[Federal Register Volume 65, Number 179 (Thursday, September 14, 2000)]
[Notices]
[Pages 55661-55662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23563]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43263; File No. SR-NASD-00-53]


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 for Order Audit System Rules

September 8, 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 August 31, 2000, the National Association of Securities Dealers, 
Inc. (``NASD or ``Association''), through its wholly-owned subsidiary, 
NASD Regulation, Inc. (``NASD Regulation'') 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. The Commission in 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend Rule 6957 to extend the effective 
date of the implementation of Phase Three of the Order Audit Trail 
System (``OATS'') Rules to December 15, 2000.
    Below is the text of the proposed rule changes. Proposed new 
language is underlined; proposed deletions are in brackets.

NASD Systems and Programs

6950. Order Audit Trail System

* * * * *

6957. Effective Date

    The requirements of the Order Audit Trail System shall be 
effective in accordance with the following schedule:
    (a) and (b) No change.
    (c) Manual Orders.
    The requirements of the Order Audit Trail System shall be 
effective on December 15, 2000 [October 31, 2000], for all manual 
orders, provided that firms shall be required to report information 
item (18) specified in Rule 6954(b) only to the extent such item is 
available to them and shall not be required to record and report 
information items (4) and (5) specified in Rule 6954(b) and 
information item (1) specified in Rule 6954(c).
    (d) Rule 3110.
    The requirements of Rule 3110(h)(1)(A) and Rule 3110(h)(1)(B) 
shall be effective on March 1, 1999, and the requirements of Rule 
3110(h)(1)(C) shall be effective on December 15, 2000 [October 31, 
2000]. The requirements of Rule 3110(h)(2) and Rule 3110(h)(3) shall 
be effective on March 1, 1999.

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

    In its filing with the Commission, NASD Regulation 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

1. Purpose
    On March 6, 1998, the SEC approved NASD OATS Rules 6950 through 
6957.\3\ OATS provides a substantially enhanced body of information 
regarding orders and transactions that improves NASD Regulation'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 
SEC relating to the settlement of an enforcement action against the 
NASD for failure to

[[Page 55662]]

adequately enforce its rules.\4\ Pursuant to the SEC Order, OATS is 
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.\5\
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    \3\ See Securities Exchange Act Release No. 39729, 63 FR 12559 
(March 13, 1998) (order approving File No. SR-NASD-97-56).
    \4\ See In the Matter of National Association of Securities 
Dealers, Inc., Securities Exchange Act Release No. 37538 (August 8, 
1996); Administrative Proceeding File No. 3-9056 (``SEC Order'').
    \5\ Id.
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    In general, OATS imposes obligations on member firms to record in 
electronic form and to report to NASD Regulation certain information 
with respect to orders originated, received, transmitted, modified, 
canceled, or executed (``reportable events'') by NASD members relating 
to a Nasdaq Stock Market, Inc. (``Nasdaq'') equity security. This 
information is integrated with quote information and transaction 
information reported to the Automated Confirmation Transaction Service 
(``ACT'') \6\ to provide the Association with an accurate, time-
sequenced record of orders and other transactions.
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    \6\ ACT is an automated system owned and operated by Nasdaq that 
captures transaction information in real-time.
    \7\ On March 9, 2000, NASD Regulation filed a proposed amendment 
with the Commission for immediate effectiveness to extend the 
implementation date of Phase Three from July 31, 2000 to October 31, 
2000. See Securities Exchange Act Release No. 42515 (March 10, 
2000), 65 FR 14638 (March 17, 2000).
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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 October 31, 2000 (``Phase Three'').\7\
    Since the implementation of OATS, NASD Regulation 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, NASD Regulation has proposed certain changes to 
OATS that it believes will enhance NASD Regulation's automated 
surveillance for compliance with trading and market making rules such 
as the NASD's Limit Order Protection Interpretation, the SEC's Order 
Handling Rules, and a member firm's best execution obligations.\8\
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    \8\ See File No. SR-NASD-00-23 (currently pending before the 
Commission).
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of 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. NASD Regulation believes 
that extending the effective date of Phase Three implementation of OATS 
will provide the additional time necessary to fully analyze and 
consider the proposed changes to OATS rules and determine whether the 
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

    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.

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

    NASD Regulation has neither solicited nor received written comments 
on the proposed rule change.

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

    Pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder,\11\ the proposed rule change has become effective 
upon filing as it effects a change that: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) by its terms, 
does not become operative for 30 days from the date of filing, and the 
Association provided the Commission with written notice of its intent 
to file the proposed rule change at least five business days prior to 
the filing date.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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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 proposed rule 
change 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 No. SR-NASD-00-53 and should 
be submitted by October 5, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23563 Filed 9-13-00; 8:45 am]
BILLING CODE 8010-01-M