[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Notices]
[Pages 42088-42089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20968]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40286; File No. SR-NASD-98-38]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc; Order Approving Proposed Rule Change Relating to NASD's
Order Audit Trail System and Recordkeeping Rules
July 31, 1998.
I. Introduction
On May 22, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') through its wholly-owned subsidiary,
NASD Regulation, Inc. (``NASD''), submitted to the Securities and
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to amend NASD Books and
Records Rule 3110 and NASD Order Audit Trail System (``OATS'') Rules
6954 and 6957 to clarify and modify the recordkeeping requirements
associated with the OATS rules.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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On June 10, 1998, the proposed rule change was published for
comment in the Federal Register and notice was given that three non-
substantive, technical revisions to NASD Rules 3110 and 6957, which
were concerned solely with the administration of the NASD, had become
effective pursuant to Section 19(b)(3)(A) of the Act \3\ and
subparagraph (e)(3) of Rule 19b-4 \4\ thereunder \5\. This order
approves the portions of the proposal relating to substantive
amendments to the OATS recordkeeping requirements.
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\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 19b-4(e)(3).
\5\ See Securities Exchange Act Release No. 40069 (June 4, 1998)
63 FR 31820.
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II. Background and Description of the Proposal
On March 6, 1998, the Commission approved NASD OATS Rules 6950
through 6957.\6\ The OATS rules require member firms to capture and
record specific information related to the handling or execution of
orders for equity securities in The Nasdaq Stock Market (``Nasdaq'').
Firms must then report that information to the NASD through OATS. The
rules also require members to synchronize their business
[[Page 42089]]
clocks to one time source. At the same time, the Commission also
approved new NASD Rule 3110(h), which requires members to record and
maintain certain information that is relevant to the OATS data
reporting requirement.
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\6\ See Securities Exchange Act Release No. 39729 (March 6,
1998) 63 FR 12559 (March 13, 1998) (order approving File No. SR-
NASD-97-56).
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The NASDR proposes to amend the OATS Rules and the books and
records requirements that apply specifically to OATS data. The proposal
would revise OATS Rule 6954(c) by adding a new paragraph (6). Rule
6954(c) sets forth the order information that must be recorded under
the OATS rules when an order is transmitted, either from one department
to another within a member firm or to another member. Rule 6954(c) does
not, however, presently contain a requirement regarding the
transmission of an order to a non-member such as a foreign broker-
dealer or a foreign exchange. The NASDR proposes to add new paragraph
(6) to Rule 6954(c) to require members to record certain information
when an order is transmitted to a non-member, including the fact that
it was so transmitted. NASD members will be required to report this
information to OATS pursuant to NASD Rule 6955. This additional
information will enable the NASDR to track an order that a member has
received and reported to OATS that is then routed to a non-member.
The NASDR also proposes to revise both OATS Rule 6954(a)(4) and
Rule 3110(h) to set forth specific record-keeping requirements. OATS
Rules 6954(a)(1) and (a)(4) require members to record specified
information and to retain records of that information; Rule 3110(h)
requires members to record and maintain information required by OATS.
However, these rules presently do not specify how long the records must
be maintained or the requirements that apply when members wish to
utilize micrographic media or electronic storage media to maintain such
records. The NASDR proposes to add new language to both Rule 6954(a)(4)
and Rule 3110(h) to make explicit the record-keeping requirements
related to OATS data. The rules have been revised to specifically
reference the record retention period specified in SEC Rule 17a-4(b)
and the conditions set forth in SEC Rule 17a-4(f) for reproducing
records on micrographic media or by means of electronic storage media.
In addition, the NASDR proposes to revise Rule 310(h)(1) to require
members to record and maintain information related to an ``order,'' as
that term is defined in OATS Rule 6951(j). As stated above, new Rule
3110(h) was adopted to require members to record and maintain
information relevant to the OATS data recording and reporting
requirements. The NASDR proposes to limit Rule 3110(h) to require
members to record and maintain information only with respect to an
``order'' in Nasdaq equity securities, as defined by OATS Rule 6951(j).
Finally, the NASDR proposes to revise Rule 6957(d) to indicate the
effectiveness dates for compliance with the proposed amendments to Rule
3110(h).
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\7\ Specifically, the Commission believes the proposal is
consistent with the requirements of Section 15A(b)(6) of the Act \8\ in
that it is designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest.
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\7\ In approving this rule, the Commission considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78o-3(b)(6).
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The Commission notes that the proposed addition of paragraph (6) to
Rule 6954(c) will require member firms to record information relating
to the transmission of orders to non-members, such as foreign broker-
dealers and foreign exchanges. The Commission believes that this
information, which will be reported to OATS pursuant to Rule 6955,
should enhance the NASDR's ability to track transactions in Nasdaq
equity securities. OATS was designed primarily to improve the NASDR's
ability to monitor member firms' transactions in Nasdaq equity
securities for possible violations of NASD rules or of the federal
securities laws, a purpose that is consistent with Section 15A of the
Act.\9\ Because the current proposal will enhance the NASD's ability to
gather information required by the OATS rules, it too is consistent
with the Act.
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\9\ 15 U.S.C. 78o-3.1.
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The proposed amendments relating to the recordkeeping requirements
applicable to OATS are designed to provide more specific information
regarding the permissible maintenance of required records.
Specifically, the proposal specifies the length of time required
records must be maintained and the requirements applicable to the use
of micrographic or electronic storage media. The proposal also
specifically references the record retention period and conditions set
forth in the Commission's Rule 17a-4. The Commission believes that the
proposed amendments should help to clarify member firms' record
retention requirements related to OATS data.
The Commission notes that the proposal would reference in NASD Rule
3110(h) the definition of the term ``order'' set forth in OATS Rule
6951(j). The Commission believes that the NASDR's efforts to achieve
consistency and uniformity in the definitions used in the NASD rules
are reasonable and should ease the compliance burdens of member firms.
Finally, the Commission notes that the proposal would establish
effective dates for compliance with the proposed amendments to Rule
3110(h). The Commission believes that the proposed deadlines for
compliance are reasonable, given the implementation schedule of the
OATS rules, set forth in NASD Rule 6957(a)-(c).
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-NASD-98-38) is approved.
\9\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-+3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20968 Filed 8-5-98; 8:45 am]
BILLING CODE 8010-01-M