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14-23 FINRA Issues an Interpretation to Clarify the Classification and Trade Reporting of Certain "Hybrid" Securities to FINRA; Effective Date: June 16, 2014

Trade Reporting

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Regulatory Notice
Notice Type

Guidance
Suggested Routing

Compliance
Fixed Income
Legal
Operations
Systems
Trading
Training
Key Topics

Capital Trust Security
Depositary Shares
Hybrid Security
Over-the-Counter Reporting Facility
Preferred Shares
TRACE
Transaction Reporting
Trust Preferred Security
Referenced Rules & Notices

FINRA Rule 6420
FINRA Rule 6622
FINRA Rule 6700 Series
FINRA Rule 6710
Regulation NMS
Regulation NMS Rule 600(b)(47)
Regulatory Notice 08-72
SEA Rule 144(a)(3)
SEA Rule 144A
SEA Section 31
Section 3 of Schedule A to the FINRA By-Laws

Executive Summary

FINRA is publishing this Notice to provide additional information on how trades in certain securities that have both debt- and equity-like features (hybrid securities) must be reported to FINRA. Specifically, the SEC approved an interpretation regarding the appropriate trade reporting facility to which firms should report transactions in the following three types of hybrid securities: (1) unlisted depositary shares having a liquidation preference of $1,000 or more; (2) unlisted non-convertible, preferred securities having a liquidation preference of $1,000 or more; and (3) unlisted capital trust securities (also referred to as trust preferred securities) (together, "covered hybrid securities").1

In accordance with this interpretation, on June 16, 2014, firms will be required to report transactions in covered hybrid securities to the Trade Reporting and Compliance Engine (TRACE). However, firms may request the set-up of a new hybrid security for trade reporting purposes in accordance with this interpretation prior to that date. A list of covered hybrid securities that will be moved from the OTC Reporting Facility (ORF) to TRACE on June 16, 2014, is attached as Appendix A.

Questions regarding this Notice should be directed to:

•   Ola Persson, Vice President, Transparency Services, at (212) 858-4796 or by email; or
•   Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email.

Background and Discussion

FINRA trade reporting rules generally require that firms report over-the-counter (OTC) transactions in debt securities that are "TRACE-Eligible Securities"2 and equity securities to FINRA. FINRA Rule 6622 requires that firms report OTC transactions in "OTC Equity Securities"3 to ORF and the FINRA Rule 6700 series requires firms to report transactions in TRACE-Eligible Securities to TRACE.

In consultation with the industry, FINRA has determined that the term "TRACE-Eligible Security" includes the following covered hybrid securities (and thus these securities should be reported to TRACE):4

1. unlisted capital trust and trust preferred securities;5
2. unlisted depositary shares having a liquidation preference of $1,000 or more (or a cash redemption price of $1,000 or more) that is a fractional interest in a non-convertible,6 preferred security ("hybrid $1,000 depositary share"); and
3. unlisted non-convertible, preferred securities having a liquidation preference of $1,000 or more (or a cash redemption price of $1,000 or more) ("hybrid $1,000 preferred security"), such as a hybrid $1,000 preferred security that is offered directly to an investor or a preferred security underlying multiple hybrid $1,000 depositary shares.

Any such security deemed a "TRACE-Eligible Security" would be excluded from the defined term "OTC Equity Security."7

All other preferred securities and depositary shares representing fractional interests in these securities, except the covered hybrid securities identified above, will continue to be included in the defined term "OTC Equity Security," and firms must report transactions in such securities to ORF.8 For example, a non-convertible preferred security having a par value or liquidation preference of $25 that is not listed on an equity facility of a national securities exchange would be an "OTC Equity Security" under the interpretation and would be required to be reported to ORF.

Thus, beginning on June 16, 2014, any firm reporting a trade in a hybrid security must report the transaction to the appropriate facility in compliance with this interpretation. However, prior to June 16, 2014, any firm requesting the set-up of a new hybrid security for trade reporting purposes may, but is not required to, do so in accordance with this interpretation.

A list of covered hybrid securities that will be moved from ORF to TRACE on June 16, 2014, is attached as Appendix A.


1 See Securities Exchange Act Release No. 71927 (April 10, 2014), 79 FR 21494 (April 16, 2014) (Order Approving Proposed Rule Change, as Modified by Amendment No. 1 of File No. SR-FINRA-2013-039).

2 FINRA Rule 6710(a) defines "TRACE-Eligible Security" as 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; 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). However, the term "TRACE-Eligible Security" does not include a debt security that is: issued by a foreign sovereign, a U.S. Treasury Security as defined in paragraph (p), or a money market instrument as defined in paragraph (o).

3 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)."

4 This 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–2/22/08, (FINRA applied TRACE reporting requirements, distinguishing between listed and unlisted securities, and required firms 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 Alternative Display Facility (ADF) or a trade reporting facility (TRF)). For purposes of this interpretation, the term "listed on an equityfacility 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).

5 The term "TRACE-Eligible Security" includes 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) and transactions in such securities must be reported to TRACE (and not to ORF) in compliance with the applicable reporting requirements. 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. Similarly, any other hybrid security that does not meet the definition of "covered hybrid security" solely because it is listed on a national securities exchange would be required to be reported to TRACE once delisted.

6 Non-convertible means not convertible into or exchangeable for property or shares of any other series or class of the issuer's capital stock.

7 This interpretation also applies to unlisted American Depository Receipts (ADRs) on hybrid securities in the same manner in which it applies to the underlying hybrid security. Thus, an unlisted ADR on a covered hybrid security would be excluded from the definition of "OTC Equity Security" under the interpretation and would be required to be reported to TRACE. Whereas, an unlisted ADR on a depositary share having a par value or liquidation preference of $25 would be an "OTC Equity Security" under the interpretation and would be required to be reported to ORF.

8 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.


Appendix A

CUSIP/CINS Symbol Issuer Issue Description
U0201H106 ALFI ALLY FINANCIAL 7% Perp Pfd Shs Series G—Reg S
02005N605 GMSPZ ALLY FINANCIAL, INC. PERP PFD SER G 7%
060505DT8 BACYL BANK OF AMERICA Depositary Shares Representing 1/25th Fixed to Floating (Non Cumulative Preferred Series M)
060505ED2 BCXOL BANK OF AMERICA Depositary Share representing 1/25th Preferred Series U
064058AB6 BKNML BANK OF NEW YORK Depositary Shares representing 1/100th Preferred Stock Series D
06738C828 BCBAY BARCLAYS BK ADR ADR Series 1 Repstg Preferred Shares Series 1 (United Kingdom)
05530RAB4 BBVZF BBVA INTERNATIONAL Guaranteed Preferred Securities (Spain)
U13620AA7 CPDJP CA PFD FDG TR Noncum Tr Pfd Secs Without Fxd Mty 2003
151327202 CRFDZ CENTAUR FDG CORP PREF SHS SER B 9.08% 144A
151895406 CNTOP CENTERPOINT PFD D Flexible Preferred Series D
172967GR6 CYGXL CITIGROUP INC. Depositary Shares representing 1/25th Preferred Series D
190750607 CBKAP COBANK ACB/PFD SER E Perp Preferred CL E Fixed to FLTG
239649205 DMRRP DAYTON & MICH RR CO Preferred Stock
30767E307 FCBTP FARM CREDIT BANK Perp Non Cumulative Sub Ser 1 Pfd 10% Cl B
316773CM0 FTBXL FIFTH THIRD BANCORP Depositary Share representing 1/25th Preferred Series H
31984K209 FCCTP FIRST COMNTY CORP A Preferred Series A
31984K308 FCCTO FIRST COMNTY CORP B Preferred Series B
344437504 FONRP FONAR CORP PFD Preferred Stock
369622SP1 GEAPP GENERAL ELECTRIC Perpetual Preferred Stock Series B Fixed to Floating Rate
369622ST3 GEAPO GENERAL ELECTRIC CAP Perpetual Preferred Series C
43787N207 HMTAP HOMETOWN BANKSHARES Non cumulative Perpetual Preferred
48124BAC9 JPYYL JP MORGAN Depositary Shares Representing 1/10th Preferred Series Q
46625HHA1 JFTTL JP MORGAN CHASE Depositary Shares Representing 1/10th Preferred Series I
46625HJ04 JPJOL JP MORGAN CHASE Depositary Shares Representing 1/10th Preferred Series S Fixed to Floating
46625HJW1 JPMOL JP MORGAN CHASE Depositary Shares Representing 1/10th interest fixed to floating preferred series U
48126HAA8 JPPML JP MORGAN CHASE Dep Shs Repstg l/10th Pfd Ser R
49455T202 KMRFZ KINDER MORGAN 144A Cumulative Pfd Ser A 144A
539439AA7 LLYDZ LLOYDS BANKING ADR Repstg Pref Shs 144A (United Kingdom)
539439AC3 LLYBZ LLOYDS BANKING ADR Repstg Pref Ser A 144A (United Kingdom)
539439AE9 LLYKY LLOYDS BANKING Sponsored ADR Representing Preferenced Shares Fixed to Floating Reg S (United Kingdom)
539439AF6 LLYKZ LLOYDS BANKING ADR Repstg Pref Shs Fxd Fltg 144A (United Kingdom)
G5533WAB3 LLYZF LLOYDS BANKING Preferenced Shares American Depositary receipt Representing Preferenced 100 Shares Reg (-S Fixed to Floating) (United Kingdom)
539439AB5 LYGZY LLOYDS BANKING GRP Ordinary Shares (ADR representing preferance shares Reg S) (United Kingdom)
55261FAG9 MTBPP M&T BANK Perpetual Preferred Series E Fixed to Floating
724481866 PBOWO PITNEY BOWES INC Preferred Series F 144a
693475AK1 PNCXL PNC FINANCIAL Depositary Shares Representing 1/100th Perpetual Preferred Series O
693475AM7 PNCYL PNC FINANCIAL Depositary Shares Representing 1/100th Perpetual Preferred Series R Fixed to Floating
74316E202 PSNNP PROFESSIONAL SVC PFD Preferred Stock
780097AU5 RLSPY ROYAL BANK SCOTLAND Sponsored ADR Ser U Repstg Pref U Shs (United Kingdom)
780097AE1 RBSLY ROYAL BK SCOTLAND SE American Depositary Shares
84129X206 SCSGP SOUTHCREST FINL GROU Preferred
846425841 SBSAO SPAN BROAD SER B PFD Series B Preferred Stock
900151507 TYABF TURKIYE IS BANKA REG Spons Reg S GDR
949746PM7 WFCNO WELLS FARGO Perp Pfd Cl A Ser K Fixed/Fltg
982356206 WRGFP WRIGHT G F STL & WIR Preferred Stock
983890206 XCSTP XCELARATOR STUDI PFD Preferred Stock
989701BD8 ZIONP ZIONS BANC Perpetual Preferred Series I
989701BF3 ZIONO ZIONS BANCORPORATION Series J Fixed/Floating Rate Non-Cumulative Perpetual Preferred Stock

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