Economic Impact Assessment'' in its proposal, which, among other
things, described the current dissemination process of new issue
reference data in the corporate bond market, benefits of the proposal,
costs and negative impacts of the proposal, the anticipated effect of
the proposal on competition among market participants and efficiency in
the market, and alternative approaches considered by FINRA.\80\
---------------------------------------------------------------------------
\78\ See supra notes 53-54 and accompanying text.
\79\ See Response Letter, at 10. See also Notice, at 13981-83
(providing FINRA's Economic Impact Assessment). However, Petitioner
stated that ``[d]eciding to excise the fee analysis, in the face of
overwhelming negative commentary, belies FINRA's claim to have
provided a `detailed analysis of the Proposal's anticipated costs
and benefits.' '' See Petitioner Letter V, at 4. See also Section
III.F., infra.
\80\ See Notice, at 13981-83.
---------------------------------------------------------------------------
In its proposal, FINRA stated that it expects that the New Issue
Reference Data Service will increase the transparency of the corporate
bond market, especially around the issuance period, and that such
increased transparency will benefit the market, including investors,
trading platforms, clearing firms, data providers, issuers, and
underwriters, in a number of ways.\81\ Specifically, FINRA stated that
such transparency would provide benefits by: (i) Providing potential
buyers with the opportunity to evaluate the bonds for investment,
especially right after issuance, which would likely increase investment
choices; (ii) allowing index operators the opportunity to evaluate new
bonds for timely inclusion, which would help ensure that the index
accurately represents the concurrent bond market condition; (iii)
reducing broken trades
[[Page 6929]]
and errors in trading due to inconsistent information; (iv) increasing
trading speed by removing delays due to manually correcting reference
data errors; (v) potentially increasing trading volumes that might
otherwise be lost when traders do not have reference data on newly
issued bonds, thereby increasing liquidity and lowering the cost of
capital for issuers; (vi) providing data providers with a complete and
accurate source of data and reducing the need for data providers to
manually collect missing data or correct errors in the new issue
reference data; (vii) increasing awareness of new issuances, which may
help underwriters in marketing and underwriting; and (viii) reducing
the need for underwriters to manually research other reference data
sources for proper procurement of information.\82\
---------------------------------------------------------------------------
\81\ See Notice, at 13981. To support this statement, FINRA
cited to various studies finding that TRACE implementation has
demonstrated that transparency has facilitated trading and improved
market quality. See FINRA's website for a list of TRACE Independent
Academic Studies, available at http://www.finra.org/industry/trace/trace-independent-academic-studies. See id. at n.20.
\82\ See Notice, at 13981.
---------------------------------------------------------------------------
On the other hand, FINRA stated in its proposal that the New Issue
Reference Data Service may impose costs on underwriters to report the
additional reference data to FINRA through system upgrades or use of
third-party vendors to report, and recognized that smaller underwriters
may be burdened disproportionally.\83\ However, FINRA also stated that
(i) it understands that underwriters do not anticipate incurring
significant costs for reporting under the proposal and (ii) any
additional burden on smaller underwriters may be alleviated because
reporting to FINRA would reduce the need for underwriters to report to
other parties and/or underwriters can leverage investments already made
in the existing reporting system necessary under FINRA Rule 6760.\84\
In addition, FINRA noted that subscribers to FINRA's New Issue
Reference Data Service will incur a subscription fee and setup cost,
and FINRA stated that it intends to price the service as a utility
provider using a cost-based approach.\85\ Finally, FINRA stated that a
centralized source of new issue reference data may create a single
point of failure if data providers stop collecting data on their own
and solely rely on FINRA's data service.\86\ However, FINRA stated that
it believes this is unlikely to happen because data providers will
likely continue to collect a range of bond reference data beyond the
limited fields provided by FINRA's service.\87\
---------------------------------------------------------------------------
\83\ See Notice, at 13982.
\84\ See id. See also Section III.D, infra.
\85\ See Notice, at 13982; FINRA Statement, at 18.
\86\ See Notice, at 13982.
\87\ See Notice, at 13982. See also Section III.C, infra. For
example, there are many other data provided by reference data
providers concerning a bond issue, such as issuer information (e.g.,
fundamentals data, capital structure data), specific bond rating,
bond trade and selling restrictions, classification data (industry,
legal entity, etc.), corporate action data, ESG (Environmental,
Social & Governance) data, dividend data, instrument analytics data,
and security ownership data. See e.g., IHS Markit Reference Data
Bonds Factsheet, available at https://cdn.ihs.com/www/pdf/Reference-Data-Bonds-factsheet.pdf; Bloomberg Reference Data Content and Data,
available at https://www.bloomberg.com/professional/product/reference-data/.
---------------------------------------------------------------------------
3. Commission Discussion and Findings
The Commission understands that currently there is an inefficiency
in the collection of reference data for newly issued corporate bonds
and that this inefficiency results in an information asymmetry in the
market for newly issued corporate bond reference data. This information
asymmetry exists because some market participants have access to
reference data necessary for identifying, valuing and settling newly
issued corporate bonds at the time such bonds begin trading in the
secondary market, while many other market participants lack that
information at the time secondary trading begins. This information
asymmetry inhibits many market participants from transacting in the
secondary market for newly issued bonds at the time those bonds begin
trading which can disadvantage those market participants.\88\
---------------------------------------------------------------------------
\88\ See generally supra notes 31-42 and accompanying text.
---------------------------------------------------------------------------
The collection of reference data by market participants currently
is inefficient and the challenges associated with collecting this data
and making it available broadly to market participants in time to trade
in the secondary market are significant.\89\ While some market
participants may have timely access to reference data directly from
underwriters or from those that obtain it from underwriters, many
market participants do not. Underwriters may be unwilling to distribute
reference data to all market participants that desire it out of concern
that distributing the data to multiple market participants increases
the risk of inaccuracies.\90\ Market participants who do not have
access to reference data from a vendor that has timely access to such
data from underwriters or do not otherwise have the necessary
relationships with underwriters \91\ must expend substantial time and
effort gathering information from multiple sources.\92\ For those that
lack this access, the process of collecting data from multiple sources
is time consuming, requires substantial effort in order to assure the
completeness and accuracy of the information, and often results in
participants having unequal access to
[[Page 6930]]
reference data on the first day a bond trades in the secondary market,
ultimately resulting in an unnecessary market inefficiency.\93\
---------------------------------------------------------------------------
\89\ See Notice, at 13980-13981 (describing in FINRA's Economic
Impact Statement the current process for the collection and
distribution of corporate bond reference data). The Commission notes
that the process FINRA described in its Notice is consistent with
the comments provided by reference data providers at the October 29,
2018 FIMSAC meeting. See also FIMSAC Transcript, supra note 36,
Comments from Spencer Gallagher, ICE Data Services, at 0069-72
(``there is one area that no investment or no level of ingenuity can
solve and that is equal access to new issue reference data at or
prior to first trade execution''). See generally FIMSAC Transcript,
supra note 36 (highlighting a detailed discussion among data vendors
of the challenges with collecting and distributing reference data).
\90\ See FIMSAC Transcript, supra note 36, Comments from Bob
LoBue, J.P. Morgan, at 0080-81 (``We tend to not disseminate data to
third party vendors off the corporate platform. I think the point of
inaccuracies is the reason for that. So, we tend to use Bloomberg as
our let's ensure it is accurate, and then people can source that
information from that venue.''). Even if underwriters were to
provide access to every market participant that sought to gain
access to such information prior to the beginning of secondary
market trading, that process would be inefficient as the
underwriters would expend substantial effort providing such data to
multiple parties and the recipients would likewise expend
substantial effort to receive and ultimately utilize data from
multiple parties.
\91\ In the corporate bond market today, the Commission
understands from market participants that Petitioner typically has
the timeliest access to newly issued bond reference data on the
first day a bond trades, as it enjoys the voluntary cooperation of
underwriters. See FIMSAC Transcript, supra note 36, Comments from
Bob LoBue, J.P. Morgan, at 0080-81 (``And I think the Refinitiv team
and the ICE team intimating a competitive advantage for Bloomberg,
there is no question that we do undertake getting our securities set
up on the Bloomberg trading platform because that is what the
industry predominately uses to book our tickets.''). See also FINRA
Statement, at 3 (noting that Petitioner is the dominant private data
vendor in today's market for corporate bond new issue reference data
and ``often gains access to new issue reference data before other
vendors and market participants.''). In his declaration, David Miao,
the Global Head of Fixed Income Data at Bloomberg, L.P., states that
he is ``not aware of any legal or structural barrier that prevents
other vendors and market participants from accessing new issue
reference data'' and that ``nothing prevents other vendors and
market participants from accessing corporate bond new issue
reference data in the same voluntary manner in which Bloomberg
acquires it.'' Based on the information available to the Commission,
the Commission disagrees. The statements of one of the largest
underwriters of corporate bonds in the United States are
particularly informative: Mr. Lobue stated at the October 29, 2018
FIMSAC meeting that J.P. Morgan provides corporate bond reference
data to Petitioner and does not provide it to other data vendors.
See See FIMSAC Transcript, supra note 36, Comments from Bob LoBue,
J.P. Morgan, at 0080-81.
\92\ See e.g., supra notes 32-37; FIMSAC Transcript, supra note
36, Comments from Spencer Gallagher, ICE Data Services, at 0069-72
(``Distribution [of new issue reference data] is not consistent in
both completeness of the content or timeliness of the delivery. . .
. All said, none of the avenues [for securing new issue reference
data], underwriter emails, new issue publishing announcement or
issuer websites provide a comprehensive coverage in a timely manner.
We piece all of this together as available to us. On the few cases
where we see no information, we will see the data on Edgar, usually
via prospectus. But that is well after the pricing event and clearly
not sufficient for pre-trade and trade workflows.'').
\93\ See id. See also FIMSAC Transcript, supra note 36, Comments
from Spencer Gallagher, ICE Data Services, at 0069-72 (``there is
one area that no investment or no level of ingenuity can solve and
that is equal access to new issue reference data at or prior to
first trade execution''); Comments from Spencer Gallagher, ICE Data
Services, at 0069-72; Comments from Rick McVey, MarketAxess, at 0066
(``there is significant manual effort today in getting new issue
information into various databases. And that is prone to error.
Reference data errors lead directly to trading errors.'').
---------------------------------------------------------------------------
The Commission believes that the information asymmetry and
resulting market inefficiency that exists can disadvantage many market
participants because it hinders timely market-wide participation in the
secondary market when a newly issued bond begins to trade, potentially
negatively impacting secondary market liquidity. Comments received from
investors, trading platforms, and data vendors support this finding.
Commenters stated that the inability to participate in the secondary
market raised a number of concerns.\94\ First, market participants that
are unable to trade newly issued bonds due to a lack of information,
whether they be intermediaries, investors or trading platforms,\95\ are
at a competitive disadvantage to other market participants that have
the information and ability to trade newly issued bonds on the first
day of secondary trading when significant trading occurs.\96\ These
market participants have fewer investment options to meet their own
business and investment needs or those of their customers relative to
market participants that have access to reference data when a newly
issued bond begins trading.\97\ For example, as stated by one
commenter, many ``retail investors and the broker dealers servicing
them are disadvantaged by not being able to participate in the
secondary markets during the critical time after a security is
available to trade.'' \98\ Additionally, to the extent some electronic
trading platforms do not have the information necessary to identify,
value and settle newly issued corporate bonds when such bonds begin
trading in the secondary market, these platforms may be at a
competitive disadvantage to those that do have such information.\99\
Second, reduced participation in the secondary market due to this
information asymmetry can adversely impact secondary market liquidity
for newly issued bonds on the first day a bond trades and ultimately
raise the cost of capital for issuers.\100\ It has been shown that
corporate issuers pay more to issue bonds (i.e., bond offering yields
are higher) when the expected liquidity in the secondary market is
lower for those corporate bonds.\101\ Third, information asymmetry with
respect to new issue reference data increases transaction and
opportunity costs, which may be passed on to customers.\102\ The
Commission also believes that the results of FINRA's outreach \103\ are
consistent with the range of comments and statements concerning the
lack of timely reference data and the resultant impact on many market
participants' ability to participate in the market on the first day a
new issue trades in the secondary market, and the potentially negative
impacts on liquidity that result.\104\
---------------------------------------------------------------------------
\94\ See generally supra notes 31-42 and accompanying text for a
discussion of commenter concerns about information asymmetry in the
corporate bond market today that can disadvantage many market
participants.
\95\ Petitioner stated that there is currently a trend in the
marketplace toward electronic trading of new issues and therefore
concluded that the bond markets are healthy and growing robustly
using existing market-based data services and the proposal is
unnecessary. See supra notes 49-50. Petitioner presented data
concerning ATS trading in new issues purporting to suggest that
there is no current access problem relating to new issue bond
reference data. See supra note 49. In response, FINRA also presented
TRACE data concerning ATSs and conducted its own analysis, which
FINRA stated suggests that some ATSs may not be receiving reference
data in a timely fashion to allow them to begin trading a newly
issued corporate bond. See supra notes 73-75 and 77 and accompanying
text. Petitioner disputed FINRA's analysis as flawed. See supra note
76. The Commission believes that the analyses of electronic trading
in corporate new issues by ATSs provided by Petitioner and FINRA are
necessarily limited, as there are a number of electronic bond
trading platforms that are not regulated as ATSs and there are a
number of other types of market participants, including investors,
intermediaries and data vendors that may not have timely access to
newly issued bond reference data to identify, value and settle bonds
on the first day of trading in the secondary market. Therefore,
these analyses, which focus on ATS trading in new issues, are not
reflective of the market for newly issued corporate bonds as a
whole.
\96\ See ICE Data Letter, at 2; ICE Bonds Letter, at 2; FIMSAC
Letter, at 2.
\97\ See ICE Bonds Letter, at 2 (``The timely dissemination of
complete reference data will allow retail investors to have more
timely access to newly issued bonds for purchase and/or price
discovery, eliminating unnecessary information asymmetry.'');
Notice, at 13981 (discussing in FINRA's Economic Impact Assessment a
variety of reasons why market participants that lack timely
reference data today are at a competitive disadvantage to those
market participants that do have timely access to reference data).
\98\ See ICE Bonds Letter, at 2.
\99\ See e.g., ICE Bonds Letter at 2; FIMSAC Letter at 2; FINRA
Notice at 13980; FIMSAC Transcript, supra note 36, Comments from
Rick McVey, MarketAxess, at 0065 (recognizing that not all trading
venues have timely access to reference data which results in some
venues being able to trade the bonds when they begin trading in the
secondary market while others cannot).
\100\ See ICE Data Letter, at 2 (``a centralized data reporting
requirement for such issues could benefit the industry and investors
by enhancing market transparency, potentially aiding liquidity,
reducing trading costs, and lowering the cost of capital for
issuers''); FIMSAC Letter, at 2. See also FIMSAC Transcript, supra
note 36, Comments from Alex Sedgwick, T. Rowe Price, at 0084-85
(``Electronic market-makers ultimately need this information to
provide accurate pricing and accurate valuation for the prices that
they are pushing out to the market. If this information is not
available, that ultimately means that there are liquidity providers
that may not be able to provide liquidity to us when those new
issues are free to trade.'').
\101\ See Goldstein, M.A., Hotchkiss, E.S., and Pedersen, D.J.,
2019. Secondary market liquidity and primary market pricing of
corporate bonds. Journal of Risk and Financial Management 12, 1-17.
\102\ See Recommendation at 2. See also FIMSAC Transcript, supra
note 36, Comments from Alex Sedgwick, T. Rowe Price, at 0084-85 (So,
when . . . we are trading on the desk, we need to be able to measure
our execution against benchmarks. If it takes more than a couple of
hours or even more than a day for those benchmarks to become
available, that is an area where we may not be able to do accurate
trade cost analysis. And that is a very important sort of supporting
piece of information as we think about best execution on the trading
desk.''); Comments from Frederic Demesy, Refinitiv, at 0078 (``[A]t
the moment, we see that there are some market anomalies where some
of the vendors have access to information much earlier than other
vendors. And that creates basically competitive advantage on certain
platforms, which is in my view not ideal for having a transparent
market. It also incurs higher costs for our customers. The first one
would be on vendors. Market participants will have to source the
data from multiple vendors to ensure that all the information is
available, so [there are] duplicating costs. There is also an
operational cost related in terms of data quality. So, when you
onboard multiple feeds, ICE Data Service and Refinitiv data is not
automatically in the same format. So, the customer has to develop
operational efficiency tools to standardize the data on their
platform. And third is when the market participant gets things
wrong, it can have a huge impact, missing trade opportunities but
also reputational risks that would be the worst.'').
\103\ FINRA's proposal was informed by FINRA's outreach to a
diverse set of market participants--including several data
providers, underwriters and trading platforms--and responses from
these market participants ``demonstrated a regulatory need for
consistent, uniform, and timely corporate bond new issue reference
data.'' See supra notes 63-69 and accompanying text. See also
Response Letter, at 4; Notice, at 13980-81. The concerns of market
participants, including data vendors, trading venues, and investors,
regarding the lack of timely reference data are described in detail
above. Based on this outreach, FINRA observed that various market
segments may be lacking accurate, complete and timely reference
data, including electronic trading platforms and smaller market
participants that may not afford multiple data vendor subscriptions.
See Response Letter, at 4. See also Notice, at 13980.
\104\ See e.g. Notice, at 13980, n.17 (``According to one
trading platform, its reference data provider would only provide
data relating to new issues the morning after issuance, which
resulted in the firm's clients not being able to trade the bond when
it began to trade.''). Petitioner argued that nothing prevented this
platform from fulfilling its needs with a different, competing
vendor. See Petitioner Statement, at 28, n.19. However, as further
discussed herein, in the present market different vendors may have
access to different reference data relating to new issues as there
is no requirement that underwriters or issuers provide the same
information to all reference data providers or provide it at the
same time. See supra notes 88-93 and accompanying text.
---------------------------------------------------------------------------
[[Page 6931]]
In sum, the record reflects that an information asymmetry that can
disadvantage many market participants currently exists in the market
for newly issued corporate bond reference data. In the Commission's
view, FINRA's proposal, as discussed further below, is reasonably
designed to address this information asymmetry in the current market to
the benefit of the marketplace.
B. The Proposal Is Reasonably Designed To Address Existing Information
Asymmetry That can Disadvantage Many Market Participants by Providing
Reference Data Important for the Identification, Valuation, and
Settlement of Newly Issued Corporate Bonds When Secondary Trading
Begins
1. Comments on the Proposal
The Commission received several comments relating to the proposed
data fields required to be reported and the timing for submission of
such data fields. Several commenters requested that FINRA make
modifications to and/or provide further clarity regarding certain data
fields.\105\ One commenter stated that, while it did not disagree with
or question the value of FINRA's proposed data fields, FINRA should
provide information to support its selections of each of the proposed
data fields.\106\ One commenter stated that the proposal would not
require the disclosure of any data that is not already disclosed in
required security registration statements and other required
filings.\107\ In its comment letter the FIMSAC recommended that FINRA
combine certain proposed data fields and include six additional data
fields.\108\ Petitioner stated that FINRA's proposal to require
underwriters to report both CUSIPs and ISINs would further entrench the
monopoly enjoyed by CUSIP and ISIN, and would embed ISIN into the FINRA
rulebook for the first time.\109\ Petitioner further stated that FINRA
does not address the market consequences or additional costs to
underwriters or end users that would result from mandating further
usage of CUSIPs and ISINs.\110\ Petitioner recommended that FINRA
consider allowing the use of free, open-source alternative security
identifiers, such as the Financial Instrument Global Identifier
(``FIGI''), in addition to or in the place of CUSIP and ISIN.\111\
---------------------------------------------------------------------------
\105\ See Credit Roundtable Letter, at 1; ICE Data Letter, at 2-
3; SIFMA Letter, at 3; FIMSAC Letter, at 14; Letter from Christopher
B. Killian, Managing Director, SIFMA, dated July 29, 2019 (``SIFMA
Letter II''), at 2; Letter from Christopher B. Killian, Managing
Director, SIFMA, dated October 24, 2019 (``SIFMA Letter III''), at
2-3.
\106\ See Healthy Markets Letter, at 4, 6; Healthy Markets
Letter III, at 2.
\107\ See Harris Letter, at 2, 66 (``The fields on the FINRA
list are sufficient to value most bonds. . . . I believe that FINRA
chose the fields wisely.'').
\108\ See FIMSAC Letter, at 7-8, 10, 12-13. FIMSAC proposed
combining the Maturity and Perpetual Maturity indicators into one
existing field (Maturity Date) and the 144A Eligible and Regulation
S indicators into one new field (Series). In addition, FIMSAC
recommended requiring the following additional data fields: First
Conversion Date; First Conversion Ratio; Spread; Reference Rate;
Floor; and Underlying. The FIMSAC also provided supporting rationale
for the data fields included in the proposal and the suggested
additional data fields. See FIMSAC Letter at 2-3 and Schedule A.
\109\ See Petitioner Letter I, at 17; Petitioner Letter, III, at
11.
\110\ See id.
\111\ See Petitioner Letter I, at 18.
---------------------------------------------------------------------------
One commenter stated that it could be challenging for underwriters
to provide all of the data elements prior to the first trade and
requested that the proposal be modified so that underwriters would only
be required to report certain information prior to the first trade,
with the remaining information required to be reported within 60
minutes of the first trade.\112\ On the other hand, one commenter
stated that phased reporting of data elements causes material
inefficiencies in the intake and consumption of data and that
eliminating phased reporting will lead to more complete and consistent
reference data.\113\
---------------------------------------------------------------------------
\112\ See Letter from Christopher B. Killian, Managing Director,
SIFMA, dated April 29, 2019 (``SIFMA Letter''), at 1-2. See also
Letter from Cathy Scott, Director, Fixed Income Forum, on behalf of
The Credit Roundtable, dated April 29, 2019 (``Credit Roundtable
Letter''), at 1 (cautioning that any data provision requirements on
underwriters should not impede their ability to make markets in the
new issue as soon as possible).
\113\ See Charles River Letter, at 2. See also Healthy Markets
Letter, at 4 (``[W]e do not disagree with FINRA's determination to
require uniform pre-first trade reporting.'').
---------------------------------------------------------------------------
Commenters also requested various other clarifications to the
proposal.\114\
---------------------------------------------------------------------------
\114\ Two commenters requested that FINRA clarify the meaning of
the ``prior to the first transaction'' deadline for reporting
reference data to FINRA. See ICE Data Letter, at 2; ICE Bonds
Letter, at 2. One commenter requested FINRA clarify the process for
underwriters to correct erroneously reported reference data. See
Letter from Salman Banaei, Executive Director, IHS Markit, dated
April 29, 2019 (``IHS Markit Letter''), at 2-3. Two commenters made
technical suggestions regarding the methods for supplying and
redistributing the required data. See SIFMA Letter, at 2; ICE Data
Letter, at 3; SIFMA Letter III, at 2.
---------------------------------------------------------------------------
2. FINRA Response to Comments
In response to the FIMSAC Letter, FINRA incorporated the FIMSAC's
additional supporting rationale for the data fields into its filing and
added the six additional data fields suggested by the FIMSAC.\115\
FINRA stated that it agrees that these six new fields are useful and
appropriate to include in the proposal as they are important for
settlement and valuation of floating rate notes and convertible
bonds.\116\ FINRA further stated that it believes the six new fields
would not materially increase the costs of the proposal on
underwriters.\117\ In addition, in response to comments requesting
clarification of certain data fields, Amendment No. 2 included
additional detail relating to certain data fields.\118\
---------------------------------------------------------------------------
\115\ See Amendment No. 2, at 5 and Exhibit 3. See also Response
Letter, at 12-13.
\116\ See Amendment No. 2, at 5 and Exhibit 3; Response Letter,
at 13. FINRA stated that it also agrees with FIMSAC's recommendation
to combine the Maturity and Perpetual Maturity indicators into one
existing field (Maturity Date) and marked the amended Exhibit 3 to
reflect that the maturity and perpetual maturity indicator fields
will be tied together as combined fields for purposes of reporting
the information. See Amendment No. 2, at 5, n.9, and Exhibit 3;
Response Letter, at 13, n.41. With respect to FIMSAC's
recommendation to combine the 144A Eligible and Regulation S
indicator fields into a single ``Series'' field, FINRA stated that
it believes it will be easier operationally to maintain the separate
fields to limit potential confusion about other security offering
types or issuances that may meet more than one offering type. See
id.
\117\ See Response Letter, at 13.
\118\ See Amendment No. 2, at 5 and Exhibit 3; Response Letter,
at 12-13. In particular, FINRA stated that it (i) provided
additional guidance to clarify that the ratings data field does not
require reporting specific ratings, but rather whether the security
is Investment Grade or Non-Investment Grade, as those terms are
defined in Rule 6710; and (ii) clarified the information to be
reported for the security type, first coupon period type, minimum
increment, and minimum piece/denomination data fields. See Amendment
No. 2, at 5, n.10, and Exhibit 3; Response Letter, at 12-13, n.39.
---------------------------------------------------------------------------
In response to comments regarding the timing of the reporting
requirement, FINRA stated that it believes it is important to maintain
the proposal's pre-first transaction reporting requirement.\119\ FINRA
stated that the purpose of the pre-first trade requirement is to
facilitate the collection and dissemination of all proposed new issue
reference data fields before secondary trading in a security begins,
and recognized supporting comments on this point.\120\ FINRA stated
that, as
[[Page 6932]]
amended, it believes its proposal ``reflects a modest expansion of Rule
6760 to include the basic set of essential new issue reference data
fields that market participants require for pricing trading and
settlement.'' \121\ FINRA stated that the proposed requirement for
underwriters to report reference data for a new issue before the first
trade in the bond, coupled with FINRA's dissemination of the new issue
reference data immediately upon receipt, ``will allow market
participants to receive the information in a timelier manner and more
efficiently participate in market activity once a new issue begins
secondary trading.'' \122\ In response to comments regarding the use of
alternative securities identifiers, rather than CUSIP and ISIN, FINRA
stated that it does not believe this element of the proposal requires
new economic impact analysis since current FINRA Rule 6760 already
requires underwriters to report a CUSIP number or a similar numeric
identifier if a CUSIP number is not available.\123\
---------------------------------------------------------------------------
\119\ See Response Letter, at 14. FINRA stated that ``[b]ased on
conversations with underwriters, FINRA understands that underwriters
do not anticipate incurring significant costs for reporting under
this proposal.'' See Notice, at 13982.
\120\ See Response Letter, at 14 (citing to ICE Bonds Letter, at
2; and ICE Data Letter). In response to comments requesting
clarification on what the term ``first transaction'' means, FINRA
stated that ``it means the time of execution of the first
transaction of the offering (i.e., the time of execution for the
first reported primary transaction in the security), as specified
currently in Rule 6760.'' See Response Letter, at 14. FINRA stated
that it believes this position is consistent with the recommendation
from ICE Data to provide clarification for the term ``first
transaction'' consistent with MSRB Rule G-34. See Response Letter at
14, n.45 (citing to ICE Data Letter, at 2).
\121\ See FINRA Statement, at 10-11.
\122\ See id.
\123\ See FINRA Response Letter, at 9, n.28.
---------------------------------------------------------------------------
FINRA further stated that it recognizes that commenters have
requested further clarification of several data fields,\124\ and that
FINRA believes such requests can be addressed with guidance provided in
the customary course of new rule implementation, and FINRA will
continue to engage with market participants as required to provide such
guidance.\125\ In addition, FINRA stated that it intends to implement
functionality to allow for underwriters to correct previously submitted
data to FINRA for a significant period after receiving the initial Rule
6760 submission and that FINRA will continue to engage with market
participants on the appropriate business requirements for the reporting
process.\126\ FINRA also stated that it may take a phased approach to
implementation to promote compliance and data accuracy, where FINRA
would make the reporting requirements effective for a brief time period
to analyze and evaluate the accuracy of the reported data before
implementing dissemination of the data.\127\
---------------------------------------------------------------------------
\124\ See, e.g., SIFMA Letter III, at 2-3.
\125\ See Response Letter, at 12-13.
\126\ See id., at 14-15.
\127\ See id., at 15.
---------------------------------------------------------------------------
3. Commission Discussion and Findings
By helping eliminate the existing information asymmetry in access
to reference data, the proposed collection and dissemination of the
proposed data elements should promote (i) competition among market
participants by facilitating broader market participation in the
secondary market of a newly issued corporate bond on the first day that
bond trades, (ii) improved secondary market liquidity when a bond
becomes available to trade in the secondary market and lower cost of
capital for issuers, and (iii) lower other costs by providing data
vendors with a more efficient method of collecting reference data and
eliminating existing market inefficiencies. As discussed further below,
the Commission believes eliminating the information asymmetry with
respect to newly issued bond reference data is consistent with Section
15A(b)(6) of the Act as it will ``promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in'' newly issued corporate bonds, and
``remove impediments to and perfect the mechanism of a free and open
market'' with respect to the market in such securities. FINRA's
proposal would require all FINRA member underwriters subject to Rule
6760 to report to FINRA 32 new data elements for all new issues in
Corporate Debt Securities, as defined in FINRA's rules. The required
data fields proposed to be reported and disseminated, together with
data fields already specified in the current rule, reflect all but one
of the fields that were described in the Recommendation and in the
supplemental FIMSAC Letter,\128\ and include additional data fields
identified by FINRA during its supplemental industry outreach.\129\ As
stated by FINRA, several fields specified in the proposed rule change
are already required to be reported or are reported voluntarily on the
FINRA TRACE New Issue Form.\130\ In addition to the FIMSAC,\131\ a
number of commenters agreed with the required data fields put forth by
FINRA.\132\ FINRA set forth a detailed description of each new required
data field \133\ and the rationale for including the field, as follows:
\134\
---------------------------------------------------------------------------
\128\ See Recommendation at Schedule A; FIMSAC Letter at
Schedule A. The one field from the Recommendation that FINRA did not
include is ``Calculation Types (CALT).'' FINRA stated that it
understands from industry outreach that this field leverages
calculation methodology that is specific to one data vendor's
protocols and may not be readily available to all underwriters that
would be required to report information to FINRA under Rule 6760, or
to consumers of the data. See Notice, at 13978, n.8.
\129\ FINRA stated these additional fields were indicated by
market participants as important in liquidity and risk assessment.
See Notice, at 13978-79. See also Amendment No. 2, Exhibit 3.
\130\ See Notice, at 13978. The FINRA TRACE New Issue Form is
used by firms to set up securities pursuant to firms' existing
obligations either under Rule 6760 or 6730 (Transaction Reporting).
It allows for the submission of data fields required by these rules
as well as additional data fields that underwriters often report
voluntarily. As part of the proposal, FINRA would codify in Rule
6760 the specific fields that have been deemed necessary under
current Rule 6760(b) and therefore are mandatory for successful
submission of the TRACE New Issue Form. See Notice, at 13978, n.9.
\131\ See supra note 128 and accompanying text.
\132\ See, e.g., Harris Letter, at 6 (``The fields on the FINRA
list are sufficient to value most bonds. . . . I believe that FINRA
chose the fields wisely.''); ICE Data Letter, at 2 (``ICE Data
Services believes the scope of the Proposal is appropriate and we
support the inclusion of the 30 data fields enumerated in the
Proposal's Exhibit 3.'').
\133\ FINRA Rule 6760 currently requires underwriters to report
to FINRA the following information: Issuer; Coupon; CUSIP Number;
Maturity; 144A Eligibility Indicator; the time that a new issue is
priced and, if different, the time that the first transaction in the
offering is executed; a brief description of the issue; and such
other information as FINRA deems necessary to properly implement the
reporting and dissemination of a TRACE-Eligible Security. FINRA's
proposal will require that these data elements be reported to FINRA
prior to the first transaction in the security in all instances.
\134\ See Amendment No. 2, Exhibit 3. Similar rationale for each
data field was also put forth by the FIMSAC. See FIMSAC Letter, at
Schedule A. In addition, in Amendment No. 2, FINRA set forth its
rationale for including certain data fields currently required to be
reported under Rule 6760, as follows: (1) Issuer--necessary for
settlement and valuation purposes; the investor needs to know the
issuing entity of the bond; (2) Coupon--needed for settlement and
valuation purposes; the coupon rate is needed for accrual/interest/
cash flow calculations; (3) CUSIP Number--needed to uniquely
identify securities that trade, clear, and settle in North America,
particularly in the United States; (4) Maturity--necessary for
settlement and valuation purposes; this field is necessary in order
to understand when the bond is due to pay back its principal at par;
this field is used to back populate accruals and cash flows; and (5)
144A Eligible Indicator--necessary for settlement purposes; this
field is needed to distinguish 144A securities for QIB eligible
investors. See Amendment No. 2, Exhibit 3. See also FIMSAC Letter,
at Schedule A.
---------------------------------------------------------------------------
ISIN Number--needed to uniquely identify securities that
are traded and settled internationally outside of North America.
Currency--necessary for settlement purposes in order to
determine the currency of the principal, interest, or premium that will
be paid or received at the time of distribution or settlement of a
trade.
Issue Date/First Settlement Date--needed for settlement
purposes; required in order to populate the first settlement date of
the bond; needed in order to settle the bond trade between
counterparties when trading new issues.
Interest Accrual Date--necessary for settlement and
valuation purposes; needed in order to start the cash flow period of
the coupon.
[[Page 6933]]
Day Count Description--necessary for settlement and
valuation purposes; needed to calculate the purchase accrued interest
and coupon of the security.
Coupon Frequency--necessary for settlement and valuation
purposes; needed to determine how often the coupon payment is made
within the year and to calculate the purchase accrued interest and
coupon payments.
First Coupon Payment Date--necessary for settlement and
valuation purposes; needed to determine whether the coupon will have a
short or long stub on its first coupon payment.
Regulation S Indicator -necessary for settlement purposes;
needed to distinguish Regulation S securities for non-U.S. entities.
Security Type--needed to identify the type of security
being traded and its terms/features.
Bond Type--necessary for valuation purposes; needed as the
bond classification dictates the payout order in the event of an issuer
default; determines the liquidation preference which specifically
affects the valuation of the security.
First Coupon Period Type--necessary for settlement and
valuation purposes; denotes whether the coupon will have a short or
long stub on its first coupon payment depending on the security's issue
date.
Convertible Indicator--necessary for valuation purposes;
needed to understand if the bond is convertible and to allow set up
with the underlying equity and conversion price/conversion ratio.
First Conversion Date--necessary for valuation purposes;
needed to determine when the bond may be converted into stock.
First Conversion Ratio--necessary for valuation purposes;
needed to determine the number of shares into which each convertible
bond can be converted.
Call Indicator--necessary for valuation purposes; needed
in order to know if the bond has call feature(s); needed when the
security is created and will also have an effect on its valuation.
First Call Date--necessary for valuation purposes; needed
in order to know the first call date of the security and will have an
effect on bond valuation.
Put Indicator--necessary for valuation purposes; needed in
order to know if the bond has puttable feature(s); needed when the
security is created and will also have an effect on its valuation.
First Put Date--necessary for valuation purposes; needed
in order to know the first put date of the security and will have an
effect on bond valuation.
Minimum Increment--necessary for settlement purposes;
needed in order to understand the minimum incremental amount of bonds
that an entity can buy and settle at the depository.
Minimum Piece/Denomination--necessary for settlement
purposes; needed in order to understand the minimum tradeable amount of
bonds that an entity can buy and settle at the depository.
Spread; Reference Rate & Floor--necessary for settlement
and valuation purposes; needed to build a cash flow table for the
security which determines the coupon for the period; directly affects
the purchase accrued interest and future interest distributions; needed
to calculate the purchase and interest accrued.
Underlying Entity Ticker--necessary for valuation
purposes; needed to value convertible bonds.
Issuance Amount--addresses the size of the deal, which is
a data attribute for index inclusion criteria across almost every fixed
income index; would have influence on ETF, liquidity, etc.\135\
---------------------------------------------------------------------------
\135\ The Commission believes that FINRA's statement here is
intended to convey that a bond's issuance amount (e.g., the total
par amount issued) is an important piece of information for market
participants because the size of the issuance impacts a bond's
potential inclusion in ETFs and impacts a bond's secondary market
liquidity.
---------------------------------------------------------------------------
First Call Price & First Put Price--critical for option
adjusted spread (OAS) and average life calculations; represent
important fields for most clients (especially retail investors) when
they gauge re-investment risk.
Coupon Type--denotes potential complexity and predictable
cash flow data.
Rating (TRACE Grade)--important to assess risk; FINRA
utilizes ratings to determine TRACE grade (Investment Grade or Non-
Investment Grade) which determines dissemination volume caps.
Perpetual Maturity Indicator--important for pre-trade
compliance; yield calculations generally use first call on perpetual
securities.
PIK Indicator--important for pre-trade compliance as it
indicates cash flow implications and risk for many investors.
As set forth above, FINRA has explained (and several commenters
have agreed) \136\ that each data field is required to either identify,
settle or value a newly issued corporate bond. The Commission agrees
with FINRA's rationale for requiring each data field, and believes that
the required data fields are appropriately tailored to facilitate the
identification, valuation and settlement of newly issued corporate
bonds.\137\ Furthermore, as discussed in detail in Section III.E below,
the Commission believes FINRA's proposal encompasses a limited set of
data that will enable broader market participation at the beginning of
secondary market trading, but will not supplant the demand for more
comprehensive data sets that contain additional fields not reported to
or disseminated by FINRA.\138\
---------------------------------------------------------------------------
\136\ See supra notes 131-132.
\137\ See ICE Data Letter, at 2, FIMSAC Letter, at 2-3 and
Schedule A and Harris Letter, at 6 (all commenting that FINRA's
proposal included the necessary data elements for achieving the
purpose of enabling market participants to participate in the
secondary market when trading begins). The Commission does not
believe that requiring the reporting of CUSIP and ISIN will cause
any change in the manner underwriters procure this information today
or the extent to which market participants rely on this information
to identify specific securities. As FINRA recognized, CUSIP is
already required to be reported to FINRA under FINRA Rule 6760. See,
e.g., FINRA Response Letter, at 9, n.28. Furthermore, both CUSIP and
ISIN are widely used today as primary methods for identifying
securities. While consideration could be given by FINRA to accept
the reporting of other securities identifiers if FINRA decided to
explore that in the future, the Commission agrees with comments that
CUSIP and ISIN are currently necessary data elements for market
participants to identify specific securities, thereby enabling their
participation in the secondary market when these securities begin
trading. See e.g., FIMSAC Letter, at Schedule A; FINRA Letter, at 6.
Regarding comments concerning the collection of alternative
securities identifiers such as FIGI, the Commission recognizes that
freely available, open alternatives to proprietary identifiers do
not entail fees for storage, use, and redistribution, as is
frequently the case for proprietary identifiers. The Commission also
recognizes there are challenges to the adoption of alternatives to
proprietary identifiers such as CUSIP and ISIN that are in
widespread use, such as the need for such alternative identifiers to
be supported in reference data and clearance and settlement systems
in order for them to be viable alternatives to proprietary
identifiers. A future proposed rule change could seek to lessen
reliance on proprietary identifiers for regulatory reporting,
including regulatory reporting related to corporate bonds. The
Commission notes that FINRA could, if appropriate, file a proposed
rule change with the Commission to supplement or allow alternatives
to the securities identifier information that it will be collecting
pursuant to this proposal. Any such proposal would be informed by
the public notice and comment process required by the Act.
\138\ There are many other data provided by data vendors that
provide bond issue reference data, such as issuer information (e.g.,
fundamentals data, capital structure data), specific bond rating,
bond trade and selling restrictions, classification data (industry,
legal entity, etc.), corporate action data, ESG (Environmental,
Social & Governance) data, dividend data, instrument analytics data,
and security ownership data. See supra note 87.
---------------------------------------------------------------------------
In addition, the Commission agrees that it is important that all
required data elements for new issues in corporate debt securities be
reported prior to the first transaction in the security so that market
participants will be able to participate in the secondary market
[[Page 6934]]
promptly.\139\ FINRA stated this approach--to require uniform pre-first
trade reporting \140\--would allow FINRA to collect and make all of the
data available immediately to market participants, resulting in a more
consistent, timely, and complete data set that will support more
efficient pricing, trading and settlement of bonds.\141\ As stated by
FINRA and other commenters, improved reference data transparency should
promote market efficiency and fair competition among all market
participants by helping to ensure all market participants have access
to consistent, timely and accurate reference data regarding newly
issued corporate bonds.\142\ The Commission believes providing market
participants with reference data important for their participation in
the secondary market when a bond begins to trade should eliminate the
information asymmetry described above, which would benefit the
corporate bond market.\143\ Enabling broader participation by all
market participants should promote (i) improved competition among
market participants by providing all market participants with the
ability to access the same investment options to meet their own
business and investment needs or those of their customers at the time a
bond becomes available in the secondary market, (ii) improved secondary
market liquidity and lower the cost of capital for issuers as more
market participants become able to participate in the secondary market
on the first day of trading; and (iii) lower other costs by providing
data vendors with a more efficient method of collecting reference data
and eliminating existing market inefficiencies.\144\ Furthermore, the
Commission agrees with commenters and believes that the provision of
reference data will benefit all participants on electronic trading
platforms, including investors and intermediaries, by enabling them to
price and trade bonds based on consistent, accurate, and timely
information, which is vital to meet the information needs of an
increasingly electronic corporate bond market.\145\
---------------------------------------------------------------------------
\139\ Currently, for information reported under Rule 6760 for
trade reporting purposes, the rule allows phased reporting in some
cases. Specifically, for an offering of a security that is priced
and begins trading on the same business day between 9:30 a.m. and
4:00 p.m. Eastern Time, Rule 6760 requires ``as much of the
information set forth in paragraph (b)(1) that is available prior to
the execution of the first transaction of the offering, which must
be sufficient to identify the security accurately, and such other
information that FINRA deems necessary and provide all other
information required under paragraph (b)(1) within 15 minutes of the
Time of Execution of the first transaction.'' See Rule 6760(c).
\140\ The Commission recognizes that there may be an incremental
burden on underwriters; however, the Commission believes this burden
will be mitigated both by the existence of current reporting
infrastructures and the fact that the data elements to be reported
are likely already in the possession of underwriters, given the use
of this information in the newly issued bond's primary offering. See
infra Section III.D.3.
\141\ See Notice, at 13979. FINRA noted that the Recommendation
stated that managing underwriters should be required to report the
data elements to FINRA no later than reporting such data elements to
any third party not involved in the offering, including reference
data vendors. See Recommendation, at 3. See also supra note 113 for
supporting comment letters.
\142\ See Notice, at 13981. See also supra notes 31-42 and
accompanying text.
\143\ See supra Section III.A.3.
\144\ See id. See also supra notes 90-104 and accompanying text
for a discussion of concerns about information asymmetry in the
corporate bond market today that can disadvantage many market
participants. Petitioner argued that FINRA provided no evidence the
proposal would reduce broken trade errors or reduce costs or
duplicated efforts. See supra notes 51-52. In contrast, other
commenters and market participants stated that FINRA's proposed data
service would reduce costs, eliminate duplicated efforts, and reduce
trading errors, as market participants would no longer have to
source data from multiple vendors or enter data manually. See supra
notes 31-42 and 92-103 and accompanying text. As discussed herein,
the Commission believes the proposal would benefit the corporate
bond market by, among other things, lowering costs and potentially
reducing trading errors.
\145\ See supra notes 37-41 and note 100. See also FIMSAC
Transcript, supra note 36, Comments from Frederic Demesy, Refinitiv,
at 0077-78 (``[W]e see a transformation in the bond markets where in
the past market participants were expecting the data to be available
at the end of day or the timeliness was not as important as it is
now. Now, a market participant wants to have the information when
the bond prices to set up their platforms to be able to trade. They
want to have updates intraday, and that is a very big difference
from what happened maybe two, three or five years ago where end of
day updates was enough for them to operate. Now, the market
participants want information intraday. And that forces market
vendors . . . to rethink the way we distribute the reference data.
And obviously the more the bond trades electronically, the more
market participants would want to have this information on time.'');
Comments from Alex Sedgwick, T. Rowe Price, at 0084-85 (``Electronic
market-makers ultimately need this information to provide accurate
pricing and accurate valuation for the prices that they are pushing
out to the market. If this information is not available, that
ultimately means that there are liquidity providers that may not be
able to provide liquidity to us when those new issues are free to
trade.'')
---------------------------------------------------------------------------
For these reasons, the Commission believes that FINRA's proposal is
consistent with Section 15A(b)(6) of the Act as it will ``promote just
and equitable principles of trade, foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in'' newly
issued corporate bonds, and ``remove impediments to and perfect the
mechanism of a free and open market'' with respect to the market in
such securities, consistent with Section 15A(b)(6) of the Act.\146\ The
Commission believes it is important for all required data fields to be
reported to FINRA prior to the first transaction in the security
because this requirement, coupled with FINRA's dissemination of the new
issue reference data immediately upon receipt, will allow all market
participants to have timely, basic information that is important for
the identification, valuation, and settlement of newly issued corporate
bonds in order to participate in the secondary market without
delay.\147\
---------------------------------------------------------------------------
\146\ One commenter stated that FINRA should be required to
demonstrate that the benefits of the proposal are so substantial and
clear to overcome the strong presumption that private actors in
competitive markets are the best means of providing goods and
services. See supra note 54 and accompanying text. Pursuant to the
Act, the Commission must approve an SRO's proposed rule change if it
finds that such proposed rule change is consistent with Act and the
rules and regulations issued thereunder that are applicable to such
organization. See Section 19(b)(2)(C)(i) of the Act. For the reasons
set forth herein, the Commission finds that FINRA has made such a
showing.
\147\ See supra Section III.A and notes 90-104 and accompanying
text for a discussion of concerns about information asymmetry in the
corporate bond market today that can disadvantage many market
participants; and note 145 and accompanying text. As discussed
above, timely availability of this data should promote (i)
competition, (ii) improve secondary market liquidity and lower cost
of capital and (iii) lower other costs. In addition, FINRA has
clearly and explicitly stated that it will provide guidance in the
course of new rule implementation to provide any further
clarification required regarding data fields, and will engage with
market participants as required to provide such guidance. FINRA has
also clearly and explicitly stated that it will engage with market
participants on the appropriate business requirements for the
reporting process and has stated that it may take a phased approach
to implementation to promote compliance and data accuracy. See supra
notes 125-127 and accompanying text.
---------------------------------------------------------------------------
C. FINRA as Centralized Data Source
1. Comments on the Proposal
Petitioner questioned whether a single SRO would provide more
accurate, complete and timely service than competing private sector
providers and noted that the impact of any errors in a centralized
system would be magnified.\148\ Petitioner stated that ``[i]f trades
need more accurate, compete and timely data, they can switch to one of
several major data providers.'' \149\ Petitioner stated that the
Approval Order did not explain ``why uniform (as opposed to accurate
and accessible) data is necessary or desirable in a competitive
market'' and that ``assuming uniformity were an important goal . . . ,
neither FINRA nor the [Approval Order] has explained why that justifies
a sole-source provider.'' \150\ Petitioner
[[Page 6935]]
further stated that private vendors will have a diminished incentive to
gather, verify, organize, maintain, and provide reference data
information, and that FINRA will not have the financial incentive to do
so in a cost-effective manner or to improve its technology for
collecting or distributing bond data, and, as a result, traders' cost
for bond reference data may increase.\151\ Another commenter opposed
giving FINRA or any other utility or vendor a monopoly or competitive
advantage in the collection and dissemination of corporate bond new
issue reference data, stating that doing so may reduce the overall
quality and timeliness, and increase the cost, of the data.\152\
Petitioner suggested that FINRA should have considered alternatives to
the proposal, including ``develop[ing] certification criteria for
vendors, or common data standards for underwriters, at far less cost
than the construction of a new service, and at far less risk of a
single point of failure'' \153\ and stated that the proposal violates
the Act because it does not foster cooperation with existing data
vendors and providers.\154\
---------------------------------------------------------------------------
\148\ See Petitioner Letter, at 9-10.
\149\ See Petitioner Statement at 23.
\150\ See Petitioner Statement, at 24.
\151\ See Petitioner Letter III, at 5-6; Petition for Review, at
31. This commenter further stated that the proposed centralized data
service could achieve a dominant position regardless of whether an
innovating company could have done a better job and that the
proposed database, run as a ``regulatory utility,'' is likely to
produce a service less valuable than what market-based providers
would produce. See Petitioner Statement, at 37.
\152\ See Letter from Larry Tabb, TABB Group, dated May 15, 2019
(``Tabb Letter''), at 3. See also Petitioner Letter V, at 2.
\153\ See Petitioner Statement, at 24.
\154\ See Petitioner Statement, at 20.
---------------------------------------------------------------------------
Petitioner and another commenter stated that the proposal creates a
conflict of interest for FINRA and reduces FINRA's standing as an
independent regulatory force.\155\ The other commenter stated that
FINRA has a pecuniary interest in promulgating the proposal and ``can
use its regulatory authority to force underwriters to provide it with
information and then sell the information to market participants at a
profit.'' \156\ On the other hand, FIMSAC stated it would be concerned
by any alternative construct to FINRA's proposal that would give
increased market power to a single commercial data provider without a
commensurate level of regulatory oversight.\157\
---------------------------------------------------------------------------
\155\ See Petitioner Letter IV, at 5; Heritage Letter V, at 2.
See also Petitioner Statement, at 31 (``The [proposal] . . . creates
an inherent conflict between a public regulator and the private
parties it regulates.'').
\156\ See Heritage Letter V, at 2. See also Petitioner
Statement, at 31 (stating that pursuant to the proposal, FINRA
``would coerce underwriters to surrender bond-reference data and
would (at least implicitly) compel broker-dealers to buy FINRA's
data'' and that if the proposed database costs more than expected or
does not achieve the purported benefits, FINRA may be motivated to
take steps to save its own finances that, ``as a regulator, it is
uniquely empowered to take.''). In Section III.F below, the
Commission discusses comments regarding FINRA's potential fees for
this service.
\157\ See FIMSAC Letter, at 4. The FIMSAC stated that data
vendors are conflicted by competing commercial interests and should
not be in a position to determine who can have access to data
necessary to value, trade and settle a newly issued corporate bond.
See id. Petitioner, which has both a data business and an electronic
bond trading platform, responded to this comment, stating that there
is no basis for FIMSAC's claims that integrated firms are using
their data business to harm competition in trading. Petitioner
pointed to data showing that it holds only 3.2% of market share of
domestic institutional electronic corporate bond trading, and argued
that these data contradict any suggestion that the commenter has
leveraged its data business to gain a competitive advantage for its
electronic trading business. See Petitioner Letter II, at 2-4.
---------------------------------------------------------------------------
A number of commenters questioned the quality of FINRA's current
TRACE data, and pointed to a recent study that found that approximately
20% of entries had errors.\158\ Petitioner stated that ``[t]he best
predictor of whether FINRA will be able to run an accurate data system
is its experience with the TRACE system, an existing system that is
simpler than the as-yet-unbuilt system FINRA proposes'' and that
``[n]othing in the record supports any inference that FINRA's new
system would outperform the 20% error rate cited in the . . . Tabb
Study.'' \159\
---------------------------------------------------------------------------
\158\ See, e.g., Healthy Markets Letter II, at 5; Petitioner
Letter III, at 5-6; and Petitioner Letter IV, at 4 (citing to Larry
Tabb, Tabb Forum, ``An SEC-Mandated Corporate Bond Monopoly Will Not
Help Quality'' (Mar. 21, 2019) (``Tabb Study'')). See also
Petitioner Statement, at 29.
\159\ See Petitioner Statement, at 30.
---------------------------------------------------------------------------
2. FINRA Response to Comments
In response to comments that private vendors should continue to
provide this information rather than a single SRO,\160\ FINRA stated
that ``[a] key element of the [p]roposal is that FINRA, as a not-for-
profit SRO, will provide a limited set of essential corporate bond new
issue reference data as a public market utility on timely, reasonable,
and non-discriminatory terms to anyone who chooses to receive it.''
\161\ FINRA noted that, in contrast, ``the private data vendors that
today provide corporate bond new issue reference data are not bound by
similar obligations, and the FIMSAC expressed particular concern that a
dominant private data vendor has refused to license data, or has
withheld it selectively, for anti-competitive reasons.'' \162\ FINRA
stated that the current disparity among vendor access to reference data
results from competitive barriers in the current market, ``as
underwriters have relatively few incentives to report to data vendors
other than the prevalent incumbent data vendor, i.e., Petitioner.''
\163\ FINRA further noted that the FIMSAC was particularly concerned
that ``a dominant private vendor's ability to restrict access to new
issue reference data has immediate and direct downstream impacts on the
ability of other market participants to perform critical market
functions such as pricing, trading, clearing, and settling new issues
once the bonds begin trading in the secondary market.'' \164\ FINRA
stated that comments from members and panelists at the FIMSAC meeting
also provided support for the Subcommittee's recommended solution that
FINRA establish and operate a consolidated, regulated data
service.\165\ Furthermore, FINRA noted that the FIMSAC reaffirmed FINRA
as ``the most logical and impartial choice'' to
[[Page 6936]]
establish and operate the data service in its comment letter, as FINRA
would provide the data impartially ``to all market participants on
objective and non-discriminatory terms.'' \166\ While FINRA
acknowledged that the proposed data service may create a potential
single point of failure,\167\ FINRA stated it continues to believe any
concerns about the risks of consolidation do not outweigh the benefits
of the data service, and that vendors are likely to continue collecting
corporate bond new issue reference data.\168\
---------------------------------------------------------------------------
\160\ See supra notes 148-152 and accompanying text.
\161\ See FINRA Statement, at 2.
\162\ See FINRA Statement, at 2 (citing Recommendation, supra
note 30). In response, Petitioner stated that it submitted the
Petitioner Motion and Declarations to rebut FINRA's allegations of
anti-competitive conduct. Specifically, Petitioner stated that the
Declarations demonstrate that Petitioner does not restrict access to
its reference data service based on firms' willingness to use any of
its trading services, or for any other anti-competitive reasons, and
that Petitioner makes its reference data service broadly available
on standard terms for standard use cases. See Petitioner Motion, at
10. FINRA, on the other hand, stated that the Declarations do not
directly address the specific concerns expressed by the FIMSAC and
are immaterial in light of the well-developed record. See FINRA
Opposition, at 6-7.
\163\ See FINRA Statement, at 12.
\164\ See FINRA Statement, at 2-3 (citing Recommendation, supra
note 30). FINRA further stated that Petitioner is the dominant
private data vendor in today's market for corporate bond new issue
reference data and ``often gains access to new issue reference data
before other vendors and market participants.'' See FINRA Statement,
at 3. In response, Petitioner stated that neither the Recommendation
nor the FIMSAC Letter suggested that one dominant private data
vendor engaged in anti-competitive activity. See Petitioner Motion,
at 3. In addition, Petitioner stated that the Declarations
``conclusively rebut the notion that Petitioner engages in an
anticompetitive leveraging of the new bond issuance functionality on
the Petitioner Terminal service to gain preferential access to
reference data.'' See Petitioner Motion, at 9. On the other hand,
FINRA stated that the Declarations neither directly address nor
dispel the concerns expressed by the FIMSAC and others that underlie
the proposed rule change. See FINRA Opposition, at 6-9.
\165\ Specifically, FINRA pointed to (i) a statement by Larry
Harris, USC Marshall School of Business, that ``FINRA is best
equipped to solve this problem;'' and (ii) a statement by Bob LoBue,
J.P. Morgan, that the firm ``could probably populate [its existing
process for providing new issue reference data to FINRA] a little
bit deeper.'' See FINRA Statement, at 9 (citing to FIMSAC
Transcript, supra note 36).
\166\ See FINRA Statement, at 9-10 (citing the FIMSAC Letter).
FINRA further noted that the FIMSAC articulated a ``concern that
certain large reference data providers `have in the past, and could
in the future, manage their data and trading businesses in a
coordinated fashion--refusing to license their leading reference
data products to trading platforms that they deem to be competitive
with their own.' '' See id. at 10 (citing FIMSAC Letter, at 3-4).
\167\ See supra note 153 and accompanying text.
\168\ See Response Letter, at 10. However, one commenter stated
that FINRA offers no reason why vendors would continue to fund their
own research in addition to paying for FINRA's information. See
Petitioner Letter V, at 3. See also Section III.E for a discussion
of the proposal's impacts on competition.
---------------------------------------------------------------------------
In response to comments that there exist alternatives to the
proposal that would be less costly,\169\ FINRA noted that it considered
alternatives and explained its rationale for the choices it made in its
proposal.\170\ FINRA further stated that Petitioner's analysis that an
SRO's proposed rule change cannot be approved if some alternative might
also accomplish the same goal is flawed.\171\
---------------------------------------------------------------------------
\169\ See supra note 153 and accompanying text.
\170\ See FINRA Statement, at 25. See also Notice, at 13979
(``FINRA alternatively considered maintaining the Rule's phased
reporting approach for offerings in corporate debt securities
subject to the proposal, with certain core information required
prior to the first trade and an extended 60-minute window for
remaining information, given the additional data fields that would
be required to be reported under the proposal. However, FINRA
believes that the proposed approach to require uniform pre-first
trade reporting better supports the stated goals in the FIMSAC
Recommendation to increase the efficiency of the corporate bond
market and promote fair competition among all market
participants.''); 13982-83 (``FINRA also considered whether there
was an appropriate alternative approach that involved an expansion
of the DTCC's NIIDS service to include corporate new issue reference
data. However, based on operational and commercial reasons,
including inefficiencies with integrating the existing FINRA
reporting infrastructure with a separate DTCC infrastructure, FINRA
concluded that expanding the current existing FINRA reporting and
dissemination framework was a more effective and efficient approach
. . .'').
\171\ See FINRA Statement, at 25.
---------------------------------------------------------------------------
In response to comments regarding alleged conflicts of interest and
FINRA acting in a commercial rather than a regulatory role,\172\ FINRA
stated that, as a non-profit registered securities association and SRO,
it does not intend to compete with or displace private data
vendors.\173\ FINRA added that it did not initiate the proposal for
commercial benefit but did so in response to a specific recommendation
and regulatory need identified by the FIMSAC.\174\ FINRA stated that
the proposal is designed to achieve a clear regulatory objective--to
provide more timely and accurate consolidation and dissemination of key
corporate bond new issue reference data.\175\ Furthermore, FINRA noted
that under Section 15A of the Act, it is charged with a number of
responsibilities including, among others, removing impediments to a
free and open market and fostering clearance, settlement, and
information processing with respect to transactions in corporate bonds
and other securities.\176\ FINRA stated that, in light of this mandate,
the collection, consolidation and dissemination of fundamental security
information is not a novel role for a registered securities
association, and FINRA routinely provides other types of basic security
information to the marketplace to, among other things, facilitate the
clearing and settlement of securities and improve transparency.\177\
FINRA also noted that SRO regulation of new issue reference data is not
novel, as the same kind of new issue reference data for municipal bonds
are made available under rules adopted by the MSRB, which is charged
with a similar mandate as FINRA in the municipal securities
market.\178\ FINRA concluded that it believes that the establishment of
a corporate bond new issue reference data service fits squarely within
the scope of FINRA's affirmative regulatory authority under the
Act.\179\
---------------------------------------------------------------------------
\172\ See supra notes 155-157 and accompanying text.
\173\ See Response Letter, at 10.
\174\ See id.
\175\ See id.
\176\ See FINRA Statement, at 2; Response Letter, at 9. See also
Section 15A(b)(6) of the Act, 15 U.S.C. 78o-3(b)(6).
\177\ See Response Letter, at 9-10. For example, FINRA makes
available to the public all transaction data in corporate bonds
through TRACE. See FINRA's TRACE Overview, available at https://www.finra.org/sites/default/files/TRACE_Overview.pdf. See also FINRA
Statement, at 2. FINRA also makes details about corporate and agency
debt securities available to FINRA members and provides a tool to
the public that enables them to analyze and compare the costs of
owning mutual funds. See TRACE OTC Corporate Bonds and Agency Debt
User Guide, available at https://www.finra.org/sites/default/files/TRAQS-CA-user-guide-v4.7.pdf.pdf; FINRA Fund Analyzer, available at
https://tools.finra.org/fund_analyzer/.
\178\ See FINRA Statement, at 2.
\179\ See FINRA Statement, at 2.
---------------------------------------------------------------------------
In response to comments concerning the risk of consolidating the
proposed corporate bond new issue reference data with FINRA and the
timeliness and accuracy of current TRACE data,\180\ FINRA stated that
there is key information missing from the analysis on which these
commenters rely, and without such information it is difficult for FINRA
to provide a meaningful response to the analysis.\181\ FINRA stated
that based on its own review of TRACE and the same vendor's data, FINRA
found different results, including a significant number of instances
where it received data not yet available from the vendor.\182\ FINRA
also stated that it would expect substantially fewer reconciliation
differences if the proposal is approved because FINRA believes a number
of the differences found in the analysis may have resulted from data
fields that are not currently system-validated.\183\ In contrast, FINRA
stated that the corporate bond new issue reference data fields would
become system-validated under this proposal, as FINRA would employ
systemic and operational checks for all of the data fields to determine
if any fields are either missing or not conforming to expected format
or standards at the time of submission.\184\ Furthermore, FINRA stated
that FINRA's long history of successfully providing critical TRACE data
to the markets since 2002 negates any concerns about TRACE' s
accuracy.\185\
---------------------------------------------------------------------------
\180\ See supra notes 148, 158-159 and accompanying text.
\181\ See Response Letter, at 10-11; FINRA Statement, at 23-22.
Specifically, with respect to the Tabb Study cited by certain
commenters, FINRA stated that it is not clear what TRACE data was
used for the analysis or which point in time during the trading day
was used to compare TRACE data with the vendor's data. In addition,
FINRA stated that the analysis does not explain which of the two
sources (TRACE or the vendor) were deemed accurate (it only
references ``reconciliation differences'') or whether the
differences included cases where data were not present yet in either
system. See id. In response, Petitioner stated that FINRA's response
is ``puzzling'' as the Tabb Study states that it used the ``initial
release'' of FINRA's own ``TRACE Corporate and Agency Master file,''
and stated that neither FINRA nor any other commenter contests that
the concern is with the inaccuracy of FINRA's data. See Petitioner
Letter V, at 2.
\182\ See Response Letter, at 10-11; FINRA Statement, at 23-22.
\183\ See id.
\184\ See id. In response, Petitioner stated that FINRA's
reliance on unspecified ``system-validated'' data is not enough to
refute the historical evidence of ``a high error rate for
comparatively simple data.'' See Petitioner Letter V, at 3.
\185\ See FINRA Statement, at 24.
---------------------------------------------------------------------------
3. Commission Discussion and Findings
a. Centralized Database Provider
The Commission believes that FINRA is an appropriate entity to
operate a centralized database for newly issued corporate bond
reference data because of its status as a regulated SRO and its
[[Page 6937]]
accompanying regulatory obligations, and because of its demonstrated
experience with the establishment and maintenance of databases used by
the public.\186\ There is an information asymmetry in the market for
newly issued corporate bond reference data.\187\ Specifically, there is
a lack of broadly available and accessible new issue reference data on
the first day of secondary market trading that impedes the efficiency
and competition in the current marketplace.\188\ The Commission finds
that FINRA's proposed reporting requirements and dissemination protocol
of such data are reasonably designed to address this information
asymmetry by facilitating access to timely and accurate new issue
corporate bond reference data, consistent with Section 15A of the
Act.\189\
---------------------------------------------------------------------------
\186\ See infra notes 193-197 and accompanying text.
\187\ As discussed above, in the corporate bond market today,
the Commission understands from market participants that Petitioner
typically has the timeliest access to newly issued bond reference
data on the first day a bond trades, as it enjoys the voluntary
cooperation of underwriters. See supra note 91. While market
participants and others have expressed concerns that Petitioner is
engaged in anti-competitive conduct in the market for newly issued
corporate bond reference data, the Commission is not making any
findings herein regarding whether Petitioner has actually engaged in
such conduct. See supra notes 162 and 164 and accompanying text.
\188\ In contrast to the corporate bond market, the municipal
securities market and Treasury market have centralized mechanisms in
place that provide market-wide access to information about newly
issued securities on the first day of trading. MSRB Rule G-34
requires municipal securities underwriters to submit new issue
information for municipal bonds to the New Issue Information
Dissemination Service (``NIIDS''), which is operated by the
Depository Trust and Clearing Corporation (``DTCC''). The FIMSAC
noted that this information includes ten data elements required to
set up an issue in the NIIDS, as well as up to 70 additional data
elements. See Recommendation, at 1. In the Treasury market, the U.S.
Department of the Treasury publishes details about upcoming
issuances in a new issue calendar and immediately following each
auction.
\189\ See supra Section III.A.3 and Section III.B.3. One
commenter argued that FINRA should have considered alternatives to
the proposal to address information asymmetries in the market for
newly issued corporate reference data. But, as discussed above, the
Act requires that the Commission approve an SRO's proposed rule
change if it finds that such proposed rule change is consistent with
Act and the rules and regulations issued thereunder that are
applicable to such organization. See Section 19(b)(2)(C)(i) of the
Act. For the reasons set forth herein, the Commission finds that
FINRA has made such a showing.
---------------------------------------------------------------------------
The Commission believes that FINRA's status as an SRO will help
ensure that it operates the New Issue Reference Data Service in a
manner that will address the current information asymmetry in reference
data availability on the first day of secondary market trading.
Importantly, Section 15A of the Act will require FINRA to provide the
New Issue Reference Data Service to market participants in a manner
that is not unfairly discriminatory and on terms that are equitable and
reasonable.\190\ Furthermore, as an SRO, the Commission oversees FINRA
to ensure that it is carrying out its regulatory responsibilities. The
Commission has the ability to review FINRA's proposed rule changes for
consistency with the Act, which would include any proposed changes with
respect to the operation of the New Issue Reference Data Service and,
as discussed below, any proposed fees for accessing the database.\191\
The Commission also oversees FINRA through inspections of its
operations and programs. Finally, FINRA has an obligation to operate
consistent with requirements under the Act and with its own rules, and
is required to enforce compliance by its members with the federal
securities laws and FINRA's own rules.\192\
---------------------------------------------------------------------------
\190\ See 15 U.S.C. 78o-3. See also FIMSAC Letter, at 3
(recognizing the importance of the operator of a reference data to
be subject these standards of conduct).
\191\ Pursuant to Section 15A of the Act, FINRA, as a registered
securities association, must establish rules that generally: (1) Are
designed to prevent fraud and manipulation, promote just and
equitable principles of trade, foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors and the public interest; (2) provide for the
equitable allocation of reasonable fees; (3) do not permit unfair
discrimination; (4) do not impose any unnecessary or inappropriate
burden on competition; and (5) with limited exceptions, allow any
broker-dealer to become a member. See 5 U.S.C. 78s(g).
\192\ See 5 U.S.C. 78s(g).
---------------------------------------------------------------------------
In addition to being subject to a comprehensive regulatory regime,
FINRA has extensive experience with collecting data from its members
and disseminating such data to the public. For example, TRACE, which
FINRA has operated since 2002, provides information to investors and
other market participants about secondary market trades in corporate
bonds and other debt securities that it collects from its member firms.
Currently, TRACE disseminates information to the marketplace about
corporate bond trades, including trade price and size, immediately upon
receipt.\193\ U.S. secondary trading markets have greatly benefitted
from the increased transparency that have resulted from FINRA's
establishment, management and expansion of TRACE.\194\ In addition,
FINRA currently operates the Order Audit Trail System (``OATS''), which
was established in 1996.\195\ Pursuant to FINRA Rules, FINRA's members
report data to OATS to create an integrated audit trail of order,
quote, and trade information for all NMS stocks and OTC equity
securities.\196\ The Commission believes that the New Issue Reference
Data Service would be an appropriate extension of the data services
that FINRA provides to the public and would benefit from FINRA's
experience in collecting and disseminating data to the public; the
Commission also notes that the proposal is limited to reference data
regarding TRACE-eligible bonds.\197\
---------------------------------------------------------------------------
\193\ See FINRA Regulation Notice 19-12 (April 12, 2019),
available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/finra-regulatory-notice-trace-19-12.pdf. In addition,
FINRA makes details about corporate and agency debt securities
available to FINRA members. See TRACE OTC Corporate Bonds and Agency
Debt User Guide, available at https://www.finra.org/sites/default/files/TRAQS-CA-user-guide-v4.7.pdf.pdf.
\194\ See, e.g., FIMSAC Letter, at 3; Hendrik Bessembinder,
William Maxwell, and Kumar Venkataraman, ``Market Transparency,
Liquidity Externalities, and Institutional Trading Costs in
Corporate Bonds,'' Journal of Financial Economics 82, 251-288
(2006), available at https://doi.org/10.1016/j.jfineco.2005.10.002;
Michael A. Goldstein, Edith S. Hotchkiss, and Erik R. Sirri,
``Transparency and Liquidity: A Controlled Experiment on Corporate
Bonds,'' The Review of Financial Studies 20, 235-273 (2007),
available at https://doi.org/10.1093/rfs/hhl020; Amy K. Edwards,
Lawrence E. Harris, and Michael S. Piwowar, ``Corporate Bond Market
Transaction Costs and Transparency,'' The Journal of Finance 62,
1421-1451 (2007), available at https://doi.org/10.1111/j.1540-6261.2007.01240.x; and Dominique C. Badoer and Cem Demiroglu, ``The
Relevance of Credit Ratings in Corporate Bond Markets,'' The Review
of Financial Studies 32, 42-74 (2018), available at https://doi.org/10.1093/rfs/hhy031.
\195\ See In the Matter of National Association of Securities
Dealers, Inc., Order Instituting Public Proceedings Pursuant to
Section 19(h)(1) of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions, Exchange Act Release No.
37538 (August 8, 1996), Administrative Proceeding File No. 3-9056
and Report Pursuant to Section 21(a) of the Securities Exchange Act
of 1934 Regarding the NASD and The Nasdaq Stock Market LLC
(``Nasdaq''). See also Securities Exchange Act Release No. 39729
(March 6, 1998), 63 FR 12559 (March 13, 1998) (order approving
proposed rules comprising OATS) (``OATS Approval Order'').
\196\ Id. See also Securities Exchange Act Release No. 63311
(November 12, 2010), 75 FR 70757 (November 18, 2010) (SR-FINRA-2010-
044) (order approving proposed rule change by FINRA relating to the
expansion of OATS to all NMS stocks). While OATS data are not
disseminated to the public, it is used by FINRA to recreate events
in the lifecycle of an order and monitor the trading activity of
member firms. See https://www.finra.org/filing-reporting/market-transparency-reporting/order-audit-trail-system-oats.
\197\ The Commission also notes that the FIMSAC considered
various alternatives to FINRA in its deliberations, including
private sector providers, and settled on FINRA because it believed
that FINRA was the most logical and impartial choice because it is
subject to regulatory oversight by the Commission and because of
underwriters' existing reporting mechanisms with FINRA. See FIMSAC
Letter, at 3.
---------------------------------------------------------------------------
[[Page 6938]]
b. Data Quality and Resilience
Some commenters have expressed concerns that the New Issue
Reference Data Service will harm corporate bond reference data quality
and resilience, noting that (1) it would create a single point of
failure, (2) FINRA would not be incentivized to maintain high quality
data, and (3) current error rates in TRACE is evidence that FINRA's
reference database will not be reliable.\198\ The Commission is not
persuaded by these arguments. Regarding concerns about a single point
of failure, it is not clear to the Commission that FINRA's New Issue
Reference Data Service will indeed be a single point of failure.\199\
While some have suggested that FINRA's proposal would increase
efficiencies due to the consolidation of reference data within one
entity,\200\ it is the Commission's judgment that it is premature to
draw conclusions about the impact of FINRA's proposal on the manner in
which underwriters currently distribute data or how other data vendors
conduct business or customers' demand for other data vendors' services.
FINRA's proposal does not disrupt the ability of underwriters to
continue reporting new issue reference data to data vendors. Because
underwriters already have these data reporting processes in place and
have incurred the costs of establishing those processes, underwriters
may choose to continue to provide new issue reference data to data
vendors as well as to FINRA. Should that be the case, private data
vendors will continue to be incentivized to invest in their current
methods of collection and distribution and concerns about a single
point of failure will be mitigated. If market participants do in fact
change their current practices and report new issue reference data to
FINRA only,\201\ the Commission believes that FINRA's experience with
establishing and maintaining databases such as TRACE and OATS and the
Commission's regulatory oversight of FINRA will ensure that the New
Issue Reference Data Service is designed and operated consistent with
the Act.\202\
---------------------------------------------------------------------------
\198\ See supra notes 148, 151-152, and 158-159 and accompanying
text.
\199\ The Commission believes that data vendors will continue to
compete for the provision of data services and expects that market
participants will turn to a variety of sources for their data needs
depending on the facts and circumstances at hand. See infra Section
III.E for a discussion of the proposal's impact on competition.
\200\ See, e.g., infra note 216 and accompanying text.
\201\ See, e.g., FIMSAC Letter, at 3 and infra note 216 and
accompanying text (describing the potential for underwriters to
change their current practices by reporting reference data to FINRA
only).
\202\ As discussed above, the Commission oversees FINRA by,
among other things, conducting inspections of its operations and
programs to examine whether FINRA is operating consistent with Act
requirements and its own rules. See supra Section III.C.3.a.
---------------------------------------------------------------------------
The Commission also believes that FINRA will be incented to build
and maintain a high quality New Issue Reference Data Service. As
discussed previously, it is possible that the current business
processes for new issue reference data distribution remain, which would
impose competitive pressures on FINRA to provide high quality new issue
reference data. If FINRA does become the sole source of new issue
reference data, however, the Commission believes that FINRA will build
and maintain a high quality New Issue Reference Data Service,
mitigating concerns about data quality and resilience, because of (i)
FINRA's experience with the establishment and maintenance of databases
such as TRACE and OATS, (ii) its status and regulatory obligations as a
regulated SRO, and (iii) the Commission's oversight of FINRA, including
our inspection and examination functions.
Finally, the Commission is not persuaded that commenters' concerns
about error rates in TRACE data call into question the ability of FINRA
to build and maintain a reliable reference database. As discussed
above, commenters have expressed concerns about FINRA's proposed
reference database, arguing that ``reconciliation differences'' show
that FINRA's current collection of bond data contains a high incidence
of errors.\203\ On the other hand, FINRA has argued that
``reconciliation differences'' do not necessarily mean errors nor
demonstrate that FINRA's current collection of data has a high
incidence of errors.\204\ Furthermore, FINRA states that it found
different results based on its own review of TRACE data, including a
significant number of instances where it received data not yet
available from the vendor.\205\ This FINRA analysis suggests that a
number of the ``reconciliation differences'' deemed to reflect FINRA
errors may in fact be the simple result of FINRA possessing certain
data that was not yet available to the vendor.
---------------------------------------------------------------------------
\203\ See supra notes 158-159 and accompanying text.
\204\ In particular, FINRA states that the analysis does not
explain which of the two sources (TRACE or the vendor) were deemed
accurate (it only references ``reconciliation differences'') or
whether the differences included cases where data were not present
yet in either system. See Response Letter, at 11.
\205\ See id.
---------------------------------------------------------------------------
Moreover, the Commission does not believe that the disputed
comments concerning existing TRACE error rates call into question the
ability of FINRA to build and maintain a reliable reference database
for the following additional reasons.\206\ First, as discussed above,
FINRA has an established track record of creating reliable databases of
information gathered from its member firms and made available to the
public.\207\ Additionally, FINRA has explicitly and clearly stated that
it will engage with market participants on the appropriate business
requirements for the reporting process, it intends to implement
functionality to allow for underwriters to correct previously submitted
data to FINRA for a significant period after receiving the initial Rule
6760 submission, it may take a phased approach to implementation to
promote compliance and data accuracy, and data reported to FINRA will
be system-validated.\208\ The Commission expects FINRA to do these
things and believes that FINRA is committed to establishing a reliable
reference database, consistent with its statutory and regulatory
obligations under the Act, and the Commission will continue to monitor
closely FINRA's work and implementation of the New Issue Reference Data
Service.\209\ Furthermore, as discussed above, the Commission oversees
FINRA as an SRO and, to the extent that it is operating the database in
a manner that violates the Act or the rules and regulations thereunder,
the Commission will have recourse.
---------------------------------------------------------------------------
\206\ The Commission is not taking a position on the accuracy of
either commenters' or FINRA's statements regarding error rates.
\207\ See supra notes 193-197 and accompanying text.
\208\ See Response Letter, at 11-15.
\209\ In addition, as discussed below, the Commission believes
that data vendors will likely continue to compete in the market for
data. In addition to potentially competing in the market for new
issue reference data by operating as they do today, these data
vendors will also continue to compete based on differing value added
services related to the required information and also based on
additional data fields, data updates, and services related to the
data and that such competition should continue to spur innovation
and allay concerns regarding a single point of failure and error
rates. See infra Section III.E.3.
---------------------------------------------------------------------------
D. Burden on Underwriters
1. Comments on the Proposal
Commenters expressed concerns about how FINRA's proposal might
impact the underwriters that will be required to provide FINRA with new
reference data elements for newly issued corporate bonds. One commenter
argued that the proposal would increase regulatory and liability
burdens for
[[Page 6939]]
underwriters without any clear benefit.\210\ This commenter and
Petitioner argued that the proposed rule's compliance burden would
disproportionately impact smaller underwriters.\211\ Another commenter
stated that FINRA should be required to demonstrate ``that the benefits
to information purchasers [of the proposal] would materially outweigh
the unrecompensed costs imposed on underwriters.'' \212\ Petitioner
argued that FINRA must include information regarding underwriter's
costs of preparing for new infrastructure and compliance
obligations.\213\
---------------------------------------------------------------------------
\210\ See Chamber Letter, at 4 (``Underwriters would face
potential liability for errors in reporting and calculation, while
there is no clear benefit for this increased burden.''); Letter from
Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce,
dated October 24, 2019 (``Chamber Letter III''), at 2.
\211\ See Petitioner Letter IV, at 5. See also Chamber Letter
III, at 3. Petitioner presented evidence of the size of underwritten
investment grade corporate bonds in 2019, stating that ``through
October 7, 33 underwriters have each underwritten more than $1
billion (notional) year to date, while 59 other underwriters also
have priced issues during 2019--overwhelmingly for small issues of
less than $25 million'' and stated that FINRA has failed to address
the differential impact of the proposed new compliance burden on
different sized underwriters. See Petitioner Letter IV, at 5, n.10.
\212\ See Heritage Letter V, at 2.
\213\ See Petitioner Statement, at 17-18
---------------------------------------------------------------------------
On the other hand, FIMSAC stated that it heard from underwriters
that it would be relatively easy for them to report the new issue
reference data to FINRA given their current established reporting
mechanisms to TRACE and that underwriters could thereby avoid the
duplicative effort involved in sending the same data multiple times to
various reference data providers.\214\
---------------------------------------------------------------------------
\214\ See FIMSAC Letter, at 3. As discussed above, it is the
Commission's judgment that it is premature to draw conclusions about
the impact of FINRA's proposal on the manner in which underwriters
currently distribute data. See supra notes 200-202 and accompanying
text.
---------------------------------------------------------------------------
2. Response to Comments
In its proposal, FINRA stated that ``[b]ased on conversations with
underwriters, FINRA understands that underwriters do not anticipate
incurring significant costs for reporting under this proposal.'' \215\
In addition, FINRA acknowledged the concern that underwriters that
underwrite fewer deals may be disproportionally burdened if there are
fixed costs associated with amending an underwriter's reporting system
to meet the additional requirements of the proposal, but stated that
any such additional burden ``may be alleviated because reporting to
FINRA would reduce or eliminate the need for underwriters to report to
other parties, or by the fact that underwriters can leverage
investments already made in the existing reporting system necessary
under Rule 6760.'' \216\
---------------------------------------------------------------------------
\215\ See Notice, at 13982.
\216\ See id.
---------------------------------------------------------------------------
3. Commission Discussion and Findings
The Commission believes that any burdens imposed on underwriters by
the proposal, including smaller underwriters, would be limited because
of such underwriters' existing data collection and reporting practices
with respect to the information FINRA proposes to be reported.\217\
First, the Commission believes, and no commenter has disputed, that all
underwriters, including small underwriters, should be able to leverage
their existing infrastructure used to connect and report to FINRA with
respect to the information required under the proposal. Underwriters
today are already required to report certain data elements related to
new issue bonds to FINRA pursuant to the requirements of current Rule
6760.\218\ All underwriters of Corporate Debt Securities, as defined in
FINRA's rules, have already developed data reporting mechanisms to
FINRA for purposes of transmitting required data concerning these
securities.\219\
---------------------------------------------------------------------------
\217\ See, e.g., Recommendation, at 3 (``The FIMSAC recognizes
that the creation of this service will impose costs on FINRA and the
underwriters. Based on available information, the FIMSAC believes
that the costs would be small relative to the value of the service
as the required information to be reported is similar to the
information that underwriters already provide directly to reference
data vendors.''). See also supra notes 215-216 and accompanying
text.
\218\ Rule 6760(b), proposed to be renumbered as Rule
6760(b)(1), currently requires the following information to be
reported to FINRA: (A) The CUSIP number or if a CUSIP number is not
available, a similar numeric identifier (e.g., a mortgage pool
number); (B) the issuer name, or, for a Securitized Product, the
names of the Securitizers; (C) the coupon rate; (D) the maturity;
(E) whether Securities Act Rule 144A applies; (F) the time that the
new issue is priced, and, if different, the time that the first
transaction in the offering is executed; (G) a brief description of
the issue (e.g., senior subordinated note, senior note); and (H)
such other information FINRA deems necessary to properly implement
the reporting and dissemination of a TRACE-Eligible Security, or if
any of items (B) through (H) has not been determined or a CUSIP
number (or a similar numeric identifier) is not assigned or is not
available when notice must be given, such other information that
FINRA deems necessary and is sufficient to identify the security
accurately. See FINRA Rule 6760.
\219\ Indeed, the purpose behind FIMSAC's recommendation to have
FINRA establish this database, as opposed to another entity, was to
minimize any burdens on underwriters by utilizing existing reporting
infrastructures. See Recommendation supra note 30; FIMSAC Letter, at
3.
---------------------------------------------------------------------------
Second, the Commission believes that underwriters today are already
collecting the additional information required under the 32 data
elements in the proposal, and are already reporting such information to
at least one private vendor on the first day a bond trades, given the
need for this information by investors in the newly issued bond's
primary offering.\220\ Underwriters should be able to leverage their
existing data collection and reporting infrastructures to FINRA and
private data vendors in order to meet their obligations under the
proposal to report additional information to FINRA.\221\ Furthermore,
because underwriters currently have infrastructure in place to report
certain information to FINRA and the information required by the
proposal to private data vendors, they are already incurring costs to
update and maintain this existing infrastructure. As a result, the
Commission believes the initial set-up costs resulting from the
proposal on underwriters will be small and there would be no or very
little additional ongoing costs as a result of the proposal that are
not already being incurred by underwriters.
---------------------------------------------------------------------------
\220\ See supra note 91. The Commission believes that it would
be rare for an underwriter involved in the distribution of debt
securities to be able to act as an underwriter and broker-dealer
without having this information immediately available for its
engagement with customers. Additionally, the Commission understands
that technical implementation may require a phased approach, as
stated by FINRA, to promote compliance and data accuracy. See
Response Letter, at 15; supra notes 125-127 and accompanying text
(describing FINRA's implementation plans).
\221\ One commenter raised concerns about underwriters facing
potential liability for errors in reporting. See supra note 210.
While the Commission recognizes that underwriters may be subject to
antifraud liability or FINRA enforcement actions, the Commission
notes that the information to be provided to FINRA under this
proposal is a subset of the information underwriters currently
provide to investors in the primary offering. For this reason, the
Commission believes that the risk of potential additional liability
for reporting this subset of information to FINRA is minimized.
---------------------------------------------------------------------------
The Commission also notes that underwriters may also be able to
efficiently leverage the services of third-party vendors to comply with
FINRA's new reporting requirements, as one commenter suggested.\222\
Moreover, the Commission believes that the incremental burden on
underwriters to set up and maintain infrastructure to comply with
FINRA's proposal, if any, is justified by the benefits to the market of
eliminating information asymmetries, which should improve efficiency
and competition.\223\
---------------------------------------------------------------------------
\222\ See IHS Markit Letter, at 3.
\223\ See supra Section III.B.3. See also FIMSAC Transcript,
supra note 36, Comments from Larry Harris, at 0111 (noting that the
burden on underwriters ``though it might be twice as large, is still
extremely small and very, very small in comparison to the value of
these data.'').
---------------------------------------------------------------------------
[[Page 6940]]
Finally, the proposal would require uniform pre-first trade
reporting to FINRA. Currently, for information reported under Rule 6760
for trade reporting purposes, the rule generally requires pre-first
trade reporting but allows some information to be reported within 15
minutes of the first-trade.\224\ The Commission recognizes that there
may be an incremental burden on underwriters to report certain
information earlier than they were previously required; however, the
Commission believes this burden will be mitigated both by the existence
of current reporting infrastructures discussed above and the fact that
the data elements to be reported are already in the possession of
underwriters, given the use of this information in the newly issued
bond's primary offering.
---------------------------------------------------------------------------
\224\ See supra note 139.
---------------------------------------------------------------------------
E. Competition
1. Comments on the Proposal
Several commenters argued that the proposal fails to adequately
explain why the rule's burden on competition is necessary or
appropriate consistent with Section 15A(b)(9) of the Act.\225\ A number
of commenters asserted that the proposal would inappropriately displace
competition among private sector reference data providers, which would
impose costs on the market and could ultimately impede the quality of
data available to market participants.\226\ Petitioner stated that the
proposal would ``both limit vendors' demand and make it harder for
vendors to obtain and distribute information from underwriters mandated
to provide the information to FINRA.'' \227\ Petitioner stated that the
proposal would establish a rival data service that would be a
``government-privileged quasi-monopoly enjoying the advantage of
compulsory access to data that market-based services must compete
for.'' \228\ This commenter argued that ``[s]upplanting the current
competitive system in favor of a compulsory government service'' is
inconsistent with the Act.\229\
---------------------------------------------------------------------------
\225\ See, e.g., Healthy Markets Letter II, at 5-6; Petitioner
Letter III, at 8-11; Heritage Letter II; at 2-3; Petitioner Letter
IV, at 4.
\226\ See Heritage Letter, at 1-2; Heritage Letter V, at 3;
Chamber Letter, at 2; Petitioner Letter, at 2-3; Healthy Markets
Letter II, at 5; Tabb Letter, at 2-3. See also Petitioner Statement,
at 3, 32-34.
\227\ See Petition for Review, at 29.
\228\ See Petitioner Statement, at 20.
\229\ See id. at 21.
---------------------------------------------------------------------------
Petitioner stated that the proposal ``would expand a key
regulator's commercial role into new lines of heretofore competitive
private business'' and stressed ``the likely chilling effect that this
would have on investment and innovation.'' \230\ This commenter stated
that the proposal would chill future innovation and investment
``through the threat of SROs commandeering private markets'' and that
``FINRA's willingness to enter new markets and provide new services
undermines the incentives for private actors to invest and innovate.''
\231\ Petitioner stated that it and other similar companies have spent
``tens of thousands of hours and millions of dollars over decades
building attractive bond-reference data services'' and that ``FINRA's
attempt to appropriate the space would cause incumbent providers to
hesitate before investing more in capital-markets innovation.'' \232\
---------------------------------------------------------------------------
\230\ See Petitioner Letter II, at 1. See also Petitioner Letter
IV, at 5. This commenter compared the proposal to a previous FINRA
proposal to create a facility to consolidate all quotation data in
the over-the-counter equities market, which was ultimately withdrawn
by FINRA. See Petitioner Letter V, at 3-4 (citing Securities
Exchange Act Release No. 60999 (November 13, 2009), 74 FR 61183
(November 23, 2009) (SR-FINRA-2009-077) (Notice of Filing of
Proposed Rule Change Relating to the Restructuring of Quotation
Collection and Dissemination for OTC Equity Securities).
\231\ See Petition for Review, at 28, 30. See Petitioner
Statement, at 32-33; 36.
\232\ See Petitioner Statement, at 38.
---------------------------------------------------------------------------
In contrast, commenters asserted that because of the limited set of
data proposed to be captured by FINRA, the proposal would not supplant
private sector market data providers.\233\ One of these commenters
asserted that providing reference data in a manner similar to that
proposed by FINRA promotes competition by reducing costs and barriers
to entry for new entrants in the reference data provider market.\234\
This commenter noted that data vendors currently sell reference data
products that provide data in addition to FINRA's proposed required
data fields.\235\
---------------------------------------------------------------------------
\233\ See FIMSAC Letter, at 3; Harris Letter at 4.
\234\ See Harris Letter, at 4.
\235\ See Harris Letter at 4 (noting that such additional data
include ratings and indications of whether an issuer is currently in
default, in an agreement to merge, or negotiating such an
agreement). One commenter who argued the proposal would diminish
competition amongst reference data providers nevertheless stated
that market participants currently demand more reference data fields
than FINRA is proposing to collect. See Petitioner Letter, at 13-14.
---------------------------------------------------------------------------
2. FINRA Response to Comments
In response, FINRA reiterated that the proposed data service is not
designed to affect the opportunity for private third party vendors to
compete and is rather intended to promote competition among new
reference data providers by, among other things, lowering barriers to
entry and allowing competition on other dimensions, such as additional
fields, updates to existing data based on subsequent events related to
the security, presentation, ease of access, and integration with other
data sets and systems deemed valuable by market participants.\236\
FINRA stated that its proposed data service is narrowly tailored to
provide only the basic fields of reference data that are essential for
trading and settling newly issued corporate bonds.\237\ FINRA argued
that because of the proposal's narrow scope, it would not interfere
with private data vendors' ability to compete to provide more enriched
and value-added data, including data with supplementary fields and
other value-added services.\238\
---------------------------------------------------------------------------
\236\ See Response Letter, at 8-9. See also Notice, at 13982.
\237\ See FINRA Statement, at 3; Response Letter, at 9.
\238\ See FINRA Statement, at 3-4; Response Letter, at 9.
---------------------------------------------------------------------------
FINRA noted that several commenters responding to the proposal,
including those that operate alongside Petitioner in both the markets
for reference data and trading services, agreed that the proposal would
not displace reference data providers or chill private market
investments and would instead enhance competition among market
participants, level the playing field, and reduce overall costs.\239\
FINRA also noted that competition among reference data providers
continues to exist in the municipal bond market, where there has long
been a centralized, SRO-mandated data service similar to that proposed
by FINRA.\240\
---------------------------------------------------------------------------
\239\ See FINRA Statement, at 4, 27; Response Letter, at 8
(citing to Harris Letter; FIMSAC Letter; ICE Data Letter; Charles
River Letter). See also supra notes 233-234 and accompanying text.
\240\ See FINRA Statement, at 4, 28.
---------------------------------------------------------------------------
FINRA also stated that a key indicator of enhanced competition is
the ability to reduce prices,\241\ and noted that a number of market
participants stated that the proposal will lower the costs to obtain
new issue reference data.\242\
[[Page 6941]]
FINRA stated it believes the proposal will promote competition in the
markets both for reference data and trading in that providing all data
vendors with timely access to a basic set of new issue reference data
will level the playing field and allow vendors to compete on other
value-added dimensions, which in turn will lower the costs of timely
and impartial access to essential data (a barrier to entry) for trading
firms.\243\ FINRA also argued that competition law is meant to protect
competition, not competitors, and that a rule proposal does not burden
competition in a market for services simply because it may impact the
standing of one market competitor.\244\
---------------------------------------------------------------------------
\241\ See FINRA Statement, at 25 (citing SEC Staff Memorandum,
Current Guidance on Economic Analysis in SEC Rulemakings, at 11
(March 16, 2012)).
\242\ Specifically, FINRA cited to statements at the FIMSAC
meeting and comment letters submitted in response to the proposal
noting that the status quo currently results in higher costs for
customers and that the proposal will reduce overall costs. See FINRA
Statement, at 25-26 (citing to statements of Frederic Demesy,
Refinitiv, FIMSAC Transcript, supra note 36; Harris Letter, at 4;
and Charles River Letter). As further discussed below, FINRA has
expressly and clearly committed that its fees for the New Issue
Reference Data Service will be cost-based. See FINRA Statement, at
18. In its filing with the Commission to adopt fees for the New
Issue Reference Data Service, FINRA will be required to set forth
why such cost-based fees meet the requirements of the Act, and the
Commission will evaluate FINRA's eventual fee application based on
the requirements of the Act and assess FINRA's proposed cost-based
formula. See infra Section III.F.3.b.
\243\ See FINRA Statement, at 12.
\244\ See FINRA Statement, at 26. FINRA further argued that if
an entity is a dominant incumbent and creates barriers to entry for
users of its service, then impacting that entity's standing may be
required to promote competition and relieve inappropriate burdens on
competition. FINRA noted that the FIMSAC expressed particular
concern that a dominant reference data vendor has limited other
market participants' access to its data for anti-competitive
purposes. See FINRA Statement, at 26 (citing FIMSAC Letter, at 4).
---------------------------------------------------------------------------
3. Commission Discussion and Findings
The Commission believes that FINRA's proposal is designed to
address an information asymmetry in the market for newly issued
corporate bond reference data. Specifically, there is a lack of broadly
available and accessible new issue reference data on the first day of
secondary market trading that impedes the efficiency and competition in
the current marketplace. The Commission believes that FINRA's proposal
will improve competition among market participants, including
investors, data vendors, and trading platforms, by providing all market
participants with the ability to access the same investment products to
meet their own business and investment needs or those of their
customers at the time a bond becomes available in the secondary market.
The Commission believes that the burden on competition imposed on
private data vendors by the proposal should be minimal and is necessary
or appropriate to further the purposes of Section 15A(b)(6) of the Act,
namely to promote just and equitable principles of trade and foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in, newly issued corporate bonds.
First, as discussed above, the impact of FINRA's proposal on the
manner in which underwriters currently distribute data or how other
data vendors conduct business is uncertain. It is possible, for
example, that FINRA's proposal could have a positive impact on
competition by lowering barriers to entry among data providers and
enabling them to compete on a more level playing field.\245\
Additionally, for those vendors or market participants that may be
getting reference data from underwriters directly, there is nothing in
FINRA's proposal that prohibits underwriters from continuing to provide
new issue reference data to data vendors as they do currently. Because
underwriters already have these data reporting processes in place and
have incurred the costs of establishing those processes, it is possible
that despite the creation of a new database by FINRA, underwriters will
continue to provide new issue reference data as they do today. Should
that be the case, private data vendors will continue to enjoy the
benefits of any investments made to acquire newly issued corporate bond
reference data, which should limit any competitive impacts of FINRA's
proposal.
---------------------------------------------------------------------------
\245\ See Notice, at 13981; FIMSAC Transcript, supra note 36,
Comments from Frederic Demesy, Refinitiv, at 0078 (``[A]t the
moment, we see that there are some market anomalies where some of
the vendors have access to information much earlier than other
vendors. And that creates basically competitive advantage on certain
platforms, which is in my view not ideal for having a transparent
market.''), Comments from Spencer Gallagher, ICE Data Services, at
0069-72 (``there is one area that no investment or no level of
ingenuity can solve and that is equal access to new issue reference
data at or prior to first trade execution''); Harris Letter, at 4-5
(describing anticipated pro-competitive impacts of the proposal on
the data vendor market).
---------------------------------------------------------------------------
If market participants do in fact change their current practices
and report new issue reference data to FINRA only,\246\ the Commission
believes that FINRA's proposal will impose a limited burden on
competition.\247\ There is nothing in FINRA's proposal that would
require market participants to purchase the reported data directly from
FINRA. The FINRA proposal only applies to new issue corporate bond data
and does not contemplate collecting and disseminating other data not
collected by FINRA (as described further below) or updates to these
data throughout the life of the bond. For this reason, the Commission
believes market participants would continue to procure data provided by
parties other than FINRA. In addition, the Commission believes that
many market participants may ultimately continue to rely on their
existing data vendors as a single source for all security-specific data
and rely on those vendors to incorporate the data proposed to be
collected by FINRA. Otherwise, these market participants could incur
the costs of collecting and maintaining two data sets--the data
available from FINRA and the range of other data available from other
data vendors as discussed further below. Furthermore, the information
that FINRA will require to be reported is a limited set of data,
leaving data vendors with space to continue competing on a variety of
fronts. For example, reference data providers could offer additional
value add-ons with respect to data reported to FINRA, such as
additional data concerning the newly issued bond, enhanced
presentation, analytical capabilities, ease of access, and integration
with other data sets and systems.\248\ In addition, data vendors could
offer additional services relating to the data, such as enhanced data
scrubbing, if their customers demand such services. Indeed, as stated
by one commenter, data vendors currently sell data products that
provide data in addition to FINRA's proposed required data fields, and
these additional data presumably provide value to their customers.\249\
In addition, the Commission understands that data vendors currently
offer various services beyond the initial supply of the data set, such
as the integration of such data into other data sets and systems, and
data vendors would presumably continue to offer such services relating
to the required reference data.\250\
---------------------------------------------------------------------------
\246\ See supra note 216 and accompanying text.
\247\ As discussed in more detail in this section, the
Commission expects that data vendors will continue to provide
enhanced data services (e.g., adding additional data and making
various analytical calculations based on the data in the New Issue
Reference Data Service) to customers, and that market participants
will turn to a variety of sources for their data needs depending on
the facts and circumstances at hand.
\248\ See, e.g., Response Letter, at 9.
\249\ See Harris Letter at 4 (noting that such additional data
include ratings and indications of whether an issuer is currently in
default, in an agreement to merge, or negotiating such an
agreement). Petitioner, who argued the proposal would diminish
competition amongst reference data providers, nevertheless stated
that market participants currently demand more reference data fields
than FINRA is proposing to collect. See Petitioner Letter, at 13-14.
\250\ For a description of various data vendor's bond reference
data offerings, see e.g. https://www.bloomberg.com/professional/product/reference-data/; https://www.theice.com/market-data/pricing-and-analytics/reference-data; https://www.refinitiv.com/en/financial-data/market-data/reference-data; and https://www.ftserussell.com/data/fixed-income-data.
---------------------------------------------------------------------------
The Commission concludes that the limited set of data proposed to
be reported and disseminated to allow for the identification, valuation
and settlement of new issue corporate bonds is unlikely to supplant the
demand for
[[Page 6942]]
a more comprehensive reference database with enhanced data sets that
contain additional fields not reported to or disseminated by FINRA and
additional services related to such data not provided by FINRA.\251\
The Commission believes that while FINRA's proposal will provide
certain basic information for a bond on an impartial basis to market
participants to allow for the identification, valuation, and settlement
of newly-issued bonds, market participants will continue to require
additional data and value-added services from reference data providers
beyond what will be provided by FINRA. As such, the Commission believes
that reference data providers will continue to compete and innovate in
order to meet the additional needs of their customers, allaying
commenters' concerns regarding potential increased costs, decreased
data quality, and a chilling on investment and innovation.
---------------------------------------------------------------------------
\251\ See FIMSAC Letter, at 3. There are many other data
provided by reference data providers concerning a bond issue, such
as issuer information (e.g., fundamentals data, capital structure
data), specific bond rating, bond trade and selling restrictions,
classification data (industry, legal entity, etc.), corporate action
data, ESG (Environmental, Social & Governance) data, dividend data,
instrument analytics data, and security ownership data. See e.g.,
IHS Markit Reference Data Bonds Factsheet, available at https://cdn.ihs.com/www/pdf/Reference-Data-Bonds-factsheet.pdf; Bloomberg
Reference Data Content and Data, available at https://www.bloomberg.com/professional/product/reference-data/.
---------------------------------------------------------------------------
For these reasons, the Commission believes that the potential
benefits of the proposal discussed above, including furtherance of the
purposes of Section 15A(b)(6), justify the minimal competitive burden
on reference data vendors that may result from this proposal. The
Commission thus finds that the proposal is consistent with Section
15A(b)(9) of the Act, and does not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.
F. Fees
1. Comments on the Proposal
As discussed above, in Amendment No. 2, FINRA withdrew the proposed
subscription fees for receipt of corporate new issue reference data
from the proposal and stated that it would submit a separate filing to
establish fees related to the new issue reference data service at a
future date and will implement the service after those fees become
effective.\252\ In particular, several commenters believed that removal
of fees from the proposal was problematic.\253\ These commenters stated
that eliminating the fees from the proposal amounts to procedural
maneuvering in order to avoid scrutiny, as any subsequent fee filing
submitted by FINRA will be immediately effective upon filing with the
Commission.\254\ Petitioner stated that ``FINRA should not be allowed
to circumvent the Act's requirement of an affirmative finding of
compliance with [Section] 15A(b)(5) by dodging the many comments
critical of its unjustified fees.'' \255\ This commenter further stated
that ``[b]y segregating and delaying the fee justification, the
[a]mended [p]roposal would relieve FINRA of the burden of proving the
reasonableness of the fees and charges associated with its new
service.'' \256\
---------------------------------------------------------------------------
\252\ See Amendment No. 2, at 4.
\253\ See Petitioner Letter IV, at 6-9; Chamber Letter III at 2-
3; Letter from John Thornton, Co-Chair, et al., Committee on Capital
Markets Regulation, dated October 22, 2019 (``Committee Letter
II''), at 2-3; Committee Letter III, at 2; Heritage Letter III, at
2-3; Healthy Markets Letter III, at 2; SIFMA Letter III, at 3-4;
Petitioner Letter V, at 4-5; Petitioner Statement, at 34-36.
\254\ See Petitioner Letter IV, at 6-9; Chamber Letter III at 2-
3; Committee Letter II at 2-3; Committee Letter III, at 2; Heritage
Letter III, at 2-3; Healthy Markets Letter III at 2; SIFMA Letter
III at 3-4; and Petitioner Letter V, at 4-5. Some commenters pointed
to the Commission's recent proposed rule change to amend Regulation
NMS to rescind a provision that allows a proposed amendment to a
national market system plan (``NMS plan'') that establishes or
changes a fee or other charge to become effective upon filing, and
argued that the concerns voiced by the Commission in that proposal
are applicable to FINRA's current proposal. See Petitioner Letter
IV, at 8; Chamber Letter III at 2; Committee Letter II at 2-3
(citing to Commission, Proposed Rule, ``Rescission of Effective-Upon
Filing Procedure for NMS Plan Fee Amendments,'' 84 FR 54794 (Oct.
11, 2019) (``Proposed Regulation NMS Fee Amendment'')). See also
Petitioner Statement, at 17-19.
\255\ See Petition for Review, at 16; Petitioner Statement, at
18.
\256\ See Petitioner Statement, at 17; Petitioner Letter V, at
4.
---------------------------------------------------------------------------
In addition, these commenters stated that the proposed fees form a
critical part of FINRA's proposed newly issued bond-reference data
service and that the Commission and the public cannot assess whether
the benefits of the proposal outweigh the costs and competitive burdens
without knowing the fees that FINRA would charge for the service.\257\
Petitioner further stated that FINRA has failed to provide any
quantitative estimate for any costs that the proposal would
impose.\258\ This commenter stated that FINRA failed to include any
information regarding the cost of developing and operating the new data
system and provided no information about whether the costs of the
service for traders will be higher or lower than current prices.\259\
This commenter argued that FINRA must include information regarding the
cost of building and operating the new reference data service, which
FINRA proposes to pass on to market participants.\260\ Petitioner
concluded that ``lacking any evidence from FINRA about the costs of its
proposed data service, the Commission cannot approve the [proposal]
consistent with the requirements of the Act.'' \261\
---------------------------------------------------------------------------
\257\ See Petitioner Letter IV, at 6-9; Chamber Letter III at 2-
3; Letter from John Thornton, Co-Chair, et al., Committee on Capital
Markets Regulation, dated October 22, 2019 (``Committee Letter
II''), at 2-3; Committee Letter III, at 2; Heritage Letter III, at
2-3; Healthy Markets Letter III, at 2; SIFMA Letter III, at 3-4;
Petitioner Letter V, at 4-5; Petitioner Statement, at 34-36.
\258\ See Petitioner Statement, at 35.
\259\ See Petitioner Statement, at 14, 36.
\260\ See id. Petitioner also noted that FINRA's own
representative acknowledged that FINRA's current TRACE system could
not support a new data service and instead FINRA would need to build
new reporting, validation and distribution infrastructure. See id.,
at 5-6 (citing to statements by Ola Persson, FINRA, FIMSAC
Transcript, supra note 36, (``Speaking for FINRA, not the effort on
behalf of the underwriters, but speaking for FINRA, we would have
some work to do. The technology today does not lend itself very well
to this. We would need to create the ability for underwriters to
come in, give us partial information and have the ability to edit
their own records, et cetera. Today, that is a . . . bit of a one-
way street. . . . We would also need to create a separate
distribution channel for this. . . .'').
\261\ See id. at 2, 12. See also Letter from Hal. S. Scott,
President, Committee on Capital Markets Regulation, dated March 16,
2020 (``Committee Letter III''), at 2 (``[B]ecause the [proposal]
does not specify its proposed fees and underlying cost, the SEC
cannot conduct the informed cost-benefit analysis necessary for
approval . . .''); Heritage Letter V, at 2 (stating that FINRA
should be required to demonstrate ``that the benefits to information
purchasers would materially outweigh the unrecompensed costs imposed
on underwriters. . . .'').
---------------------------------------------------------------------------
Petitioner further stated that the Commission erred in the Approval
Order by not making a finding under Section 15A(b)(5) of the Act that
the proposal provides for the equitable allocation of reasonable dues,
fees, and other charges among members and issuers and other persons
using any facility or system which FINRA operates or controls.\262\
This commenter stated that ``[t]o the extent the [Approval] Order
suggests that requirement applies only to a `proposed fee filing' . . .
it is wrong'' and, rather, that Section 15A(b)(5) applies to all the
rules of the national securities association.\263\ Petitioner argued
that the Commission must determine whether FINRA's current proposal
provides for the equitable allocation of reasonable charges.\264\
---------------------------------------------------------------------------
\262\ See Petition for Review, at 12-13; Petitioner Statement,
at 11-13.
\263\ See Petition for Review, at 13; Petitioner Statement, at
13.
\264\ See Petitioner Statement, at 11. This commenter further
argued that the proposal cannot satisfy the requirements of Section
15(A)((b)(5) of the Act because FINRA has failed to provide any
information regarding fees or an analysis of costs or ``margins.''
See Petitioner Statement, at 2, 13-16.
---------------------------------------------------------------------------
[[Page 6943]]
2. FINRA Response to Comments
In response, FINRA stated that it did not withdraw the fees from
the current proposal to avoid subjecting the fees to further public
comment, but rather so it could further evaluate an appropriate fee
structure for the data service.\265\ FINRA stated that it believed that
``with additional time, it could better assess the costs it incurs to
develop the data service, and also better forecast the number of
expected subscribers,'' and that this information would help it to
better determine the proposed fees for the data service.\266\
---------------------------------------------------------------------------
\265\ See FINRA Statement, at 17; Response Letter, at 12, n.35.
FINRA stated that it removed the fees so that it could further
evaluate the appropriate fee structure in light of comments
received, as well as new Commission staff guidance on SRO fee
filings published after FINRA's initial proposal. See FINRA
Statement, at 17.
\266\ See FINRA Statement, at 17-18.
---------------------------------------------------------------------------
FINRA stated that it has committed to pricing the data service as a
utility, using a cost-based formula, meaning that it will tie the
subscription price of the data service to FINRA's costs and that FINRA
will allow all market participants to subscribe to the data service on
reasonable, disclosed terms, as required of SROs.\267\ In addition,
FINRA stated that it will not employ discriminatory pricing or
unreasonably refuse anyone access to the data, unlike the anti-
competitive practices the FIMSAC noted have been observed in the
current private market.\268\
---------------------------------------------------------------------------
\267\ See FINRA Statement, at 18.
\268\ See id.
---------------------------------------------------------------------------
FINRA stated that any new fees would be filed with the Commission
in advance of the implementation of the newly issued corporate bond new
issue reference data service and would be subject to applicable
Commission rule filing requirements under the Act.\269\ In addition,
FINRA argued that Petitioner's contentions that the proposal cannot be
approved without including the proposed fees and that the Commission
erred by not making an affirmative finding under Section 15A(b)(5) of
the Act are is inconsistent with the plain text of the Act and
longstanding Commission precedent.\270\
---------------------------------------------------------------------------
\269\ See FINRA Statement, at 18; Response Letter, at 12.
\270\ See FINRA Statement, at 19-21 (citing to Section
19(b)(3)(A) of the Act, Section 15(A)((b)(5) of the Act, and various
immediately effective proposed rule changes filed by SROs to adopt
fees).
---------------------------------------------------------------------------
3. Commission Discussion and Findings
A number of commenters expressed concerns about the lack of
information regarding fees for the New Issue Reference Data Service,
including (a) the appropriateness of separating the fees into a
separate immediately effective filing; (b) the ability of the
Commission to assess the proposal's consistency with the Act without
knowing either the proposed fees for the service or the potential costs
to FINRA for building the service; and (c) the application of Section
15A(b)(5) to the proposal. The Commission addresses each of these
issues below.
a. Fee Filings
The Commission disagrees that separating the fee proposal into a
subsequent filing would allow FINRA to avoid regulatory and public
scrutiny of the proposed fees.\271\ FINRA cannot charge fees for the
proposed data service until the Commission receives a proposed rule
change that complies with the Act and Commission rules concerning
proposed fee changes. All proposed rule changes, including proposed fee
changes, are subject to public notice and comment and must be
consistent with the Act. As required by Section 19(b)(1) of the Act,
the Commission must publish notice of all proposed rule changes and
must give interested persons an opportunity to comment, whether or not
such proposed rule change is immediately effective or not. The
instructions to Form 19b-4 state that the form ``is intended to elicit
information necessary for the public to provide meaningful comment on
the proposed rule change . . . and for the Commission to determine
whether the proposed rule change . . . is consistent with the
requirements of the Act and the rules and regulations thereunder . . .
as applicable to the self- regulatory organization and in accordance
with the requirements for each type of filing.'' A proposed fee filing
must fully and fairly describe the operation of the applicable fee
(including its effect on market participants) and do so in sufficient
detail so that the public can understand the proposal sufficiently to
provide meaningful comment and the Commission can determine whether the
proposal is consistent with the Act. While FINRA may file its eventual
fees for the New Issue Reference Data Service as immediately effective
pursuant to Section 19(b)(3)(A) of the Act, the fee filing will be
subject to the same notice and comment requirements as a proposed rule
change that is not eligible to be filed as immediately effective. Thus,
use of the immediately effective fee filing process will not allow
FINRA to avoid commenter scrutiny for its proposed fees for the
service.
---------------------------------------------------------------------------
\271\ The Commission notes that SROs are required by Section
19(b) of the Act and Rule 19b-4 thereunder to file proposed rule
changes with the Commission on Form 19b-4. The Act provides that a
proposed rule change may not take effect unless it is approved by
the Commission pursuant to Section 19(b)(2) of the Act, or it
becomes immediately effective upon filing pursuant to Section
19(b)(3)(A) of the Act. Furthermore, Section 19(b)(3)(A) of the Act
states ``a proposed rule change shall take effect upon filing with
the Commission if designated by the self-regulatory organization as
. . . establishing or changing a due, fee, or other charge imposed
by the self-regulatory organization on any person, whether or not
the person is a member of the self-regulatory organization. . . .''
See 15 U.S.C. 78s(b)(3)(A). Rule 19b-4(f) under the Act specifies
the types of proposed rule changes that may become immediately
effective upon filing with the Commission, and includes those
properly designated by the SROs as ``establishing or changing a due,
fee, or other charge imposed by the self-regulatory organization.''
See Rule 19b-4(f)(2) under the Act.
---------------------------------------------------------------------------
A proposed fee filing by a national securities association such as
FINRA must also address all relevant statutory requirements, including
Section 15A(b)(5) of the Act which requires that ``[t]he rules of the
association provide for the equitable allocation of reasonable dues,
fees, and other charges among members and issuers and other persons
using any facility or system which the association operates or
controls;'' Section 15A(b)(6) of the Act, which requires, in part, that
the rules of an association are ``not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers;'' and
Section 15A(b)(9)of the Act, which requires, in part, that the rules of
an association ``not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of this title.'' Regardless
of whether a fee proposed by FINRA is effective upon filing with the
Commission, the Commission assesses whether or not the fee proposal is
consistent with the Act.\272\ If the Commission determines that a fee
filing merits further review, the Commission may temporarily suspend it
and issue an order instituting proceedings to determine whether to
approve or disapprove the proposal.\273\ Such a
[[Page 6944]]
determination would be informed by any comments received on a fee
filing. Therefore, the Commission does not believe that FINRA's use of
the immediately effective fee filing process would allow FINRA to avoid
regulatory scrutiny for its proposed fees for the service.
---------------------------------------------------------------------------
\272\ Furthermore, in contrast to Petitioner's assertion, FINRA
has the burden of demonstrating that a proposed fee is consistent
with the Act and the rules and regulations thereunder, regardless of
whether the proposed fee is effective upon filing with the
Commission. See Securities and Exchange Commission Rules of
Practice, Rule 700(b)(3) (17 CFR 201.700(b)(3)). See also supra note
256.
\273\ See Section 19(b)(3)(C) of the Act, authorizing the
Commission at any time within 60 days of the date of filing of a
proposed rule change pursuant to Section 19(b)(1) of the Act, to
summarily temporarily suspend the change in the rules of an SRO if
it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of the Act, and Section
19(b)(2)(B) of the Act, setting forth a notice and hearing procedure
for an order instituting proceedings.
---------------------------------------------------------------------------
Finally, while the Commission outlined various concerns relating to
effective-upon-filing fee changes for NMS plans under Rule 608(b) in
the Proposed Regulation NMS Fee Amendment, we do not believe those
concerns call into question our approach here. Fee filings in this
context are governed by Section 19 of the Act rather than Rule 608.
More importantly, as stated above, the Commission assesses whether or
not any fee proposal filed under Section 19 of the Act is consistent
with the Act. If the Commission determines that a fee filing pursuant
to Section 19(b)(3)(A) merits further review, which may be informed by
the required notice and comment process, the Commission may temporarily
suspend it and issue an order instituting proceedings to determine
whether to approve or disapprove the proposal.
b. Assessment of Proposal's Consistency With the Act
The Commission further disagrees that it cannot adequately assess
the proposal's consistency with the Act and its economic effects
without knowing the fees that FINRA will charge for the proposed
reference data service or the costs to build the service. The
Commission has evaluated the economic effects, including the
qualitative costs and benefits, of the proposal based on the record
before it and has concluded that there is a lack of broadly available
and accessible new issue reference data on the first day of secondary
market trading that impedes the efficiency and competition in the
current marketplace, and that FINRA's proposal would address this
information asymmetry to the benefit of the market and market
participants.\274\ The Commission's consideration of the proposal's
economic effects, including the burden on underwriters, the proposal's
impact on competition among market participants, including other data
vendors, and its impact on efficiency and capital formation, as
discussed above, is based upon the understanding that the fees assessed
will be consistent with the Act and will be assessed using a cost-based
formula. It is reasonable for the Commission to assume that any future
fees assessed will be consistent with the Act because, as discussed
above, if it believes such fees are not consistent with the Act, the
Commission must suspend and disapprove them.\275\ The Commission will
evaluate FINRA's eventual fee application based on the requirements of
the Act and assess FINRA's proposed cost-based formula. It is that fee
filing that will merit a consideration of FINRA's cost to build the New
Issue Reference Data Service because the costs of the system, which
will be better known once the system is built, will be necessary to
assess whether FINRA has proposed a fee for that service that is
consistent with the Act, including Section 15A(b)(5).\276\ FINRA has
expressly and clearly committed that its fees will be cost-based, and
it will be required to set forth why such cost-based fees meet the
requirements of the Act. While commenters have raised concerns
regarding FINRA's costs to build and operate the new reference data
service,\277\ should FINRA hypothetically build a New Issue Reference
Data Service at a high cost that would be unreasonable to pass on to
end-users, FINRA would not be able to make a showing that any such fees
proposed to be assessed on the basis of its cost to build the service
are reasonable, as required by Section 15A(b)(5) of the Act. In such a
case, as discussed above, the Commission would suspend and disapprove
the proposal.
---------------------------------------------------------------------------
\274\ See generally Sections III.A and III.B; supra notes 31-42,
89-102 and 139-145 and accompanying text.
\275\ See supra note 273 and accompanying text.
\276\ See supra note 266 and accompanying text.
\277\ See supra notes 259-261 and accompanying text.
---------------------------------------------------------------------------
c. Application of Section 15A(b)(5) to FINRA's Proposal
The Commission disagrees with one commenter's argument that the
Commission is required to make a finding under Section 15A(b)(5) of the
Act that the current proposal ``provides for the equitable allocation
of reasonable dues, fees, and other charges among members and issuers
and other persons using any facility or system which the association
operates or controls.'' The plain language of the Act necessitates that
the proposal involve a due, fee or other charge in order to make such a
finding concerning Section 15A(b)(5) of the Act.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities association.
It is therefore ordered, pursuant to Rule 431 of the Commission's
Rules of Practice, that the earlier action taken by delegated
authority, Exchange Act Release No. 87656 (December 4, 2019), 84 FR
67491 (December 10, 2019), is set aside and, pursuant to Section
19(b)(2) of the Act, the proposed rule change (SR-FINRA-2019-008), as
modified by Amendment No. 2, hereby is approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-01438 Filed 1-22-21; 8:45 am]
BILLING CODE 8011-01-P