[Federal Register Volume 89, Number 213 (Monday, November 4, 2024)]
[Notices]
[Pages 87668-87674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25558]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101468; File No. S7-2024-07]
Notice of an Application of the New York Stock Exchange LLC for
an Exemption Pursuant to Section 36 of the Securities Exchange Act of
1934 and Request for Comment
October 29, 2024.
On April 12, 2024, the Securities and Exchange Commission (the
``Commission'') received an application from the New York Stock
Exchange LLC (the ``NYSE'') to amend an exemption granted to the NYSE
on November 16, 2006 (the ``2006 Exemption'') \1\ pursuant to Section
36 \2\ of the Securities Exchange Act of 1934 (the ``Exchange
Act''),\3\ in accordance with the procedures set forth in Exchange Act
Rule 0-12.\4\ The 2006 Exemption granted exemptive relief from Section
12(a) of the Exchange Act \5\ to permit the NYSE's members, brokers and
dealers to trade debt securities not registered under the Exchange Act
on the NYSE's Automated Bond System, now known as ``NYSE Bonds,''
subject to certain conditions. One of those conditions is that an
issuer of the debt securities, or the issuer's parent if the issuer is
a wholly-owned subsidiary, have at least one class of common or
preferred equity securities that is (i) registered under Section 12(b)
of the Exchange Act and (ii) listed on the NYSE.\6\ The NYSE seeks to
amend the 2006 Exemption by revising the condition that the class of
listed common or preferred equity securities be listed on the NYSE. The
NYSE requests that debt securities not registered under the Exchange
Act be permitted to trade on NYSE Bonds if their issuer, or the
issuer's parent if the issuer is a wholly-owned subsidiary, has a class
of common or preferred equity securities listed on any registered
national securities exchange, not only the NYSE. All other terms of the
2006 Exemption would remain in effect.\7\ We are publishing this notice
to provide interested persons with an opportunity to comment.
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\1\ Order Granting the New York Stock Exchange, Inc.'s (n/k/a
the New York Stock Exchange LLC) Application for an Exemption
Pursuant to Section 36 of the Securities Exchange Act of 1934,
Release No. 34-54766 (Nov. 16, 2006) [71 FR 67657 (Nov. 22, 2006)].
\2\ 15 U.S.C. 78mm. Section 36(a)(1) of the Exchange Act gives
the Commission the authority to exempt any person, security or
transaction or any class or classes of persons, securities or
transactions, conditionally or unconditionally, from any Exchange
Act provision by rule, regulation or order, to the extent that the
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors.
\3\ 15 U.S.C. 78a et seq.
\4\ 17 CFR 240.0-12. Exchange Act Rule 0-12 sets forth the
procedures for filing applications for orders for exemptive relief
pursuant to Section 36.
\5\ 15 U.S.C. 78l(a).
\6\ See 2006 Exemption, supra note 1. See also Letter from Mary
Yeager, New York Stock Exchange, to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, dated May 26, 2005 (NYSE's
request for exemptive relief); Notice of an Application of the New
York Stock Exchange, Inc. for an Exemption Pursuant to Section 36 of
the Securities Exchange Act of 1934 and Request for Comment, Release
No. 34-51998 (July 8, 2005) [70 FR 40748 (July 14, 2005)].
\7\ The NYSE's application for exemptive relief is included as
an Appendix to this release.
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I. Background
Section 12(a) of the Exchange Act provides in relevant part that it
``shall be unlawful for any member, broker or dealer to effect any
transaction in any security (other than an exempted security) on a
national securities exchange unless a registration is effective as to
such security for such exchange.'' Section 12(b) \8\ of the Exchange
Act dictates how the registration referred to in Section 12(a) must be
accomplished. Accordingly, all equity and debt securities that are not
``exempted securities'' \9\ or are not otherwise exempt from Exchange
Act registration must be registered by the issuer under the Exchange
Act before a member, broker or dealer may trade that class of
securities on a national securities exchange.
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\8\ 15 U.S.C. 78l(b).
\9\ An exempted security may be traded on a national securities
exchange absent Exchange Act registration. Section 3(a)(12) of the
Exchange Act [15 U.S.C. 78c(a)(12)] defines exempted security to
include securities such as government securities, municipal
securities, various trust fund interests, pooled income fund
interests and church plan interests.
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[[Page 87669]]
At the same time, brokers or dealers who trade debt securities
other than on a national securities exchange may trade debt securities
regardless of whether the issuer registered that class of debt under
the Exchange Act. This is the case because, while the Exchange Act
requires issuers to register certain equity securities that are not
traded on a national securities exchange, it does not require issuers
to register debt securities that are not traded on a national
securities exchange. In particular, Section 12(g) \10\ of the Exchange
Act, the only Exchange Act provision other than Section 12(a) to impose
an affirmative Exchange Act registration requirement, requires the
registration of equity securities only.\11\
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\10\ 15 U.S.C. 78l(g).
\11\ Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR
240.12g-1] promulgated thereunder require an issuer to register a
class of equity securities if the issuer of the securities, at the
end of its fiscal year, has more than $10,000,000 in total assets
and a class of equity securities held by either 2,000 persons or 500
persons who are not accredited investors. When Congress amended the
Exchange Act in 1964 to add Section 12(g), it extended the
registration requirement to specified equity securities that are not
exchange-traded. No comparable provision was provided for debt
securities that are not exchange-traded.
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As the Commission has stated in the past, this disparate regulatory
treatment between debt securities traded on an exchange versus ``over-
the-counter'' (``OTC'') may have negatively and unnecessarily affected
the structure and development of the debt markets.\12\ Therefore, the
Commission has taken steps to mitigate the effects of such disparate
treatment. For example, in 1994, to reduce existing regulatory
distinctions between exchange-traded debt securities and debt
securities that trade in the OTC market, the Commission adopted
Exchange Act Rule 3a12-11.\13\ Rule 3a12-11 provides for the automatic
effectiveness of Form 8-A registration statements for exchange-traded
debt securities, exempts exchange-traded debt from the borrowing
restrictions under section 8(a) of the Exchange Act,\14\ and exempts
exchange-traded debt from certain proxy and information statement
requirements under sections 14(a), (b) and (c) of the Exchange Act.\15\
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\12\ See discussion of Exchange Act Rule 3a12-11 in the NYSE's
application for exemptive relief. See also Release Nos. 34-34922
(Nov. 1, 1994) [59 FR 55342 (Nov. 7, 1994)], and 34-34139 (June 1,
1994) [59 FR 29398 (June 7, 1994)]. See also supra note 1.
\13\ 17 CFR 240.3a12-11. Release No. 34-34922 (Nov. 1, 1994) [59
FR 55342 (Nov. 7, 1994)].
\14\ 15 U.S.C. 78h(a).
\15\ 15 U.S.C. 78n(a), (b) and (c).
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As another example, in 2002, the Commission approved the Financial
Industry Regulatory Authority's (``FINRA'') rules for the Transaction
Reporting and Compliance Engine (``TRACE'') to, among other things,
improve price transparency in the corporate bond market.\16\ Since
2002, FINRA has increased transparency in the corporate bond market
through TRACE by, most recently, reducing the 15-minute reporting
timeframe for transactions reported to FINRA's TRACE system to one
minute.\17\
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\16\ See Release No. 34-43873 (Jan. 23, 2001) [66 FR 8131 (Jan.
29, 2001)] (Order Approving File No. SR-NASD-99-65).
\17\ See Release No. 34-101121 (Sept. 20, 2024) [89 FR 78930
(Sept. 26, 2024)] (Order Approving File No. SR-FINRA-2024-004).
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The Commission stated that granting the 2006 Exemption ``will serve
the public interest by minimizing unnecessary regulatory disparity and
promoting competition'' between the corporate debt security
markets.\18\ The 2006 Exemption required the following conditions in
order for debt securities not registered under the Exchange Act to
trade on NYSE Bonds: (1) that the offer and sale of the debt securities
traded on what is now NYSE Bonds be registered under the Securities
Act; (2) that the issuer of the debt securities (or its parent if the
issuer is a wholly-owned subsidiary) have at least one class of equity
securities registered under Section 12(b) the Exchange Act and listed
on the NYSE; (3) that the transfer agent for the debt securities be
registered under Section 17A of the Exchange Act; (4) that the trust
indenture for the debt security be qualified under the Trust Indenture
Act of 1939; (5) that the NYSE comply with the undertakings set forth
in its exemptive application to distinguish between debt securities
registered under Section 12(b) of the Exchange Act and listed on the
NYSE and debt securities trading pursuant to the exemptive order; \19\
and (6) that the NYSE would delist a class of debt securities that is
listed on the NYSE as of the date of the order only if the issuer of
that class of debt security did not object to the delisting of those
securities.\20\
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\18\ See supra note 1 at 67658.
\19\ For a description of the undertakings, see the NYSE's
application for exemptive relief, Appendix at 3.
\20\ See supra note 1 at 67659.
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The NYSE posts on its website a list of the bonds that can be
traded on the NYSE Bonds platform.\21\ As of October 2024, this list
contained over 8,000 securities. In its application, the NYSE states
that, of the bonds that can be traded on the NYSE Bonds platform, the
listed bonds total more than 1,000 securities and represent a notional
value of about $464 billion, and the unlisted bonds total more than
7,000 securities and represent a notional value of about $840
billion.\22\
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\21\ See https://www.nyse.com/products/bonds.
\22\ See the NYSE's application for exemptive relief, Appendix
at 1.
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II. Summary of the Application
In its application, the NYSE requests that we amend one of the
conditions in the 2006 Exemption. That exemption permits the NYSE to
trade debt securities \23\ not registered under Section 12(b) of the
Exchange Act on NYSE Bonds subject to certain conditions. One of those
conditions requires that an issuer, or the issuer's parent if the
issuer is a wholly-owned subsidiary, have at least one class of common
or preferred equity securities that is (i) registered under Section
12(b) of the Exchange Act and (ii) listed on the NYSE. The NYSE asks
the Commission to amend item (ii) to require that an issuer have at
least one class of preferred or common equity securities that is listed
on any registered national security exchange, not just the NYSE. All
other conditions of the 2006 Exemption, including item (i), would
remain the same. Specifically, debt securities traded on NYSE Bonds
would be required to meet the following conditions:
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\23\ The 2006 Exemption defines ``debt security'' as any
security that, if the class of securities were listed on the NYSE,
would be listed under Sections 102.03 or 103.05 of the NYSE's Listed
Company Manual. Under this definition, a debt security does not
include any security that, if the class of securities were listed on
the NYSE, would be listed under Sections 703.19 or 703.21 of the
NYSE's Listed Company Manual. A debt security also does not include
any security that is defined as an ``equity security'' under Section
3(a)(11) of the Exchange Act [15 U.S.C. 78c(a)(11)]. The references
to Section 102.03, 103.05, 703.19 and 703.21 of the NYSE's Listed
Company Manual are to those sections as in effect on January 31,
2005. The proposed exemptive order would not change this definition.
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(a) The issuer of the debt security has registered the offer and
sale of such security under the Securities Act of 1933; \24\
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\24\ 15 U.S.C. 77a.
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(b) The issuer of the debt security or the issuer's parent company
if the issuer is a wholly-owned subsidiary, has at least one class of
common or preferred equity securities registered under Section 12(b)
\25\ of the Exchange Act and listed on a registered national security
exchange;
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\25\ 15 U.S.C. 78l(b).
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(c) The transfer agent of the debt security is registered under
Section 17A \26\ of the Exchange Act;
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\26\ 15 U.S.C. 78qA.
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[[Page 87670]]
(d) The trust indenture for the debt security is qualified under
the Trust Indenture Act of 1939; \27\
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\27\ 15 U.S.C. 77aaa-77bbbb.
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(e) The NYSE has complied with the undertakings (see below) set
forth in its exemptive application to distinguish between debt
securities registered under Section 12(b) of the Exchange Act and
listed on the NYSE and debt securities trading pursuant to this
requested exemptive relief; and
(f) The NYSE will delist a class of debt securities that were
listed on the NYSE as of November 16, 2006 only if the issuer of such
class of debt securities does not object to the delisting of those
securities.
The NYSE states that it would continue to comply with the
undertakings that are a condition of the 2006 Exemption in connection
with its current request.\28\ Specifically, in its application the NYSE
states that it would continue to:
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\28\ See the NYSE's application for exemptive relief, Appendix
at 3.
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(a) Provide definitions of ``listed'' debt securities and
``traded'' debt securities on NYSE Bonds and on the NYSE's website;
(b) Identify on NYSE Bonds and on the NYSE's website whether a
particular debt security is ``listed'' or ``traded''; \29\
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\29\ The NYSE states that it would distinguish debt securities
``listed'' on NYSE Bonds from those ``traded'' on NYSE Bonds in the
following manner: (1) The NYSE would uniquely identify ``listed''
and ``traded'' debt securities on the NYSE Bonds Bond Directory
located on the NYSE's website; (2) The NYSE would also make such
information available on the NYSE Bonds Security Master File on a
daily basis through ICE Data Services (``IDS''); and (3) The NYSE
would publish a Trader Update to notify members and member
organizations each time a debt security becomes available to trade
on NYSE Bonds.
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(c) Directly provide members and member organizations notification
prior to the date that trading of the debt securities commences on NYSE
Bonds to clarify the distinction between ``listed'' debt securities and
``traded'' debt securities and to provide notification that eligible
debt securities will be traded on NYSE Bonds;
(d) Issue a press release upon approval of this exemption request
stating that ``listed'' debt securities would trade alongside
``traded'' debt securities on NYSE Bonds; and
(e) Obtain corporate action information from a third-party bond
issue tracking service for debt securities covered by this request.\30\
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\30\ In its application for exemptive relief, the NYSE states
that the third-party bond issue tracking service it currently uses
is IDS. It also states in its application that it would use
information from IDS and FactSet to comply with NYSE Listing Manual
Rule 1401.
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The NYSE states that the current regulatory landscape puts the NYSE
at a competitive disadvantage vis-[agrave]-vis Alternative Trading
Systems (``ATSs''), which are permitted to trade any corporate bond
that is currently available to trade in the secondary market.\31\ NYSE
states that NYSE Bonds is the only regulated platform for corporate
bonds that offers firm prices that are live and executable versus what
it describes as ``subject pricing'' on ATSs.\32\ NYSE also states that
NYSE Bonds, in contrast to the OTC bond markets, disseminates both last
sale prices as they occur on NYSE Bonds exclusive of any mark-ups,
mark-downs, or other charges, and bid and ask quotations. In addition,
the NYSE states that such market data is accessible instantaneously on
NYSE Bonds.\33\ The NYSE further states that it is not aware of any
comparable level of transparency that exists currently elsewhere for
corporate bond trading.\34\
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\31\ See the NYSE's application for exemptive relief, Appendix
at 6.
\32\ As stated in NYSE's application for exemptive relief, ATSs
typically offer dealers on their platforms a ``last look'' to an
otherwise firm price, which allows the dealer to review the posted
price prior to any execution. The ``last look'' allows the dealer to
reject the order if the price is no longer advantageous. NYSE states
that this practice ``can create a false sense of liquidity in the
market.'' See the NYSE's application for exemptive relief, Appendix
at 6.
\33\ FINRA members generally are required to report transactions
in corporate bonds to TRACE as soon as practicable but no later than
15 minutes from the time of execution. See FINRA Rule 6730(a)(1).
FINRA publicly disseminates information on the transactions reported
to TRACE immediately upon receipt. See FINRA Rule 6750(a).
\34\ See the NYSE's application for exemptive relief, Appendix
at 7.
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Section 36 of the Exchange Act grants the Commission the authority
to ``conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from any provision or provisions of [the Exchange Act] or
of any rule or regulation thereunder, to the extent that such exemption
is necessary or appropriate in the public interest, and is consistent
with the protection of investors.''
In order to facilitate investor protection, we propose the
following additional condition: the NYSE will ensure daily monitoring
of delistings of equity securities of each issuer whose debt securities
are listed for trading on NYSE Bonds or, if the issuer of the debt
securities is a wholly-owned subsidiary, equity securities of the
issuer's parent company. The Commission preliminarily believes that
this condition will help protect investors by facilitating appropriate
monitoring and timely handling of equity security delistings for each
issuer whose debt securities are listed for trading on NYSE Bonds or,
if the issuer of the debt securities is a wholly-owned subsidiary,
equity securities of the issuer's parent company.
III. Request for Comment
We request and encourage any interested person to submit comments
regarding the NYSE's application, including whether the request should
be granted. In particular, we solicit comment on the following
questions:
1. Is the scope of the requested exemption appropriate? If not,
please explain and provide examples of an appropriate scope.
2. Please describe how the requested exemption would or would not
protect investors and the public interest. For example, would investors
lose access to any material information?
3. Please describe how the requested exemption would or would not
help to maintain fair and orderly markets.
4. Would the requested exemption impact competition between
exchanges and the OTC markets for trading in corporate bonds? If so,
please describe the impact on competition, and how this impact would
occur.
5. Would the requested exemption increase the transparency of the
public debt markets? If so, please describe the kind of transparency it
would foster.
6. Increased trading on the NYSE Bonds platform that might follow
from the requested exemption would result in greater dissemination of
last sale prices as they occur on NYSE Bonds exclusive of any mark-ups,
mark-downs, or other charges, and bid and ask quotations. To what
extent would the information disseminated by NYSE Bonds and, in
particular, the pre-trade information improve overall market quality in
the corporate bond market in terms of access to information, liquidity
or other factors?
7. Would the requested exemption impact competition between
national securities exchanges? If so, explain how.
8. Would issuers be more or less likely to issue debt securities to
trade on NYSE Bonds in accordance with this exemptive relief?
9. Are there differences between issuers, in terms of industry,
capitalization or other characteristics, who list their equity
securities on the NYSE and those who list their equity securities on
other registered national securities exchanges? If so, are there any
such differences that warrant not expanding the 2006 Exemption as
requested?
[[Page 87671]]
10. Are there differences between the listing standards for equity
securities among national securities exchanges that warrant not
expanding the 2006 Exemption as requested?
11. The current condition requiring the issuer of the debt security
to have at least one class of common or preferred equity securities
registered under Section 12(b) of the Exchange Act and listed on the
NYSE was designed to assure that the issuer of debt securities has a
significant and continuous listing (and oversight) relationship with
the NYSE. Does the loss of such a direct relationship with the issuer
under the requested exemption warrant not expanding the 2006 Exemption
as requested?
12. Are there particular listing standards for an issuer's listed
securities the presence of which should be a condition for expanding
the 2006 Exemption?
13. Any new or amended listing standards must be filed with the
Commission, meet the statutory standard and comply with Rule 19b-4, and
be approved by the Commission. Would approving this request affect the
incentives of each of the national securities exchanges, including the
NYSE, to maintain or change its listing standards?
14. Are there differences between exchange-traded debt securities
and debt securities traded in the OTC market broadly or on ATSs in
particular that have developed since 2006 that warrant not expanding
the 2006 Exemption as requested?
15. Are there any implications or concerns that may arise because
NYSE members would be able to trade a debt security of an issuer that
is not subject to the rules of the NYSE (even with respect to its
equity securities) and where the NYSE has no formal listing agreement
with the issuer, and the issuer's equity securities are listed on a
national securities exchange other than the NYSE?
16. Should we condition the requested exemption on any additional
listing standards on any exchange where the issuer's securities are
listed?
17. Are the conditions sufficiently designed so that investors are
appropriately protected?
18. Is the undertaking regarding the use of corporate action
information from a third party bond issue tracking service adequate to
provide the NYSE and its members with sufficient information regarding
corporate actions relevant to debt securities traded on NYSE Bonds? Is
such undertaking sufficient for NYSE to ascertain compliance with the
requirements of NYSE Rule 1401, on initial and continued trading? If
not, what additional information or measures would be appropriate?
Should any such additional information or measures be required as an
additional condition of the exemption?
19. Should the provision of corporate action information provided
by a third-party bond issue tracking service to the NYSE and its
members be a condition of the exemption?
20. Should we require additional conditions to the requested
exemption if any of the events identified in the information to be
provided by the third-party bond issue tracking service to the NYSE
were to occur?
21. The NYSE states that it would continue to ``[i]dentify on NYSE
Bonds and on the NYSE's website whether a particular debt security is
``listed'' or ``traded'' and the NYSE explains the manner in which it
would do so.\35\ Should the NYSE also be required to identify the
exchanges where the equity securities of its NYSE Bond issuers are
listed? If so, should this identification be required as a condition of
the exemptive order?
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\35\ See the NYSE's application for exemptive relief, Appendix
at 3.
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22. Should we add the proposed condition that the NYSE ensure daily
monitoring of delistings of equity securities of each issuer whose debt
securities are listed for trading on NYSE Bonds or, if the issuer of
the debt securities is a wholly-owned subsidiary, equity securities of
the issuer's parent company? Would that condition help to ensure
compliance with the requested exemption and timely handling of an event
of delisting of such equity securities?
23. Should we make any other modifications to the existing
conditions or add any other conditions?
24. Would the requested change to the listing condition impact any
of the other conditions to the exemption? If so, which condition or
conditions, and why?
25. Would there be any adverse consequences to market participants
if we granted this exemption as requested?
Comments should be received on or before December 4, 2024. Comments
may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/exorders.shtml); or
Send an email to [email protected]. Please include
File Number S7-2024-07 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-2024-07. 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 (https://www.sec.gov/rules/exorders.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the notice that are filed with
the Commission, and all written communications relating to the notice
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 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection.
For further information, you may contact Ingram Weber, Special
Counsel, Office of Rulemaking, at (202) 551-3430, in the Division of
Corporation Finance or Justin Pica, Assistant Director, at (202) 551-
7476, in the Division of Trading and Markets; U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
By the Commission.
Dated: October 29, 2024.
Sherry R. Haywood,
Assistant Secretary.
Appendix: The New York Stock Exchange LLC's Application for an
Exemption Pursuant to Section 36 of the Exchange Act
Appendix
April 12, 2024
Vanessa Countryman
Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090
Dear Ms. Countryman:
[[Page 87672]]
The New York Stock Exchange LLC (the ``Exchange'' or ``NYSE'')
requests that the Securities and Exchange Commission (the
``Commission'') amend a single term of previously granted exemptive
relief to permit Exchange members and member organizations to trade
certain debt securities that are not registered under Section 12(b)
\1\ of the Securities Exchange Act of 1934 (the ``Exchange
Act'').\2\
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\1\ 15 U.S.C. 78l(b).
\2\ 15 U.S.C. 78a.
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Background/Exemptive Relief Requested
Section 12(a) \3\ of the Exchange Act provides that it shall be
unlawful for any ``member, broker, or dealer to effect any
transaction in any security (other than an exempted security) on a
national securities exchange unless a registration is effective as
to such security for such exchange.''
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\3\ 15 U.S.C. 78l(a).
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In 2006, the Commission granted exemptive relief from Section
12(a) of the Exchange Act to permit Exchange members and member
organizations to trade unregistered debt securities on the NYSE's
Automated Bond System (ABS),\4\ now known as ``NYSE Bonds.'' \5\
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\4\ See Exchange Act Release No. 54766 (November 16, 2006), 71
FR 67657 (November 22, 2006) (Order Granting the New York Stock
Exchange Inc.'s (n/k/a the New York Stock Exchange LLC) Application
for an Exemption Pursuant to Section 36 of the Securities Exchange
Act of 1934) (the ``2006 Exemption''). See also Letter from Mary
Yeager, New York Stock Exchange, to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, dated May 26, 2005 (NYSE's
request for exemptive relief).
\5\ See Securities Exchange Act Release No. 55496 (March 20,
2007), 72 FR 14631 (March 28, 2007) (SR-NYSE-2006-37) (Order
Granting Accelerated Approval of Proposed Rule Change Relating to
the Establishment of NYSE Bonds).
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The 2006 Exemption is limited to debt securities of an issuer,
or a wholly-owned subsidiary of an issuer, with at least one class
of common or preferred equity securities that is (i) registered
under Section 12(b) of the Exchange Act and (ii) listed on the NYSE.
The Exchange now asks the Commission to amend this single
limitation. As amended, unregistered debt securities could be traded
on NYSE Bonds if their issuer (or their issuer's parent) had a class
of common or preferred equity listed on any registered national
securities exchange, not just the NYSE. All other terms of the 2006
Exemption would remain in effect.
More specifically, if the Commission were to grant the
Exchange's request, in order for an unregistered debt security to be
traded on NYSE Bonds, the debt security would have to meet the
following conditions:
(a) The issuer of the debt securities registered the offer and
sale of that class of debt securities under the Securities Act of
1933, as amended (the ``1933 Act''); \6\
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\6\ 15 U.S.C. 77a.
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(b) The issuer of the debt securities or the issuer's parent, if
the issuer is a wholly-owned subsidiary, has at least one class of
common or preferred equity securities registered under Section 12(b)
\7\ of the Exchange Act and listed on any registered national
securities exchange;
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\7\ 15 U.S.C. 78l(b).
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(c) The transfer agent for the debt securities is registered
under Section 17A \8\ of the Exchange Act; \9\
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\8\ 15 U.S.C. 78qA.
\9\ If the Commission grants exemptive relief from Section
12(a), members, brokers and dealers would be able to trade on the
NYSE eligible debt securities that have not been registered under
Section 12(b), which prescribes the procedures for an issuer's
registration of a security and the information required to be
submitted. Similarly, the Exchange would no longer need to comply
with the provisions of Section 12(d) regarding the certification of
listing and registration of debt securities.
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(d) The trust indenture for the debt security is qualified under
the Trust Indenture Act of 1939,\10\
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\10\ 15 U.S.C. 77aaa-77bbbb.
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(e) The NYSE has complied with the undertakings (see below) set
forth in its exemptive application to distinguish between debt
securities registered under Section 12(b) of the Exchange Act and
listed on the NYSE and debt securities trading pursuant to this
requested exemptive relief; and
(f) The NYSE will delist a class of debt securities that were
listed on the NYSE as of November 16, 2006 only if the issuer of
such class of debt securities does not object to the delisting of
those securities.
In connection with the 2006 Exemption, the Exchange undertook
that it would take or had taken a number of specified steps. The
Exchange undertakes that it will continue to provide this same
information in connection with this request. Specifically, the NYSE
will continue to:
(a) Provide definitions of ``listed'' debt securities and
``traded'' debt securities on NYSE Bonds and on the NYSE's website;
(b) Identify on NYSE Bonds and on the NYSE's website whether a
particular debt security is ``listed'' or ``traded''; \11\
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\11\ The NYSE will distinguish debt securities ``listed'' on
NYSE Bonds from those ``traded'' on NYSE Bonds in the following
manner: (1) The Exchange will uniquely identify ``listed'' and
``traded'' debt securities on the NYSE Bonds Bond Directory located
on the NYSE's website; (2) The Exchange will also make such
information available on the NYSE Bonds Security Master File on a
daily basis through ICE Data Services (``IDS''); and (3) The
Exchange will publish a Trader Update to notify members and member
organizations each time a debt security becomes available to trade
on NYSE Bonds.
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(c) The NYSE will directly provide members and member
organizations notification prior to the date that trading of the
debt securities commences on NYSE Bonds to clarify the distinction
between ``listed'' debt securities and ``traded'' debt securities
and to provide notification that eligible debt securities will be
traded on NYSE Bonds;
(d) Issue a press release upon approval of this exemption
request stating that ``listed'' debt securities would trade
alongside ``traded'' debt securities on NYSE Bonds; and
(e) Obtain corporate action information from IDS for debt
securities covered by this request.
With respect to undertaking (e), IDS, an affiliate of the
Exchange, is a bond issue tracking service that provides the NYSE a
customized on-line reference for corporate actions relevant to
bonds. The tracking system provides information and data
electronically to the NYSE, and provides:
Notification of calls (redemptions) of traded bonds,
Notification of tender offers for traded bonds,
Notice of defaults in payment of interest on traded
bonds,
Notice of consent solicitations for traded bonds, and
Notice of corporate actions for traded bonds (includes
tender offers, issuer name changes, CUSIP number changes).
The tracking system does not provide notification of changes in
trustees, obligors or transfer agents with respect to traded debt
securities. NYSE receives this information electronically from IDS
on a daily basis. IDS independently obtains, researches and
organizes the information. The NYSE does not itself verify the
information provided by IDS.
NYSE currently has rules that set forth the requirements for
trading unlisted debt securities on NYSE Bonds.\12\ Rule 1400
provides:
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\12\ See NYSE Rules 1400 and 1401.
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``The term Debt Securities includes only securities that, if
they were to be listed on the NYSE, would be listed under Sections
102.03 or 103.05 of the NYSE's Listed Company Manual; provided,
however, that such securities shall not include any security that is
defined as an ``equity security'' under Section 3(a)(11) of the
Exchange Act.
For the avoidance of doubt, note that the term Debt Securities
does not include a security that, if listed on the NYSE, would have
been listed under Section 703.19 of the NYSE's Listed Company Manual
or any equity-linked debt securities listed under Rule 5P. The
references in this Rule to Sections 102.03, 103.05, and 703.19 of
the NYSE's Listed Company Manual are to those sections as in effect
on January 31, 2005.''
Rule 1401 specifies that only Debt Securities with an
outstanding market value or principal amount of at least $5 million
will be permitted to be traded by NYSE members and member
organizations. Rule 1401 also specifies that trading in Debt
Securities will be suspended if (a) the outstanding aggregate market
value or principal amount of the Debt Securities has fallen to less
than $1,000,000, or (b) the Debt Securities either (1) no longer
qualify for a statutory exemption from the registration requirements
of Section 12(b) of the Exchange Act, or (2) may no longer be traded
by NYSE members or member organizations on an unregistered basis
pursuant to the 2006 Exemption.
In order to ensure that Debt Securities have at least $5,000,000
in aggregate market value or principal amount at the time trading
commences, as required under Rule 1401(1), the NYSE, as it currently
does, will review two existing corporate bond issue databases (IDS
and FactSet) that provide issue size information for the
preponderance of corporate bonds.
To monitor the $1,000,000 suspension threshold, as required
under Rule 1401(2),
[[Page 87673]]
the NYSE will generally utilize, as it currently does, IDS' tracking
system to monitor partial redemptions and tender offers. The most
prevalent reason for outstanding principal amounts to fall below $1
million is when an issuer commences a partial redemption of the
bonds resulting in a smaller amount of bonds outstanding and by
extension, a drop in the aggregate market value or principal amount
to below the $1,000,000 threshold.
The NYSE intends to provide an opportunity for NYSE members and
member organizations to trade all eligible debt securities. Once
eligible debt securities are identified, the NYSE will notify NYSE
members and member organizations that such debt securities are
eligible to be traded on NYSE Bonds through Trader Updates and
postings on the NYSE website. Debt securities that would be
ineligible for trading include convertible debt securities, debt
securities that were listed under Section 703.19 of the NYSE's
Listed Company Manual, debt issued by listed company subsidiaries
that are not wholly-owned, and foreign government debt.
Discussion
The NYSE believes that increased exchange trading of debt
securities will have substantial benefits to market participants in
the form of greater transparency around pricing and issuer
information. The regulatory structure around trading of debt
securities, however, has not sufficiently incentivized trading on a
regulated national securities exchange. Presently, all equity and
debt securities that are not ``exempted securities'' or are not
otherwise exempt from Exchange Act registration must be registered
by the issuer under the Exchange Act before a member, broker or
dealer may trade that class of securities on a national securities
exchange. By contrast, brokers or dealers who trade debt securities
in the over-the-counter, or OTC, market may trade debt securities
regardless of whether the issuer registered that class of debt under
the Exchange Act. In fact, debt securities traded OTC need not even
be issued by reporting companies.
The Commission has taken a number of steps over the years to
address its view ``that this disparate regulatory treatment may have
negatively and unnecessarily affected the structure and development
of the debt markets.'' \13\ In 1994, the Commission adopted Exchange
Act Rule 3a12-11 to ``reduce regulatory distinctions between
exchange-traded debt securities required to be registered under
Section 12 of the Exchange Act and bonds traded over-the-counter for
which such registration is not required.'' \14\
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\13\ See 2006 Exemption, supra note 4, at 67658.
\14\ 17 CFR 240.3a12-11. The Commission, among other things,
exempted debt securities listed on a national securities exchange
from Sections 14(a), 14(b) and 14(c) of the Exchange Act. 15 U.S.C.
78n(a), (b) and (c).
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The Commission has also sought to increase the level of
transparency in the public debt markets. In this regard, the
National Association of Securities Dealers, Inc. (``NASD''), now the
Financial Industry Regulatory Authority, Inc. (``FINRA''),
introduced TRACE (Trade Reporting and Compliance Engine) to bring
transparency to the bond market by providing comprehensive, real-
time access to bond price information. Introduced in 2002, TRACE
captures and disseminates consolidated information on secondary
market transactions in publicly traded TRACE-eligible securities--
representing all OTC market activity in these bonds.
The Commission's 2006 Exemption was another step to ``serve the
public interest by minimizing unnecessary regulatory disparity and
promoting competition.'' \15\ Pursuant to the 2006 Exemption, the
Exchange currently lists on its NYSE Bonds platform more than 1,000
CUSIPs, representing a notional value of about $464 billion, and
trades more than 7,000 CUSIPs, representing a notional value of
about $840 billion. The Exchange believes that its present request
will further increase exchange trading of debt securities to the
benefit of investors and other market participants.
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\15\ See 2006 Exemption, supra note 4, at 67659.
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NYSE Bonds
NYSE Bonds is an electronic order-driven matching system \16\
for fixed income securities to which Exchange members and member
organizations subscribe and through which they enter and match
customer bond orders on a strict price and time priority basis. The
system provides member subscribers with access to the order book in
each bond which displays orders and in the time sequence received.
Completed, locked-in trades are submitted to the clearing
corporation (i.e., Depository Trust Clearing Corporation) with
calculated accrued interest. NYSE Bonds centralizes bond trading and
publishes a real-time bond data feed to NYSE Bonds customers and
subscribers that reflects all orders in time sequence on the NYSE
Bonds order book. NYSE Bonds is an order-driven system and,
therefore, the Exchange does not disseminate any information on a
particular bond if there are no orders entered on the order book for
such bond.
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\16\ See supra note 5.
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NYSE Bonds primarily serves the ``small-lot'' corporate bond
market. Small-lot bond buyers and sellers are primarily individuals,
bank trust accounts, and small institutions. In addition, bond
dealers use NYSE Bonds to offset so-called ``tail-end'' bond
positions acquired in the course of large-lot trading. NYSE Bonds is
the only system that provides the public with real-time disclosure
of quotations and trade prices, exclusive of mark-ups/mark-downs,
commissions, or other charges.
Growth in electronic trading of corporate bonds has been
noteworthy. It has been decades in the making, but electronic
trading in corporate bonds has made notable inroads in a market
known for its low-tech ways. In November 2023, 45% of US investment-
grade bond volume was traded electronically.\17\ During that month,
the average daily notional volume traded grew 13% year over year to
$43 billion, with $18.8 billion of corporate bonds trading
electronically, representing an 18% growth from November of
2022.\18\ The vast majority of those electronic transactions occur
on Alternative Trading Systems (``ATSs''), which are permitted to
trade any corporate bond that is currently available to trade in the
secondary market. This universe of bonds represents approximately
62,000 CUSIPs with a notional value of over $10 trillion. The
current regulatory landscape not only puts NYSE Bonds at a
competitive disadvantage to the ATSs, it also puts investors at a
disadvantage given that NYSE Bonds is the only regulated platform
for corporate bonds that offers firm prices that are live and
executable versus subject pricing on ATSs which can create a false
sense of liquidity in the market. ATSs typically offer dealers on
their platforms a ``last look'' to an otherwise firm price, which
allows the dealer to review the posted price prior to any execution.
The ``last look'' allows the dealer to reject the order if the price
is no longer advantageous. On the contrary, all prices on NYSE Bonds
are live and executable and are matched based on price/time priority
automatically by the matching engine.
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\17\ See Kevin McPartland, Is the Corporate Bond E-Trading
Drought Over?, Greenwich Associates (2023).
\18\ Id.
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In addition, the Exchange believes that investors in debt
securities are adversely impacted by the competitive constraints on
exchanges trading debt securities. In contrast to OTC markets
trading debt securities, the Exchange's bond market disseminates
both last sale prices as they occur on the Exchange exclusive of any
mark-ups, mark-downs, or other charges, and bid and ask quotations.
This market data is available through some 400,000 market data
displays providing subscribers--primarily securities firms and
financial institutions--with direct instantaneous access to this
information, throughout each trading day. The Exchange is not aware
of any comparable level of transparency--trade prices, quotations,
and speed of availability for corporate bond prices--that exists
currently elsewhere. This transparency is absent when a bond delists
from, or is not traded on, the Exchange.\19\
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\19\ One instance in which this transparency may be lost is when
a company with both listed equity and debt is merged or reorganizes
with another company. The successor may list its stock on the
Exchange but leave its debt in a now wholly-owned subsidiary, which
may seek to delist its debt to avoid separate Section 13 reporting
requirements. Once delisted from the Exchange, the debt is traded
only OTC, and the Exchange believes that investors lose the benefit
of the transparency provided by the real time reporting of
quotations and trades on the Exchange.
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Bond Issue Information
The Exchange believes that increasing the universe of
unregistered debt securities that may be traded on the Exchange will
have significant benefits to market participants. First, the
Exchange's proposal will not result in any loss of debt security or
issuer information to investors for the following reasons: The
Exchange is only requesting exemptive relief with respect to the
trading by Exchange members and member organization of debt
securities issued by companies listed on a national securities
[[Page 87674]]
exchange and their wholly-owned subsidiaries. All such issuers are
already subject to the requirements of Section 13 of the Exchange
Act, and thus information about an issuer will be available to
investors, even in the absence of an Exchange Act registration
requirement for the debt securities of these issuers or their
wholly-owned subsidiaries.
Only debt securities that are registered under the 1933 Act
would be eligible to be traded by NYSE members and member
organizations on NYSE Bonds. Additionally, under Section 15(d) of
the Exchange Act, issuers not required to register their debt
securities under Section 12 of the Exchange Act are subject to
Section 13 reporting requirements for the fiscal year following the
effective date of a registration statement filed under the 1933
Act.\20\ Issuers must continue to file such reports so long as they
have a class of securities with at least 300 ``holders of record''
as defined under Exchange Act Rule 12g5-1.\21\ Therefore, with
respect to eligible debt securities that have been issued by the
wholly-owned subsidiary of a listed company, that wholly-owned
subsidiary may or may not itself be currently subject to the
requirements of Section 15(d) or Section 13 of the Exchange Act.
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\20\ 15 U.S.C. 78o(d) (2000).
\21\ 17 CFR 240.12g5-1.
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The 1933 Act registration statements themselves supply much of
the relevant information needed by the bond markets and investors.
Indeed, for the most part, the Exchange Act registration Form 8-A
simply incorporates by reference the information found in the 1933
Act registration statement. The 1933 Act registration statement also
contains a much more detailed and relevant description of the debt
issue than is required by Rule 12b-3 of the Exchange Act.\22\ The
description contained in the term sheet of the registration
statement provides the information necessary to trade that issue--
whether on an exchange or OTC. The issue description contained in
the Form 8-A registration statement does not provide the information
needed to trade bonds.
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\22\ 17 CFR 240.12b-3. Rule 12b-3 requires that wherever the
title of securities is required to be stated one shall also indicate
``the type and general character of the securities. . . .'' For
funded debt, issuers are required to state the following: the rate
of interest, the maturity date (or dates for serial issues), an
indication if the payment of principal or interest is contingent, a
brief indication of the priority of the issue, and, if the issue is
convertible, a statement to that effect.
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Most of the other disclosure items required in connection with
debt securities arise with respect to Forms 8-K, 10-Q and 10-K.
These forms would continue to be filed by eligible listed companies
and, where required by Sections 15(d) or 13 under the Exchange Act,
by eligible wholly-owned subsidiaries, regardless of whether the
debt securities are registered under the Exchange Act. Item 2.04 of
Form 8-K requires disclosure of any triggering event, such as a
default, that accelerates or increases a direct financial
obligation. Item 3.03 of Form 8-K requires disclosure of any
material modification to the rights of security holders. Item
601(b)(4) of Regulation S-K (required to be included in 10-Ks and
10-Qs) discusses the definition of the rights of debt holders. Part
II--Item 3(a) of Form 10-Q requires that, to the extent that the
registrant has not previously disclosed such information on Form 8-
K, the registrant must provide information regarding defaults in the
payment of principal, interest, sinking fund, etc., ``with respect
to any indebtedness of the registrant or any of its significant
subsidiaries exceeding 5 percent of the total assets of the
registrant and its consolidated subsidiaries . . .'' (emphasis
added). Thus, the Form 10-Q requires disclosure of defaults in the
payment of principal, interest, sinking fund, etc. for any bonds of
the registrant, irrespective of whether such bonds are exchange-
listed or not.
If, as described above, a wholly-owned subsidiary ceases to
provide Exchange Act reports itself, much of the information that
had been provided by the wholly-owned subsidiary will be provided
instead by the wholly-owned subsidiary's listed parent company in
its own Exchange Act reports. The listed parent company, however,
will not be required to list and describe the debt securities issued
by the wholly-owned subsidiary on the cover page of its own annual
report on Form 10-K or to include as an exhibit to its own Forms 10-
K or 10-Q the exhibits that would have been required to be filed by
the wholly-owned subsidiary pursuant to Item 601(b)(4) of Regulation
S-K (relating to creation of a new class of securities or
indebtedness or the modification of existing rights of security
holders).
There are also a variety of databases providing bond
information, including information regarding the listing and/or
trading location of a bond. A few examples of these database
services include Standard & Poor's Market Intelligence, the Mergent
Bond Record, APEX, Bloomberg and the Commission's EDGAR internet
service, among other services. In addition, the Exchange's own bond
issue directory is available on the Exchange's website and carries
the description of each listed bond issue, including bonds currently
exempt from Exchange Act registration requirements, such as
Tennessee Valley Authority bonds.
Most notably, of course, OTC bond trading functions without the
information obtained as a result of Exchange Act registration. OTC
bond trading relies on the information disclosed in the 1933 Act
registration statement and the indentures filed under the Trust
Indenture Act, including amendments to the indenture affecting the
rights of bondholders.
In addition to helping ensure that investors have access to
current information about debt securities traded on the Exchange,
the NYSE's present request will have additional benefits. First, the
request will increase competition by allowing more exchanges to
provide a trading venue for debt securities which will, in turn,
likely increase trading volume and liquidity of debt securities.
This will provide investors and market participants with greater
pricing transparency for bonds traded on the Exchange. In granting
an exemption pursuant to Section 36 of the Exchange Act, the
Commission must consider whether the requested exemption is
``necessary or appropriate in the public interest, and is consistent
with the protection of investors.'' \23\ For the reasons discussed
herein, the Exchange believes its requested relief meets this
standard. If granted, investors will have corporate information
about the issuer of debt securities, there will be increased numbers
of trading venues for debt securities, and the resulting growth in
trading will provide market participants with greater pricing
transparency.
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\23\ 15 U.S.C. 78a.
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Conclusion
The Exchange believes that its request to amend a single term of
the 2006 Exemption to permit unregistered debt securities to be
traded on NYSE Bonds if their issuer (or their issuer's parent) had
a class of common or preferred equity listed on any registered
national securities exchange will further the Commission's goals of
improving transparency in the bond market while also providing
sufficient safeguards for the investing public. In remarks at City
Week, Chair Gensler outlined targeted initiatives to improve
transparency, resiliency, integrity, and access in fixed-income
markets.\24\ ``Together, through driving greater transparency,
modernizing rule sets for electronified platforms, and enhancing
financial resiliency, we can help investors and issuers in the bond
markets get the same benefits as many other parts of our capital
markets,'' said Gensler.\25\ Pre-trade transparency in particular
has been identified as a key area for improvement in the fixed
income markets.
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\24\ See Gary Gensler, `` ``The Name's Bond:'' Remarks at City
Week'' (April 26, 2022), available at https://www.sec.gov/news/speech/gensler-names-bond-042622.
\25\ Id.
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As noted above, the Commission has already shown its willingness
to lessen the opaqueness in the bond market by providing exemptive
relief to the Exchange pursuant to which the Exchange currently
trades debt securities of issuers that are listed on NYSE and such
issuers' wholly-owned subsidiaries. By extending this exemption to
allow Exchange members and member organizations to trade debt
securities of issuers that are listed on any national securities
exchange and such issuers' wholly-owned subsidiaries would further
remove unnecessary and anti-competitive barriers to exchange trading
of debt securities. In addition, trading of such debt securities on
NYSE Bonds would provide market participants trading such
securities, as well as the owners of such securities, much greater
levels of price transparency than is currently available.
Accordingly, we urge the Commission to use its exemptive power to
remove the requirement that debt securities of non-NYSE-listed
equity issuers and their wholly-owned subsidiaries be registered
under the Exchange Act in order to be traded on the Exchange.
Sincerely,
Hope M. Jarkowski
[FR Doc. 2024-25558 Filed 11-1-24; 8:45 am]
BILLING CODE P