[Federal Register Volume 65, Number 48 (Friday, March 10, 2000)]
[Notices]
[Pages 13069-13071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5916]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42494; File No. SR-NASD-00-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Delay of the Implementation 
Date of Changes to Riskless Principal Trade Reporting Rules

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 24, 2000, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of 
the Act,\3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\15 U.S.C. 78s(b)(3)(A).
    \4\17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposal

    Nasdaq's proposal is an re-interpretation to NASD Rules 4632, 4642, 
4652, 6420, and 6620, regarding riskless principal trade reporting. The 
intent of this proposed re-interpretation is to delay the effective 
date of the riskless principal trade reporting rule changes announced 
in SR-NASD-98-59\5\ and SR-NASD-98-08,\6\ and the interpretations 
thereto filed in SR-NASD-99-39\7\ and SR-NASD-99-52.\8\
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    \5\See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999).
    \6\See Securities Exchange Act Release No. 41606 (July 8, 1999), 
64 FR 37226 (July 15, 1999).
    \7\See Securities Exchange Act Release No. 41731 (August 11, 
1999), 64 FR 44983 (August 18, 1999).
    \8\See Securities Exchange Act Release No. 41974 (October 4, 
1999), 64 FR 55508 (October 13, 1999).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning

[[Page 13070]]

the purpose of and basis for its proposal and discussed any comments it 
received regarding the proposal. The text of these statements may be 
examined at the places specified in Item IV below. Nasdaq has prepared 
summaries, set forth in Sections A, B and C below, of the most 
significant aspects of such statements.

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

1. Purpose
    On March 24, 1999 and July 8, 1999, respectively, the Commission 
approved proposals to amend NASD trade reporting rules relating to 
riskless principal transactions in Nasdaq National Market, Nasdaq 
SmallCap Market, Nasdaq convertible debt, non-Nasdaq over-the-counter 
(``OTC'') equity securities, and exchange-listed securities traded in 
the third market (``Riskless Principal Trade Reporting Rules'').\9\ 
Under the new Riskless Principal Trade Reporting Rules, a ``riskless'' 
principal transaction is one where an NASD member, after having 
received an order to buy (sell) a security, purchases (sells) the 
security as principal at the same price to satisfy the order to buy 
(sell).\10\ The Riskless Principal Trade Reporting Rules provide that 
if a transaction is ``riskless,'' the offsetting transaction/leg (e.g., 
the transaction with the customer) need not be reported.
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    \9\See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999) (SR-NASD-98-59). See also 
Securities Exchange Act Release No. 41606 (July 8, 1999), 64 FR 
38226 (July 15, 1999) (SR-NASD-98-08).
    \10\See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999)(SR-NASD-98-59). See also, 
Securities Exchange Act Release No. 41606 (July 8, 1999), 64 FR 
38226 (July 15, 1999)(SR-NASD-98-08).
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    In the Order approving SR-NASD-98-59, the Commission asked Nasdaq 
to submit an interpretation providing examples of how mark-ups, mark-
downs, and other fees will be excluded for purposes of the amended 
riskless principal rules.\11\ On August 5, 1999, Nasdaq filed with the 
Commission SR-NASD-99-39\12\ attached to which was Notice to Members 
99-65, which gave examples of how mark-ups and other fees will be 
excluded for purposes of the Riskless Principles Trade Reporting Rules. 
SR-NASD-99-39 and Notice to Members 99-65 were filed as an 
interpretation to existing NASD Rules 4632, 4642, 4652 and 6620. In 
addition to giving examples of how mark-ups and other fees will be 
excluded for purposes of the Riskless Principal Trade Reporting Rules, 
Notice to Members 99-65 stated that the rule changes announced in SR-
NASD-98-59\13\ and the interpretations to those rules contained in the 
Notice would become effective on September 30, 1999.
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    \11\See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999) at footnote 15.
    \12\See Securities Exchange Act Release No. 41731 (August 11, 
1999), 64 FR 44983 (August 18, 1999).
    \13\See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999).
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    The NASD published Notice of Members 99-65 (discussing the trade 
reporting rules for riskless principal transactions in Nasdaq and OTC 
securities) and Notice to Members 99-66 (discussing, among other 
things, the trade reporting rules for the third market) in August 1999. 
The Notices announced that the Riskless Principal Trade Reporting Rules 
would go into effect on September 30, 1999.
    Shortly after publication of Notices to Members 99-65 and 99-66, a 
number of firms represented that they were unable to prepare their 
systems for compliance with the new Riskless Principal Trade Reporting 
Rules by the September 30, 1999 deadline. The firms' inability to meet 
the September 30, 1999 deadline was due, in large part, to Year 2000 
(``Y2K'') remediation and testing requirements, as well as other code 
changes. In addition, the firms stated that, due to a Y2K code freeze, 
they were not able to complete programming for the Riskless Principal 
Trade Reporting Rules until the end of the first quarter of 2000. 
Subsequently, Nasdaq filed SR-NASD-99-52,\14\ the purpose of which was 
to delay the implementation date of the new Riskless Principal Trade 
Reporting Rules until March 1, 2000.
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    \14\See Securities Exchange Act Release No. 41974 (October 4, 
1999), 64 FR 55508 (October 13, 1999).
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    Nasdaq proposes to defer the implementation date of the Riskless 
Principal Trade Reporting Rules until September 1, 2000, because a 
number of NASD members have represented that the approach described in 
Notices to Members 99-65 and 99-66 for riskless principal trade 
reporting would raise significant issues that need to be addressed in 
greater detail through, for example, interpretive guidance. The firms 
have requested an extension of the implementation date until September 
1, 2000, to allow the firms and the NASD time to resolve the issues 
posed, and to program their systems.
    Specifically, Nasdaq received a copy of a letter dated February 18, 
2000 (``Letter'') in which the signatory firms requested an extension 
of the implementation date of the Riskless Principal Trade Reporting 
Rules.\15\ The Letter stated that the signatory firms (``Firms'') are 
requesting the extension because they have asked the NASD to consider a 
proposed new approach to riskless principal trade reporting that 
differs significantly from the approach described in Notices to Members 
99-65 and 99-66. The Firms proposed the new approach because they 
believe that, under the approach set forth in the Notices, accurately 
reporting trades through electronic communication networks would be 
problematic, as would executions in which both the first and second leg 
of riskless principal trades are reported by their own trading systems. 
The Letter gives examples of trade reporting problems presented by the 
Riskless Principal Trade Reporting Rules.
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    \15\See February 18, 2000 letter to Belinda Blaine, Associate 
Director, SEC (a copy was sent to, among others, Robert Aber, Senior 
Vice President and General Counsel, Nasdaq), from Automated 
Securities Clearance, Ltd. and the following NASD member firms: 
Bernard L. Madoff Securities; CIBC World Markets; Credit Suisse 
First Boston; Deutsche Banc Alex. Brown; Donaldson, Lufkin & 
Jenrette; Goldman Sachs & Co.; Jefferies; Lehman Bros.; Merrill 
Lynch, Pierce, Fenner & Smith, Inc.; Morgan Stanley Dean Writer; and 
Salomon Smith Barney Inc.
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    The Firms request an extension of the implementation date until 
September 1, 2000, to give them and the NASD adequate time to develop 
workable solutions to the reporting problems that have been identified, 
and to program their systems. The extension until September 1, 2000 is 
necessary because the industry and the NASD will be required to devote 
a portion of their technology resources in the first and second 
quarters of 2000 to the implementation of decimal pricing by the July 
3, 2000 deadline established by the SEC's Decimalization Order.\16\
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    \16\Order Directing the Exchanges and the NASD to Submit a 
Decimalization Implementation Plan Pursuant to Section 11A(a)(3)(B) 
of the Act, Release No. 34-42360 (January 28, 2000), 65 FR 5003 
(February 2, 2000) (File No. 4-430).
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    Nasdaq believes that a delay in the implementation of the Riskless 
Principal Trade Reporting Rules is reasonable in light of the 
decimalization efforts, the need for the NASD and the Firms to develop 
workable solutions to the problems identified, and the programming 
changes required by the rule change.
2. Statutory Basis
    Nasdaq believes it would not be prudent nor would it be consistent 
with Section 15A of the Act\17\ to require members to implement 
substantial system changes at a time when they are focusing significant 
resources and time

[[Page 13071]]

to implement decimal pricing, especially if the changes will not 
accomplish the objectives of streamlining trade reporting in Nasdaq, 
OTC, and Third Market securities and reducing SEC transaction fees. 
Thus, Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act\18\ 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.
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    \17\15 U.S.C. 78o-3.
    \18\15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    Nasdaq 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

    Written comments were neither solicited nor received.

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

    The foregoing proposal has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act,\19\ and Rule 19b-4(f)(1)\20\ thereunder, in 
that it constitutes a stated policy and interpretation with respect to 
the meaning of an existing rule.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\21\
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    \19\15 U.S.C. 78s(b)(3)(A)(i).
    \20\17 CFR 240.19b-4(f)(1).
    \21\In reviewing this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to file number SR-NASD-00-06 and should be 
submitted by March 31, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-5916 Filed 3-9-00; 8:45 am]
BILLING CODE 8010-01-M