
[Federal Register Volume 78, Number 177 (Thursday, September 12, 2013)]
[Notices]
[Pages 56251-56253]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22167]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \10\ Public Law 112-106, 126 Stat. 306.
    \11\ See Notice, 78 FR at 44998.
    \12\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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+.''
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \18\ See Notice, 78 FR at 45000 n.29.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \19\ See supra note 7.
    \20\ ICI Letter at 2.
    \21\ See OFI Letter at 2.
    \22\ See id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \27\ See 2001 TRACE Order, 66 FR at 8132.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22167 Filed 9-11-13; 8:45 am]
BILLING CODE 8011-01-P


