
[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Notices]
[Pages 59995-59997]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23681]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70482; File No. SR-FINRA-2013-039]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Clarify 
the Classification and Reporting of Certain Securities to FINRA

September 24, 2013.
    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 September 16, 2013, the 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. 
The Commission is publishing this notice to solicit comments 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is filing a proposed rule change to adopt an interpretation 
to clarify the classification and the reporting of certain securities 
to FINRA.
    The proposed rule change does not make any changes to the text of 
FINRA rules.

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
    FINRA trade reporting rules generally require that members report 
over-the-counter (``OTC'') transactions in debt securities that are 
TRACE-Eligible Securities and equity securities to

[[Page 59996]]

FINRA.\3\ FINRA Rule 6622 requires that members report OTC transactions 
in ``OTC Equity Securities'' \4\ to the ORF and the FINRA Rule 6700 
Series requires members to report transactions in ``TRACE-Eligible 
Securities'' to TRACE.\5\
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    \3\ See FINRA Rules 6282 (relating to the Alternative Display 
Facility (``ADF'')), 6380A (relating to the FINRA/Nasdaq Trade 
Reporting Facility), 6380B (relating to the FINRA/NYSE Trade 
Reporting Facility), 6622 (relating to the OTC Reporting Facility 
(``ORF'')) and 6730 (relating to the Trade Reporting and Compliance 
Engine (``TRACE'')).
    \4\ FINRA Rule 6420(f) defines ``OTC Equity Security'' to 
include ``any equity security that is not an `NMS stock' as that 
term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, 
however, that the term `OTC Equity Security' shall not include any 
Restricted Equity Security.'' FINRA Rule 6420(k) defines 
``Restricted Equity Security'' to mean ``any equity security that 
meets the definition of `restricted security' as contained in 
Securities Act Rule 144(a)(3).''
    \5\ FINRA Rule 6710(a) defines ``TRACE-Eligible Security'' to 
include ``a debt security that is United States (`U.S.') dollar-
denominated and issued by a U.S. or foreign private issuer, and, if 
a `restricted security' as defined in Securities Act Rule 144(a)(3), 
sold pursuant to Securities Act Rule 144A.''
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    FINRA recently has received inquiries regarding the appropriate 
classification of certain ``hybrid'' securities for trade reporting 
purposes. FINRA is aware that as new securities are created and issued, 
in some cases, the newer hybrid iteration, although derived from a 
traditional security, may be increasingly complex, and may have both 
debt- and equity-like features. These hybrid securities are frequently 
designed to straddle both classifications for a variety of purposes, 
including the tax treatment applicable to issuers and recipients when 
distributions are made (or not made) to holders of the security, and 
the treatment of the principal as capital for issuers subject to 
capital requirements. As such, determining whether these hybrid 
securities should be classified as ``debt'' or ``equity'' for purposes 
of trade reporting to the appropriate FINRA facility has become less 
clear.
    Given the complexity of these hybrid securities, FINRA proposes an 
interpretation regarding the classification and reporting of two 
categories of hybrid securities (depositary shares and capital trust 
securities (also referred to as trust preferred securities)) to clarify 
the appropriate trade reporting facility to which such securities 
should be reported.\6\ In addition, FINRA proposes a policy to address 
the treatment of securities that are currently being reported to a 
facility that is not the designated facility under this interpretation.
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    \6\ The proposed interpretation applies solely to a hybrid 
security that is not listed on an equity facility of a national 
securities exchange. See, e.g., FINRA Trade Reporting Notice, 
February 22, 2008 (FINRA applied TRACE reporting requirements, 
distinguishing between listed and unlisted securities, and required 
members to report transactions in unlisted convertible debt and 
unlisted equity-linked notes to TRACE, and OTC transactions in 
convertible debt and equity-linked notes listed on an equity 
facility of a national securities exchange to an appropriate FINRA 
equity trade reporting facility for NMS Stocks (the ADF or a trade 
reporting facility (``TRF'')). For purposes of this proposed rule 
change, the term ``listed on an equity facility of a national 
securities exchange'' means a security that qualifies as an NMS 
stock (as defined in Rule 600(b)(47) of Regulation NMS under the 
Act) as distinguished from a security that is listed on a bond 
facility of a national securities exchange. See 17 CFR 
242.600(b)(47).
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Depositary Shares
    FINRA proposes to interpret the term OTC Equity Security to include 
a depositary share that is not listed on an equity facility of a 
national securities exchange. Depositary shares generally are 
securities that represent a fractional interest in a share of preferred 
stock, which is considered an equity security. Depositary shares 
generally entitle the holder, through the depositary, to a proportional 
fractional interest in the rights, powers and preferences of the 
preferred stock represented by the depositary share. Under this 
interpretation, members must request a symbol, if one has not already 
been assigned, for such depositary shares for ORF reporting in 
compliance with the applicable reporting requirements. Members must 
also report in accordance with ORF requirements; for example, price 
should be reported as the dollar price per share and volume should be 
reported as the number of depositary shares traded.\7\
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    \7\ See FINRA Rule 6622; see also Trade Reporting FAQ 101.6, 
available at www.finra.org/Industry/Regulation/Guidance/p038942#101.
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Capital Trust Securities
    FINRA proposes to interpret the term TRACE-Eligible Security to 
include capital trust securities and trust preferred securities. 
Historically, many of these securities, particularly those issued with 
$1,000 par value and not listed on an equity facility of a national 
securities exchange, were reported to Fixed Income Pricing System 
(``FIPS'') prior to the implementation of TRACE.\8\ When TRACE was 
proposed, FIPS securities were to be transferred to TRACE.\9\ In 
addition, as part of the proposal, FINRA (then NASD) specifically 
identified capital trust securities in a list of instruments that NASD 
considered TRACE-Eligible Securities, which would be reported to TRACE 
and otherwise subject to the FINRA Rule 6700 Series requirements.\10\
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    \8\ FINRA (formerly, the National Association of Securities 
Dealers, Inc. (``NASD'')) operated FIPS through its then subsidiary, 
NASDAQ. FIPS began in April 1994 and collected transaction and 
quotation information on domestic, registered, non-convertible high-
yield corporate bonds. OTC capital trust securities and trust 
preferred securities were treated as FIPS securities and often 
included in the regularly published lists of the most actively-
traded FIPS securities, referred to as the ``FIPS 50.'' See 
Securities Exchange Act Release No. 43873 (January 23, 2001), 66 FR 
8131 (January 29, 2001) (Order Approving Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 4, Relating to the Creation of a Corporate Bond Trade 
Reporting and Transaction Dissemination Facility and the Elimination 
of Nasdaq's Fixed Income Pricing System) (File No. SR-NASD-99-65) 
(``SEC TRACE Approval Order'').
    \9\ See, e.g., SEC TRACE Approval Order, 66 FR 8131, at 8132-
8133, note 13 and note 16.
    \10\ In SR-NASD-99-65, FINRA (then NASD) indicated that capital 
trust securities would be TRACE-Eligible Securities. See Securities 
Exchange Act Release No. 42201 (December 3, 1999), 64 FR 69305, at 
69309 (December 10, 1999) (Notice of Filing of Proposed Rule Change 
Relating to the Creation of a Corporate Bond Trade Reporting and 
Transaction Dissemination Facility and the Elimination of Nasdaq's 
Fixed Income Pricing System (``FIPS'')) (File No. SR-NASD-99-65); 
see also SEC TRACE Approval Order.
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    FINRA is clarifying that capital trust securities and trust 
preferred securities (other than a capital trust security or a trust 
preferred security that is listed on an equity facility of a national 
securities exchange) must be reported to TRACE (and not to ORF) and 
transactions in such securities must be reported in compliance with the 
applicable reporting requirements.\11\ For example, price should be 
reported as a percentage of par value and volume should be reported as 
the total par value of the transaction (not the number of bonds 
traded).\12\
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    \11\ This interpretation would apply even if the capital trust 
security (or a trust preferred security) was previously listed on an 
equity facility of a national securities exchange and reported to a 
FINRA equity facility, but has since been delisted. Once delisted, 
the security must be reported to TRACE.
    \12\ See FINRA Rule 6730.
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Hybrid Securities Currently Being Reported to ORF and TRACE
    FINRA believes that, given the complexity of many of the securities 
that are the subject of this proposed rule change, it is reasonable 
that firms, despite their best efforts, may have reached different 
conclusions on where transactions in these hybrid securities should be 
reported. FINRA proposes that, as of the effective date of this 
proposed rule change, securities that are affected by this 
interpretation will be transferred, if necessary, for reporting to the 
appropriate trade reporting facility, and after this transfer members 
must report all transactions in such securities to the appropriate 
trade reporting facility. Members will not be required to retroactively 
cancel and correct any

[[Page 59997]]

transactions in such securities previously reported to a facility that 
is not the designated facility under this interpretation. Thus, members 
will not be required to cancel and correct transactions in capital 
trust securities reported to the ORF or transactions in depositary 
shares reported to TRACE prior to the effective date of this proposed 
rule change.\13\ However, if a firm reported a transaction to the 
facility designated in this proposed interpretation, but did not report 
in accordance with applicable trade reporting requirements of that 
facility (e.g., a firm reported a transaction to ORF, but inaccurately 
reported the price or size as if reporting to TRACE), the firm will be 
required to cancel and re-report such transactions accurately.
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    \13\ Pursuant to Section 31 of the Act, FINRA and the national 
securities exchanges are required to pay transaction fees and 
assessments to the SEC that are designed to recover the costs 
related to the government's supervision and regulation of the 
securities markets and securities professionals. See 15 U.S.C. 78ee. 
FINRA obtains its Section 31 fees and assessments from its 
membership, in accordance with Section 3 of Schedule A to the FINRA 
By-Laws. The transactions that are assessable under Section 3 of 
Schedule A to the FINRA By-Laws are reported to FINRA through one of 
FINRA's equity trade reporting facilities: The ORF, the ADF, or a 
TRF. As expressly stated in the Act, sales of bonds, debentures, or 
other evidence of indebtedness (debt securities) are excluded from 
Section 31 of the Act. See 15 U.S.C. 78ee(b). Because of this 
exclusion under Section 31 of the Act, transactions reported to 
TRACE are not subject to the regulatory transaction fee under 
Section 3 of Schedule A to the FINRA By-Laws. To determine whether a 
non-exchange listed security is an equity security or a debt 
security for purposes of assessing the regulatory transaction fee, 
FINRA relies on the facility to which the transaction is reported. 
If the transaction is reported to the ORF, the transaction is 
treated as one involving an equity security and is subject to the 
regulatory transaction fee. If the transaction is reported to TRACE, 
the transaction is treated as one involving a debt security and thus 
is not subject to the regulatory transaction fee. See Regulatory 
Notice 08-72 (November 2008).
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    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 will be no later than 90 days 
following publication of the Regulatory Notice announcing 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,\14\ 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 by clarifying the classification 
of certain hybrid securities for reporting purposes the proposed rule 
change will reduce market and investor confusion. In addition, FINRA 
believes that the proposed rule change will improve transparency 
significantly because members will report transactions in the same 
security using a uniform set of conventions and to the same facility 
(i.e., the ORF or TRACE). This will allow investors and other market 
participants to better compare transaction pricing and the quality of 
their executions, which promotes just and equitable principles of 
trade, deters fraudulent and manipulative acts and practices in the 
market for such securities, and furthers the protection of investors 
and the public interest.
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    \14\ 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. Members that are required 
currently to report transactions in hybrid securities will continue to 
be subject to transaction reporting requirements and will be provided 
clarity as to which facility such hybrid securities should be reported, 
which will promote uniformity and consistency in trade reporting within 
these categories of products.

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 will:
    (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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-039 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-2013-039. 
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 the filing will also be 
available for inspection and copying at 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 publicly available. All 
submissions should refer to File Number SR-FINRA-2013-039 and should be 
submitted on or before October 21, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23681 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P


