In September 2009, FINRA issued its regulatory notice no. 09-57, regarding the approval by the SEC of 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. These amendments become effective March 1, 2010.
The notice may be accessed via FINRA’s website: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120043.pdf.
The amendments delete the criteria that a security be investment grade or non-investment grade and depository eligible under NASD Rule 11310(d). The amendments also expand the term “TRACE-Eligible Security” to include a debt security issued or guaranteed by an Agency or a Government-Sponsored Enterprise. For purposes of FINRA Rule 6710(k), “Agency” means a U.S. “executive agency” as defined in 5 U.S.C. § 105; however, the term “Agency” excludes the U.S. Department of the Treasury (the “Treasury”) in the exercise of its authority to issue Treasury securities. In FINRA Rule 6710(n), “Government-Sponsored Enterprise” has the same meaning as defined in 2 U.S.C. § 622(8). Fannie Mae and Freddie Mac are examples of Government-Sponsored Entities.
TRACE-Eligible Securities do not include debt securities that at issuance have maturities of one year or less. Also excluded are asset-backed securities (as that term is used in Securities Act Regulation AB, Section 1101(c)), mortgage-backed securities, collateralized mortgage obligations, synthetic asset-backed securities, or any instrument involving or based on the securitization of mortgages or other credits or assets, including but not limited to collateralized debt obligations, collateralized bond obligations, collateralized debt obligations of assetbacked securities, or collateralized debt obligations of collateralized debt obligations.
The amendments also expand TRACE to include primary market transactions as Reportable TRACE Transactions, as defined in FINRA Rule 6710(c), and require members to report transactions in Agency Debt Securities and primary market transactions under FINRA Rule 6730. FINRA identifies 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. A “Listed or Fixed Offering Price Transaction” is defined in FINRA Rule 6710(q) as a primary market sale 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 transaction effected under Securities Act Rule 144A, by an initial purchaser, syndicate manger, syndicate member, or selling group member at the published or stated fixed offering price. In FINRA Rule 6710(r), a “Takedown Transaction” means 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 form the published or stated list or fixed price offering, or (ii) in the case of a primary market sale transaction effected under 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. Listed or Fixed Offering Price Transactions and Takedown Transactions also will not be disseminated as provided in FINRA Rule 6750(b)(3).
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.
On March 1, 2010, the amended TRACE Rules and amended FINRA Rule 7730 will be effective and members must begin reporting transactions in Agency Debt Securities and primary market transactions and comply with all other requirements in these amended rules.