[Federal Register Volume 65, Number 192 (Tuesday, October 3, 2000)]
[Notices]
[Pages 59038-59042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25333]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43344; File No. SR-NASD-00-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the National Association of Securities 
Dealers, Inc. Relating to Amendments to Order Audit Trail System Rules

September 26, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on April 19, 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. On September 5, 2000, NASD 
Regulation amended its proposal.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated September 
5, 2000 (``Amendment No. 1''). Amendment No. 1 proposed substantive 
changes to the proposed rule language, including the definition of 
the time of receipt for manual block orders of 10,000 shares or 
greater, and the provisions for exemptive relief.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Rules 6951, 6954, 6955 
and 9610. The proposed rule change would: (1) provide that the time of 
order origination and receipt for an electronic order is the time the 
order is captured by a member's electronic order-routing or execution 
system; for a manual order that is fewer than 10,000 shares, the time 
of order origination and receipt is the time the order is received by 
the member's trading desk or trading department for execution or 
routing purposes; and for a manual order that is 10,000 shares or 
greater, the time of order origination and receipt is the time the 
order is received by the member from the customer; (2) exclude certain 
members from the definition of ``Reporting Member'' for those orders 
that meet specified conditions and are recorded and reported to the 
Order Audit Trail System (``OATS'') by another member; (3) require any 
receiving reporting member, including electronic communications 
networks (``ECNs''), that receive routed orders, electronically or 
manually, to capture and report a routed order identifier; and (4) 
permit NASD Regulation to grant exemptive relief from the OATS 
reporting requirements to members that meet specified criteria.
    The text of the proposed rule change follows. Proposed new rule 
language is in italics; proposed deletions are in brackets.

NASD Systems and Programs

6950. Order Audit Trail System

6951. Definitions

    For purposes of Rules 6950 through 6957:
    (a) through (m) No Change.
    (n) ``Reporting Member'' shall mean a member that receives or 
originates an order and has an obligation to record and report 
information under Rules 6954 and 6955. A member shall not be 
considered a Reporting Member in connection with an order, if the 
following conditions are met:
    (1) the member engages in non-discretionary order routing 
process, pursuant to which it immediately routes, by electronic or 
other means, all of its orders to receiving Reporting Member;
* * * * *
    (2) the members does not direct and does not maintain control 
over subsequent routing or execution by the receiving Reporting 
Member;
    (3) the receiving Reporting Member records and reports all 
information required under Rules 6954 and 6955 with respect to the 
orders; and
    (4) the member has a written agreement with the receiving 
Reporting Members specifying the respective functions and 
responsibilities of each part to affect full compliance with the 
requirements of Rules 6954 and 6955.
* * * * *

6954. Recording of Order Information

    (a) No Change.
    (b) Order Origination and Receipt.
    Unless otherwise indicated, the following order information must 
be recorded under this Rule when an order is received or originated. 
For purpose of this Rule, the order origination and receipt time for 
an electronic order is the time the order is captured by a member's 
electronic order-routing or execution system; for a manual order 
that is fewer than 10,000 shares, the order origination and receipt 
time is the time the order is received by the member's trading desk 
or trading department for execution or further routing purposes; and 
for a manual order that is 10,000 shares or greater, the order 
origination and receipt time is the time the order is received by 
the member from the customer.
    (1) through (18) No Change.
    (c) Order Transmittal.
    Order information required to be recorded under this Rule when 
an order is transmitted includes the following.
    (1) and (2) No Change.
    (3) When a member electronically transmits an order for 
execution on an Electronic Communications Network:
    (A) the transmitting Reporting Member and shall record:
    (i) the fact that the order was transmitted to an Electronic 
Communications Network.
    (ii) the order identifier assigned to the order by the Reporting 
Member.
    (iii) the maker participant symbol assigned by the Association 
to the Reporting Member.
    (iv) the market participant symbol assigned by the Association 
to the member to which the order is transmitted,
    (v) the date the order was first originated or received by the 
Reporting Member,
    (vi) the date and time the order is transmitted, and
    (vii) the number of shares to which the transmission applies; 
and
    (B) the receiving Reporting Member operating the Electronic 
Communications Network shall record:
    (i) the fact that the order was received by an Electronic 
Communications Network,
    (ii) the order identifier assigned to the order by the member 
that transmits the order,
    (iii) [(ii)] the market participant symbol assigned by the 
Association to the transmitting Reporting Member, and
    (iv) [(iii)] other information items in Rule 6954(b) that apply 
with respect to such order, which must include information items 
(1), (2), (3), (6), (7), (8), (10), (11), (12), (13), (15), and 
(16).
    (4) When a member manually transmits an order to another member, 
other than to an Electronic Communications Network:
    (A) the transmitting Reporting Member shall record:
    (i) the fact that the order was transmitted manually,
    (ii) the order identifier assigned to the order by the Reporting 
Member,
    (iii) the market participant symbol assigned by the Association 
to the Reporting Member,
    (iv) the market participant symbol assigned by the Association 
to the member to which the order is transmitted,
    (v) the date the order was first originated or received by the 
Reporting Member,
    (vi) the date and time the order is transmitted,
    (vii) the number of shares to which the transmission applies, 
and
    (viii) for each order to be included in a bunched order, the 
bunched order route indicator assigned to the bunched order by the 
Reporting Member; and
    (B) the receiving Reporting Member shall record, in addition to 
all other information

[[Page 59039]]

items in Rule 6954(b) that apply with respect to such order:
    (i) the fact that the order was received manually, [and]
    (ii) the order identifier assigned to the order by the member 
that transmits the order, and
    (iii) [(ii)] the market participant symbol assigned by the 
Association to the member that transmits the order.
    (5) When a member manually transmits an order to an Electronic 
Communications Network:
    (A) the transmitting Reporting Member shall record:
    (i) the fact that the order was transmitted manually,
    (ii) the order identifier assigned to the order by the Reporting 
Member,
    (iii) the market participant symbol assigned by the Association 
to the Reporting Member,
    (iv) the market participant symbol assigned by the Association 
to the member to which the order is transmitted,
    (v) the date the order was first originated or received by the 
Reporting Member,
    (vi) the date and time the order is transmitted,
    (vii) the number of shares to which the transmission applies, 
and
    (viii) for each order to be included in a bunched order, the 
bunched order route indicator assigned to the bunched order by the 
Reporting Member; and
    (B) the receiving Reporting Member shall record:
    (i) the fact that the order was received manually,
    (ii) the order identifier assigned to the order by the member 
that transmits the order,
    (iii) [ii] the market participant symbol assigned by the 
Association to the transmitting Reporting Member, and
    (iv) [(iii)] other information items in Rule 6954(b) that apply 
with respect to such order, which must include information items 
(1), (2), (3), (6), (7), (8), (10), (11), (12), (13), (15), and 16).
    (6) No Change.
    (d) No Change.

6955. Order Data Transmission Requirements

    (a) through (c) No Change
    (d) Exemptions
    (1) Pursuant to the Rule 9600 Series, the staff, for good cause 
shown after taking into consideration all relevant factors, may 
exempt, subject to specified terms and conditions, a member from the 
order data transmission requirements of this Rule for manual orders, 
if such exemption is consistent with the protection of investors and 
the public interest, and the member meets the following criteria:
    (A) the member and current control affiliates and associated 
persons of the member have not been subject within the last five 
years to any disciplinary action, and within the last ten years to 
any disciplinary action involving fraud;
    (B) the member has annual revenues of less than $2 million;
    (C) the member does not conduct any market making activities in 
Nasdaq Stock Market equity securities;
    (D) the member does not execute principal transactions with its 
customers (with limited exception for principal transactions 
executed pursuant to error corrections); and
    (E) the member does not conduct clearing or carrying activities 
for other firms.
    (2) An exemption provided pursuant to this paragraph (d) shall 
not exceed a period of two years. At or prior to the expiration of a 
grant of exemptive relief under this paragraph (d), a member meeting 
the criteria set forth in paragraph (d)(1) may request, pursuant to 
the Rule 9600 Series, a subsequent exemption, which will be 
considered at the time of the request, consistent with the 
protection of investors and the public interest.
    (3) This paragraph shall be in effect until [five years from the 
effective date of the proposed rule change].
* * * * *

9600. Procedures for Exemptions

9610. Application

    (a) Where to File
    A member seeking an exemption from Rule 1021, 1022, 1070, 2210, 
2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive 
Material 2860-1, 3010(b)(2), 3020, 3210, 3230, 3350, 6955, 8211, 
8212, 8213, 11870, or 11900, Interpretive Material 2110-1, or 
Municipal Securities Rulemaking Board Rule G-37 shall file a written 
application with the appropriate department or staff of the 
Association and provide a copy of the application to the Office of 
General Counsel of NASD Regulation.
    (b) and (c) No Change.
* * * * *

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
(a) Background
    On March 6, 1998, the SEC approved NASD Order Audit Trail System 
(``OATS'') Rules 6950 through 6957.\4\ 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 federal securities 
laws and 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 adequately enforce its rules.\5\ 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 
recording of market events.\6\
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    \4\ See Securities Exchange Act Release No. 39729 (March 6, 
1998), 63 FR 12559 (March 13, 1998) (``OATS Approval Order'').
    \5\ See In the Matter of National Association of Securities 
Dealers, Inc., 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 NASD Regulation on a daily basis 
certain information with respect to orders originated, received, 
transmitted, modified, canceled, or executed (``reportable events'') by 
NASD members relating to Nasdaq Stock Market, Inc. (``Nasdaq'') equity 
securities. OATS also requires member firms to synchronize their 
business clocks and to keep them continually synchronized with a 
specific time designated by the Association. OATS captures this order 
information reported by NASD members and integrates it 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, quotes, 
and 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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    In addition to NASD Rules 6950 through 6957, NASD Rule 3110 imposes 
recordkeeping requirements on NASD members that are obligated to record 
and report information to the NASD under the OATS rules. With respect 
to an order that is received or executed at the member's trading 
department, the member is required to record the identification of the 
registered person who received the order directly from a customer and 
the identification of the person who executed the order at a market 
maker's trading desk. In

[[Page 59040]]

addition, NASD Rule 3110 requires a member to record the identification 
of the department of the member that originated an order that is 
transmitted manually to another department within a member.
    The effective date 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'').
    As of December 15, 2000, the OATS rules will apply to all manual 
orders (``Phase Three'').\8\ 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.\9\
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    \8\ See Securities Exchange Act Release No. 43263 (September 8, 
2000), 65 FR 55661 (September 14, 2000). On March 9, 2000, NASD 
Regulation filed a proposed amendment with the SEC for immediate 
effectiveness to extend the implementation date of Phase Three from 
July 31, 2000 to October 31, 2000. See Exchange Act Release No. 
42515 (March 10, 2000), 65 FR 14638 (March 17, 2000). The purpose of 
these extensions is to provide NASD Regulation adequate time to 
analyze and consider the proposed changes described in the current 
proposal, and, in particular, those affecting Phase Three recording 
and reporting requirements.
    \9\ See OATS Approval Order, pp. 22-23, supra note 4. 
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) or Rule 6954(b) 
and information items under (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) under the Exchange Act), 
(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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    The books and records requirements, set forth in NASD Rule 
3110(h)(1)(A) and (B), pertaining to the identification of the 
registered representative who receives an order directly from a 
customer and the identification of each registered person who executes 
the order, became effective on March 1, 1999. The recordkeeping 
requirements, set forth in NASD Rule 3110(h)(1)(C), applicable to 
orders originated by a member and manually transmitted to another 
department within the member firm, will become effective on December 
15, 2000.
    Since the implementation of the OSTS requirements, NASD Regulation 
staff has been closely reviewing OATS activities with the goal of 
identifying ways in which to enhance the effectiveness of OATS as a 
regulatory tool. In this regard, NASD Regulation has identified certain 
changes to OATS that its 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. These rule changes will, at the same time, eliminate the 
reporting of duplicative information and reduce the regulatory burdens 
on member firms, particularly certain smaller member firms.
(b) Current Proposal
(1) Change to Time of Receipt of Order
    NASD Rule 6954 requires certain identifying information to be 
recorded at various critical points during the life of an order. In 
addition to uniquely identifying the order, this information assists 
NASD Regulation in carrying out its regulatory responsibilities with 
respect to that order. In general, the required information items 
relate to: (1) the origin of an order (i.e., in-house, customer, or 
another member); (2) whether the member relies upon a Reporting Agent 
to fulfill its reporting obligations; (3) how the order was received 
(i.e. manually or electronically); (4) the items of the order; (5) 
whether the order was transmitted for execution to another department 
within the member (other than to the trading department), to another 
member, or to an ECN, and how it was transmitted (i.e., manually or 
electronically); and (6) whether the order was modified, canceled, or 
executed.
    NASD Rule 6954(b) requires certain information to be recorded when 
an order is received or originated. For electronic orders, the proposed 
rule change would codify the staff's current position that the order 
origination and receipt time is the time the order is captured by a 
member's electronic order-routing or execution system. NASD Regulation 
believes that this definition of time of receipt is a close substitute 
for the time an order is received by the trading desk because routing 
through the electronic system to the trading desk is nearly 
instantaneous.
    Once the OATS rules are fully phased in on December 15, 2000, 
manual orders, whether recorded at a market maker trading desk or at 
another location, will be subject to all the recording and reporting 
requirements. Currently, the time of receipt recorded and reported to 
OATS is the time the firm receives the order from a customer.\10\ 
Although the actual time a manual order is received by a firm is useful 
for certain regulatory purposes, it is of little value to NASD 
Regulation's Market Regulation Department's automated surveillance for 
identifying potential violations of NASD IM 2110-2 (the limit order 
protection rule), Rule 11Ac1-4 under the Exchange Act (limit order 
display rule), and NASD Rule 2320 (best execution obligations). In many 
instances, the more useful time for these purposes is the time the 
order is received by the trading desk or trading department. 
Accordingly, NASD Regulation is proposing to amend Rule 6954(b) to 
require the time of receipt to be recorded and reported by a member 
firm to OATS for a manual order that is fewer than 10,000 shares to be 
the time the order is received by the member's trading desk or trading 
department for execution or routing purposes. For a manual order that 
is 10,000 shares or greater, the time of receipt required to be 
recorded and reported would continue to be the time the order is 
received by the member from the customer. \11\
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    \10\ If an order is received and then immediately entered into 
an electronic system, the time the order is captured by such system 
has been interpreted to be the time of receipt. See OATS Reporting 
Technical Specifications, Section 4.1.3.
    \11\ Because certain order handling rules may apply different to 
block orders of 10,000 shares or greater, the proposed rule change 
defines the time of receipt differently depending on the size of the 
order. For example, members may attach terms and conditions to 
certain block orders of 10,000 shares or greater for purposes of the 
limit order protection rule, such orders excepted from the limit 
order display rule unless a customer expressly requests otherwise.

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[[Page 59041]]

    NASD Regulation believes that, for electronic orders and manual 
orders for fewer than 10,000 shares, the time the order is received at 
the trading desk or trading department is the most relevant time and 
will provide the best indicator for NASD Regulation's automated 
surveillance systems to review for compliance with applicable rules. In 
addition, NASD Regulations believes the proposed rule change will 
reduce the burden of reprogramming reporting systems for Phase Three 
requirements, as well as the cost of manually inputting these times for 
orders not directly inputted into an electronic order handling system, 
while still substantially fulfilling the undertakings contained in the 
SEC Order.
    Notwithstanding this proposed rule change to the OATS rules, NASD 
Regulation recognizes the importance of capturing the time the order 
was actually received from the customer to determine if there are any 
inordinate delays in transmitting the order to the trading desk. In 
this regard, all firms must continue to capture and retain the time an 
order was received from a customer (if different than the time the 
order was entered into an electronic system) under Rule 17a-3(a)(6) of 
the Exchange Act.\12\ This information is available to NASD Regulation 
staff as part of its investigatory process and is used during field 
examinations of member firms to determine, among other things, how 
promptly the firm transmits its orders for execution.
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    \12\ 17 CFR 240.17a-3(a)(6).
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(2) Exclusion from OATS Reporting for Certain Members
    Certain members engage in a non-discretionary order routing process 
whereby, immediately after receipt of a customer order, the member 
routes the order, by electronic or other means, to another member 
(``receiving member'') for further routing or execution at the 
receiving member's discretion. Currently, the OATS rules require both 
the member with whom the order originated and the receiving member to 
create and report new order reports and possibly route reports. This 
results in the receipt of duplicative information by OATS. In such 
instances, therefore, NASD Regulation is proposing that the OATS rules 
be amended to require, in such instances, that only the receiving 
member report OATS data. Under the proposed rule change to NASD Rule 
6951(n), a member would not be required to report OATS data regarding 
an order, if the following conditions are met:
    (1) the member engages in a non-discretionary order routing 
process, pursuant to which it immediately rouges, by electronic or 
other means, all of its orders to a receiving Reporting Member; \13\
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    \13\ If any delay results in the routing of an order due to 
systems problems or other reasons, the member with whom the order 
originated would be required to report OATS data.
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    (2) the member does not direct or maintain control over subsequent 
routing or execution by the receiving Reporting Member;
    (3) the receiving Reporting Member records and reports all 
information required under NASD Rules 6954 and 6955 with respect to the 
order; and
    (4) the member has a written agreement with the receiving Reporting 
Member specifying the respective functions and responsibilities of each 
party to effect full compliance with the requirements of NASD Rules 
6954 and 6955.
    In addition to eliminating the reporting of duplicative information 
to OATS, NASD Regulation believes the proposed rule change will reduce 
the regulatory burdens on members, particularly smaller members, that 
route all their orders to another Reporting Member by means of a non-
discretionary order routing process, for execution or further routing 
purposes.\14\
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    \14\ This exclusion would not change a member's requirement to 
capture and retain the time an order was received from a customer 
under Rule 17a-3(a)(6) or the Exchange Act. 17 CFR 240.17a-3(a)(6).
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(3) Capturing Routed Order Information
    OATS has the capability of tracking the history of an order by 
linking it across firms through the use of a routed order identifier. 
If the order does not contain a routed order identifier, the order 
cannot be linked to subsequent actions, such as further routing or 
execution by other firms or Nasdaq systems. In this regard, the 
complete history of a significant percentage of orders are not tracked 
because the OATS rules do not require any receiving Reporting Member to 
capture and report a routed order identifier if the order is routed to 
it manually. OATS rules also do not currently require ECNs to capture 
and report a routed order identifier for orders routed to the ECN 
manually or electronically. Given the current level of participation of 
ECNs, the linking of these orders is essential if OATs is to capture 
the life cycle of orders for Nasdaq securities. Therefore, NASD 
Regulation is proposing new provisions to Rule 6954(c) that will 
require firms and ECNs to capture and report the transmitting Reporting 
Member's unique identifier for all routed orders. NASD Regulation 
anticipates a ``phase-in'' period for implementation of this proposed 
rule change to provide adequate time for necessary systems and 
procedures changes.
(4) Exemptive Relief
    Finally, NASD Regulation is proposing new paragraph (d) of Rule 
6955 and an amendment to Rule 9610(a) to permit NASD Regulation to 
grant exemptive relief to certain members from the reporting 
requirements of the OATS rules under the procedures set forth in the 
Rule 9600 series. Specifically, members that meet the following 
criteria would be eligible to request an exemption from the OATS 
reporting requirements for manual orders:
    (1) the member and current control affiliates and associated 
persons of the member have not been subject within the last five years 
to any disciplinary action, and within the last ten years to any 
disciplinary action involving fraud;
    (2) the member has annual revenues of less than $2 million;
    (3) the member does not conduct any market making activities in 
Nasdaq Stock Market equity securities;
    (4) the member does not execute principal transactions with its 
customers (with limited exceptions for error corrections); and
    (5) the member does not conduct clearing or carrying activities for 
other firms.
    Under the proposed rule change, any exemptive relief granted would 
expire no later than two years from the date the member receives the 
exemptive relief. At or prior to the expiration of a grant of exemptive 
relief, members meeting the specified criteria may request a subsequent 
exemption, In addition, under the proposed rule change, NASD 
Regulation's exemptive authority shall be in effect for five years from 
the effective date of the proposed rule change.
    The proposed exemptive authority will provide NASD Regulation the 
ability to grant relief to members meeting the specified criteria in 
situations where, for example, reporting of this information would be 
unduly burdensome for the member or where temporary relief from the 
rules (in the form of additional time to achieve compliance would 
permit the member to avoid unnecessary expense or hardship.
2. Statutory Basis
    The Association believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of

[[Page 59042]]

the Exchange Act,\15\ which require that the rules of an association 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, under the proposed rule change, OATS will continue to provide a 
substantially enhanced body of information regarding orders and 
transactions and will improve NASD Regulation's ability to conduct 
surveillance and investigations of member firms for violations of the 
Association's and other applicable rules.
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    \15\ 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 
impose 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 neither solicited nor received written comments.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Exchange Act. In particular, the Commission 
solicits comments on the propriety of the proposed time of receipt to 
be recorded and reported to OATS for manual orders. Currently, the time 
of receipt recorded and reported to OATS is the time the firm receives 
the order from a customer. Under the proposed rule change, this would 
continue to be the time of receipt for manual orders that are 10,000 
shares or greater. For manual orders of fewer than 10,000 shares, 
however, the NASD has proposed that the time of receipt to be recorded 
and reported pursuant to the OATS rules be the time the order is 
received by the member's trading desk or trading department for 
execution or routing purposes. The distinction is due to the types of 
problems the NASD and the Commission have encountered with manual 
orders of various sizes. Manual orders of greater than 10,000 shares 
are more likely to be subject to potential manipulation through delays 
in transferring the orders to a firm's trading desk or trading 
department. Manual orders of fewer than 10,000 shares, however, may 
need to be more closely examined for violations of the Commission's 
order handling rules. The Commission seeks comment on whether the 
proposed distinction between manual orders of different sizes for 
purposes of the proposed time of receipt is reasonable.
    Persons making written submissions 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 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 at 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-00-23 and should be 
submitted by October 24, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25333 Filed 10-2-00; 8:45 am]
BILLING CODE 8010-01-M