[Federal Register Volume 62, Number 172 (Friday, September 5, 1997)]
[Notices]
[Pages 47096-47105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23602]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38990; File No. SR-NASD-97-56]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Creation of New Rules 6900 Through 6970 or an Audit Trail System 
Owned and Operated by the National Association of Securities Dealers, 
Inc.

August 28, 1997.
    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 August 
25, 1997,\1\ the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD Regulation, 
Inc. (``NASDR''). The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ The proposal was originally filed on July 29, 1997, but was 
subsequently amended on August 25, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation is proposing new Rules 6900 through 6970 of the 
Conduct Rules of the NASD, relating to an audit trail system owned and 
operated by the NASD that is designed to capture order information 
reported by members for integration with The Nasdaq Stock Market, Inc. 
(``Nasdaq'') quote information and trade information reported to the 
Automated Confirmation Transaction Service (``ACT'') in order to 
provide the Association with an accurate time sequenced record of 
orders and transactions. Below is the text of the proposed rule change. 
Proposed new language is underlined.

3110. Books and Records

* * * * *
    (c) Each member that acts as a market maker in an equity security 
quoted in the Nasdaq system shall record, with respect to each order 
for such security that is received and executed at its trading 
department, an identification of each registered person who executes 
the order.
* * * * *

6900. Order Audit System

6910. Definitions

    For purposes of the Rules 6900 through 6970:
    (a) Terms shall have the same meaning as those defined in the By-
Laws and other rules of the Association, unless otherwise specified.
    (b) ``Association'' shall mean the National Association of 
Securities Dealers, Inc. and its two subsidiaries, NASD Regulation, 
Inc. and The Nasdaq Stock Market, Inc.
    (c) ``Customer'' shall mean a person other than a broker or dealer.
    (d) ``ACT'' shall mean the Automated Confirmation Transaction 
Service operated by Nasdaq, Inc.
    (e) ``Index Arbitrage Trade'' shall mean an arbitrage trading 
strategy involving the purchase or sale of a ``basket'' or group of 
securities in conjunction with the purchase or sale, or intended 
purchase or sale, of one or more cash-settled options or futures 
contracts on index stock groups, or options on any such futures 
contracts in an attempt to profit by the price difference, as further 
defined in New York Stock Exchange Rule 80A.
    (f) ``Order'' shall mean any oral, written, or electronic 
instruction to effect a transaction in a Nasdaq equity security that is 
received by a member from another person for handling or execution, or 
that is originated by a department of a member for execution by the 
same or another member, other than any such instruction to effect a 
proprietary transaction originated by a trading desk in the ordinary 
course of a member's market making activities.
    (g) ``Order Audit System'' shall mean the automated system owned 
and operated by the Association that is designed to capture Order 
information reported by members for integration with trade information 
reported to ACT and quotation information disseminated by members in 
order to provide the Association with an accurate time sequenced record 
of orders and transactions.
    (h) ``Program Trade'' shall mean a trading strategy involving the 
related purchase or sale of a group of 15 or

[[Page 47097]]

more securities having a total market value of $1 million or more, as 
further defined in New York Stock Exchange Rule 80A.
    (i) ``Reporting Agent'' shall mean a member that enters into any 
agreement with another member pursuant to which the Reporting Agent 
agrees to fulfill such member's obligations under Rule 6950.
    (j) ``Reporting Member'' shall mean a member that receives or 
originates an Order.

6920. Applicability

    (a) Unless otherwise indicated, the requirements of Rules 6910 
through 6970 are in addition to the requirements contained in the By-
Laws and other rules of the Association.
    (b) Unless otherwise indicated, the requirements of Rules 6910 
through 6970 shall apply to all brokers and dealers admitted to 
membership in the Association and to their associated persons.
    (c) Unless otherwise indicated, the requirements of Rules 6910 
through 6970 shall apply to all executed or unexecuted Orders for 
equity securities traded in The Nasdaq Stock Market.

6930. Synchronization of Member Business Clocks

    Each member shall synchronize its business clocks that are used for 
purposes of recording the date and time of any event that must be 
recorded pursuant to the By-Laws or other rules of the Association, 
with reference to a time source as designated by the Association, and 
shall maintain the synchronization of such business clocks in 
conformity with such procedures as are prescribed by the Association.

6940. Recording of Order Information

    (a) Procedures:
    (1) Subject to the terms and conditions contained in Rules 6910 
through 6970, each Reporting Member shall:
    (A) immediately following receipt or origination of an Order, 
record each item of information described in paragraph (b) of this Rule 
that applies to such Order, and record any additional information 
described in paragraph (b) immediately after such information is 
received or becomes available; and
    (b) immediately following the transmission of an Order to another 
member, or from one department to another within the same member, 
record each item of information described in paragraph (b) of this Rule 
that applies with respect to such transmission.
    (2) Each required record of the time of an event shall be expressed 
in terms of hours, minutes and seconds.
    (3) Each Reporting Member shall, by the end of each business day, 
record each item of information required to be recorded under this Rule 
in such electronic form as is prescribed by the Association from time 
to time.
    (b) Order information required to be recorded under this Rule 
includes:
    1. an order identifier assigned to the Order by the Reporting 
Member that uniquely identifies the Order for the date it was received;
    2. the identification symbol assigned by the Association to the 
security to which the Order applies;
    3. the member identification symbol assigned by the Association to 
the Reporting Member;
    4. the identification of any department and any registered person 
who receives the Order directly from a customer;
    5. where the Order is originated by a Reporting Member, the 
identification of the department of the member that originates the 
Order;
    6. where the Reporting Member is a party to an agreement described 
in Rule 6950(c), the identification of the Reporting Agent;
    7. the number of shares to which the Order applies;
    8. the designation of the Order as a buy or sell order;
    9. the designation of the Order as a short sale order;
    10. the designation of the Order as a market order, limit order, 
stop order or stop limit order;
    11. any limit or stop price prescribed in the Order;
    12. the date on which the Order expires;
    13. the time limit during which the Order is in force;
    14. any request by a customer that an order not be displayed, or 
that a block size order be displayed, pursuant to Rule 11Ac1-4(c) under 
the Securities Exchange Act of 1934;
    15. any minimum quantity of shares required for execution;
    16. special handling requests, specified by the Association for 
purposes of this Rule;
    17. the date and time the Order is originated or received by a 
Reporting Member;
    18. an identification of the Order as related to a Program Trade or 
an Index Arbitrage Trade;
    19. the type of account, i.e., retail, wholesale, employee, or 
proprietary, for which the Order is submitted;
    20. where a Reporting Member transmits an Order to another 
department within the member: (A) the order identifier assigned to the 
Order by the Reporting Member, (B) the member identification symbol 
assigned by the Association to the Reporting Member, (C) the date the 
Order was first originated or received by the Reporting Member, (D) an 
identification of the department to which the Order was transmitted, 
and (E) the date and time the Order was received by that department;
    21. when a Reporting Member transmits an Order to another member: 
(A) the order identifier assigned to the Order by the Reporting Member, 
(B) the member identification symbol assigned by the Association to the 
Reporting Member, (C) the member identification symbol assigned by the 
Association to the member to which the Order is transmitted, (D) the 
date the Order was first originated or received by the Reporting 
Member, (E) the date and time the Order is transmitted, and (F) the 
number of shares to which the transmission applies.
    22. when a Reporting Member receives an Order from another member, 
in addition to all other applicable information items that apply with 
respect to such Order: (A) the order identifier assigned to the Order 
by the member that transmits the Order, (B) the member identification 
symbol assigned by the Association to the member that transmits the 
Order, and (C) the date the Order was first originated or received by 
the member that transmits the Order;
    23. when a Reporting Member modifies or receives a modification to 
the terms of the Order, in addition to all other applicable information 
items (including a new order identifier) that would apply as if the 
modified Order were originated or received at the time of the 
modification: (A) the order identifier assigned to the Order by the 
Reporting Member prior to the modification, (B) the date and time the 
modifications was originated or received, and (C) the date the Order 
was first originated or received by the Reporting Member.
    24. when the Reporting Member cancels or receives a cancellation of 
an Order, in whole or in part: (A) the order identifier assigned to the 
Order by the Reporting Member, (B) the member identification symbol 
assigned by the Association to the Reporting Member, (C) the date the 
Order was first originated or received by the Reporting Member, (D) the 
date and time the cancellation was originated or received, (E) if the 
open balance of an Order is canceled after a partial execution, the 
number of shares canceled, and (F) whether the Order was canceled on 
the

[[Page 47098]]

instruction of a customer or the Reporting Member; and
    25. when an Order is executed, in whole or in part: (A) the order 
identifier assigned to the Order by the Reporting Member, (B) the 
member identification symbol assigned by the Association to the 
Reporting Member, (C) the date the Order was first originated or 
received by the Reporting Member, (D) the Reporting Member's number 
assigned for purposes of identifying transaction data in ACT, (E) the 
designation of the Order as fully or partially executed, (F) the number 
of shares to which a partial execution applies and the number of 
unexecuted shares remaining, (G) an identification of each registered 
person who executed the Order, and (H) the date and time of execution.

6950. Order Data Transmission Requirements

(a) General Requirement

    All applicable order information required to be recorded under Rule 
6940 shall be transmitted to the Order Audit System by each Reporting 
Member or by a Reporting Agent pursuant to an agreement described by 
paragraph (c) of this Rule.

(b) Method of Transmitting Data

    (1) Order information shall be transmitted in electronic form, as 
may be prescribed by the Association from time to time, to a receiving 
location designated by the Association.
    (2) Each Reporting Member shall transmit to the Order Audit System 
a report containing each applicable item of Order information 
identified in Rule 6940(b) whenever an Order is originated, received, 
executed, canceled, modified, or transmitted to another member or 
another department within the member. Each report shall be transmitted 
on the day such event occurred, or with respect to any such information 
that is not available on such day, on the day that such information 
fist becomes available. Order information reports may be aggregated 
into one or more transmissions, during such business hours as may be 
prescribed by the Association.

(c) Reporting Agent Agreements

    (1) Any Reporting Member may enter into an agreement with a 
Reporting Agent pursuant to which the Reporting Agent agrees to fulfill 
the obligations of such Reporting Member under this Rule. Any such 
agreement shall be evidenced in writing, which shall specify the 
respective functions and responsibilities of each party to the 
agreement that are required to effect full compliance with the 
requirements of this Rule.
    (2) All written documents evidencing an agreement described in 
paragraph (1) shall be maintained by each party to the agreement.
    (3) Each Reporting Member remains primarily responsible for 
compliance with the requirements of this rule, notwithstanding the 
existence of an agreement described in this paragraph.

6960. Violation of Order Audit System Rules

    Failure of a member or person associated with a member to comply 
with any of the rules or requirements of Rule 6910 through Rule 6970 
may be considered conduct that is inconsistent with high standards of 
commercial honor and just and equitable principles of trade, in 
violation of Rule 2110.

6970. Effective Date

    The requirements of the Order Audit System shall be effective in 
accordance with the following schedule:
    (a) The requirements of Rule 6930 shall be effective on February 2, 
1998.
    (b) The requirements of the Order Audit System shall be effective 
on August 8, 1998 with respect to Orders that are captured by members 
in electronic form upon or promptly after receipt (``electronic 
order'').
    (c) The requirements of the Order Audit System shall be effective 
on January 1, 1999 for Orders other than electronic Orders that: (i) 
are received at the trading department of market makers in the 
securities that are the subject of the Orders, and (ii) are executed on 
the same day on which they are received, provided that only information 
items (1), (2), (3), (6) through (17), (19), (22), (23), (24), and (25) 
(other than 25(G)), specified in Rule 6940(b) shall be required to be 
recorded and reported with respect to such Orders.
    (d) The requirements of the Order Audit System shall be effective 
on January 31, 2000 in all respects with respect to all Orders.
    (e) The requirements of Rule 3110(c) shall be effective from 
January 1, 1999 to January 31, 2000.

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. NASD Regulation 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

a. Summary
    The NASDR is proposing a series of rule changes (``Proposed Rule'') 
to create a new order audit trail system (``Order Audit System'') that 
would impose obligations on member firms to retain in electronic form 
and to report to NASDR certain items of information with respect to 
orders received by members relating to equity securities traded in 
Nasdaq. This information would be integrated with transaction data 
currently reported by members through ACT and quotation information 
disseminated by members. In addition, related to the operation of the 
Order Audit System, the Proposed Rules would require that member firms 
maintain synchronization of their member clocks with a specific time 
source designated by the Association.
    The Order Audit System will be operated by NASDR as the operating 
subsidiary of the Association that is responsible for regulating member 
firms and conducting surveillance of the Nasdaq Market. NASDR will 
obtain ACT transaction data from, which is responsible for receiving 
ACT transaction information, on a daily basis for purposes of 
constructing an integrated audit trail of transaction and order data, 
and members will be required to transmit ACT identifying information to 
the Order Audit System. The combination of order data received by the 
Order Audit System and ACT data is discussed further below.
    The Order Audit System would provide a substantially enhanced body 
of information regarding orders and transactions that would improve the 
NASDR's ability to conduct surveillance investigations of member firms 
for violations of Association rules. In addition, the implementation of 
the Order Audit System would directly fulfill one of the undertakings 
contained in the order issued by the SEC relating to the effectuation 
of the Association's regulatory responsibilities.\2\ Pursuant to the 
SEC Order, the Association agreed to undertake to design and implement 
by August 8, 1998 (or as specified by further order of the Commission) 
an

[[Page 47099]]

audit trail sufficient to enable the Association to reconstruct markets 
promptly, conduct efficient surveillance and enforce its rules. The 
audit trail is required, subject to the Commission's approval, at a 
minimum, to (a) provide an accurate time-sequenced record of orders and 
transactions, beginning with the receipt of an order at the first point 
of contact between the broker-dealer and the customer or counterparty 
and further documenting the life of the order through the process of 
execution, and (b) provide for market-wide synchronization of clocks 
utilized in connection with the audit trail.
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    \2\ See, In the Matter of National Association of Securities 
Dealers, Inc., SEC Release No. 34-37538 (August 8, 1996); 
Administrative Proceeding File No. 3-9056 (``SEC Order'').
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    In general, the Proposed Rules would require that each member 
receiving an order relating to equity securities traded in the Market 
must electronically capture specified information related to the order 
and electronically transmit this information to the Order Audit System. 
These requirements would apply both to orders originated by customers 
and to proprietary orders originated by a department of a member firm 
and sent to its trading desk or to another member for execution. 
Further, for both a customer order and an order originated by a 
department, or desk, of a member firm, the requirement to capture and 
transmit information would apply whenever the order is passed to 
another department of the same firm.
    Order information would be required to be submitted in either 
single or multiple electronic file transmissions on the same day that 
the order, or the specific information pertaining to the order, was 
received, originated, canceled, modified, transmitted, or executed. 
Where information containing a particular order is not complete or 
changes, because for example, the order is only partially executed on 
the day that it is received, but the order remains outstanding, or if 
the order is canceled, the additional information would be required to 
be transmitted on the day that the information first becomes available.
    The Proposed Rules contain a special provision that allows a firm 
to enter into an arrangement with another member pursuant to which such 
member agrees to report order information on its behalf, in the same 
way that firms now contract with other members to report transaction 
data to ACT. In each case, however, the member that actually receives 
or originates the order would remain primarily responsible for 
fulfilling each of its obligations under the Proposed Rules.
    In addition to the recording and transmission requirements, the 
Proposed Rules would require that members synchronize their business 
clocks used for purposes of recording order or trade data to the 
Association with reference to a single time designated by the 
Association for this purpose, and that they adopt such procedures as 
may be necessary to maintain such synchronization during each trading 
day. This provision is designed to ensure that the times of various 
events that are reported pursuant to the Proposed Rules are reported in 
conjunction with a single and verifiable reference point.
    The implementation schedule for the Proposed Rules would require 
all members to synchronize their business clocks that record times for 
regulatory purposes pursuant to Rule 6930 by February 2, 1998. The 
implementation schedule for the Proposed Rules contemplates that the 
requirements would apply to all orders that are received 
electronically, or captured in electronic form promptly after receipt, 
as of August 8, 1998. In addition, the Proposed Rules would apply 
January 1, 1999, a slightly later implementation date, to all orders in 
an equity security that are received by other than electronic means at 
the trading desk of a market maker in the security and that are 
executed on the same day on which they are received. With respect to 
this group of orders, however, the information required to be 
electronically recorded and transmitted to the Order Audit System is 
limited to items of information that are expected to be readily 
available at the trading desk. These items are enumerated in Rule 
6970(c). The proposed implementation schedule would be completed on 
January 31, 2000, when the Proposed Rules would apply in all respects 
to all Orders.
    Based on extensive consultation with members and regulators and on 
its own analysis, NASDR believes that, given the substantial initial 
investments that will be required by member firms to comply with the 
proposed requirements, and in light of other substantial systems costs 
that members have been and will be required to make during the next 
several years, it is appropriate to limit the initial application of 
the rules. Where members already are capturing order information 
electronically, the proposal will require that members alter their data 
processing systems as necessary in order to permit recording all the 
items required by the rules and to transmit this information to the 
Order Audit System.
    The proposed January 1, 1999 inclusion of orders received by market 
makers at their trading desks is based on the critical role that market 
makers play in the market for Nasdaq securities, and the important 
regulatory interest in assuring that the processing of orders by market 
makers complies with all applicable requirements. The limitation of the 
elements that must be recorded recognizes, however, that some 
information may not be readily available at the trading desk, and that 
an orderly and efficient implementation of the Order Audit System with 
respect to market maker telephone orders could be impeded by 
immediately requiring the manual recordation of all the data elements. 
In connection with market maker orders, one item of information, the 
identity of the trader who executes a market maker order, is not being 
required initially because of the additional time that would be 
required to manually input long identification numbers in connection 
with each transaction. However, a temporary amendment to Rule 3110 is 
being proposed that would require that the member record the identity 
of traders executing orders sent to market maker trading desks. This 
provision would ensure that information that could be important for 
regulatory purposes will be available to regulators upon request.
    The limitation to orders that are received and executed on the same 
day reflects the expectation that compliance burdens will be relatively 
less when members are contemporaneously being required to provide 
transaction reports related to the same security following the 
availability of such additional information.
    Rule 6970 proposes to apply the Order Audit System requirements on 
January 31, 2000 in all respects to all orders. NASDR solicits comment 
on this issue, based on system changes or other factors that would 
apply to members that do not presently maintain systems for electronic 
receipt and routing, and on any associated cost estimates.
b. Section by Section Discussion
    Rule 6910--Definitions. Rule 6910 prescribes the definitions that 
apply to each of the other rules pertaining to the Order Audit System. 
Paragraph (a) provides that, unless otherwise defined, terms have the 
same meanings assigned to them in the By-Laws and other rules of the 
Association.
    The term Order is defined by paragraph (f) to include any oral, 
written, or electronic instruction to effect a transaction in a Nasdaq 
equity security that is either originated by a member or received by a 
member for handling or execution. The definition is not intended to 
apply to communications that involve only ``indications of interest'' 
or discussions that are prefatory to the determination

[[Page 47100]]

of the sender of the order to instruct the member to execute or attempt 
to execute a transaction. At the same time, because the definition 
includes orders that are received for ``handling,'' it would include 
instructions that may not be capable of being executed immediately or 
fully executed at one time, but may instead require negotiation with 
market makers or other firms, or may require execution in a series of 
separate transactions.
    The definition applies to orders that are received from public 
customers and from other broker-dealers. It would include orders 
originated by affiliates of a member and sent to that member, including 
for example, an order originated by a registered investment company 
sent to its affiliated broker-dealer. In addition, it applies to orders 
that are originated by one department of a member and transmitted to 
another department of the member, e.g., an order that is originated by 
an institutional sales desk and transmitted to a trading desk or sent 
to another member. The definition would include, among others, all 
orders that member firms are obligated to execute under the terms of 
the ``Firm Quote Rule'' (Rule 11Ac1-1 under the Securities Exchange Act 
of 1934). The term expressly would not include, however, a proprietary 
transaction originated by a trading desk in the ordinary course of a 
member's market making activities.
    The definition of Reporting Member in paragraph (j) describes the 
members who are subject to the requirements simply as members that 
receive or originate Orders. The definition includes members who 
receive Orders from public customers as well as from other members. In 
conjunction with the definition of ``Order'', this definition makes 
clear that all Orders from public customers, from other securities 
firms, and those that are originated in-house are subject to the 
requirements of the Proposed Rules.
    Paragraph (e) defines the term Index Arbitrage Trade to refer to an 
arbitrage trading strategy involving the purchase or sale of a group of 
securities in conjunction with the actual or intended purchase or sale 
of one or more cash-settled options, futures contracts on stock 
indexes, or options on such futures contracts in an attempt to profit 
by the price difference. The term Program Trade in paragraph (h) is 
defined to refer to a trading strategy involving the related purchase 
or sale of a group of 15 or more securities with a market value of at 
least $1 million. Both definitions generally track the related 
definitions in, and are further defined by reference to, New York Stock 
Exchange Rule 80A. The definitions are relevant to the information 
recording requirements of Rule 6940, described below, that pertain to 
Orders that are part of an index arbitrage or program trade.
    The term Report Agent is defined to include members that agree with 
other members to fulfill the reporting obligations of Rule 6950 on the 
other member's behalf and is specifically relevant to Rule 6950(c), 
discussed further below, which permits the use of such agreements, 
subject to certain conditions.
    Rule 6930--Synchronization of member business clocks. The 
reliability and usefulness of the Order Audit System will depend on the 
ability of NASDR to require that the business clocks of member firms 
that are required to record audit trail data are appropriately 
synchronized. The requirement for such synchronization is a specified 
element of the undertakings contained in the SEC Order. Because the 
determination of whether members have complied with various rules and 
standards to which they are subject, including among others, best 
execution obligations, compliance with the obligation to honor firm 
quotes, and prohibitions on frontrunning customer orders, depends 
critically on establishing with reasonable confidence the time at which 
Order information is received, the synchronization requirement is a 
necessary and integral part of the Order Audit System. This requirement 
is important both with respect to synchronization of clocks within a 
member firm as well as with respect to market-wide synchronization 
across member firms.
    Proposed Rule 6930 provides that each member shall synchronize its 
business clocks that are used for purposes of recording and reporting 
Order, transaction, or related data required by the By-Laws or other 
rules of the Association, with reference to a specific time source as 
designated by the Association. The rule further requires that each 
member firm maintain the synchronization of such clocks in conformity 
with such procedures as the Association may prescribe. Accordingly, the 
rule would apply the synchronization requirement to recording and 
reporting of information to the Order Audit System, to ACT, or to other 
requirements that the Association may adopt pertaining to transmission 
of Order and transaction data.
    Presently, members and electronic communication networks and 
service bureaus use a variety of methods for synchronizing business 
clocks. These methods range from manual synchronization based on time 
derived from local time sources to subscription to commercial providers 
of satellite services that programmatically update computers with 
accurate time. Accordingly, the degree of accuracy of recorded times 
may vary significantly among member firms.
    In implementing this requirement, NASDR would designate, through 
Notices to Members or other appropriate means, as appropriate sources 
one or more satellite time scales that are generally recognized and 
widely followed for commercial purposes. For example, the National 
Institute of Standards and Technology (NIST) and U.S. Naval Observatory 
maintain time scales that are essentially equivalent, i.e., they are 
maintained within a very small fraction of a second of each other.\3\ 
The designation of reference sources such as these should provide to 
both members and investors an efficient means for confirming the 
accuracy and reliability of business clocks that are used for trading 
and reporting purposes.\4\
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    \3\ See Proceedings of the Institute of Electrical and 
Electronics Engineers, Time and Frequency Information in 
Telecommunications Systems Standardized by Federal Standard 1002A, 
Volume 79, No. 7 (July 1991).
    \4\ For example, a member or investor can obtain through the 
Internet information concerning the NIST's Automated Computer Time 
Service. This service provides to users the ability to synchronize 
business clocks programmatically with time maintained by NIST. The 
NIST Website can be accessed at http://www.bldrdoc.gov/timefreq/
service/acts.htm.
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    The obligation to maintain the synchronization of business clocks 
will be ongoing. It is intended that any policies and procedures 
adopted by NASDR in this respect will require that the accuracy of 
clocks be resynchronized on at least a daily basis. NASDR also 
anticipates that compliance examinations would include a review for the 
existence of adequate procedures and checks to fulfill this obligation, 
as well as testing the degree of accuracy of clocks that are used for 
providing audit trail information against the time reference that is 
designated by NASDR.
    Pursuant to the proposed rule, each such recorded time would need 
to be synchronized with a designated time and recorded in hours, 
minutes, and seconds. NASDR will provide further guidance, prior to the 
effective date of the Proposed Rules, as to the specific standard of 
accuracy that will need to be maintained, given existing technology and 
the requirement that times be recorded in seconds. NASDR expects to 
review carefully member firms' compliance with these requirements,

[[Page 47101]]

given the importance of accurate time recordation to the integrated 
audit trail.
    As discussed below, the proposed effective date of the 
synchronization requirement is February 2, 1998, prior to the 
effectiveness of the other Proposed Rules.
    Rule 6940--Recording of Order information. Rule 6940 prescribes the 
specific items of Order data that are required to be recorded by each 
Reporting Member. Paragraph (a)(1)(A) specifically requires that each 
Reporting Member shall, immediately following receipt of origination of 
an Order, record each applicable item of information listed in 
paragraph (b) of the rule. In addition, where specified information is 
not available at the time that the Order is received, or if information 
that has been received changes, the rule would require that such 
information be immediately recorded when it is received. For example, 
if the Order is canceled, this information would necessarily need to be 
separately recorded when received.
    Paragraph (a)(1)(B) provides that when a member transmits an Order 
to another member, or from one department to another, each item of 
information described in paragraph (b) that applies with respect to 
such transmission must be recorded.
    Under paragraph (a)(2), each required record of the time of an 
event, including the time of receipt or transmission within a member or 
to another member, must be expressed in terms of hours, minutes, and 
seconds. The recorded times will be subject to the synchronization 
requirements, described above.
    Finally, pursuant to paragraph (a)(3), each item of information 
that is not initially recorded electronically, or that is not recorded 
electronically in an appropriate form, must be recorded in such 
electronic form as is prescribed by the Association, before the end of 
the business day on which the information is received. The rule would 
not preclude recording Order information by paper means, provided that 
the information is translated into electronic form intra-day in order 
to permit the daily reporting of this information to the Order Audit 
System. In many cases, efficiencies may dictate initially recording 
Order information in electronic form at the point of receipt, but the 
rule does not mandate this method.
    As noted, the rule would require that specified information that 
pertains to each Order be recorded ``immediately'' following receipt. 
The rule does not attempt to specify a time limit between receipt and 
recordation, since the factor may differ marginally based on the volume 
or Orders that are received at any one time, and whether a particular 
Order in communicated electronically or orally. Where Order information 
is not received and processed electronically, it is expected that the 
time required will be defined by reference to the time practically 
required to react to the information received and either enter it into 
an electronic database or manually record it for later translation into 
electronic form. Whether an Order is received electronically or 
manually, members would be required to accurately time stamp thee 
Orders on receipt to comply with the requirements of the Rule. The rule 
would not permit the ``bunching'' or aggregating of Orders for these 
purposes but instead would require that information pertaining to each 
Order be entered sequentially as it is received.
    Paragraph (b) of the rule lists the various items of information 
that are required to be recorded under the rule. We note that this list 
does not necessarily reflect all of the information that may prove to 
be necessary or useful for audit trial purposes, and that other or 
additional items of information could be sought after NASDR has 
acquired experience with the Order Audit System. For purposes of 
understanding the different recording requirements in various 
situations, the following description categories the recording 
requirements in the following ways: basic identifying information 
pertaining to the Order itself, or to members, departments or 
individuals who handle the Order; the terms of the Order as specified 
by the customer; other information related to the Order; information 
that is required to be recorded whenever an Order is routed within a 
member or is passed from one member or another; information that is 
related to modifications or cancellations; and information pertaining 
to a complete a partial execution of an Order.
    Identifying information. At the point that an Order is received or 
originated, certain identifying information is required to be recorded, 
including a unique order identifier assigned by the member firm, the 
member identification symbol assigned by the Association to the member, 
and the date on which the Order was received or originated. The 
combination of these three elements will uniquely identify an Order 
from all other Orders received or originated by any member on any day. 
In assigning order identifies, it is intended that members may use 
identification numbering methods that they presently employ, consistent 
with any specific requirements imposed by NASDR.
    Additional identifying information includes the identification 
symbol assigned by the Association to the security issue; an 
identification of the department and any registered person who receives 
an Order from a customer; where an Order is originated by a member 
firm, an identification of the department where the Order originated; 
and where a member is using a Reporting Agent to help fulfill is 
reporting obligations under Rule 6950, the member identification symbol 
assigned by the Association to that firm. As noted below, additional 
information will be required to be recorded when a member routes or 
passes an Order within the firm or to another member.
    With respect to departments and individuals who receive Orders, the 
rule limits coverage to persons who receive Orders directly from 
customers, rather than from other members. Rule 6910 defines the term 
``customer'' to exclude members or other broker-dealer firms. This 
formulation results from the significant compliance burden that could 
result from identification of each individual person who receives an 
Order from any source, and the relatively greater importance for 
surveillance purposes attached to identifying persons who receive 
communications from public customers with respect to their Orders. 
NASDR specifically solicits comment on the appropriateness of this 
limitation.
    In addition, the rule requires identification of persons who are 
registered with the Association, rather than extending the coverage to 
``associated persons.'' \5\ Because all persons handling orders 
relating to securities are required to be registered with the 
Association, we believe that this requirement should not create a 
significant problem for members. In addition, because all registered 
persons are assigned a number by the Association's Central Registration 
Depository (``CRD''), and many members may use these numbers currently 
for purposes of identifying registered persons in their data processing 
systems, we believe that the limitation to registered persons will 
significantly lessen the compliance burdens that would be imposed.
---------------------------------------------------------------------------

    \5\ See NASD Bylaws, Article I(q); 15 U.S.C. Sec. 78c(a)(18).
---------------------------------------------------------------------------

    Terms of the Order. The following items of information will be 
required with respect to the terms of the Order that are specified by 
the party placing the Order: the number of shares to which the Order 
applies; designation as

[[Page 47102]]

a buy or sell order; designation as a market order, limit order, stop 
order or stop limit order; any limit or stop price prescribed in the 
Order; designation as a short sale order; designation of the time limit 
during which the Order is to remain in force; any special handling 
requests contained in the Order; any minimum number of shares required 
for execution; and the date on which the Order expires.
    Prior to the effective date of the Proposed Rules, NASDR will 
prescribe the types of special handling requests that would need to be 
recorded. The order type designations, e.g., market or limit order, are 
not intended to be exclusive, and other designations of Order types 
that may be prescribed by NASDR based on current commercial practice 
may also be required. Each such item of information is required to be 
recorded at the time the Order is placed. As described below, where a 
customer modifies an existing Order, the modification is treated as a 
new Order, and the modified information is required to be recorded when 
the modification is received.
    Other information related to the Order. Other information directly 
related to the Order itself includes: the date and time on which the 
Order was received; the type of customer account for which the Order is 
placed; whether the Order is related to a Program Trade or Index 
Arbitrage Trade \6\; and any special instructions required by the 
customer under the Commission's Order Handling Rules.
---------------------------------------------------------------------------

    \6\ Transaction data for trades that are part of a program trade 
or index arbitrage strategy is required by the New York Stock 
Exchange to be transmitted to ACT with respect to securities listed 
on that exchange.
---------------------------------------------------------------------------

    As noted above, recording of the date and time on which the Order 
was received is of paramount importance for reviewing compliance with a 
number of regulatory requirements, because of the importance of the 
timing of market developments and activities by the member in relation 
to Order receipt time. The time of receipt must be accurately recorded, 
with reference to the synchronized time that is required to be 
maintained under Rule 6930. For purposes of defining the type of 
account for which the Order was placed, the rule describes four 
categories: retail, wholesale, employee, or proprietary. A separate 
designation for ``institutional'' accounts has not been included 
because of our understanding that firm record keeping procedures do not 
make use of this classification for most purposes, and there is no 
clear test that is applied for purposes of differentiating 
``institutional'' from other public customer accounts. NASDR solicits 
comment on whether the prescribed categories are appropriate and 
useful.
    The Rule would require identification of situations in which a 
customer provides special instructions with respect to display of limit 
orders, pursuant to Rule 11Ac1-4(c) under the Exchange Act. That rule 
expressly excepts from the requirement to display limit orders: (i) 
block orders, unless customers request that they be displayed; and (ii) 
those situations in which customers request that limit orders not be 
displayed.
    Orders routed within a firm. When an Order is routed to another 
department of the member for execution or for other purposes, item 20 
of Rule 6940 prescribes information that is required with respect to 
this event. Specifically, the information required includes the order 
identifier assigned to the Order by the member, the member 
identification symbol, the date the Order was first received or 
originated by the member, an identification of the department to which 
the Order was transmitted, and the date and time the Order was received 
by that department.
    Orders routed to another firm. When an Order is sent to another 
firm, for execution or any other purpose, items 21 and 22 prescribe the 
information that is required on the part of both the sending and 
receiving members in order to accurately track the Order. With respect 
to the sending firm, the following elements are required in order for 
the Order Audit System to track the Order: the unique order identifier 
assigned by that firm; the firm's member identification symbol; the 
date on which the Order was originally received or originated by the 
member; the date and time the Order is transmitted; the identification 
symbol of the member to which the Order is transmitted; and the number 
of shares that are routed. The requirement to record the member 
identification symbol assigned by the Association to the receiving firm 
will require that each Reporting Member retain a list of symbols 
assigned to all members by the Association for electronic reporting 
purposes.
    Where an Order is transmitted to another member, the receiving firm 
is required to capture all of the elements prescribed in Rule 6940(b) 
that apply whenever an Order is received. For example, it is required 
to assign its own unique order identifier and to record all the other 
terms pertaining to the Order, regardless of whether the Order is 
originated by the transmitting member or by a third party. In addition 
to these requirements, other elements pertaining to the sending firm 
are required. Specifically, the receiving firm will be required to 
record the unique order identifier assigned by the sending firm, that 
firm's member identification symbol, and the date the Order was 
originally received or originated by the transmitting firm. In 
aggregate, this information will be used to link the Order from firm to 
firm for purposes of accurately tracking each Order that is passed. 
NASDR requests comment as to the burdens involved in requiring each 
receiving firm to record this identifying information with respect to 
each telephoned Order between members.
    Modifications and cancellations. Whenever a member modifies the 
terms of an Order that it has originated, or receives a modification of 
terms from a customer or from another member, the Order Audit System 
will treat the modification effectively as a cancellation of the 
original Order and its replacement by the modified Order. Accordingly, 
in this circumstance, all of the other information items prescribed by 
the rule, including a new order identifier, would need to be recorded 
as if the Order was modified were originated or received at the time of 
the modification. In addition, to permit the linkage by the Order Audit 
System of this ``new'' Order to the previous one, item 23 requires that 
the following elements be recorded: the order identifier that was 
assigned prior to the modification; the date and time the modification 
was originated or received; and the date the original Order was first 
originated or received by the member.
    In the case of a ``true'' cancellation of an existing Order, 
whether it is a total or partial cancellation, the following elements 
are required to be recorded: the order identifier assigned by the 
Reporting Member; its member identification symbol; the date the Order 
was first originated or received by the Reporting Member; the date and 
time the cancellation was originated or received; if the open balance 
of an Order is canceled after a partial execution, the number of shares 
canceled; and whether or not the Order was canceled at the instruction 
of the Reporting Member, or a customer.
    Executions. One of the most critical functions of the Order Audit 
System will be to link information reported to the Order Audit System 
with transaction data that members are now required to report to ACT. 
This linkage is central to the construction of a wholly integrated 
audit trail that incorporates the new requirements with existing 
information for purposes of tracking each Order from the time that it 
arises until it is executed, modified, or canceled. This linkage is 
accomplished

[[Page 47103]]

principally by requiring that the executing member firm record, and 
report to the Order Audit System under Rule 6950, the Branch Sequence 
number included in each report to ACT for a trade associated with the 
Order. The member firm reporting to ACT must include, in the Branch 
Sequence field of the ACT report, and Order identifier that is unique 
for that firm throughout the reporting day. In addition, for purposes 
of linking transaction and order data, members will be required to 
record and report the unique order identifier assigned by the firm, the 
firm's member identification symbol; and the date the Order was first 
originated or received.
    In addition to these elements, item 25 of Rule 6940(b) prescribes 
the following elements: a designation of the Order as fully or 
partially executed; the number of shares to which a partial execution 
applies and the number of unexecuted shares remaining; an 
identification of each registered person who executed the Order; and 
the date and time of execution. Because the rule would prescribe 
identification of each registered person who receives an Order from a 
customer (see ``Identifying Information'' above), in tandem with this 
requirement, the Order Audit System will be able to identify each 
individual involved at the inception of the receipt of an Order from a 
customer, and each individual who actually executes every Order. As 
noted above, the identity of traders who execute non-electronic Orders 
at market maker trading desks is not being required, but instead NASDR 
is proposing an amendment to Rule 3110 to require that this identifying 
information be recorded in connection with each such Order that is 
executed so that the information will be available for regulatory 
purposes. The requirements of the proposed amendment to Rule 3110 will 
be effective only from January 1, 1999 until January 31, 2000, at which 
time the identity of all registered persons who execute an Order will 
be required to be recorded with the other information items listed 
under Rule 6940(b)(25).
    Rule 6950--Order data transmission requirements. Rule 6950 
prescribes the requirements that apply to transmitting to the Order 
Audit System information that is recorded under rule 6940. Paragraph 
(a) states the general requirement that all applicable information that 
is required to be recorded with regard to a particular Order must be 
transmitted to the Order Audit System by the Reporting Member, or by a 
Reporting Agent that agrees to send reports on behalf of the Recording 
Member.
    Paragraph (b) sets forth the means by which a data is required to 
be transmitted. Subparagraph (1) provides that all Order information 
shall be transmitted in electronic form, as may be prescribed by the 
Association from time to time, to a receiving location designated by 
the Association. Compliance with the reporting requirements of the 
Proposed Rules generally will require member firms to modify existing 
systems to permit efficient and timely transmission of information,or 
in some cases, to create new data capturing and reporting systems. 
Based on the final requirements contained in the Proposed Rules 
following their approval by the Commission, NASDR will consult with and 
provide notices to members as necessary in order to further clarify the 
changes that will be required and to assist member firms in making 
these modifications in the most cost-efficient way possible. In 
circumstances where the cost of such changes appears to be 
disproportionate based on the size of the firm or the nature of its 
trading activity, paragraph (c) as discussed below would permit the 
reporting responsibility to be assumed by another member that maintains 
the technological capability to perform this function. NASDR 
specifically solicits comment from member firms on this issue, to the 
extent that they have information that would permit an estimate of the 
costs that would be required based on the configuration of the Order 
Audit system defined by the Proposed Rules.
    Subparagraph (b)(2) prescribes other requirements for transmitting 
reports. Each Reporting Member would be required to transmit, on the 
day that the Order is received, originated, canceled, modified, 
transmitted, or executed, each applicable item of Order data required 
to be recorded in electronic form under Rule 6940 that is available on 
that day, including information pertaining to modifications, 
cancellations or executions that occur on that day. Where information 
that initially is recorded changes later in the same day because, for 
example, a customer determines to modify the terms of the Order due to 
changing market conditions, consistent with the requirements noted 
above (see ``Modifications and Cancellations''), the member would 
report the modified Order as if it were a new Order, along with the 
other information required to be recorded when Orders are modified.
    With respect to Orders that are not fully executed on that day that 
they are received, any additional information pertaining to the Order, 
including execution information, would be transmitted on the day that 
it first becomes available. The rule provides that Order reports will 
be transmitted in either single or multiple files during such business 
hours as may be prescribed by the Association. This provision is 
intended to provide members with the flexibility to provide reports in 
the most time and cost-efficient way. Particularly during periods of 
heavy volume, it may be desirable to transmit groups of report at 
various intervals during the course of the day. In addition, this 
flexibility is intended to avoid delays or other problems in processing 
information by the Order Audit System that could be caused by the 
transmission of reports by member firms at or near the same point in 
time.
    Based on further development of the Order Audit System and 
determinations relating to system capacity and other factors, NASDR 
will prescribe the hours during which information may be transmitted. 
The prescribed hours likely will extend past the end of the trading 
day. The proposal contemplates that all Order information, along with 
corresponding ACT data that has been integrated with such information, 
will be available to NASDR staff at the beginning of the trading day 
following the day on which the information has been transmitted.
    Paragraph (c) provides the conditions to use agreements between 
members and Reporting Agents, by which these agents agree to fulfill 
reporting obligations under the Rule. Each agreement is required to be 
set forth in writing, specifying the respective functions and 
responsibilities of each party. Further, each agreement is required to 
be maintained by each party. Subparagraph (c)(3) provides that the 
Reporting Member in each case remains primarily responsible for 
compliance with the reporting obligations. It is expected therefore 
that each member that is a party to such an agreement will exercise 
appropriate diligence to insure that the Reporting Agent is discharging 
the member's obligations.
    NASDR believes that the ability to rely on reporting relations is 
important to the practicability of the Order Audit System from the 
standpoint of many small and medium-size firms. Presently, clearing 
relationships often include the responsibility to report trade 
information to ACT on behalf of member firms. It is intended that these 
existing relationships can also be used for purposes of Order Audit 
System reports. NASDR specifically solicits comment on costs or 
difficulties that could be involved in amendment existing clearing and 
reporting

[[Page 47104]]

relationships to encompass reporting obligations under Rule 6950.
    Rule 6960--Violation of order audit system rules. Rule 6960 
provides that failure to comply with any of the requirements set forth 
in the Proposed Rules may be considered conduct that is inconsistent 
with high standards of commercial honor and just and equitable 
principles of trade, in violation of NASD Rule 2110. This provision 
emphasizes the importance of the Order Audit System to the regulatory 
mission of the Association and NASDR. NASDR believes that violations of 
the Proposed Rules that may be deemed to be violations of Rule 2110 of 
the Conduct Rules would include patterns of persistent or repeated 
violations, or submissions of inaccurate reports. Ordinarily, cases of 
isolated or inadvertent violations would not be considered to be 
violations of Rule 2110 but could be subject to specified fines imposed 
in an expedited process. In this regard, NASDR specifically solicits 
comment on whether the Proposed Rules should be included among the 
rules subject to the disciplinary penalties and procedures contained 
Rule 9217 and IM-9217 of the NASD Code of Procedure.\7\
---------------------------------------------------------------------------

    \7\ See also Rule 476A and Supplementary Material of the New 
York Stock Exchange Guide for comparable rules of the New York Stock 
Exchange.
---------------------------------------------------------------------------

    Rule 6970--Effective date. NASDR is proposing that the requirements 
of Rule 6930 be effective for all members on February 2, 1998. This 
proposed effective date pre-dates by approximately six months the 
proposed application to certain Orders of the other Proposed Rules. 
Because the synchronization requirement is designed to ensure the 
accuracy of times of events that are recorded for regulatory purposes, 
including under current regulations, the requirement has a purpose that 
is broader that the accurate recordation of times pursuant to the 
Proposed Rules. Accordingly, NASDR preliminarily believes that it may 
be appropriate to implement this requirement as soon as is feasible. In 
addition, an earlier implementation of the requirement could provide 
NASDR with experience that could be useful in preparing for the 
implementation of the Order Audit System. NASDR specifically solicits 
comment on the feasibility of this implementation date, based on any 
necessary enhancements to existing systems that would be required. In 
particular, comments should address the extent to which manual or 
``punch'' clocks current are in use for purposes of complying with 
regulatory requirements, and the extent to which business clocks now 
record in seconds, or the timetable for any existing plans to upgrade 
these clocks.
    Because of the substantial compliance burdens that will be 
associated with systems and other changes in order to permit member 
firms to record and report all the information that would be required 
under the Proposed Rules, as noted above, NASDR is proposing to apply 
the requirements on August 8, 1998 only to Orders that are captured by 
members in electronic form upon or promptly after receipt (``electronic 
orders''). Where Orders presently are communicated by telephone or some 
other means but are routinely entered into an electronic data base as 
soon they are received, NASDR preliminarily believes that its is 
appropriate to treat these Orders in the same way as if they were 
transmitted directly in electronic form. NASDR solicits comment on 
whether this treatment is appropriate.
    In addition, a January 1, 1999 implementation date would apply to 
Orders that are not communicated or routinely entered electronically 
(``non-electronic orders''), where they are received at the trading 
desk by members that are market makers in the subject securities. Under 
this provision, only certain information items initially would be 
required to be recorded and reported to the Order Audit System. These 
information items in general correspond to those items that are 
expected to be generally available at the trading desk at the time that 
Orders are received. Specifically, the required items include: the 
order identifier assigned to the Order by the market maker; the date 
and time on which the Order was originated or received; the member 
identification symbol assigned by the Association; the identification 
of the Reporting Member's Reporting Agent, where applicable; the symbol 
assigned by the Association to the securities that are the subject of 
the Order; where applicable, the designation of the order as a short 
sale; whether the Order is to buy or sell; the quantity of shares; the 
designation of the time in force that applies to the Order; the 
expiration date; the type of account for which the Order is submitted; 
any request by a customer that a limit order not be displayed or that a 
block order be displayed pursuant to Rule 11Ac1-4(c) of the Exchange 
Act: the designation of the type of Order (market, limit, stop, or stop 
limit); the designation of any stop or limit price; any designation of 
a minimum number of shares that must be executed; any special handling 
instructions; where a member receives an Order from another member, the 
order identifier assigned to the Order by the member that transmits the 
Order, the member identification symbol assigned by the Association to 
the member that transmits the Order, and the date the Order was first 
originated or received by the member that transmits the Order; and 
other relevant information when the order is executed, canceled, 
modified or transmitted to another member. As noted above, data 
concerning all Orders that are not received electronically will be 
required to be captured manually immediately after receipt and recorded 
intra-day in electronic form.
    NASDR is not proposing to require initially that the identification 
of each trader who executes non-electronic Orders received at the 
trading desk of a market maker be recorded. However, NASDR is proposing 
an amendment to Rule 3110 to require that this item be recorded in some 
form, so that this information can be available for regulatory purposes 
on request.
    As noted above, the proposed inclusion of these Orders in the Order 
Audit System by January 1, 1999 reflects the important role that market 
makers play in the market for Nasdaq securities and the paramount 
regulatory and surveillance interest in assuring that market makers 
comply with all of their obligations. At the same time, the proposal to 
reduce the number of elements that must be captured initially by market 
makers when receiving telephone or other non-electronic orders 
recognizes that requiring the manual transcription of all data 
elements, including those that may not be immediately available to a 
registered person at the trading desk, in a form that can be reported 
to the Order Audit System could impede an orderly and efficient 
implementation of the Order Audit System. In particular, this provision 
recognizes the unique nature of market maker trading desks, in terms of 
the volume of Orders processed and the attendant difficulties that 
could result in attempting to record and report the specified 
information during periods of high volume and changing market 
conditions.
    Following finalization of the system configuration and requirements 
based on Commission approval, substantial systems development and 
testing will be required prior to August 8, 1998. NASDR may seek a 
representative group of member firms to participate in early testing 
and in a voluntary pilot program in advance of the effective date in 
order to identify problems and gain insight into reporting patterns and 
volumes. NASDR will provide periodic notices to its members prior to 
the effective date

[[Page 47105]]

with regard to these development activities.
    Rule 6970 propose to apply the Order Audit System requirements on 
January 31, 2000 to all Orders. Accordingly, non-electronic Orders, 
whether recorded at a market maker trading desk or at another location 
would be fully subject to all of the recording and reporting 
requirements of the Proposed Rules on such date. NASDR solicits comment 
on this issue and on the implementation schedule generally, based on 
system changes or other factors that would apply to members that do not 
presently maintain systems for electronic receipt and routing, and on 
any associated cost estimates.
    NASDR believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act \8\ in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest 
by creating an Order Audit System that would provide a substantially 
enhanced body of information regarding orders and transactions that 
would improve the NASDR's ability to conduct surveillance and 
investigations of member firms for violations of Association rules. In 
addition, the implementation of the Order Audit System would directly 
fulfill one of the undertakings contained in the SEC Order relating to 
the effectuation of the Association's regulatory responsibilities. 
Pursuant to the SEC Order, the Association agreed to undertake to 
design and implement by August 8, 1998 (or as specified by further 
Order of the Commission) an audit trail sufficient to enable the 
Association to reconstruct markets promptly, conduct efficient 
surveillance and enforce its rules.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. Sec. 78o-3.
---------------------------------------------------------------------------

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

    NASD Regulation 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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In the process of developing the proposed rule change, NASDR 
consulted generally with industry representatives and received a number 
of comment letters in connection with this consultation. Such comment 
letters are available from NASDR upon request.

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 the self-regulatory organization 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 file number SR-NASD-97-56 and 
should be submitted by September 26, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-23602 Filed 9-4-97; 8:45 am]
BILLING CODE 8010-01-M