[Federal Register Volume 87, Number 159 (Thursday, August 18, 2022)]
[Notices]
[Pages 50896-50902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17745]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95494; File No. SR-FINRA-2022-025]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 11880 (Settlement of Syndicate Accounts) To Revise the 
Syndicate Account Settlement Timeframe for Corporate Debt Offerings

August 12, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 5, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 11880 (Settlement of 
Syndicate Accounts) to revise the syndicate account settlement 
timeframe for corporate debt offerings.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Underwriting groups ordinarily form syndicate accounts \3\ to 
process the income and expenses of the syndicate. The syndicate manager 
\4\ is responsible for maintaining syndicate account records and must 
provide to each selling syndicate member an itemized statement of 
syndicate expenses no later than the date of the final settlement of 
the syndicate account. Syndicate members record the expected payments 
from the syndicate manager as ``receivables'' on their books and 
records but generally do not receive the payments for up to 90 days 
after the syndicate settlement date,\5\ as currently permitted under 
FINRA rules.\6\
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    \3\ A syndicate account is the account formed by members of the 
selling syndicate for the purpose of purchasing and distributing the 
corporate securities of a public offering. See FINRA Rule 
11880(a)(2).
    \4\ A syndicate manager is the member of the selling syndicate 
that is responsible for the maintenance of syndicate account 
records. See FINRA Rule 11880(a)(3).
    \5\ The syndicate settlement date is the date that the issuer 
delivers corporate securities to or for the account of the syndicate 
members. See FINRA Rule 11880(a)(4).
    \6\ During this time, a syndicate member may not treat the 
``receivables'' as allowable assets for purposes of Exchange Act 
Rule 15c3-1 (``Net Capital Rule'') and therefore must deduct them 
from its net worth in computing its net capital.
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    To help avoid lengthy settlement delays, FINRA Rule 11880 provides 
that the syndicate manager in a public offering of corporate securities 
must effect the final settlement of syndicate accounts within 90 days 
following the settlement date. When FINRA (then NASD) initially adopted 
a settlement rule in 1985, it required that final settlement of 
syndicate accounts be effected within 120 days after the syndicate 
settlement date.\7\ The syndicate settlement timeframe was reduced from 
120 days to 90 days in 1987, and it has remained the same since 
then.\8\
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    \7\ See Securities Exchange Act Release No. 22238 (July 15, 
1985), 50 FR 29503 (July 19, 1985) (Order Approving File No. SR-
NASD-85-14).
    \8\ See Securities Exchange Act Release No. 24290 (April 1, 
1987), 52 FR 11148 (April 7, 1987) (Order Approving File No. SR-
NASD-87-7).
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    In consideration of the technological advances since 1987, FINRA is 
proposing to amend the timeframe to settle syndicate accounts set forth 
in FINRA Rule 11880(b). Specifically, FINRA is proposing to establish a 
two-stage syndicate account settlement approach whereby the syndicate 
manager would be required to remit to each syndicate member at least 70 
percent of the gross amount due to such syndicate member within 30 days 
following the syndicate settlement date, with any final balance due 
remitted within 90 days following the syndicate settlement date.
    The proposed two-stage approach would be limited to public 
offerings of corporate debt securities.\9\ FINRA is not proposing at 
this time to change the current 90-day period for the final settlement 
of syndicate accounts for public offerings of equity securities, which 
often involve complexities that may necessitate a longer settlement 
timeframe than corporate debt offerings (e.g., an overallotment option 
that may have an exercise term of 30 days).
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    \9\ A ``corporate debt security'' would be defined as a debt 
security that is United States (``U.S.'') dollar-denominated and 
issued by a U.S. or foreign private issuer, including a Securitized 
Product as defined in FINRA Rule 6710(m). ``Corporate debt 
security'' would not include a Money Market Instrument as defined in 
FINRA Rule 6710(o). See proposed Rule 11880(a)(1).
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    FINRA also notes that, with respect to municipal debt offerings, 
Municipal Securities Rulemaking Board (``MSRB'') Rule G-11 (Primary 
Offering Practices) currently provides that final settlement of a 
syndicate or similar account must be made within 30 calendar days of 
the syndicate settlement date. The MSRB shortened the settlement 
timeframe from 60 days to 30 days in 2009 to reduce the exposure of 
syndicate account members to the credit risk of potential deterioration 
in the credit of the syndicate manager during the pendency of account 
settlements.\10\ The MSRB believed that this change would not be unduly 
burdensome on firms given the more efficient billing and accounting 
systems firms had implemented since the rules were first adopted in the 
1970s.\11\
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    \10\ See Securities Exchange Act Release No. 60487 (August 12, 
2009), 74 FR 41771 (August 18, 2009) (Notice of Filing of File No. 
SR-MSRB-2009-12) and Securities Exchange Act Release No. 60725 
(September 28, 2009), 74 FR 50855 (October 1, 2009) (Order Approving 
File No. SR-MSRB-2009-12).
    \11\ See supra note 10.
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    FINRA similarly believes that the proposed rule change will benefit 
syndicate members by reducing the exposure of syndicate members to the 
credit risk of the syndicate manager during the pendency of account

[[Page 50897]]

settlements. FINRA also believes that the proposed rule change will 
benefit syndicate members, including capital-constrained small firms, 
by allowing them to obtain earlier access to the funds earned from an 
offering without significantly increasing the risks of resettlements. 
In addition, FINRA believes that the proposed staged approach will 
provide these benefits to syndicate members while easing compliance for 
syndicate managers by permitting them to retain 30 percent of the gross 
amount earned by syndicate members to cover expenses and remit any 
balance due to the syndicate members within the current 90-day period 
following the syndicate settlement date.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be January 1, 2023.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change promotes 
just and equitable principles of trade and is in the public interest as 
it will reduce the exposure of syndicate members to the potential 
deterioration of the credit of syndicate managers during the pendency 
of account settlement without negatively impacting the ability of 
syndicate managers to run the syndicate settlement account process. 
FINRA also believes that the proposed rule change promotes just and 
equitable principles of trade because it will result in syndicate 
managers more quickly remitting the majority of the gross amount earned 
by syndicate members and will not be unduly burdensome on syndicate 
managers given the technological advances that have been made since the 
90-day syndicate account settlement timeframe was adopted in 1987.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the potential economic impacts of the proposed rule 
change, including potential costs, benefits, and distributional and 
competitive effects, relative to the current baseline.
Regulatory Need
    FINRA Rule 11880 requires final settlement of syndicate accounts 
within 90 days following the syndicate settlement date. As discussed 
further below, FINRA understands that syndicate managers currently 
could conduct partial settlements of syndicate accounts much more 
quickly, at limited additional expense, to the benefit of syndicate 
members. Longstanding industry practices, the number of parties in 
selling syndicates and possibly greater efficiency in syndicate 
settlement by syndicate managers that conduct more settlements may 
limit the impact of competition and negotiation on final settlement 
practices and timelines. FINRA also believes that modifying the current 
syndicate settlement timeframe will benefit syndicate members, 
including capital-constrained small firms, by allowing them to obtain 
earlier access to the funds earned from an offering without 
significantly increasing the risks of resettlements. FINRA is therefore 
proposing a two-staged syndicate settlement framework to enable quicker 
remittance of a significant portion of syndicate revenue to syndicate 
members.
Economic Baseline
    The economic baseline for the proposed rule change is current FINRA 
Rule 11880, which allows 90 days for the final settlement of syndicate 
accounts, industry practices for compliance and implementation of the 
rule, and the competitive landscape.
    FINRA conducted an analysis of the primary corporate debt market to 
study the extent and scope of participation in corporate debt 
syndicates by member firms using data from the Trade Reporting and 
Compliance Engine (``TRACE''). From 2019 to 2021, FINRA estimates that 
approximately 377 member firms, on average per year, participated in 
syndicates for corporate debt offerings and could be affected by the 
proposed rule change.\13\ Of these firms, 57 percent, 18 percent, and 
25 percent are small, mid-size and large firms, respectively.\14\
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    \13\ The extent of firm participation in the primary corporate 
debt market was approximated using TRACE data. Issuers sell new 
stocks and bonds in the primary market to the public, such as 
through an initial public offering. The data is limited to the 
primary market sellers for corporate debt, excluding offerings made 
in compliance with Rule 144A of the Securities Act of 1933 (``144A 
offerings'').
    \14\ See 2022 FINRA Industry Snapshot, https://www.finra.org/sites/default/files/2022-03/2022-industry-snapshot.pdf. Small, mid-
size and large firms are defined as having 1-150, 151-499, and at 
least 500 registered representatives, respectively. See Article I of 
the FINRA By-Laws.
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    The 90-day period following the syndicate settlement date allows 
the syndicate manager to record income and expenses incurred in 
connection with the offering and then to distribute the net 
underwriting revenue due to each syndicate member. Syndicate managers 
tend to be large, well-capitalized firms.\15\ The syndicate manager 
collects the underwriting revenue for the syndicate and pays expenses. 
The other syndicate members, which often include smaller firms, are 
paid their respective portion of the underwriting revenue, net of 
expenses, from the syndicate managers by the final syndicate account 
settlement date.
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    \15\ See, e.g., Hendrik Bessembinder, Stacey E. Jacobsen, 
William F. Maxwell & Kumar Venkataraman, Overallocation and 
Secondary Market Outcomes in Corporate Bond Offerings (April 29, 
2022), SMU Cox School of Business Research Paper No. 20-04, 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3611056. The authors developed a sample of 
5,573 bond offerings that were issued between 2010 and 2018, based 
upon primary allocation data collected through TRACE. They found 
that only 10 firms were syndicate managers and that the most 
frequent bookrunners (manager and co-managers) were large firms. 
This finding is consistent with FINRA's findings from its outreach 
efforts.
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    To assess the magnitude of the gross revenue from underwriting 
public offerings of corporate debt, FINRA calculated that, on average 
each year between 2019 and 2021, there were 41,756 U.S. dollar-
denominated corporate debt offerings (excluding 144A offerings) with an 
average amount of $3.5 trillion raised (see Table 1). Investment grade 
corporate debt offerings account for 49 percent of the total issued 
amount, and high yield and non-rated corporate debt offerings account 
for the remainder (see Table 1).\16\ A recent study estimates that the 
average gross underwriting spread is 0.65 percent for investment grade 
debt securities and 1.42 percent for high yield debt securities.\17\ 
Using these

[[Page 50898]]

estimates, FINRA estimates that the gross revenue from underwriting 
public offerings of corporate debt (excluding 144A offerings) would be 
at least $36 billion per year.\18\ Underwriting revenue, net of 
expenses, is distributed to syndicate members.
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    \16\ While members are required to report revenue from 
underwriting on Financial and Operational Combined Uniform Single 
(``FOCUS'') and Supplemental Statement of Income (``SSOI'') reports, 
the data is in aggregate form and thus we are unable to determine 
underwriting revenue for public offerings of corporate debt 
securities.
    \17\ The gross revenue from an underwriting is the difference 
between the price the syndicate pays the issuer for the securities 
and the initial price at which the syndicate sells the securities to 
the public, also called the ``gross underwriting spread.'' The 
spread generally accounts for management fees paid to lead 
underwriters, underwriting fees and the sales credits paid to 
syndicate members for selling the securities. As a rule, gross 
revenue from a public offering is directly related to the size of 
the offering.
    \18\ Research using a sample of municipal bond offerings between 
1997 and 2001 found that the absence of a rating increases 
underwriting gross spreads by about 40 basis points after 
controlling for bond rating and other characteristics. See Alexander 
W. Butler, Distance Still Matters: Evidence from Municipal Bond 
Underwriting, 21(2) Rev. Fin. Stud. 763-784 (March 2008), available 
at https://www.jstor.org/stable/40056834?seq=1. Information on gross 
spreads for unrated corporate bonds is harder to find. One study 
found the default rate among unrated institutional loans issued by 
U.S. publicly owned companies was comparable to that of rated high 
yield loans. See Edward I. Altman, Sreedhar T. Bharath & Anthony 
Saunders, Credit Ratings and the BIS Capital Adequacy Reform Agenda, 
26(5) J. Bank. Fin. 909-921 (May 2002), available at https://www.sciencedirect.com/science/article/abs/pii/S0378426601002692. 
These findings indicate that the gross spread for unrated corporate 
bonds is likely somewhat greater than that for high yield corporate 
bonds. Based on these assumptions, the gross underwriting revenue 
from public offerings of corporate debt would be at least $36B (= 
0.0065 * 1.71*10[caret]12 + 0.0142 *(0.21 + 1.56)*10[caret]12).

                Table 1--TRACE-Eligible Corporate Bonds (Excluding 144A) Issued by Grade and Year
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                                                                      Total  issued amount    % of annual total
                                                Number of  offerings       (trillion $)        issued amounts
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2019..........................................                26,769                  3.10               100.00%
    Investment Grade..........................                 3,275                  1.50                 48.39
    High Yield................................                   468                  0.26                  8.45
    Non-rated.................................                23,026                  1.34                 43.15
2020..........................................                43,334                  4.22                100.00
    Investment Grade..........................                 3,828                  2.14                 50.81
    High Yield................................                   374                  0.24                  5.58
    Non-rated.................................                39,132                  1.84                 43.61
2021..........................................                55,164                  3.12                100.00
    Investment Grade..........................                 3,615                  1.48                 47.31
    High Yield................................                   275                  0.15                  4.71
    Non-rated.................................                51,274                  1.50                 47.98
Average 2019-2021.............................                41,756                  3.48                100.00
    Investment Grade..........................                 3,573                  1.71                 48.84
    High Yield................................                   372                  0.21                  6.25
    Non-rated.................................                37,811                  1.56                 44.92
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Source: Bloomberg for TRACE-eligible Corporate Bonds.

    Through its outreach efforts, FINRA has heard that the settlement 
of syndicate accounts for corporate debt offerings is typically 
conducted at the end of the 90-day window, rather than earlier in the 
window, as permitted under the current rule. FINRA also has heard, 
however, that syndicate income is often known much earlier, even by the 
closing date of the offering. This information is consistent with 
recent research findings that, in more than 95 percent of the debt 
offerings from 2016 to 2018, the debt security is priced, allocated to 
investors, and starts trading in the secondary market all within the 
same day.\19\ Thus, a large part of syndicate income can be accounted 
for within days after the date of issuance.\20\
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    \19\ See Liying Wang, Lifting the Veil: The Price Formation of 
Corporate Bond Offerings, 142(3) J. Fin. Econ. 1340-1358 (December 
2021), available at https://www.sciencedirect.com/science/article/abs/pii/S0304405X2100307X.
    \20\ FINRA understands that, in the absence of an overallotment 
option, syndicate managers may over-allocate an offering to 
stabilize secondary market prices--effectively creating a syndicate 
short position. Profits or losses from these transactions are 
considered part of a syndicate's revenues or expenses and depend on 
secondary market price movements, which cannot be estimated before 
the public offering. Research has found, however, that average 
profit/loss from covering overallocations relative to corporate debt 
underwriting revenue is very small, and most of the overallocations 
are offset within a few days of the date of issuance. Bessembinder 
et al. (2022) found that over 70 percent of the issues with 
overallocations in their sample are offset within two days after 
issuance and by day 15 about 80 percent of the issues have the 
overallocation fully offset. See supra note 15. According to the 
authors, the mean net position for covering overallotment short-
transactions and round-trip trades in the secondary market ranges 
from a $240,967 loss per high-yield issue with a large 
overallocation to a $161,578 gain per high-yield issue with a 
smaller overallocation.
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    Through its outreach efforts, FINRA understands that syndicate 
expenses are also generally known within 90 days following the 
syndicate settlement date. However, syndicate managers sometimes 
receive invoices after 90 days. Certain expenses, such as legal fees 
and covering overallotment short transactions, take time to realize and 
are difficult to estimate as they might depend on another party or 
market movements. Invoices received after the final settlement of 
syndicate accounts result in resettlements. FINRA understands that 
syndicate managers prefer to avoid this scenario as much as possible. 
Data on the prevalence of resettlements after 90 days is unavailable, 
but some public comments submitted in response to the Notice suggest 
that they are infrequent.
Economic Impacts
    Under the proposed rule change, syndicate members would receive 70 
percent of the gross receivables due to them within 30 days following 
the syndicate settlement date and any final balance due within 90 days. 
The proposed rule change could impact firms of different sizes that 
participate in corporate debt offerings in different ways, as explained 
further below. The aggregate impact is less clear, as it depends upon 
the extent of long-term competitive benefits and short-term cost 
increases. If competition increases in the market for corporate debt 
offerings in the long term, investors may also benefit from improved 
pricing.
Anticipated Benefits
    FINRA expects that the proposed rule change could reduce a number 
of risks associated with syndicate debt issuance, including 
counterparty and liquidity risk. Remitting revenues earned from the 
offering to syndicate members more quickly would reduce counterparty 
risk to syndicate members. The reduction in

[[Page 50899]]

counterparty risk would depend on the financial capacity of the 
syndicate manager--where the syndicate manager is smaller or more 
financially constrained, the reduction in counterparty risk will likely 
be greater. In addition, a shorter syndicate settlement timeframe would 
result in providing syndicate members with earlier access to capital 
and improve the member's liquidity position where their own net capital 
is limited. Members may therefore be exposed to lower liquidity risk. 
The extent of this benefit would depend on the relative magnitude of 
syndicate receivables to the firm's liquidity position and the strength 
of the liquidity position itself.
    FINRA expects that these potential benefits would be more 
pronounced for firms with lower capital levels. For instance, firms 
that do not have sufficient capital to engage in other business 
activities due to the length of the current settlement period may reap 
greater benefits from the proposed rule change. Syndicate members 
exposed to higher counterparty default risk may also disproportionately 
bear the risks associated with longer final settlement times. To the 
extent that smaller firms tend to have lower capital levels, the 
proposed rule change will benefit smaller firms by providing additional 
capital to engage in other business activities and manage default risk.
    The proposed rule change is expected to have positive effects on 
competition and efficiency in the corporate debt underwriting market to 
the extent that the anticipated syndicate receivables constrain a 
firm's liquidity position. Alleviation of liquidity constraints would 
create opportunities for the syndicate members to participate in new 
offerings and enhance their ability to compete with other firms, 
maintain business operations or use the funds for other purposes. This 
may reduce barriers to entering the corporate debt underwriting market 
and could ultimately result in an increase in the supply of 
underwriters and lower costs for corporate debt issuers and investors. 
Lowering costs to issuers and investors may increase the size and 
frequency of new corporate debt offerings, benefiting all member firms 
engaged in the underwriting process. However, the extent of this 
potential gain in market competitiveness cannot be fully and accurately 
estimated.
    As the syndicate manager would be required to remit a large part of 
the revenue to the syndicate members sooner, the proposed rule change 
could lead to a transfer of some of the interest earned on the 
syndicate's underwriting revenue--i.e., from the syndicate manager to 
other syndicate members. The magnitude of such benefit is positively 
correlated with the interest rate environment. Under the proposed rule 
change, if part of the underwriting revenue is paid earlier, the 
syndicate manager would forego the earned interest on the amount to be 
distributed to syndicate members over the 60-day period--the difference 
between the 90-day baseline and proposed 30-day timeframe for the first 
payment of the underwriting revenue. Other syndicate members would have 
the opportunity to earn that interest where they do not have a better 
economic use for the capital.
    Finally, FINRA does not expect the proposed rule change to increase 
the frequency of resettlements. The maximum time to final syndicate 
settlement under the proposed rule change, 90 days, is the same as 
under the baseline, and nothing in the proposed rule change would make 
it more difficult for parties to provide timely invoices of expenses 
relative to the baseline.
Anticipated Costs
    FINRA believes the proposed rule change may result in additional 
one-time and ongoing direct costs to member firms that serve as 
syndicate managers in public offerings of corporate debt. These firms 
will need to adapt their internal policies and procedures as well as 
their accounting, compliance, and supervision and management systems to 
accommodate a two-stage syndicate account settlement cycle. Firms may 
also adopt better technology and greater automation of accounting and 
recordkeeping processes. Firms may also need to hire additional staff 
depending on how settlement cycles on multiple offerings overlap. The 
magnitude of such associated costs, specifically staff and related 
human and technology resources, could increase as the volume and 
frequency of offerings in which firms participate as syndicate managers 
increases. Syndicate managers could absorb such costs or pass them on 
to the syndicate members or the issuers.
    FINRA believes that the adoption of MSRB Rule G-11 provides a 
useful case study for understanding the potential costs of the proposed 
rule change. Both commenters that supported and those more critical of 
the FINRA rule proposal set forth in Regulatory Notice 21-40 discussed 
comparisons between the offering process for municipal bonds versus 
corporate bonds. Opponents argued that, because the process for 
corporate bond offerings is more complex than that for municipal bonds, 
experience with the 30-day settlement period for municipal bond 
offerings is not directly relevant to corporate bond offerings. 
However, when the MSRB Rule G-11 amendment was proposed to shorten the 
deadline for municipal bond syndicate account settlement from 60 days 
to 30 days, similar opposing arguments were raised. Specifically, 
commenters noted uncertain expenses in complex issuances, the inability 
to obtain counsel bills and invoices within 30 days, and the fact that 
some bonds might take longer than 30 days to sell.\21\ The amendment to 
MSRB Rule G-11 became effective in 2009 and market participants were 
able to implement necessary changes to adapt to the new timeline. While 
a transition in syndicate settlement timeframes involves costs, FINRA 
believes that the long-term benefits of shortening the settlement 
timeframe would outweigh the costs.
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    \21\ See 74 FR 41771, supra note 10.
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Alternatives Considered
    In developing the proposed rule change, FINRA considered 
alternatives to the two-stage syndicate settlement approach. 
Specifically, FINRA considered requiring syndicate accounts to be fully 
settled within 30 days. FINRA also considered a 45-day settlement 
period instead of 30 days. These alternatives could deliver some 
benefits as well as carry some costs in comparison with the current 
proposed rule change. FINRA believes that the proposed approach is 
appropriate at this time because it balances the goals of reducing 
exposure of syndicate members to the credit risk of the syndicate 
manager during the pendency of account settlements and providing 
syndicate members with earlier access to the funds earned from an 
offering, with preserving the ability of syndicate managers to 
effectively run the settlement process and thereby limit resettlements.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 21-40 (``Notice''). FINRA received 12 comment letters in 
response to the Notice.\22\ A copy of the Notice is attached as Exhibit 
2a. A list of the comment letters received in response to the Notice is 
attached as Exhibit 2b. Copies of the comment letters received in 
response to the Notice are attached as Exhibit 2c. Of the 12 comment 
letters received, eight were in favor of the

[[Page 50900]]

proposal set forth in the Notice and four were opposed. In the Notice, 
FINRA proposed to reduce the timeframe for the final settlement of 
syndicate accounts in a public offering of corporate debt securities 
from 90 days to 30 days following the syndicate settlement date. FINRA 
has considered the comment letters received and engaged in further 
discussions with a wide variety of industry members. As a result, FINRA 
has revised the proposal to instead provide for a two-stage syndicate 
account settlement process, as described above. The comments received 
in response to the approach described in the Notice are summarized 
below.
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    \22\ All references to commenters are to the comment letters as 
listed in Exhibit 2b.
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1. Reduction of Syndicate Settlement Timeframe to 30 Days
    BDA supported the proposal to reduce the timeframe for the final 
settlement of syndicate accounts in a public offering of corporate debt 
securities from 90 days to 30 days, stating it would provide the 
following economic benefits: (1) lessen the risk that a syndicate 
manager could become insolvent before syndicate members receive 
payment; (2) provide quicker access to the revenues earned from an 
offering (and thereby lower barriers for broker-dealers to enter the 
corporate debt underwriting market); and (3) reduce the amount of 
interest lost by syndicate members while the funds are held in the 
syndicate account.
    BDA also expressed support by noting that various technological 
advances that have emerged since 1987, such as electronic order entry 
and accounting systems, facilitate faster syndicate settlements. BDA 
further noted support for the proposal by stating that there are not 
substantial differences between syndicate management and accounting for 
municipal versus corporate debt offerings that would justify the 90-day 
timeframe for corporates, including in the areas of multiple lead 
managers, cross-border offerings, the complexity of the legal issues 
involved, investor carve-out letters, and asset-backed securities. In 
addition, BDA stated that overallotments (which effectively do not 
exist in corporate bond transactions), travel expensing, and vendor 
billing also present no impediments to a 30-day settlement timeframe.
    Castle Oak, InspereX, Loop Capital, SWS, and R. Seelaus supported 
the proposal, stating it would provide the following economic benefits: 
(1) lessen the risk that a syndicate manager could become insolvent 
before the payment of deal revenue to syndicate members; (2) provide 
quicker access to the revenues earned from an offering, which would 
allow syndicate members to conduct more business, including additional 
new-issue underwritings and secondary market trading; and (3) reduce 
the amount of interest lost by syndicate members while the funds are 
held in the syndicate account. ASA also supported the proposal, stating 
that it would provide syndicate members quicker access to the revenues 
earned from an offering. These commenters, except for Loop Capital, 
also supported the proposal by noting that there have been significant 
technological and logistical improvements in the past 35 years that 
have made the process of settling syndicate accounts cheaper and 
faster. Loop Capital noted support for the proposal by stating that, 
based on its experience, shortening the settlement period to 30 days 
would not present substantive challenges to firms that serve as 
syndicate managers.
    On the other hand, Mizuho opposed the proposal described in the 
Notice, expressing concern regarding the feasibility of a syndicate 
manager receiving, reviewing, and approving all expenses within a 30-
day window. Mizuho also stated that a 30-day account settlement 
timeframe would take firms some time to implement and would result in a 
loss of revenue for firms if done too soon.
    Cleary also opposed the proposal, stating that the reduction of the 
syndicate account settlement period to 30 days would require syndicate 
managers to hire and train a significant number of additional employees 
to complete the settlement process within this shortened timeframe.\23\ 
Cleary noted that these additional costs would be passed on to the 
syndicate, which would reduce the net earnings of syndicate members. 
Cleary also opposed the proposal because a reduction of the settlement 
period would result in more frequent resettlements, which is a 
burdensome process. In addition, Cleary argued that the technological 
advances that have enabled a 30-day settlement process for municipal 
debt offerings cannot be expected to expedite, to the same degree, the 
settlement process for corporate debt offerings. In this regard, Cleary 
stated that the syndicate settlement process for corporate debt 
offerings is more complex and involves more manual inputs, many of 
which are beyond the control of syndicate managers, than the settlement 
process for municipal debt offerings.
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    \23\ Cleary submitted its comment letter on behalf of BofA 
Securities, Inc., Barclays Capital Inc., Citigroup Global Markets 
Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities 
Inc., Goldman Sachs & Co. LLC, Jefferies LLC, J.P. Morgan Securities 
LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS 
Securities LLC, and Wells Fargo Securities, LLC.
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    Cleary also opposed the proposal by asserting that there are a 
number of important differences between the settlement mechanics of 
corporate versus municipal debt offerings that make corporate debt 
offerings not amenable to a 30-day settlement period. According to 
Cleary, these differences include: (1) corporate bond offerings 
generally involve multiple lead managers; (2) syndicates in corporate 
debt offerings routinely engage in aftermarket support; (3) expenses in 
corporate debt offerings are not known up front; (4) corporate bonds 
are offered outside the United States; (5) corporate bond offerings do 
not have fixed legal fees; and (6) delivery of investor carve-out 
letters occurs after closing in corporate bond offerings.
2. Alternatives to a 30-Day Syndicate Account Settlement Requirement
    Commenters discussed several potential alternatives to reducing the 
syndicate account settlement timeframe to 30 days.\24\ As discussed 
above, one potential alternative was a two-stage approach, whereby the 
syndicate manager would be required to remit a specified percentage of 
the syndicate proceeds to syndicate members within 30 days and would be 
permitted to retain a portion to cover expenses for an additional 
period of time. Mizuho expressed support for revising the syndicate 
account settlement timeframe by either implementing a two-stage--50/
50--syndicate account settlement approach or by shortening the 
syndicate settlement timeframe in incremental steps rather than a 
sudden reduction to 30 days. Cleary also supported implementing a two-
stage--50/50--syndicate account settlement approach, stating that it 
would more quickly provide to syndicate members the revenues earned 
from an offering and also allow syndicate managers to retain a 
sufficient amount of syndicate funds to effect timely and accurate 
settlements.
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    \24\ BDA, Cleary, Mizuho, SIFMA.
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    SIFMA supported a two-stage--70/30--syndicate account settlement 
approach for corporate debt offerings because it provides for payment 
within 30 days of a very large percentage of the net compensation 
ultimately payable to syndicate members and preserves the ability of 
syndicate managers to effectively manage the settlement process. SIFMA 
stated that it had received input on this alternative from broker-
dealers that frequently act as syndicate managers as well as other

[[Page 50901]]

broker-dealers that routinely act as syndicate members, and that all of 
these constituencies fully support this alternative.
    While BDA initially opposed a two-stage syndicate account 
settlement approach as an alternative to the proposal, BDA subsequently 
expressed support for a two-stage--70/30--syndicate account settlement 
approach, stating that it was a more practical way to shorten the time 
to provide compensation to syndicate members.\25\ According to BDA, the 
70/30 approach would strike an appropriate balance between ensuring 
that syndicate members have ready access to their funds and minimizing 
the number of resettlements. In addition, BDA asserted that this 
approach would benefit investors by encouraging broader syndicate 
membership and making new-issue corporate bonds available to customers 
of a wider group of broker-dealers.
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    \25\ BDA submitted three comment letters in response to the 
Notice.
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    FINRA has modified the approach that was described in the Notice to 
instead adopt a two-stage--70/30--syndicate account settlement 
approach. FINRA believes that the proposed two-stage--70/30--approach 
is preferable to a two-stage 50/50 approach because it provides for a 
larger up-front payment with a smaller reserve amount and should not 
significantly increase the number of resettlements.
    In response to a question posed in the Notice regarding the use of 
sole recourse loans as an alternative means of addressing concerns 
regarding the length of the syndicate account settlement timeframe, BDA 
stated that such loans are not a feasible alternative to shortening the 
syndicate account settlement timeframe because such a borrowing option 
does not exist generally, the lender would charge interest and thereby 
require a syndicate member to incur a liability for access to its own 
capital, and this alternative does not address the interest lost by 
syndicate members while their funds are held in the syndicate account. 
Cleary also opposed sole recourse loans as an alternative to address 
the length of the syndicate account settlement period. In this regard, 
Cleary stated that a syndicate manager will not know the amount 
required for a sole recourse loan because the syndicate manager will 
not know the net amount ultimately to be paid to each syndicate member 
and, as a result, syndicate managers will not know whether the 
receivable adequately secures any such loan. Cleary commented that 
syndicate managers also need to treat unsecured and partly-secured 
receivables as unallowable assets, and this approach therefore would 
cause uncertainty with regard to net capital for syndicate managers.
    In light of the comments received and further discussions regarding 
the current syndicate account settlement framework, FINRA has 
determined to modify the approach that was described in the Notice and 
amend FINRA Rule 11880 as described above. In this regard, FINRA 
believes that the proposed amendments to FINRA Rule 11880 most directly 
and fairly balance the goals of reducing exposure of syndicate members 
to the credit risk of the syndicate manager during the pendency of 
account settlements and providing syndicate members with earlier access 
to the funds earned from an offering with preserving the ability of 
syndicate managers to effectively run the settlement process and 
thereby limit resettlements. After gaining experience with the two-
stage--70/30--syndicate account settlement approach, FINRA will 
consider whether to reduce the 90-day time period for final settlement 
to align with the MSRB timeframe.
3. Definition of Corporate Debt Security
    In the Notice, FINRA proposed defining a ``corporate debt 
security'' as a type of ``TRACE-Eligible Security'' that is U.S. 
dollar-denominated and issued by a U.S. or foreign private issuer. BDA 
and Loop Capital expressed support for the definition of ``corporate 
debt security'' proposed in the Notice by stating that it generally 
captures the universe of corporate bonds for which a move to a 30-day 
settlement timeframe would be easily achievable. Mizuho similarly 
expressed support for the definition of ``corporate debt security'' 
proposed in the Notice. BDA and Loop Capital specifically suggested 
that the definition should include securitized products as defined in 
FINRA Rule 6710(m), because the process for managing the syndicate 
account, paying vendors, and releasing deal revenue to comanagers is 
virtually the same for both corporate bonds and publicly offered 
securitized products.
    However, Cleary opposed including asset-backed securities in the 
definition and stated that those securities are often composed of 
multiple tranches, and offerings of these securities often navigate 
novel, multi-jurisdictional legal issues. FINRA has determined that it 
is appropriate that the proposed modifications to the syndicate account 
settlement process also apply to public offerings of corporate debt 
securities that are securitized products. Therefore, the proposed 
definition of ``corporate debt security'' in Rule 11880 would include 
securitized products.
4. Public Offerings of Equity Securities
    In response to a question posed in the Notice regarding whether the 
period permitted for the final settlement of syndicate accounts for 
public offerings of corporate equity securities should be shortened, 
Cleary stated that the time period should not be less than 90 days 
because equity offerings are likely to be more complicated than debt 
offerings, including requiring more diligence and marketing. Mizuho 
also opposed reducing the timeframe for settling equity syndicate 
accounts from 90 days to 30 days. However, Loop Capital argued that the 
time period for settling equity syndicate accounts should be reduced 
from 90 days and supported the adoption of a two-stage approach for 
such offerings. FINRA has determined at this time not to propose an 
amendment to reduce the syndicate account settlement timeframe for 
equity offerings.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days of such 
date (i) as the Commission may designate if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-025 on the subject line.

Paper Comments

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


[[Page 50902]]


All submissions should refer to File Number SR-FINRA-2022-025. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2022-025 and should be submitted 
on or before September 8, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17745 Filed 8-17-22; 8:45 am]
BILLING CODE 8011-01-P