Daily Rules, Proposed Rules, and Notices of the Federal Government
The current definition of "TRACE-eligible security" in Rule 6710(a) was adopted in 2002 and has not been amended. FINRA generally believes that this definition is sufficiently broad to require the reporting of, and provide price transparency for, a substantial portion of corporate debt securities that are eligible for public sale. However, FINRA has identified several situations where corporate debt securities that are eligible for public sale in the secondary market are trading without TRACE price transparency. According to FINRA, such securities are in many cases "exempted securities" under Section 3 of the Securities Act.
Therefore, FINRA has proposed to amend Rule 6710(a), the definition of "TRACE-eligible security," by eliminating the requirement that such securities be "(1) registered under the Securities Act; or (2) issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Securities Act Rule 144A." This change would expand TRACE eligibility to include additional corporate debt securities that are eligible for public sale, and may have participation by retail investors. Moreover, FINRA notes that its obligation to conduct surveillance in the corporate bond market is not limited to transactions in securities that are registered under the Securities Act, and that its equity trade reporting rules generally apply to any equity securities eligible for public sale and do not consider registration a factor. FINRA believes that expanding TRACE eligibility in this manner "is vital to its mandate to regulate the market, to promote market integrity and to protect investors."
FINRA also has proposed to add the phrase "and, if a 'restricted security' as defined in Securities Act Rule 144(a)(3)" in place of the deleted language discussed in the preceding paragraph. Thus, if a security were a restricted security, it would be TRACE-eligible if it were sold pursuant to Rule 144A under the Securities Act
The Commission received two comments on the proposed rule change.
Another commenter argued that FINRA has "not provided any direction or clarity regarding the operational requirements" of reporting certain Regulation S
In response, FINRA stated that the proposed rule change does not require members to report bona fide off-shore Regulation S transactions to TRACE. If a security that is the subject of a Regulation S offering were subsequently part of a U.S. transaction that is required to be reported to TRACE, such securities generally would be assigned CUSIPs. FINRA stated, however, that it would provide guidance on reporting obligations if certain TRACE-eligible securities had for some reason not been assigned a CUSIP number. Finally, FINRA stated that it would establish an effective date that will provide firms sufficient time to make any minor operational enhancements needed to report these types of transactions.
FINRA also responded to the commenter's request for a grace period to report transactions in securities offered under Regulation S and other securities that a member finds are not in the TRACE system at the time the member is required to report a transaction. FINRA responded that members that are a party to a transaction in a TRACE-eligible security are required to report the transaction, and if the CUSIP for a TRACE-eligible security is not in the TRACE system, a member must notify FINRA Operations promptly, provide the CUSIP and other identifying information, and thereafter report the member's transaction. FINRA stated that it takes into account a delay in reporting that may occur if a member, upon trying to report a transaction, determines that the member first must notify FINRA Operations and provide the CUSIP and other identifying information for the security to be added to TRACE. Rather than supporting the proposed grace period, FINRA advises members to maintain a record of any notifications the member provides to FINRA Operations, which FINRA would view as a mitigating factor in reviewing the transaction report(s) in such security of members providing notification. FINRA further suggested that, where there has been prompt notification and reporting of a security as soon as possible after the security is included in TRACE, FINRA generally would not include such trades in any regulatory inquiry directed to the firm and that, generally, it would be unlikely for such late trades to form the factual basis for formal or informal action, absent other regulatory concerns or violations.
Also in Amendment No. 1, FINRA deleted certain language from its Form 19b-4 wherein it discussed the purpose of the proposed rule change.
After carefully considering the proposal and the comments submitted, 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.
The Commission believes that it is reasonable and consistent with the Act for FINRA to broaden the definition of "TRACE-eligible security" in the manner set forth in the proposal. The larger universe of transactions in corporate debt securities that are subject to TRACE reporting should result in greater transparency for market participants and the public. Including in the audit trail additional corporate debt securities that are eligible for public sale (and that otherwise meet the standards for TRACE eligibility) should enhance FINRA's surveillance efforts, as FINRA's obligation to conduct surveillance in the corporate bond market is not limited to transactions in securities that are registered under the Securities Act.
In addition, the Commission believes that amending the definition of "TRACE-eligible security" in Rule 6710(a) to include all restricted securities sold pursuant to Rule 144A, rather than only those preceded by an offering exempt pursuant to Securities Act Section 4(2), is a reasonable expansion of TRACE reporting. The additional transaction data will allow FINRA to obtain a more complete audit trail of transactions in corporate debt securities.
The Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1 thereto, before the thirtieth day after the date of publication of notice of filing of Amendment No. 1 in the
Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods:
* Use the Commission's Internet comment form (
* Send an e-mail to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.