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FINRA Manual
Corporate Organization Notices
2009
09-66 SEC Approves Changes to FINRA's BrokerCheck Disclosure Rule to Retain and Make Publicly Available Information About Final Regulatory Actions Against Former Brokers; Effective Date: November 30, 2009
09-65 FINRA Delays the Effective Date for Increased Margin Requirements for Options on Leveraged ETFs and Day-Trading Requirements for Leveraged ETFs; New Effective Date: April 30, 2010
09-63 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Discretionary Accounts and Transactions; Comment Period Expires: December 28, 2009
09-62 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2010; Payment Deadline: December 11, 2009
09-61 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update
09-60 SEC Approval and Effective Dates for New Consolidated FINRA Rules; Effective Date (all rules except FINRA Rule 3310): December 14, 2009 Effective Date (FINRA Rule 3310): January 1, 2010
09-58 SEC Approves Amendments Regarding Best Execution and Interpositioning; Effective Date: September 8, 2009
09-57 SEC Approves Amendments Expanding TRACE to Include Agency Debt Securities and Primary Market Transactions; Effective Date: March 1, 2010
09-56 Proposed Changes to the Personnel Assessment and Gross Income Assessment Fees; Effective Date: Upon SEC Approval With an Implementation Date of January 1, 2010
09-55 FINRA Requests Comments on Proposed New Rules Governing Communications with the Public; Comment Period Expires: November 20, 2009
09-54 SEC Approves Amendments Requiring Related Market Center Indicator in Non-Tape Reports Submitted to FINRA; Effective Date: March 1, 2010
09-53 Increased Margin Requirements for Leveraged Exchange-Traded Funds and Associated Uncovered Options; Effective Date: December 1, 2009
09-52 SEC Approves Amendments to FINRA Trade Reporting Rules on OTC Equity Transactions Executed Outside Normal Market Hours; Effective Date: January 11, 2010
09-51 SEC Approves Amendments Relating to Recordkeeping and the Unsolicited Customer Order Exception of SEA Rule 15c2-11; Effective Date: September 21, 2009
09-50 SEC Approval and Effective Date for New Consolidated FINRA Rules; Effective Date (FINRA Rule 2320): October 19, 2009; Effective Date (Repeal of Incorporated NYSE Rules 134 and 440I): August 17, 2009
09-49 SEC Approves Amendments to Modernize and Simplify NASD Rule 2720 Relating to Public Offerings in Which a Member Firm With a Conflict of Interest Participates; Effective Date: September 14, 2009
09-48 SEC Approves Rule Establishing Expedited Procedures for Arbitrating Promissory Note Cases; Effective Date: September 14, 2009
09-47 New Large Options Positions Report (LOPR) Requirements Due to Implementation of Options Symbology Initiative
09-45 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Sale of Securities in a Fixed Price Offering; Comment Period Expires: September 18, 2009
09-44 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Fidelity Bonds; Comment Period Expires: September 14, 2009
09-43 SEC Approves Amendments to the Panel Composition Rules of the Arbitration Code for Industry Disputes; Effective Date: August 31, 2009
09-41 SEC Approves Rule Change Creating New Limited Representative – Investment Banker Registration Category and Series 79 Investment Banking Exam; Effective Date: November 2, 2009
09-40 SEC Approval and Effective Dates for New Consolidated FINRA Rules on Electronic Filing Requirements for Uniform Forms and Arbitration Disclosures; Effective Date (FINRA Rule 1010): July 27, 2009; Effective Date (FINRA Rule 2263): September 25, 2009
09-39 SEC Approves Changes to the FINRA Regulation Board Composition and Conforming Changes to the FINRA Regulation By-Laws; Effective Date: August 20, 2009
09-38 Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program Component of the FDIC's Temporary Liquidity Guarantee Program; Effective Date: July 15, 2009
09-36 SEC Approves an Amendment to the Tolling Provision in the Arbitration Codes for Customer and Industry Disputes; Effective Date: August 10, 2009
09-34 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Investment Company Securities; Comment Period Expires: August 3, 2009
09-33 SEC Approval and Effective Date for New Consolidated FINRA Rules; Effective Date: August 17, 2009
09-32 SEC Approves Amendments to NASD Rule 2821 Governing Purchases and Exchanges of Deferred Variable Annuities; Effective Date: February 8, 2010
09-31 FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds
09-30 SEC Approves Rule Establishing an Interim Pilot Program on Margin Requirements for Transactions in Credit Default Swaps; Effective Date: June 3, 2009
09-29 FINRA Requests Comment on Proposed FINRA Rule Addressing the Origination and Circulation of Rumors; Comment Period Expires: July 16, 2009
09-28 FINRA Reminds Firms of Their Obligation to Provide Accurate Information in Disseminating, or Using Services to Disseminate, Indications of Interest
09-27 SEC Approves New FINRA Rule 5122 Relating to Private Placements of Securities Issued by a Member Firm or a Control Entity; Effective Date: June 17, 2009
09-26 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update
09-25 Proposed Consolidated FINRA Rules Governing Suitability and Know-Your-Customer Obligations; Comment Period Expires: June 29, 2009
09-24 SEC Approves Amendments Expanding the Definition of "TRACE-Eligible Security"; Effective Date: June 15, 2009
09-23 SEC Approval of Proposed Changes to Forms U4 and U5 and FINRA Rule 8312 (FINRA BrokerCheck Disclosure); Effective Date: May 18, 2009; Effective Date (Regulatory Action Disclosure Questions): November 14, 2009
09-22 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Personal Securities Transactions for or by Associated Persons; Comment Period Expires: June 5, 2009
09-21 FINRA Adopts Amendments Relating to Reporting Transfers of Proprietary Positions in Debt and Equity Securities in Connection With Certain Corporate Control Transactions; Effective Date: May 4, 2009
09-20 SEC Approval and Effective Date for New Consolidated FINRA Rules on the Transfer of Customer Accounts, Recommendations to Customers in OTC Equity Securities and Anti-Intimidation/Coordination; Effective Date: June 15, 2009
09-19 Amendments to FINRA Rule 9520 Series to Establish Procedures Applicable to Firms and Associated Persons Subject to Certain Statutory Disqualifications; Effective Date: June 15, 2009
09-16 SEC Approves Amendments to Require Arbitrators to Provide an Explained Decision at Parties' Joint Request; Effective Date: April 13, 2009
09-15 FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Limit and Market Order Protection; Comment Period Expired: April 24, 2009
09-14 SEC Approves Alternative Means for Calculating the Minimum Price-Improvement Obligations Under Certain Circumstances; Effective Date: February 11, 2009
09-13 SEC Approves Amendments Raising the Threshold for Single Arbitrator Cases to $100,000; Effective Date: March 30, 2009
09-11 SEC Approval and Effective Date for New Consolidated FINRA Rule on Trading Ahead of Research Reports; Effective Date: April 20, 2009
09-09 Customer Account Statements and Due Diligence Requirements for Unlisted Real Estate Investment Trusts (REITs) and Direct Participation Programs (DPPs)
09-07 SEC Approves New Motion to Dismiss Rule and Amendment to the Eligibility Rule in Arbitration; Effective Date: January 23, 2009
09-06 FINRA Requests Comment on Proposed Rule to Establish a Leverage Limitation for Retail Forex; Comment Period Expires: February 20, 2009
09-05 FINRA Reminds Firms of Their Obligations to Determine Whether Securities are Eligible for Public Sale
09-04 SEC Approves Proposed Rule Change to Amend the Submission Agreement and Related Rules in the Arbitration Codes for Customer and Industry Disputes; Effective Date: February 9, 2009
09-03 FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Financial Responsibility and Operational Requirements; Comment Period Expires: February 20, 2009
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09-57 SEC Approves Amendments Expanding TRACE to Include Agency Debt Securities and Primary Market Transactions; Effective Date: March 1, 2010
Trade Reporting and Compliance Engine (TRACE)
| Regulatory Notice | |
|
Notice Type Rule Amendment New Rule |
Referenced Rules & Notices FINRA Rule Series 6700 FINRA Rule 7730 NASD Rule 11310(d) |
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Suggested Routing Compliance Executive Representatives Fixed Income Legal Operations Sales Senior Management Systems Trading Training |
Key Topic(s) Agency Debt Security Dissemination Emergency Suspension Fees Government-Sponsored Enterprise List or Fixed Offering Price Transaction New Issue Notification Primary Market Transaction Reportable TRACE Transaction Takedown Transaction TRACE-Eligible Security |
Executive Summary
The SEC approved major amendments to the TRACE Rules (FINRA Rule 6700 Series) and FINRA Rule 7730 relating to TRACE fees that will increase the number and type of securities and transactions that will be reported to TRACE. The changes become effective March 1, 2010.
Debt securities that are issued or guaranteed by an Agency or by a Government-Sponsored Enterprise (collectively, Agency Debt Securities) will become TRACE-Eligible Securities, and transactions in such securities will be reported and disseminated. Primary market transactions in TRACE-Eligible Securities will be Reportable TRACE Transactions. For certain primary market transactions—List or Fixed Offering Price Transactions or Takedown Transactions—several significant exceptions to the current TRACE requirements will apply:
The SEC also approved new FINRA Rule 6770, granting FINRA emergency authority to suspend the reporting and/or dissemination of certain transactions in TRACE-Eligible Securities, or certain reporting or dissemination requirements as market conditions warrant and in consultation with the SEC.
These and other related amendments to the TRACE Rules and FINRA Rule 7730, which the SEC approved on September 28, 2009, are discussed below.1 The amended rule text is available on our Web site at www.finra.org/notices/09-57.
Questions regarding this Notice should be directed to:
Background and Discussion
The SEC approved amendments to the FINRA Rule 6700 Series and FINRA Rule 7730 that will expand transparency in the debt securities markets by adding a significant number of securities—all Agency Debt Securities—to TRACE, and by requiring that all primary market transactions in any TRACE-Eligible Security be reported to TRACE.
The amendments:
The most significant changes to the FINRA Rule 6700 Series and FINRA Rule 7730 regarding the expansion of the TRACE program are highlighted below.
Agency Debt Securities
Under the current definition of TRACE-Eligible Security in FINRA Rule 6710(a), among other criteria, a security must be issued by a U.S. or foreign private issuer to be a TRACE-Eligible Security, which makes any security issued by an agency of the U.S. government ineligible.3 In addition, certain types of securities, including a security issued by a GSE, are specifically excluded from the defined term TRACE-Eligible Security.4
The amendments expand the term TRACE-Eligible Security to include a debt security that is issued or guaranteed by an Agency or a GSE. For purposes of FINRA Rule 6710(k), "Agency" will be defined by incorporating a broad statutory term, "executive agency," from 5 U.S.C. 105. Although the U.S. Department of the Treasury is defined as an executive agency under this federal statutory provision, for purposes of TRACE, the term "Agency" will not include the U.S. Treasury in the exercise of its authority to issue U.S. Treasury Securities.5
GSEs were created at different times and for different purposes, do not present uniform structures and, prior to and after the market events in 2008, have not been treated uniformly under various federal regulatory schemes. In FINRA Rule 6710(n), FINRA has defined an issuer or guarantor that is a GSE for purposes of TRACE by reference to the statutory definition in 2 U.S.C. 622(8).6 Fannie Mae and Freddie Mac are examples of issuers or guarantors that are GSEs.7
Under new FINRA Rule 6710(l), the securities of both types of issuers (or guarantors of issues) will be defined collectively as "Agency Debt Securities," which reflects industry convention. Specifically, under FINRA Rule 6710(l) "Agency Debt Security" will be defined as a debt security (i) issued or guaranteed by an Agency as defined in paragraph (k); or (ii) issued or guaranteed by a GSE as defined in paragraph (n). The definition also explicitly excludes U.S. Treasury Securities.
Several of the institutions that are defined as Agencies or GSEs, such as Ginnie Mae,8 Freddie Mac and Fannie Mae, are well-known issuers or guarantors of mortgage-backed and other structured securities. However, for purposes of TRACE, such securities, which are Asset-Backed Securities as broadly defined in FINRA Rule 6710(m), will not be included in the definition of TRACE-Eligible Security, as amended.9
With the foregoing parameters included, a TRACE-Eligible Security will be defined in amended FINRA Rule 6710(a) as:
a debt security that is United States 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; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an Agency as defined in paragraph (k) or a Government-Sponsored Enterprise as defined in paragraph (n). "TRACE-Eligible Security" does not include a debt security that is:(1) issued by a foreign sovereign or is a U.S. Treasury Security as defined in paragraph (p);(2) a Money Market Instrument as defined in paragraph (o); or(3) an Asset-Backed Security as defined in paragraph (m).
Primary Market Transactions
FINRA Rule 6710(c) currently defines "Reportable TRACE Transaction" as any secondary market transaction in a TRACE-Eligible Security except transactions that are not reported as specified in FINRA Rule 6730(e). As amended, FINRA Rule 6710(c) is not limited to secondary market transactions, and firms will be required to report primary market transactions in any TRACE-Eligible Security.
FINRA has identified two types of primary market transactions, List or Fixed Offering Price Transactions and Takedown Transactions, that will be subject to more liberal trade reporting requirements and two other significant modifications to the current TRACE requirements due to the nature of the transactions and the assumption that such transactions (in a single security) will be executed at a single price. A List or Fixed Offering Price Transaction will be defined in FINRA Rule 6710(q) as:
a primary market sale transaction sold on the first day of trading of a new issue: (i) by a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price.
A Takedown Transaction will be defined similarly in Rule 6710(r).10
The current TRACE requirements that will be modified for List or Fixed Offering Price Transactions and Takedown Transactions are:
Emergency Authority
Under new Rule 6770, FINRA will possess emergency authority regarding TRACE. FINRA may suspend the reporting and/or dissemination of certain transactions in TRACE-Eligible Securities, or the reporting of certain data elements that are otherwise required to be reported under FINRA Rule 6730, and/or the dissemination of certain data elements, as market conditions warrant and in consultation with the SEC.
Conclusion
Effective March 1, 2010, firms must begin reporting transactions in Agency Debt Securities and primary market transactions and otherwise comply with all other requirements in the TRACE Rules, as amended, and amended FINRA Rule 7730.
1 See Exchange Act Release No. 60726 (September 28, 2009), 74 FR 50991 (October 2, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-010).
2 Other changes that will be incorporated in the TRACE Rules and FINRA Rule 7730 include amendments to: 1) FINRA Rule 6710(h) to state that FINRA will classify an unrated Agency Debt Security as an Investment Grade security for purposes of the dissemination of trans-action volume; and 2) the FINRA Rule 6700 Series and FINRA Rule 7730 to incorporate minor amendments that conform or clarify rule text or eliminate unnecessary provisions.
3 In addition, FINRA Rule 6710(a) requires that a security that is a TRACE-Eligible Security be U.S. dollar denominated; depository eligible under NASD Rule 11310(d); Investment Grade or Non-Investment Grade (as defined, respectively, in FINRA Rules 6710(h) and (i)); and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A.
4 Other securities that are excluded are mortgage-or asset-backed securities, collateralized mortgage obligations, and money market instruments (having at issuance a maturity of one year or less).
5 Specifically, "Agency" will be defined in FINRA Rule 6710(k) as:
a U.S. "executive agency" as defined in 5 U.S.C. 105 that is authorized to issue debt directly or through a related entity, such as a government corporation, or to guarantee the repayment of principal and/or interest of a debt security issued by another entity. The term excludes the U.S. Department of the Treasury (Treasury) in the exercise of its authority to issue U.S. Treasury Securities as defined in paragraph (p).
5 U.S.C. 105 defines "executive agency" broadly to include "an Executive department, a Government corporation, and an independent establishment." Debt securities issued by most government agencies or government-affiliated entities will be included under this definition. "Executive department" is defined in 5 U.S.C. 101 to include cabinet-level agencies or departments (e.g., the Department of State, the Department of the Treasury, the Department of Commerce, the Department of Homeland Security, etc.). "Government Corporation" is defined in 5 U.S.C. 103 as "a corporation owned or controlled by the Government of the United States...." (e.g., the Pension Benefit Guaranty Corporation is a wholly owned government corporation). "Independent establishment" is defined in 5 U.S.C. 104 as "(1) an establishment in the executive branch (other than the United States Postal Service or the Postal Regulatory Commission) which is not an Executive department, military department, Government corporation, or part thereof, or part of an independent establishment; and (2) the General Accounting Office." (For example, the Federal Reserve Banks are independent establishments.)
6 In FINRA Rule 6710(l), the definition of Agency Debt Security will provide, in pertinent part, that the term Agency Debt Security excludes "an Asset-Backed Security as defined in paragraph (m) where an Agency or a Government-Sponsored Enterprise is the sponsor of the trust or other entity that issues the Asset-Backed Security, or is the guarantor of the Asset-Backed Security."
7 Fannie Mae is the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation.
8 Ginnie Mae is the Government National Mortgage Association.
9 In FINRA Rule 6710(m) "Asset-Backed Security" will mean:
an asset-backed security as used in Securities Act Regulation AB, Section 1101(c), a mortgage-backed security, a collateralized mortgage obligation, a synthetic asset-backed security, or any instrument involving or based on the securitization of mortgages or other credits or assets, including but not limited to a collateralized debt obligation, a collateralized bond obligation, a collateralized debt obligation of asset-backed securities or a collateralized debt obligation of collateralized debt obligations.
10 Specifically, a Takedown Transaction will be defined in FINRA Rule 6710(r) as:
a primary market sale transaction sold on the first day of trading of a new issue: (i) by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser or syndicate manager to a syndicate or selling group member at a discount from the published or stated fixed offering price.
11 Like FINRA Rule 6730(a)(4), FINRA Rule 6730(a)(5) will include extended reporting periods for transactions that occur on a Saturday, a Sunday, or a federal or religious holiday when the TRACE system is closed.
Under FINRA Rule 6730(d)(4)(D), members will be required to append the new indicator that identifies List or Fixed Offering Price Transactions and Takedown Transactions when reporting such transactions.
