[Federal Register Volume 65, Number 154 (Wednesday, August 9, 2000)]
[Notices]
[Pages 48774-48776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20058]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43103; File No. SR-NASD-00-44]


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

August 1, 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 July 31, 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)(i) 
of the Act,\3\ and Rule 19b-4(f)(1) \4\ thereunder, 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)(i).
    \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 Proposed Rule Change

    Nasdaq's proposes to delay until November 1, 2000 the 
implementation 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\ SR-NASD-99-52,\8\ 
and SR-NASD-00-06.\9\ Nasdaq also is proposing an interpretation to 
clarify a statement in Notice to Members 99-65.
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    \5\ Securities Exchange Act Release No. 41208 (March 24, 1999), 
64 FR 15386 (March 31, 1999).
    \6\ Securities Exchange Act Release No. 41606 (July 8, 1999), 64 
FR 38226 (July 15, 1999).
    \7\ Securities Exchange Act Release No. 41731 (August 11, 1999), 
64 FR 44983 (August 18, 1999).
    \8\ Securities Exchange Act Release No. 41974 (October 4, 1999), 
64 FR 55508 (October 13, 1999).
    \9\ Securities Exchange Act Release No. 42494 (March 3, 2000), 
65 FR 15933 (March 24, 2000).
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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 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

    On March 24, 1999 and July 8, 1999, the Commission approved 
proposals to amend the NASD trade reporting rules relating to riskless 
principal transactions in Nasdaq National Market, Nasdaq SmallCap 
Market, Nasdaq convertible debt, and non-Nasdaq over-the-counter 
(``OTC'') equity securities, and exchange-listed securities traded in 
the Nasdaq InterMarket (``Riskless Principal Trade Reporting 
Rules'').\10\ 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). The Rules require a firm to report a riskless principal trade 
as one transaction.
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    \10\ See footnotes 5 and 6, supra.
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    In the Order approving SR-NASD-98-59, the Commission asked Nasdaq 
to submit an interpretation providing

[[Page 48775]]

examples of how mark-ups, mark-downs, and other fees would be excluded 
for purposes of the amended riskless principal rules.\11\ As requested, 
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 Principal Trade Reporting Rules. SR-NASD-99-39 \13\ and Notice 
to Members 99-65 were filed as an interpretation to NASD Rules 4632, 
4642, 4652, and 6620.
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    \11\ Securities Exchange Act Release No. 41208 (March 24, 1999), 
64 FR 15386 (March 31, 1999) at footnote 15.
    \12\ See footnote 7, supra.
    \13\ Id.
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    Notices to Members 99-65 (discussing the trade reporting rules for 
riskless principal transactions in Nasdaq and OTC securities) and 99-66 
(discussing, among other things, the trade reporting rules for the 
Nasdaq InterMarket) were published 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, due (in large part) to Year 
2000 (``Y2K'') remediation and testing requirements. in response, 
Nasdaq filed a proposed interpretation to NASD Rules 4632, 4642, 4652, 
and 6620, the purpose of which was to delay the implementation date of 
the new Riskless Principal Trade Reporting Rules until March 1, 
2000.\14\
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    \14\ See footnote 8, supra.
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    Subsequently, a number of NASD member firms requested a further 
extension of the implementation date of the Riskless Principal Trade 
Reporting Rules.\15\ The firms stated that the approach described in 
Notices to Members 99-65 and 99-66 for riskless principal trade 
reporting raised significant issues that needed to be addressed in 
greater detail through, for example, interpretive guidance. The firms 
requested an extension of the implementation date until September 1, 
2000 to provide time to resolve the issues posed and to program 
systems. On February 23, 2000, Nasdaq filed a proposed interpretation 
to NASD Rules 4632, 4642, 4652, and 6620 to delay the implementation 
date of the new Riskless Principal Trade Reporting Rules until 
September 1, 2000.\16\
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    \15\ See letter to Belinda Blaine, Associate Director, SEC, 
dated February 18, 2000 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.; Jeffries & 
Company, Inc.; Lehman Bros.; Merrill Lynch, Pierce, Fenner & Smith, 
Inc.; Morgan Stanley Dean Witter; and Salomon Smith Barney Inc.
    \16\ See footnote 9, supra.
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    Nasdaq is now requesting a further extension of the implementation 
date until November 1, 2000. Nasdaq believes the extension is necessary 
to allow Nasdaq and the firms the time to finalize a workable solution 
to the problems the firms identified, and to make the necessary 
programming changes, especially in light of the resources that are 
being devoted to the implementation of decimal pricing by both the 
firms and Nasdaq.\17\
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    \17\ See Order Directing the Exchanges and the NASD to Submit a 
Decimalization Implementation Plan Pursuant to Section 11A(a)(3)(B) 
of the Act, Securities Exchange Act Release No. 42360 (January 28, 
2000), 65 FR 5003 (February 2, 2000) (File No. 4-430), and Order 
Directing the Exchanges and the NASD to Submit a Phase-In Plan to 
Implement Decimal Pricing in Equity Securities and Options, 
Securities Exchange Act Release No. 42914 (June 8, 2000), 65 FR 
38010 (June 19, 2000).
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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. Nasdaq believes it would not be 
prudent, nor would it be consistent with section 15A of the Act,\18\ to 
require members to implement substantial system changes at a time when 
they are focusing significant resources and time to implement decimal 
pricing, especially if the changes will not accomplish the objectives 
of streamlining trade reporting in Nasdaq, OTC, and Nasdaq InterMarket 
securities and reducing SEC transaction fees.\19\
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    \18\ 15 U.S.C. 78o-3.
    \19\ See Section 31 of the Act, 15 U.S.C. 78ee.
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    Nasdaq also proposes to issue an interpretation to clarify a 
statement that was made in Notice to Members 99-65 with respect to net 
trading of Nasdaq and OTC securities. A market maker trades ``net'' 
with an institution when the firm accumulates a position at one price 
and executes the offsetting trade with the institutional customer at 
another price.
    Notice to Members 99-65 announced SEC approval of the Riskless 
Principal Trade Reporting Rules and included an attachment containing 
questions and answers regarding the rule change. A number of questions 
and answers in the Notice discuss net trading. For example. question 
and answer 4 state the following:

    Q. How does a member determine whether transactions are at the 
``same price''?
    [If] a member is working an order for an institutional account * 
* * or of a block size * * * and the member finds the other side of 
the order, the presumption will be that the orders will be matched 
off at the same price (exclusive of any markup or markdown, 
commission equivalent, or other fee) and reported as riskless 
principal, unless the customer has specifically requested that the 
order be traded on a net basis at a difference price.

Questions and answers 3, 6, and 7 also addressed net trading.
    After this Notice was issued, a number of firms requested guidance 
on how to document the customer request that the order be traded on a 
net basis, and asked for permission to use ``negative consent'' letters 
to refute the presumption that the orders will be matched off at the 
same price, citing difficulties with obtaining affirmative consent from 
customers. After thorough consideration of this issue, Nasdaq has 
concluded that firms may use negative consent letters to evidence a 
customer request to trade on a net basis, as long as the letter meets 
the following conditions.
    A firm using a negative consent letter to demonstrate a customer 
request to trade on a net basis should send a letter to the customer 
clearly disclosing the terms and conditions for handling the customer's 
orders. Only one letter must be sent to each customer; a letter is not 
required for each transaction. The customer must be provided with a 
meaningful opportunity to object to any statements in the letter. If no 
objection is received, the firm may reasonably conclude that the 
customer has consented to the terms and conditions in the letter and 
has requested that the firm trade for the customer on a net basis. 
Nasdaq will publicize this interpretation in a new Notice to Members 
that will be issued when further revisions are made to the Riskless 
Principal Trade Reporting Rules.
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the Act,\20\ 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

[[Page 48776]]

general, to protect investors and the public interest.
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    \20\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    Nasdaq believes that the proposed rule change will not result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, 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,\21\ and Rule 19b-4(f)(1) \22\ thereunder, in 
that it constitutes a stated policy and interpretation with respect to 
the meaning of an existing rule.
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    \21\ 15 U.S.C. 78s(b)(3)(A)(i).
    \22\ 17 CFR 240.19b-4(f)(1).
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    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.

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-00-44 and should be 
submitted by August 30, 2000.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-20058 Filed 8-8-00; 8:45 am]
BILLING CODE 8010-01-M