[Federal Register: March 5, 2007 (Volume 72, Number 42)]
[Notices]
[Page 9807-9810]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05mr07-90]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55346; File No. SR-NASD-2007-014]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Make Conforming Changes to the Rules Relating to the
NASD/NSX TRF, NASD/BSE TRF, and NASD/NYSE TRF Consistent With the New
Requirements of Regulation NMS
February 26, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 12, 2007, the National Association of Securities Dealers,
Inc. (``NASD'') 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 substantially prepared by NASD.
NASD has filed the proposal as a ``non-controversial'' rule change
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)
thereunder,\4\ which renders it effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD proposes (1) amendments to the transaction reporting rules
relating to the NASD/NSX Trade Reporting Facility (``NASD/NSX TRF''),
the NASD/BSE Trade Reporting Facility (``NASD/BSE TRF''), and the NASD/
NYSE Trade Reporting Facility (``NASD/NYSE TRF'') (collectively
referred to herein as the ``Subject TRFs'') consistent with the new
requirements of Regulation NMS under the Act;\5\ and (2) technical
amendments to conform, to the extent practicable, the reporting rules
of the Subject TRFs to the reporting rules of the NASD/Nasdaq Trade
Reporting Facility (``NASD/Nasdaq TRF'') and NASD's Alternative Display
Facility (``ADF''). The text of the proposed rule change is available
at NASD, the Commission's Public Reference Room, and http://www.nasd.com
.
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\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD 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. NASD 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
1. Purpose
Background
On June 29, 2005, the Commission published its release adopting
Regulation NMS,\6\ which established new substantive rules designed to
modernize and strengthen the regulatory structure of the U.S. equities
markets. Pursuant to Regulation NMS, the Commission, among other
things, adopted Rule 611 (``Order Protection Rule'') to establish
protection against trade-throughs for NMS stocks.\7\
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\6\ Id.
\7\ NMS stock is defined in Rule 600(b)(47) of Regulation NMS as
``any NMS security other than an option.'' Rule 600(b)(46) of
Regulation NMS defines NMS security as ``any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan, or an effective national market system plan for reporting
transactions in listed options.''
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In general, the Order Protection Rule requires a trading center
(which includes national securities exchanges, self-regulatory
organization (``SRO'') trading facilities, alternative trading systems,
OTC market makers, and block positioners) to establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent trade-throughs on that trading center of protected quotations
and, if relying on an exception, that are reasonably designed to assure
compliance with the terms of the exception. There currently are nine
exceptions and two exemptions to the Order Protection Rule.\8\ In
[[Page 9808]]
addition, the Order Protection Rule requires trading centers to surveil
regularly to ascertain the effectiveness of the policies and procedures
adopted pursuant to Rule 611 of Regulation NMS and take prompt action
to remedy deficiencies in such policies and procedures.
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\8\ See 17 CFR 242.611; Securities Exchange Act Release Nos.
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (Order
Granting an Exemption for Qualified Contingent Trades from Rule
611(a) of Regulation NMS) and 54678 (October 31, 2006), 71 FR 65018
(November 6, 2006) (Order Exempting Certain Sub-Penny Trade-Throughs
from Rule 611 of Regulation NMS).
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On November 6, 2006, the Commission approved the establishment of
the NASD/NSX TRF.\9\ On December 13, 2006, the Commission approved the
establishment of the NASD/BSE TRF.\10\ On February 1, 2007, NASD filed
for immediate effectiveness a proposed rule change relating to the
establishment of the NASD/NYSE TRF.\11\ The Subject TRFs provide
members additional mechanisms for reporting locked-in trades in
exchange-listed securities executed otherwise than on an exchange.
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\9\ See Securities Exchange Act Release No. 54715 (November 6,
2006), 71 FR 66354 (November 14, 2006) (SR-NASD-2006-108). The NASD/
NSX TRF commenced operation for the reporting of over-the-counter
trades in Nasdaq-listed securities on November 27, 2006 and is
expected to expand to the reporting of over-the-counter trades in
all exchange-listed securities in the first quarter of 2007.
\10\ See Securities Exchange Act Release No. 54931 (December 13,
2006), 71 FR 76409 (December 20, 2006) (SR-NASD-2006-115). The NASD/
BSE TRF will commence operation upon successful completion of system
testing and certification (currently anticipated to be in the first
quarter of 2007).
\11\ See Securities Exchange Act Release No. 55325 (February 21,
2007) (SR-NASD-2007-011). The NASD/NYSE TRF will commence operation
upon successful completion of system testing and certification
(currently anticipated to be in the first quarter of 2007).
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Neither NASD, generally, nor any of the NASD Trade Reporting
Facilities, specifically, qualifies as a trading center within the
meaning of Regulation NMS. Thus, the provisions of the Order Protection
Rule requiring trading centers to establish, maintain, and enforce
written policies and procedures that are reasonably designed to prevent
trade-throughs on that trading center of protected quotations in NMS
stocks are not applicable to NASD. However, NASD has a responsibility
to enforce requirements under the Act that apply to activity within its
regulatory authority. Thus, unlike exchanges that have direct
Regulation NMS obligations with respect to the SRO trading facilities,
NASD has indirect Regulation NMS obligations with respect to all over-
the-counter market activity, including post-trade regulation for
compliance with the Order Protection Rule with respect to trading
centers that trade report through an NASD Trade Reporting Facility.
Such regulation includes monitoring for whether trading centers are
reporting trades to an NASD Trade Reporting Facility that are trade-
throughs of protected quotes and whether such trade-throughs are
permissible under one of the specific exceptions and exemptions under
the Order Protection Rule.
Proposed Amendments To Align the Rules of the Subject TRFs With
Regulation NMS
NASD proposes to amend Rule 4632C relating to the NASD/NSX TRF,
Rule 4632D relating to the NASD/BSE TRF, and Rule 4632E relating to the
NASD/NYSE TRF to require reporting members to append applicable
modifiers to last-sale transaction reports with respect to trades that
fall within the exceptions and exemptions from Rule 611 of Regulation
NMS. The proposed amendments are substantially similar to amendments to
the transaction reporting requirements relating to the ADF, which were
approved by the Commission on September 28, 2006,\12\ and the NASD/
Nasdaq TRF, which were filed for immediate effectiveness on January 8,
2007.\13\
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\12\ See Securities Exchange Act Release No. 54537 (September
28, 2006), 71 FR 59173 (October 6, 2006) (SR-NASD-2006-091). See
also Securities Exchange Act Release No. 55088 (January 11, 2007),
72 FR 2573 (January 19, 2007) (SR-NASD-2007-001). Unlike the ADF, an
NASD Trade Reporting Facility (e.g., the NASD/NSX TRF) is a trade
reporting mechanism only; it does not permit quoting. As such, not
all of the amendments to the ADF rules are applicable to the rules
relating to the NASD Trade Reporting Facilities.
\13\ See Securities Exchange Act Release No. 55101 (January 12,
2007), 72 FR 2568 (January 19, 2007) (SR-NASD-2007-002).
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Specifically, NASD proposes to adopt new paragraph (a)(5)(C) of
Rule 4632C, paragraph (a)(5)(F) of Rule 4632D, and paragraph (a)(5)(I)
of Rule 4632E to require members to append a unique modifier, specified
by NASD, to indicate whether the trade would be a trade-through of a
protected quotation but for the trade being qualified for an exception
or exemption from Rule 611 of Regulation NMS. Further, NASD proposes to
adopt new paragraph (a)(5)(D) of Rule 4632C, paragraph (a)(5)(G) of
Rule 4632D, and paragraph (a)(5)(J) of Rule 4632E to require that, for
any trade that would be a trade-through of a protected quotation but
for the trade being qualified for an exception or exemption from Rule
611 of Regulation NMS, a member must append to the transaction report,
in addition to the modifier required under new Rule 4632C(a)(5)(C),
Rule 4632D(a)(5)(F), and Rule 4632E(a)(5)(I), respectively, a unique
modifier, specified by NASD, that identifies the specific applicable
exception or exemption from Rule 611 of Regulation NMS upon which the
member is relying.\14\ As stated in the proposed rules, these modifiers
will be used in conformity with the specifications approved by the
Operating Committee of the relevant National Market System Plans to
identify trades executed pursuant to an exception or exemption from
Rule 611 of Regulation NMS. NASD, along with the respective Subject
TRFs, will publish technical specifications regarding the specific
modifiers required under the proposed new rules.
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\14\ A Member using the trade report modifiers under the
proposed new rules is responsible for ensuring that the transaction
meets the criteria of the specific exemption or exception set forth
in Rule 611 of Regulation NMS.
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Additionally, NASD proposes to adopt new paragraph (a)(5)(E) of
Rule 4632C, paragraph (a)(5)(H) of Rule 4632D, and paragraph (a)(5)(K)
of Rule 4632E to require members to append ``[a]ny other modifier as
specified by NASD or the Securities and Exchange Commission.'' An
identical provision in the ADF rules was subject to notice and comment
and approved by the Commission pursuant to SR-NASD-2006-091 and also
was incorporated in Rule 4632 relating to the NASD/Nasdaq TRF pursuant
to SR-NASD-2007-002. Under this proposed provision, NASD will have the
authority to prescribe additional trade report modifiers by updating
the Technical Specifications for the Subject TRFs without submitting a
further proposed rule change for approval by the Commission. For
example, such authority will be used to require additional modifiers to
designate trades that qualify under two existing exemptions from the
Order Protection Rule (qualified contingent trades and certain sub-
penny trade-throughs) \15\ as well as any other exemption that the
Commission may grant in the future. This authority may also be used to
capture additional regulatory information that NASD deems necessary
(e.g., NASD will require more specific delineation of the Intermarket
Sweep Order (``ISO'') exception than is required by the National Market
System specifications).\16\ To enable members to make the necessary
systems changes, NASD would provide at least 30 days advance written
notice relating to any new modifiers.
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\15\ See supra note 8.
\16\ The National Market System specifications identify both
types of ISO orders with a single modifier. NASD, however, intends
to distinguish between the ISO exceptions by requiring firms to use
a separate modifier, as defined by NASD, in instances where the
executing firm is responsible for sweeping the market.
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NASD also proposes to amend Rules 4632C, 4632D, and 4632E to
expressly
[[Page 9809]]
provide that, in the event that the rules require multiple modifiers on
any given trade report, members are to report in accordance with
guidance published by NASD regarding priorities among modifiers, if
such guidance is provided. A Member that reports in accordance with
such guidance would not be in violation of the trade reporting rules
for failing to use a particular modifier.
NASD believes that the proposed rule change is necessary to ensure
that there is transparency relating to trades that are exempt from the
trade-through rule and to enhance NASD's ability to examine for
compliance with the Order Protection Rule.
Proposed Amendments to Rules of the Subject TRFs To Conform to NASD/
Nasdaq TRF and ADF Rules
NASD proposes changes to conform, to the extent practicable, the
reporting rules of the Subject TRFs to the NASD/Nasdaq TRF and ADF
reporting rules. Specifically, NASD proposes to reorganize Rule 4632C
relating to the NASD/NSX TRF, Rule 4632D relating to the NASD/BSE TRF,
and Rule 4632E relating to the NASD/NYSE TRF and renumber paragraphs
(a)(3) and (a)(5) of Rule 4632C, paragraphs (a)(3) and (a)(6) of Rule
4632D, and paragraphs (a)(3) and (a)(6) of Rule 4632E, without amending
the text of those provisions. NASD also proposes to renumber paragraphs
(a)(4), (a)(6), and (a)(8) of Rule 4632C, paragraphs (a)(5), (a)(8),
and (a)(10) of Rule 4632D and paragraphs (a)(5), (a)(8), and(a)(10) of
Rule 4632E, and amend the text of those provisions to conform to the
text of the equivalent provisions in Rule 4632 relating to the NASD/
Nasdaq TRF.
Additionally, NASD proposes to adopt new Rules 4632C(a)(5),
4632D(a)(5), and 4632E(a)(5) to require members to use trade report
modifiers designated by NASD for certain enumerated transactions. As
with the NASD/Nasdaq TRF and ADF, members will be required to include
such modifiers on all trade reports, including reports of ``as/of''
trades.\17\ Consistent with SR-NASD-2007-001 and SR-NASD-2007-002, the
proposed amendments to Rules 4632C, 4632D, and 4632E would delete the
labels (e.g., .T or .W) for the modifiers that members are required to
use when reporting the enumerated transactions. Thus, Rules 4632C,
4632D, and 4632E would identify the types of transactions that must
have a unique identifier associated with them, and such modifiers would
be labeled in the system technical specifications rather than in the
rules.
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\17\ The NASD/NSX TRF currently does not accept ``as/of''trade
reports and the rules for the NASD/BSE TRF, which have been approved
by the Commission but are not yet effective, also do not permit the
submission of ``as/of'' trade reports. NASD will file a separate
proposed rule change to reflect the reporting of ``as/of'' trades to
the NASD/NSX TRF and NASD/BSE TRF. Thus, upon the operative date of
this proposed rule change, members will be required to append all
applicable trade report modifiers to ``as/of'' trade reports
submitted to the NASD/NSX TRF and the NASD/BSE TRF. NASD reminds
members that they should mark any ``as/of'' trade report for
publication if that trade would have been for publication had it
been reported on trade date.
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It should be noted that, because of differences in functionality,
not all of the rules relating to NASD's Trade Reporting Facilities are
identical. For example, unlike the NASD/Nasdaq TRF, the NASD/BSE TRF,
and the NASD/NYSE TRF, pursuant to current Rule 4632C(a)(7), the NASD/
NSX TRF does not accept trade reports for Stop Stock Transactions (as
such term is defined in Rule 4200C), transactions occurring at prices
based on average-weighting or other special pricing formulae, or
transactions that reflect a price different from the current market
when the execution price is based on a prior reference point in time.
In this proposed rule change, NASD proposes to renumber Rule
4632C(a)(7) as 4632C(a)(8) without amending the text of the rule.
In addition, neither the NASD/NSX TRF nor the NASD/BSE TRF will
accept trades reported as other than regular way settlement (see Rules
6130C(a) and 6130D(a), respectively). Thus, unlike Rule 4632(a)(5)
relating to the NASD/Nasdaq TRF and Rule 4632E(a)(5) relating to the
NASD/NYSE TRF, proposed Rules 4632C(a)(5) and 4632D(a)(5) do not
include provisions pertaining to trade report modifiers for Seller's
Option, Cash, or Next Day transactions.
As discussed in footnote 17 above, the NASD/NSX TRF and NASD/BSE
TRF rules currently do not provide for the submission of ``as/of''
trade reports; however, once the necessary system changes have been
made, NASD will file a separate proposed rule change proposing
amendments to Rules 4632C(a)(2)(B) and (D) and 4632D(a)(2)(B) and (D)
that are consistent with Rule 4632(a)(2)(B) and (D) and proposed Rule
4632E(a)(2)(B) and (D).
NASD has filed the proposed rule change for immediate
effectiveness. In accordance with the Regulation NMS compliance dates
established by the Commission,\18\ NASD proposes to make the proposed
rule change operative on the Pilot Stocks Phase Date, which is
currently anticipated to be July 9, 2007. However, members may begin
submitting trade reports to the Subject TRFs in compliance with the
proposed rule change after the Trading Phase Date, which is currently
anticipated to be March 5, 2007. This does not change in any way a
member's responsibilities under the Regulation NMS compliance
dates.\19\
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\18\ See Securities Exchange Act Release No. 55160 (January 24,
2007), 72 FR 4202 (January 30, 2007).
\19\ NASD notes that, although the proposed rule change will not
be operative until the Pilot Stocks Phase Date, members may be
required to meet the Regulation NMS message format requirements for
reporting to the Subject TRFs prior to that date. NASD will notify
members of the date of mandatory compliance with Regulation NMS
message formatting requirements for the Subject TRFs and on such
date, members will be required to report in accordance with the new
systems requirements, although the specific new modifiers proposed
herein would continue to be voluntary until the Pilot Stocks Phase
Date.
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2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\20\ which requires, among
other things, that NASD rules 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. NASD believes that the proposed rule change
facilitates the goals articulated in Regulation NMS, including
providing an effective mechanism and regulatory framework for reporting
over-the-counter transactions to NASD.
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\20\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD 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.
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
The foregoing proposed rule change is subject to Section
19(b)(3)(A)(iii) of the Act \21\ and Rule 19b-4(f)(6) thereunder \22\
because the proposal: (i) Does not significantly affect the protection
of investors or the public interest; (ii) does not impose any
significant burden on competition; and (iii) does not become operative
prior to 30 days after the date
[[Page 9810]]
of filing or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest;
provided that NASD has given the Commission notice of its intent to
file the proposed rule change, along with a brief description and text
of the proposed rule change, at least five business days prior to the
date of filing of the proposed rule change, or such shorter time as
designated by the Commission.\23\
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\21\ 15 U.S.C. 78s(b)(3)(A)(iii).
\22\ 17 CFR 240.19b-4(f)(6).
\23\ NASD has satisfied the five-day pre-filing requirement.
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At any time within 60 days of the filing of such proposed rule
change the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2007-014 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2007-014. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room. Copies of the filing
also will be available for inspection and copying at the principal
office of NASD. 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
available publicly. All submissions should refer to File Number SR-
NASD-2007-014 and should be submitted on or before March 26, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3744 Filed 3-2-07; 8:45 am]
BILLING CODE 8010-01-P