[Federal Register: March 24, 2004 (Volume 69, Number 57)]
[Notices]
[Page 13927-13929]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr04-118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49439; File No. SR-NASD-2004-023]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by National Association of
Securities Dealers, Inc. To Amend Order Audit Trail System Rules
Relating to Execution Reports
March 17, 2004.
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 5, 2004, 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 prepared by NASD. On March 11,
2004, NASD filed Amendment No. 1 to the proposed rule change.\3\ 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\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated March 10,
2004 (``Amendment No. 1''). Amendment No. 1 replaces the proposed
rule change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend NASD Rule 6954(d) to require that
members record and report the execution price and firm capacity in
Order Audit Trail System (``OATS'') Execution Reports. The text of the
proposed rule appears below. Proposed new text is in italics. Deleted
text is in brackets.
* * * * *
NASD Systems and Programs
6950. Order Audit Trail System
6951. through 6953. No Changes.
6954. Recording of Order Information
(a) through (c) No Changes.
(d) Order Modifications, Cancellations, and Executions.
Order information required to be recorded under this Rule when an
order is modified, canceled, or executed includes the following.
(1) and (2) No Change.
(3) When a Reporting Member executes an order, in whole or in part,
the Reporting Member shall record:
(A) through (G) No Change.
(H) the date and time of execution, [and]
(I) the execution price,
(J) the capacity in which the member executed the transaction
(e.g., agency, principal or riskless principal), and
(K) the national securities exchange or facility operated by a
registered securities association where the trade was reported.
* * * * *
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
On March 6, 1998, the Commission approved NASD Rules 6950 through
6957 (``OATS Rules'').\4\ NASD represents that OATS provides a
substantially enhanced body of information regarding orders and
transactions that NASD believes improves its ability to conduct
surveillance and investigations of member firms for potential
violations of NASD rules and the federal securities laws.
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\4\ See Securities Exchange Act Release No. 39729 (March 6,
1998), 63 FR 12559 (March 13, 1998) (SR-NASD-97-56).
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When the OATS Rules initially were adopted, it was determined that
NASD would obtain execution price and firm capacity (i.e., the capacity
in which the member acted for purposes of the transaction, for example,
on an agency, principal or riskless principal basis) information from
trading information rather than from information submitted to OATS. At
that time, the vast majority of trading in Nasdaq securities was
reported through Nasdaq's Automated Confirmation Transaction Service
(``ACT'').\5\ Members are required to input order identifier
information into ACT trade reports, and NASD systematically matches the
ACT trade reports with corresponding OATS reports to obtain certain
trade-related information including execution price and firm capacity.
Similarly, members using the NASD Alternative Display Facility
(``ADF'') Trade Reporting and Comparison Service (``TRACS'') are
required to record OATS order identifier information in TRACS trade
reports, which also is then matched with OATS information to obtain
execution price and firm capacity.
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\5\ ACT is an automated system owned and operated by Nasdaq that
captures transaction information on a real-time basis.
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NASD believes that recently, however, the ``ACT/TRACS matching''
process has become more and more limited, in part because a percentage
of trades in Nasdaq securities are no longer reported to ACT or TRACS.
Furthermore, NASD believes that if there are any errors in the linking
[[Page 13928]]
information provided to ACT, TRACS or OATS, the ACT/TRACS matching
process is hindered.
In June 2002, NASD issued Notice to Members 02-31 soliciting
comments from members and other interested parties on four proposed
changes to the OATS rules, one of which was intended to address the
potential gaps in the audit trail associated with the ACT/TRACS
matching process. Commenters that provided substantive comments about
the four proposals generally opposed the proposals. NASD represents
that the commenters' primary concern was that service bureaus and
member firms already have spent a significant amount of time and
resources in complying with OATS. NASD represents that commenters
indicated that current OATS reporting has reached a stage where it
appears to be working well and commenters, therefore, opposed making
any significant changes, particularly at a time when there currently
are a number of other regulatory initiatives placing demands on
members' technological resources.
In response to concerns raised by commenters, NASD now is proposing
only a subset of one of the four proposals, which NASD views as the
most critical to addressing potential gaps in the audit trail
information currently collected by NASD. Specifically, NASD is
proposing to amend the OATS Rules to require members to record and
report two additional fields, execution price and firm capacity, as
part of the OATS Execution Report. Because the proposed rule change
adds two additional data elements that typically are accessible with
the other information required in an OATS Execution Report, NASD does
not believe that the proposed rule change will be overly burdensome to
members. Furthermore, by having this data reported directly in the OATS
Execution Report, NASD believes that it will not have to rely on
accessing or matching the trade report to obtain these two data
elements.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\6\ which requires, among
other things, that NASD's 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. NASD also believes that the proposed rule change will
enhance OATS information and will improve NASD's ability to conduct
surveillance and investigations relating to compliance with NASD and
other applicable rules.
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\6\ 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 impose 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
NASD published for comment in Notice to Members 02-31 (June 2002)
(``Notice'') four proposals to the OATS Rules. The comment period
expired on July 10, 2002. Ten comment letters were received in response
to the Notice.\7\ Copies of the Notice and the comment letters have
been provided to the Commission. Of the 10 letters, three were in favor
of the proposed rule change and seven were opposed to the proposed rule
change. The majority of the commenters expressed concern that the
proposed rule change was unnecessarily burdensome.
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\7\ Comment letters were received from Allen J. Thomas, Vice
President, Manager of Trade Processing, A.G. Edwards & Sons, Inc.;
Andrea Psoras; Thomas Murphy, Vice President, Bishop, Rosen & Co.,
Inc.; Kevin M. Foley, Bloomberg Tradebook LLC; W. Leo McBlain,
Chairman, Financial Information Forum, Michele Samuelson, Compliance
Trading Specialist, First Allied Securities, Inc.; Gregory M. Power,
Vice President, Jefferies & Company, Inc.; John L. Keeley, Jr.,
Keeley Investment Corp.; David Wells, Program Trading Corp.; and
Cindy D. Foster, SunGuard Trading Systems.
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The Notice requested comment on four proposals, which would require
that members: (1) Record and report execution price, capacity, ACT
control number and a special circumstances indicator as part of their
OATS Execution Reports, but would rescind the requirement that members
record and report an identical order identifier (referred to as the
branch/sequence number) on the OATS Execution Report and the related
ACT trade report (``Execution Report Proposal''); (2) report the
execution time rather than prior reference price (``.PRP'') time or
allocation time in OATS Execution Reports; (3) record and report for
OATS purposes the route of the proprietary order if they comply with
the SEC Limit Order Display Rule by routing a proprietary order in
place of a customer order to another market, electronic communications
networks (``ECN'') or market maker; and (4) provide the trading desk
receipt time via a Desk Report in addition to the electronic system
time reported as their order receipt time on New Order Reports in those
instances when those times differ by more than one second.
The proposed rule change is two components of the Execution Report
Proposal described above. NASD believes that it is important to note
that the proposed rule change does not require the recording and
reporting of the ACT control number as required under the Execution
Report Proposal, which several commenters indicated would be the most
burdensome component of that proposal. A general description of the
comments is described in the Purpose section.
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 proposed rule
change 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.
Comments may also be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-NASD-2004-023. 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, comments should be sent in
hardcopy or by e-mail but not by both methods. 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
[[Page 13929]]
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 NASD. All submissions
should refer to File No. SR-NASD-2004-023 and should be submitted by
April 14, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6592 Filed 3-23-04; 8:45 am]
BILLING CODE 8010-01-P