[Federal Register Volume 78, Number 177 (Thursday, September 12, 2013)]
[Notices]
[Pages 56251-56253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-22167]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70345; File No. SR-FINRA-2013-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of Proposed Rule Change
Relating to the Dissemination of Transactions in TRACE-Eligible
Securities That Are Effected Pursuant to Securities Act Rule 144A
September 6, 2013.
I. Introduction
On July 17, 2013, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange 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 relating to dissemination of transactions in
TRACE-Eligible Securities \3\ that are effected pursuant to Rule 144A
\4\ under the Securities Act of 1933 (``Securities Act'').\5\ The
proposed rule change was published for comment in the Federal Register
on July 25, 2013.\6\ The Commission received two comments on the
proposal.\7\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The term ``TRACE-Eligible Security'' is defined in FINRA
Rule 6710(a).
\4\ 17 CFR 230.144A.
\5\ 15 U.S.C. 77a et seq.
\6\ See Securities Exchange Act Release No. 70009 (July 19,
2013), 78 FR 44997 (``Notice'').
\7\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from: Dorothy Donohue, Deputy General Counsel--Securities
Regulation, Investment Company Institute, dated August 15, 2013
(``ICI Letter''); and Ari Gabinet, Executive Vice President and
General Counsel, OFI Global Asset Management, dated August 15, 2013
(``OFI Letter'').
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II. Description of the Proposal
Historically, FINRA has utilized the Trade Reporting and Compliance
Engine (``TRACE'') to collect from its members and publicly disseminate
information on secondary over-the-counter transactions in corporate
debt securities and Agency Debt Securities \8\ and certain primary
market transactions. For certain other asset types, FINRA has utilized
TRACE to collect transaction information but has not reported such
information publicly.\9\ Information
[[Page 56252]]
regarding transactions in TRACE-Eligible Securities that are effected
pursuant to Rule 144A under the Securities Act (``Rule 144A
transactions'') falls into this category, as it is currently collected
through TRACE but not disseminated publicly.
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\8\ The term ``Agency Debt Security'' is defined in FINRA Rule
6710(l).
\9\ Recently, however, FINRA has expanded TRACE's functionality
to include public dissemination of transaction information for
certain Asset-Backed Securities, which information FINRA previously
collected but did not disseminate. See Securities Exchange Act
Release No. 61566 (February 22, 2010), 75 FR 9262 (March 1, 2010)
(approving SR-FINRA-2009-065); see also Securities Exchange Act
Release No. 66829 (April 18, 2012), 77 FR 24748 (April 25, 2012)
(approving SR-FINRA-2012-020); Securities Exchange Act Release No.
68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) (approving
SR-FINRA-2012-042). The term ``Asset-Backed Security'' is defined in
FINRA Rule 6710(m).
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As FINRA notes, Section 201 of the Jumpstart Our Business Startups
Act (the ``JOBS Act'') \10\ directed the Commission to eliminate the
long-standing prohibition against general solicitation and general
advertising in offerings of securities pursuant to Securities Act Rule
144A and in certain other private placements.\11\ According to FINRA,
up to this point Rule 144A transactions reported to TRACE have not been
disseminated in part to avoid concerns about soliciting persons other
than qualified institutional buyers (``QIBs'') for such
transactions.\12\ As a result, price information regarding Rule 144A
transactions has been limited, which has made it difficult for market
participants to assess the quality of executions of Rule 144A
securities or to compare them to executions of similar publicly traded
securities of the same issuer or similarly-rated issuers.
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\10\ Public Law 112-106, 126 Stat. 306.
\11\ See Notice, 78 FR at 44998.
\12\ See id.
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FINRA now has proposed to provide for public dissemination of Rule
144A transactions and to make certain related changes to its rules, as
described below.
Dissemination of Rule 144A Transaction Information
Currently, FINRA Rule 6750(b)(1) states that FINRA will not
disseminate information on a transaction in a TRACE-Eligible Security
that is effected pursuant to Rule 144A. FINRA has proposed to remove
that language from FINRA Rule 6750(b)(1) and amend FINRA Rule 6750(a)
to include Rule 144A transactions among the transactions for which
FINRA disseminates information immediately upon receipt of the
transaction report, provided that the asset type involved in the Rule
144A transaction is currently subject to dissemination under FINRA Rule
6750.\13\ Consequently, only Rule 144A transactions in corporate bonds
will be newly disseminated as a result of the proposed rule change. The
proposed rule change will not otherwise expand TRACE dissemination at
this time.\14\
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\13\ Equity securities transactions effected pursuant to Rule
144A are not reported to TRACE and are not the subject of FINRA's
proposal.
\14\ See Notice, 78 FR at 44999 n.24. As mentioned above,
transactions in Agency Debt Securities and certain Asset-Backed
Securities are currently disseminated. But there would be no
additional transactions in such securities disseminated as a result
of the proposal because Rule 144A is not used to effect transactions
in such securities. There are also certain Asset-Backed Security
transactions that are not currently subject to dissemination, which
would preclude them from dissemination under the proposal at this
time.
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Dissemination Caps
Currently, there are dissemination caps in place for disseminated
TRACE data, such that the actual size of a transaction over a certain
par value is not displayed. FINRA has proposed that Rule 144A
transactions be disseminated subject to the same dissemination caps
that are currently in effect for a non-Rule 144A transaction in the
applicable security.\15\ Accordingly, the dissemination caps currently
in effect for non-Rule 144A corporate bond transactions--$5 million
(``$5MM'') for Investment Grade corporate bonds and $1 million
(``$1MM'') for Non-Investment Grade corporate bonds \16\--would apply
to the Rule 144A corporate bond transactions disseminated as result of
this proposal. As a result, the size of a Rule 144A Investment Grade
corporate bond transaction in excess of $5MM would be displayed as
``$5MM+'' and the size of a Rule 144A Non-Investment Grade corporate
bond transaction in excess of $1MM would be displayed as ``$1MM+.''
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\15\ See Notice, 78 FR at 44999.
\16\ The terms ``Investment Grade'' and ``Non-Investment Grade''
are defined in FINRA Rules 6710(h) and 6710(i), respectively.
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Market Data
FINRA has proposed to amend Rule 7730(c) to establish a real-time
market data set for Rule 144A transactions (``Rule 144A Data Set'')--
similar to the data sets for corporate bonds, Agency Debt Securities,
and Asset-Backed Securities--which would consist of information
disseminated immediately upon receipt of a transaction report for a
Rule 144A transaction. FINRA also has proposed to amend Rule 7730(d) to
establish a historic data set for Rule 144A transactions (``Historic
Rule 144A Data Set''), also similar to the existing historic data sets
for corporate bonds, Agency Debt Securities, and Asset-Backed
Securities.\17\
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\17\ The Historic Rule 144A Data Set would include Rule 144A
transactions in securities subject to dissemination, effected as of
or after July 1, 2002, and, among other things, would include
uncapped volume information. However, like all other Historic TRACE
Data, Rule 144A transaction data included in the Historic Rule 144A
Data Set would be released subject to a delay of approximately 18
months from the date of the transaction. See Notice, 78 FR at 44999.
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Relatedly, FINRA would amend the definition of ``Historic TRACE
Data'' in Rule 7730(f)(4) to reference the three existing data sets and
the proposed Historic Rule 144A Data Set and to clarify that the
Historic Rule 144A Data Set would include all historic Rule 144A
transactions reported to TRACE, except transactions involving a type of
TRACE-Eligible Security that is not subject to real-time dissemination
under FINRA Rule 6750. FINRA would further amend Rule 7730(f)(4) to
define the existing historic data sets for corporate bonds, Agency Debt
Securities, and Asset-Backed Securities, and to clarify, as applicable,
that they do not contain historic Rule 144A transactions.
In addition, FINRA has proposed minor revisions to the TRACE fee
table in the beginning of Rule 7730, and also to Rules 7730(c) and
7730(d), to clarify that the fees set forth therein apply only to the
existing real-time and historic data sets for corporate bonds, Agency
Debt Securities, and Asset-Backed Securities. FINRA has stated that it
plans to file a separate proposal to address market data fees for the
Rule 144A Data Set and the Historic Rule 144A Data Set.\18\ FINRA also
has proposed to make a minor, technical revision to Rule 7730(d) to
clarify that the 2012 Historic ABS Data Set includes the 2011 Historic
ABS Data Set.
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\18\ See Notice, 78 FR at 45000 n.29.
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Effective Date of Proposed Rule Change
FINRA has stated that it would announce the effective date of the
proposed rule change in a Regulatory Notice to be published no later
than 60 days following Commission approval, and that the effective date
be no later than 270 days following publication of that Regulatory
Notice.
III. Comment Summary
The Commission received two comment letters on the proposal.\19\
Both commenters supported the proposal. One commenter stated that
``[t]he Rule 144A market has, over time, become a more mature and
liquid market with no corresponding enhancement in its transparency,''
and that requiring information regarding Rule 144A transactions to be
disseminated to the same extent as comparable non-Rule 144A
transactions ``will provide enhanced transparency in a manner that
addresses the potential negative impact
[[Page 56253]]
that such dissemination could have on liquidity.'' \20\ The other
commenter asserted that dissemination of Rule 144A transactions would
be in keeping with TRACE's goal of improving transparency in the
corporate debt market.\21\ This commenter also stated that the proposed
rule change would enhance pre-trade price discovery, foster more
competitive pricing within the Rule 144A market, and significantly
improve the ability of market participants to conduct analyses of Rule
144A transactions and assess the quality of their executions.\22\
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\19\ See supra note 7.
\20\ ICI Letter at 2.
\21\ See OFI Letter at 2.
\22\ See id.
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IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\23\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\24\ which
requires, among other things, that FINRA's rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. The Commission notes that the only two
entities that submitted comments supported the proposal.
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\23\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\24\ 15 U.S.C. 78o-3(b)(6).
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In approving the original TRACE rules, the Commission stated that
price transparency plays a fundamental role in promoting the fairness
and efficiency of U.S. capital markets.\25\ To further the goal of
increasing price transparency in the debt markets in general and the
market for Rule 144A securities in particular, the Commission now
believes that it is reasonable and consistent with the Act for FINRA to
extend post-trade price transparency to Rule 144A transactions. Real-
time dissemination of last-sale information could aid dealers in
deriving better quotations, because they would know the prices at which
other market participants had recently transacted in the same or
similar instruments. This information could aid all market participants
in evaluating current quotations, because they could inquire why dealer
quotations might differ from the prices of recently executed
transactions. Furthermore, post-trade transparency affords market
participants a means of testing whether dealer quotations before the
last sale were close to the price at which the last sale was executed.
In this manner, post-trade transparency can promote price competition
between dealers and more efficient price discovery, and ultimately
lower transaction costs in the market for Rule 144A securities.
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\25\ See Securities Exchange Act Release No. 43873 (January 23,
2001), 66 FR 8131, 8136 (January 29, 2001) (approving SR-NASD-99-65)
(``2001 TRACE Order'').
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Although the market for Rule 144A securities remains restricted to
QIBs, the Commission believes that non-QIB market participants could
still benefit from post-trade transparency in the Rule 144A market.
Certain Rule 144A securities are issued by the same entity as, or are
otherwise similar to, corporate debt securities not issued pursuant to
Rule 144A, which securities may be purchased and sold by non-QIBs. Some
academic research suggests that post-trade transparency in one market
can have ``spillover benefits'' in a related market.\26\
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\26\ See Henrik Bessembinder, William Maxwell, and Kumar
Venkataraman, ``Market Transparency, Liquidity Externalities, and
Institutional Trading Costs in Corporate Bonds'' (2005), available
at http://home.business.utah.edu/hank.bessembinder/publications/bondtransparency.pdf (presenting a model implying and finding
empirical evidence in TRACE data for what the authors term a
``liquidity externality,'' i.e., improved market quality in certain
securities that were not yet TRACE-eligible, when related securities
had become subject to TRACE post-trade transparency).
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In addition, the Commission believes that the proposed
dissemination caps are reasonable and consistent with the Act. The caps
to be employed for Rule 144A debt securities will be the same as those
for other corporate debt securities, which were previously approved by
the Commission.\27\ The Commission notes that, in its Regulatory Notice
12-39, FINRA requested comment on the existing dissemination caps for
transactions in corporate bonds, Agency Debt Securities, and Asset-
Backed Securities, although FINRA determined not to propose changes to
any of the current dissemination caps at this time. The Commission
expects FINRA to periodically re-evaluate whether the dissemination
caps, including the caps for Rule 144A transactions being approved
today, continue to be appropriate.
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\27\ See 2001 TRACE Order, 66 FR at 8132.
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The Commission further believes that establishing real-time and
historic market data products for Rule 144A securities in the manner
described in the proposal is reasonable and consistent with the Act.
The new data sets are similar to the data sets for corporate bonds,
Agency Debt Securities, and Asset-Backed Securities, which products
have previously been approved by the Commission.\28\ The Commission
notes FINRA's representation that it will submit a separate rule filing
to address the market data fees for the Rule 144A Data Set and the
Historic Rule 144A Data Set. Finally, the Commission believes that the
minor revisions to certain of FINRA's market data rules are consistent
with the Act.
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\28\ See id. (approving real-time dissemination of reported
corporate bond transactions as part of approval of original TRACE
rules); see also Securities Exchange Act Release No. 60726
(September 28, 2009), 74 FR 50991 (October 2, 2009) (approving SR-
FINRA-2009-010, which expanded TRACE to include real-time
dissemination of Agency-Debt Security transactions and most primary
market transactions, and to create separate corporate bond and
Agency-Debt Security market data sets); Securities Exchange Act
Release No. 61012 (November 16, 2009), 74 FR 61189 (November 23,
2009) (approving SR-FINRA-2007-006, which established the historic
TRACE market data sets for corporate bond and Agency-Debt Security
transactions); Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (approving SR-FINRA-2012-020,
which established real-time and historic market data sets for
certain Asset-Backed Securities traded ``To Be Announced'');
Securities Exchange Act Release No. 68084 (October 23, 2012), 77 FR
65436 (October 26, 2012) (approving SR-FINRA-2012-042, which
established real-time and historic market data sets for certain
other Asset-Backed Securities).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-FINRA-2013-029) be, and it
hereby is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22167 Filed 9-11-13; 8:45 am]
BILLING CODE 8011-01-P