Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 11880 (Settlement of Syndicate Accounts) To Revise the Syndicate Account Settlement Timeframe for Corporate Debt Offerings, 50896-50902 [2022-17745]
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50896
Federal Register / Vol. 87, No. 159 / Thursday, August 18, 2022 / Notices
to make available publicly. All
submissions should refer to File
Number SR–NYSEAMER–2022–35 and
should be submitted on or before
September 8, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–17750 Filed 8–17–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95494; File No. SR–FINRA–
2022–025]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 11880 (Settlement of
Syndicate Accounts) To Revise the
Syndicate Account Settlement
Timeframe for Corporate Debt
Offerings
August 12, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 5,
2022, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 11880 (Settlement of Syndicate
Accounts) to revise the syndicate
account settlement timeframe for
corporate debt offerings.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Underwriting groups ordinarily form
syndicate accounts 3 to process the
income and expenses of the syndicate.
The syndicate manager 4 is responsible
for maintaining syndicate account
records and must provide to each selling
syndicate member an itemized
statement of syndicate expenses no later
than the date of the final settlement of
the syndicate account. Syndicate
members record the expected payments
from the syndicate manager as
‘‘receivables’’ on their books and
records but generally do not receive the
payments for up to 90 days after the
syndicate settlement date,5 as currently
permitted under FINRA rules.6
To help avoid lengthy settlement
delays, FINRA Rule 11880 provides that
the syndicate manager in a public
offering of corporate securities must
effect the final settlement of syndicate
accounts within 90 days following the
settlement date. When FINRA (then
NASD) initially adopted a settlement
rule in 1985, it required that final
settlement of syndicate accounts be
effected within 120 days after the
syndicate settlement date.7 The
syndicate settlement timeframe was
reduced from 120 days to 90 days in
1987, and it has remained the same
since then.8
3 A syndicate account is the account formed by
members of the selling syndicate for the purpose of
purchasing and distributing the corporate securities
of a public offering. See FINRA Rule 11880(a)(2).
4 A syndicate manager is the member of the
selling syndicate that is responsible for the
maintenance of syndicate account records. See
FINRA Rule 11880(a)(3).
5 The syndicate settlement date is the date that
the issuer delivers corporate securities to or for the
account of the syndicate members. See FINRA Rule
11880(a)(4).
6 During this time, a syndicate member may not
treat the ‘‘receivables’’ as allowable assets for
purposes of Exchange Act Rule 15c3–1 (‘‘Net
Capital Rule’’) and therefore must deduct them from
its net worth in computing its net capital.
7 See Securities Exchange Act Release No. 22238
(July 15, 1985), 50 FR 29503 (July 19, 1985) (Order
Approving File No. SR–NASD–85–14).
8 See Securities Exchange Act Release No. 24290
(April 1, 1987), 52 FR 11148 (April 7, 1987) (Order
Approving File No. SR–NASD–87–7).
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In consideration of the technological
advances since 1987, FINRA is
proposing to amend the timeframe to
settle syndicate accounts set forth in
FINRA Rule 11880(b). Specifically,
FINRA is proposing to establish a twostage syndicate account settlement
approach whereby the syndicate
manager would be required to remit to
each syndicate member at least 70
percent of the gross amount due to such
syndicate member within 30 days
following the syndicate settlement date,
with any final balance due remitted
within 90 days following the syndicate
settlement date.
The proposed two-stage approach
would be limited to public offerings of
corporate debt securities.9 FINRA is not
proposing at this time to change the
current 90-day period for the final
settlement of syndicate accounts for
public offerings of equity securities,
which often involve complexities that
may necessitate a longer settlement
timeframe than corporate debt offerings
(e.g., an overallotment option that may
have an exercise term of 30 days).
FINRA also notes that, with respect to
municipal debt offerings, Municipal
Securities Rulemaking Board (‘‘MSRB’’)
Rule G–11 (Primary Offering Practices)
currently provides that final settlement
of a syndicate or similar account must
be made within 30 calendar days of the
syndicate settlement date. The MSRB
shortened the settlement timeframe
from 60 days to 30 days in 2009 to
reduce the exposure of syndicate
account members to the credit risk of
potential deterioration in the credit of
the syndicate manager during the
pendency of account settlements.10 The
MSRB believed that this change would
not be unduly burdensome on firms
given the more efficient billing and
accounting systems firms had
implemented since the rules were first
adopted in the 1970s.11
FINRA similarly believes that the
proposed rule change will benefit
syndicate members by reducing the
exposure of syndicate members to the
credit risk of the syndicate manager
during the pendency of account
9 A ‘‘corporate debt security’’ would be defined as
a debt security that is United States (‘‘U.S.’’) dollardenominated and issued by a U.S. or foreign private
issuer, including a Securitized Product as defined
in FINRA Rule 6710(m). ‘‘Corporate debt security’’
would not include a Money Market Instrument as
defined in FINRA Rule 6710(o). See proposed Rule
11880(a)(1).
10 See Securities Exchange Act Release No. 60487
(August 12, 2009), 74 FR 41771 (August 18, 2009)
(Notice of Filing of File No. SR–MSRB–2009–12)
and Securities Exchange Act Release No. 60725
(September 28, 2009), 74 FR 50855 (October 1,
2009) (Order Approving File No. SR–MSRB–2009–
12).
11 See supra note 10.
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Federal Register / Vol. 87, No. 159 / Thursday, August 18, 2022 / Notices
settlements. FINRA also believes that
the proposed rule change will benefit
syndicate members, including capitalconstrained small firms, by allowing
them to obtain earlier access to the
funds earned from an offering without
significantly increasing the risks of
resettlements. In addition, FINRA
believes that the proposed staged
approach will provide these benefits to
syndicate members while easing
compliance for syndicate managers by
permitting them to retain 30 percent of
the gross amount earned by syndicate
members to cover expenses and remit
any balance due to the syndicate
members within the current 90-day
period following the syndicate
settlement date.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice. The effective date will be
January 1, 2023.
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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,12 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed rule change promotes just and
equitable principles of trade and is in
the public interest as it will reduce the
exposure of syndicate members to the
potential deterioration of the credit of
syndicate managers during the
pendency of account settlement without
negatively impacting the ability of
syndicate managers to run the syndicate
settlement account process. FINRA also
believes that the proposed rule change
promotes just and equitable principles
of trade because it will result in
syndicate managers more quickly
remitting the majority of the gross
amount earned by syndicate members
and will not be unduly burdensome on
syndicate managers given the
technological advances that have been
made since the 90-day syndicate
account settlement timeframe was
adopted in 1987.
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.
12 15
U.S.C. 78o–3(b)(6).
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Economic Impact Assessment
FINRA has undertaken an economic
impact assessment, as set forth below, to
analyze the potential economic impacts
of the proposed rule change, including
potential costs, benefits, and
distributional and competitive effects,
relative to the current baseline.
Regulatory Need
FINRA Rule 11880 requires final
settlement of syndicate accounts within
90 days following the syndicate
settlement date. As discussed further
below, FINRA understands that
syndicate managers currently could
conduct partial settlements of syndicate
accounts much more quickly, at limited
additional expense, to the benefit of
syndicate members. Longstanding
industry practices, the number of parties
in selling syndicates and possibly
greater efficiency in syndicate
settlement by syndicate managers that
conduct more settlements may limit the
impact of competition and negotiation
on final settlement practices and
timelines. FINRA also believes that
modifying the current syndicate
settlement timeframe will benefit
syndicate members, including capitalconstrained small firms, by allowing
them to obtain earlier access to the
funds earned from an offering without
significantly increasing the risks of
resettlements. FINRA is therefore
proposing a two-staged syndicate
settlement framework to enable quicker
remittance of a significant portion of
syndicate revenue to syndicate
members.
Economic Baseline
The economic baseline for the
proposed rule change is current FINRA
Rule 11880, which allows 90 days for
the final settlement of syndicate
accounts, industry practices for
compliance and implementation of the
rule, and the competitive landscape.
FINRA conducted an analysis of the
primary corporate debt market to study
the extent and scope of participation in
corporate debt syndicates by member
firms using data from the Trade
Reporting and Compliance Engine
(‘‘TRACE’’). From 2019 to 2021, FINRA
estimates that approximately 377
member firms, on average per year,
participated in syndicates for corporate
debt offerings and could be affected by
the proposed rule change.13 Of these
13 The extent of firm participation in the primary
corporate debt market was approximated using
TRACE data. Issuers sell new stocks and bonds in
the primary market to the public, such as through
an initial public offering. The data is limited to the
primary market sellers for corporate debt, excluding
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50897
firms, 57 percent, 18 percent, and 25
percent are small, mid-size and large
firms, respectively.14
The 90-day period following the
syndicate settlement date allows the
syndicate manager to record income and
expenses incurred in connection with
the offering and then to distribute the
net underwriting revenue due to each
syndicate member. Syndicate managers
tend to be large, well-capitalized
firms.15 The syndicate manager collects
the underwriting revenue for the
syndicate and pays expenses. The other
syndicate members, which often include
smaller firms, are paid their respective
portion of the underwriting revenue, net
of expenses, from the syndicate
managers by the final syndicate account
settlement date.
To assess the magnitude of the gross
revenue from underwriting public
offerings of corporate debt, FINRA
calculated that, on average each year
between 2019 and 2021, there were
41,756 U.S. dollar-denominated
corporate debt offerings (excluding
144A offerings) with an average amount
of $3.5 trillion raised (see Table 1).
Investment grade corporate debt
offerings account for 49 percent of the
total issued amount, and high yield and
non-rated corporate debt offerings
account for the remainder (see Table
1).16 A recent study estimates that the
average gross underwriting spread is
0.65 percent for investment grade debt
securities and 1.42 percent for high
yield debt securities.17 Using these
offerings made in compliance with Rule 144A of the
Securities Act of 1933 (‘‘144A offerings’’).
14 See 2022 FINRA Industry Snapshot, https://
www.finra.org/sites/default/files/2022-03/2022industry-snapshot.pdf. Small, mid-size and large
firms are defined as having 1–150, 151–499, and at
least 500 registered representatives, respectively.
See Article I of the FINRA By-Laws.
15 See, e.g., Hendrik Bessembinder, Stacey E.
Jacobsen, William F. Maxwell & Kumar
Venkataraman, Overallocation and Secondary
Market Outcomes in Corporate Bond Offerings
(April 29, 2022), SMU Cox School of Business
Research Paper No. 20–04, available at https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3611056. The authors developed a sample of
5,573 bond offerings that were issued between 2010
and 2018, based upon primary allocation data
collected through TRACE. They found that only 10
firms were syndicate managers and that the most
frequent bookrunners (manager and co-managers)
were large firms. This finding is consistent with
FINRA’s findings from its outreach efforts.
16 While members are required to report revenue
from underwriting on Financial and Operational
Combined Uniform Single (‘‘FOCUS’’) and
Supplemental Statement of Income (‘‘SSOI’’)
reports, the data is in aggregate form and thus we
are unable to determine underwriting revenue for
public offerings of corporate debt securities.
17 The gross revenue from an underwriting is the
difference between the price the syndicate pays the
issuer for the securities and the initial price at
which the syndicate sells the securities to the
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Federal Register / Vol. 87, No. 159 / Thursday, August 18, 2022 / Notices
estimates, FINRA estimates that the
gross revenue from underwriting public
offerings of corporate debt (excluding
144A offerings) would be at least $36
billion per year.18 Underwriting
revenue, net of expenses, is distributed
to syndicate members.
TABLE 1—TRACE-ELIGIBLE CORPORATE BONDS (EXCLUDING 144A) ISSUED BY GRADE AND YEAR
Number of
offerings
2019 .........................................................................................................
Investment Grade .............................................................................
High Yield .........................................................................................
Non-rated ..........................................................................................
2020 .........................................................................................................
Investment Grade .............................................................................
High Yield .........................................................................................
Non-rated ..........................................................................................
2021 .........................................................................................................
Investment Grade .............................................................................
High Yield .........................................................................................
Non-rated ..........................................................................................
Average 2019–2021 ................................................................................
Investment Grade .............................................................................
High Yield .........................................................................................
Non-rated ..........................................................................................
Total
issued amount
(trillion $)
26,769
3,275
468
23,026
43,334
3,828
374
39,132
55,164
3,615
275
51,274
41,756
3,573
372
37,811
3.10
1.50
0.26
1.34
4.22
2.14
0.24
1.84
3.12
1.48
0.15
1.50
3.48
1.71
0.21
1.56
% of annual total
issued amounts
100.00%
48.39
8.45
43.15
100.00
50.81
5.58
43.61
100.00
47.31
4.71
47.98
100.00
48.84
6.25
44.92
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Source: Bloomberg for TRACE-eligible Corporate Bonds.
syndicate settlement date and any final
balance due within 90 days. The
proposed rule change could impact
firms of different sizes that participate
in corporate debt offerings in different
ways, as explained further below. The
aggregate impact is less clear, as it
depends upon the extent of long-term
competitive benefits and short-term cost
increases. If competition increases in
the market for corporate debt offerings
in the long term, investors may also
benefit from improved pricing.
Through its outreach efforts, FINRA
has heard that the settlement of
syndicate accounts for corporate debt
offerings is typically conducted at the
end of the 90-day window, rather than
earlier in the window, as permitted
under the current rule. FINRA also has
heard, however, that syndicate income
is often known much earlier, even by
the closing date of the offering. This
information is consistent with recent
research findings that, in more than 95
percent of the debt offerings from 2016
to 2018, the debt security is priced,
allocated to investors, and starts trading
in the secondary market all within the
same day.19 Thus, a large part of
syndicate income can be accounted for
within days after the date of issuance.20
Through its outreach efforts, FINRA
understands that syndicate expenses are
also generally known within 90 days
following the syndicate settlement date.
However, syndicate managers
sometimes receive invoices after 90
days. Certain expenses, such as legal
fees and covering overallotment short
transactions, take time to realize and are
difficult to estimate as they might
depend on another party or market
movements. Invoices received after the
final settlement of syndicate accounts
result in resettlements. FINRA
understands that syndicate managers
prefer to avoid this scenario as much as
possible. Data on the prevalence of
resettlements after 90 days is
unavailable, but some public comments
submitted in response to the Notice
suggest that they are infrequent.
Under the proposed rule change,
syndicate members would receive 70
percent of the gross receivables due to
them within 30 days following the
FINRA expects that the proposed rule
change could reduce a number of risks
associated with syndicate debt issuance,
including counterparty and liquidity
risk. Remitting revenues earned from
the offering to syndicate members more
quickly would reduce counterparty risk
to syndicate members. The reduction in
public, also called the ‘‘gross underwriting spread.’’
The spread generally accounts for management fees
paid to lead underwriters, underwriting fees and
the sales credits paid to syndicate members for
selling the securities. As a rule, gross revenue from
a public offering is directly related to the size of the
offering.
18 Research using a sample of municipal bond
offerings between 1997 and 2001 found that the
absence of a rating increases underwriting gross
spreads by about 40 basis points after controlling
for bond rating and other characteristics. See
Alexander W. Butler, Distance Still Matters:
Evidence from Municipal Bond Underwriting, 21(2)
Rev. Fin. Stud. 763–784 (March 2008), available at
https://www.jstor.org/stable/40056834?seq=1.
Information on gross spreads for unrated corporate
bonds is harder to find. One study found the default
rate among unrated institutional loans issued by
U.S. publicly owned companies was comparable to
that of rated high yield loans. See Edward I.
Altman, Sreedhar T. Bharath & Anthony Saunders,
Credit Ratings and the BIS Capital Adequacy
Reform Agenda, 26(5) J. Bank. Fin. 909–921 (May
2002), available at https://www.sciencedirect.com/
science/article/abs/pii/S0378426601002692. These
findings indicate that the gross spread for unrated
corporate bonds is likely somewhat greater than
that for high yield corporate bonds. Based on these
assumptions, the gross underwriting revenue from
public offerings of corporate debt would be at least
$36B (= 0.0065 * 1.71*10∧12 + 0.0142 *(0.21 +
1.56)*10∧12).
19 See Liying Wang, Lifting the Veil: The Price
Formation of Corporate Bond Offerings, 142(3) J.
Fin. Econ. 1340–1358 (December 2021), available at
https://www.sciencedirect.com/science/article/abs/
pii/S0304405X2100307X.
20 FINRA understands that, in the absence of an
overallotment option, syndicate managers may
over-allocate an offering to stabilize secondary
market prices—effectively creating a syndicate short
position. Profits or losses from these transactions
are considered part of a syndicate’s revenues or
expenses and depend on secondary market price
movements, which cannot be estimated before the
public offering. Research has found, however, that
average profit/loss from covering overallocations
relative to corporate debt underwriting revenue is
very small, and most of the overallocations are
offset within a few days of the date of issuance.
Bessembinder et al. (2022) found that over 70
percent of the issues with overallocations in their
sample are offset within two days after issuance and
by day 15 about 80 percent of the issues have the
overallocation fully offset. See supra note 15.
According to the authors, the mean net position for
covering overallotment short-transactions and
round-trip trades in the secondary market ranges
from a $240,967 loss per high-yield issue with a
large overallocation to a $161,578 gain per highyield issue with a smaller overallocation.
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Anticipated Benefits
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counterparty risk would depend on the
financial capacity of the syndicate
manager—where the syndicate manager
is smaller or more financially
constrained, the reduction in
counterparty risk will likely be greater.
In addition, a shorter syndicate
settlement timeframe would result in
providing syndicate members with
earlier access to capital and improve the
member’s liquidity position where their
own net capital is limited. Members
may therefore be exposed to lower
liquidity risk. The extent of this benefit
would depend on the relative
magnitude of syndicate receivables to
the firm’s liquidity position and the
strength of the liquidity position itself.
FINRA expects that these potential
benefits would be more pronounced for
firms with lower capital levels. For
instance, firms that do not have
sufficient capital to engage in other
business activities due to the length of
the current settlement period may reap
greater benefits from the proposed rule
change. Syndicate members exposed to
higher counterparty default risk may
also disproportionately bear the risks
associated with longer final settlement
times. To the extent that smaller firms
tend to have lower capital levels, the
proposed rule change will benefit
smaller firms by providing additional
capital to engage in other business
activities and manage default risk.
The proposed rule change is expected
to have positive effects on competition
and efficiency in the corporate debt
underwriting market to the extent that
the anticipated syndicate receivables
constrain a firm’s liquidity position.
Alleviation of liquidity constraints
would create opportunities for the
syndicate members to participate in new
offerings and enhance their ability to
compete with other firms, maintain
business operations or use the funds for
other purposes. This may reduce
barriers to entering the corporate debt
underwriting market and could
ultimately result in an increase in the
supply of underwriters and lower costs
for corporate debt issuers and investors.
Lowering costs to issuers and investors
may increase the size and frequency of
new corporate debt offerings, benefiting
all member firms engaged in the
underwriting process. However, the
extent of this potential gain in market
competitiveness cannot be fully and
accurately estimated.
As the syndicate manager would be
required to remit a large part of the
revenue to the syndicate members
sooner, the proposed rule change could
lead to a transfer of some of the interest
earned on the syndicate’s underwriting
revenue—i.e., from the syndicate
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manager to other syndicate members.
The magnitude of such benefit is
positively correlated with the interest
rate environment. Under the proposed
rule change, if part of the underwriting
revenue is paid earlier, the syndicate
manager would forego the earned
interest on the amount to be distributed
to syndicate members over the 60-day
period—the difference between the 90day baseline and proposed 30-day
timeframe for the first payment of the
underwriting revenue. Other syndicate
members would have the opportunity to
earn that interest where they do not
have a better economic use for the
capital.
Finally, FINRA does not expect the
proposed rule change to increase the
frequency of resettlements. The
maximum time to final syndicate
settlement under the proposed rule
change, 90 days, is the same as under
the baseline, and nothing in the
proposed rule change would make it
more difficult for parties to provide
timely invoices of expenses relative to
the baseline.
Anticipated Costs
FINRA believes the proposed rule
change may result in additional onetime and ongoing direct costs to member
firms that serve as syndicate managers
in public offerings of corporate debt.
These firms will need to adapt their
internal policies and procedures as well
as their accounting, compliance, and
supervision and management systems to
accommodate a two-stage syndicate
account settlement cycle. Firms may
also adopt better technology and greater
automation of accounting and
recordkeeping processes. Firms may
also need to hire additional staff
depending on how settlement cycles on
multiple offerings overlap. The
magnitude of such associated costs,
specifically staff and related human and
technology resources, could increase as
the volume and frequency of offerings in
which firms participate as syndicate
managers increases. Syndicate managers
could absorb such costs or pass them on
to the syndicate members or the issuers.
FINRA believes that the adoption of
MSRB Rule G–11 provides a useful case
study for understanding the potential
costs of the proposed rule change. Both
commenters that supported and those
more critical of the FINRA rule proposal
set forth in Regulatory Notice 21–40
discussed comparisons between the
offering process for municipal bonds
versus corporate bonds. Opponents
argued that, because the process for
corporate bond offerings is more
complex than that for municipal bonds,
experience with the 30-day settlement
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50899
period for municipal bond offerings is
not directly relevant to corporate bond
offerings. However, when the MSRB
Rule G–11 amendment was proposed to
shorten the deadline for municipal bond
syndicate account settlement from 60
days to 30 days, similar opposing
arguments were raised. Specifically,
commenters noted uncertain expenses
in complex issuances, the inability to
obtain counsel bills and invoices within
30 days, and the fact that some bonds
might take longer than 30 days to sell.21
The amendment to MSRB Rule G–11
became effective in 2009 and market
participants were able to implement
necessary changes to adapt to the new
timeline. While a transition in syndicate
settlement timeframes involves costs,
FINRA believes that the long-term
benefits of shortening the settlement
timeframe would outweigh the costs.
Alternatives Considered
In developing the proposed rule
change, FINRA considered alternatives
to the two-stage syndicate settlement
approach. Specifically, FINRA
considered requiring syndicate accounts
to be fully settled within 30 days.
FINRA also considered a 45-day
settlement period instead of 30 days.
These alternatives could deliver some
benefits as well as carry some costs in
comparison with the current proposed
rule change. FINRA believes that the
proposed approach is appropriate at this
time because it balances the goals of
reducing exposure of syndicate
members to the credit risk of the
syndicate manager during the pendency
of account settlements and providing
syndicate members with earlier access
to the funds earned from an offering,
with preserving the ability of syndicate
managers to effectively run the
settlement process and thereby limit
resettlements.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 21–40 (‘‘Notice’’). FINRA
received 12 comment letters in response
to the Notice.22 A copy of the Notice is
attached as Exhibit 2a. A list of the
comment letters received in response to
the Notice is attached as Exhibit 2b.
Copies of the comment letters received
in response to the Notice are attached as
Exhibit 2c. Of the 12 comment letters
received, eight were in favor of the
21 See
74 FR 41771, supra note 10.
references to commenters are to the
comment letters as listed in Exhibit 2b.
22 All
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proposal set forth in the Notice and four
were opposed. In the Notice, FINRA
proposed to reduce the timeframe for
the final settlement of syndicate
accounts in a public offering of
corporate debt securities from 90 days to
30 days following the syndicate
settlement date. FINRA has considered
the comment letters received and
engaged in further discussions with a
wide variety of industry members. As a
result, FINRA has revised the proposal
to instead provide for a two-stage
syndicate account settlement process, as
described above. The comments
received in response to the approach
described in the Notice are summarized
below.
1. Reduction of Syndicate Settlement
Timeframe to 30 Days
BDA supported the proposal to reduce
the timeframe for the final settlement of
syndicate accounts in a public offering
of corporate debt securities from 90 days
to 30 days, stating it would provide the
following economic benefits: (1) lessen
the risk that a syndicate manager could
become insolvent before syndicate
members receive payment; (2) provide
quicker access to the revenues earned
from an offering (and thereby lower
barriers for broker-dealers to enter the
corporate debt underwriting market);
and (3) reduce the amount of interest
lost by syndicate members while the
funds are held in the syndicate account.
BDA also expressed support by noting
that various technological advances that
have emerged since 1987, such as
electronic order entry and accounting
systems, facilitate faster syndicate
settlements. BDA further noted support
for the proposal by stating that there are
not substantial differences between
syndicate management and accounting
for municipal versus corporate debt
offerings that would justify the 90-day
timeframe for corporates, including in
the areas of multiple lead managers,
cross-border offerings, the complexity of
the legal issues involved, investor carveout letters, and asset-backed securities.
In addition, BDA stated that
overallotments (which effectively do not
exist in corporate bond transactions),
travel expensing, and vendor billing
also present no impediments to a 30-day
settlement timeframe.
Castle Oak, InspereX, Loop Capital,
SWS, and R. Seelaus supported the
proposal, stating it would provide the
following economic benefits: (1) lessen
the risk that a syndicate manager could
become insolvent before the payment of
deal revenue to syndicate members; (2)
provide quicker access to the revenues
earned from an offering, which would
allow syndicate members to conduct
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more business, including additional
new-issue underwritings and secondary
market trading; and (3) reduce the
amount of interest lost by syndicate
members while the funds are held in the
syndicate account. ASA also supported
the proposal, stating that it would
provide syndicate members quicker
access to the revenues earned from an
offering. These commenters, except for
Loop Capital, also supported the
proposal by noting that there have been
significant technological and logistical
improvements in the past 35 years that
have made the process of settling
syndicate accounts cheaper and faster.
Loop Capital noted support for the
proposal by stating that, based on its
experience, shortening the settlement
period to 30 days would not present
substantive challenges to firms that
serve as syndicate managers.
On the other hand, Mizuho opposed
the proposal described in the Notice,
expressing concern regarding the
feasibility of a syndicate manager
receiving, reviewing, and approving all
expenses within a 30-day window.
Mizuho also stated that a 30-day
account settlement timeframe would
take firms some time to implement and
would result in a loss of revenue for
firms if done too soon.
Cleary also opposed the proposal,
stating that the reduction of the
syndicate account settlement period to
30 days would require syndicate
managers to hire and train a significant
number of additional employees to
complete the settlement process within
this shortened timeframe.23 Cleary
noted that these additional costs would
be passed on to the syndicate, which
would reduce the net earnings of
syndicate members. Cleary also opposed
the proposal because a reduction of the
settlement period would result in more
frequent resettlements, which is a
burdensome process. In addition, Cleary
argued that the technological advances
that have enabled a 30-day settlement
process for municipal debt offerings
cannot be expected to expedite, to the
same degree, the settlement process for
corporate debt offerings. In this regard,
Cleary stated that the syndicate
settlement process for corporate debt
offerings is more complex and involves
more manual inputs, many of which are
beyond the control of syndicate
23 Cleary submitted its comment letter on behalf
of BofA Securities, Inc., Barclays Capital Inc.,
Citigroup Global Markets Inc., Credit Suisse
Securities (USA) LLC, Deutsche Bank Securities
Inc., Goldman Sachs & Co. LLC, Jefferies LLC, J.P.
Morgan Securities LLC, Morgan Stanley & Co. LLC,
RBC Capital Markets, LLC, UBS Securities LLC, and
Wells Fargo Securities, LLC.
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Fmt 4703
Sfmt 4703
managers, than the settlement process
for municipal debt offerings.
Cleary also opposed the proposal by
asserting that there are a number of
important differences between the
settlement mechanics of corporate
versus municipal debt offerings that
make corporate debt offerings not
amenable to a 30-day settlement period.
According to Cleary, these differences
include: (1) corporate bond offerings
generally involve multiple lead
managers; (2) syndicates in corporate
debt offerings routinely engage in
aftermarket support; (3) expenses in
corporate debt offerings are not known
up front; (4) corporate bonds are offered
outside the United States; (5) corporate
bond offerings do not have fixed legal
fees; and (6) delivery of investor carveout letters occurs after closing in
corporate bond offerings.
2. Alternatives to a 30-Day Syndicate
Account Settlement Requirement
Commenters discussed several
potential alternatives to reducing the
syndicate account settlement timeframe
to 30 days.24 As discussed above, one
potential alternative was a two-stage
approach, whereby the syndicate
manager would be required to remit a
specified percentage of the syndicate
proceeds to syndicate members within
30 days and would be permitted to
retain a portion to cover expenses for an
additional period of time. Mizuho
expressed support for revising the
syndicate account settlement timeframe
by either implementing a two-stage—50/
50—syndicate account settlement
approach or by shortening the syndicate
settlement timeframe in incremental
steps rather than a sudden reduction to
30 days. Cleary also supported
implementing a two-stage—50/50—
syndicate account settlement approach,
stating that it would more quickly
provide to syndicate members the
revenues earned from an offering and
also allow syndicate managers to retain
a sufficient amount of syndicate funds
to effect timely and accurate
settlements.
SIFMA supported a two-stage—70/
30—syndicate account settlement
approach for corporate debt offerings
because it provides for payment within
30 days of a very large percentage of the
net compensation ultimately payable to
syndicate members and preserves the
ability of syndicate managers to
effectively manage the settlement
process. SIFMA stated that it had
received input on this alternative from
broker-dealers that frequently act as
syndicate managers as well as other
24 BDA,
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broker-dealers that routinely act as
syndicate members, and that all of these
constituencies fully support this
alternative.
While BDA initially opposed a twostage syndicate account settlement
approach as an alternative to the
proposal, BDA subsequently expressed
support for a two-stage—70/30—
syndicate account settlement approach,
stating that it was a more practical way
to shorten the time to provide
compensation to syndicate members.25
According to BDA, the 70/30 approach
would strike an appropriate balance
between ensuring that syndicate
members have ready access to their
funds and minimizing the number of
resettlements. In addition, BDA asserted
that this approach would benefit
investors by encouraging broader
syndicate membership and making newissue corporate bonds available to
customers of a wider group of brokerdealers.
FINRA has modified the approach
that was described in the Notice to
instead adopt a two-stage—70/30—
syndicate account settlement approach.
FINRA believes that the proposed twostage—70/30—approach is preferable to
a two-stage 50/50 approach because it
provides for a larger up-front payment
with a smaller reserve amount and
should not significantly increase the
number of resettlements.
In response to a question posed in the
Notice regarding the use of sole recourse
loans as an alternative means of
addressing concerns regarding the
length of the syndicate account
settlement timeframe, BDA stated that
such loans are not a feasible alternative
to shortening the syndicate account
settlement timeframe because such a
borrowing option does not exist
generally, the lender would charge
interest and thereby require a syndicate
member to incur a liability for access to
its own capital, and this alternative does
not address the interest lost by
syndicate members while their funds
are held in the syndicate account.
Cleary also opposed sole recourse loans
as an alternative to address the length of
the syndicate account settlement period.
In this regard, Cleary stated that a
syndicate manager will not know the
amount required for a sole recourse loan
because the syndicate manager will not
know the net amount ultimately to be
paid to each syndicate member and, as
a result, syndicate managers will not
know whether the receivable adequately
secures any such loan. Cleary
commented that syndicate managers
25 BDA submitted three comment letters in
response to the Notice.
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17:42 Aug 17, 2022
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also need to treat unsecured and partlysecured receivables as unallowable
assets, and this approach therefore
would cause uncertainty with regard to
net capital for syndicate managers.
In light of the comments received and
further discussions regarding the
current syndicate account settlement
framework, FINRA has determined to
modify the approach that was described
in the Notice and amend FINRA Rule
11880 as described above. In this regard,
FINRA believes that the proposed
amendments to FINRA Rule 11880 most
directly and fairly balance the goals of
reducing exposure of syndicate
members to the credit risk of the
syndicate manager during the pendency
of account settlements and providing
syndicate members with earlier access
to the funds earned from an offering
with preserving the ability of syndicate
managers to effectively run the
settlement process and thereby limit
resettlements. After gaining experience
with the two-stage—70/30—syndicate
account settlement approach, FINRA
will consider whether to reduce the 90day time period for final settlement to
align with the MSRB timeframe.
3. Definition of Corporate Debt Security
In the Notice, FINRA proposed
defining a ‘‘corporate debt security’’ as
a type of ‘‘TRACE-Eligible Security’’
that is U.S. dollar-denominated and
issued by a U.S. or foreign private
issuer. BDA and Loop Capital expressed
support for the definition of ‘‘corporate
debt security’’ proposed in the Notice by
stating that it generally captures the
universe of corporate bonds for which a
move to a 30-day settlement timeframe
would be easily achievable. Mizuho
similarly expressed support for the
definition of ‘‘corporate debt security’’
proposed in the Notice. BDA and Loop
Capital specifically suggested that the
definition should include securitized
products as defined in FINRA Rule
6710(m), because the process for
managing the syndicate account, paying
vendors, and releasing deal revenue to
comanagers is virtually the same for
both corporate bonds and publicly
offered securitized products.
However, Cleary opposed including
asset-backed securities in the definition
and stated that those securities are often
composed of multiple tranches, and
offerings of these securities often
navigate novel, multi-jurisdictional legal
issues. FINRA has determined that it is
appropriate that the proposed
modifications to the syndicate account
settlement process also apply to public
offerings of corporate debt securities
that are securitized products. Therefore,
the proposed definition of ‘‘corporate
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
50901
debt security’’ in Rule 11880 would
include securitized products.
4. Public Offerings of Equity Securities
In response to a question posed in the
Notice regarding whether the period
permitted for the final settlement of
syndicate accounts for public offerings
of corporate equity securities should be
shortened, Cleary stated that the time
period should not be less than 90 days
because equity offerings are likely to be
more complicated than debt offerings,
including requiring more diligence and
marketing. Mizuho also opposed
reducing the timeframe for settling
equity syndicate accounts from 90 days
to 30 days. However, Loop Capital
argued that the time period for settling
equity syndicate accounts should be
reduced from 90 days and supported the
adoption of a two-stage approach for
such offerings. FINRA has determined at
this time not to propose an amendment
to reduce the syndicate account
settlement timeframe for equity
offerings.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days of such date (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2022–025 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE,
Washington, DC 20549–1090.
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Federal Register / Vol. 87, No. 159 / Thursday, August 18, 2022 / Notices
All submissions should refer to File
Number SR–FINRA–2022–025. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2022–025 and should be submitted on
or before September 8, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–17745 Filed 8–17–22; 8:45 am]
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to codify certain practices and
requirements related to the Exchange’s
port message rate thresholds. The
proposed rule change was published for
comment in the Federal Register on
February 9, 2022.3 On March 23, 2022,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
On May 10, 2022, the Commission
instituted proceedings under Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change.7 The Commission
has received no comment letters on the
proposed rule change. On July 21, 2022,
the Exchange withdrew the proposed
rule change (CboeEDGX–2022–004).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–17748 Filed 8–17–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95495; File No. SR–
NASDAQ–2022–047]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
Nasdaq Equity 6, Section 5
BILLING CODE 8011–01–P
August 12, 2022.
SECURITIES AND EXCHANGE
COMMISSION
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 8,
2022, The Nasdaq Stock Market LLC
[Release No. 34–95497; File No. SR–
CboeEDGX–2022–004]
khammond on DSKJM1Z7X2PROD with NOTICES
1 15
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of
Withdrawal of a Proposed Rule Change
To Codify Certain Practices and
Requirements Related to the
Exchange’s Port Message Rate
Thresholds
August 12, 2022.
On January 21, 2022, Cboe EDGX
Exchange, Inc. (‘‘Exchange’’) filed with
the Securities and Exchange
26 17
CFR 200.30–3(a)(12).
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17:42 Aug 17, 2022
Jkt 256001
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 94144
(February 3, 2022), 87 FR 7519.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 94496,
87 FR 18410 (March 30, 2022). The Commission
designated May 10, 2022 as the date by which the
Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 94883,
87 FR 29776 (May 16, 2022).
8 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
2 17
PO 00000
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Fmt 4703
Sfmt 4703
(‘‘Nasdaq’’ or ‘‘Exchange’’) 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 the Exchange. 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
The Exchange proposes to amend
Rule Nasdaq Equity 6, Section 5 (Risk
Settings) to provide Participants with
additional optional settings.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange 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. The
Exchange 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
The purpose of the proposed rule
changes under Rule Nasdaq Equity 6,
Section 5 (Risk Settings) is to provide
Participants 3 with additional optional
settings to assist them in their efforts to
3 Pursuant to Rule Nasdaq Equity 1, Section
1(a)(5), a ‘‘Participant’’ is defined as an entity that
fulfills the obligations contained in Equity 2,
Section 3 regarding participation in the System, and
shall include: (1) ‘‘Nasdaq ECNs,’’ members that
meet all of the requirements of Equity 2, Section 14,
and that participates in the System with respect to
one or more System Securities; (2) ‘‘Nasdaq Market
Makers’’ or ‘‘Market Makers’’, members that are
registered as Nasdaq Market Makers for purposes of
participation in the System on a fully automated
basis with respect to one or more System securities;
and (3) ‘‘Order Entry Firms,’’ members that are
registered as Order Entry Firms for purposes of
entering orders in System Securities into the
System. This term shall also include any Electronic
Communications Network or Alternative Trading
System (as such terms are defined in Regulation
NMS) that fails to meet all the requirements of
Equity 2, Section 14.
E:\FR\FM\18AUN1.SGM
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]]>Agencies
[Federal Register Volume 87, Number 159 (Thursday, August 18, 2022)]
[Notices]
[Pages 50896-50902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17745]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95494; File No. SR-FINRA-2022-025]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 11880 (Settlement of Syndicate Accounts) To Revise the
Syndicate Account Settlement Timeframe for Corporate Debt Offerings
August 12, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 5, 2022, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\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 proposing to amend FINRA Rule 11880 (Settlement of
Syndicate Accounts) to revise the syndicate account settlement
timeframe for corporate debt offerings.
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Underwriting groups ordinarily form syndicate accounts \3\ to
process the income and expenses of the syndicate. The syndicate manager
\4\ is responsible for maintaining syndicate account records and must
provide to each selling syndicate member an itemized statement of
syndicate expenses no later than the date of the final settlement of
the syndicate account. Syndicate members record the expected payments
from the syndicate manager as ``receivables'' on their books and
records but generally do not receive the payments for up to 90 days
after the syndicate settlement date,\5\ as currently permitted under
FINRA rules.\6\
---------------------------------------------------------------------------
\3\ A syndicate account is the account formed by members of the
selling syndicate for the purpose of purchasing and distributing the
corporate securities of a public offering. See FINRA Rule
11880(a)(2).
\4\ A syndicate manager is the member of the selling syndicate
that is responsible for the maintenance of syndicate account
records. See FINRA Rule 11880(a)(3).
\5\ The syndicate settlement date is the date that the issuer
delivers corporate securities to or for the account of the syndicate
members. See FINRA Rule 11880(a)(4).
\6\ During this time, a syndicate member may not treat the
``receivables'' as allowable assets for purposes of Exchange Act
Rule 15c3-1 (``Net Capital Rule'') and therefore must deduct them
from its net worth in computing its net capital.
---------------------------------------------------------------------------
To help avoid lengthy settlement delays, FINRA Rule 11880 provides
that the syndicate manager in a public offering of corporate securities
must effect the final settlement of syndicate accounts within 90 days
following the settlement date. When FINRA (then NASD) initially adopted
a settlement rule in 1985, it required that final settlement of
syndicate accounts be effected within 120 days after the syndicate
settlement date.\7\ The syndicate settlement timeframe was reduced from
120 days to 90 days in 1987, and it has remained the same since
then.\8\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 22238 (July 15,
1985), 50 FR 29503 (July 19, 1985) (Order Approving File No. SR-
NASD-85-14).
\8\ See Securities Exchange Act Release No. 24290 (April 1,
1987), 52 FR 11148 (April 7, 1987) (Order Approving File No. SR-
NASD-87-7).
---------------------------------------------------------------------------
In consideration of the technological advances since 1987, FINRA is
proposing to amend the timeframe to settle syndicate accounts set forth
in FINRA Rule 11880(b). Specifically, FINRA is proposing to establish a
two-stage syndicate account settlement approach whereby the syndicate
manager would be required to remit to each syndicate member at least 70
percent of the gross amount due to such syndicate member within 30 days
following the syndicate settlement date, with any final balance due
remitted within 90 days following the syndicate settlement date.
The proposed two-stage approach would be limited to public
offerings of corporate debt securities.\9\ FINRA is not proposing at
this time to change the current 90-day period for the final settlement
of syndicate accounts for public offerings of equity securities, which
often involve complexities that may necessitate a longer settlement
timeframe than corporate debt offerings (e.g., an overallotment option
that may have an exercise term of 30 days).
---------------------------------------------------------------------------
\9\ A ``corporate debt security'' would be defined as a debt
security that is United States (``U.S.'') dollar-denominated and
issued by a U.S. or foreign private issuer, including a Securitized
Product as defined in FINRA Rule 6710(m). ``Corporate debt
security'' would not include a Money Market Instrument as defined in
FINRA Rule 6710(o). See proposed Rule 11880(a)(1).
---------------------------------------------------------------------------
FINRA also notes that, with respect to municipal debt offerings,
Municipal Securities Rulemaking Board (``MSRB'') Rule G-11 (Primary
Offering Practices) currently provides that final settlement of a
syndicate or similar account must be made within 30 calendar days of
the syndicate settlement date. The MSRB shortened the settlement
timeframe from 60 days to 30 days in 2009 to reduce the exposure of
syndicate account members to the credit risk of potential deterioration
in the credit of the syndicate manager during the pendency of account
settlements.\10\ The MSRB believed that this change would not be unduly
burdensome on firms given the more efficient billing and accounting
systems firms had implemented since the rules were first adopted in the
1970s.\11\
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\10\ See Securities Exchange Act Release No. 60487 (August 12,
2009), 74 FR 41771 (August 18, 2009) (Notice of Filing of File No.
SR-MSRB-2009-12) and Securities Exchange Act Release No. 60725
(September 28, 2009), 74 FR 50855 (October 1, 2009) (Order Approving
File No. SR-MSRB-2009-12).
\11\ See supra note 10.
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FINRA similarly believes that the proposed rule change will benefit
syndicate members by reducing the exposure of syndicate members to the
credit risk of the syndicate manager during the pendency of account
[[Page 50897]]
settlements. FINRA also believes that the proposed rule change will
benefit syndicate members, including capital-constrained small firms,
by allowing them to obtain earlier access to the funds earned from an
offering without significantly increasing the risks of resettlements.
In addition, FINRA believes that the proposed staged approach will
provide these benefits to syndicate members while easing compliance for
syndicate managers by permitting them to retain 30 percent of the gross
amount earned by syndicate members to cover expenses and remit any
balance due to the syndicate members within the current 90-day period
following the syndicate settlement date.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice. The effective date will be January 1, 2023.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change promotes
just and equitable principles of trade and is in the public interest as
it will reduce the exposure of syndicate members to the potential
deterioration of the credit of syndicate managers during the pendency
of account settlement without negatively impacting the ability of
syndicate managers to run the syndicate settlement account process.
FINRA also believes that the proposed rule change promotes just and
equitable principles of trade because it will result in syndicate
managers more quickly remitting the majority of the gross amount earned
by syndicate members and will not be unduly burdensome on syndicate
managers given the technological advances that have been made since the
90-day syndicate account settlement timeframe was adopted in 1987.
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\12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the potential economic impacts of the proposed rule
change, including potential costs, benefits, and distributional and
competitive effects, relative to the current baseline.
Regulatory Need
FINRA Rule 11880 requires final settlement of syndicate accounts
within 90 days following the syndicate settlement date. As discussed
further below, FINRA understands that syndicate managers currently
could conduct partial settlements of syndicate accounts much more
quickly, at limited additional expense, to the benefit of syndicate
members. Longstanding industry practices, the number of parties in
selling syndicates and possibly greater efficiency in syndicate
settlement by syndicate managers that conduct more settlements may
limit the impact of competition and negotiation on final settlement
practices and timelines. FINRA also believes that modifying the current
syndicate settlement timeframe will benefit syndicate members,
including capital-constrained small firms, by allowing them to obtain
earlier access to the funds earned from an offering without
significantly increasing the risks of resettlements. FINRA is therefore
proposing a two-staged syndicate settlement framework to enable quicker
remittance of a significant portion of syndicate revenue to syndicate
members.
Economic Baseline
The economic baseline for the proposed rule change is current FINRA
Rule 11880, which allows 90 days for the final settlement of syndicate
accounts, industry practices for compliance and implementation of the
rule, and the competitive landscape.
FINRA conducted an analysis of the primary corporate debt market to
study the extent and scope of participation in corporate debt
syndicates by member firms using data from the Trade Reporting and
Compliance Engine (``TRACE''). From 2019 to 2021, FINRA estimates that
approximately 377 member firms, on average per year, participated in
syndicates for corporate debt offerings and could be affected by the
proposed rule change.\13\ Of these firms, 57 percent, 18 percent, and
25 percent are small, mid-size and large firms, respectively.\14\
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\13\ The extent of firm participation in the primary corporate
debt market was approximated using TRACE data. Issuers sell new
stocks and bonds in the primary market to the public, such as
through an initial public offering. The data is limited to the
primary market sellers for corporate debt, excluding offerings made
in compliance with Rule 144A of the Securities Act of 1933 (``144A
offerings'').
\14\ See 2022 FINRA Industry Snapshot, https://www.finra.org/sites/default/files/2022-03/2022-industry-snapshot.pdf. Small, mid-
size and large firms are defined as having 1-150, 151-499, and at
least 500 registered representatives, respectively. See Article I of
the FINRA By-Laws.
---------------------------------------------------------------------------
The 90-day period following the syndicate settlement date allows
the syndicate manager to record income and expenses incurred in
connection with the offering and then to distribute the net
underwriting revenue due to each syndicate member. Syndicate managers
tend to be large, well-capitalized firms.\15\ The syndicate manager
collects the underwriting revenue for the syndicate and pays expenses.
The other syndicate members, which often include smaller firms, are
paid their respective portion of the underwriting revenue, net of
expenses, from the syndicate managers by the final syndicate account
settlement date.
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\15\ See, e.g., Hendrik Bessembinder, Stacey E. Jacobsen,
William F. Maxwell & Kumar Venkataraman, Overallocation and
Secondary Market Outcomes in Corporate Bond Offerings (April 29,
2022), SMU Cox School of Business Research Paper No. 20-04,
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3611056. The authors developed a sample of
5,573 bond offerings that were issued between 2010 and 2018, based
upon primary allocation data collected through TRACE. They found
that only 10 firms were syndicate managers and that the most
frequent bookrunners (manager and co-managers) were large firms.
This finding is consistent with FINRA's findings from its outreach
efforts.
---------------------------------------------------------------------------
To assess the magnitude of the gross revenue from underwriting
public offerings of corporate debt, FINRA calculated that, on average
each year between 2019 and 2021, there were 41,756 U.S. dollar-
denominated corporate debt offerings (excluding 144A offerings) with an
average amount of $3.5 trillion raised (see Table 1). Investment grade
corporate debt offerings account for 49 percent of the total issued
amount, and high yield and non-rated corporate debt offerings account
for the remainder (see Table 1).\16\ A recent study estimates that the
average gross underwriting spread is 0.65 percent for investment grade
debt securities and 1.42 percent for high yield debt securities.\17\
Using these
[[Page 50898]]
estimates, FINRA estimates that the gross revenue from underwriting
public offerings of corporate debt (excluding 144A offerings) would be
at least $36 billion per year.\18\ Underwriting revenue, net of
expenses, is distributed to syndicate members.
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\16\ While members are required to report revenue from
underwriting on Financial and Operational Combined Uniform Single
(``FOCUS'') and Supplemental Statement of Income (``SSOI'') reports,
the data is in aggregate form and thus we are unable to determine
underwriting revenue for public offerings of corporate debt
securities.
\17\ The gross revenue from an underwriting is the difference
between the price the syndicate pays the issuer for the securities
and the initial price at which the syndicate sells the securities to
the public, also called the ``gross underwriting spread.'' The
spread generally accounts for management fees paid to lead
underwriters, underwriting fees and the sales credits paid to
syndicate members for selling the securities. As a rule, gross
revenue from a public offering is directly related to the size of
the offering.
\18\ Research using a sample of municipal bond offerings between
1997 and 2001 found that the absence of a rating increases
underwriting gross spreads by about 40 basis points after
controlling for bond rating and other characteristics. See Alexander
W. Butler, Distance Still Matters: Evidence from Municipal Bond
Underwriting, 21(2) Rev. Fin. Stud. 763-784 (March 2008), available
at https://www.jstor.org/stable/40056834?seq=1. Information on gross
spreads for unrated corporate bonds is harder to find. One study
found the default rate among unrated institutional loans issued by
U.S. publicly owned companies was comparable to that of rated high
yield loans. See Edward I. Altman, Sreedhar T. Bharath & Anthony
Saunders, Credit Ratings and the BIS Capital Adequacy Reform Agenda,
26(5) J. Bank. Fin. 909-921 (May 2002), available at https://www.sciencedirect.com/science/article/abs/pii/S0378426601002692.
These findings indicate that the gross spread for unrated corporate
bonds is likely somewhat greater than that for high yield corporate
bonds. Based on these assumptions, the gross underwriting revenue
from public offerings of corporate debt would be at least $36B (=
0.0065 * 1.71*10[caret]12 + 0.0142 *(0.21 + 1.56)*10[caret]12).
Table 1--TRACE-Eligible Corporate Bonds (Excluding 144A) Issued by Grade and Year
----------------------------------------------------------------------------------------------------------------
Total issued amount % of annual total
Number of offerings (trillion $) issued amounts
----------------------------------------------------------------------------------------------------------------
2019.......................................... 26,769 3.10 100.00%
Investment Grade.......................... 3,275 1.50 48.39
High Yield................................ 468 0.26 8.45
Non-rated................................. 23,026 1.34 43.15
2020.......................................... 43,334 4.22 100.00
Investment Grade.......................... 3,828 2.14 50.81
High Yield................................ 374 0.24 5.58
Non-rated................................. 39,132 1.84 43.61
2021.......................................... 55,164 3.12 100.00
Investment Grade.......................... 3,615 1.48 47.31
High Yield................................ 275 0.15 4.71
Non-rated................................. 51,274 1.50 47.98
Average 2019-2021............................. 41,756 3.48 100.00
Investment Grade.......................... 3,573 1.71 48.84
High Yield................................ 372 0.21 6.25
Non-rated................................. 37,811 1.56 44.92
----------------------------------------------------------------------------------------------------------------
Source: Bloomberg for TRACE-eligible Corporate Bonds.
Through its outreach efforts, FINRA has heard that the settlement
of syndicate accounts for corporate debt offerings is typically
conducted at the end of the 90-day window, rather than earlier in the
window, as permitted under the current rule. FINRA also has heard,
however, that syndicate income is often known much earlier, even by the
closing date of the offering. This information is consistent with
recent research findings that, in more than 95 percent of the debt
offerings from 2016 to 2018, the debt security is priced, allocated to
investors, and starts trading in the secondary market all within the
same day.\19\ Thus, a large part of syndicate income can be accounted
for within days after the date of issuance.\20\
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\19\ See Liying Wang, Lifting the Veil: The Price Formation of
Corporate Bond Offerings, 142(3) J. Fin. Econ. 1340-1358 (December
2021), available at https://www.sciencedirect.com/science/article/abs/pii/S0304405X2100307X.
\20\ FINRA understands that, in the absence of an overallotment
option, syndicate managers may over-allocate an offering to
stabilize secondary market prices--effectively creating a syndicate
short position. Profits or losses from these transactions are
considered part of a syndicate's revenues or expenses and depend on
secondary market price movements, which cannot be estimated before
the public offering. Research has found, however, that average
profit/loss from covering overallocations relative to corporate debt
underwriting revenue is very small, and most of the overallocations
are offset within a few days of the date of issuance. Bessembinder
et al. (2022) found that over 70 percent of the issues with
overallocations in their sample are offset within two days after
issuance and by day 15 about 80 percent of the issues have the
overallocation fully offset. See supra note 15. According to the
authors, the mean net position for covering overallotment short-
transactions and round-trip trades in the secondary market ranges
from a $240,967 loss per high-yield issue with a large
overallocation to a $161,578 gain per high-yield issue with a
smaller overallocation.
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Through its outreach efforts, FINRA understands that syndicate
expenses are also generally known within 90 days following the
syndicate settlement date. However, syndicate managers sometimes
receive invoices after 90 days. Certain expenses, such as legal fees
and covering overallotment short transactions, take time to realize and
are difficult to estimate as they might depend on another party or
market movements. Invoices received after the final settlement of
syndicate accounts result in resettlements. FINRA understands that
syndicate managers prefer to avoid this scenario as much as possible.
Data on the prevalence of resettlements after 90 days is unavailable,
but some public comments submitted in response to the Notice suggest
that they are infrequent.
Economic Impacts
Under the proposed rule change, syndicate members would receive 70
percent of the gross receivables due to them within 30 days following
the syndicate settlement date and any final balance due within 90 days.
The proposed rule change could impact firms of different sizes that
participate in corporate debt offerings in different ways, as explained
further below. The aggregate impact is less clear, as it depends upon
the extent of long-term competitive benefits and short-term cost
increases. If competition increases in the market for corporate debt
offerings in the long term, investors may also benefit from improved
pricing.
Anticipated Benefits
FINRA expects that the proposed rule change could reduce a number
of risks associated with syndicate debt issuance, including
counterparty and liquidity risk. Remitting revenues earned from the
offering to syndicate members more quickly would reduce counterparty
risk to syndicate members. The reduction in
[[Page 50899]]
counterparty risk would depend on the financial capacity of the
syndicate manager--where the syndicate manager is smaller or more
financially constrained, the reduction in counterparty risk will likely
be greater. In addition, a shorter syndicate settlement timeframe would
result in providing syndicate members with earlier access to capital
and improve the member's liquidity position where their own net capital
is limited. Members may therefore be exposed to lower liquidity risk.
The extent of this benefit would depend on the relative magnitude of
syndicate receivables to the firm's liquidity position and the strength
of the liquidity position itself.
FINRA expects that these potential benefits would be more
pronounced for firms with lower capital levels. For instance, firms
that do not have sufficient capital to engage in other business
activities due to the length of the current settlement period may reap
greater benefits from the proposed rule change. Syndicate members
exposed to higher counterparty default risk may also disproportionately
bear the risks associated with longer final settlement times. To the
extent that smaller firms tend to have lower capital levels, the
proposed rule change will benefit smaller firms by providing additional
capital to engage in other business activities and manage default risk.
The proposed rule change is expected to have positive effects on
competition and efficiency in the corporate debt underwriting market to
the extent that the anticipated syndicate receivables constrain a
firm's liquidity position. Alleviation of liquidity constraints would
create opportunities for the syndicate members to participate in new
offerings and enhance their ability to compete with other firms,
maintain business operations or use the funds for other purposes. This
may reduce barriers to entering the corporate debt underwriting market
and could ultimately result in an increase in the supply of
underwriters and lower costs for corporate debt issuers and investors.
Lowering costs to issuers and investors may increase the size and
frequency of new corporate debt offerings, benefiting all member firms
engaged in the underwriting process. However, the extent of this
potential gain in market competitiveness cannot be fully and accurately
estimated.
As the syndicate manager would be required to remit a large part of
the revenue to the syndicate members sooner, the proposed rule change
could lead to a transfer of some of the interest earned on the
syndicate's underwriting revenue--i.e., from the syndicate manager to
other syndicate members. The magnitude of such benefit is positively
correlated with the interest rate environment. Under the proposed rule
change, if part of the underwriting revenue is paid earlier, the
syndicate manager would forego the earned interest on the amount to be
distributed to syndicate members over the 60-day period--the difference
between the 90-day baseline and proposed 30-day timeframe for the first
payment of the underwriting revenue. Other syndicate members would have
the opportunity to earn that interest where they do not have a better
economic use for the capital.
Finally, FINRA does not expect the proposed rule change to increase
the frequency of resettlements. The maximum time to final syndicate
settlement under the proposed rule change, 90 days, is the same as
under the baseline, and nothing in the proposed rule change would make
it more difficult for parties to provide timely invoices of expenses
relative to the baseline.
Anticipated Costs
FINRA believes the proposed rule change may result in additional
one-time and ongoing direct costs to member firms that serve as
syndicate managers in public offerings of corporate debt. These firms
will need to adapt their internal policies and procedures as well as
their accounting, compliance, and supervision and management systems to
accommodate a two-stage syndicate account settlement cycle. Firms may
also adopt better technology and greater automation of accounting and
recordkeeping processes. Firms may also need to hire additional staff
depending on how settlement cycles on multiple offerings overlap. The
magnitude of such associated costs, specifically staff and related
human and technology resources, could increase as the volume and
frequency of offerings in which firms participate as syndicate managers
increases. Syndicate managers could absorb such costs or pass them on
to the syndicate members or the issuers.
FINRA believes that the adoption of MSRB Rule G-11 provides a
useful case study for understanding the potential costs of the proposed
rule change. Both commenters that supported and those more critical of
the FINRA rule proposal set forth in Regulatory Notice 21-40 discussed
comparisons between the offering process for municipal bonds versus
corporate bonds. Opponents argued that, because the process for
corporate bond offerings is more complex than that for municipal bonds,
experience with the 30-day settlement period for municipal bond
offerings is not directly relevant to corporate bond offerings.
However, when the MSRB Rule G-11 amendment was proposed to shorten the
deadline for municipal bond syndicate account settlement from 60 days
to 30 days, similar opposing arguments were raised. Specifically,
commenters noted uncertain expenses in complex issuances, the inability
to obtain counsel bills and invoices within 30 days, and the fact that
some bonds might take longer than 30 days to sell.\21\ The amendment to
MSRB Rule G-11 became effective in 2009 and market participants were
able to implement necessary changes to adapt to the new timeline. While
a transition in syndicate settlement timeframes involves costs, FINRA
believes that the long-term benefits of shortening the settlement
timeframe would outweigh the costs.
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\21\ See 74 FR 41771, supra note 10.
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Alternatives Considered
In developing the proposed rule change, FINRA considered
alternatives to the two-stage syndicate settlement approach.
Specifically, FINRA considered requiring syndicate accounts to be fully
settled within 30 days. FINRA also considered a 45-day settlement
period instead of 30 days. These alternatives could deliver some
benefits as well as carry some costs in comparison with the current
proposed rule change. FINRA believes that the proposed approach is
appropriate at this time because it balances the goals of reducing
exposure of syndicate members to the credit risk of the syndicate
manager during the pendency of account settlements and providing
syndicate members with earlier access to the funds earned from an
offering, with preserving the ability of syndicate managers to
effectively run the settlement process and thereby limit resettlements.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 21-40 (``Notice''). FINRA received 12 comment letters in
response to the Notice.\22\ A copy of the Notice is attached as Exhibit
2a. A list of the comment letters received in response to the Notice is
attached as Exhibit 2b. Copies of the comment letters received in
response to the Notice are attached as Exhibit 2c. Of the 12 comment
letters received, eight were in favor of the
[[Page 50900]]
proposal set forth in the Notice and four were opposed. In the Notice,
FINRA proposed to reduce the timeframe for the final settlement of
syndicate accounts in a public offering of corporate debt securities
from 90 days to 30 days following the syndicate settlement date. FINRA
has considered the comment letters received and engaged in further
discussions with a wide variety of industry members. As a result, FINRA
has revised the proposal to instead provide for a two-stage syndicate
account settlement process, as described above. The comments received
in response to the approach described in the Notice are summarized
below.
---------------------------------------------------------------------------
\22\ All references to commenters are to the comment letters as
listed in Exhibit 2b.
---------------------------------------------------------------------------
1. Reduction of Syndicate Settlement Timeframe to 30 Days
BDA supported the proposal to reduce the timeframe for the final
settlement of syndicate accounts in a public offering of corporate debt
securities from 90 days to 30 days, stating it would provide the
following economic benefits: (1) lessen the risk that a syndicate
manager could become insolvent before syndicate members receive
payment; (2) provide quicker access to the revenues earned from an
offering (and thereby lower barriers for broker-dealers to enter the
corporate debt underwriting market); and (3) reduce the amount of
interest lost by syndicate members while the funds are held in the
syndicate account.
BDA also expressed support by noting that various technological
advances that have emerged since 1987, such as electronic order entry
and accounting systems, facilitate faster syndicate settlements. BDA
further noted support for the proposal by stating that there are not
substantial differences between syndicate management and accounting for
municipal versus corporate debt offerings that would justify the 90-day
timeframe for corporates, including in the areas of multiple lead
managers, cross-border offerings, the complexity of the legal issues
involved, investor carve-out letters, and asset-backed securities. In
addition, BDA stated that overallotments (which effectively do not
exist in corporate bond transactions), travel expensing, and vendor
billing also present no impediments to a 30-day settlement timeframe.
Castle Oak, InspereX, Loop Capital, SWS, and R. Seelaus supported
the proposal, stating it would provide the following economic benefits:
(1) lessen the risk that a syndicate manager could become insolvent
before the payment of deal revenue to syndicate members; (2) provide
quicker access to the revenues earned from an offering, which would
allow syndicate members to conduct more business, including additional
new-issue underwritings and secondary market trading; and (3) reduce
the amount of interest lost by syndicate members while the funds are
held in the syndicate account. ASA also supported the proposal, stating
that it would provide syndicate members quicker access to the revenues
earned from an offering. These commenters, except for Loop Capital,
also supported the proposal by noting that there have been significant
technological and logistical improvements in the past 35 years that
have made the process of settling syndicate accounts cheaper and
faster. Loop Capital noted support for the proposal by stating that,
based on its experience, shortening the settlement period to 30 days
would not present substantive challenges to firms that serve as
syndicate managers.
On the other hand, Mizuho opposed the proposal described in the
Notice, expressing concern regarding the feasibility of a syndicate
manager receiving, reviewing, and approving all expenses within a 30-
day window. Mizuho also stated that a 30-day account settlement
timeframe would take firms some time to implement and would result in a
loss of revenue for firms if done too soon.
Cleary also opposed the proposal, stating that the reduction of the
syndicate account settlement period to 30 days would require syndicate
managers to hire and train a significant number of additional employees
to complete the settlement process within this shortened timeframe.\23\
Cleary noted that these additional costs would be passed on to the
syndicate, which would reduce the net earnings of syndicate members.
Cleary also opposed the proposal because a reduction of the settlement
period would result in more frequent resettlements, which is a
burdensome process. In addition, Cleary argued that the technological
advances that have enabled a 30-day settlement process for municipal
debt offerings cannot be expected to expedite, to the same degree, the
settlement process for corporate debt offerings. In this regard, Cleary
stated that the syndicate settlement process for corporate debt
offerings is more complex and involves more manual inputs, many of
which are beyond the control of syndicate managers, than the settlement
process for municipal debt offerings.
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\23\ Cleary submitted its comment letter on behalf of BofA
Securities, Inc., Barclays Capital Inc., Citigroup Global Markets
Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities
Inc., Goldman Sachs & Co. LLC, Jefferies LLC, J.P. Morgan Securities
LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS
Securities LLC, and Wells Fargo Securities, LLC.
---------------------------------------------------------------------------
Cleary also opposed the proposal by asserting that there are a
number of important differences between the settlement mechanics of
corporate versus municipal debt offerings that make corporate debt
offerings not amenable to a 30-day settlement period. According to
Cleary, these differences include: (1) corporate bond offerings
generally involve multiple lead managers; (2) syndicates in corporate
debt offerings routinely engage in aftermarket support; (3) expenses in
corporate debt offerings are not known up front; (4) corporate bonds
are offered outside the United States; (5) corporate bond offerings do
not have fixed legal fees; and (6) delivery of investor carve-out
letters occurs after closing in corporate bond offerings.
2. Alternatives to a 30-Day Syndicate Account Settlement Requirement
Commenters discussed several potential alternatives to reducing the
syndicate account settlement timeframe to 30 days.\24\ As discussed
above, one potential alternative was a two-stage approach, whereby the
syndicate manager would be required to remit a specified percentage of
the syndicate proceeds to syndicate members within 30 days and would be
permitted to retain a portion to cover expenses for an additional
period of time. Mizuho expressed support for revising the syndicate
account settlement timeframe by either implementing a two-stage--50/
50--syndicate account settlement approach or by shortening the
syndicate settlement timeframe in incremental steps rather than a
sudden reduction to 30 days. Cleary also supported implementing a two-
stage--50/50--syndicate account settlement approach, stating that it
would more quickly provide to syndicate members the revenues earned
from an offering and also allow syndicate managers to retain a
sufficient amount of syndicate funds to effect timely and accurate
settlements.
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\24\ BDA, Cleary, Mizuho, SIFMA.
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SIFMA supported a two-stage--70/30--syndicate account settlement
approach for corporate debt offerings because it provides for payment
within 30 days of a very large percentage of the net compensation
ultimately payable to syndicate members and preserves the ability of
syndicate managers to effectively manage the settlement process. SIFMA
stated that it had received input on this alternative from broker-
dealers that frequently act as syndicate managers as well as other
[[Page 50901]]
broker-dealers that routinely act as syndicate members, and that all of
these constituencies fully support this alternative.
While BDA initially opposed a two-stage syndicate account
settlement approach as an alternative to the proposal, BDA subsequently
expressed support for a two-stage--70/30--syndicate account settlement
approach, stating that it was a more practical way to shorten the time
to provide compensation to syndicate members.\25\ According to BDA, the
70/30 approach would strike an appropriate balance between ensuring
that syndicate members have ready access to their funds and minimizing
the number of resettlements. In addition, BDA asserted that this
approach would benefit investors by encouraging broader syndicate
membership and making new-issue corporate bonds available to customers
of a wider group of broker-dealers.
---------------------------------------------------------------------------
\25\ BDA submitted three comment letters in response to the
Notice.
---------------------------------------------------------------------------
FINRA has modified the approach that was described in the Notice to
instead adopt a two-stage--70/30--syndicate account settlement
approach. FINRA believes that the proposed two-stage--70/30--approach
is preferable to a two-stage 50/50 approach because it provides for a
larger up-front payment with a smaller reserve amount and should not
significantly increase the number of resettlements.
In response to a question posed in the Notice regarding the use of
sole recourse loans as an alternative means of addressing concerns
regarding the length of the syndicate account settlement timeframe, BDA
stated that such loans are not a feasible alternative to shortening the
syndicate account settlement timeframe because such a borrowing option
does not exist generally, the lender would charge interest and thereby
require a syndicate member to incur a liability for access to its own
capital, and this alternative does not address the interest lost by
syndicate members while their funds are held in the syndicate account.
Cleary also opposed sole recourse loans as an alternative to address
the length of the syndicate account settlement period. In this regard,
Cleary stated that a syndicate manager will not know the amount
required for a sole recourse loan because the syndicate manager will
not know the net amount ultimately to be paid to each syndicate member
and, as a result, syndicate managers will not know whether the
receivable adequately secures any such loan. Cleary commented that
syndicate managers also need to treat unsecured and partly-secured
receivables as unallowable assets, and this approach therefore would
cause uncertainty with regard to net capital for syndicate managers.
In light of the comments received and further discussions regarding
the current syndicate account settlement framework, FINRA has
determined to modify the approach that was described in the Notice and
amend FINRA Rule 11880 as described above. In this regard, FINRA
believes that the proposed amendments to FINRA Rule 11880 most directly
and fairly balance the goals of reducing exposure of syndicate members
to the credit risk of the syndicate manager during the pendency of
account settlements and providing syndicate members with earlier access
to the funds earned from an offering with preserving the ability of
syndicate managers to effectively run the settlement process and
thereby limit resettlements. After gaining experience with the two-
stage--70/30--syndicate account settlement approach, FINRA will
consider whether to reduce the 90-day time period for final settlement
to align with the MSRB timeframe.
3. Definition of Corporate Debt Security
In the Notice, FINRA proposed defining a ``corporate debt
security'' as a type of ``TRACE-Eligible Security'' that is U.S.
dollar-denominated and issued by a U.S. or foreign private issuer. BDA
and Loop Capital expressed support for the definition of ``corporate
debt security'' proposed in the Notice by stating that it generally
captures the universe of corporate bonds for which a move to a 30-day
settlement timeframe would be easily achievable. Mizuho similarly
expressed support for the definition of ``corporate debt security''
proposed in the Notice. BDA and Loop Capital specifically suggested
that the definition should include securitized products as defined in
FINRA Rule 6710(m), because the process for managing the syndicate
account, paying vendors, and releasing deal revenue to comanagers is
virtually the same for both corporate bonds and publicly offered
securitized products.
However, Cleary opposed including asset-backed securities in the
definition and stated that those securities are often composed of
multiple tranches, and offerings of these securities often navigate
novel, multi-jurisdictional legal issues. FINRA has determined that it
is appropriate that the proposed modifications to the syndicate account
settlement process also apply to public offerings of corporate debt
securities that are securitized products. Therefore, the proposed
definition of ``corporate debt security'' in Rule 11880 would include
securitized products.
4. Public Offerings of Equity Securities
In response to a question posed in the Notice regarding whether the
period permitted for the final settlement of syndicate accounts for
public offerings of corporate equity securities should be shortened,
Cleary stated that the time period should not be less than 90 days
because equity offerings are likely to be more complicated than debt
offerings, including requiring more diligence and marketing. Mizuho
also opposed reducing the timeframe for settling equity syndicate
accounts from 90 days to 30 days. However, Loop Capital argued that the
time period for settling equity syndicate accounts should be reduced
from 90 days and supported the adoption of a two-stage approach for
such offerings. FINRA has determined at this time not to propose an
amendment to reduce the syndicate account settlement timeframe for
equity offerings.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days of such
date (i) as the Commission may designate if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, the Commission
will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2022-025 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
[[Page 50902]]
All submissions should refer to File Number SR-FINRA-2022-025. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2022-025 and should be submitted
on or before September 8, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17745 Filed 8-17-22; 8:45 am]
BILLING CODE 8011-01-P
