[Federal Register Volume 76, Number 54 (Monday, March 21, 2011)]
[Notices]
[Pages 15352-15357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6567]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64084; File No. SR-FINRA-2011-012]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
TRACE Reporting of Asset-Backed Securities
March 16, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'')\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 3, 2011, the Financial Industry
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been 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 the FINRA Rule 6700 Series and FINRA
Rule 7730:
(1) In FINRA Rule 6710, to incorporate minor amendments to clarify,
simplify or conform the defined terms, ``TRACE-Eligible Security,''
``Reportable TRACE Transaction,'' ``Agency Debt Security,'' ``Asset-
Backed Security'' and ``TRACE System Hours''; to add a defined term,
``Securitizer''; and, to delete the defined terms ``Sponsor'' and
``Issuing Entity'';
(2) In FINRA Rule 6730, (A) to revise, renumber and conform the
text of parallel reporting provisions in FINRA Rule 6730(a); (B) to
incorporate minor amendments regarding the duration and expiration of
the pilot program (``Pilot Program'') for reporting Asset-Backed
Securities transactions; (C) to consolidate reporting requirements for
Asset-Backed Securities transactions that are executed other than
during TRACE System Hours; (D) to simplify how settlement is reported
for Asset-Backed Securities transactions; (E) to add alternative
reporting requirements for Asset-Backed Securities transactions that
are collateralized mortgage obligation (``CMO'') or real estate
mortgage investment conduit (``REMIC'') transactions that occur prior
to the issuance of the CMO or REMIC (``pre-issuance CMOs/REMICs''); and
(F) to incorporate other minor technical, conforming or clarifying
amendments to the Rule;
(3) In FINRA Rule 6760, to incorporate requirements that apply to
Securitizers of Asset-Backed Securities, alternative notification
requirements for pre-issuance CMOs/REMICs and minor technical,
conforming or clarifying changes; and
(4) In FINRA Rule 7730, to add the Financial Information eXchange
(``FIX'') as a method to report transactions to TRACE, establish a
system-related FIX fee, and incorporate a minor technical amendment.
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA, on the
Commission's Web site at http://www.sec.gov, and at the Commission's
Public Reference Room.
The proposed amendments set forth in Exhibit 5 are shown as changes
to the FINRA Rule 6700 Series and FINRA Rule 7730 as amended by SR-
FINRA-2009-065 (``TRACE ABS filing''), which was approved by the SEC on
February 22, 2010.\3\ The TRACE ABS filing is anticipated to become
effective on May 16, 2011.\4\ The proposed rule change
[[Page 15353]]
amends or supplements the TRACE reporting and other requirements that
will apply to Asset-Backed Securities transactions, with certain
exceptions regarding minor conforming and other technical proposed
amendments.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 61566 (February 22,
2010), 75 FR 9262 (March 1, 2010) (Order Approving File No. SR-
FINRA-2009-065) (``TRACE ABS filing'') and Regulatory Notice 10-23
(April 2010).
\4\ See Securities Exchange Act Release No. 63223 (November 1,
2010), 75 FR 68654 (November 8, 2010) (Notice of Filing and
Immediate Effectiveness of SR-FINRA-2010-054 to Extend the
Implementation Period for SR-FINRA-2009-065); Regulatory Notice 10-
55 (October 2010) (establishing May 16, 2011 as the effective date).
---------------------------------------------------------------------------
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
On February 22, 2010, the SEC approved the TRACE ABS filing, which
amends the FINRA Rule 6700 Series to define Asset-Backed Securities as
TRACE-Eligible Securities and to require members to report transactions
in such securities to TRACE, and, concomitantly, FINRA Rule 7730, to
establish reporting fees for transactions in such securities. The rule
amendments in the TRACE ABS filing currently are anticipated to become
effective on May 16, 2011.\5\ In the proposed rule change, FINRA
proposes additional amendments to the FINRA Rule 6700 Series and FINRA
Rule 7730 to prepare for the reporting of Asset-Backed Securities
transactions to TRACE.
---------------------------------------------------------------------------
\5\ See supra note 4.
---------------------------------------------------------------------------
As discussed in greater detail below, in FINRA Rule 6710, FINRA
proposes minor amendments to five defined terms, an additional defined
term, ``Securitizer,'' and the deletion of two defined terms that are
no longer necessary. In FINRA Rule 6730, FINRA proposes to: (A) Revise,
renumber and conform the text of parallel reporting provisions in FINRA
Rule 6730(a); (B) incorporate minor amendments regarding the duration
and expiration of the Pilot Program for reporting Asset-Backed
Securities transactions; (C) consolidate reporting requirements for
transactions in Asset-Backed Securities that are executed other than
during TRACE System Hours; (D) simplify how settlement is reported for
Asset-Backed Securities transactions; and (E) add alternative reporting
requirements for Asset-Backed Securities transactions that are pre-
issuance CMO/REMIC transactions. FINRA also proposes to add new FINRA
Rule 6730(a)(6) to clarify a member's obligation to provide information
to FINRA Operations regarding a TRACE-Eligible Security when such
security is not in the TRACE system, and to incorporate other minor
technical or clarifying amendments to FINRA Rule 6730. In FINRA Rule
6760, FINRA proposes to incorporate requirements that apply to
Securitizers of Asset-Backed Securities, alternative notification
requirements for pre-issuance CMOs/REMICs, and minor technical,
conforming or clarifying changes, and in FINRA Rule 7730, to add FIX as
a method to report transactions to TRACE, establish a system-related
fee for transactions reported to TRACE via FIX and make a technical
amendment.
FINRA Rule 6710
FINRA proposes minor amendments to five defined terms in FINRA Rule
6710, a new defined term, and the deletion of two defined terms that
are no longer necessary, as set forth below.
TRACE-Eligible Security. FINRA proposes minor technical amendments
to the defined term ``TRACE-Eligible Security'' in FINRA Rule 6710(a),
such as deleting unnecessary numbering.
Asset-Backed Security. FINRA proposes to amend the defined term
``Asset-Backed Security'' in FINRA Rule 6710(m) to incorporate, in
pertinent part, Section 3(a)(77) of the Act,\6\ a definition of asset-
backed security added to the Act as part of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'').\7\ As
amended, FINRA Rule 6710(m) would provide:
\6\ 15 U.S.C. 78c(a)(77).
\7\ Public Law 111-203, 124 Stat. 1376 (2010). ``Asset-Backed
Security'' was added to the Act under Section 941(a) of Title IX of
the Dodd-Frank Act. Under Section 3(a)(77)(A) of the Act, the term
asset-backed security:
Means a fixed-income or other security collateralized by any
type of self-liquidating financial asset (including a loan, a lease,
a mortgage, or a secured or unsecured receivable) that allows the
holder of the security to receive payments that depend primarily on
cash flow from the asset, including--
(i) A collateralized mortgage obligation;
(ii) A collateralized debt obligation;
(iii) A collateralized bond obligation;
(iv) A collateralized debt obligation of asset-backed
securities;
(v) A collateralized debt obligation of collateralized debt
obligations; and
(vi) A security that the Commission, by rule, determines to be
an asset-backed security for purposes of this section; and * * *
The definition of ``asset-backed security'' in Section 3(a)(77)
of the Act (15 U.S.C. 78c(a)(77)) ``is broader than the definition
of `asset-backed security' in Regulation AB and includes securities
typically offered and sold in private transactions.'' See Securities
Act Release No. 9150 (October 13, 2010), 75 FR 64182, 64183 (October
19, 2010) (File No. S7-26-10: Issuer Review of Assets in Offerings
of Asset-Backed Securities); and SEC Regulation AB, Item 1101(c) (17
CFR 229.1101(c)).
``Asset-Backed Security'' means a security collateralized by any
type of financial asset, such as a loan, a lease, a mortgage, or a
secured or unsecured receivable, and includes but is not limited to
an asset-backed security as defined in Section 3(a)(77)(A) of the
Exchange Act, a synthetic asset-backed security and any residual
tranche or interest of any security specified above, which tranche
or interest is a debt security for purposes of Rule 6710(a) and the
---------------------------------------------------------------------------
Rule 6700 Series.
The proposed amendment to the term ``Asset-Backed Security'' clarifies,
but does not broaden, the term.
Securitizer. The Dodd-Frank Act also added a definition of
``securitizer'' in Section 15G(a)(3) of the Act,\8\ which FINRA
proposes to incorporate in FINRA Rule 6710 as paragraph (s). In FINRA
Rule 6710(s), ``Securitizer'' would have the same meaning it has in
Section 15G(a)(3) of the Act.\9\
---------------------------------------------------------------------------
\8\ Section 941(b) of Title IX of the Dodd-Frank Act added the
definition of ``securitizer'' to the Act as Section 15G(a)(3) (15
U.S.C. 78o-11(a)(3)).
\9\ 15 U.S.C. 78o-11(a)(3). Section 15G(a)(3) of the Act
provides that a securitizer is ``(A) an issuer of an asset-backed
security; or (B) a person who organizes and initiates an asset-
backed securities transaction by selling or transferring assets,
either directly or indirectly, including through an affiliate, to
the issuer; and * * * ''
---------------------------------------------------------------------------
Reportable TRACE Transaction; Agency Debt Security. FINRA proposes
to use the term ``Securitizer,'' which is broad and includes sponsors
and issuers, among others,\10\ in lieu of the defined terms ``Sponsor''
and ``Issuing Entity,'' in ``Reportable TRACE Transaction'' in FINRA
Rule 6710(c) and ``Agency Debt Security'' in FINRA Rule
[[Page 15354]]
6710(l), and any other provisions in the FINRA Rule 6700 Series where
Sponsor and/or Issuing Entity were used.\11\
---------------------------------------------------------------------------
\10\ The Commission has stated that ``[W]ith respect to
registered transactions and the definitions of transaction parties
in Regulation AB, sponsors and depositors both fall within the
statutory definition of securitizer.'' Securities Exchange Act
Release No. 63029 (October 4, 2010), 75 FR 62718, 62720 (October 13,
2010) (File No. S7-24-10: Disclosure for Asset-Backed Securities
Required by Section 943 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act: Proposed Rule). In addition, the term
``securitizer'' ``is not specifically limited to entities that
undertake transactions that are registered under the Securities Act
or conducted in reliance upon any particular exemption.
Consequently, * * * [securitizer] is intended to apply to any entity
or person that issues or organizes an * * * [asset-backed security]
as specified in Section 15G(a)(3) of the Exchange Act.'' Id. The SEC
noted that entities included in the definition of securitizer
included Government-Sponsored Enterprises (GSEs) such as Fannie Mae,
Freddie Mac, and municipal entities. Id.
\11\ In FINRA Rule 6710(c) and FINRA Rule 6710(l), FINRA
substitutes the single term, ``Securitizer'' for ``Sponsor'' and
``Issuing Entity.'' See also minor proposed amendments to Rule 6760,
discussed infra.
---------------------------------------------------------------------------
TRACE System Hours. FINRA proposes to conform the time referenced
in the defined term ``TRACE System Hours'' to times stated in the FINRA
Rule 6700 Series generally (to include seconds) and also to relocate
the defined term from FINRA Rule 6710(bb) to FINRA Rule 6710(t). FINRA
Rule 6710(bb) would be deleted.
Sponsor; Issuing Entity. FINRA proposes to delete the defined terms
``Sponsor'' in FINRA Rule 6710(s) and ``Issuing Entity'' in FINRA Rule
6710(t), which are no longer necessary with the inclusion of the
defined term Securitizer.
FINRA Rule 6730
As noted above, FINRA proposes certain amendments to FINRA Rule
6730 regarding the reporting of Asset-Backed Securities transactions to
TRACE, and certain technical amendments, including restructuring and
renumbering FINRA Rule 6730(a) and FINRA Rule 6730(a)(1) through
(a)(8), to align parallel or similar reporting provisions. The proposed
restructuring also includes minor technical amendments to conform the
text of parallel or similar reporting provisions.\12\
---------------------------------------------------------------------------
\12\ As TRACE has expanded, FINRA Rule 6730 has been amended
several times to incorporate additional reporting requirements.
Before March 1, 2010, all TRACE-Eligible Securities transactions
were subject to a single reporting standard (and three exceptions
relating to transactions executed when the TRACE System was not
open) (see FINRA Rule 6730(a)(1) and FINRA Rule 6730(a)(2) through
(a)(4)). On March 1, 2010, a second set of requirements for
reporting List or Fixed Offering Price Transactions and Takedown
Transactions became effective (T+1 reporting requirement for most
transactions) (see FINRA Rule 6730(a)(5)). See Securities Exchange
Act Release No. 60726 (September 28, 2009), 74 FR 50991(October 2,
2009) (Order Approving File No. SR-FINRA-2009-010). See also
Regulatory Notice 09-57 (September 2009).
---------------------------------------------------------------------------
FINRA Rule 6730(a); Proposed Renumbered FINRA Rule 6730(a)(1):
Generally Applicable Reporting Requirements. FINRA Rule 6730(a)
provides that TRACE-Eligible Securities transactions must be reported
within 15 minutes. FINRA Rule 6730(a)(1) through (3) set forth
reporting requirements for transactions executed, respectively, on a
business day during, after, and before TRACE System Hours, and FINRA
Rule 6730(a)(4) states such requirements for transactions executed on a
weekend or a holiday.
To restructure FINRA Rule 6730(a) to align parallel or similar
reporting provisions, FINRA first proposes minor technical amendments
to FINRA Rule 6730(a),\13\ and to reorganize the reporting requirements
of general applicability (i.e., applicable to corporate debt and Agency
Debt Securities)\14\ that are set forth in FINRA Rule 6730(a)(1)
through (a)(4). Amended FINRA Rule 6730(a)(1) would be titled,
``Reporting Requirements'' and provide: ``Except as otherwise
specifically provided in paragraph (a)(2) and paragraph (a)(3),
transactions in TRACE-Eligible Securities must be reported as provided
in this paragraph (a)(1).'' FINRA Rule 6730(a)(1) through FINRA Rule
6730(a)(4) would be renumbered as subparagraphs of FINRA Rule
6730(a)(1) and include minor technical and conforming amendments to
conform the rule text to similar or parallel provisions in FINRA Rule
6730(a).\15\
---------------------------------------------------------------------------
\13\ The current general requirements set forth in FINRA Rule
6730(a)--requiring all Parties to a Transaction to report the
transaction and for reports to be made within 15 minutes of the Time
of Execution (except as otherwise provided)--would be retained.
FINRA proposes to delete the statement that, ``Specific trade
reporting obligations during a 24-hour cycle are set forth below.''
\14\ The reporting requirements in proposed renumbered FINRA
Rule 6730(a)(1) and subparagraphs (A) through (D) also would apply
to primary market transactions that do not qualify for T + 1
reporting, consistent with current FINRA Rule 6730(a)(1) through
(4).
\15\ FINRA Rule 6730(a)(1)-(4) would be renumbered as Rule
6730(a)(1)(A)-(D), respectively.
---------------------------------------------------------------------------
Proposed Renumbered FINRA Rule 6730(a)(2)--List or Fixed Offering
Price Transactions and Takedown Transactions. FINRA Rule 6730(a)(5),
containing reporting requirements for List or Fixed Offering Price
Transactions and Takedown Transactions, would be renumbered as FINRA
Rule 6730(a)(2), and titled ``Reporting Requirements--List or Fixed
Offering Price Transactions and Takedown Transactions.'' FINRA also
proposes minor technical and conforming amendments to conform the rule
text to similar or parallel provisions in FINRA Rule 6730(a).\16\
---------------------------------------------------------------------------
\16\ The rule text would be set forth in two subparagraphs,
proposed FINRA Rule 6730(a)(2)(A) and proposed FINRA Rule
6730(a)(2)(B).
---------------------------------------------------------------------------
Proposed Renumbered FINRA Rule 6730(a)(3)--Asset-Backed Securities.
FINRA Rule 6730(a)(6), containing reporting requirements for Asset-
Backed Securities, would be renumbered as proposed FINRA Rule
6730(a)(3), and titled ``Reporting Requirements--Asset-Backed
Securities Transactions.'' \17\ FINRA also proposes minor technical and
conforming amendments to conform the rule text of renumbered FINRA Rule
6730(a)(3) to similar or parallel provisions in FINRA Rule 6730(a).
Finally, current FINRA Rule 6730(a)(7) and current FINRA Rule
6730(a)(8) would be renumbered, respectively, as FINRA Rule 6740(a)(4)
and FINRA Rule 6730(a)(5).
---------------------------------------------------------------------------
\17\ FINRA Rule 6730(a)(6) would be renumbered as follows: FINRA
Rule 6730(a)(6)(A)(i) would be renumbered as FINRA Rule
6730(a)(3)(A)(ii); FINRA Rule 6730(a)(6)(A)(ii) (the Pilot Program)
would be renumbered as FINRA Rule 6730(a)(3)(A)(i); and FINRA Rule
6730(a)(6)(B) and FINRA Rule 6730(a)(6)(B)(i)-(ii) would be
renumbered as FINRA Rule 6730(a)(3)(B) and FINRA Rule
6730(a)(3)(B)(i)-(ii), respectively. As discussed infra, FINRA
proposes to consolidate FINRA Rule 6730(a)(6)(B)(ii) and FINRA Rule
6730(a)(6)(B)(iii) in renumbered FINRA Rule 6730(a)(3)(B)(ii), and
delete FINRA Rule 6730(a)(6)(B)(iii).
---------------------------------------------------------------------------
Pilot Program. FINRA Rule 6730(a)(6)(A)(ii) (proposed renumbered
FINRA Rule 6730(a)(3)(A)(i)) provides for a six-month Pilot Program for
reporting transactions in Asset-Backed Securities, which extends the
period for a member to timely report such transactions to no later than
the next business day (T + 1) at any time during TRACE System
Hours.\18\ The Pilot Program provides additional time for members to
prepare and submit accurate transaction reports for Asset-Backed
Securities on a temporary basis.
---------------------------------------------------------------------------
\18\ After the Pilot Program expires, transactions in Asset-
Backed Securities must be reported on the date of trade during TRACE
System Hours, with certain exceptions. See FINRA Rule
6730(a)(6)(A)(i) (proposed renumbered FINRA Rule 6730(a)(3)(A)(ii)).
---------------------------------------------------------------------------
FINRA proposes a technical amendment to the Pilot Program (proposed
renumbered FINRA Rule 6730(a)(3)(A)(i)) providing that the Pilot
Program shall expire 180 days (instead of six months) following the
commencement of the reporting of Asset-Backed Securities transactions,
provided that if the 180th day is not a Friday, the Pilot Program will
expire on the Friday next occurring (that the TRACE system is open)
after the 180th day. FINRA proposes that the Pilot Program expire on a
Friday in response to comments requesting that members and vendors be
given additional time to incorporate the system changes that must be
implemented at the termination of the Pilot Program.\19\
---------------------------------------------------------------------------
\19\ As discussed infra, the Pilot Program is also incorporated
in the proposed reporting requirements applicable to transactions in
pre-issuance CMOs/REMICs (see proposed FINRA Rule 6730(a)(3)(C)).
The expiration of the Pilot Program will also necessitate
modifications of systems and procedures in place to report such
transactions.
---------------------------------------------------------------------------
Asset-Backed Securities Transactions Executed on Non-Business Day.
Currently, trades that are executed on a weekend, holiday or other day
when the TRACE system is closed must be reported the next business day
(T + 1), designated ``as/of,'' and are subject to two unique
requirements. First, the date
[[Page 15355]]
of execution reported to TRACE is not the actual date of execution;
instead, a member reports the date of execution as the same day (T + 1)
that the report must be timely submitted. In addition, the execution
time reported must be ``12:01:00 a.m. Eastern Time'' (``00:01:00''),
instead of the actual Time of Execution.\20\ These adaptations were
incorporated when TRACE began because the TRACE system does not
recognize any day on which the TRACE system is closed as a valid date
of execution, and the two unique requirements permit FINRA to
distinguish such non-business day transactions from all other reported
transactions.\21\
---------------------------------------------------------------------------
\20\ Also, when the reporting method used includes a ``special
price memo'' field, the member must enter the actual date of
execution and Time of Execution in the field.
\21\ See, e.g., FINRA Rule 6730(a)(4) (proposed renumbered FINRA
Rule 6730(a)(1)(D)), FINRA Rule 6730(a)(5) (proposed renumbered
FINRA Rule 6730(a)(2)(B)), and FINRA Rule 6730(a)(6)(B)(iii).
---------------------------------------------------------------------------
FINRA has improved the TRACE system, which, for transactions in
Asset-Backed Securities, will recognize any calendar day, including
days on which the TRACE system is not open, as a valid date of
execution. Accordingly, FINRA proposes to streamline FINRA Rule
6730(a)(6) (proposed renumbered FINRA Rule 6730(a)(3)) regarding Asset-
Backed Securities Transactions, combining the requirements of FINRA
Rule 6730(a)(6)(B)(ii) and FINRA Rule 6730(a)(6)(B)(iii) in proposed
renumbered FINRA Rule 6730(a)(3)(B)(ii) because, with this system
enhancement, the standards for reporting under both provisions are the
same, and separate provisions are no longer necessary.\22\ FINRA Rule
6730(a)(6)(B)(iii) would be deleted.
---------------------------------------------------------------------------
\22\ Proposed renumbered FINRA Rule 6730(a)(3)(B)(ii) would
provide that any transaction in an Asset-Backed Security that is
executed on a Saturday, Sunday, a Federal or religious holiday or
other day on which the TRACE system is not open, or executed on a
business day at or after 6:30:00 p.m. Eastern Time through 11:59:59
p.m. Eastern Time must be reported not later than the next business
day during TRACE System Hours, designated ``as/of'' and include the
date of execution.
---------------------------------------------------------------------------
Settlement. FINRA Rule 6730(d)(4)(B)(ii) currently requires a
member to report two items regarding the terms of settlement of an
Asset-Backed Securities transaction: (1) The actual date of settlement;
and (2) an indicator that the transaction will settle ``regular way''
(i.e., T + 3 or in conformity with the uniform practices established as
``good delivery'' for the specific Asset-Backed Security), or one
indicating that the transaction will not be settled ``regular way.''
FINRA proposes to retain the requirement to report the actual date
of settlement and delete the requirement to report the indicator, which
will simplify the reporting of settlement in connection with Asset-
Backed Securities transactions.
Pre-Issuance CMO/REMIC Transactions. FINRA proposes to supplement
the rules requiring members to report Asset-Backed Securities in FINRA
Rule 6730(a)(6) (proposed renumbered FINRA Rule 6730(a)(3)) to include
alternative reporting requirements for pre-issuance CMO/REMIC
transactions. Proposed FINRA Rule 6730(a)(3)(C)(i) provides that a pre-
issuance CMO/REMIC transaction must be reported, during the Pilot
Program, the earlier of: (i) the business day following the business
day that the security is assigned a CUSIP, a similar numeric identifier
or a FINRA symbol during TRACE System Hours, or (ii) the business day
following the date of issuance of the security during TRACE System
Hours. As provided in proposed FINRA Rule 6730(a)(3)(C)(ii), after the
Pilot Program expires, such pre-issuance CMO/REMIC transactions must be
reported the earlier of (i) the business day that the security is
assigned a CUSIP, a similar numeric identifier or a FINRA symbol during
TRACE System Hours (unless such identifier is assigned after 1:00:00
p.m. Eastern Time, and in such case, such transactions must be reported
no later than the next business day during TRACE System Hours), or (ii)
the date of issuance of the security during TRACE System Hours.\23\
---------------------------------------------------------------------------
\23\ Under proposed FINRA Rule 6730(a)(3)(C)(i) and proposed
FINRA Rule 6730(a)(3)(C)(ii), any transaction that is reported other
than on the date of execution must be designated ``as/of'' and
include the date of execution.
---------------------------------------------------------------------------
The alternative reporting requirements in proposed FINRA Rule
6730(a)(3)(C) differ from current TRACE reporting requirements and
those that will apply generally to Asset-Backed Securities transactions
in that, for pre-issuance CMO/REMIC transactions, the reporting period
begins (or is triggered) on the date of issuance of the security (or,
if earlier, the date the security is assigned an appropriate
identifier), instead of the date and time of the member's execution of
the transaction. FINRA proposes this alternative approach because
although pre-issuance CMO/REMIC transactions occur frequently, in many
cases, a CUSIP or other identifier is not yet assigned or is difficult
to assign (or cannot be assigned), because certain aspects of the
collateral and structure of the CMO or REMIC are not finalized at the
time of such transactions, and will not be finalized until shortly
before the CMO or REMIC is actually issued. CMO and REMIC transactions
that are not pre-issuance CMO/REMIC transactions--i.e., those executed
on or after the date of issuance of the security--must be reported in
compliance with FINRA Rule 6730(a)(6)(A) and (B) (proposed renumbered
FINRA Rules 6730(a)(3)(A) and (B)) and may not be reported under the
alternative reporting provisions (proposed FINRA Rule 6730(a)(3)(C)(i)
and proposed FINRA Rule 6730(a)(3)(C)(ii)).
Other FINRA Rule 6730 Amendments. FINRA proposes to amend FINRA
Rule 6730 to state explicitly in new paragraph (a)(6) that when a
member is a Party to a Transaction and makes a good faith determination
that a transaction involves a TRACE-Eligible Security, if the TRACE-
Eligible Security is not entered in the TRACE system, the member must
promptly provide FINRA Operations the information required under FINRA
Rule 6760(b) and thereafter report. The proposed amendment will
incorporate in FINRA Rule 6730(a)(6) previous guidance regarding
members' obligations to take all the steps necessary to report a
transaction to TRACE, including providing notification to FINRA
Operations when circumstances so require.
FINRA also proposes minor technical amendments to FINRA Rule
6730(a) regarding reporting transactions executed on weekends, Federal
or religious holidays, or other days on which the TRACE system does not
operate. FINRA Rule 6730(a) provisions would be amended to refer to
transactions executed on ``a Saturday, a Sunday, a Federal or religious
holiday or other day on which the TRACE system is not open at any time
during that day'' (instead of transactions executed on ``a Saturday, a
Sunday or a Federal or religious holiday on which the TRACE system is
closed'').\24\
---------------------------------------------------------------------------
\24\ See proposed amendments to FINRA Rule 6730(a)(4) (proposed
renumbered Rule 6730(a)(1)(D)), FINRA Rule 6730(a)(5) (proposed
renumbered Rule 6730(a)(2)(B)), FINRA Rule 6730(a)(6)(B)(ii)
(proposed renumbered Rule 6730(a)(3)(B)(ii)) and FINRA Rule
6730(a)(8) (proposed renumbered Rule 6730(a)(5)).
---------------------------------------------------------------------------
FINRA Rule 6760
FINRA Rule 6760 requires a member that is a managing underwriter in
an initial offering of a TRACE-Eligible Security (or, if a managing
underwriter is not appointed, members that are underwriters or initial
purchasers) to notify FINRA Operations of a new TRACE-Eligible
Security. For Asset-Backed Securities, a member Sponsor or
[[Page 15356]]
a member Issuing Entity must provide notice. The notice must include
certain information that clearly identifies the security, which FINRA
uses to confirm information in the TRACE System or add the security to
the TRACE system. Generally, the notice must be provided to FINRA
Operations prior to the execution of the first transaction in the
offering. FINRA proposes to amend FINRA Rule 6760 to incorporate
requirements that apply to Securitizers of Asset-Backed Securities (and
delete those applicable to Sponsors and Issuing Entities), to add
alternative notification requirements for pre-issuance CMOs/REMICs and
make other minor technical, conforming or clarifying changes.
In FINRA Rule 6760(a), FINRA Rule 6760(a)(1) would be amended such
that, for Asset-Backed Securities, a member that is a Securitizer
(instead of a member Sponsor or a member Issuing Entity) would be a
managing underwriter for purposes of the Rule and required to provide
notice under the Rule. References to Sponsors and Issuing Entities
would be deleted. FINRA also proposes to amend FINRA Rule 6760(a)(2) to
provide that FINRA will specify the method of communication or media
that a member must use to provide the information to FINRA Operations
under FINRA Rule 6760, and to delete the requirement to provide such
information by facsimile or e-mail. The proposed amendment to FINRA
Rule 6760(a)(2) will provide FINRA the flexibility, as technology
advances and systems change, to change quickly the method or media a
member may use to comply with FINRA Rule 6760.
In FINRA Rule 6760(b), FINRA proposes that when a Securitizer
provides notice regarding an Asset-Backed Security, all Securitizers
(instead of the Issuing Entity and the Sponsor) must be named in the
notice.\25\ Also, FINRA proposes to transfer the requirement that a
member make a good faith determination of TRACE eligibility before
providing notice about a security to FINRA Operations from FINRA Rule
6760(b) to FINRA Rule 6760(a)(1), and the deadline for providing timely
notice, and the exceptions thereto, from FINRA Rule 6760(b) to proposed
FINRA Rule 6760(c).
---------------------------------------------------------------------------
\25\ FINRA notes that only a Securitizer that is also a FINRA
member is required to provide notice under FINRA Rule 6760(a)(1),
but all Securitizers, including non-member Securitizers, must be
identified in the notice under FINRA Rule 6760(b).
---------------------------------------------------------------------------
Proposed FINRA Rule 6760(c) would set forth the deadline for
providing notice, and the exceptions thereto. The current provisions
regarding the deadline for providing notice and the exceptions would be
set forth in proposed FINRA Rule 6760(c)(1). In proposed FINRA Rule
6760(c)(2), FINRA would provide alternative notice requirements for
Asset-Backed Securities that are CMOs or REMICs in which pre-issuance
transactions will occur. As discussed above, proposed alternative
reporting requirements for pre-issuance CMO/REMIC transactions provide
that reporting deadlines will be calculated by reference to the earlier
of the date of issuance (or, during the Pilot Program, the following
day) or date of assignment of a CUSIP or another appropriate identifier
(or, during the Pilot Program, the following day) due to the delays in
the final structuring and issuance of such CMOs and REMICs.\26\ For the
same reasons, FINRA proposes alternative notification requirements
regarding CMOs and REMICs in which pre-issuance transactions will
occur. Under proposed FINRA Rule 6760(c)(2), a member that is required
to provide notice to FINRA Operations of such CMOs or REMICs must do so
promptly on the date of issuance or other event that establishes the
reference date that determines when a reporting period begins under
proposed FINRA Rule 6730(a)(3)(C)(i), which applies during the Pilot
Program, or, after the expiration of the Pilot Program, under proposed
FINRA Rule 6730(a)(3)(C)(ii).
---------------------------------------------------------------------------
\26\ See proposed FINRA Rule 6730(a)(3)(C)(i) and proposed FINRA
Rule 6730(a)(3)(C)(ii).
---------------------------------------------------------------------------
FINRA also proposes to incorporate technical and clarifying
amendments to FINRA Rule 6760, including changes related to the
restructuring of FINRA Rule 6760(a) and (b) and the addition of
proposed FINRA Rule 6760(c).
FINRA Rule 7730
FINRA Rule 7730 sets forth fees applicable to reporting
transactions to TRACE and purchasing TRACE data. FINRA proposes minor
amendments to two provisions. Under FINRA Rule 7730(a), members may
report transactions in TRACE-Eligible Securities to TRACE using: (1) a
TRACE Web browser; (2) a Computer-to-Computer Interface (``CTCI'')
(whether or not dedicated exclusively to TRACE); or (3) a third-party
reporting intermediary, and incur system-related fees based upon the
method selected. A member pays a system fee of $25 per month, per firm
to report transactions in TRACE-Eligible Securities via CTCI as
provided in FINRA Rule 7730(a)(2). FINRA proposes to amend FINRA Rule
7730(a), FINRA Rule 7730(a)(2) and the fee chart in Rule 7730 to add
FIX as another method for reporting transactions in TRACE-Eligible
Securities. FINRA proposes that the FIX line, like CTCI, would not be
required to be dedicated exclusively to TRACE, and the system-related
fee for reporting via FIX, like CTCI, would be $25 per month, per firm.
FINRA also proposes minor, conforming, non-substantive amendments to
FINRA Rule 7730(a).
In addition, FINRA proposes to correct a technical error regarding
reporting fees in FINRA Rule 7730(b)(1) and the fee chart. FINRA Rule
7730(b)(1) and the fee chart set forth three tiers of reporting fees.
Currently, both provide that the middle tier reporting fee applies to
trades ``between $200,001 and $999,999 par value'' (which are charged a
reporting fee of $0.000002375 times the par value of the transaction
(i.e., $0.002375/$1000)). FINRA proposes to correct the middle tier
reporting fee to correctly state that such middle tier reporting fee is
applicable to ``trades over $200,000 and up to and including
$999,999.99 par value.''
Finally, FINRA has received questions regarding the Factor that
will be used to calculate a reporting fee for a transaction in an
Asset-Backed Security that will be assessed based on the Remaining
Principal Balance of the security. The Remaining Principal Balance will
be calculated using the Factor submitted by the member, if the member
is required to report a Factor under FINRA Rule 6730(d)(2), and, in
fact, does report such Factor, or if no Factor is reported, using the
Factor that FINRA has adopted and incorporated in the TRACE system,
which will be the Factor that FINRA has identified as the most current
Factor publicly available for such Asset-Backed Security at the Time of
Execution. Also, FINRA will not recalculate reporting fee amounts due
to FINRA for Asset-Backed Securities transactions after FINRA has
identified the appropriate Factor for the specified Asset-Backed
Security and calculated the fee based on such Factor.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date of the proposed rule change
will be the date that the proposed rule changes in the TRACE ABS filing
become effective, which is currently anticipated to be May 16,
2011.\27\
---------------------------------------------------------------------------
\27\ See supra note 4.
---------------------------------------------------------------------------
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions
[[Page 15357]]
of Section 15A(b)(6) of the Act,\28\ 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 will
facilitate more timely and accurate reporting of transactions in Asset-
Backed Securities to TRACE, and enhance FINRA's surveillance of the
debt market in connection with Asset-Backed Securities transactions for
the protection of investors and in furtherance of the public interest.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission shall:
(a) By order approve or disapprove such proposed rule change, or (b)
institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2011-012 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-012. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of the filing will also be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File No. SR-FINRA-2011-012
and should be submitted on or before April 11, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
---------------------------------------------------------------------------
\29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6567 Filed 3-18-11; 8:45 am]
BILLING CODE 8011-01-P