[Federal Register Volume 65, Number 53 (Friday, March 17, 2000)]
[Notices]
[Pages 14638-14639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6607]



[[Page 14638]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42515; File No. SR-NASD-00-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Extension of the Effective 
Date of Phase Three of Order Audit Trail System Rules

March 10, 2000.
    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 March 9, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') through its wholly-owned subsidiary, 
NASD Regulation, Inc. (``NASDR'') 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 NASDR. The NASDR has designated this proposal as one 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act, \3\ which renders the proposal effective 
upon the Commission's receipt of this filing. 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASDR proposes to amend NASD Rule 6957 to extend the effective date 
of the implementation of Phase Three of the Order Audit Trail System 
(``OATS'') Rules from July 31, 2000 to October 31, 2000. The text of 
the proposed rule change is available at the NASD and at the 
Commission.

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 NASDR included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASDR has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    On March 6, 1998, the Commission approved the NASD's OATS Rules 
6950 through 6957.\4\ OATS provides a substantially enhanced body of 
information regarding orders and transactions that improves the NASDR's 
ability to conduct surveillance and investigations of member firms for 
violations of Association rules. In addition, OATS is intended to 
fulfill one of the undertakings contained in the order issued by the 
Commission relating to the settlement of an enforcement action against 
the NASD for failure to adequately enforce its rules.\5\ Pursuant to 
the SEC Order, OATS was required, at a minimum, to: (1) 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 (2) provide 
for market-wide synchronization of clocks used in connection with the 
audit trail. \6\
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    \4\ See Securities Exchange Act Release No. 39729, 63 FR 12559 
(March 13, 1998) (order approving File No. SR-NASD-97-56).
    \5\ See In the Matter of the National Association of Securities 
Dealers, Inc., Securities Exchange Act Release No. 37538, August 8, 
1996; Administrative Proceeding File No. 3-9056 (``SEC Order'').
    \6\ Id.
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    In general, OATS imposes obligations on member firms to record in 
electronic form and to report to the NASDR certain information with 
respect to orders originated, received, transmitted, modified, 
canceled, or executed (``reportable events'') by NASD members relating 
to equity securities traded on The Nasdaq Stock Market, Inc. 
(``Nasdaq''). This information is integrated with quote information and 
transaction information reported to the Automated Confirmation 
Transaction Service (``ACT'') \7\ to provide the Association with an 
accurate, time-sequenced record of orders and other transactions.
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    \7\ ACT is an automated system owned and operated by Nasdaq that 
captures transaction information in real-time.
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    The effective dates for OATS requirements are set forth in NASD 
Rule 6957, which provides for different phases of implementation. All 
members were required to synchronize their computer system clocks and 
all mechanical clocks that record times for regulatory purposes by 
August 7, 1998, and July 1, 1999, respectively. In addition, the 
implementation schedule required that electronic orders received at the 
trading department of a member that is a market maker in the subject 
securities and those received by electronic communications networks 
(``ECNs'') be entered into OATS as of March 1, 1999 (``Phase One''). 
Not all information relating to electronic orders received by market 
makers was required to be reported to OATS during Phase One. 
Information items relating to all electronic orders, however, was 
required to be reported to OATS by August 1, 1999 (``Phase Two'').
    Under the current implementation schedule, the OATS rules will 
apply to all manual orders on July 31, 2000 (''Phase Three''). With 
respect to manual orders and all orders received by ECNs, however, the 
data required to be electronically recorded and transmitted to the OATS 
is limited to information that is expected to be readily available at 
the trading desk.\8\
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    \8\ Specifically, with respect to manual orders, information 
item (18) (type of account for which the order is submitted) of NASD 
Rule 6954(b) would be required to be reported only to the extent 
that such information item is available. Information items (4) 
(identification of any department or the identification number of 
any terminal where an order is received) and (5) (identification of 
the department of the member originating an order) of Rule 6954(b) 
and (1) (recordkeeping requirements for orders transmitted to 
another department within the member) specified in Rule 6954(c) 
would not be required to be recorded and reported with respect to 
manual orders. In addition, information items (4) (identification of 
any department or identification number of any terminal where an 
order is received), (5) (the identification of the department of the 
member that originates the order), (9) (the designation of the order 
as a short sale), (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)), (17) (the identification of the order as related 
to a Program trade or an Index Arbitrage Trade), and (18) (the type 
of account for which the order is submitted) specified in Rule 
6954(b) would not be required to be recorded and reported by ECNs 
receiving orders either electronically or manually.
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    Since the implementation of OATS, NASDR has been closely reviewing 
OATS activities with the goal of identifying ways in which to improve 
OATS and enhance the effectiveness of OATS as a regulatory tool. In 
this regard, NASDR is considering certain changes to OATS that it 
believes will enhance NASDR's automated surveillance for compliance 
with trading and market making rules such as the NASD's Limit Order 
Protection Interpretation, the SEC's Order Execution Rules and a member 
firm's best execution obligations.
    Several of these enhancements that the staff is considering would 
change the requirements that will become effective as part of Phase 
Three under current OATS rules. To provide NASDR

[[Page 14639]]

adequate time to fully analyze and consider these changes and determine 
whether further proposed rule changes are appropriate, the NASDR is 
proposing that the effective date of Phase Three implementation be 
extended from July 31, 2000 to October 31, 2000. In addition, the NASDR 
believes this extension is particularly important in light of the 
increased constraints on member technology and systems due to other 
impending regulatory initiatives, such as decimalization.
2. Statutory Basis
    The NASDR believes the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\9\ which requires, among other things, 
that the Association's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The NASDR believes that extending the effective date 
of Phase Three implementation of OATS will provide NASDR adequate time 
to fully analyze and consider certain potential enhancements to OATS 
and determine whether further proposed rule changes are appropriate.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASDR does not believe that the proposed rule change will 
impose a 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 proposed rule change has been filed by the Association as a 
``non-controversial'' rule change under Rule 19b-4(f)(6) under the 
Act.\10\ Consequently, because the foregoing proposed rule change does 
not significantly affect the protection of investors or the public 
interest, does not impose any significant burden on competition, and 
does not become operative until 30 days after the date on which it was 
filed, and because NASDR provided the Commission with written notice of 
its intent to file the proposed rule change prior to the filing date, 
the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\
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    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submissions, 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 also will be 
available for inspection and copying at the NASD. All submissions 
should refer to File No. SR-NASD-00-09 and should be submitted by April 
7, 2000.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\13\
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    \13\ 17 CFR 200.30-3-(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-6607 Filed 3-16-00; 8:45 am]
BILLING CODE 8010-01-M