
[Federal Register: June 2, 2008 (Volume 73, Number 106)]
[Notices]               
[Page 31518-31523]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jn08-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57866; File No. SR-FINRA-2007-026]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change as Modified 
by Amendment No. 1 Thereto To Adopt a FINRA Policy To Expand 
Disseminated Trade Reporting and Compliance Engine (``TRACE'') Data

May 23, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 31519]]

(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 5, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) \3\ 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 substantially 
prepared by FINRA. On May 20, 2008, FINRA filed Amendment No.1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Effective July 30, 2007, FINRA was formed through the 
consolidation of NASD and the member regulatory functions of NYSE 
Regulation, Inc. Generally, pre-consolidation actions by NASD are 
referred to as FINRA actions, except for NASD Rules, when referenced 
singularly, and NASD Notices to Members. When FINRA files proposed 
rule changes to create a consolidated FINRA rule manual, such NASD 
rules and interpretations, as incorporated in the consolidated FINRA 
Manual, will no longer be referred to as ``NASD'' rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt a FINRA policy to expand disseminated 
Trade Reporting and Compliance Engine (``TRACE'') data to show, for 
each disseminated transaction, that the transaction is an inter-dealer 
transaction (``Dealer Transaction'') or a transaction with a customer 
(``Customer'') (``Customer Transaction'') and the member referenced is 
a buyer (``Buyer'') or a (``Seller'') (or acts as agent on the buy or 
the sell side). The proposed rule change does not include proposed rule 
text.

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
    Currently, FINRA members that are parties to a transaction in a 
TRACE-eligible security report several types of information to the 
TRACE System. Among the elements of data that are reported, for each 
transaction the member reports that it is a Buyer from a broker-dealer 
(``Dealer'') or a Customer or a Seller to a Dealer or a Customer (or 
acts as agent on the buy or the sell side).\4\ In addition, the member 
reports that the transaction is a Dealer Transaction or a Customer 
Transaction. Currently, these data elements are not included in the 
TRACE transaction data disseminated immediately upon FINRA's receipt of 
a transaction report.
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    \4\ Hereinafter, ``Buy'' means either or both (i) a Dealer's 
purchase of a security from a Customer, and/or (ii) a Dealer, as 
agent of a Customer, facilitating a purchase of a security from the 
Customer; similarly, ``Sell'' means either or both (i) a Dealer's 
sale of a security to a Customer, and/or (ii) a Dealer, as agent of 
a Customer, facilitating a sale of a security to the Customer.
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    The data elements that are disseminated include: the bond 
identifier (i.e., the TRACE symbol); the price inclusive of any mark-
up, mark-down, or commission; the quantity (expressed as the total par 
value); the yield; the time of execution; and, if the transaction were 
executed on a day other than when TRACE data is being disseminated, the 
actual day of execution of the transaction.
    For a Dealer Transaction, FINRA receives a TRACE report from each 
Dealer, but disseminates data reflecting only the information received 
in the Sell transaction report. For a Customer Transaction, only one 
side of the trade has to be reported--the Dealer (or Dealers) side--and 
FINRA disseminates the data from the TRACE report(s), which may be 
either a Dealer's Buy or a Dealer's Sell.
    FINRA is proposing that additional data elements showing the side 
on which a Dealer acts in a transaction (``Buy/Sell data element'') and 
the information identifying the transaction as a Dealer Transaction or 
a Customer Transaction (``Dealer/Customer data element'') (but not the 
MPID or identity of any Dealer) be disseminated publicly for each 
transaction, because Dealers need access to these additional data 
elements and investors would benefit from this enhanced level of 
transparency. Dealers need the additional data elements to compare 
prices, and in order to comply with their best execution obligations 
under NASD Rule 2320, the fair and reasonable mark-up/mark-down 
requirements under NASD Rule 2440, NASD IM-2440-1, NASD IM-2440-2, and 
other provisions of the federal securities laws.\5\ Investors would 
benefit from the dissemination of these additional data elements by 
being able to compare prices and request better, lower prices. Given 
the limited occurrence of transactions in certain sectors of the debt 
markets, including the corporate debt sector, FINRA believes that the 
Dealer/Customer data element and Buy/Sell data element should be added 
to the disseminated TRACE data to provide TRACE users additional 
clarity about what each disseminated TRACE price actually represents.
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    \5\ When a member charges a Customer an excessive or 
unreasonable mark-up/mark-down, the member violates NASD Rule 2110, 
NASD Rule 2440, NASD IM-2440-1, and, if charged in a debt securities 
transaction, NASD IM-2440-2. In addition, in some cases, when a 
member charges an excessive or unreasonable mark-up/mark-down and 
does not fully disclose it to the customer, the member may be in 
violation of Section 10(b) of the Act, 15 U.S.C. 78j(b), and Rule 
10b-5 thereunder, 17 CFR 240.10b-5, or Section 17(a) of the 
Securities Act of 1933, 15 U.S.C. 77q(a). NASD Rule 2320, NASD Rule 
2110, NASD Rule 2440, NASD IM-2440-1, and NASD IM-2440-2 do not 
apply to transactions in municipal securities. Instead, when a 
Dealer or a municipal securities dealer engages in a municipal 
securities transaction, the rules of the Municipal Securities 
Rulemaking Board (``MSRB'') apply. See, e.g., MSRB Rule G-30, Prices 
and Commissions; MSRB Rule G-18, Execution of Transactions.
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    The disseminated TRACE data enhanced by the addition of the Dealer/
Customer data element and the Buy/Sell data element will inform Dealers 
and Customers of actual executed prices for Customer Transactions and 
Dealer Transactions across a broad universe of corporate debt 
securities. Even prior to the adoption of NASD IM-2440-2, ``Additional 
Mark-Up Policy For Transactions in Debt Securities, Except Municipal 
Securities'' (``the Debt Mark-Up Interpretation''), the availability of 
these data elements would have aided Dealers in complying with their 
obligations regarding best execution and fair mark-ups set forth in 
FINRA rules and other provisions of the federal securities laws, and 
described in various litigated or settled proceedings.\6\ With the 
implementation of the Debt Mark-Up Interpretation on July 5, 2007, 
FINRA believes that the data elements identifying a transaction as 
either a Dealer Transaction or a Customer

[[Page 31520]]

Transaction and as either a Buy or a Sell now must be made available to 
Dealers.
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    \6\ NASD IM-2440-2 was approved by the SEC on April 16, 2007, 
and became effective on July 5, 2007. See Securities Exchange Act 
Release No. 55638 (April 16, 2007), 72 FR 20150 (April 23, 2007) 
(order approving SR-NASD-2003-141); NASD Notice to Members 07-28 
(June 2007).
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    Under the Debt Mark-Up Interpretation, when a Dealer is pricing or 
determining mark-ups (or mark-downs) by referring to recent transaction 
prices other than the Dealer's own price, a Dealer must be able to 
determine if a trade is an inter-dealer transaction (as used in the 
Debt Mark-Up Interpretation) or a Customer Transaction.\7\ In addition, 
the Dealer must be able to determine which side of the market a Dealer 
traded from, whether looking to a Customer Transaction or an inter-
dealer transaction (as used in the Debt Mark-Up Interpretation).\8\ 
Disseminating the Dealer/Customer and the Buy/Sell data elements would 
allow Dealers to more accurately identify the type of pricing 
information disseminated by TRACE, and would permit them to use the 
information to comply with FINRA rules and the federal securities laws 
regarding fair prices and best execution.
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    \7\ In IM-2440-2, the Debt Mark-Up Interpretation, references to 
``inter-dealer trades'' or ``inter-dealer transactions'' (that, in 
certain circumstances, must or may be used to determine the 
prevailing market price of a security--whether in the same or 
similar securities as the security for which a mark-up is being 
calculated) do not include any inter-dealer transaction in which the 
Dealer that is determining prevailing market price is a party. In 
contrast, in this proposed rule filing, the term ``inter-dealer 
transaction'' (defined as ``Dealer Transaction'') includes all 
inter-dealer transactions (e.g., if Dealer A is a party to an inter-
dealer transaction, from Dealer A's perspective, inter-dealer 
transactions means all inter-dealer transactions, including those to 
which Dealer A is a party). In this note 7 and note 8, infra, when 
describing various provisions of the Debt Mark-Up Interpretation, 
FINRA uses the term ``inter-dealer transaction'' to make clear that 
FINRA means inter-dealer transactions as used in the Debt Mark-Up 
Interpretation. See IM-2440-2, paragraph (b)(5)(A) (requiring that a 
Dealer must consider--after considering the Dealer's own 
contemporaneous cost (or proceeds)--the prices of any 
contemporaneous inter-dealer transaction in the same security to 
determine prevailing market price). See also NASD IM-2440-2, 
paragraph (b)(5)(B) (requiring that a Dealer must consider--after 
considering the Dealer's own contemporaneous cost (or proceeds) and 
the prices of any contemporaneous inter-dealer transactions in the 
same security--the prices of contemporaneous Dealer purchases 
(sales) in the security in question from (to) institutional accounts 
with which any Dealer regularly effects transactions in the same 
security (``certain institutional accounts'') to determine 
prevailing market price); NASD IM-2440-2, paragraph (b)(6) 
(referring to a Dealer's review, in certain circumstances, of the 
pricing information from (i) contemporaneous inter-dealer 
transactions in a similar security, and (ii) contemporaneous Dealer 
purchase (sale) transactions in a similar security with certain 
institutional accounts, as part of the Dealer's analysis to 
determine the prevailing market price of a particular security).
    \8\ For example, under NASD IM-2440-2, paragraph (b)(6), when a 
Dealer refers to transactions in similar securities, a Dealer must 
know the side of the market (i.e., Buy or Sell information) to 
determine the relative comparability of a transaction in a similar 
security to the transaction that is being marked.
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    In view of the fact that Customer Transaction prices disseminated 
are ``all-in prices,'' and the prices of Customer Transactions and 
Dealer Transactions are intermingled, the dissemination of data 
elements that identify transactions as Customer Transactions or Dealer 
Transactions will allow all who view the TRACE data to distinguish 
those transactions that do not include a mark-up/mark-down or a 
commission--Dealer Transactions--from transactions displayed as ``all-
in prices'' that include Dealer mark-ups/mark-downs or commissions--
Customer Transactions.
    By adding the Buy/Sell data element to any transaction identified 
as a Customer Transaction, anyone viewing the TRACE data will be able 
to determine that, in the case of a Buy, the disseminated price 
includes a mark-down or a commission, or, in the case of a Sell, the 
disseminated price includes a mark-up or a commission. Thus, with the 
two additional elements viewable in disseminated TRACE data, Customers 
that are TRACE data users will be able to knowledgeably assess and 
compare the disseminated ``all-in price'' of their purchases and sales 
with other Customer Transactions. In addition, Dealers will be able to 
determine approximate levels of Dealer Transaction pricing by ``backing 
out'' of a disseminated ``all-in price'' clearly labeled as a Customer 
Transaction, a mark-up (or mark-down) or commission amount if Dealer 
Transaction pricing is not available in TRACE for the Dealer's analyses 
of its mark-up (or mark-down) and its compliance with best execution 
obligations.
    Such transparency exists in other markets. The Municipal Securities 
Rulemaking Board (``MSRB'') determined that disseminating buy/sell and 
dealer/customer information was an important element of transparency in 
the municipal securities market, and currently disseminates both of 
these data elements real-time together with other price, quantity, and 
yield information per transaction.\9\ FINRA believes it is appropriate 
to provide comparable data to TRACE data users.
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    \9\ Disseminated municipal securities transaction prices, like 
TRACE-disseminated prices, are ``all-in prices.''
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    Finally, debt pricing, particularly debt mark-ups, remains an area 
of regulatory concern and focus.\10\ For more than two years, FINRA has 
considered incorporating the Dealer/Customer data element and Buy/Sell 
data element in disseminated TRACE transaction data to aid Dealers in 
improving their pricing of TRACE-eligible securities and similar debt 
securities; and to provide them with information to evidence their 
adherence to the requirements of the federal securities laws and 
regulations regarding fair pricing and best execution. In 2005, FINRA 
staff began receiving requests that these reported data elements be 
included in the disseminated TRACE data from members attending FINRA 
seminars discussing debt mark-ups. Also, in April 2005, when NASD IM-
2440-2 was pending as a proposed rule change, a commenter highlighted 
the deficiencies in disseminated TRACE data, noting that TRACE data did 
not differentiate between Customer Transactions and Dealer 
Transactions, thus making Dealer compliance with the various 
requirements of NASD IM-2440-2 difficult (e.g., the identification and 
required use, in certain cases, of certain Dealer Transaction prices to 
establish prevailing market price).\11\ In October 2005, in FINRA's 
response to comments, FINRA indicated that FINRA was ``evaluating 
enhancing the quality of disseminated TRACE information to show, for 
each trade, whether the trade is inter-dealer or customer, as is now 
indicated in real-time disseminated municipal securities transaction

[[Page 31521]]

data.'' \12\ By adding the Dealer/Customer data element and Buy/Sell 
data element to TRACE disseminated information now, Customers and 
Dealers would be able to more accurately and carefully assess the 
quality of the pricing of their corporate bond transactions.
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    \10\ In remarks to the securities industry, senior SEC staff has 
indicated that debt mark-ups are an area of regulatory concern and 
focus. See, e.g., Remarks before the TBMA Legal and Compliance 
Conference, Commissioner Annette L. Nazareth, SEC, New York, NY, 
February 7, 2006 (``[The industry] should consider improving 
transparency concerning dealer mark-up policies * * * Investors 
should understand what they are paying, whether the broker is acting 
as agent or principal, and whether the price paid includes 
compensation to the broker-dealer, and if so, how much.'') at http:/
/www.sec.gov/news/speech/spch020706aln.htm; Remarks to The SIFMA 
Legal and Compliance Division, ``The Regulatory Focus on Broker-
Dealer Legal and Compliance Issues,'' Mary Ann Gadziala, Associate 
Director, Office of Compliance Inspections and Examinations, SEC, 
Chicago, Ill., June 7, 2007 (listing mark-ups on fixed income 
securities as an examination priority), at http://www.sec.gov/news/
speech/2007/spch060707mag.htm. FINRA acknowledges that the 
Commission, as a matter of policy, disclaims responsibility for any 
private publications or statements by any of its employees, and that 
the views expressed in the remarks referenced above are those of the 
speaker and do not necessarily reflect the views of the Commission, 
another Commissioner, or the Commission staff.
    \11\ See File No. SR-NASD-2003-141. Letter from The Bond Market 
Association (regarding File No. SR-NASD-2003-141), to Jonathan G. 
Katz, Secretary, SEC, dated April 5, 2005 at 13 (``[T]he NASD's 
TRACE system does not differentiate between inter-dealer trades and 
customer trades in its disseminated reports, making the 
identification of an inter-dealer trade difficult.''). FINRA also 
published the proposed change of policy regarding TRACE disseminated 
data in NASD Notice to Members 06-22 (May 2006). The comments 
received in connection with the proposal at that time are summarized 
below in Item 5.
    \12\ See File No. SR-NASD-2003-141. Response to Comments on 
Additional Mark-Up Policy for Transactions in Debt Securities 
(regarding File No. SR-NASD-2003-141), to Katherine A. England, 
Assistant Director, Division of Market Regulation, SEC, dated 
October 4, 2005 at 13.
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    FINRA would announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 90 days following 
Commission approval, if the Commission approves the proposal. The 
effective date would be no later than 120 days following publication of 
the Regulatory Notice announcing a Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among 
other things, that FINRA 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. FINRA believes that the proposed policy, by improving 
the quality of information available to institutional investors, retail 
investors, and Dealers: (i) Will allow them to compare prices in TRACE-
eligible securities transactions more meaningfully; (ii) will allow 
them to negotiate transaction prices with more information; (iii) will 
allow Dealers to comply more easily with FINRA rules and various 
provisions of the federal securities laws requiring Dealers to buy or 
sell debt securities at prices related to the prevailing market prices, 
adjusted by a fair and reasonable mark-up (mark-down) or commission, 
which provisions are designed to prevent unfair or unjust practices, or 
fraudulent, deceptive, and manipulative acts or practices in the 
pricing of securities transactions; and (iv) may stimulate price 
competition among Dealers, for the protection of investors and in 
furtherance of the public interest.
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    \13\ 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 would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of purposes of the Act.

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 NASD Notice 
to Members 06-22 (May 2006). Five comments were received in response to 
the NASD Notice to Members. Of the five comment letters received, two 
commenters were in favor of the proposed rule change \14\ and three 
commenters were opposed.\15\
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    \14\ See letters from Kenneth M. Cherrier, Chief Compliance 
Officer, Fintegra, to Barbara Z. Sweeney, Office of Corporate 
Secretary, NASD, dated June 1, 2006; and Bari Havlik, Senior Vice 
President, Global Compliance, Charles Schwab & Co., Inc. to Sharon 
K. Zackula, Associate General Counsel, Office of General Counsel, 
NASD, dated June 15, 2006 (``Schwab Letter'').
    \15\ See letters from Brad Ziemba, Chief Compliance Officer, 
Duncan-Williams, Inc, to Barbara Z. Sweeney, Office of Corporate 
Secretary, NASD, dated June 26, 2006; Mary C.M. Kuan, Vice President 
and Assistant General Counsel, The Bond Market Association 
(``TBMA''), to Barbara Z. Sweeney, Office of Corporate Secretary, 
NASD, dated June 16, 2006 (``TBMA Letter''); and John R. Gidman, 
Chairman, Asset Managers Division, TBMA, to Barbara Z. Sweeney, 
Office of Corporate Secretary, NASD, dated June 19, 2006 (``TBMA-AMD 
Letter'').
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    Two of the commenters indicated that they fully supported the 
proposed public disclosures of the Buy/Sell data element and Dealer/
Customer data element because: (i) Lack of disclosure of pertinent bond 
information places the public investor at a disadvantage; (ii) both 
public investors and Dealers need such pricing information, which will 
permit them to compare prices meaningfully; (iii) Dealers need the 
additional data elements to comply with best execution and mark-up 
requirements; (iv) the data disseminated for municipal securities 
transactions already includes these data elements and the inclusion of 
such information plays an important role in providing transparency in 
the municipal securities markets; (v) companies claiming that their 
bond trading strategies would be exposed have not substantiated such 
claims; (vi) corporate debt market participants, including Dealers, 
will not be unduly burdened by dissemination of the additional data 
elements; and (vii) the benefit to the public investor and the 
participating TRACE Dealers will outweigh any negative impact to the 
market, Dealers, or Customers, including certain companies' position 
that possibly smaller profit margins for Dealers may result if these 
additional elements of TRACE data are disseminated. One of the 
commenters requested that, if the policy were adopted, members be given 
12 months to adopt any necessary systems changes.\16\
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    \16\ See Schwab Letter.
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    Three commenters opposed the proposed policy change. The three 
commenters stated that Dealers did not need the Dealer/Customer data 
element and Buy/Sell data element to comply with best execution and 
mark-up/mark-down rules and the federal securities laws, and that the 
liquidity of the corporate bond market ``could be'' substantially 
reduced because, if the disseminated TRACE data included the additional 
information, it would limit a Dealer's ability to execute trades 
without having the market move adversely.
    Two commenters submitted nearly identical comments summarized 
below.\17\ Generally, both commenters opposed the Proposal stating, in 
addition to the comments summarized immediately above, that the 
proposed dissemination of the two additional data elements would not 
facilitate price transparency, and the information currently 
disseminated through TRACE is sufficient for investors to determine if 
they receive fair prices from dealers. The commenters posited that the 
Dealer/Customer and Buy/Sell data elements, if published, would hamper 
the ability of investors trying to accumulate or dispose of positions 
without moving the market (as noted above) and would: (i) Permit market 
participants to discern the trading intent of others and consequently 
trade in a manner that is harmful to the identified investor; (ii) 
permit others to intrude upon the trading strategies of an investor; 
(iii) increase investor costs; and (iv) as noted above, potentially 
reduce liquidity. In addition, the commenters stated that FINRA does 
not need to implement the Proposal to further its audit and 
surveillance functions and ``the Proposal should be effected only to 
the extent that investors and dealers determine there is a need for 
it.'' \18\ Further, although the inclusion of Dealer/Customer and Buy/
Sell data elements in disseminated municipal securities transaction 
information does not appear to be harmful to the municipal securities 
market, the commenters stated that such information would have an 
adverse impact in the corporate bond market (particularly to 
institutional traders and Dealers) and should not be disseminated.
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    \17\ See generally TBMA Letter; TBMA-AMD Letter.
    \18\ TBMA Letter at 2; TBMA-AMD Letter at 2.
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    The two commenters focused on the trading patterns of institutional

[[Page 31522]]

customers, their block trades of bonds, and their reliance on Dealers 
to facilitate trading in such blocks--by acting as a riskless 
principal, by taking the other side of the Customer's trade (a risk 
position), or by the Dealer selling bonds short to facilitate the 
institutional Customer's purchase and thereafter going out into the 
market to cover the short (a Dealer short position) in which, the 
commenters noted, Dealers take on considerable risk.\19\ The commenters 
stated that such investors must be able to execute block trades and 
Dealers must be able to facilitate such trades without signaling the 
market because prices in the securities market are driven by supply and 
demand and, if an institutional investor or a Dealer tries to sell, or 
facilitate the sale of, a block without having the ability to shroud 
its activity, it might cost more. In addition, other market 
participants might try to raise prices, by buying some of the desired 
bonds, or conversely, might try to lower prices, by selling some of the 
desired bonds. The commenters stated that transactions might cost more 
and other institutional market participants and the public might be 
able to free-ride on the research and strategies of an institution or a 
Dealer. Moreover, the higher costs of trades and free-riding costs 
might flow downstream to the retail Customers of institutional 
investors. In addition, the commenters alleged that the proposal to 
disseminate the Dealer/Customer data element and Buy/Sell data element 
``would undermine such institutional investors' fiduciary 
responsibilities to their customers to maintain policies and procedures 
to prevent misuse of their trading strategies.'' \20\
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    \19\ The terms riskless principal, risk position, and Dealer 
short position are the terms and characterizations of the 
commenters. See generally TBMA Letter; TBMA-AMD Letter.
    \20\ TBMA Letter at 4; TBMA-AMD Letter at 4.
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    Finally, the two commenters argued that the practice of 
disseminating dealer/customer and buy/sell data elements for 
transactions in municipal securities should not be adopted in TRACE 
because the corporate bond market is ``sufficiently distinct from the 
municipal bond market'' and such information would hinder corporate 
bond Dealers and their Customers. They asserted that generally 
municipal bonds trade less frequently, there is less trading in blocks 
by municipal bond dealers and large institutional customers, and 
municipal bond dealers do not take short positions to facilitate 
municipal securities customer trades, in contrast to corporate bond 
Dealers. Thus, with fewer large block trades and fewer short positions 
held by municipal bond dealers, the overall risk from one or more 
trades (for which information is known in the market) moving the price 
against the trading party's economic interests is significantly lower 
in the municipal market (i.e., because such large trades are 
infrequent).
    The two commenters also requested access to empirical data on TRACE 
to study the market.
    FINRA has considered the comments fully and carefully and continues 
to believe that the dissemination of the Dealer/Customer data element 
and Buy/Sell data element should occur to provide important information 
to Customers and Dealers about current pricing, to permit a meaningful 
comparison of prices, and to allow Dealers to comply with fair pricing 
and best execution obligations. Further, FINRA is not persuaded by 
those commenters who are opposed to the Proposal. None of the opposing 
comments voice any supportable proposition that the information benefit 
to TRACE data users can otherwise be obtained without the disclosure of 
the proposed information or that compliance with NASD IM-2440-2 is 
possible without the disclosure of the information since there is no 
other way to divine the necessary data elements or to use any price 
other than contemporaneous price from which the mark-up or mark-down is 
to occur. Finally, FINRA does not understand how the dissemination of 
the Buy/Sell and Dealer/Customer data elements adds materially to any 
quantum of information that exacerbates the potential for the ``reverse 
engineering'' of trading interest and strategies in comparison to the 
ability to divine such information today with the mix of TRACE 
information presently disseminated. Presumably, there are people 
reading the disseminated information today who, from such information, 
make calculated assumptions about the nature and quantity of debt 
securities for sale, trading strategies, and the identity of the 
beneficial interests behind such sales or strategies. The question not 
answered by the commenters is how the addition of a data element 
identifying either Buy/Sell or Dealer/Customer information adds 
material content that, in fact, aids in the ability to make such 
calculations more accurately. Stated another way, it is unclear how, 
even with these data elements added to the TRACE data already 
disseminated, a consumer of disseminated information will know who is 
behind a trade, the nature and extent of its strategy, and the size of 
the total debt position being disposed of or acquired. In any event, 
FINRA does not believe that those contentions, even if they could be 
established, trump the basis for the Proposal with its legitimate 
purposes under the Act and its necessary purposes under NASD IM-2440-2.
    Finally, in response to the two commenters' request for empirical 
data on TRACE to study the market, FINRA proposed to provide access to 
historic TRACE data in SR-FINRA-2007-006, which was filed with the 
Commission on August 9, 2007, and published for notice and comment on 
September 10, 2007.\21\ The proposal is currently pending before the 
Commission.
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    \21\ See Securities Exchange Act Release No. 56327 (August 28, 
2007), 72 FR 51689 (September 10, 2007) (notice of filing of SR-
FINRA-2007-006 and request for comment).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2007-026 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2007-026. This 
file number should be included on the subject line if e-mail is used. 
To help the

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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 inspection and copying 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 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-2007-026 and should be submitted 
on or before June 23, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-12161 Filed 5-30-08; 8:45 am]

BILLING CODE 8010-01-P
