[Federal Register Volume 59, Number 48 (Friday, March 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5646]


[[Page Unknown]]

[Federal Register: March 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33713; File No. SR-NASD-93-68]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Eliminating Regulatory 
Reporting Requirements for Certain Equity Securities Under Section 2 of 
Schedule H to the NASD Bylaws

March 4, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s (b)(1), notice is hereby given that on 
November 17, 1993, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') 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 the NASD. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and simultaneously is 
approving the proposal.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to section 19(b)(1) of the Act, and Rule 19b-4 thereunder, 
the NASD has filed a proposed rule change to eliminate a regulatory 
reporting requirement that now exists for certain equity securities 
under Section 2 of Schedule H to the NASD Bylaws. Following is the full 
text of the proposal. (Additions are italicized.)
Schedule H
    * * *
Sec. 2. Price and Volume Reporting
    * * *
    (c) The reporting requirements contained in paragraphs (a) and (b) 
of this Section shall not apply to any non-NASDAQ security for which 
members are required to report individual transactions pursuant to Part 
XII of Schedule D to the NASD Bylaws.

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

    In its filing with the Commission, the 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. The 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
    The NASD hereby proposes an amendment to Section 2 of Schedule H to 
the NASD Bylaws to eliminate the obligation of member firms to report 
aggregate volume of purchases and sales, price range, and certain 
contra party information for principal transactions in equity 
securities classified as non-NASDAQ securities. Currently, this 
regulatory reporting mechanism extends to over-the-counter (``OTC'') 
principal transactions in equity securities that are not listed on The 
NASDAQ Stock Market or on a national securities exchange. It also 
extends to a small group of equities that are listed on regional 
exchanges, but do not qualify as ``eligible securities'' for purposes 
of certain national market system plans governing the collection and 
dissemination of quotation and transaction information, respectively.
    The foregoing categories of securities are subsumed by the 
definition of OTC Equity Security (``OTC equity'') in Section 1(b), 
Part XII of Schedule D to the NASD Bylaws.\1\ Part XII, which took 
effect on December 20, 1993, establishes requirements and procedures 
for reporting individual transactions in OTC equities on a real-time 
basis (i.e., within 90 seconds of execution). The reporting 
requirements and procedures in Part XII closely approximate those that 
now apply to NASD members when they effect transactions in NASDAQ-
listed securities.
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    \1\Part XII was the subject of File No. SR-NASD-92-48, which was 
approved by the Commission in Securities Exchange Act Release No. 
32647 (July 16, 1993), 58 FR 39262 (July 22, 1993).
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    When Part XII was implemented on December 20, 1993, the NASD began 
capturing far more information for regulatory purposes than was 
previously captured via Schedule H reporting. Specifically, the NASD 
began collecting trade-by-trade information on a real-time basis and 
processing that data to form a sequenced audit trail of members' 
trading activity in individual OTC equities. Such information has 
greater utility to the NASD's market surveillance program than the 
aggregate volume and price range data reported for principal 
transactions under Section 2 of Schedule H.\2\ In essence, the 
regulatory purposes underlying the capture of Schedule H information 
are satisfied more effectively by the NASD's collection and processing 
of individual trade reports entered in accord with Part XII of Schedule 
D. The NASD posits that no regulatory purpose would be served by 
continuing Schedule H reporting for OTC equities subject to Schedule D 
reporting after December 20, 1993.\3\
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    \2\In addition, the reporting requirements of Part XII would 
require member firms to report dual agency trades within 90 seconds 
of execution. Such trades are not reportable under Section 2 of 
Schedule H because its scope is limited to principal transactions.
    \3\Recently, the NASD represented to the Commission that members 
are complying with the new real-time transaction reporting 
requirements, and that other than some minor training needed for 
some members' staff, the NASD has found no regulatory or 
surveillance problems with respect to member compliance with the new 
provisions. Telephone conversation between Michael Kulczak, NASD and 
Betsy Prout, Commission, on February 9, 1994.
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2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
sections 11A(a)(1), 15A(b)(2) and (b)(6) of the Act. Section 11a(A)(1) 
contains the Congressional findings and policy goals respecting 
operational enhancements to the securities markets. Basically, the 
Congress found that new data processing and communications techniques 
should be applied to improve the efficiency of market operations, 
broaden the distribution of market information, enhance the ability of 
investors to monitor the quality of executions received, and foster 
competition among market participants. Section 15A(b)(2) requires the 
NASD, as a registered national securities association, to have the 
capacity to enforce members' compliance with all applicable provisions 
of the Act as well as the NASD's own rules. Finally, Section 15A(b)(6) 
requires that the NASD's rules be designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and facilitate transactions in securities.
    The NASD submits that elimination of Schedule H reporting 
requirements for securities classified as OTC equities--concurrently 
with the implementation of real-time trade reporting for those same 
securities--will produce operational efficiencies for member firms by 
permitting the use of existing reporting techniques and procedures 
applicable to NASDAQ-listed securities. From the NASD's perspective, it 
will eliminate what has become redundant mechanism for the capture of 
regulatory data to surveil trading in OTC equities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the proposed rule change will not 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

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The NASD requests that the Commission find good cause, pursuant to 
section 19(b)(2) of the Act, for approving the proposed rule change 
prior to the 30th day after the publication in the Federal Register. 
The NASD grounds its request on the following factors: (1) The December 
20, 1993 effective date of real-time trade reporting requirements for 
OTC equities, which requirements were approved by the Commission 
earlier this year; (2) the more comprehensive and real-time nature of 
the transaction data reported under new Part XII of Schedule D versus 
the aggregate and historical character of data currently reported under 
Section 2 of Schedule H; (3) the NASD's ability to process trade-by-
trade data received under Part XII to form an electronic audit trail 
file for surveillance of trading in OTC equities; and (4) in light of 
the preceding factors, the lack of any regulatory purpose to be served 
by continuing Schedule H price and volume reporting from December 20, 
1993, onward.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that approval of the proposed rule change is 
consistent with the Act and the rules and regulations thereunder, and 
in particular, with the requirements of section 15A(b)(2). Section 
15A(b)(2) requires, among other things, the NASD to have the capacity 
to enforce compliance by its members and persons associated with its 
members with the provisions of the Act and with the NASD's rules.
    As the Commission stated in the recent order approving the NASD's 
real-time trade reporting provisions for OTC equities, the Commission 
believes that by providing the NASD with real-time reports of 
transactions in those securities and enabling the construction of audit 
trails, the new reporting provisions will improve significantly the 
NASD's ability to regulate the market in those securities.\4\ The 
Commission also believes that real-time trade reporting in the relevant 
securities supersedes the aggregate reporting requirements for 
principal transactions found in Schedule H to the NASD By-Laws. The 
Commission agrees with the NASD that the regulatory purpose underlying 
the capture of Schedule H information is satisfied more effectively by 
the NASD's collection and processing of individual trade reports 
entered in accord with Part XII of Schedule D, and that no regulatory 
purpose is served by continuing Schedule H reporting. Thus, the 
Commission believes that the recently approved real-time reporting 
requirements, as compared to the Schedule H reporting requirements, 
should improve the NASD's capacity to enforce compliance by its members 
and persons associated with its members with the provisions of the Act 
and with the NASD's rules. Elimination of the redundant, less 
informative Schedule H reporting requirements, therefore, is 
appropriate and consistent with section 15A(b)(2) of the Act.
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    \4\See supra note 1.
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    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publishing notice of 
filing thereof. Accelerated approval of the NASD's proposal is 
appropriate to avoid member confusion as to whether real-time 
transaction reporting and Schedule H reporting are both required, when 
dual reporting would serve no regulatory purpose and would create an 
unnecessary and unintended expense to NASD members.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 the file number in the caption 
above and should be submitted by April 1, 1994.

VI. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with section 15A(b)(2) of the Act.
    It is therefore ordered, Pursuant to section 19(b)(2) of the Act, 
that the proposed rule change be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5646 Filed 3-10-94; 8:45 am]
BILLING CODE 8010-01-M