Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Clarify the Classification and Reporting of Certain Securities to FINRA, 59995-59997 [2013-23681]
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Federal Register / Vol. 78, No. 189 / Monday, September 30, 2013 / Notices
and the process for designating MRC
members. Specifically, OCC is
amending Article III, Section 9 of OCC’s
By-Laws to provide that at least one
Public Director is required to serve on
the MRC. The Public Director(s) will be
nominated to serve on the MRC by the
Chairman of the Board and such
nomination will be subject to approval
by the Board of Directors. OCC is also
amending Article III, Section 9 of OCC’s
By-Laws to provide that the Chairman of
the MRC will be required to be a Public
Director. If more than one Public
Director is nominated to serve on the
MRC, the Chairman of the Board will
nominate one of the Public Directors to
serve as the MRC Chairman.
In addition, OCC is amending Article
III, Section 9 of OCC’s By-Laws to
eliminate the requirement that MRC
members must be designated at the first
meeting of OCC’s Board of Directors that
follows each annual meeting. Instead,
OCC’s By-Laws will require MRC
members to be designated annually.
OCC is also amending Article III,
Section 9 to eliminate specific
references to Article V of the By-Laws
and Chapter VI of the Rules in order to
avoid any erroneous inference that those
are the only provisions of OCC’s ByLaws and Rules that set forth powers
and duties of the MRC, which are in fact
contained in a number of other
provisions of its By-Laws and Rules as
well.
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III. Discussion
Section 19(b)(2)(C) of the Act 5 directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
such organization. Section 17A(b)(3)(F)
of the Act6 requires that the rules of a
registered clearing agency be designed
to, among other things, assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible, and, in general, protect
investors and the public interest.
Section 17A(b)(3)(F) 7 of the Act also
requires that the rules of a registered
clearing agency not be designed to
permit unfair discrimination in the
admission of participants or among
participants in the use of the clearing
agency.
exchange, national securities association, or any
broker or dealer engaging in securities transactions.
5 15 U.S.C. 78s(b)(2)(C).
6 15 U.S.C. 78q–1(b)(3)(F).
7 Id.
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The Commission finds that the rule
change is consistent with Section
17A(b)(3)(F) of the Act 8 because
amending OCC’s By-Laws to require that
OCC’s Board of Directors appoints at
least one Public Director to the MRC
and designates a Public Director as
Chairman of the MRC, should help
ensure that diverse viewpoints
contribute to the decision-making
process at the MRC, which should
ultimately lead to decisions that assure
the safeguarding of securities and funds
which are in OCC’s custody or control
or for which OCC is responsible, and
generally protect investors and the
public interest. Furthermore, by
proposing rules that require the
appointment of a Public Director to the
MRC, the rule change should help
diminish the likelihood of unfair
discrimination in the evaluation of
prospective OCC members and the
treatment of current OCC members by
interested participants.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the Act 9
and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,10 that the
proposed rule change (File No. SR–
OCC–2013–12) be and hereby is
approved.11
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–23684 Filed 9–27–13; 8:45 am]
BILLING CODE 8011–01–P
59995
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70482; File No. SR–FINRA–
2013–039]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Clarify the
Classification and Reporting of Certain
Securities to FINRA
September 24, 2013.
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
September 16, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is filing a proposed rule
change to adopt an interpretation to
clarify the classification and the
reporting of certain securities to FINRA.
The proposed rule change does not
make any changes to the text of FINRA
rules.
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
8 Id.
9 15
U.S.C. 78q–1.
10 15 U.S.C. 78s(b)(2).
11 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
12 17 CFR 200.30–3(a)(12).
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FINRA trade reporting rules generally
require that members report over-thecounter (‘‘OTC’’) transactions in debt
securities that are TRACE-Eligible
Securities and equity securities to
1 15
2 17
E:\FR\FM\30SEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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tkelley on DSK3SPTVN1PROD with NOTICES
FINRA.3 FINRA Rule 6622 requires that
members report OTC transactions in
‘‘OTC Equity Securities’’ 4 to the ORF
and the FINRA Rule 6700 Series
requires members to report transactions
in ‘‘TRACE-Eligible Securities’’ to
TRACE.5
FINRA recently has received inquiries
regarding the appropriate classification
of certain ‘‘hybrid’’ securities for trade
reporting purposes. FINRA is aware that
as new securities are created and issued,
in some cases, the newer hybrid
iteration, although derived from a
traditional security, may be increasingly
complex, and may have both debt- and
equity-like features. These hybrid
securities are frequently designed to
straddle both classifications for a variety
of purposes, including the tax treatment
applicable to issuers and recipients
when distributions are made (or not
made) to holders of the security, and the
treatment of the principal as capital for
issuers subject to capital requirements.
As such, determining whether these
hybrid securities should be classified as
‘‘debt’’ or ‘‘equity’’ for purposes of trade
reporting to the appropriate FINRA
facility has become less clear.
Given the complexity of these hybrid
securities, FINRA proposes an
interpretation regarding the
classification and reporting of two
categories of hybrid securities
(depositary shares and capital trust
securities (also referred to as trust
preferred securities)) to clarify the
appropriate trade reporting facility to
which such securities should be
reported.6 In addition, FINRA proposes
3 See FINRA Rules 6282 (relating to the
Alternative Display Facility (‘‘ADF’’)), 6380A
(relating to the FINRA/Nasdaq Trade Reporting
Facility), 6380B (relating to the FINRA/NYSE Trade
Reporting Facility), 6622 (relating to the OTC
Reporting Facility (‘‘ORF’’)) and 6730 (relating to
the Trade Reporting and Compliance Engine
(‘‘TRACE’’)).
4 FINRA Rule 6420(f) defines ‘‘OTC Equity
Security’’ to include ‘‘any equity security that is not
an ‘NMS stock’ as that term is defined in Rule
600(b)(47) of SEC Regulation NMS; provided,
however, that the term ‘OTC Equity Security’ shall
not include any Restricted Equity Security.’’ FINRA
Rule 6420(k) defines ‘‘Restricted Equity Security’’ to
mean ‘‘any equity security that meets the definition
of ‘restricted security’ as contained in Securities Act
Rule 144(a)(3).’’
5 FINRA Rule 6710(a) defines ‘‘TRACE-Eligible
Security’’ to include ‘‘a debt security that is United
States (‘U.S.’) dollar-denominated and issued by a
U.S. or foreign private issuer, and, if a ‘restricted
security’ as defined in Securities Act Rule 144(a)(3),
sold pursuant to Securities Act Rule 144A.’’
6 The proposed interpretation applies solely to a
hybrid security that is not listed on an equity
facility of a national securities exchange. See, e.g.,
FINRA Trade Reporting Notice, February 22, 2008
(FINRA applied TRACE reporting requirements,
distinguishing between listed and unlisted
securities, and required members to report
transactions in unlisted convertible debt and
unlisted equity-linked notes to TRACE, and OTC
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a policy to address the treatment of
securities that are currently being
reported to a facility that is not the
designated facility under this
interpretation.
Depositary Shares
FINRA proposes to interpret the term
OTC Equity Security to include a
depositary share that is not listed on an
equity facility of a national securities
exchange. Depositary shares generally
are securities that represent a fractional
interest in a share of preferred stock,
which is considered an equity security.
Depositary shares generally entitle the
holder, through the depositary, to a
proportional fractional interest in the
rights, powers and preferences of the
preferred stock represented by the
depositary share. Under this
interpretation, members must request a
symbol, if one has not already been
assigned, for such depositary shares for
ORF reporting in compliance with the
applicable reporting requirements.
Members must also report in accordance
with ORF requirements; for example,
price should be reported as the dollar
price per share and volume should be
reported as the number of depositary
shares traded.7
Capital Trust Securities
FINRA proposes to interpret the term
TRACE-Eligible Security to include
capital trust securities and trust
preferred securities. Historically, many
of these securities, particularly those
issued with $1,000 par value and not
listed on an equity facility of a national
securities exchange, were reported to
Fixed Income Pricing System (‘‘FIPS’’)
prior to the implementation of TRACE.8
transactions in convertible debt and equity-linked
notes listed on an equity facility of a national
securities exchange to an appropriate FINRA equity
trade reporting facility for NMS Stocks (the ADF or
a trade reporting facility (‘‘TRF’’)). For purposes of
this proposed rule change, the term ‘‘listed on an
equity facility of a national securities exchange’’
means a security that qualifies as an NMS stock (as
defined in Rule 600(b)(47) of Regulation NMS
under the Act) as distinguished from a security that
is listed on a bond facility of a national securities
exchange. See 17 CFR 242.600(b)(47).
7 See FINRA Rule 6622; see also Trade Reporting
FAQ 101.6, available at www.finra.org/Industry/
Regulation/Guidance/p038942#101.
8 FINRA (formerly, the National Association of
Securities Dealers, Inc. (‘‘NASD’’)) operated FIPS
through its then subsidiary, NASDAQ. FIPS began
in April 1994 and collected transaction and
quotation information on domestic, registered, nonconvertible high-yield corporate bonds. OTC capital
trust securities and trust preferred securities were
treated as FIPS securities and often included in the
regularly published lists of the most actively-traded
FIPS securities, referred to as the ‘‘FIPS 50.’’ See
Securities Exchange Act Release No. 43873 (January
23, 2001), 66 FR 8131 (January 29, 2001) (Order
Approving Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to
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When TRACE was proposed, FIPS
securities were to be transferred to
TRACE.9 In addition, as part of the
proposal, FINRA (then NASD)
specifically identified capital trust
securities in a list of instruments that
NASD considered TRACE-Eligible
Securities, which would be reported to
TRACE and otherwise subject to the
FINRA Rule 6700 Series requirements.10
FINRA is clarifying that capital trust
securities and trust preferred securities
(other than a capital trust security or a
trust preferred security that is listed on
an equity facility of a national securities
exchange) must be reported to TRACE
(and not to ORF) and transactions in
such securities must be reported in
compliance with the applicable
reporting requirements.11 For example,
price should be reported as a percentage
of par value and volume should be
reported as the total par value of the
transaction (not the number of bonds
traded).12
Hybrid Securities Currently Being
Reported to ORF and TRACE
FINRA believes that, given the
complexity of many of the securities
that are the subject of this proposed rule
change, it is reasonable that firms,
despite their best efforts, may have
reached different conclusions on where
transactions in these hybrid securities
should be reported. FINRA proposes
that, as of the effective date of this
proposed rule change, securities that are
affected by this interpretation will be
transferred, if necessary, for reporting to
the appropriate trade reporting facility,
and after this transfer members must
report all transactions in such securities
to the appropriate trade reporting
facility. Members will not be required to
retroactively cancel and correct any
Amendment No. 4, Relating to the Creation of a
Corporate Bond Trade Reporting and Transaction
Dissemination Facility and the Elimination of
Nasdaq’s Fixed Income Pricing System) (File No.
SR–NASD–99–65) (‘‘SEC TRACE Approval Order’’).
9 See, e.g., SEC TRACE Approval Order, 66 FR
8131, at 8132–8133, note 13 and note 16.
10 In SR–NASD–99–65, FINRA (then NASD)
indicated that capital trust securities would be
TRACE-Eligible Securities. See Securities Exchange
Act Release No. 42201 (December 3, 1999), 64 FR
69305, at 69309 (December 10, 1999) (Notice of
Filing of Proposed Rule Change Relating to the
Creation of a Corporate Bond Trade Reporting and
Transaction Dissemination Facility and the
Elimination of Nasdaq’s Fixed Income Pricing
System (‘‘FIPS’’)) (File No. SR–NASD–99–65); see
also SEC TRACE Approval Order.
11 This interpretation would apply even if the
capital trust security (or a trust preferred security)
was previously listed on an equity facility of a
national securities exchange and reported to a
FINRA equity facility, but has since been delisted.
Once delisted, the security must be reported to
TRACE.
12 See FINRA Rule 6730.
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Federal Register / Vol. 78, No. 189 / Monday, September 30, 2013 / Notices
transactions in such securities
previously reported to a facility that is
not the designated facility under this
interpretation. Thus, members will not
be required to cancel and correct
transactions in capital trust securities
reported to the ORF or transactions in
depositary shares reported to TRACE
prior to the effective date of this
proposed rule change.13 However, if a
firm reported a transaction to the facility
designated in this proposed
interpretation, but did not report in
accordance with applicable trade
reporting requirements of that facility
(e.g., a firm reported a transaction to
ORF, but inaccurately reported the price
or size as if reporting to TRACE), the
firm will be required to cancel and rereport such transactions accurately.
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 60 days following
Commission approval. The effective
date will be no later than 90 days
following publication of the Regulatory
Notice announcing Commission
approval.
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2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,14 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that by
13 Pursuant to Section 31 of the Act, FINRA and
the national securities exchanges are required to
pay transaction fees and assessments to the SEC
that are designed to recover the costs related to the
government’s supervision and regulation of the
securities markets and securities professionals. See
15 U.S.C. 78ee. FINRA obtains its Section 31 fees
and assessments from its membership, in
accordance with Section 3 of Schedule A to the
FINRA By-Laws. The transactions that are
assessable under Section 3 of Schedule A to the
FINRA By-Laws are reported to FINRA through one
of FINRA’s equity trade reporting facilities: The
ORF, the ADF, or a TRF. As expressly stated in the
Act, sales of bonds, debentures, or other evidence
of indebtedness (debt securities) are excluded from
Section 31 of the Act. See 15 U.S.C. 78ee(b).
Because of this exclusion under Section 31 of the
Act, transactions reported to TRACE are not subject
to the regulatory transaction fee under Section 3 of
Schedule A to the FINRA By-Laws. To determine
whether a non-exchange listed security is an equity
security or a debt security for purposes of assessing
the regulatory transaction fee, FINRA relies on the
facility to which the transaction is reported. If the
transaction is reported to the ORF, the transaction
is treated as one involving an equity security and
is subject to the regulatory transaction fee. If the
transaction is reported to TRACE, the transaction is
treated as one involving a debt security and thus
is not subject to the regulatory transaction fee. See
Regulatory Notice 08–72 (November 2008).
14 15 U.S.C. 78o-3(b)(6).
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clarifying the classification of certain
hybrid securities for reporting purposes
the proposed rule change will reduce
market and investor confusion. In
addition, FINRA believes that the
proposed rule change will improve
transparency significantly because
members will report transactions in the
same security using a uniform set of
conventions and to the same facility
(i.e., the ORF or TRACE). This will
allow investors and other market
participants to better compare
transaction pricing and the quality of
their executions, which promotes just
and equitable principles of trade, deters
fraudulent and manipulative acts and
practices in the market for such
securities, and furthers the protection of
investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Members that
are required currently to report
transactions in hybrid securities will
continue to be subject to transaction
reporting requirements and will be
provided clarity as to which facility
such hybrid securities should be
reported, which will promote
uniformity and consistency in trade
reporting within these categories of
products.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
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59997
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 email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2013–039 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR- FINRA–2013–039. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also be available for
inspection and copying at 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
publicly available. All submissions
should refer to File Number SR–FINRA–
2013–039 and should be submitted on
or before October 21, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–23681 Filed 9–27–13; 8:45 am]
BILLING CODE 8011–01–P
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CFR 200.30–3(a)(12).
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Agencies
[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Notices]
[Pages 59995-59997]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23681]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70482; File No. SR-FINRA-2013-039]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Clarify
the Classification and Reporting of Certain Securities to FINRA
September 24, 2013.
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 September 16, 2013, the Financial Industry Regulatory
Authority, Inc. (``FINRA'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by FINRA.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is filing a proposed rule change to adopt an interpretation
to clarify the classification and the reporting of certain securities
to FINRA.
The proposed rule change does not make any changes to the text of
FINRA rules.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA trade reporting rules generally require that members report
over-the-counter (``OTC'') transactions in debt securities that are
TRACE-Eligible Securities and equity securities to
[[Page 59996]]
FINRA.\3\ FINRA Rule 6622 requires that members report OTC transactions
in ``OTC Equity Securities'' \4\ to the ORF and the FINRA Rule 6700
Series requires members to report transactions in ``TRACE-Eligible
Securities'' to TRACE.\5\
---------------------------------------------------------------------------
\3\ See FINRA Rules 6282 (relating to the Alternative Display
Facility (``ADF'')), 6380A (relating to the FINRA/Nasdaq Trade
Reporting Facility), 6380B (relating to the FINRA/NYSE Trade
Reporting Facility), 6622 (relating to the OTC Reporting Facility
(``ORF'')) and 6730 (relating to the Trade Reporting and Compliance
Engine (``TRACE'')).
\4\ FINRA Rule 6420(f) defines ``OTC Equity Security'' to
include ``any equity security that is not an `NMS stock' as that
term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided,
however, that the term `OTC Equity Security' shall not include any
Restricted Equity Security.'' FINRA Rule 6420(k) defines
``Restricted Equity Security'' to mean ``any equity security that
meets the definition of `restricted security' as contained in
Securities Act Rule 144(a)(3).''
\5\ FINRA Rule 6710(a) defines ``TRACE-Eligible Security'' to
include ``a debt security that is United States (`U.S.') dollar-
denominated and issued by a U.S. or foreign private issuer, and, if
a `restricted security' as defined in Securities Act Rule 144(a)(3),
sold pursuant to Securities Act Rule 144A.''
---------------------------------------------------------------------------
FINRA recently has received inquiries regarding the appropriate
classification of certain ``hybrid'' securities for trade reporting
purposes. FINRA is aware that as new securities are created and issued,
in some cases, the newer hybrid iteration, although derived from a
traditional security, may be increasingly complex, and may have both
debt- and equity-like features. These hybrid securities are frequently
designed to straddle both classifications for a variety of purposes,
including the tax treatment applicable to issuers and recipients when
distributions are made (or not made) to holders of the security, and
the treatment of the principal as capital for issuers subject to
capital requirements. As such, determining whether these hybrid
securities should be classified as ``debt'' or ``equity'' for purposes
of trade reporting to the appropriate FINRA facility has become less
clear.
Given the complexity of these hybrid securities, FINRA proposes an
interpretation regarding the classification and reporting of two
categories of hybrid securities (depositary shares and capital trust
securities (also referred to as trust preferred securities)) to clarify
the appropriate trade reporting facility to which such securities
should be reported.\6\ In addition, FINRA proposes a policy to address
the treatment of securities that are currently being reported to a
facility that is not the designated facility under this interpretation.
---------------------------------------------------------------------------
\6\ The proposed interpretation applies solely to a hybrid
security that is not listed on an equity facility of a national
securities exchange. See, e.g., FINRA Trade Reporting Notice,
February 22, 2008 (FINRA applied TRACE reporting requirements,
distinguishing between listed and unlisted securities, and required
members to report transactions in unlisted convertible debt and
unlisted equity-linked notes to TRACE, and OTC transactions in
convertible debt and equity-linked notes listed on an equity
facility of a national securities exchange to an appropriate FINRA
equity trade reporting facility for NMS Stocks (the ADF or a trade
reporting facility (``TRF'')). For purposes of this proposed rule
change, the term ``listed on an equity facility of a national
securities exchange'' means a security that qualifies as an NMS
stock (as defined in Rule 600(b)(47) of Regulation NMS under the
Act) as distinguished from a security that is listed on a bond
facility of a national securities exchange. See 17 CFR
242.600(b)(47).
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Depositary Shares
FINRA proposes to interpret the term OTC Equity Security to include
a depositary share that is not listed on an equity facility of a
national securities exchange. Depositary shares generally are
securities that represent a fractional interest in a share of preferred
stock, which is considered an equity security. Depositary shares
generally entitle the holder, through the depositary, to a proportional
fractional interest in the rights, powers and preferences of the
preferred stock represented by the depositary share. Under this
interpretation, members must request a symbol, if one has not already
been assigned, for such depositary shares for ORF reporting in
compliance with the applicable reporting requirements. Members must
also report in accordance with ORF requirements; for example, price
should be reported as the dollar price per share and volume should be
reported as the number of depositary shares traded.\7\
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\7\ See FINRA Rule 6622; see also Trade Reporting FAQ 101.6,
available at www.finra.org/Industry/Regulation/Guidance/p038942#101.
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Capital Trust Securities
FINRA proposes to interpret the term TRACE-Eligible Security to
include capital trust securities and trust preferred securities.
Historically, many of these securities, particularly those issued with
$1,000 par value and not listed on an equity facility of a national
securities exchange, were reported to Fixed Income Pricing System
(``FIPS'') prior to the implementation of TRACE.\8\ When TRACE was
proposed, FIPS securities were to be transferred to TRACE.\9\ In
addition, as part of the proposal, FINRA (then NASD) specifically
identified capital trust securities in a list of instruments that NASD
considered TRACE-Eligible Securities, which would be reported to TRACE
and otherwise subject to the FINRA Rule 6700 Series requirements.\10\
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\8\ FINRA (formerly, the National Association of Securities
Dealers, Inc. (``NASD'')) operated FIPS through its then subsidiary,
NASDAQ. FIPS began in April 1994 and collected transaction and
quotation information on domestic, registered, non-convertible high-
yield corporate bonds. OTC capital trust securities and trust
preferred securities were treated as FIPS securities and often
included in the regularly published lists of the most actively-
traded FIPS securities, referred to as the ``FIPS 50.'' See
Securities Exchange Act Release No. 43873 (January 23, 2001), 66 FR
8131 (January 29, 2001) (Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 4, Relating to the Creation of a Corporate Bond Trade
Reporting and Transaction Dissemination Facility and the Elimination
of Nasdaq's Fixed Income Pricing System) (File No. SR-NASD-99-65)
(``SEC TRACE Approval Order'').
\9\ See, e.g., SEC TRACE Approval Order, 66 FR 8131, at 8132-
8133, note 13 and note 16.
\10\ In SR-NASD-99-65, FINRA (then NASD) indicated that capital
trust securities would be TRACE-Eligible Securities. See Securities
Exchange Act Release No. 42201 (December 3, 1999), 64 FR 69305, at
69309 (December 10, 1999) (Notice of Filing of Proposed Rule Change
Relating to the Creation of a Corporate Bond Trade Reporting and
Transaction Dissemination Facility and the Elimination of Nasdaq's
Fixed Income Pricing System (``FIPS'')) (File No. SR-NASD-99-65);
see also SEC TRACE Approval Order.
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FINRA is clarifying that capital trust securities and trust
preferred securities (other than a capital trust security or a trust
preferred security that is listed on an equity facility of a national
securities exchange) must be reported to TRACE (and not to ORF) and
transactions in such securities must be reported in compliance with the
applicable reporting requirements.\11\ For example, price should be
reported as a percentage of par value and volume should be reported as
the total par value of the transaction (not the number of bonds
traded).\12\
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\11\ This interpretation would apply even if the capital trust
security (or a trust preferred security) was previously listed on an
equity facility of a national securities exchange and reported to a
FINRA equity facility, but has since been delisted. Once delisted,
the security must be reported to TRACE.
\12\ See FINRA Rule 6730.
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Hybrid Securities Currently Being Reported to ORF and TRACE
FINRA believes that, given the complexity of many of the securities
that are the subject of this proposed rule change, it is reasonable
that firms, despite their best efforts, may have reached different
conclusions on where transactions in these hybrid securities should be
reported. FINRA proposes that, as of the effective date of this
proposed rule change, securities that are affected by this
interpretation will be transferred, if necessary, for reporting to the
appropriate trade reporting facility, and after this transfer members
must report all transactions in such securities to the appropriate
trade reporting facility. Members will not be required to retroactively
cancel and correct any
[[Page 59997]]
transactions in such securities previously reported to a facility that
is not the designated facility under this interpretation. Thus, members
will not be required to cancel and correct transactions in capital
trust securities reported to the ORF or transactions in depositary
shares reported to TRACE prior to the effective date of this proposed
rule change.\13\ However, if a firm reported a transaction to the
facility designated in this proposed interpretation, but did not report
in accordance with applicable trade reporting requirements of that
facility (e.g., a firm reported a transaction to ORF, but inaccurately
reported the price or size as if reporting to TRACE), the firm will be
required to cancel and re-report such transactions accurately.
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\13\ Pursuant to Section 31 of the Act, FINRA and the national
securities exchanges are required to pay transaction fees and
assessments to the SEC that are designed to recover the costs
related to the government's supervision and regulation of the
securities markets and securities professionals. See 15 U.S.C. 78ee.
FINRA obtains its Section 31 fees and assessments from its
membership, in accordance with Section 3 of Schedule A to the FINRA
By-Laws. The transactions that are assessable under Section 3 of
Schedule A to the FINRA By-Laws are reported to FINRA through one of
FINRA's equity trade reporting facilities: The ORF, the ADF, or a
TRF. As expressly stated in the Act, sales of bonds, debentures, or
other evidence of indebtedness (debt securities) are excluded from
Section 31 of the Act. See 15 U.S.C. 78ee(b). Because of this
exclusion under Section 31 of the Act, transactions reported to
TRACE are not subject to the regulatory transaction fee under
Section 3 of Schedule A to the FINRA By-Laws. To determine whether a
non-exchange listed security is an equity security or a debt
security for purposes of assessing the regulatory transaction fee,
FINRA relies on the facility to which the transaction is reported.
If the transaction is reported to the ORF, the transaction is
treated as one involving an equity security and is subject to the
regulatory transaction fee. If the transaction is reported to TRACE,
the transaction is treated as one involving a debt security and thus
is not subject to the regulatory transaction fee. See Regulatory
Notice 08-72 (November 2008).
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FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 90 days
following publication of the Regulatory Notice announcing 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,\14\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that by clarifying the classification
of certain hybrid securities for reporting purposes the proposed rule
change will reduce market and investor confusion. In addition, FINRA
believes that the proposed rule change will improve transparency
significantly because members will report transactions in the same
security using a uniform set of conventions and to the same facility
(i.e., the ORF or TRACE). This will allow investors and other market
participants to better compare transaction pricing and the quality of
their executions, which promotes just and equitable principles of
trade, deters fraudulent and manipulative acts and practices in the
market for such securities, and furthers the protection of investors
and the public interest.
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\14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Members that are required
currently to report transactions in hybrid securities will continue to
be subject to transaction reporting requirements and will be provided
clarity as to which facility such hybrid securities should be reported,
which will promote uniformity and consistency in trade reporting within
these categories of products.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2013-039 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR- FINRA-2013-039.
This file number should be included on the subject line if email is
used. To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (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 Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE., Washington, DC 20549, on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be
available for inspection and copying at 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 publicly available. All
submissions should refer to File Number SR-FINRA-2013-039 and should be
submitted on or before October 21, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23681 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P