[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Notices]
[Pages 43885-43887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-17444]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67427; File No. SR-FINRA-2012-034]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Amend TRACE Reporting Rules Relating to
Transfers of TRACE-Eligible Securities To Create or Redeem Instruments
Such as ETFs
July 12, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 11, 2012, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change, as described in Items I, II,
and III below, which Items have been prepared by FINRA. FINRA has
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under
the Act,\3\ which renders the proposal effective upon receipt of this
filing by the Commission. The Commission is publishing this notice to
solicit comment on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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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 6730(e) to expressly exclude
from the Trade Reporting and Compliance Engine (``TRACE'') trade
reporting requirements transfers of TRACE-Eligible Securities for the
sole purpose of creating or redeeming instruments such as exchange-
traded funds (``ETFs'').
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, 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under the Rule 6700 Series (the TRACE rules), members are required
to report transactions in debt securities that are TRACE-Eligible
Securities as defined in Rule 6710(a) to FINRA unless they fall within
an express exception listed in Rule 6730(e). Certain transactions and
transfers are not reported to FINRA (e.g., trades executed and reported
through an exchange and transfers made pursuant to an asset purchase
agreement that has been approved by a bankruptcy court). Members must
have policies and procedures and internal controls in place to
determine whether a transaction qualifies for an exception under the
TRACE rules.
FINRA proposes to amend Rule 6730(e) to provide that transfers of
TRACE-Eligible Securities for the sole purpose of creating or redeeming
an instrument that evidences ownership or otherwise tracks the
underlying securities transferred, such as an ETF, shall be excluded
expressly from the TRACE reporting requirements. The proposed amendment
to Rule 6730(e) is similar to an exclusion for such
[[Page 43886]]
transfers in equity securities incorporated in FINRA equity trade
reporting rules in 2011.\4\
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\4\ See Securities Exchange Act Release No. 65025 (August 3,
2011), 76 FR 48937 (August 9, 2011) (SEC order approving SR-FINRA-
2011-027, amending FINRA Rules 6282(i)(1), 6380A(e)(1), 6380B (e)(1)
and 6622(e)(1)) and Regulatory Notice 11-40 (August 2011) (2011
Equity Trade Reporting Filing). The proposed rule change also
codifies interpretive guidance that was published in 2003 regarding
transfers of TRACE-Eligible Securities for such purposes. See Letter
dated March 18, 2003, to Alice Yau, Vice President, Compliance, J.P.
Morgan Securities from Sharon Zackula, Office of General Counsel,
FINRA (f/k/a the National Association of Securities Dealers).
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For example, a member broker-dealer that is an ``authorized
participant'' of an ETF on behalf of a customer transfers TRACE-
Eligible Securities to an ETF and in return receives ETF creation
units. Under the proposed rule change, the transfers of the TRACE-
Eligible Securities from the broker-dealer to the ETF would not be
reported to TRACE.\5\ (Similarly, the transfer of the ETF creation
units to the broker-dealer would not be reported.)
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\5\ FINRA notes that the proposed exception would apply
irrespective of whether the member is acting as agent, principal or
riskless principal in the creation process. Thus, if the broker-
dealer that is an authorized participant in the above example is
acting as riskless principal on behalf of its customer, the
immediate subsequent transfer of the ETF creation units from the
authorized participant to its customer also would not be reportable.
Similarly, if a broker-dealer that is an authorized participant is
acting as riskless principal on behalf of a customer that redeems an
ETF creation unit, neither the transfer of the ETF creation unit
from the broker-dealer to the ETF in return for TRACE-Eligible
Securities, nor the immediate subsequent transfer of such TRACE-
Eligible Securities to the customer would be reportable. This is
consistent with interpretive guidance relating to the 2011 Equity
Trade Reporting Filing. See Regulatory Notice 11-40.
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In contrast, FINRA notes that purchases and sales of TRACE-Eligible
Securities that are to be transferred for the purposes of creating or
redeeming instruments such as ETFs (or a creation unit thereof) and
subsequent purchases and sales of the ETF or a similar instrument in
the secondary market are not subject to an exclusion. Such purchases
and sales involving TRACE-Eligible Securities must be reported to FINRA
in accordance with the Rule 6700 Series. Additionally, purchases and
sales of the underlying TRACE-Eligible Securities in order to track the
performance of an instrument such as an ETF, without actually creating
the instrument, are reportable events and must be reported to TRACE.
As noted in Item 2 of this filing, FINRA has filed the proposed
rule change for immediate effectiveness. The implementation date will
be 30 days after the date of the filing.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\6\ 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
clarify members' obligations with respect to the reporting of transfers
of TRACE-Eligible Securities to create or redeem instruments such as
ETFs under the Rule 6700 Series. In addition, the proposed rule change
is consistent with an exclusion for such transfers in equity securities
incorporated in FINRA equity trade reporting rules in 2011.
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\6\ 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.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act\7\ and Rule 19b-
4(f)(6) thereunder.\8\
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\7\ 15 U.S.C. 78s(b)(3)(A).
\8\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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 email to [email protected]. Please include
File Number SR-FINRA-2012-034 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-2012-034. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2012-034 and should be
submitted on or before August 16, 2012.
[[Page 43887]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17444 Filed 7-25-12; 8:45 am]
BILLING CODE 8011-01-P