September 24, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) 
and Rule 19b-4 thereunder,
notice is hereby given that on September 16, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FINRA is filing a proposed rule change to adopt an interpretation to clarify the classification and the reporting of certain securities to FINRA.
The proposed rule change does not make any changes to the text of FINRA rules.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
FINRA trade reporting rules generally require that members report over-the-counter (“OTC”) transactions in debt securities that are TRACE-Eligible Securities and equity securities to Start Printed Page 59996FINRA.
FINRA Rule 6622 requires that members report OTC transactions in “OTC Equity Securities” 
to the ORF and the FINRA Rule 6700 Series requires members to report transactions in “TRACE-Eligible Securities” to TRACE.
FINRA recently has received inquiries regarding the appropriate classification of certain “hybrid” securities for trade reporting purposes. FINRA is aware that as new securities are created and issued, in some cases, the newer hybrid iteration, although derived from a traditional security, may be increasingly complex, and may have both debt- and equity-like features. These hybrid securities are frequently designed to straddle both classifications for a variety of purposes, including the tax treatment applicable to issuers and recipients when distributions are made (or not made) to holders of the security, and the treatment of the principal as capital for issuers subject to capital requirements. As such, determining whether these hybrid securities should be classified as “debt” or “equity” for purposes of trade reporting to the appropriate FINRA facility has become less clear.
Given the complexity of these hybrid securities, FINRA proposes an interpretation regarding the classification and reporting of two categories of hybrid securities (depositary shares and capital trust securities (also referred to as trust preferred securities)) to clarify the appropriate trade reporting facility to which such securities should be reported.
In addition, FINRA proposes a policy to address the treatment of securities that are currently being reported to a facility that is not the designated facility under this interpretation.
FINRA proposes to interpret the term OTC Equity Security to include a depositary share that is not listed on an equity facility of a national securities exchange. Depositary shares generally are securities that represent a fractional interest in a share of preferred stock, which is considered an equity security. Depositary shares generally entitle the holder, through the depositary, to a proportional fractional interest in the rights, powers and preferences of the preferred stock represented by the depositary share. Under this interpretation, members must request a symbol, if one has not already been assigned, for such depositary shares for ORF reporting in compliance with the applicable reporting requirements. Members must also report in accordance with ORF requirements; for example, price should be reported as the dollar price per share and volume should be reported as the number of depositary shares traded.
Capital Trust Securities
FINRA proposes to interpret the term TRACE-Eligible Security to include capital trust securities and trust preferred securities. Historically, many of these securities, particularly those issued with $1,000 par value and not listed on an equity facility of a national securities exchange, were reported to Fixed Income Pricing System (“FIPS”) prior to the implementation of TRACE.
When TRACE was proposed, FIPS securities were to be transferred to TRACE.
In addition, as part of the proposal, FINRA (then NASD) specifically identified capital trust securities in a list of instruments that NASD considered TRACE-Eligible Securities, which would be reported to TRACE and otherwise subject to the FINRA Rule 6700 Series requirements.
FINRA is clarifying that 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) must be reported to TRACE (and not to ORF) and transactions in such securities must be reported in compliance with the applicable reporting requirements.
For example, price should be reported as a percentage of par value and volume should be reported as the total par value of the transaction (not the number of bonds traded).
Hybrid Securities Currently Being Reported to ORF and TRACE
FINRA believes that, given the complexity of many of the securities that are the subject of this proposed rule change, it is reasonable that firms, despite their best efforts, may have reached different conclusions on where transactions in these hybrid securities should be reported. FINRA proposes that, as of the effective date of this proposed rule change, securities that are affected by this interpretation will be transferred, if necessary, for reporting to the appropriate trade reporting facility, and after this transfer members must report all transactions in such securities to the appropriate trade reporting facility. Members will not be required to retroactively cancel and correct any Start Printed Page 59997transactions in such securities previously reported to a facility that is not the designated facility under this interpretation. Thus, members will not be required to cancel and correct transactions in capital trust securities reported to the ORF or transactions in depositary shares reported to TRACE prior to the effective date of this proposed rule change.
However, if a firm reported a transaction to the facility designated in this proposed interpretation, but did not report in accordance with applicable trade reporting requirements of that facility (e.g., a firm reported a transaction to ORF, but inaccurately reported the price or size as if reporting to TRACE), the firm will be required to cancel and re-report such transactions accurately.
FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 90 days following publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,
which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that by clarifying the classification of certain hybrid securities for reporting purposes the proposed rule change will reduce market and investor confusion. In addition, FINRA believes that the proposed rule change will improve transparency significantly because members will report transactions in the same security using a uniform set of conventions and to the same facility (i.e., the ORF or TRACE). This will allow investors and other market participants to better compare transaction pricing and the quality of their executions, which promotes just and equitable principles of trade, deters fraudulent and manipulative acts and practices in the market for such securities, and furthers the protection of investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Members that are required currently to report transactions in hybrid securities will continue to be subject to transaction reporting requirements and will be provided clarity as to which facility such hybrid securities should be reported, which will promote uniformity and consistency in trade reporting within these categories of products.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
- Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR- FINRA-2013-039. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR-FINRA-2013-039 and should be submitted on or before October 21, 2013.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2013-23681 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P