Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 Thereto To Adopt a FINRA Policy To Expand Disseminated Trade Reporting and Compliance Engine (“TRACE”) Data, 31518-31523 [E8-12161]
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Federal Register / Vol. 73, No. 106 / Monday, June 2, 2008 / Notices
and professional engagement period’’ is
defined to include two discrete periods
of time. The ‘‘audit period’’ is the period
covered by any financial statements
being audited or reviewed.2 The
‘‘professional engagement period’’ is the
period beginning when the firm either
signs the initial engagement letter or
begins audit procedures, whichever is
earlier, and ends when either the
company or the firm notifies the SEC
that the company is no longer that firm’s
audit client.3
On April 3, 2007, the Board issued a
concept release to solicit comment
about the possible effect on a firm’s
independence of providing tax services
to a person covered by Rule 3523 during
the portion of the audit period that
precedes the beginning of the
professional engagement period and
other practical consequences of
applying the restrictions imposed by
Rule 3523 to that portion of the audit
period.4 The Board also adjusted the
implementation schedule for Rule 3523,
as it applies to tax services provided
during the period subject to audit but
before the professional engagement
period.5
On July 24, 2007, the Board proposed
an amendment to Rule 3523 to exclude
the portion of the audit period that
precedes the beginning of the
professional engagement period, as well
as a new ethics and independence rule
regarding communication with audit
committees, and further adjusted the
implementation schedule for Rule 3523
to allow sufficient time for
consideration of commenters’ views.6
After considering commenters’ views,
the Board adopted the amendment on
April 22, 2008.7
The Board has determined to further
adjust the implementation schedule for
Rule 3523 to allow sufficient time for
the SEC to consider whether to approve
the amendment to Rule 3523.
Specifically, the Board will not apply
Rule 3523 to tax services provided on or
before December 31, 2008, when those
services are provided during the audit
2 Rule
3501(a)(iii)(1).
3501(a)(iii)(2).
4 See PCAOB Release No. 2007–002 (Apr. 3,
2007).
5 See id., at 7. Specifically, the Board stated that
it would not apply Rule 3523 to tax services
provided on or before July 31, 2007, when those
services are provided during the audit period and
are completed before the professional engagement
period begins.
6 See PCAOB Release No. 2007–008 (July 24,
2007). Specifically, the Board stated that it would
not apply Rule 3523 to tax services provided on or
before April 30, 2008, when those services are
provided during the audit period and are completed
before the professional engagement period begins.
7 See PCAOB Release No. 2008–003 (Apr. 22,
2008).
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period and are completed before the
professional engagement period begins.8
(b) Statutory Basis
The statutory basis for the proposed
rule change is Title I of the Act.
B. Board’s Statement on Burden on
Competition
The Board 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.
C. Board’s Statement on Comments on
the Proposed Rule Change Received
From Members, Participants or Others
The Board did not solicit or receive
written comments on the proposed rule
change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Securities Exchange Act of 1934
(as incorporated, by reference, into
Section 107(b)(4) of the Act) and
paragraph (f) of Rule 19b–4 thereunder
because of its designation by the PCAOB
as ‘‘constituting a stated policy,
practice, or interpretation with respect
to the meaning, administration, or
enforcement of an existing rule.’’ At any
time within 60 days of the filing of the
proposed rule change, the Commission
may summarily abrogate such rule
change if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in furtherance of the purposes of the
Act.
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
requirements of Title I of the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/pcaob.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number PCAOB–2008–02 on the subject
line.
8 This
will apply regardless of whether there is an
engagement in process on April 30, 2008.
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number PCAOB–2008–02. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/pcaob/shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
changes that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Section, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of the PCAOB. All
comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number PCAOB–
2008–02 and should be submitted on or
before June 23, 2008.
By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–12162 Filed 5–30–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57866; File No. SR–FINRA–
2007–026]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change as Modified by
Amendment No. 1 Thereto To Adopt a
FINRA Policy To Expand Disseminated
Trade Reporting and Compliance
Engine (‘‘TRACE’’) Data
May 23, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
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Federal Register / Vol. 73, No. 106 / Monday, June 2, 2008 / Notices
(‘‘Act’’)1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
5, 2007, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) 3 filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
substantially prepared by FINRA. On
May 20, 2008, FINRA filed Amendment
No.1 to the proposed rule change. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt a FINRA
policy to expand disseminated Trade
Reporting and Compliance Engine
(‘‘TRACE’’) data to show, for each
disseminated transaction, that the
transaction is an inter-dealer transaction
(‘‘Dealer Transaction’’) or a transaction
with a customer (‘‘Customer’’)
(‘‘Customer Transaction’’) and the
member referenced is a buyer (‘‘Buyer’’)
or a (‘‘Seller’’) (or acts as agent on the
buy or the sell side). The proposed rule
change does not include proposed rule
text.
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Effective July 30, 2007, FINRA was formed
through the consolidation of NASD and the member
regulatory functions of NYSE Regulation, Inc.
Generally, pre-consolidation actions by NASD are
referred to as FINRA actions, except for NASD
Rules, when referenced singularly, and NASD
Notices to Members. When FINRA files proposed
rule changes to create a consolidated FINRA rule
manual, such NASD rules and interpretations, as
incorporated in the consolidated FINRA Manual,
will no longer be referred to as ‘‘NASD’’ rules.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Currently, FINRA members that are
parties to a transaction in a TRACEeligible security report several types of
information to the TRACE System.
Among the elements of data that are
reported, for each transaction the
member reports that it is a Buyer from
a broker-dealer (‘‘Dealer’’) or a Customer
or a Seller to a Dealer or a Customer (or
acts as agent on the buy or the sell
side).4 In addition, the member reports
that the transaction is a Dealer
Transaction or a Customer Transaction.
Currently, these data elements are not
included in the TRACE transaction data
disseminated immediately upon
FINRA’s receipt of a transaction report.
The data elements that are
disseminated include: the bond
identifier (i.e., the TRACE symbol); the
price inclusive of any mark-up, markdown, or commission; the quantity
(expressed as the total par value); the
yield; the time of execution; and, if the
transaction were executed on a day
other than when TRACE data is being
disseminated, the actual day of
execution of the transaction.
For a Dealer Transaction, FINRA
receives a TRACE report from each
Dealer, but disseminates data reflecting
only the information received in the Sell
transaction report. For a Customer
Transaction, only one side of the trade
has to be reported—the Dealer (or
Dealers) side—and FINRA disseminates
the data from the TRACE report(s),
which may be either a Dealer’s Buy or
a Dealer’s Sell.
FINRA is proposing that additional
data elements showing the side on
which a Dealer acts in a transaction
(‘‘Buy/Sell data element’’) and the
information identifying the transaction
as a Dealer Transaction or a Customer
Transaction (‘‘Dealer/Customer data
element’’) (but not the MPID or identity
of any Dealer) be disseminated publicly
for each transaction, because Dealers
need access to these additional data
elements and investors would benefit
from this enhanced level of
transparency. Dealers need the
additional data elements to compare
prices, and in order to comply with
4 Hereinafter, ‘‘Buy’’ means either or both (i) a
Dealer’s purchase of a security from a Customer,
and/or (ii) a Dealer, as agent of a Customer,
facilitating a purchase of a security from the
Customer; similarly, ‘‘Sell’’ means either or both (i)
a Dealer’s sale of a security to a Customer, and/or
(ii) a Dealer, as agent of a Customer, facilitating a
sale of a security to the Customer.
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31519
their best execution obligations under
NASD Rule 2320, the fair and
reasonable mark-up/mark-down
requirements under NASD Rule 2440,
NASD IM–2440–1, NASD IM–2440–2,
and other provisions of the federal
securities laws.5 Investors would benefit
from the dissemination of these
additional data elements by being able
to compare prices and request better,
lower prices. Given the limited
occurrence of transactions in certain
sectors of the debt markets, including
the corporate debt sector, FINRA
believes that the Dealer/Customer data
element and Buy/Sell data element
should be added to the disseminated
TRACE data to provide TRACE users
additional clarity about what each
disseminated TRACE price actually
represents.
The disseminated TRACE data
enhanced by the addition of the Dealer/
Customer data element and the Buy/Sell
data element will inform Dealers and
Customers of actual executed prices for
Customer Transactions and Dealer
Transactions across a broad universe of
corporate debt securities. Even prior to
the adoption of NASD IM–2440–2,
‘‘Additional Mark-Up Policy For
Transactions in Debt Securities, Except
Municipal Securities’’ (‘‘the Debt MarkUp Interpretation’’), the availability of
these data elements would have aided
Dealers in complying with their
obligations regarding best execution and
fair mark-ups set forth in FINRA rules
and other provisions of the federal
securities laws, and described in various
litigated or settled proceedings.6 With
the implementation of the Debt MarkUp Interpretation on July 5, 2007,
FINRA believes that the data elements
identifying a transaction as either a
Dealer Transaction or a Customer
5 When a member charges a Customer an
excessive or unreasonable mark-up/mark-down, the
member violates NASD Rule 2110, NASD Rule
2440, NASD IM–2440–1, and, if charged in a debt
securities transaction, NASD IM–2440–2. In
addition, in some cases, when a member charges an
excessive or unreasonable mark-up/mark-down and
does not fully disclose it to the customer, the
member may be in violation of Section 10(b) of the
Act, 15 U.S.C. 78j(b), and Rule 10b–5 thereunder,
17 CFR 240.10b–5, or Section 17(a) of the Securities
Act of 1933, 15 U.S.C. 77q(a). NASD Rule 2320,
NASD Rule 2110, NASD Rule 2440, NASD IM–
2440–1, and NASD IM–2440–2 do not apply to
transactions in municipal securities. Instead, when
a Dealer or a municipal securities dealer engages in
a municipal securities transaction, the rules of the
Municipal Securities Rulemaking Board (‘‘MSRB’’)
apply. See, e.g., MSRB Rule G–30, Prices and
Commissions; MSRB Rule G–18, Execution of
Transactions.
6 NASD IM–2440–2 was approved by the SEC on
April 16, 2007, and became effective on July 5,
2007. See Securities Exchange Act Release No.
55638 (April 16, 2007), 72 FR 20150 (April 23,
2007) (order approving SR–NASD–2003–141);
NASD Notice to Members 07–28 (June 2007).
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Transaction and as either a Buy or a Sell
now must be made available to Dealers.
Under the Debt Mark-Up
Interpretation, when a Dealer is pricing
or determining mark-ups (or markdowns) by referring to recent transaction
prices other than the Dealer’s own price,
a Dealer must be able to determine if a
trade is an inter-dealer transaction (as
used in the Debt Mark-Up
Interpretation) or a Customer
Transaction.7 In addition, the Dealer
must be able to determine which side of
the market a Dealer traded from,
whether looking to a Customer
Transaction or an inter-dealer
transaction (as used in the Debt MarkUp Interpretation).8 Disseminating the
Dealer/Customer and the Buy/Sell data
elements would allow Dealers to more
accurately identify the type of pricing
information disseminated by TRACE,
and would permit them to use the
information to comply with FINRA
7 In IM–2440–2, the Debt Mark-Up Interpretation,
references to ‘‘inter-dealer trades’’ or ‘‘inter-dealer
transactions’’ (that, in certain circumstances, must
or may be used to determine the prevailing market
price of a security—whether in the same or similar
securities as the security for which a mark-up is
being calculated) do not include any inter-dealer
transaction in which the Dealer that is determining
prevailing market price is a party. In contrast, in
this proposed rule filing, the term ‘‘inter-dealer
transaction’’ (defined as ‘‘Dealer Transaction’’)
includes all inter-dealer transactions (e.g., if Dealer
A is a party to an inter-dealer transaction, from
Dealer A’s perspective, inter-dealer transactions
means all inter-dealer transactions, including those
to which Dealer A is a party). In this note 7 and
note 8, infra, when describing various provisions of
the Debt Mark-Up Interpretation, FINRA uses the
term ‘‘inter-dealer transaction’’ to make clear that
FINRA means inter-dealer transactions as used in
the Debt Mark-Up Interpretation. See IM–2440–2,
paragraph (b)(5)(A) (requiring that a Dealer must
consider—after considering the Dealer’s own
contemporaneous cost (or proceeds)—the prices of
any contemporaneous inter-dealer transaction in
the same security to determine prevailing market
price). See also NASD IM–2440–2, paragraph
(b)(5)(B) (requiring that a Dealer must consider—
after considering the Dealer’s own
contemporaneous cost (or proceeds) and the prices
of any contemporaneous inter-dealer transactions
in the same security—the prices of
contemporaneous Dealer purchases (sales) in the
security in question from (to) institutional accounts
with which any Dealer regularly effects transactions
in the same security (‘‘certain institutional
accounts’’) to determine prevailing market price);
NASD IM–2440–2, paragraph (b)(6) (referring to a
Dealer’s review, in certain circumstances, of the
pricing information from (i) contemporaneous interdealer transactions in a similar security, and (ii)
contemporaneous Dealer purchase (sale)
transactions in a similar security with certain
institutional accounts, as part of the Dealer’s
analysis to determine the prevailing market price of
a particular security).
8 For example, under NASD IM–2440–2,
paragraph (b)(6), when a Dealer refers to
transactions in similar securities, a Dealer must
know the side of the market (i.e., Buy or Sell
information) to determine the relative comparability
of a transaction in a similar security to the
transaction that is being marked.
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rules and the federal securities laws
regarding fair prices and best execution.
In view of the fact that Customer
Transaction prices disseminated are
‘‘all-in prices,’’ and the prices of
Customer Transactions and Dealer
Transactions are intermingled, the
dissemination of data elements that
identify transactions as Customer
Transactions or Dealer Transactions will
allow all who view the TRACE data to
distinguish those transactions that do
not include a mark-up/mark-down or a
commission—Dealer Transactions—
from transactions displayed as ‘‘all-in
prices’’ that include Dealer mark-ups/
mark-downs or commissions—Customer
Transactions.
By adding the Buy/Sell data element
to any transaction identified as a
Customer Transaction, anyone viewing
the TRACE data will be able to
determine that, in the case of a Buy, the
disseminated price includes a markdown or a commission, or, in the case
of a Sell, the disseminated price
includes a mark-up or a commission.
Thus, with the two additional elements
viewable in disseminated TRACE data,
Customers that are TRACE data users
will be able to knowledgeably assess
and compare the disseminated ‘‘all-in
price’’ of their purchases and sales with
other Customer Transactions. In
addition, Dealers will be able to
determine approximate levels of Dealer
Transaction pricing by ‘‘backing out’’ of
a disseminated ‘‘all-in price’’ clearly
labeled as a Customer Transaction, a
mark-up (or mark-down) or commission
amount if Dealer Transaction pricing is
not available in TRACE for the Dealer’s
analyses of its mark-up (or mark-down)
and its compliance with best execution
obligations.
Such transparency exists in other
markets. The Municipal Securities
Rulemaking Board (‘‘MSRB’’)
determined that disseminating buy/sell
and dealer/customer information was an
important element of transparency in
the municipal securities market, and
currently disseminates both of these
data elements real-time together with
other price, quantity, and yield
information per transaction.9 FINRA
believes it is appropriate to provide
comparable data to TRACE data users.
Finally, debt pricing, particularly debt
mark-ups, remains an area of regulatory
concern and focus.10 For more than two
9 Disseminated municipal securities transaction
prices, like TRACE-disseminated prices, are ‘‘all-in
prices.’’
10 In remarks to the securities industry, senior
SEC staff has indicated that debt mark-ups are an
area of regulatory concern and focus. See, e.g.,
Remarks before the TBMA Legal and Compliance
Conference, Commissioner Annette L. Nazareth,
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years, FINRA has considered
incorporating the Dealer/Customer data
element and Buy/Sell data element in
disseminated TRACE transaction data to
aid Dealers in improving their pricing of
TRACE-eligible securities and similar
debt securities; and to provide them
with information to evidence their
adherence to the requirements of the
federal securities laws and regulations
regarding fair pricing and best
execution. In 2005, FINRA staff began
receiving requests that these reported
data elements be included in the
disseminated TRACE data from
members attending FINRA seminars
discussing debt mark-ups. Also, in April
2005, when NASD IM–2440–2 was
pending as a proposed rule change, a
commenter highlighted the deficiencies
in disseminated TRACE data, noting
that TRACE data did not differentiate
between Customer Transactions and
Dealer Transactions, thus making Dealer
compliance with the various
requirements of NASD IM–2440–2
difficult (e.g., the identification and
required use, in certain cases, of certain
Dealer Transaction prices to establish
prevailing market price).11 In October
2005, in FINRA’s response to comments,
FINRA indicated that FINRA was
‘‘evaluating enhancing the quality of
disseminated TRACE information to
show, for each trade, whether the trade
is inter-dealer or customer, as is now
indicated in real-time disseminated
municipal securities transaction
SEC, New York, NY, February 7, 2006 (‘‘[The
industry] should consider improving transparency
concerning dealer mark-up policies * * * Investors
should understand what they are paying, whether
the broker is acting as agent or principal, and
whether the price paid includes compensation to
the broker-dealer, and if so, how much.’’) at
https://www.sec.gov/news/speech/
spch020706aln.htm; Remarks to The SIFMA Legal
and Compliance Division, ‘‘The Regulatory Focus
on Broker-Dealer Legal and Compliance Issues,’’
Mary Ann Gadziala, Associate Director, Office of
Compliance Inspections and Examinations, SEC,
Chicago, Ill., June 7, 2007 (listing mark-ups on fixed
income securities as an examination priority), at
https://www.sec.gov/news/speech/2007/
spch060707mag.htm. FINRA acknowledges that the
Commission, as a matter of policy, disclaims
responsibility for any private publications or
statements by any of its employees, and that the
views expressed in the remarks referenced above
are those of the speaker and do not necessarily
reflect the views of the Commission, another
Commissioner, or the Commission staff.
11 See File No. SR–NASD–2003–141. Letter from
The Bond Market Association (regarding File No.
SR–NASD–2003–141), to Jonathan G. Katz,
Secretary, SEC, dated April 5, 2005 at 13 (‘‘[T]he
NASD’s TRACE system does not differentiate
between inter-dealer trades and customer trades in
its disseminated reports, making the identification
of an inter-dealer trade difficult.’’). FINRA also
published the proposed change of policy regarding
TRACE disseminated data in NASD Notice to
Members 06–22 (May 2006). The comments
received in connection with the proposal at that
time are summarized below in Item 5.
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Federal Register / Vol. 73, No. 106 / Monday, June 2, 2008 / Notices
data.’’ 12 By adding the Dealer/Customer
data element and Buy/Sell data element
to TRACE disseminated information
now, Customers and Dealers would be
able to more accurately and carefully
assess the quality of the pricing of their
corporate bond transactions.
FINRA would announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 90 days following
Commission approval, if the
Commission approves the proposal. The
effective date would be no later than
120 days following publication of the
Regulatory Notice announcing a
Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,13 which
requires, among other things, that
FINRA rules 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
policy, by improving the quality of
information available to institutional
investors, retail investors, and Dealers:
(i) Will allow them to compare prices in
TRACE-eligible securities transactions
more meaningfully; (ii) will allow them
to negotiate transaction prices with
more information; (iii) will allow
Dealers to comply more easily with
FINRA rules and various provisions of
the federal securities laws requiring
Dealers to buy or sell debt securities at
prices related to the prevailing market
prices, adjusted by a fair and reasonable
mark-up (mark-down) or commission,
which provisions are designed to
prevent unfair or unjust practices, or
fraudulent, deceptive, and manipulative
acts or practices in the pricing of
securities transactions; and (iv) may
stimulate price competition among
Dealers, for the protection of investors
and in furtherance of the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
jlentini on PROD1PC65 with NOTICES
FINRA does not believe that the
proposed rule change would impose any
burden on competition that is not
necessary or appropriate in furtherance
of purposes of the Act.
12 See File No. SR–NASD–2003–141. Response to
Comments on Additional Mark-Up Policy for
Transactions in Debt Securities (regarding File No.
SR–NASD–2003–141), to Katherine A. England,
Assistant Director, Division of Market Regulation,
SEC, dated October 4, 2005 at 13.
13 15 U.S.C. 78o–3(b)(6).
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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 NASD Notice
to Members 06–22 (May 2006). Five
comments were received in response to
the NASD Notice to Members. Of the
five comment letters received, two
commenters were in favor of the
proposed rule change 14 and three
commenters were opposed.15
Two of the commenters indicated that
they fully supported the proposed
public disclosures of the Buy/Sell data
element and Dealer/Customer data
element because: (i) Lack of disclosure
of pertinent bond information places the
public investor at a disadvantage; (ii)
both public investors and Dealers need
such pricing information, which will
permit them to compare prices
meaningfully; (iii) Dealers need the
additional data elements to comply with
best execution and mark-up
requirements; (iv) the data disseminated
for municipal securities transactions
already includes these data elements
and the inclusion of such information
plays an important role in providing
transparency in the municipal securities
markets; (v) companies claiming that
their bond trading strategies would be
exposed have not substantiated such
claims; (vi) corporate debt market
participants, including Dealers, will not
be unduly burdened by dissemination of
the additional data elements; and (vii)
the benefit to the public investor and
the participating TRACE Dealers will
outweigh any negative impact to the
market, Dealers, or Customers,
including certain companies’ position
that possibly smaller profit margins for
Dealers may result if these additional
elements of TRACE data are
disseminated. One of the commenters
requested that, if the policy were
adopted, members be given 12 months
14 See letters from Kenneth M. Cherrier, Chief
Compliance Officer, Fintegra, to Barbara Z.
Sweeney, Office of Corporate Secretary, NASD,
dated June 1, 2006; and Bari Havlik, Senior Vice
President, Global Compliance, Charles Schwab &
Co., Inc. to Sharon K. Zackula, Associate General
Counsel, Office of General Counsel, NASD, dated
June 15, 2006 (‘‘Schwab Letter’’).
15 See letters from Brad Ziemba, Chief
Compliance Officer, Duncan-Williams, Inc, to
Barbara Z. Sweeney, Office of Corporate Secretary,
NASD, dated June 26, 2006; Mary C.M. Kuan, Vice
President and Assistant General Counsel, The Bond
Market Association (‘‘TBMA’’), to Barbara Z.
Sweeney, Office of Corporate Secretary, NASD,
dated June 16, 2006 (‘‘TBMA Letter’’); and John R.
Gidman, Chairman, Asset Managers Division,
TBMA, to Barbara Z. Sweeney, Office of Corporate
Secretary, NASD, dated June 19, 2006 (‘‘TBMA–
AMD Letter’’).
PO 00000
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31521
to adopt any necessary systems
changes.16
Three commenters opposed the
proposed policy change. The three
commenters stated that Dealers did not
need the Dealer/Customer data element
and Buy/Sell data element to comply
with best execution and mark-up/markdown rules and the federal securities
laws, and that the liquidity of the
corporate bond market ‘‘could be’’
substantially reduced because, if the
disseminated TRACE data included the
additional information, it would limit a
Dealer’s ability to execute trades
without having the market move
adversely.
Two commenters submitted nearly
identical comments summarized
below.17 Generally, both commenters
opposed the Proposal stating, in
addition to the comments summarized
immediately above, that the proposed
dissemination of the two additional data
elements would not facilitate price
transparency, and the information
currently disseminated through TRACE
is sufficient for investors to determine if
they receive fair prices from dealers.
The commenters posited that the
Dealer/Customer and Buy/Sell data
elements, if published, would hamper
the ability of investors trying to
accumulate or dispose of positions
without moving the market (as noted
above) and would: (i) Permit market
participants to discern the trading intent
of others and consequently trade in a
manner that is harmful to the identified
investor; (ii) permit others to intrude
upon the trading strategies of an
investor; (iii) increase investor costs;
and (iv) as noted above, potentially
reduce liquidity. In addition, the
commenters stated that FINRA does not
need to implement the Proposal to
further its audit and surveillance
functions and ‘‘the Proposal should be
effected only to the extent that investors
and dealers determine there is a need
for it.’’ 18 Further, although the
inclusion of Dealer/Customer and Buy/
Sell data elements in disseminated
municipal securities transaction
information does not appear to be
harmful to the municipal securities
market, the commenters stated that such
information would have an adverse
impact in the corporate bond market
(particularly to institutional traders and
Dealers) and should not be
disseminated.
The two commenters focused on the
trading patterns of institutional
16 See
17 See
Schwab Letter.
generally TBMA Letter; TBMA–AMD
Letter.
18 TBMA Letter at 2; TBMA–AMD Letter at 2.
E:\FR\FM\02JNN1.SGM
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Federal Register / Vol. 73, No. 106 / Monday, June 2, 2008 / Notices
customers, their block trades of bonds,
and their reliance on Dealers to facilitate
trading in such blocks—by acting as a
riskless principal, by taking the other
side of the Customer’s trade (a risk
position), or by the Dealer selling bonds
short to facilitate the institutional
Customer’s purchase and thereafter
going out into the market to cover the
short (a Dealer short position) in which,
the commenters noted, Dealers take on
considerable risk.19 The commenters
stated that such investors must be able
to execute block trades and Dealers
must be able to facilitate such trades
without signaling the market because
prices in the securities market are
driven by supply and demand and, if an
institutional investor or a Dealer tries to
sell, or facilitate the sale of, a block
without having the ability to shroud its
activity, it might cost more. In addition,
other market participants might try to
raise prices, by buying some of the
desired bonds, or conversely, might try
to lower prices, by selling some of the
desired bonds. The commenters stated
that transactions might cost more and
other institutional market participants
and the public might be able to free-ride
on the research and strategies of an
institution or a Dealer. Moreover, the
higher costs of trades and free-riding
costs might flow downstream to the
retail Customers of institutional
investors. In addition, the commenters
alleged that the proposal to disseminate
the Dealer/Customer data element and
Buy/Sell data element ‘‘would
undermine such institutional investors’
fiduciary responsibilities to their
customers to maintain policies and
procedures to prevent misuse of their
trading strategies.’’ 20
Finally, the two commenters argued
that the practice of disseminating
dealer/customer and buy/sell data
elements for transactions in municipal
securities should not be adopted in
TRACE because the corporate bond
market is ‘‘sufficiently distinct from the
municipal bond market’’ and such
information would hinder corporate
bond Dealers and their Customers. They
asserted that generally municipal bonds
trade less frequently, there is less
trading in blocks by municipal bond
dealers and large institutional
customers, and municipal bond dealers
do not take short positions to facilitate
municipal securities customer trades, in
contrast to corporate bond Dealers.
Thus, with fewer large block trades and
19 The terms riskless principal, risk position, and
Dealer short position are the terms and
characterizations of the commenters. See generally
TBMA Letter; TBMA–AMD Letter.
20 TBMA Letter at 4; TBMA–AMD Letter at 4.
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19:06 May 30, 2008
Jkt 214001
fewer short positions held by municipal
bond dealers, the overall risk from one
or more trades (for which information is
known in the market) moving the price
against the trading party’s economic
interests is significantly lower in the
municipal market (i.e., because such
large trades are infrequent).
The two commenters also requested
access to empirical data on TRACE to
study the market.
FINRA has considered the comments
fully and carefully and continues to
believe that the dissemination of the
Dealer/Customer data element and Buy/
Sell data element should occur to
provide important information to
Customers and Dealers about current
pricing, to permit a meaningful
comparison of prices, and to allow
Dealers to comply with fair pricing and
best execution obligations. Further,
FINRA is not persuaded by those
commenters who are opposed to the
Proposal. None of the opposing
comments voice any supportable
proposition that the information benefit
to TRACE data users can otherwise be
obtained without the disclosure of the
proposed information or that
compliance with NASD IM–2440–2 is
possible without the disclosure of the
information since there is no other way
to divine the necessary data elements or
to use any price other than
contemporaneous price from which the
mark-up or mark-down is to occur.
Finally, FINRA does not understand
how the dissemination of the Buy/Sell
and Dealer/Customer data elements
adds materially to any quantum of
information that exacerbates the
potential for the ‘‘reverse engineering’’
of trading interest and strategies in
comparison to the ability to divine such
information today with the mix of
TRACE information presently
disseminated. Presumably, there are
people reading the disseminated
information today who, from such
information, make calculated
assumptions about the nature and
quantity of debt securities for sale,
trading strategies, and the identity of the
beneficial interests behind such sales or
strategies. The question not answered by
the commenters is how the addition of
a data element identifying either Buy/
Sell or Dealer/Customer information
adds material content that, in fact, aids
in the ability to make such calculations
more accurately. Stated another way, it
is unclear how, even with these data
elements added to the TRACE data
already disseminated, a consumer of
disseminated information will know
who is behind a trade, the nature and
extent of its strategy, and the size of the
total debt position being disposed of or
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
acquired. In any event, FINRA does not
believe that those contentions, even if
they could be established, trump the
basis for the Proposal with its legitimate
purposes under the Act and its
necessary purposes under NASD IM–
2440–2.
Finally, in response to the two
commenters’ request for empirical data
on TRACE to study the market, FINRA
proposed to provide access to historic
TRACE data in SR–FINRA–2007–006,
which was filed with the Commission
on August 9, 2007, and published for
notice and comment on September 10,
2007.21 The proposal is currently
pending before the Commission.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2007–026 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2007–026. This file
number should be included on the
subject line if e-mail is used. To help the
21 See Securities Exchange Act Release No. 56327
(August 28, 2007), 72 FR 51689 (September 10,
2007) (notice of filing of SR–FINRA–2007–006 and
request for comment).
E:\FR\FM\02JNN1.SGM
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Federal Register / Vol. 73, No. 106 / Monday, June 2, 2008 / Notices
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of FINRA. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2007–026 and
should be submitted on or before June
23, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–12161 Filed 5–30–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57873; File No. SR–
NASDAQ–2008–044]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Order Granting Accelerated
Approval of a Proposed Rule Change
To Amend Nasdaq Rule 4420(g)
jlentini on PROD1PC65 with NOTICES
May 27, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 13,
2008, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
change as described in Items I and II
below, which Items have been prepared
substantially by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons and is
granting accelerated approval to the
proposed rule change.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Nasdaq proposes to amend Nasdaq
Rule 4420(g) for the purpose of adding
new text clarifying that securities listed
under the rule are done so pursuant to
Rule 19b–4(e) of the Act.3 Nasdaq also
proposes to remove the maximum term
limitation set forth in the rule and to
allow securities listed under the rule to
be based on multiple underlying
securities. The text of the proposed rule
change is available at the Exchange, the
Commission’s Public Reference Room,
and https://www.nasdaq.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
Nasdaq included statements concerning
the purpose of, and basis for, the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III below.
Nasdaq 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
Nasdaq proposes an amendment to
Nasdaq Rule 4420(g) to clarify that
Selected Equity-linked Debt Securities
(‘‘SEEDS’’) listed on the Nasdaq Global
Market are listed pursuant to Rule 19b–
4(e) of the Act.4 Rule 19b–4(e) allows
self-regulatory organizations (‘‘SROs’’)
to, among other things, list and trade
new derivative securities products
without going through the rule change
process under Section 19(b) of the Act.5
Specifically, Rule 19b–4(e) provides that
the listing and trading of derivatives
securities products is not deemed a
proposed rule change under Rule 19b–
4(c)(1). To qualify for this exemption
from Rule 19b–4(c)(1), an SRO must
have existing, Commission-approved
trading rules, procedures, and listing
22 17
3 17
1 15
4 Id.
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19:06 May 30, 2008
5 15
Jkt 214001
PO 00000
CFR 240.19b–4(e).
U.S.C. 78s(b)(1).
Frm 00099
Fmt 4703
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31523
standards for the product class that
would include the new derivative
securities product. In addition, the SRO
must have a surveillance program for
the product class.
Nasdaq adopted its listing rules for
SEEDS in 1994,6 prior to the
Commission’s amendment to Rule 19b–
4 of the Act, which added paragraph (e)
and its exemption from the Section
19(b) rule change filing requirement.
Subsequent to the Commission’s
amendment of Rule 19b–4 in 1998,7
Nasdaq did not amend its rule relating
to the listing of SEEDS to clarify that
such securities are considered
derivative securities products and, as
such, may be listed and traded without
submitting a proposed rule change
under Section 19(b). Nasdaq has
adopted listing rules for derivative
securities products subsequent to the
Commission’s adoption of the 1998
amendment to Rule 19b–4(e) that
specifically note that such listing is
pursuant to Rule 19b–4(e).8
Accordingly, Nasdaq is filing this rule
change proposal to make clear in its
rules that SEEDS listed under Rule
4420(g) are done so pursuant to Rule
19b–4(e) of the Act.
Nasdaq is also proposing to amend
4420(g) to conform the rule to the
analogous rule of the American Stock
Exchange LLC (‘‘Amex’’).9 Nasdaq notes
that Amex requires its Equity Linked
Term Notes to have only a minimum
term of one year, with no maximum
term limit;10 however, Nasdaq limits
SEEDS based on a domestic security to
a term of one to seven years, and limits
SEEDS based on a non-U.S. security or
sponsored ADR to a maximum term of
three years.11 Amex’s listing rules also
allow Equity Linked Term Notes to be
linked up to thirty underlying equity
securities if all of the underlying equity
securities individually satisfy the
applicable listing standards. As such,
Nasdaq is proposing to allow SEEDS to
be listed on up to thirty equity securities
and have only a minimum term of one
year, with no maximum term.
6 Securities Exchange Act Release No. 34758
(September 30, 1994), 59 FR 50943 (October 6,
1994), (SR–NASD–94–49).
7 Securities Exchange Act Release No. 40761
(December 8, 1998), 63 FR 70952 (December 22,
1998), (File No. S7–13–98).
8 See e.g., Securities Exchange Act Release No.
45920 (May 13, 2002), 67 FR 35605 (May 20, 2002)
(SR–NASD–2002–45).
9 Section 107B of the Amex Company Guide.
10 Like the Amex, The New York Stock Exchange
also requires equity-linked debt securities to have
only a minimum term of one year, with no
maximum term. See Paragraph 703.21 NYSE Listed
Company Manual.
11 Rule 4420(g)(2)(D).
E:\FR\FM\02JNN1.SGM
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]]>Agencies
[Federal Register Volume 73, Number 106 (Monday, June 2, 2008)]
[Notices]
[Pages 31518-31523]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-12161]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57866; File No. SR-FINRA-2007-026]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change as Modified
by Amendment No. 1 Thereto To Adopt a FINRA Policy To Expand
Disseminated Trade Reporting and Compliance Engine (``TRACE'') Data
May 23, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 31519]]
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 5, 2007, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) \3\ filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by FINRA. On May 20, 2008, FINRA filed Amendment No.1 to the
proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Effective July 30, 2007, FINRA was formed through the
consolidation of NASD and the member regulatory functions of NYSE
Regulation, Inc. Generally, pre-consolidation actions by NASD are
referred to as FINRA actions, except for NASD Rules, when referenced
singularly, and NASD Notices to Members. When FINRA files proposed
rule changes to create a consolidated FINRA rule manual, such NASD
rules and interpretations, as incorporated in the consolidated FINRA
Manual, will no longer be referred to as ``NASD'' rules.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt a FINRA policy to expand disseminated
Trade Reporting and Compliance Engine (``TRACE'') data to show, for
each disseminated transaction, that the transaction is an inter-dealer
transaction (``Dealer Transaction'') or a transaction with a customer
(``Customer'') (``Customer Transaction'') and the member referenced is
a buyer (``Buyer'') or a (``Seller'') (or acts as agent on the buy or
the sell side). The proposed rule change does not include proposed rule
text.
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
Currently, FINRA members that are parties to a transaction in a
TRACE-eligible security report several types of information to the
TRACE System. Among the elements of data that are reported, for each
transaction the member reports that it is a Buyer from a broker-dealer
(``Dealer'') or a Customer or a Seller to a Dealer or a Customer (or
acts as agent on the buy or the sell side).\4\ In addition, the member
reports that the transaction is a Dealer Transaction or a Customer
Transaction. Currently, these data elements are not included in the
TRACE transaction data disseminated immediately upon FINRA's receipt of
a transaction report.
---------------------------------------------------------------------------
\4\ Hereinafter, ``Buy'' means either or both (i) a Dealer's
purchase of a security from a Customer, and/or (ii) a Dealer, as
agent of a Customer, facilitating a purchase of a security from the
Customer; similarly, ``Sell'' means either or both (i) a Dealer's
sale of a security to a Customer, and/or (ii) a Dealer, as agent of
a Customer, facilitating a sale of a security to the Customer.
---------------------------------------------------------------------------
The data elements that are disseminated include: the bond
identifier (i.e., the TRACE symbol); the price inclusive of any mark-
up, mark-down, or commission; the quantity (expressed as the total par
value); the yield; the time of execution; and, if the transaction were
executed on a day other than when TRACE data is being disseminated, the
actual day of execution of the transaction.
For a Dealer Transaction, FINRA receives a TRACE report from each
Dealer, but disseminates data reflecting only the information received
in the Sell transaction report. For a Customer Transaction, only one
side of the trade has to be reported--the Dealer (or Dealers) side--and
FINRA disseminates the data from the TRACE report(s), which may be
either a Dealer's Buy or a Dealer's Sell.
FINRA is proposing that additional data elements showing the side
on which a Dealer acts in a transaction (``Buy/Sell data element'') and
the information identifying the transaction as a Dealer Transaction or
a Customer Transaction (``Dealer/Customer data element'') (but not the
MPID or identity of any Dealer) be disseminated publicly for each
transaction, because Dealers need access to these additional data
elements and investors would benefit from this enhanced level of
transparency. Dealers need the additional data elements to compare
prices, and in order to comply with their best execution obligations
under NASD Rule 2320, the fair and reasonable mark-up/mark-down
requirements under NASD Rule 2440, NASD IM-2440-1, NASD IM-2440-2, and
other provisions of the federal securities laws.\5\ Investors would
benefit from the dissemination of these additional data elements by
being able to compare prices and request better, lower prices. Given
the limited occurrence of transactions in certain sectors of the debt
markets, including the corporate debt sector, FINRA believes that the
Dealer/Customer data element and Buy/Sell data element should be added
to the disseminated TRACE data to provide TRACE users additional
clarity about what each disseminated TRACE price actually represents.
---------------------------------------------------------------------------
\5\ When a member charges a Customer an excessive or
unreasonable mark-up/mark-down, the member violates NASD Rule 2110,
NASD Rule 2440, NASD IM-2440-1, and, if charged in a debt securities
transaction, NASD IM-2440-2. In addition, in some cases, when a
member charges an excessive or unreasonable mark-up/mark-down and
does not fully disclose it to the customer, the member may be in
violation of Section 10(b) of the Act, 15 U.S.C. 78j(b), and Rule
10b-5 thereunder, 17 CFR 240.10b-5, or Section 17(a) of the
Securities Act of 1933, 15 U.S.C. 77q(a). NASD Rule 2320, NASD Rule
2110, NASD Rule 2440, NASD IM-2440-1, and NASD IM-2440-2 do not
apply to transactions in municipal securities. Instead, when a
Dealer or a municipal securities dealer engages in a municipal
securities transaction, the rules of the Municipal Securities
Rulemaking Board (``MSRB'') apply. See, e.g., MSRB Rule G-30, Prices
and Commissions; MSRB Rule G-18, Execution of Transactions.
---------------------------------------------------------------------------
The disseminated TRACE data enhanced by the addition of the Dealer/
Customer data element and the Buy/Sell data element will inform Dealers
and Customers of actual executed prices for Customer Transactions and
Dealer Transactions across a broad universe of corporate debt
securities. Even prior to the adoption of NASD IM-2440-2, ``Additional
Mark-Up Policy For Transactions in Debt Securities, Except Municipal
Securities'' (``the Debt Mark-Up Interpretation''), the availability of
these data elements would have aided Dealers in complying with their
obligations regarding best execution and fair mark-ups set forth in
FINRA rules and other provisions of the federal securities laws, and
described in various litigated or settled proceedings.\6\ With the
implementation of the Debt Mark-Up Interpretation on July 5, 2007,
FINRA believes that the data elements identifying a transaction as
either a Dealer Transaction or a Customer
[[Page 31520]]
Transaction and as either a Buy or a Sell now must be made available to
Dealers.
---------------------------------------------------------------------------
\6\ NASD IM-2440-2 was approved by the SEC on April 16, 2007,
and became effective on July 5, 2007. See Securities Exchange Act
Release No. 55638 (April 16, 2007), 72 FR 20150 (April 23, 2007)
(order approving SR-NASD-2003-141); NASD Notice to Members 07-28
(June 2007).
---------------------------------------------------------------------------
Under the Debt Mark-Up Interpretation, when a Dealer is pricing or
determining mark-ups (or mark-downs) by referring to recent transaction
prices other than the Dealer's own price, a Dealer must be able to
determine if a trade is an inter-dealer transaction (as used in the
Debt Mark-Up Interpretation) or a Customer Transaction.\7\ In addition,
the Dealer must be able to determine which side of the market a Dealer
traded from, whether looking to a Customer Transaction or an inter-
dealer transaction (as used in the Debt Mark-Up Interpretation).\8\
Disseminating the Dealer/Customer and the Buy/Sell data elements would
allow Dealers to more accurately identify the type of pricing
information disseminated by TRACE, and would permit them to use the
information to comply with FINRA rules and the federal securities laws
regarding fair prices and best execution.
---------------------------------------------------------------------------
\7\ In IM-2440-2, the Debt Mark-Up Interpretation, references to
``inter-dealer trades'' or ``inter-dealer transactions'' (that, in
certain circumstances, must or may be used to determine the
prevailing market price of a security--whether in the same or
similar securities as the security for which a mark-up is being
calculated) do not include any inter-dealer transaction in which the
Dealer that is determining prevailing market price is a party. In
contrast, in this proposed rule filing, the term ``inter-dealer
transaction'' (defined as ``Dealer Transaction'') includes all
inter-dealer transactions (e.g., if Dealer A is a party to an inter-
dealer transaction, from Dealer A's perspective, inter-dealer
transactions means all inter-dealer transactions, including those to
which Dealer A is a party). In this note 7 and note 8, infra, when
describing various provisions of the Debt Mark-Up Interpretation,
FINRA uses the term ``inter-dealer transaction'' to make clear that
FINRA means inter-dealer transactions as used in the Debt Mark-Up
Interpretation. See IM-2440-2, paragraph (b)(5)(A) (requiring that a
Dealer must consider--after considering the Dealer's own
contemporaneous cost (or proceeds)--the prices of any
contemporaneous inter-dealer transaction in the same security to
determine prevailing market price). See also NASD IM-2440-2,
paragraph (b)(5)(B) (requiring that a Dealer must consider--after
considering the Dealer's own contemporaneous cost (or proceeds) and
the prices of any contemporaneous inter-dealer transactions in the
same security--the prices of contemporaneous Dealer purchases
(sales) in the security in question from (to) institutional accounts
with which any Dealer regularly effects transactions in the same
security (``certain institutional accounts'') to determine
prevailing market price); NASD IM-2440-2, paragraph (b)(6)
(referring to a Dealer's review, in certain circumstances, of the
pricing information from (i) contemporaneous inter-dealer
transactions in a similar security, and (ii) contemporaneous Dealer
purchase (sale) transactions in a similar security with certain
institutional accounts, as part of the Dealer's analysis to
determine the prevailing market price of a particular security).
\8\ For example, under NASD IM-2440-2, paragraph (b)(6), when a
Dealer refers to transactions in similar securities, a Dealer must
know the side of the market (i.e., Buy or Sell information) to
determine the relative comparability of a transaction in a similar
security to the transaction that is being marked.
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In view of the fact that Customer Transaction prices disseminated
are ``all-in prices,'' and the prices of Customer Transactions and
Dealer Transactions are intermingled, the dissemination of data
elements that identify transactions as Customer Transactions or Dealer
Transactions will allow all who view the TRACE data to distinguish
those transactions that do not include a mark-up/mark-down or a
commission--Dealer Transactions--from transactions displayed as ``all-
in prices'' that include Dealer mark-ups/mark-downs or commissions--
Customer Transactions.
By adding the Buy/Sell data element to any transaction identified
as a Customer Transaction, anyone viewing the TRACE data will be able
to determine that, in the case of a Buy, the disseminated price
includes a mark-down or a commission, or, in the case of a Sell, the
disseminated price includes a mark-up or a commission. Thus, with the
two additional elements viewable in disseminated TRACE data, Customers
that are TRACE data users will be able to knowledgeably assess and
compare the disseminated ``all-in price'' of their purchases and sales
with other Customer Transactions. In addition, Dealers will be able to
determine approximate levels of Dealer Transaction pricing by ``backing
out'' of a disseminated ``all-in price'' clearly labeled as a Customer
Transaction, a mark-up (or mark-down) or commission amount if Dealer
Transaction pricing is not available in TRACE for the Dealer's analyses
of its mark-up (or mark-down) and its compliance with best execution
obligations.
Such transparency exists in other markets. The Municipal Securities
Rulemaking Board (``MSRB'') determined that disseminating buy/sell and
dealer/customer information was an important element of transparency in
the municipal securities market, and currently disseminates both of
these data elements real-time together with other price, quantity, and
yield information per transaction.\9\ FINRA believes it is appropriate
to provide comparable data to TRACE data users.
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\9\ Disseminated municipal securities transaction prices, like
TRACE-disseminated prices, are ``all-in prices.''
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Finally, debt pricing, particularly debt mark-ups, remains an area
of regulatory concern and focus.\10\ For more than two years, FINRA has
considered incorporating the Dealer/Customer data element and Buy/Sell
data element in disseminated TRACE transaction data to aid Dealers in
improving their pricing of TRACE-eligible securities and similar debt
securities; and to provide them with information to evidence their
adherence to the requirements of the federal securities laws and
regulations regarding fair pricing and best execution. In 2005, FINRA
staff began receiving requests that these reported data elements be
included in the disseminated TRACE data from members attending FINRA
seminars discussing debt mark-ups. Also, in April 2005, when NASD IM-
2440-2 was pending as a proposed rule change, a commenter highlighted
the deficiencies in disseminated TRACE data, noting that TRACE data did
not differentiate between Customer Transactions and Dealer
Transactions, thus making Dealer compliance with the various
requirements of NASD IM-2440-2 difficult (e.g., the identification and
required use, in certain cases, of certain Dealer Transaction prices to
establish prevailing market price).\11\ In October 2005, in FINRA's
response to comments, FINRA indicated that FINRA was ``evaluating
enhancing the quality of disseminated TRACE information to show, for
each trade, whether the trade is inter-dealer or customer, as is now
indicated in real-time disseminated municipal securities transaction
[[Page 31521]]
data.'' \12\ By adding the Dealer/Customer data element and Buy/Sell
data element to TRACE disseminated information now, Customers and
Dealers would be able to more accurately and carefully assess the
quality of the pricing of their corporate bond transactions.
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\10\ In remarks to the securities industry, senior SEC staff has
indicated that debt mark-ups are an area of regulatory concern and
focus. See, e.g., Remarks before the TBMA Legal and Compliance
Conference, Commissioner Annette L. Nazareth, SEC, New York, NY,
February 7, 2006 (``[The industry] should consider improving
transparency concerning dealer mark-up policies * * * Investors
should understand what they are paying, whether the broker is acting
as agent or principal, and whether the price paid includes
compensation to the broker-dealer, and if so, how much.'') at http:/
/www.sec.gov/news/speech/spch020706aln.htm; Remarks to The SIFMA
Legal and Compliance Division, ``The Regulatory Focus on Broker-
Dealer Legal and Compliance Issues,'' Mary Ann Gadziala, Associate
Director, Office of Compliance Inspections and Examinations, SEC,
Chicago, Ill., June 7, 2007 (listing mark-ups on fixed income
securities as an examination priority), at https://www.sec.gov/news/
speech/2007/spch060707mag.htm. FINRA acknowledges that the
Commission, as a matter of policy, disclaims responsibility for any
private publications or statements by any of its employees, and that
the views expressed in the remarks referenced above are those of the
speaker and do not necessarily reflect the views of the Commission,
another Commissioner, or the Commission staff.
\11\ See File No. SR-NASD-2003-141. Letter from The Bond Market
Association (regarding File No. SR-NASD-2003-141), to Jonathan G.
Katz, Secretary, SEC, dated April 5, 2005 at 13 (``[T]he NASD's
TRACE system does not differentiate between inter-dealer trades and
customer trades in its disseminated reports, making the
identification of an inter-dealer trade difficult.''). FINRA also
published the proposed change of policy regarding TRACE disseminated
data in NASD Notice to Members 06-22 (May 2006). The comments
received in connection with the proposal at that time are summarized
below in Item 5.
\12\ See File No. SR-NASD-2003-141. Response to Comments on
Additional Mark-Up Policy for Transactions in Debt Securities
(regarding File No. SR-NASD-2003-141), to Katherine A. England,
Assistant Director, Division of Market Regulation, SEC, dated
October 4, 2005 at 13.
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FINRA would announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 90 days following
Commission approval, if the Commission approves the proposal. The
effective date would be no later than 120 days following publication of
the Regulatory Notice announcing a Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among
other things, that FINRA rules 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 policy, by improving
the quality of information available to institutional investors, retail
investors, and Dealers: (i) Will allow them to compare prices in TRACE-
eligible securities transactions more meaningfully; (ii) will allow
them to negotiate transaction prices with more information; (iii) will
allow Dealers to comply more easily with FINRA rules and various
provisions of the federal securities laws requiring Dealers to buy or
sell debt securities at prices related to the prevailing market prices,
adjusted by a fair and reasonable mark-up (mark-down) or commission,
which provisions are designed to prevent unfair or unjust practices, or
fraudulent, deceptive, and manipulative acts or practices in the
pricing of securities transactions; and (iv) may stimulate price
competition among Dealers, for the protection of investors and in
furtherance of the public interest.
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\13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change would impose
any burden on competition that is not necessary or appropriate in
furtherance of purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
The proposed rule change was published for comment in NASD Notice
to Members 06-22 (May 2006). Five comments were received in response to
the NASD Notice to Members. Of the five comment letters received, two
commenters were in favor of the proposed rule change \14\ and three
commenters were opposed.\15\
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\14\ See letters from Kenneth M. Cherrier, Chief Compliance
Officer, Fintegra, to Barbara Z. Sweeney, Office of Corporate
Secretary, NASD, dated June 1, 2006; and Bari Havlik, Senior Vice
President, Global Compliance, Charles Schwab & Co., Inc. to Sharon
K. Zackula, Associate General Counsel, Office of General Counsel,
NASD, dated June 15, 2006 (``Schwab Letter'').
\15\ See letters from Brad Ziemba, Chief Compliance Officer,
Duncan-Williams, Inc, to Barbara Z. Sweeney, Office of Corporate
Secretary, NASD, dated June 26, 2006; Mary C.M. Kuan, Vice President
and Assistant General Counsel, The Bond Market Association
(``TBMA''), to Barbara Z. Sweeney, Office of Corporate Secretary,
NASD, dated June 16, 2006 (``TBMA Letter''); and John R. Gidman,
Chairman, Asset Managers Division, TBMA, to Barbara Z. Sweeney,
Office of Corporate Secretary, NASD, dated June 19, 2006 (``TBMA-AMD
Letter'').
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Two of the commenters indicated that they fully supported the
proposed public disclosures of the Buy/Sell data element and Dealer/
Customer data element because: (i) Lack of disclosure of pertinent bond
information places the public investor at a disadvantage; (ii) both
public investors and Dealers need such pricing information, which will
permit them to compare prices meaningfully; (iii) Dealers need the
additional data elements to comply with best execution and mark-up
requirements; (iv) the data disseminated for municipal securities
transactions already includes these data elements and the inclusion of
such information plays an important role in providing transparency in
the municipal securities markets; (v) companies claiming that their
bond trading strategies would be exposed have not substantiated such
claims; (vi) corporate debt market participants, including Dealers,
will not be unduly burdened by dissemination of the additional data
elements; and (vii) the benefit to the public investor and the
participating TRACE Dealers will outweigh any negative impact to the
market, Dealers, or Customers, including certain companies' position
that possibly smaller profit margins for Dealers may result if these
additional elements of TRACE data are disseminated. One of the
commenters requested that, if the policy were adopted, members be given
12 months to adopt any necessary systems changes.\16\
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\16\ See Schwab Letter.
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Three commenters opposed the proposed policy change. The three
commenters stated that Dealers did not need the Dealer/Customer data
element and Buy/Sell data element to comply with best execution and
mark-up/mark-down rules and the federal securities laws, and that the
liquidity of the corporate bond market ``could be'' substantially
reduced because, if the disseminated TRACE data included the additional
information, it would limit a Dealer's ability to execute trades
without having the market move adversely.
Two commenters submitted nearly identical comments summarized
below.\17\ Generally, both commenters opposed the Proposal stating, in
addition to the comments summarized immediately above, that the
proposed dissemination of the two additional data elements would not
facilitate price transparency, and the information currently
disseminated through TRACE is sufficient for investors to determine if
they receive fair prices from dealers. The commenters posited that the
Dealer/Customer and Buy/Sell data elements, if published, would hamper
the ability of investors trying to accumulate or dispose of positions
without moving the market (as noted above) and would: (i) Permit market
participants to discern the trading intent of others and consequently
trade in a manner that is harmful to the identified investor; (ii)
permit others to intrude upon the trading strategies of an investor;
(iii) increase investor costs; and (iv) as noted above, potentially
reduce liquidity. In addition, the commenters stated that FINRA does
not need to implement the Proposal to further its audit and
surveillance functions and ``the Proposal should be effected only to
the extent that investors and dealers determine there is a need for
it.'' \18\ Further, although the inclusion of Dealer/Customer and Buy/
Sell data elements in disseminated municipal securities transaction
information does not appear to be harmful to the municipal securities
market, the commenters stated that such information would have an
adverse impact in the corporate bond market (particularly to
institutional traders and Dealers) and should not be disseminated.
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\17\ See generally TBMA Letter; TBMA-AMD Letter.
\18\ TBMA Letter at 2; TBMA-AMD Letter at 2.
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The two commenters focused on the trading patterns of institutional
[[Page 31522]]
customers, their block trades of bonds, and their reliance on Dealers
to facilitate trading in such blocks--by acting as a riskless
principal, by taking the other side of the Customer's trade (a risk
position), or by the Dealer selling bonds short to facilitate the
institutional Customer's purchase and thereafter going out into the
market to cover the short (a Dealer short position) in which, the
commenters noted, Dealers take on considerable risk.\19\ The commenters
stated that such investors must be able to execute block trades and
Dealers must be able to facilitate such trades without signaling the
market because prices in the securities market are driven by supply and
demand and, if an institutional investor or a Dealer tries to sell, or
facilitate the sale of, a block without having the ability to shroud
its activity, it might cost more. In addition, other market
participants might try to raise prices, by buying some of the desired
bonds, or conversely, might try to lower prices, by selling some of the
desired bonds. The commenters stated that transactions might cost more
and other institutional market participants and the public might be
able to free-ride on the research and strategies of an institution or a
Dealer. Moreover, the higher costs of trades and free-riding costs
might flow downstream to the retail Customers of institutional
investors. In addition, the commenters alleged that the proposal to
disseminate the Dealer/Customer data element and Buy/Sell data element
``would undermine such institutional investors' fiduciary
responsibilities to their customers to maintain policies and procedures
to prevent misuse of their trading strategies.'' \20\
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\19\ The terms riskless principal, risk position, and Dealer
short position are the terms and characterizations of the
commenters. See generally TBMA Letter; TBMA-AMD Letter.
\20\ TBMA Letter at 4; TBMA-AMD Letter at 4.
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Finally, the two commenters argued that the practice of
disseminating dealer/customer and buy/sell data elements for
transactions in municipal securities should not be adopted in TRACE
because the corporate bond market is ``sufficiently distinct from the
municipal bond market'' and such information would hinder corporate
bond Dealers and their Customers. They asserted that generally
municipal bonds trade less frequently, there is less trading in blocks
by municipal bond dealers and large institutional customers, and
municipal bond dealers do not take short positions to facilitate
municipal securities customer trades, in contrast to corporate bond
Dealers. Thus, with fewer large block trades and fewer short positions
held by municipal bond dealers, the overall risk from one or more
trades (for which information is known in the market) moving the price
against the trading party's economic interests is significantly lower
in the municipal market (i.e., because such large trades are
infrequent).
The two commenters also requested access to empirical data on TRACE
to study the market.
FINRA has considered the comments fully and carefully and continues
to believe that the dissemination of the Dealer/Customer data element
and Buy/Sell data element should occur to provide important information
to Customers and Dealers about current pricing, to permit a meaningful
comparison of prices, and to allow Dealers to comply with fair pricing
and best execution obligations. Further, FINRA is not persuaded by
those commenters who are opposed to the Proposal. None of the opposing
comments voice any supportable proposition that the information benefit
to TRACE data users can otherwise be obtained without the disclosure of
the proposed information or that compliance with NASD IM-2440-2 is
possible without the disclosure of the information since there is no
other way to divine the necessary data elements or to use any price
other than contemporaneous price from which the mark-up or mark-down is
to occur. Finally, FINRA does not understand how the dissemination of
the Buy/Sell and Dealer/Customer data elements adds materially to any
quantum of information that exacerbates the potential for the ``reverse
engineering'' of trading interest and strategies in comparison to the
ability to divine such information today with the mix of TRACE
information presently disseminated. Presumably, there are people
reading the disseminated information today who, from such information,
make calculated assumptions about the nature and quantity of debt
securities for sale, trading strategies, and the identity of the
beneficial interests behind such sales or strategies. The question not
answered by the commenters is how the addition of a data element
identifying either Buy/Sell or Dealer/Customer information adds
material content that, in fact, aids in the ability to make such
calculations more accurately. Stated another way, it is unclear how,
even with these data elements added to the TRACE data already
disseminated, a consumer of disseminated information will know who is
behind a trade, the nature and extent of its strategy, and the size of
the total debt position being disposed of or acquired. In any event,
FINRA does not believe that those contentions, even if they could be
established, trump the basis for the Proposal with its legitimate
purposes under the Act and its necessary purposes under NASD IM-2440-2.
Finally, in response to the two commenters' request for empirical
data on TRACE to study the market, FINRA proposed to provide access to
historic TRACE data in SR-FINRA-2007-006, which was filed with the
Commission on August 9, 2007, and published for notice and comment on
September 10, 2007.\21\ The proposal is currently pending before the
Commission.
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\21\ See Securities Exchange Act Release No. 56327 (August 28,
2007), 72 FR 51689 (September 10, 2007) (notice of filing of SR-
FINRA-2007-006 and request for comment).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2007-026 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2007-026. This
file number should be included on the subject line if e-mail is used.
To help the
[[Page 31523]]
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2007-026 and should be submitted
on or before June 23, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-12161 Filed 5-30-08; 8:45 am]
BILLING CODE 8010-01-P
