[Federal Register Volume 65, Number 238 (Monday, December 11, 2000)]
[Notices]
[Pages 77405-77407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31384]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43654; File No. SR-NASD-00-70]


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 Trail System Rules

December 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 November 30, 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 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.
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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 until 120 days after the SEC approves File No. 
SR-NASD-00-23,\3\ which also proposes changes to the OATS rules. The 
text of the proposed rule change is available at the Office of the 
Secretary, NASD Regulation and the Commission.
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    \3\ See Exchange Act Release No. 43344 (September 26, 2000), 65 
FR 59038 (October 3, 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, 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.\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 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

[[Page 77406]]

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 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 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 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 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'') \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 December 15, 2000 (``Phase Three'').\8\
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    \8\ On August 31, 2000, NASD Regulation filed a proposed 
amendment with the Commission for immediate effectiveness to extend 
the implementation date of Phase Three from October 31, 2000 to 
December 15, 2000. See Exchange Act Release No. 43263 (September 8, 
2000), 65 FR 55661 (September 14, 2000).
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    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.\9\
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    \9\ See supra note 3.
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    Several of these proposed changes would alter the requirements that 
will become effective as part of Phase Three under current OATS Rules. 
For example, one proposed change would require that a different order 
origination and receipt time be recorded and reported for certain 
orders. Another proposed amendment would change the definition of 
reporting member, which would eliminate OATS reporting requirements for 
certain firms. To provide adequate time for these proposed changes to 
be considered and potentially acted upon, NASD Regulation is proposing 
that the effective date of Phase Three implementation be 120 days after 
the SEC approves File No. SR-NASD-00-23.\10\ NASD Regulation believes 
that by linking the effective date of Phase Three to SEC approval of 
pending proposed changes to OATS rules, members will be provided 
sufficient time to implement internal systems programming and other 
changes resulting from the rule change.
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    \10\ In response to the Federal Register publication of SR-NASD-
00-23, some commenters indicated that members would require 90 days 
from the date the OATS Technical Specifications are amended to 
incorporate necessary systems changes resulting from SEC approval of 
SR-NASD-00-23. In this regard, NASD Regulation believes that the 
OATS Technical Specifications will be amended within 30 days of SEC 
approval of SR-NASD-00-23. Accordingly, NASD Regulation believes 
that 120 days after the date of SEC approval of SR-NASD-00-23 should 
provide adequate time for the OATS Technical Specifications to be 
amended and published, and for members to make necessary systems and 
programming changes.
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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,\11\ 
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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    \11\ 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 \12\ and Rule 19b-
4(f)(6) thereunder,\13\ 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, or such 
shorter time that the Commission may designate if consistent with the 
protection of investors and the public interest. NASD Regulation 
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 and has requested that the Commission accelerate the operative 
date of the proposal to become effective immediately.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.16b-4(f)(6).
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    The Commission finds good cause for accelerating the operative date 
of the proposal as of the date of this notice.\14\ In order to prevent 
unnecessary systems changes, NASD Regulation needs to give its members 
as much notice as possible that the effective date of Phase Three has 
been extended. The Commission also notes that the previous proposal to 
extend the implementation date of Phase Three from October 31, 2000 to 
December 15, 2000 did not become operative for 30 days from the date of 
filing, and the Commission received no comments.\15\
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    \14\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \15\ See supra note 8.

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[[Page 77407]]

    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, 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 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-00-70 and should 
be submitted by January 2, 2001.

    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. 00-31384 Filed 12-8-00; 8:45 am]
BILLING CODE 8010-01-M