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01-19 SEC Approves Trade Reporting For PORTAL Securities
The PORTAL Market
Effective Date: June 16, 2001 For PORTAL Equity Securities
On March 6, 2001, the Securities and Exchange Commission (SEC) approved amendments to the rules of The PORTAL® Market (PORTAL rules) to require that National Association of Securities Dealers, Inc. (NASD® or Association) members submit trade reports of secondary market transactions in PORTAL-designated equity securities through the Automated Confirmation Transaction Service® (ACT) and of PORTAL-designated debt securities pursuant to rules that require members to report secondary market transactions in eligible fixed income securities to the NASD, currently referred to as the "TRACE rules." Other amendments revise the security application process and eliminate unnecessary provisions in the PORTAL rules.1 The amendments to the PORTAL rules were effective when approved by the SEC, except for the reporting requirements. The reporting requirements for PORTAL equity securities will be effective on June 16, 2001. The reporting requirements for PORTAL debt securities will be effective on a date announced in a subsequent NASD Notice to Members regarding the implementation of TRACE rules. The revised text of the PORTAL rules is included with this NASD Notice to Members 01-19 (see Attachment A).
Questions concerning reporting for PORTAL equity securities may be directed to Lucy Pasqua, Supervisor, Nasdaq Market Operations, at (203) 378-0166. Questions concerning reporting for PORTAL debt securities may be directed to Justin Tubiolo, Vice President, Fixed Income Department, NASD, at (212) 858-4419 or to Sharon K. Zackula, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8985.
The NASD created The PORTAL Market for securities that are sold in private placements and are eligible for resale under SEC Rule 144A adopted under the Securities Act of 1933 (Securities Act). Rule 144A provides an exemption from SEC registration for resales by investors of privately placed securities to qualified institutional buyers (QIBS), i.e., institutional investors with at least $100 million invested in securities.
The PORTAL Market reviews whether an issue of privately placed securities meets the eligibility requirements of Rule 144A. PORTAL designation is required for all Rule 144A security issues, except investment grade rated debt,2 in order for the security to receive a CUSIP number and the book-entry services of The Depository Trust & Clearing Corporation (DTCC). An issuer of an investment grade rated debt issue can apply directly to DTCC for book-entry services under DTCC rules.
Summary Of Amendments
The PORTAL rules in the NASD Rule 5300 Series have been amended to require that NASD members submit trade reports of secondary market transactions in PORTAL equity securities through ACT pursuant to the ACT rules in the Rule 6100 Series. ACT is a system operated by The Nasdaq Stock Market® that accommodates reporting of secondary market transactions in equity securities (including preferred stock issues), and can provide automated comparison and confirmation services and can forward confirmed trades to DTCC for settlement. The reporting requirements for PORTAL equity securities are effective on June 16, 2001.
In addition, the PORTAL rules have been amended to require that trade reports of secondary market transactions in PORTAL debt securities be submitted pursuant to the TRACE rules in the Rule 6200 Series. The reporting for PORTAL debt securities will be subject to TRACE rules and will be effective on a date announced by the NASD.3
Only reporting obligations will be imposed with respect to secondary market transactions in PORTAL equity and debt securities. Members that use ACT rules for reporting secondary market transactions in PORTAL securities have, however, the option to also use automated services for comparison, confirmation, and the forwarding of confirmed trades to DTCC for settlement.
Other amendments to the PORTAL rules that revise the security application process and eliminate obsolete provisions were effective upon approval by the SEC.
The rule amendments approved by the SEC did not include a provision that would have prohibited members from entering a quotation in any PORTAL security in any electronic communications network or other inter-dealer quotation system. The NASD requested that the proposed provision be deleted in light of the potential negative effect of the provision on the liquidity of Rule 144A securities. However, members entering quotations in PORTAL securities in any electronic system should be aware of their obligations under the federal securities laws with respect to restricted securities.4
Description Of Amendments
Definitions - Rule 5310
PORTAL Equity Security—The term "PORTAL equity security" is defined to include any:
security that represents an ownership interest in a legal entity, including but not limited to any common, capital, ordinary, preferred stock, or warrant for any of the foregoing, shares of beneficial interest, or the equivalent thereof (regardless of whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, exerciseable or non-exerciseable, callable or non-callable, redeemable or nonredeemable).
PORTAL Debt Security—The term "PORTAL debt security" is defined to include all PORTAL securities that are:
United States dollar denominated debt securities issued by United States and/or foreign private corporations, but shall not include mortgage- or asset-backed securities, collateralized mortgage obligations, money market instruments, or municipal or municipalderivative securities.
This definition is consistent with the definition of "TRACE-eligible security" in the TRACE rules.
Time Of Execution—The commencement of the obligation to report a secondary market transaction in a PORTAL security occurs at the "time of execution." This term is defined to mean:
the time when all of the terms of a transaction in a PORTAL security have been agreed to that are sufficient to calculate the dollar price of the transaction and a determination has been made that the transaction is in compliance with Rule 144A or any other applicable exemption from registration under Section 5 of the Securities Act.
If the time of execution must be included in the trade report for a secondary market transaction in a PORTAL security, the reported time may reflect the time necessary to determine that the transaction is in compliance with Rule 144A or another applicable exemption from Securities Act registration. This definition differs from that in TRACE rules, which is only intended to apply to non- PORTAL securities.
PORTAL Market System—The definition of "PORTAL Market system" has been revised to allow the Association to designate one or more computer systems to accept trade reports or to display transaction, quotation or other information on PORTAL securities.
PORTAL Transaction Report—The definition of "PORTAL transaction report" has been revised to eliminate the requirement that trade reports be submitted within 15 minutes of the execution of the transaction.
Reporting Requirements Rule 5332
General Reporting Obligation— Rule 5332 that contains the reporting requirements for PORTAL securities has been significantly revised.5 New paragraph (a) of Rule 5332 requires that all secondary market transactions in PORTAL equity securities be reported through ACT, except for those transactions meeting certain exceptions in the TRACE rules discussed below.6 Members may, at their option, also use the confirmation, comparison, and |settlement features of ACT with respect to secondary market transactions in PORTAL equity securities.7
New paragraph (b) of Rule 5332 requires that all secondary market transactions in PORTAL debt securities be reported pursuant to TRACE rules, except for transactions that meet the exceptions in the TRACE rules.
Exceptions From Reporting Obligation—The exceptions to the transaction reporting obligations in Rule 5332(a) for PORTAL equity securities are contained in Rules 6230(e)(1) through (4) of the TRACE rules for reporting secondary market transactions in debt securities.
Two of the trade reporting exceptions have a special applicability to PORTAL securities. In a traditional private placement, the issuer sells its securities to investors under Section 4(2) of the Securities Act, with any participating broker/dealer acting solely as agent. In a "Rule 144A private placement," the issuer sells its securities under Section 4(2) of the Securities Act to a single broker/dealer. That broker/dealer-purchaser resells the securities to the initial QIBs in reliance on Rule 144A.
Rule 6230(e)(1) of the TRACE rules excepts from reporting "transactions which are part of a primary distribution by an issuer." This provision will except from reporting resales of PORTAL equity securities by a broker/dealer in a "Rule 144A private placement" to the first QIB purchasers, so long as the broker/dealer is acting as an intermediary.
Rule 6230(e)(2) of the TRACE rules excepts from reporting "transactions made in reliance on Section 4(2) of the Securities Act of 1933."This provision will except from reporting initial sales f PORTAL equity securities by an issuer to a broker/dealer acting as purchaser in a "Rule 144A private placement" or to investors that purchase through a broker/dealer acting solely as placement agent in a traditional private placement.
Where, however, a broker/dealer purchases PORTAL securities from the issuer in a private placement as an investment or is unable to immediately sell all of the securities it purchased intending to act as an intermediary, the broker/dealer will be considered the initial investor in such securities. Under these circumstances, the broker/dealer is obligated to report its resales of the PORTAL securities because none of the trade reporting exceptions are available for the resale transaction.
Thus, the first transaction in a PORTAL security that is subject to trade reporting will be a resale by:
- an investor who has purchased directly from the issuer in a traditional private placement (where a broker/ dealer has only acted as an agent);
- a QIB that has purchased directly from the broker/dealerpurchaser in a "Rule 144A private placement;" or
- a broker/dealer that is considered to be the initial investor purchasing from the issuer.
Information In Trade Reports/Time Of Submission—Trade reports for secondary market transactions PORTAL securities are required to include the same information that is required in a trade report for other securities reported through ACT or pursuant to TRACE rules. Thus, Rule 5332(a) requires that a PORTAL transaction report include the trade report information required by Rule 6130(d) of the ACT rules, and specifically requires that the trade report include the time of execution because PORTAL equity trade reports are unlikely to be reported within 90 seconds of execution. PORTAL transaction reports for equity securities are required to be submitted no later than 6:30 p.m., Eastern Time, to ACT or the currently effective close of the ACT reporting session.
The requirements of the TRACE rules will regulate the content and timing of the submission of trade reports on PORTAL debt securities.
The obligation to submit a trade report with respect to a secondary market trade in a PORTAL security commences as of the time of execution for a PORTAL security, which—as discussed above—takes into account the member's obligation to make a determination that an exemption from registration is available for the transaction.
Party Obligated To Submit Trade Report—Rule 5332(a) incorporates the requirements in Rule 6130(c) of the ACT rules that specify which party to a secondary market transaction in a PORTAL equity security is obligated to report the transaction. The requirements of the TRACE rules will determine the party responsible for the submission of trade reports in PORTAL debt security.
Rule 144/Offshore Transactions Provision—Rule 5332(c), previously paragraph (d), has been revised to clarify that members are obligated under PORTAL rules to report the resale of PORTAL securities:
- into the U.S. public market under the exemption provided by SEC Rule 144; and
- from the U.S. private market to an offshore market or from an offshore market to the U.S. private market.
Transactions in PORTAL securities that occur entirely offshore are not required to be reported.
Imposition Of Fees For Trade Reporting—Under new Rule 5332(d) of the PORTAL rules, members submitting trade reports to ACT with respect to secondary market transactions in PORTAL equity securities will be subject to the same fees currently imposed on other members reporting through ACT under the Rule 7000 Series.8 The submission of trade reports in PORTAL securities to ACT and pursuant to TRACE rules are not subject to SEC transaction fees under Subsection 31(d)(1) of the Securities Exchange Act of 1934.
Designation Of PORTAL Securities - Rule 5320
Modification Of PORTAL Security Application Process—Rule 5321 currently requires that an application for designation of a security as a PORTAL security shall be submitted by a PORTAL dealer or broker. Because it is no longer necessary to qualify broker/dealers as PORTAL dealers or brokers, Rule 5321(a) has been amended to permit any member of the Association or the issuer of the securities to submit an application for designation of a security as a PORTAL security.
In addition, Rule 5321(a) has been revised to require that an application for designation of a PORTAL security include three undertakings proposed to be adopted as new paragraph (c) of Rule 5321. The undertakings may be provided by a member that is submitting the application or by the issuer in lieu of the applicant-member. New paragraph (c) requires that an applicant undertake to promptly advise the Association when the issuer has submitted to the SEC a registration statement to register the resale of a PORTAL security, securities to be exchanged for a PORTAL security, or securities into which the PORTAL security is exchangeable or convertible. In addition, the applicant must undertake to promptly advise the Association of the effectiveness of such a registration statement.
Paragraph (c) also requires that an applicant undertake to promptly advise the Association of the assignment of any CUSIP or CINS security identification to the PORTAL security or any tranch of a PORTAL security issue.
Modification Of PORTAL Security Designation Requirements—The qualification criteria for PORTAL securities in Rule 5322(a)(3) have been amended to require that a PORTAL security must be a "depository eligible security." The definition of this term in Rule 11310 would operate to only include securities with book-entry services at DTC.
Deletion Of Obsolete Provisions
The PORTAL rules have been amended to delete a large number of obsolete provisions.
Registration Of PORTAL Dealers, Brokers, And Qualified Investors—The original concept of The PORTAL Market was that only designated broker/dealers and investors would trade in an closed system. Remnants of this concept were retained in the PORTAL rules and are now deleted. The following rules and related definitions have been deleted: Rules 5338, 5339, 5340, 5350, 5351, 5351, 5352, 5353, and Rule 5360; and "PORTAL broker," "PORTAL dealer," "PORTAL participant," and "PORTAL qualified investor."
Quotations, Trading, Uniform Practice—The PORTAL rules contain provisions that were intended to regulate the quotation and trading of PORTAL securities between PORTAL participants on a PORTAL-designated computer system. The following rules and related definitions have been deleted: Rules 5370, 5371, 5372, 5373, 5375, 5376, 5377, 5378, 5379, and 5380; 9 and "PORTAL account instruction system," "PORTAL clearing organization," "PORTAL clearing system," "PORTAL depository organization," "PORTAL depository system," "PORTAL Market Information," and "Short Sale."
Previously Adopted Reporting Requirements—The provisions of Rule 5332 that previously were adopted to require that PORTAL dealers and brokers report transactions in PORTAL securities have been mostly replaced by the new reporting requirements discussed above. The following rules and related definitions have been deleted: Rules 5333, 5334, 5335, 5336 and 5337; and "execution," "PORTAL non-participant report," "PORTAL surveillance report," and "PORTAL transaction report."
1 SEC Release No. 34-44042 (March 6, 2001).
2 Investment grade rated debt is a debt security rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories. See, Rule 6210(p).
3 SEC Release No. 34-43873 (Jan. 23, 2001); 66 FR 8131 (Jan. 29, 2001). Information submitted in trade reports on secondary market transactions in PORTAL debt securities and in Rule 144A investment grade debt securities will not be publicly disseminated. See, NASD Notice to Members 01-18.
4 See, discussion of members' obligations under the federal securities laws with respect to quotations in PORTAL securities in Adopting Release.
5 The reporting requirements deleted from Rule 5332 have never been implemented.
6 Transaction reports for secondary market trades in PORTAL equity securities are not subject to "prompt last sale reporting" and, therefore, not subject to SEC transaction fees under Subsection 31(d)(1) of the Securities Exchange Act of 1934.
7 In its release adopting Rule 144A, the SEC issued an interpretation of its Uniform Net Capital Rule, Rule 15c3-1, with respect to securities which are eligible for resale under Rule 144A. The SEC has not modified its position as a result of this adoption of trade reporting for PORTAL equity securities. See, SEC Release No. 33-6862 (April 23, 1990); 55 Fed.Reg.17933 (April 30, 1990).
8 Trade reports submitted pursuant to TRACE rules will be subject to fees to be adopted by the NASD.
9 The NASD's Uniform Practice Code has been amended to apply to resales of restricted securities as defined in Rule 144(a)(3) under the Securities Act. See, paragraph (a) of Rule 11100, NASD Manual (CCH).
Revised Text of PORTAL Rules
5300. THE PORTAL® MARKET
For purposes of the PORTAL® Market Rules, unless the context requires otherwise:
5320. Requirements Applicable to PORTAL Securities
5321. Application for Designation
5322. Qualification Requirements for PORTAL Securities
5323. Suspension or Termination of a PORTAL Security Designation
5324. Review of Denial, Suspension or Termination of a PORTAL Security
A determination by the Association to deny, suspend or terminate the designation of a PORTAL security may be reviewed upon application by the aggrieved person pursuant to the provisions of the Rule 4800 Series.
5325. PORTAL Entry Fees
When an issuer or member submits an application for designation of any class of securities as a PORTAL security, it shall pay to the Association a filing fee of $2,000.00 for an application covering a security or group of identifi- able securities issuable as part of a single private placement covered by the same offering documents, plus $200.00 per assigned security symbol that is in addition to the first symbol assigned.
5330. Requirements Applicable to Members of the Association
5331. Limitations on Transactions in PORTAL Securities
5332. Reporting Debt and Equity Transactions in PORTAL Securities
The facilities of the Association's Arbitration Department, and the procedures of the Code of Arbitration Procedure shall be available to members to resolve disputes arising from PORTAL transactions and transfers or activities related thereto.
5350. Rules of the Association