[Federal Register: September 22, 2004 (Volume 69, Number 183)]
[Notices]
[Page 56806-56808]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se04-99]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50376]
Order Granting Exemption to National Association of Securities
Dealers, Inc. From Certain Reporting Requirements Under Section 31 of
the Exchange Act
September 14, 2004.
I. Introduction
Section 36 of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ authorizes the Securities and Exchange Commission
(``Commission'')--by rule, regulation, or order--to conditionally or
unconditionally exempt any person, security, transaction (or any class
or classes of persons, securities, or transactions) from any provision
or provisions of the Exchange Act or any rule or regulation thereunder,
to the extent such exemption is necessary or appropriate in the public
interest and is consistent with the protection of investors. By this
Order, the Commission is exempting the National Association of
Securities Dealers, Inc. (``NASD'') from certain reporting
requirements, described below, that are imposed by Rules 31 and 31T and
Form R31,\2\ which implement Section 31 of the Exchange Act.\3\
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\1\ 15 U.S.C. 78mm.
\2\ 17 CFR 240.31, 240.31T, and 249.11. The Commission
established Rules 31 and 31T and Form R31 in June 2004. See
Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR
41060 (July 7, 2004) (``Rule 31 Adopting Release'').
\3\ 15 U.S.C. 78ee.
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II. Background
Section 31, among other things, requires NASD to pay the Commission
fees based on the aggregate dollar amount of certain sales of
securities. Rules 31 and 31T and Form R31 established a procedure for
the calculation and collection of Section 31 fees on the ``covered
sales'' of NASD and the national securities exchanges.\4\ Paragraph
(b)(1) of Rule 31 requires NASD to submit a completed Form R31 for each
month by the tenth business day of the following month. NASD must
provide on Form R31 the aggregate dollar amount of its covered sales
having a ``charge date'' \5\ in the month of the report. The first Form
R31 required by Rule 31 covers the month of July 2004 and was due on
August 13, 2004. Paragraph (b) of temporary Rule 31T requires NASD to
submit a completed Form R31 for each of the months September 2003 to
June 2004, inclusive; these forms also were due on August 13, 2004.
Based on the data provided by NASD, the Commission will calculate the
amount of Section 31 fees owed and send a bill to NASD.
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\4\ For NASD, a covered sale is the sale of a security (other
than an exempt sale or a sale of a security future) that occurs by
or through any NASD member otherwise than on a national securities
exchange, if the security is registered on a national securities
exchange or is subject to prompt last sale reporting pursuant to
NASD rules. See 15 U.S.C. 78ee(c); 17 CFR 240.31(a)(6).
\5\ The charge date is the date on which a covered sale occurs
for purposes of determining the liability of a national securities
exchange or national securities association pursuant to Section 31
of the Exchange Act. See 17 CFR 240.31(a)(3).
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For NASD, the charge date for most covered sales is the trade date
(rather than the settlement date).\6\ NASD has requested, however, that
it be permitted to use a charge date other than the trade date for
certain covered sales that are reported on an ``as-of'' basis.\7\ NASD
rules generally require its members, during normal market hours, to
report securities transactions within 90 seconds after execution. There
are situations in which a member fails to report a transaction on the
trade date during normal market hours, although NASD trade reporting
systems were open, and the member was obligated to do so within 90
seconds. These trades are reported as ``as-of'' trades.\8\ NASD
considers such ``as-of'' trades to be late and in violation of NASD
rules.\9\ An ``as-of'' report also could result when a trade is
executed when NASD trade reporting systems are not open. The trade,
therefore, must be reported on the next business day when NASD systems
re-open. NASD trade reporting rules allow for the next-day reporting of
these transactions; NASD does not consider these trades to be reported
late or in violation of NASD rules. NASD reviewed the ``as-of'' trades
reported by its members over a selected period and found that, during
the review period, the percentage of trades reported ``as-of'' was
relatively consistent on a month-to-month basis, and the vast majority
of ``as-of'' trades were reported to NASD in the same month that the
trades occurred.\10\
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\6\ The only covered sales for which NASD does not incur
liability based on the trade date are those resulting from the
exercise of options that are not listed or registered on a national
securities exchange, in which case the charge date is the exercise
date. See 17 CFR 240.31(a)(3)(ii).
\7\ See letter from Marc Menchel, Executive Vice President and
General Counsel, NASD, to Margaret McFarland, Deputy Secretary,
Commission, dated August 11, 2004.
\8\ An ``as-of'' trade is a trade that is reported to NASD after
the date that the actual trade occurred.
\9\ See NASD Rules 4632, 4642, 5430, 6420, 6550, 6620, and
related interpretive material.
\10\ See letter from Patrice M. Gliniecki, Senior Vice President
and Deputy General Counsel, NASD, to Margaret McFarland, Deputy
Secretary, Commission, dated August 18, 2004. NASD also found that,
during the review period, the number of ``as-of'' trades represented
a de minimus percentage of the total number of trades.
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NASD has stated that it considered making adjustments to its
internal systems to track ``as-of'' covered sales by trade date but
determined that it could not do so prior to August 13, 2004. Even if
NASD could make these changes, another problem would arise: a
previously submitted Form R31 would be rendered inaccurate if an ``as-
of'' trade were reported in a month different from the month in which
the trade was actually effected.\11\ Therefore, NASD has requested
relief to be permitted to report ``as-of'' covered sales based on the
report date rather than the trade date, as would otherwise be required.
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\11\ For instance, assume that an ``as-of'' covered sale is
effected in July 2004 but not reported to NASD until December 2004.
In the absence of this Section 36 exemption, the July 2004 Form R31
would no longer contain an accurate tabulation of NASD's aggregate
dollar amount of covered sales for that month.
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NASD also has requested relief from the requirement, for the months
September 2003 to June 2004, to report on Form R31 covered sales with a
price substantially unrelated to the current market price.\12\ Rules 31
and 31T and Form R31 require NASD to include the aggregate dollar
amount of such ``away-from-the-market'' covered sales in Part III of
its Form R31. NASD's rules \13\ currently do not require members to
report such trades to the Automated Confirmation Transaction Service
[[Page 56807]]
(``ACT'').\14\ Because away-from-the-market covered sales are not
captured in ACT, the only way that NASD could obtain data on them would
be to require its members to report them manually.
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\12\ See letter from Marc Menchel, Executive Vice President and
General Counsel, NASD, to Annette L. Nazareth, Director, Division of
Market Regulation, Commission, dated August 5, 2004.
\13\ See NASD Rules 4632(e)(5), 4642(e)(4), 6420(e)(5), and
6920(e)(2).
\14\ ACT is the automated system owned and operated by the
Nasdaq Stock Market which compares trade information entered by ACT
participants and submits ``locked-in'' trades to National Securities
Clearing Corporation for clearance and settlement; transmits reports
of the transactions automatically to the National Trade Reporting
System, if required, for dissemination to the public and the
industry; and provides participants with monitoring and risk
management capabilities to facilitate participation in a ``locked-
in'' trading environment. See NASD Rule 6110(d). ACT is a ``trade
reporting system'' as defined in Rule 31(a)(18), 17 CFR
240.31(a)(18).
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Presently, NASD does not require its members to manually report
data on away-from-the-market covered sales, and NASD members do not
have practices and procedures in place for collecting such data. NASD
argues that, in the absence of such practices and procedures and in
light of an earlier Commission interpretation with respect to away-
from-the-market covered sales,\15\ requesting historical information
from NASD member firms on away-from-the-market covered sales for the
period from September 2003 to June 2004--which would enable NASD to
carry out its reporting obligations under temporary Rule 31T--would be
unduly burdensome. NASD believes that the number of away-from-the-
market covered sales is de minimis, while the cost associated with
requiring all member firms to search for such historical data would be
high. Therefore, NASD has requested relief from the obligation imposed
by Rule 31T to report the aggregate dollar amount of away-from-the-
market covered sales on its Form R31 submissions for the months
September 2003 to June 2004.
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\15\ In a 1996 release wherein the Commission adopted amendments
to prior Rule 31-1 under the Exchange Act, the Commission stated
that ``no transaction fee will arise from transactions where the
buyer and the seller have agreed to trade at a price substantially
unrelated to the current market price for the securities, e.g., to
enable the seller to make a gift.'' Securities Exchange Act Release
No. 38073 (December 23, 1996), 61 FR 68590, 68592 n.27 (December 30,
1996).
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With respect to its ongoing obligations under Rule 31, NASD has
represented that it will promptly amend its ``self-reporting'' form
\16\ to solicit information from NASD member firms on away-from-the-
market covered sales prospectively. However, NASD has stated that its
members would not be able to provide data on away-from-the-market
covered sales for the July 2004 reporting period before August 13,
2004. NASD has represented, however, that it will report away-from-the-
market covered sales occurring in July 2004 on its August 2004 Form
R31.\17\ Therefore, NASD also has requested relief from the obligation
to report the aggregate dollar amount of its away-from-the-market
covered sales occurring in July 2004 in its Form R31 for that month,
and instead to report such covered sales along with its August 2004
Part III covered sales in its August 2004 Form R31.
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\16\ NASD currently uses this form to collect data from its
members on covered sales that: (1) occur in odd lots (i.e., for less
than 100 shares), where the trade is not captured by ACT; or (2)
result from the exercise of non-exchange-traded options that settle
by physical delivery of the underlying securities.
Because these two types of covered sales are not captured in a
trade reporting system, NASD must include the aggregate dollar
amount of such trades in Part III of Form R31.
\17\ The August 2004 Form R31 is due to the Commission by
September 15, 2004, the tenth business day of September.
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III. Discussion
After careful consideration, the Commission believes that
exercising its exemptive authority under Section 36 of the Exchange Act
to grant NASD the relief it has requested is necessary or appropriate
in the public interest and consistent with the protection of investors.
As discussed below, the Commission believes that, in view of the
structure of the over-the-counter (``OTC'') markets, using the report
date rather than the trade date for ``as-of'' covered sales is a
practical solution that should have no net impact on the Commission's
ability to collect the appropriate amount of Section 31 fees from NASD.
While some OTC trading occurs through NASD's facilities (such as the
Nasdaq Stock Market), other trading activity results from direct
negotiation between NASD members or their customers. NASD must rely on
its members to report these trades in a timely fashion. While the
Commission expects NASD to zealously enforce its trade reporting rules
to minimize the instances of late reporting by members, sometimes late
reporting will occur.
Based on the NASD representations noted above, the Commission
believes that, in most instances, using the report date rather than the
trade date as the charge date of these ``as-of'' covered sales will not
affect the aggregate dollar amount of NASD's covered sales reported on
Form R31 in a given month.\18\ In the limited circumstances when the
trade date and the report date are not in the same month, the aggregate
dollar amounts of covered sales reported by NASD in the affected months
will change, but the Commission will still collect the same amount of
Section 31 fees unless there is a fee rate change in the intervening
period.\19\ Furthermore, the Commission believes that, in the very
limited circumstances when a fee rate change occurs between the trade
date and the report date, allowing NASD to report ``as-of'' trades
using report date should not materially affect the amount of Section 31
fees that the Commission collects.\20\ On this basis, the Commission
believes that granting NASD's request for an exemption with respect to
``as-of'' covered sales is necessary or appropriate in the public
interest and consistent with the protection of investors.
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\18\ For example, assume that an OTC covered sale is effected on
May 3 but is reported ``as-of'' to NASD on May 13 and there is no
fee rate change in the intervening period. The Commission will
collect exactly the same amount of Section 31 fees from NASD because
NASD's aggregate dollar amount of covered sales for the month of May
is unchanged.
\19\ For example, assume that the covered sale occurs on May 13
but is reported ``as-of'' to NASD on June 13 and that no fee rate
change occurs in the intervening period. Although the dollar amount
of this ``as-of'' covered sale will be included in the June rather
than the May Form R31 figures, the fees due in the billing period
will be unchanged because May and June are in the same billing
period. See 17 CFR 240.31(a)(2).
\20\ NASD has reported that, in a sample period, the number of
``as-of'' trades reported to ACT is relatively consistent on a
month-to-month basis. Therefore, the ``as-of'' covered sales that
are ``lost'' to a future period where a different fee rate applies
(i.e., the trade is effected in the current period but the ``as-of''
report to NASD is not made until the next period) should be roughly
offset by the ``as-of'' trades ``gained'' from a previous period
(i.e., the trade was effected in a prior period but was reported to
NASD ``as-of'' in the current period).
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With respect to away-from-the-market covered sales, NASD previously
has not obtained data on such trades, and NASD members do not have
practices and procedures to provide NASD with such data. The Commission
believes that, based on NASD's representations,\21\ the minimal
aggregate dollar amount of such covered sales--and the correspondingly
limited Section 31 fees on such covered sales--does not justify the
substantial cost of collecting the historical data from NASD (through
its members). Therefore, the Commission believes that granting NASD's
request for relief from the requirements of Rules 31 and 31T and Form
R31 with respect to away-from-the-market covered sales occurring
between September 2003 and June 2004 is necessary or appropriate in the
public interest and consistent with the protection of investors. The
Commission further believes that reporting July 2004 away-from-the-
market covered sales along with NASD's August 2004 data is a practical
solution. NASD will have additional time to obtain this information
from its members, and the delayed reporting of one month's worth of
this data will not
[[Page 56808]]
affect the amount of Section 31 fees that NASD will owe the
Commission.\22\ Therefore, the Commission believes that granting NASD's
request for relief from the requirements of Rules 31 and 31T and Form
R31 with respect to away-from-the-market covered sales occurring in
July 2004 is necessary or appropriate in the public interest and
consistent with the protection of investors. After August 2004, NASD
must report away-from-the-market covered sales occurring in a given
month in the Form R31 due by the tenth business day of the following
month, as required by Rule 31.
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\21\ See supra note 12.
\22\ July 2004 and August 2004 are in the same billing period
and the same fee rate applies to covered sales occurring in these
months.
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IV. Conclusion
It is hereby ordered, pursuant to section 36 of the Exchange Act,
that NASD: (1) May use the report date rather than the trade date as
the charge date of any covered sale reported to NASD ``as-of''; (2) is
not required to include in its Form R31 submissions for the months
September 2003 to July 2004, inclusive, the aggregate dollar amount of
any away-from-the-market covered sales; and (3) may report in its
August 2004 Form R31 the aggregate dollar amount of away-from-the-
market covered sales that occurred in July 2004 and August 2004.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2290 Filed 9-21-04; 8:45 am]
BILLING CODE 8010-01-P