FR Doc 03-19724

[Federal Register: August 4, 2003 (Volume 68, Number 149)]
[Notices]
[Page 45871-45875]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04au03-123]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48239; File No. SR-NASD-2003-98]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by National Association of
Securities Dealers, Inc., Regarding Reporting of Transactions Conducted
Through Electronic Communications Networks to the Automated
Confirmation Transaction Service

July 28, 2003.
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 June 19, 2003, National Association of Securities Dealers, Inc.
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), 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 Nasdaq. The Exchange
submitted an amendment to the proposed rule change on January 27,
2003.\3\ The Commission is publishing

[[Page 45872]]

this notice, as amended, 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\ See Letter from John Yetter, Associate General Counsel,
Nasdaq, to Kathy England, Assistant Director, Division of Market
Regulation, Commission, dated July 10, 2003 (``Amendment No. 1'').
Amendment No. 1 deletes the reference in NASD Rule 6130(c)(6) to
subparagraph (3) because this provision would not apply to ECNs.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

Nasdaq proposes to clarify the reporting requirements applicable to
transactions conducted through electronic communications networks
(``ECNs'') and reported to the Automated Confirmation Transaction
Service (``ACT''). ECNs would be required to file Automated
Confirmation Transaction Service (``ACT''). ECNs would be required to
file notice of their methods for trade reporting under the proposed
rule change within 30 calendar days after the date of Commission
approval.
The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.
5400. NASDAQ STOCK MARKET AND ALTERNATIVE DISPLAY FACILITY TRADE
REPORTING
* * * * *
5430. Transaction Reporting
(a) No change.
(b) Which Party Reports Transaction and to Which Facility
(1) In transactions between two Registered Reporting Nasdaq Market
Makers, the member representing the sell side shall report the trade
using ACT.
(2) In transactions between a Registered Reporting Nasdaq Market
Maker and a Non-Registered Reporting Member, the Registered Reporting
Nasdaq Market Maker shall report the trade using ACT.
(3) In transactions between two Non-Registered Reporting Members,
the member representing the sell side shall report the trade using ACT
or TRACS.
(4) In transactions between a member and a customer, the member
shall report as follows:
(A) A Registered Reporting Nasdaq Market Maker shall report the
trade using ACT;
(B) A Registered Reporting ADF Market Maker shall report the trade
using TRACS; and
(C) A Non-Registered Reporting Member shall report the trade using
ACT or TRACS.
(5) In transactions between two Registered Reporting ADF Market
Makers, the member representing the sell side shall report the trade
using TRACS.
(6) In transactions between a Registered Reporting ADF Market Maker
and a Non-Registered Reporting Member, the Registered Reporting ADF
Market Maker shall report the trade using TRACS.
(7) In transactions between a Registered Reporting Nasdaq Market
Maker and a Registered Reporting ADF Market Maker, the member
representing the sell side shall report as follows:
(A) A Registered Reporting Nasdaq Market Maker shall report the
trade using ACT; and
(B) A Registered Reporting ADF Market Maker shall report the trade
using TRACS.
(8) If a member simultaneously is a Registered Reporting Nasdaq
Market Maker and a Registered Reporting ADF Market Maker, and has the
trade reporting obligation pursuant to paragraphs (1), (2), (4), (5),
(6), or (7), the member can report the trade using either ACT or TRACS,
unless the trade is executed using ACES; the Nasdaq National Market
Execution System (``NNMS''); [the SelectNet Service; the SmallCap Small
Order Execution System (``SOES'');] or the Primex Auction System
(``Primex''). A trade executed using ACES must be reported using ACT,
and trades executed using NNMS[, SelectNet, SOES,] or Primex will be
reported to ACT automatically.
(9) In transactions conducted through an ACT ECN (as defined in
Rule 6110) that are reported to ACT, the ACT ECN shall ensure that
transactions are reported in accordance with Rule 6130(c). If an ACT
ECN is also a Registered Reporting ADF ECN (as defined in Rule 4200A),
Rule 6130(c) shall apply only to transactions conducted through the ECN
for which trade reports are submitted to ACT.
* * * * *
6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)
6110. Definitions
(a)-(p) No change.
(q) The term ``ACT ECN'' shall mean a member of the Association
that is an electronic communications network that is a member of a
registered clearing agency for clearing or comparison purposes or has a
clearing arrangement with such a member, to the extent that
transactions executed through it are reported to ACT.
* * * * *
6130. Trade Report Input
(a)-(b) No change.
(c) Which Party Inputs Trade Reports to ACT.
ACT Participants shall, subject to the input requirements below,
either input trade reports into the ACT system or utilize the Browse
feature to accept or decline a trade within the applicable time-frames
as specified in paragraph (b) of this Rule. Trade data input
obligations are as follows:
(1) in transactions between a Market Maker and an Order Entry Firm,
the Market Maker shall be required to submit a trade report to ACT;
(2) in transactions between two Market Makers, the member
representing the sell side shall be required to submit a trade report
to ACT;
(3) in transactions between two Order Entry Firms, the member
representing the sell side shall be required to submit a trade report
to ACT[.];
(4) in transactions between a member and a customer, the member
shall be required to submit a trade report to ACT;
(5) in transactions conducted through an ACT ECN that are reported
to ACT, the ACT ECN shall ensure that transactions are reported in
accordance with one of the following methods:
(A) the ACT ECN shall submit the trade reports to ACT and identify
itself as the reporting party;
(B) the ACT ECN shall submit the trade reports to ACT on behalf of
the reporting party and identify the reporting party in accordance with
the rules for determining reporting parties reflected in paragraphs
(1), (2), (3), and (4) above; or
(C) the ACT ECN shall require one of the parties, determined in
accordance with the rules for determining reporting parties reflected
in paragraphs (1), (2), (3), and (4) above, to submit the trade reports
to ACT.
When an ACT ECN reports transactions in accordance with
subparagraph (A), the ACT ECN shall be responsible for ensuring that
the trade reports are accurate and contain all information required by
subsection (d) of this rule for both the ACT ECN and the identified
non-reporting party. When an ACT ECN reports transactions in accordance
with subparagraph (B), both the ACT ECN and the party identified as the
reporting party shall be responsible for ensuring that the trade
reports are accurate and contain all information required by subsection
(d) of this rule for both the ACT ECN and the identified reporting
party. When an ACT ECN requires reporting of transactions in accordance
with subparagraph (C), the reporting party shall be responsible for
ensuring the accuracy and completeness of the trade report.

[[Page 45873]]

An ACT ECN shall provide written notice to the Association of the
method of trade reporting used by the ACT ECN for each of its
subscribers, and may change the method of trade reporting used for a
subscriber by providing advance written notice of the change to the
Association;
(6) in transactions conducted through two ACT ECNs or an ACT ECN
and an ECN that is not an ACT ECN, an ACT ECN shall be responsible for
complying with the requirements of paragraph (5) above for reporting a
transaction executed through its facilities, and an ECN that routed an
order to it for execution shall be deemed to be a Market Maker and a
member for purposes of the rules for determining reporting parties
reflected in paragraphs (1), (2), and (4) above; and
(7) in transactions conducted through an ACT ECN in which neither
of the parties is a member, the ACT ECN shall report the transaction in
accordance with the requirements of subparagraph (5)(A) above.
(d)-(e) No change.
* * * * *
6400. REPORTING TRANSACTIONS IN LISTED SECURITIES
* * * * *
6420. Transaction Reporting
(a) No change.
(b) Which Party Reports Transaction
(1) Transactions executed on an exchange are reported by the
exchange and shall not be reported by members.
(2) In transactions between two Registered Reporting Members, only
the member representing the sell side shall report.
(3) In transactions between a Registered Reporting Member and a
Non-Registered Reporting Member, only the Registered Reporting Member
shall report.
(4) In transactions between Non-Registered Reporting Members, only
the member representing the sell side shall report.
(5) In transactions conducted through an ACT ECN (as defined in
Rule 6110), the ACT ECN shall ensure that the transactions are reported
in accordance with Rule 6130(c).
(c)-(e) No change.
IM-6420. Transactions in Eligible Securities

Summary of Provisions Governing Members' Requirements To Report Transactions in Eligible Securities
Chart I.--General Reporting Requirements Under Rule 6420(b)
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Member reports when contra-party is
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Member Transaction [Designated] Non-[Designated]
Registered Reporting Registered Exchange Customer
Member Reporting Member
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[Designated] Registered Buys from......................... No.................. Yes................. No............... Yes.
Reporting Member.
Sells to.......................... Yes................. Yes................. No............... Yes.
Non-[Designated]............... Buys from......................... No.................. No.................. No............... Yes.
Non-[Designated] Registered Buys from customer and sells to... No.................. Yes................. No............... Yes.
Reporting Member.
Sells to customer and buys from... No.................. No.................. No............... Yes.
Registered Reporting Member.... Sells to.......................... No.................. Yes................. No............... Yes.
ACT ECN........................ .................................. See 6130(c)......... See 6130(c)......... No............... See 6130(c)
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Chart II.--Reporting Requirements for ``Riskless'' Transactions as Defined in Rule 6420(d)(4)
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Member Reports When Contra-Party Is
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Member Transaction [Designated] Non-[Designated]
Registered Reporting Registered Reporting Exchange Customer
Member Member
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Designated] Registered Buys from customer and sells to Yes Yes No Yes.
Reporting Member.
Sells to customer and buys from No Yes No Yes.
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* * * * *
6600. REPORTING TRANSACTIONS IN OVER-THE-COUNTER SECURITIES
* * * * *
6620. Transaction Reporting
(a) No change.
(b) Which Party Reports Transaction
(1) In transactions between two OTC Market Makers, only the member
representing the sell side shall report.
(2) In transactions between an OTC Market Maker and a Non-Market
Maker, only the OTC Market Maker shall report.
(3) In transactions between two Non-Market Makers, only the member
representing the sell side shall report.
(4) In transactions between a member and a customer, the member
shall report.
(5) In transactions conducted through an ACT ECN (as defined in
Rule 6110), the ACT ECN shall ensure that the transactions are reported
in accordance with Rule 6130(c), and the term ``Market Maker'' as used
in such rule shall be construed to include an OTC Market Maker.
(c)-(e) No change.
* * * * *
6900. REPORTING TRANSACTIONS IN DIRECT PARTICIPATION PROGRAMS
6920. Transaction Reporting
(a) No change.
(b) Which Party Reports Transactions

[[Page 45874]]

(1) In transactions between two members, only the member
representing the sell side shall report.
(2) In transactions between a member and a customer, the member
shall report.
(3) In transactions conducted through an ACT ECN (as defined in
Rule 6110), the ACT ECN shall ensure that the transactions are reported
in accordance with Rule 6130(c); provided that for purposes of Rule
6130(c)(5)(B) and (C), the party with the reporting obligation shall be
as set forth in Rule 6130(c)(3) and the term ``Order Entry Firm'' as
used in such rule shall be construed to refer to any member.
(c)-(e) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Nasdaq 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. Nasdaq 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
Nasdaq is proposing to adopt rules to define with greater clarity
the reporting obligations applicable to transactions executed through
ECNs that are reported to ACT. The proposal is based on Nasdaq's
understanding of the different methods used by ECNs today to report
trades, and in general, the rule filing is not intended to require ECNs
to modify their current trade reporting practices. Rather, the purpose
of the filing is to codify these practices in the form of clear,
enforceable rules that will provide greater guidance to market
participants.\4\ The proposed rule change would apply to transactions
in all securities that are executed through an ECN and reported to ACT.
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\4\ The proposed rules are intended to provide greater certainty
while Nasdaq remains a subsidiary of the NASD, and do not impact the
trade reporting rules filed by Nasdaq in its application to register
as an exchange, which are different from the current proposal.
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Reporting of transactions executed through ECNs is complex because
ECNs conduct transactions on an ``agency'' basis, with the ECN standing
as a central contra party to two offsetting transactions with ECN
subscribers. However, the substance of the transaction is the
transference of shares from one ECN subscriber to another, and
therefore only one transaction is reported to the tape for public
dissemination.
Current practices of ECN trade reporting have developed over time
in conjunction with the growth of the number of ECNs. As each new ECN
entered the market, it registered with Nasdaq under NASD Rule 4623 and
informed Nasdaq and NASD of its planned method for reporting
transactions. Although Nasdaq believes that the use of different
reporting methodologies by different ECNs has generally allowed ECNs to
fulfill reporting obligations while tailoring their methodology to
their own business needs and those of their subscribers, the absence of
clearly defined rules has, in some circumstances, created confusion as
to the trade reporting responsibilities of ECNs and their subscribers.
Nasdaq believes that the proposed rule change will provide members
greater certainty concerning their trade reporting responsibilities,
while allowing ECNs to continue using the various methods of trade
reporting that have developed over time.
The proposed rule change permits ECNs to use any of three methods
for reporting transactions.\5\ Each ECN would inform NASD which method
it would use for reporting trades to ACT for each of its subscribers,
but it could change its method at any time by providing advance notice
to NASD.\6\ First, an ECN may assume sole responsibility for reporting
transactions executed through its facilities and identify itself as the
reporting party. Second, an ECN may assume sole responsibility for
transaction reporting, but identify a subscriber as the reporting
party. In that case, the identified reporting party would be determined
in accordance with the existing rules for allocating trade reporting
responsibility. Thus, if the subscribers conducting a transaction
through the ECN were both market makers or both order entry firms, the
selling party would be identified as the reporting party; if the
transaction were between a market maker and an order entry firm, the
market maker would be identified as the reporting party; and if the
transaction were between a member (i.e., a broker-dealer) and a non-
member (such as an institutional investor), the member would be
identified as the reporting party.
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\5\ As discussed earlier, the three methods are based on ECN
trade reporting practices. Nasdaq also understands that, at any
given time, an ECN may utilize more than one of these methods and
the choice of the method varies depending on the needs of particular
subscribers. For example, ECN A may use one method for subscriber B
and another method for subscriber C. This proposal is not intended
to limit this flexibility. Accordingly, an ECN will be permitted to
use more than one of the methods described in Rule 6130(c), as long
as it provides NASD written notice concerning the methods that it
will use for each subscriber.
\6\ Notices must be filed with Nasdaq's Market Watch Department
and NASD's Market Regulation Department.
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Third, the ECN may impose some or all of the responsibility for
reporting on its subscribers. In that case, the ECN would notify the
appropriate reporting party, determined in accordance with the existing
rules of priority for trade reporting, that it had an obligation to
submit a report concerning the trade.
In each case, the party submitting a trade report is responsible
for ensuring its accuracy and completeness.\7\ In addition, when an ECN
submits a trade report identifying another party as the reporting
party, both the ECN and the identified reporting party are responsible
for ensuring the accuracy and completeness of the report.
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\7\ Rule 6130(d) specifies the information that is required to
be included in each ACT report.
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The proposed rule change also addresses procedures for reporting
transactions in several unique circumstances associated with ECNs.
First, the rule provides that when the parties to a transaction
executed through an ECN are both non-members, the ECN must submit all
required trade reports and identify itself as the reporting party. This
is the case because as non-members, the parties to the transaction
would not be eligible to report trades through ACT. Second, in
circumstance where one ECN routes an order to another ECN that executes
the order, the ECN that executes the order would be responsible for
reporting the transaction, or requiring a subscriber to report the
transaction, in accordance with one of the three basic methods for
trade reporting described above. For purposes of the rules for
allocating trade reporting responsibility between ECN subscribers, the
routing ECN would be deemed to be a market maker. Thus, if the
executing ECN uses the second method of trade reporting, and it
receives an order from a routing ECN that is matched against the order
of an order entry firm or a non-member customer, the routing ECN would
be identified as the reporting party. If the executing ECN matched the
routed order against the order of a market maker or another ECN,
however, the sell

[[Page 45875]]

side would be identified as the reporting party.
Finally, it should be noted that the proposed rule change applies
only to transactions that are reported to ACT, since Nasdaq does not
have authority to establish rules governing the reporting of trades to
non-Nasdaq systems. Thus, in circumstances where an ECN has the option
to report trades to ACT or to another trade reporting system, such as
the NASD's TRACS system, the rule does not mandate that the ECN use ACT
for trade reporting. However, to the extent that the ECN or its
subscribers opt to use ACT to report a particular transaction, all
provisions of the proposed rule change would apply to that
transaction.\8\ In addition to the above changes, Nasdaq is also
removing references to ``Select Net Service'' and the ``SmallCap Small
Order Execution System'' from NASD Rule 5430(b)(8) because these
systems are no longer in place.\9\
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\8\ The proposed rule change also corrects several typographical
errors in IM-6420.
\9\ Telephone call between John Polise, Senior Special Counsel,
Sonia Trocchio, Special Counsel, and Leah Mesfin, Attorney,
Division, Commission, and John Yetter, Assistant General Counsel,
and Peter Geraghty, Associated Vice President and Associate General
Counsel, Office of the General Counsel, Nasdaq on July 9, 2003.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\10\ in general, and with
section 15A(b)(6) of the Act,\11\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, and to protect investors and
the public interest. Nasdaq purports that the proposed rule change will
clarify the trade reporting obligations associated with transactions
conducted through ECNs. Nasdaq believes that the adoption of clear,
enforceable rules will provide guidance to market participants and
thereby provide greater assurance of comprehensive reporting of ECN
transactions.
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\10\ 15 U.S.C. 78o-3.
\11\ 15 U.S.C. 78o-3(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change, as amended,
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

Within 35 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 NASD consents, the Commission will:
A. By order approve 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 proposal, as
amended, is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to file number SR-NASD-2003-98, and
should be submitted by August 25, 2003.

For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-19724 Filed 8-1-03; 8:45 am]

BILLING CODE 8010-01-P