[Federal Register Volume 66, Number 19 (Monday, January 29, 2001)]
[Notices]
[Pages 8131-8143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2440]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43873; File No. SR-NASD-99-65]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 4 to the Proposed Rule Change by the National Association 
of Securities Dealers, Inc., Relating to the Creation of a Corporate 
Bond Trade Reporting and Transaction Dissemination Facility and the 
Elimination of Nasdaq's Fixed Income Pricing System

January 23, 2001.

I. Introduction

    On October 28, 1999, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to establish a 
corporate bond trade reporting and transaction dissemination facility 
and to eliminate Nasdaq's Fixed Income Pricing System (``FIPS''). 
Notice of the proposed rule change was published for comment in the 
Federal Register on December 10, 1999.\3\ The Commission received 39 
comment letters regarding the proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42201 (December 3, 
1999), 64 FR 69305.
    \4\ A list of the commenters on the proposal as originally 
noticed appears in Appendix A.
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    On November 17 and November 22, 2000, respectively, the NASD filed 
Amendment Nos. 2 and 3 to the proposed rule change.\5\ Notice of these 
amendments was published in the Federal Register on November 29, 
2000.\6\ The Commission received 13 additional comments on the amended 
proposal since that time.\7\ On January 5, 2001, the NASD filed 
Amendment No. 4 to the proposed rule change.\8\ This order approves the 
proposed rule change, as amended by Amendments 2-4, accelerates 
approval of Amendment No. 4, and solicits comments from interested 
persons on that Amendment.
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    \5\ Amendment No. 2 reflected certain changes proposed by the 
commenters in response to the proposed rule change, as originally 
noticed, or changes suggested by the NASD staff after additional 
review. Amendment No. 3 sets forth the statutory basis of the 
proposed rule change. Amendment No. 1, which had been submitted to 
reflect the Association's receipt of written comments from the 
Regional Municipal Operations Association (``RMOA''), was withdrawn, 
and the RMOA's comments and the NASD's response to them were 
incorporated in Amendment No. 2.
    \6\ See Securities Exchange Act Release No. 43616 (November 24, 
2000), 65 FR 71174.
    \7\ A list of the commenters on Amendment Nos. 2 and 3 appears 
in Appendix B.
    \8\ Amendment No. 4 is described in Section IV.C., infra.
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II. Background

    In 1998, Commission staff conducted a review of the U.S. debt 
market, with a particular focus on price transparency. The review 
concluded that the corporate bond market did not measure up to the 
standard of other securities markets--including the government and 
municipal bond markets--in making price information readily available 
to investors. In light of these findings, SEC Chairman Arthur Levitt 
called upon the NASD to take the following actions:

    First, adopt rules requiring dealers to report all transactions 
in U.S. corporate bonds and preferred stocks to the NASD and to 
develop systems to receive and redistribute transaction prices on an 
immediate basis;
    Second, create a database of transactions in corporate bonds and 
preferred stocks to enable regulators to take a proactive role in 
supervising the corporate debt market; and
    Third, create a surveillance program, in conjunction with the 
development of a database, to better detect fraud and foster 
investor confidence in the fairness of the corporate debt market.\9\
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    \9\ Speech by Chairman Levitt, September 9, 1998, at Media 
Studies Center, New York, NY.

In response to this request, the NASD formed the Bond Market 
Transparency Committee, comprised largely of market participants, to 
work toward an industry-guided solution to increase price transparency 
and oversight for the corporate debt market.
    In September 1998 and March 1999, Chairman Levitt testified for the 
Commission before Congress on bond

[[Page 8132]]

transparency; in May 1999, the Commission submitted its Statement 
Concerning Transparency in the U.S. Corporate Debt Market to the 
Securities Subcommittee of the Senate Banking Committee.\10\ In these 
statements, which were approved by the Commission, Chairman Levitt 
described the results of the Commission's debt review, reiterated the 
request that the NASD improve bond transparency, and described the 
NASD's progress in implementing the proposal.
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    \10\ See Testimony of Chairman Levitt before the Subcommittee on 
Finance and Hazardous Materials, Committee on Commerce, United 
States House of Representatives, September 28, 1998 and March 18, 
1999; Statement of the U.S. Securities and Exchange Commission 
before the Subcommittee on Securities, Committee on Banking, 
Housing, and Urban Affairs, United States Senate, May 26, 1999.
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    As noted above, in October 1999 the NASD filed the original version 
of the proposed rule change that is being approved today in amended 
form. In its general outline, the amended proposal requires NASD 
members to report transaction information on specified U.S. corporate 
bonds and establishes a transaction dissemination facility--to be known 
as the Trade Reporting and Comparison Entry Service, or ``TRACE''\11\--
to facilitate the reporting, collection, and public dissemination of 
this transaction information. In its amended proposal, the NASD also 
states that, in accordance with the Commission's mandate, it intends to 
use TRACE reports to develop a database of transactions that will 
enable NASD Regulation (``NASDR'') to take a more proactive role in 
supervising the corporate debt market. The specifics of the proposed 
rule change are described in Section IV below.
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    \11\ The NASD has represented, however, that it intends 
eventually to rename TRACE.
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    The 39 comment letters received in response to the original 
proposal are summarized in Sections III and V below. Although these 
letters generally supported enhanced price transparency in the 
corporate debt markets, they raised a number of specific concerns. As a 
result, the NASD entered into substantial discussions with industry 
representatives, including The Bond Market Association (``TBMA''), 
aimed at responding to their comments. Subsequently, the NASD filed 
Amendment Nos. 2 and 3 to the proposal to reflect discussions with the 
industry. Commenters filed 13 additional comments in response to those 
Amendments; the NASD filed Amendment No. 4 to address those comments.

III. Summary of Comments

    The principal areas of concern reflected in the 39 initial comment 
letters related to potential negative effects on liquidity; the role of 
Nasdaq as an exclusive processor of bond data given its announced 
intention to become a privatized, profit-making exchange; and 
objections of some market participants to the associated mandatory 
trade comparison service. There were also concerns that the proposed 
implementation schedule was impractical.
    Comments submitted in response to Amendments 2 and 3 suggested that 
those Amendments did not fully resolve all the concerns regarding the 
original proposal, and suggested alternative approaches to facilitate 
corporate bond transparency. Sections IV and V below discuss both 
rounds of comments, the ways in which the NASD amended its proposal to 
address the concerns articulated in those comments, and the 
Commission's findings after consideration of the comments.

IV. Description of the Proposal

A. The Original Proposal

    The original TRACE proposal contemplated: (1) The adoption of new 
rules (``NASD/TRACE Rules'') requiring members to report transactions 
in specified U.S. corporate bonds (``TRACE-eligible bonds'')\12\ to 
Nasdaq; and (2) the establishment of the TRACE facility, operated by 
Nasdaq, to facilitate the collection, dissemination, and comparison of 
reported transactions. As proposed, TRACE featured a mandatory trade 
comparison component for transactions between two NASD members in which 
a reported ``buy'' or ``sell'' would be compared with the contra side 
of the transaction and forwarded to the National Securities Clearing 
Corporation (``NSCC'') for clearance and settlement as a ``locked-in'' 
trade. Significantly, the NASD proposed to use TRACE reports to develop 
a database of transactions in corporate bonds to enable NASDR and 
Nasdaq Market Watch staff to take a more proactive role in surveilling 
the corporate bond market. Finally, the NASD proposed to eliminate the 
FIPS reporting system for high-yield corporate bonds.\13\
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    \12\ TRACE-eligible bonds consist of: dollar-denominated debt 
securities issued by U.S. and private foreign corporations that are 
registered with the Commission and eligible for book-entry services 
at the Depository Trust Company (``DTC''); Rule 144A U.S. high-yield 
debt securities designated as ``PORTAL Debt Securities'' in Nasdaq's 
PORTAL Market; and Rule 144A investment grade debt securities 
eligible for book-entry services at DTC.
    \13\ ``FIPS'' is an acronym for the Fixed Income Pricing System 
operated by Nasdaq. Begun in April 1994, FIPS collects transaction 
and quotation information on domestic, registered, non-convertible 
high-yield corporate bonds.
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    Implementation of the proposal was to take place in two phases. In 
the first phase of the plan, which would last six months, members were 
required to report transactions to TRACE within one hour after trade 
execution, and there was no public dissemination of transaction 
information. In the second phase, the one-hour reporting interval was 
reduced to 15 minutes, and immediate dissemination of transaction 
information for all reported bonds except Rule 144A issues was to 
begin. Trade reports were required to include: (1) Trade ``side,'' 
i.e., whether a buy, sell, or ``cross'' transaction; (2) CUSIP number 
or NASD symbol; (3) quantity; (4) price, inclusive of mark-up, mark-
down, and stated commission (stated commission to be reported as a 
separate field for agency trades); (5) contra party's NASD symbol (or 
``C'' for customer); (6) date and time of trade execution; and (7) 
capacity, i.e., principal (with riskless principal reported as 
principal) or agent. As noted, TRACE generally proposed to disseminate 
actual quantity of bonds traded expressed as par value; however, high-
yield and unrated bond transactions over $1 million par value were 
proposed to be disseminated as ``1MM+,'' and investment grade 
transactions over $5 million par value were proposed to be disseminated 
as ``5MM+.''

B. Amendment Nos. 2 and 3

    In response to comments received on the initial proposal, and after 
extensive discussions, the NASD made six main changes to the proposal:

    First, it designated the NASD as owner and operator of TRACE, 
removing TRACE from the control of Nasdaq;
    Second, it agreed to register as an exclusive securities 
information processor (``ESIP'') under section 11A of the Act;
    Third, it proposed a phase-in schedule for dissemination of 
transaction information, to permit dissemination of transaction 
information for larger sized bonds to begin immediately and allow 
smaller sized bonds to be phased-in later;
    Fourth, it withdrew all proposed rules requiring trade 
comparison, but added a requirement that trade information provided 
to a member's clearing agency be provided to the NASD as well;
    Fifth, it added yield to the information required to be included 
in the trade reports submitted by members; and

[[Page 8133]]

    Sixth, it established an implementation date 180 days following 
Commission approval of the amended proposal.

    The NASD's proposed phase-in schedule contemplates the involvement 
of a Bond Transaction Reporting Committee (``BTRC'') to advise the NASD 
Board of Governors regarding liquidity issues. The BTRC will consist of 
eight persons selected by the NASD Board. Four members will be 
recommended by the staff of the NASD; the other four members will be 
recommended by TBMA.\14\ The BTRC will provide input to the NASD Board 
on issues related to the operation of TRACE, including effects on 
liquidity associated with the dissemination of transaction information. 
The BTRC also will make recommendations to the NASD Board concerning 
appropriate time frames for public dissemination of transaction 
information for smaller, less-actively traded issues.\15\ The NASD 
represents that its staff may make independent recommendations or 
proposals to the NASD Board concerning bond market issues. In any case, 
the NASD Board will have the authority and responsibility to determine 
how and at what pace to expand the public dissemination of transaction 
reports.
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    \14\ BTRC members will not include current staff or officers of 
the NASD or TBMA; moreover, the NASD represents that it and TBMA 
will commit to selecting a broad range of bond market participants, 
including public participants.
    \15\ The NASD represents that its Board will give significant 
weight to the advice and recommendations of the BTRC. The NASD 
represents, however, that the formation and operation of the BTRC 
shall in no way limit or hinder the responsibility and ability of 
the NASD Board to make final decisions, in accordance with the 
statutory obligations and responsibility articulated in section 15A 
of the Act and the NASD By-Laws.
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    During the first three months of the plan (Phase I), NASD members 
will be required to report transactions in TRACE-eligible securities 
within one hour of trade execution. The NASD will immediately 
disseminate transaction reports in publicly offered, investment grade 
corporate bonds having an initial issuance size of $1 billion or 
greater. If applicable, these reports will include the large volume 
trade dissemination cap identifier (``5 MM+'') for trades of more than 
$5 million face value, as proposed in the original TRACE filing. 
Transaction reports in the high yield debt securities called the ``FIPS 
50'' \16\ will also be disseminated and will use the large volume trade 
dissemination cap identifier (``1 MM'') applicable to trades in high 
yield bonds of more than $1 million face value.
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    \16\ The ``FIPS 50'' refers to 50 high-yield corporate debt 
issues for which transaction and quotation information is collected. 
The FIPS 50 are selected by a committee of NASD members from the 
most actively traded FIPS securities. The FIPS 50 issues are the 
only FIPS issues subject to trade reporting within five minutes 
after execution of a transaction--non-FIPS 50 issues need not be 
reported until end-of-day. In addition, the FIPS 50 are the only 
issues subject to dissemination of hourly trade summaries to 
vendors; reports on non-FIPS 50 issues are not publicly 
disseminated.
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    During this period, the BTRC will begin examining the impact of 
transaction information dissemination on liquidity. By the end of Phase 
I, the BTRC will recommend dissemination protocols for investment grade 
bonds, starting with the largest issuance size, that, when combined 
together, make up the top 50% (by dollar volume) of such bonds.
    During the next six months of the plan (Phase II), NASD members 
will continue to report transactions within one hour of execution. The 
NASD will disseminate transaction reports of all transactions in the 
top 50% (by dollar volume) of investment grade bonds as determined by 
the NASD Board (subject to the approval of the SEC) after considering 
the recommendations of the BTRC.\17\ If applicable, these reports will 
include the large-volume trade dissemination cap identifiers proposed 
in the original TRACE filing. Transaction reports in the FIPS 50 will 
continue to be disseminated. The BTRC will continue to evaluate the 
impact of dissemination of transaction information on liquidity. By the 
end of Phase II, the BTRC will provide recommendations for appropriate 
dissemination protocols for all remaining issues eligible for public 
dissemination. Finally, three months after the start of Phase II, the 
one hour maximum time period to submit trade reports will be reduced to 
15 minutes, subject to the members' ability to comply technologically 
and operationally.
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    \17\ Trade reports for Rule 144A securities will not be 
considered as part of the total average daily volume of the TRACE 
system for purposes of Phase II. In addition, the NASD notes that 
the proposed Phase II formula will result in an overlap with Phase I 
securities that may reduce the number of newly disseminated bonds in 
the second phase. The NASD represents that it will ask BTRC to 
review the Phase II dissemination formula in more detail to 
determine if a different approach to expanding the universe of 
disseminated bonds in Phase II is appropriate.
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C. Amendment No. 4

    In response to comments received regarding Amendment Nos. 2 and 3, 
the NASD amended its proposal to:

    (1) Clarify the definition of ``TRACE-eligible securities'' in 
TRACE Rule 6210(a). The amendment reorganizes the definition and 
specifically excludes certain securities that were described as 
excluded in the narrative portion of the original rule filing;
    (2) Delete Rule 6230(e)(2) exempting transactions in debt 
securities issued under section 4(2) of the Securities Act of 1933 
from the TRACE reporting requirements. According to the NASD, the 
provision was intended to apply to debt securities issued under 
Section 4(2) that were not depository-eligible. Because the NASD 
clarified the definition of ``TRACE-eligible securities'' in Rule 
6210(a) to include only depository-eligible securities, Rule 
6230(e)(2) is no longer necessary;
    (3) Delete proposed TRACE Rule 6231(a), which required members 
to report to the NASD the same transaction information the member 
provides to its registered clearing agency for clearance and 
settlement;
    (4) Add language to the NASD/TRACE Rules requiring information 
on the FIPS 50 \19\ to be publicly disseminated at the time 
reporting of such transactions begins under the rules;
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    \19\ See supra note 16.
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    (5) Clarify a provision in the narrative of Amendment No. 2 
regarding shortening the one-hour transaction reporting interval in 
Rule 6230(a)(1) to fifteen minutes in the future. Amendment No. 4 
modifies the proposal to clarify that Rule 6230(a)(1) requires 
reporting within one hour of trade execution, and states that if it 
seeks to reduce that reporting interval in the future, it will be 
required to file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act;
    (6) Withdraw the NASD's previous proposal to register with the 
Commission as a ``securities information processor'' under the Act;
    (7) Make explicit in Rule 6250 that market aggregate and last 
sale information will be collected, updated, and disseminated on a 
continuing basis only through 5:15 p.m., although the NASD will 
continue to collect and disseminate information on individual 
transactions on a continuing basis through 6:30 p.m.; modify Rule 
6250(b) to exclude the price of certain non-standard transactions in 
a debt security from the calculation of the market aggregate figures 
or the last-sale figures for such security; and
    (8) Change the implementation date from 180 days after the date 
of Commission approval to 180 days after the date the NASD provides 
members with technical specifications relating to TRACE, to allow 
members to make the systems changes necessary to comply with the 
NASD/TRACE Rules.

V. Discussion

A. Liquidity

    As noted above, as first proposed, TRACE was intended to 
immediately disseminate trade reports on all reported bonds except Rule 
144A issues, after an initial six-month review period. Many commenters 
objected to immediate dissemination of transaction information for so 
many reported bonds. Although most commenters supported

[[Page 8134]]

enhanced price transparency in the corporate debt market,\20\ many 
expressed concern that immediate dissemination of transaction 
information in less frequently traded corporate bonds could have a 
negative impact on the liquidity of those issues.\21\ Specifically, 
these commenters contended that immediate dissemination of transaction 
information on less frequently traded bonds could reduce the 
willingness of dealers and their customers to commit capital and assume 
risk positions in those securities.\22\ One such commenter argued that 
distribution of transaction information could reveal the trading 
patterns and intentions of market participants, making it more 
difficult to conduct further trades at acceptable prices. This, in 
turn, could result in a decline in demand and a corresponding increase 
in required yield for certain types of bonds, raising the overall cost 
of capital and decreasing the efficiency of the capital formation 
process.\23\
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    \20\ See D.A. Davidson Letter; Edward Jones Letter; Merrill 
Letter; Liberty Letter; ICI Letter; Morgan Letter; Thomson Letter; 
CSFB Letter; Garban Letter; Schwab Letter; SIA Letter; Warburg 
Letter; Legg Mason Letter; Zions Bank Letter; A.G. Edwards Letter; 
DLJ Letter; TBMA Letter; AMF Letter; Bear Stearns Letter; BAS 
Letter; Fidelity Letter; and Instinet Letter, Appendix A.
    \21\ See D.A. Davidson Letter; Liberty Letter; Morgan Letter; 
CSFB Letter; Garban Letter; Freeman Letter; Warburg Letter; Legg 
Mason Letter; Zions Bank Letter; A.G. Edwards Letter; DLJ Letter; 
TBMA Letter; Bear Stearns Letter; BAS Letter; Lehman Letter; ABN-
AMRO Letter; Salomon Letter; and Fidelity Letter, Appendix A. Some 
of the commenters who opposed public dissemination of transaction 
information for less frequently traded bonds for transparency 
purposes nevertheless supported reporting of prices on those bonds 
for regulatory purposes. Lehman Letter; ICI Letter; Schwab Letter; 
TBMA Letter; Warburg Letter; Freeman Letter; and Fidelity Letter, 
Appendix A.
    \22\ See, e.g., TBMA Letter, Appendix A.
    \23\ See TBMA Letter. See also DLJ Letter, Appendix A. In 
addition, some commenters were concerned that immediate distribution 
of trade data may damage U.S. markets by compelling U.S. 
institutional investors to effect their debt trades offshore. CSFB 
Letter; Morgan Letter, Appendix A. One such commenter stated that 
the movement of trading outside the U.S. would not only diminish the 
quality and liquidity of U.S. markets, but would also render the 
transaction data ``incomplete and potentially misleading.'' Morgan 
Letter, at 4, Appendix A. In addition, one commenter suggested that 
trade reports be disseminated twice per day rather than on a 
continuous and immediate basis. This commenter argued that twice 
daily distribution would provide current pricing information, 
especially in view of the trading frequency of even the most liquid 
bonds. Merrill Letter, Appendix A. Other commenters, however, 
supported immediate distribution of all corporate bond transaction 
data. One commenter in particular argued that the benefits of 
increased transparency outweigh any speculative concerns regarding 
the impact of real-time reporting on liquidity. ICI Letter, Appendix 
A.
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    In light of this concern, TBMA suggested a phase-in framework 
designed to reduce the risk of any possible adverse effects on 
liquidity.\24\ The phase-in plan provided for dissemination of 
transaction information for larger, more frequently traded issues 
first, and smaller, less frequently traded issues later. TBMA's phase-
in proposal was similar to the original TRACE proposal in its approach 
to the time frames in which members would be required to submit trade 
reports. It differed from the TRACE proposal, however, in that it 
proposed a phase-in schedule in which transaction data on the largest 
sized bonds could be displayed immediately during the first six months 
of the plan, with smaller sized bonds to be phased-in later. The 
proposal was supported by many other commenters.\25\
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    \24\ See TBMA Letter, Appendix A.
    \25\ See Morgan Letter; McFadden Letter; CSFB Letter; Freeman 
Letter; Warburg Letter; Legg Mason Letter; A.G. Edwards Letter; DLJ 
Letter; Bear Stearns Letter; BAS Letter; Lehman Letter; ABN-AMRO 
Letter; Zions Bank Letter; and Salomon Letter, Appendix A.
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    In response to these concerns and after extensive discussions, the 
NASD modified its proposal to adopt the phase-in schedule described in 
Section IV above.\26\ Under the phase-in schedule, the BTRC will advise 
the NASD Board of Governors regarding liquidity issues. During the 
first three months (Phase I), transaction information on publicly 
offered, investment grade bonds with an initial issuance size of $1 
billion or greater, and the FIPS 50, will be distributed immediately. 
By the end of Phase I, the BTRC will recommend to the NASD Board 
dissemination protocols for investment grade bonds, starting with the 
largest issuance size that, when combined together, make up the top 50% 
(by dollar volume) of such bonds. During the next six months (Phase 
II), TRACE will disseminate reports of all transactions in the top 50% 
of investment grade bonds as determined by the NASD Board (subject to 
the approval of the SEC) after considering the recommendations of the 
BTRC; and transaction reports in the FIPS 50 will continue to be 
disseminated. By the end of Phase II, the BTRC will recommend 
appropriate dissemination protocols for transactions in all remaining 
issues eligible for public dissemination.
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    \26\ See Amendment Nos. 2 and 3.
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    All recommendations made by the BTRC will be subject to approval of 
the NASD Board of Governors. The Board will have the authority and 
responsibility to determine how and at what pace to expand the public 
dissemination of transaction reports.
    After careful consideration, the Commission finds that the NASD's 
revised proposal strikes an appropriate balance between commenters' 
concerns about liquidity and the need to make transaction information 
publicly available on an immediate basis. First, the phased-in approach 
proposed by the NASD will permit dissemination of transaction 
information for only the largest sized bonds first, and that 
distribution of transaction information for smaller sized bonds is 
delayed until the impact on liquidity of the larger bonds can be 
assessed. Second, the involvement of the BTRC, composed in part of 
members recommended by TBMA, should provide the industry with 
meaningful participation in the phase-in process.\27\ Third, because 
the recommendations of the BTRC are subject to approval by the NASD 
Board of Governors, the revised proposal ensures that the NASD will 
retain ultimate authority over and responsibility for the phase-in 
process, consistent with the Act and the NASD's obligations under the 
Commission's Order \28\ and Report Pursuant to Section 21(a) of the 
(Act) Regarding the Nasdaq Market (``Section 21(a) Report'').\29\
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    \27\ One commenter on Amendment Nos. 2 and 3 stated that the 
NASD should ensure that the BTRC reflects equal representation by 
the ``buy-side.'' ICI Letter, Appendix B. In its filing, the NASD 
represents that both the NASD and TBMA will commit to selecting a 
broad range of bond market participants, including public 
representation. Under the NASD By-Laws, the Board of Governors has 
ultimate responsibility for the appointment of the BTRC. See NASD 
By-Laws, Article IX, Section 1 (authorizing the Board generally to 
``appoint such committees or subcommittees as it deems necessary or 
desirable . * * *''). By contrast, the NASD staff and TBMA have 
authority only to recommend members of the BTRC under the amended 
TRACE proposal. Therefore, should the recommendations of the NASD 
staff or TBMA fail to adequately represent an industry segment, the 
NASD Board may disapprove those recommendations pursuant to its 
broad authority to appoint committees and subcommittees under the 
By-Laws. The Commission staff intends to monitor the progress of the 
TRACE phase-in as well.
    \28\ Securities Exchange Act Release No. 37538 (August 8, 1996).
    \29\ Securities Exchange Act Release No. 37542 (August 8, 1996). 
In the Section 21(a) Report, the Commission stated that the NASD, as 
part of its settlement, has undertaken ``to provide for the autonomy 
and independence of its staff with respect to disciplinary and 
regulatory matters. * * * Staff autonomy and independence are vital 
to the future effectiveness of the NASD if it is to comply with its 
statutory mandate. The NASD must have an environment in which they 
can bring to bear the objectivity, professionalism, and concern for 
investor protection that an SRO must always display.'' Section 21(a) 
Report, at 44.
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    Significantly, the revised TRACE proposal provides for trade data 
to be made publicly available more quickly than under the original 
proposal. Unlike the original proposal, which contemplated no public 
dissemination of transaction information during the first six months, 
under the revised

[[Page 8135]]

proposal information on investment grade bonds with an initial issuance 
size of $1 billion or greater will be made available immediately. 
Distribution of information with respect to successively smaller 
initial issuance amounts will begin after the first three months, 
subject to the approval of the NASD Board, after considering the 
recommendations of the BTRC. On balance, the Commission believes that 
the immediate public availability of transaction information on the 
largest sized bonds, followed by the phase-in of smaller sized bonds, 
significantly strengthens the proposal.\30\
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    \30\ With respect to the commenter who suggested that the TRACE 
proposal provide for twice-daily dissemination of trade reports 
instead of immediate and continuous dissemination, the Commission 
questions whether twice-daily dissemination would provide investors 
with timely and accurate pricing information on a wide range of 
bonds. Moreover, to the extent this commenter's concern is premised 
on anticipated negative effects on liquidity, the Commission 
believes that the NASD's proposed phase-in approach adequately 
addresses this concern, as discussed above.
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    The Commission notes that the NASD has stated that the formula for 
phasing-in public dissemination of transaction information for bonds in 
Phase II may need to be reviewed by the BTRC in light of the fact that 
the Phase II formula will result in an overlap with Phase I securities 
that may reduce the number of newly disseminated bonds in Phase II. The 
Commission believes that it is reasonable for the NASD to build in this 
layer of guidance by the BTRC; and further, that it is appropriate for 
the BTRC, when making its recommendations to the NASD Board, to use its 
discretion to adjust applicable dissemination formulas in light of its 
assessment of the impact on liquidity of each phase of the TRACE 
dissemination schedule. In this regard, the Commission emphasizes that 
the NASD Board retains ultimate authority and responsibility for these 
matters after considering the recommendations of the BTRC.\31\
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    \31\ One commenter suggested that the NASD delegate authority 
over the phase-in schedule to the BTRC. See Morgan Letter, Appendix 
B. The Commission believes that such delegation would undermine the 
autonomy and independence of the NASD, in direct contravention of 
the section 21(a) Report and the NASD's obligations under the Act as 
a registered securities association and as a self-regulatory 
organization.
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    In addition, the NASD plans to reduce the time frame for reporting 
bond trades--from one hour to 15 minutes--during Phase II of the 
plan.\32\ This will help ensure that transaction information is 
reported to TRACE and released to the public before it becomes 
``stale.'' During all phases of the plan, the NASD represents that the 
BTRC will evaluate the technological readiness of the industry, with a 
view to further reducing this time frame.
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    \32\ In order to change the one-hour transaction reporting 
interval to fifteen minutes in the future, the NASD must submit a 
rule filing pursuant to section 19(b)(1) of the Act.
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    Finally, the Commission believes it is significant that the revised 
proposal captures more information for regulatory purposes in a shorter 
time frame than under the original TRACE proposal. This will allow the 
NASD to continue to develop and refine its surveillance plan for the 
fixed income market.

B. Competition

    As originally proposed, the NASD/TRACE Rules required NASD members 
to report their transactions in TRACE-eligible securities to Nasdaq. 
Nasdaq was to collect, process, and disseminate the trade reports to 
interested parties, and provide the information to the NASD for 
surveillance and other regulatory purposes.
    While generally supporting increased price transparency and 
heightened surveillance in the OTC corporate bond market, many 
commenters strongly objected to Nasdaq ownership and operation of the 
TRACE system.\33\ Several commenters argued that it was an unwarranted 
use of regulatory power for the NASD to give Nasdaq, a for-profit, 
privately (and potentially publicly) owned enterprise that might 
compete with other corporate bond market participants, the exclusive 
right to collect and disseminate bond trade data.\34\ Other commenters 
acknowledged the NASD's legitimate interest as an SRO in obtaining 
corporate bond transaction information for surveillance, enforcement, 
and other regulatory purposes, but took issue with the NASD having the 
right to the commercial value of that data.\35\ Some commenters stated 
that the NASD should not be permitted to profit from the sale and 
distribution of the data, suggesting instead that fees should be 
collected on a cost recovery basis, or that any revenue collected 
should be rebated to the dealer community.\36\
---------------------------------------------------------------------------

    \33\ See Advantage Letter; Bear Stearns Letter; Fidelity Letter; 
Freeman Letter; Garban Letter; Instinet Letter; Lazard Letter; Legg 
Mason Letter; Liberty Letter; Phlx/Bloomberg Letter; Morgan Letter; 
TBMA Letter; Thomson Letter; Wachovia Letter; Warburg Letter, 
Appendix A.
    \34\ See Freeman Letter; Garban Letter; Liberty Letter; Morgan 
Letter; TBMA Letter; Thomson Letter; Wachovia Letter, Appendix A.
    \35\ See Bear Stearns Letter, CSFB Letter; Fidelity Letter; 
Instinet Letter, Appendix A.
    \36\ See BAS Letter; Bear Stearns Letter; Freeman Letter; Garban 
Letter; ICI Letter; Lazard Letter; Legg Mason Letter; Merrill 
Letter; Morgan Letter; Schwab Letter; TBMA Letter; Warburg Letter, 
Appendix A. See also Phlx/Bloomberg Letter (arguing that proposal 
would cast the SEC into a ratemaking role).
---------------------------------------------------------------------------

    Other commenters objected more generally to any single entity 
having an exclusive franchise on collection and dissemination of 
corporate bond transaction data.\37\ A few commenters proposed that the 
NASD limit its proposal to setting forth standards for transaction 
reporting and dissemination without mandating a specific provider.\38\ 
Several commenters argued that mandating a single provider of bond 
market data would not only give the single provider the right to 
monopoly profits, but also would frustrate technological innovation in 
the area of reporting and dissemination of market data.\39\
---------------------------------------------------------------------------

    \37\ See ABN-MRO Letter; A.G. Edwards Letter; Bear Stearns 
Letter; CSFB Letter; Fidelity Letter; ICI Letter; Instinet Letter; 
Legg Mason Letter; Merrill Letter; Phlx/Bloomberg Letter; TBMA 
Letter; Salomon Letter; SIA Letter; Thomson Letter; Warburg Letter, 
Appendix A.
    \38\ See A.G. Edwards Letter; CSFB Letter; D.A. Davidson Letter; 
Legg Mason Letter; Merrill Letter; SIA Letter; TBMA Letter; Warburg 
Letter, Appendix A. See also, Zions Bank Letter.
    \39\ See Instinet Letter; Phlx/Bloomberg Letter; Salomon Letter; 
SIA Letter, Appendix A. See also, Thomson Letter, Appendix A.
---------------------------------------------------------------------------

    In response to comment that the NASD/TRACE Rules, as originally 
proposed, could lead to granting an exclusive right over bond trade 
data to a private competitor in the OTC bond market (i.e., a for-profit 
Nasdaq), the NASD submitted Amendment Nos. 2 and 3 to provide that the 
NASD, rather than Nasdaq, will instead own and operate the TRACE 
facility. In Amendment No. 2, the NASD also represented that it would 
register with the Commission as an exclusive securities information 
processor (``ESIP'') on the rationale that it would be subject to 
Section 11A of the Act.\40\
---------------------------------------------------------------------------

    \40\ The NASD subsequently withdrew this undertaking in 
Amendment No. 4, stating that it will not register as a securities 
information processor in any capacity (either exclusive or non-
exclusive), and explaining that such registration would be 
superfluous given that the Act vests the Commission with plenary 
authority to regulate the information processing and dissemination 
activities of the NASD.
---------------------------------------------------------------------------

    Comment in response to Amendment Nos. 2 and 3 was more limited than 
comment on the original proposal. A few commenters stated that the 
amendments are not an adequate response to the anti-competitive 
concerns raised initially, arguing that the amended proposal remains a 
monopoly model.\41\ One commenter stated that NASD ownership of TRACE 
creates a conflict of interest between the

[[Page 8136]]

NASD and its members.\42\ This commenter stated that TRACE establishes 
a monopoly, and argued that if it is approved, fees for TRACE must be 
cost-based.\43\ Two commenters stated that the NASD should not select 
Nasdaq as its vendor for information processing, but should instead use 
a competitive bidding process.\44\ Other commenters noted that the 
Commission has established an Advisory Committee on Market Information 
\45\ to examine whether the existing structure of market data 
collection and dissemination in the equity markets should be improved 
or replaced, and suggested that because TRACE is similar to existing 
models, the Commission should defer final action on the TRACE proposal 
until after the Advisory Committee issues its report.\46\
---------------------------------------------------------------------------

    \41\ See Bloomberg Letter; Phlx Letter; Schwab Letter; IFI 
Letter, Appendix B. See also, Datek Letter, Appendix B.
    \42\ See Schwab Letter, Appendix B.
    \43\ See Schwab Letter, Appendix B. See also, Phlx Letter, 
Appendix B (arguing that TRACE proposal creates incentives for fees 
to exceed costs).
    \44\ See Morgan Letter, Schwab Letter, Appendix B.
    \45\ See Securities Exchange Act Release No. 43313 (September 
20, 2000), 65 FR 58135 (September 27, 2000).
    \46\ See Datek Letter; Phlx Letter; Schwab Letter; IFI Letter, 
Appendix B.
---------------------------------------------------------------------------

    The NASD filed with the Commission its response to comment letters 
received following the publication of Amendment Nos. 2 and 3 
(``Response Letter'').\47\ In its Response Letter, the NASD stated that 
the TRACE Proposal does not give the NASD a monopoly over data 
collection, explaining that the NASD/TRACE Rules do not specify or 
limit the means by which members may report trades to the NASD. In 
regard to fee setting, the NASD stated that it expects to partially 
recover its costs of regulating the bond market through TRACE fees, and 
noted that the Act contemplates such regulatory cost recovery. The NASD 
explained that it is not accurate to characterize regulatory cost 
recovery as cross-subsidization of regulation because regulation 
``contributes directly to the integrity, reliability, and * * * value 
of, market data.'' Additionally, the NASD represented that it will not 
sell unconsolidated data and will limit its dissemination of 
consolidated data to broker-dealers and to those seeking to compete in 
the resale of the data. Furthermore, the NASD represented that it will 
cease functioning as a consolidated information disseminator and limit 
its role to bond market regulation in the event the Advisory Committee 
on Market Information ``develop(s) a market-driven approach to equities 
market data that can be applied to bond market data.''
---------------------------------------------------------------------------

    \47\ See Letter from Joan C. Conley, Senior Vice President and 
Corporate Secretary, NASD, to Katherine A. England, Commission, 
dated January 5, 2001.
---------------------------------------------------------------------------

    The Commission believes Amendment Nos. 2-4 strengthen the initial 
proposal, and that they should address many commenters' concerns 
regarding competition, without compromising the goal of increased 
transparency and heightened surveillance in the corporate bond market. 
For the reasons more fully discussed below, the Commission finds that 
the TRACE proposal is consistent with section 15A , including section 
15A(b)(6),\48\ and Section 11A(a)(1)(C) of the Act,\49\ and that the 
proposal does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act, as required by 
section 15A(b)(9) of the Act.\50\
---------------------------------------------------------------------------

    \48\ 15 U.S.C.78o-3(b)(6).
    \49\ 15 U.S.C. 78k-1(a)(1)(C).
    \50\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission has long believed that price transparency plays a 
fundamental role in promoting the fairness and efficiency of U.S. 
capital markets, and likewise that market surveillance is a fundamental 
means of promoting fairness and confidence in those markets.\51\ Price 
transparency and market surveillance go hand in hand. The key to 
meaningful surveillance is regulatory access to comprehensive trading 
information--including the information that is required for price 
transparency.\52\
---------------------------------------------------------------------------

    \51\ See Statement of the U.S. Securities and Exchange 
Commission to the Subcommittee on Securities, Committee on Banking, 
Housing and Urban Affairs, United States Senate, May 26, 1999.
    \52\ Id.
---------------------------------------------------------------------------

    To date, the NASD has not had routine access to comprehensive 
transaction information for the broad OTC corporate bond market, even 
though the NASD is responsible for conducting surveillance in and 
regulating that market.\53\ As the sole SRO responsible under the Act 
for regulating the OTC market, the NASD is the only SRO that can 
effectively use consolidated bond transaction data for regulatory 
purposes.
---------------------------------------------------------------------------

    \53\ In enacting Section 15A of the Exchange Act (15 U.S.C. 78o-
3), Congress determined that the over-the-counter (``OTC'') markets 
should be regulated by registered securities associations, rather 
than by the SEC. See S. Rep. No. 75-1455, at 1684-85 (1938). Today, 
the NASD remains the only registered securities association 
responsible for regulation of the OTC markets. Although the 
Municipal Securities Rulemaking Board (``MSRB'') has the authority 
to adopt rules governing the conduct of municipal securities 
dealers, it is the NASD that is responsible for enforcing those 
rules and conducting surveillance in the municipal securities 
market. To close the gap with regard to corporate bond transactions 
not listed on an exchange, it is logical for the NASD to require 
members to report OTC corporate bond transactions to the NASD.
---------------------------------------------------------------------------

    The NASD/TRACE Rules require only that NASD members trading 
corporate bonds in the OTC market submit transaction reports to the 
NASD.\54\ The rules exempt securities listed and traded on a national 
exchange.\55\ A few commenters outlined alternative proposals to 
promote price transparency in the corporate bond market.\56\ One 
commenter proposed that the NASD delete the listed securities exemption 
in the TRACE proposal, suggesting instead that multiple SROs should 
collect corporate bond transaction data and contribute to a 
``consolidated tape'' through data linkages. This commenter further 
suggested that multiple SROs conduct surveillance of the corporate bond 
market and pass the resulting information to interested parties (i.e., 
the Commission, the NASD, or an SRO acting as the Designated Examining 
Authority for the broker-dealer involved).\57\ This commenter argued 
that such a proposal would be superior to the TRACE proposal because it 
would contribute greatly to ``robust competition'' and that, unlike the 
TRACE proposal, it would not unfairly discriminate between bonds listed 
on an exchange and bonds traded over-the-counter (``OTC'').\58\ Another 
commenter proposed a ``network model,'' whereby multiple competing 
vendors could obtain trade reports, issue market-data for corporate 
bonds, and share their data with SROs and clearing agencies to 
facilitate surveillance and processing functions.\59\ Another commenter 
suggested that TBMA sponsor a corporate bond transparency facility, 
arguing that such a facility would have greater access to expertise and 
would better serve the interests of bond market participants.\60\
---------------------------------------------------------------------------

    \54\ See TRACE Rule 6230.
    \55\ See TRACE Rule 6230(e).
    \56\ See Phlx/Bloomberg Letter, Appendix A; Schwab Letter, 
Appendix B.
    \57\ See Phlx/Bloomberg Letter, Appendix A.
    \58\ See Phlx/Bloomberg Letter, Appendix A (arguing that the 
TRACE proposal unfairly discriminates between exchange listed and 
OTC bonds in violation of section 15A(b)(6) of the Act).
    \59\ See Schwab Letter, Appendix B (arguing that its proposal 
fosters innovation, competition, minimizes the need for regulatory 
oversight of fees, and eliminates conflict of interest). See also, 
Datek Letter, Appendix B (arguing that open network information 
technology ``has emerged as one of the most revolutionary 
developments transforming our nation's securities markets'').
    \60\ See Morgan Letter, Appendix B.
---------------------------------------------------------------------------

    These proposals fail to recognize that, under the Act, the NASD is 
the only regulator, other than the Commission itself, of the OTC 
market. Whereas bond transactions that take place on an exchange are 
regulated by that

[[Page 8137]]

exchange, the statutory scheme contemplates that the NASD will regulate 
bond transactions in the OTC market.\61\ No other SRO has the necessary 
authority to conduct surveillance of the OTC corporate bond market. The 
NASD/TRACE Rules permit the NASD to obtain the information that it 
needs to better fulfill its statutory responsibility to regulate the 
OTC corporate bond market.\62\ The Commission does not believe the 
TRACE proposal discriminates unfairly between exchange listed and OTC 
corporate bonds within the meaning of section 15A(b)(6) of the Act. 
Rather, the NASD's proposal reasonably proposes only to regulate 
matters within its jurisdiction.
---------------------------------------------------------------------------

    \61\ Transaction data for corporate bonds trading on the New 
York Stock Exchange's Automated Bond System is reported to the NYSE.
    \62\ The MSRB requires dealers to report transactions in 
municipal securities to the MSRB. See MSRB Rule G-14 (establishing 
public availability of Daily and Comprehensive Transaction Reports 
disclosing price and other information on municipal securities 
transactions). Likewise, transaction information for bonds listed 
and traded on an exchange is reported to such exchange. The NASD's 
proposal to require its members to report OTC corporate bond 
transactions to the NASD simply closes a gap in regulation.
---------------------------------------------------------------------------

    The NASD's need for comprehensive bond transaction data to better 
fulfill its regulatory responsibilities cannot seriously be in dispute. 
Indeed, several commenters acknowledged the NASD's legitimate interest 
as an SRO in obtaining corporate bond transaction information for 
surveillance, enforcement, and other regulatory purposes.\63\ 
Accordingly, the Commission finds that the NASD/TRACE Rules are 
consistent with section 15A(b)(6) of the Act, in that they further 
empower the NASD to fulfill its statutory obligations in the OTC 
corporate bond market 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, and further that 
they do not unfairly discriminate between customers, issuers, brokers, 
or dealers.
---------------------------------------------------------------------------

    \63\ See Bear Stearns Letter; CSFB Letter; ICI Letter, Appendix 
A.
---------------------------------------------------------------------------

    As a general matter, commenters did not object to the NASD/TRACE 
Rules authorizing the NASD to collect corporate bond trade data for 
regulatory purposes. Rather, commenters were more concerned that it was 
anti-competitive to permit the NASD to give Nasdaq or another single 
entity the exclusive right to market the data.\64\ The Commission 
believes that the NASD's amendment giving the NASD control over TRACE, 
in lieu of Nasdaq, addresses these concerns. The NASD is less likely to 
be viewed as a potential competitor than Nasdaq. Unlike Nasdaq, the 
NASD intends to remain a membership organization and has no plans to 
operate an organized market. With regard to commenters' concerns that 
the TRACE proposal confers a regulatory monopoly with regard to the 
data, the Commission believes that these concerns are overstated 
because the NASD is not an exclusive securities information processor 
by virtue of operating the TRACE system. Third parties can obtain bond 
transaction data, either from the NASD or directly from broker-dealers, 
and the proposal does not prevent these third parties from marketing 
the data. Furthermore, the Act has in place regulatory safeguards to 
prevent the NASD from taking unfair advantage of its position as a 
consolidator of market information. Pursuant to sections 15A and 19(b) 
of the Act, the Commission has authority to oversee the NASD's 
provision of data to third parties, including the fees that the NASD 
proposes to charge for the data, as well as claims of unfair denial of 
access.\65\
---------------------------------------------------------------------------

    \64\ See e.g., ABN-AMRO Letter; A.G. Edwards Letter; Bear 
Stearns Letter; CSFB Letter; Fidelity Letter; ICI Letter; Instinet 
Letter; Legg Mason Letter; Merrill Letter; Phlx/Bloomberg Letter; 
TBMA Letter; Salomon Letter; SIA Letter; Warburg Letter, Appendix A. 
See also Bloomberg Letter, Datek Letter, Phlx Letter, Schwab Letter; 
IFI Letter, Appendix B.
    \65\ See also discussion infra. The Commission also notes that 
in its report recommending that the Senate adopt the Securities Act 
Amendments of 1975, the Senate Committee on Banking, Housing and 
Urban Affairs stated that, ``the Commission's broad authority under 
the bill includes all powers necessary to ensure the regulation of 
the securities information processing activities of * * * exchanges 
and [registered securities] associations in the same manner and to 
the same extent as the Commission may regulate securities 
information processors registered and regulated under new section 
11A(b).'' Senate Report No. 94-75 (Apr. 14, 1975).
---------------------------------------------------------------------------

    To achieve its goal of consolidating bond market data for 
regulatory purposes, the NASD/TRACE Rules require NASD members to 
ensure that the NASD receives transaction reports in a timely 
fashion.\66\ The rules do not prevent intermediaries from collecting 
the data from NASD members for transmission to the NASD.\67\ Moreover, 
the rules do not establish any exclusive rights to that information. 
Vendors are expected to offer value-added services, incorporating data 
they receive from the NASD.\68\ NASD members that provide the data are 
free to sell or give the same information to information vendors. Once 
required to make trade data available in corporate bonds, bond dealers 
will have little remaining reason to withhold this data from vendors. 
Those vendors in turn are free to offer ``unconsolidated'' information 
products in direct competition with the NASD.\69\ At the same time, the 
data available from the NASD will provide a reference point for 
measuring the accuracy and completeness of private vendors' data 
streams. The Commission believes that actual or potential competition 
from providers of unconsolidated data, some of which may include data 
unavailable to the NASD, will deter the NASD from charging excessive 
rates for consolidated data. Furthermore, the NASD's distribution of 
the raw data will provide competing vendors with opportunities to 
package the information in forms that will be useful to institutions 
and retail investors. Unlike the equity markets, where pricing 
information is easily interpreted, in the bond market, information may 
need to be packaged with ancillary information and analytical tools to 
be fully valuable to users. The mandatory transaction reporting to the 
TRACE system will almost certainly create competitive opportunities for 
market products designed to analyze and interpret the data.
---------------------------------------------------------------------------

    \66\ See TRACE Rule 6230.
    \67\ See NSCC Letter, Appendix B, indicating that NSCC 
participants may use NSCC as an intermediary to submit trade reports 
to the NASD.
    \68\ Indeed, one commenter stated that ``private initiatives to 
capture and distribute trade data should be able to develop freely 
in the marketplace'' and acknowledged that ``the NASD's proposal 
would not preclude the development of such other initiatives.'' See 
ICI Letter, Appendix A. Another commenter stated that TRACE ``should 
serve as the ultimate collector and repository of reportable trade 
data which will permit regulatory surveillance of the market * * * 
(but) should allow for the development of other alternative means of 
data collection and dissemination.'' See Fidelity Letter, Appendix 
A. The Commission believes the TRACE proposal will in fact allow for 
such alternatives.
    \69\ Rule 11Ac1-2(b) under the Act, which requires vendors of 
reported security information to offer a consolidated product, does 
not apply to corporate bonds.
---------------------------------------------------------------------------

    Some commenters argued that TRACE creates a monopoly, and 
therefore, the NASD's fees for TRACE would almost certainly exceed its 
costs.\70\ Other commenters suggested that the NASD use a competitive 
bidding process to select a technology vendor to keep costs down. Given 
the opportunities that exist for other vendors and market participants 
to obtain the data, either from the NASD or directly from broker-
dealers, and compete with the NASD to collect and disseminate data, the 
Commission does not agree that TRACE fees will necessarily exceed the 
NASD's costs. Even in the absence of such competition, the Act limits 
the ability of

[[Page 8138]]

the NASD to charge unreasonable fees for consolidated information. The 
NASD proposed in Amendment No. 2 to voluntarily register as an ESIP on 
the rationale that, by doing so, it would become subject to certain 
additional regulatory safeguards set forth in section 11A(c) of the 
Act. The Commission finds, however, that such registration would not 
place meaningful additional regulatory requirements on the NASD, as the 
Act provides plenary authority to regulate the information processing 
and dissemination activities of the NASD, including the NASD's fee 
structure. Furthermore, by virtue of its status as an SRO, the NASD is 
subject to the requirements of section 15A(b)(5) \71\ and (b)(6) of the 
Act to deliver market information on terms that are reasonable and not 
unfairly discriminatory.\72\ Moreover, as an SRO, the NASD will 
establish charges and fees for TRACE by submitting a rule filing with 
the Commission pursuant to section 19(b)(1) of the Act. When the 
Commission reviews fees to be charged for market information in the 
context of a proposed rule change under section 19(b) of the Act, the 
Commission must consider whether the proposed fees are consistent with 
the Act. In the context of a section 19(b) filing by the NASD to 
establish fees and charges for TRACE, section 15A(b)(5) of the Act will 
be particularly important. Specifically, section 15A(b)(5) requires the 
``equitable allocation of reasonable'' fees charged to any person using 
the facilities operated or controlled by the NASD, and as such requires 
that the proposed fees be reasonable and not unfairly 
discriminatory.\73\ The Commission believes that purchasers of 
consolidated TRACE data are users of the TRACE facility for purposes of 
considering whether a section 19(b) rule filing establishing fees and 
charges for TRACE is consistent with the Act.
---------------------------------------------------------------------------

    \70\ See Phlx Letter; Schwab Letter, Appendix B. See also Morgan 
Letter, Appendix B.
    \71\ 15 U.S.C. 78o-3(b)(5).
    \72\ 15 U.S.C. 78o-3(b)(5) and (6).
    \73\ Additionally, section 15A(b)(6) of the Act provides that 
the rules of a registered securities association must not be 
designed ``to permit unfair discrimination between customers.'' As 
vendors and other market participants who review transaction 
information could be considered customers of TRACE, the Commission 
believes this provision also prohibits the NASD from unfairly 
discriminating against those vendors and market participants.
---------------------------------------------------------------------------

    Further, in section 11A(a)(1)(C), Congress found that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure: (1) The economically 
efficient execution of securities transactions; (2) fair competition 
among brokers and dealers; and (3) the availability to brokers, 
dealers, and investors of information with respect to quotations and 
transactions in securities. The NASD/TRACE Rules further these goals by 
increasing the amount of public information available in the corporate 
bond market. Without the availability of public information, 
participation in this market has been limited to well-established 
participants who are able to devote significant resources to obtain the 
necessary information. By increasing public availability of information 
about bond prices, the NASD/TRACE Rules may encourage greater 
participation in the market by brokers, dealers, and investors, which 
will contribute to deeper markets and increased competition. The 
Commission believes that the TRACE proposal is tailored to achieve the 
important goals of increased price transparency and enhanced market 
surveillance in the corporate bond market; and despite some commenters' 
assertions to the contrary, the Commission believes that the TRACE 
proposal is not so broad as to eliminate the opportunity for others to 
compete in the marketing and dissemination of corporate bond data.
    Additionally, the Commission does not agree with commenters that 
bond market transparency should be deferred to await the outcome of the 
Commission's Advisory Committee on Market Information, which is 
currently studying whether the traditional model for market data 
collection and dissemination is still appropriate. Should the Advisory 
Committee on Market Information conclude that an approach substantially 
different from the TRACE approach provides a superior way to assure 
price transparency in the corporate bond market, the Commission would 
consider such a conclusion when evaluating any NASD amendments to 
TRACE.\74\ After careful consideration of commenters' concerns, the 
Commission concludes that the TRACE proposal is consistent with section 
15A(b)(9) of the Act, which requires that the rules of a registered 
securities association not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \74\ The Commission notes that in its Response Letter, the NASD 
stated that it will cease functioning as a consolidated information 
disseminator and limit its role to bond market regulation in the 
event the Advisory Committee on Market Information ``develop(s) a 
market-driven approach to equities market data that can be applied 
to bond market data.'' See note 47 supra.
---------------------------------------------------------------------------

C. Trade Comparison, T+1, and Straight Through Processing

    As originally proposed, the NASD/TRACE Rules included a mandatory 
trade comparison feature. Several commenters objected to the mandatory 
comparison feature of the TRACE proposal, arguing that price 
transparency and trade processing issues should be addressed 
separately.\75\ A few argued that the NSCC and DTC comparison framework 
works well and that the NASD's proposed system was neither necessary 
nor efficient.\76\ Other commenters objected specifically to Nasdaq 
having an exclusive franchise over the provision of comparison services 
for corporate bond trades.\77\ Some commenters raised concerns that 
inserting the TRACE comparison proposal between the trade execution and 
clearance and settlement functions would hinder the transition to a T+1 
settlement cycle.\78\
---------------------------------------------------------------------------

    \75\ See A.G. Edwards Letter; AMF Letter; Fidelity Letter; 
Freeman Letter; Garban Letter; Lazard Letter; Legg Mason Letter; 
Liberty Letter; Merrill Letter; Morgan Letter; SIA Letter; Salomon 
Letter; Schwab Letter; TBMA Letter, Appendix A.
    \76\ See D.A. Davidson Letter; Edward Jones Letter; J.C. 
Bradford Letter; RMOA Letter, Appendix A.
    \77\ See ABN-AMRO Letter; CSFB Letter; Bear Stearns Letter; 
Merrill Letter; Morgan Letter; Salomon Letter; TBMA Letter; Thomson 
Letter, Appendix A.
    \78\ See A.G. Edwards Letter; AMF Letter; D.A. Davidson Letter; 
DTC Letter; Freeman Letter; J.C. Bradford Letter; Morgan Letter; SIA 
Letter; Thomson Letter, Appendix A. See also, DTC Letter (stating 
that TRACE Proposal does not indicate whether TRACE is compatible 
with NSCC technology).
---------------------------------------------------------------------------

    In response to these concerns, the NASD, in Amendment No. 2, 
deleted the mandatory trade comparison feature, but required TRACE 
participants to provide the same data on corporate bond transactions 
they provide to their clearing agency within the same time frame. 
Several commenters, in response to Amendment Nos. 2 and 3, objected to 
the ``optional comparison feature'' of the amended proposal, on the 
grounds that it could lead to confusion in the industry.\79\ 
Additionally, several commenters urged the NASD to delete the 
requirement in proposed Rule 6231(a) that members report to TRACE the 
same information they report to their clearing agency.\80\
---------------------------------------------------------------------------

    \79\ See RMOA Letter; SIA Letter; SIA/Streetside Letter, 
Appendix B.
    \80\ See Morgan Letter; RMOA Letter; SIA Letter; TBMA Letter, 
Appendix B. See also Phlx Letter; IFI Letter, Appendix B.
---------------------------------------------------------------------------

    The Commission recognizes the value of crosschecking the trade data 
submitted by the reporting dealer with information from the 
counterparty. Nonetheless, this process should be done in the most 
efficient manner

[[Page 8139]]

possible. Commenters stated that submitting clearing information to the 
NASD would add significantly to a participant's burden in complying 
with the Rules, without providing the NASD any information it could not 
obtain from the participant's clearing agency. Accordingly, the NASD 
filed Amendment No. 4 to delete this requirement, and the Commission is 
accelerating approval of that amendment as more fully described in 
Section VI below. In this regard, the NASD has indicated that it 
intends to address this issue by amending Rule 6230(b) to require both 
the buy and sell sides of a member-to-member transaction to report to 
TRACE.\81\ Such a proposed rule change will be subject to notice and 
comment under section 19(b) of the Act.The Commission finds that the 
NASD's amendments to scale back the TRACE proposal to delete all 
provisions concerning trade comparison and submission of clearing 
information addresses commenters' concerns about a single comparison 
processor. Furthermore, because the amended proposal no longer has any 
direct bearing on clearance and settlement, the Commission believes 
that the changes should eliminate any concerns that TRACE could 
seriously affect the industry's move to T+1 settlement.
---------------------------------------------------------------------------

    \81\ See Response Letter, note 47 supra.
---------------------------------------------------------------------------

D. Information Required to be Reported

    As originally proposed, the NASD/TRACE Rules did not require 
members to include yield information in their trade reports. Commenters 
stated that yield information would be useful, and suggested that the 
NASD specify how yield should be calculated.\82\ In response, the NASD 
amended the NASD/TRACE Rules to require reporting of yield, and 
specified that yield should be calculated in accordance with Rule 10b-
10 under the Act.\83\ We believe that the NASD has made a reasonable 
response to the comments, and that inclusion of yield information will 
enhance the usefulness of the transaction reports.\84\
---------------------------------------------------------------------------

    \82\ ICI Letter; Schwab Letter, Appendix A. See also, Fidelity 
Letter, Appendix A. See also Morgan Letter, Appendix B.
    \83\ 17 CFR 240.10b-10.
    \84\ Commenters raised several additional concerns about the 
types of information required to be included in TRACE trade reports. 
Several commenters argued that the trade reports should include 
information on the amount of interest on the trades (see, e.g., D.A. 
Davidson Letter; J.C. Bradford Letter, Appendix A). Another 
disagreed with the NASD's decision to include markup and markdown 
figures in reported prices (Briggs and Morgan Letter, Appendix A). 
Finally, two commenters recommended adjusting the amount of the 
large volume trade identifiers disclosed in the reports (Merrill 
Letter, ICI Letter).
    Because there is no current consolidated reporting system for 
corporate bonds, it is difficult to make a firm determination 
regarding what information will be most useful to investors. We 
believe that the NASD has made a reasonable first attempt at this, 
based on its extensive discussions with the industry. For example, 
the NASD has developed its large volume trade identifiers in 
consultation with the industry. Other commenters, including TBMA, 
have supported these identifiers. Once TRACE operates, the NASD 
Board will be in a better position to determine whether to modify 
the system, including the large volume identifiers, to reflect 
suggestions provided by members, vendors, and end-users. At that 
time, we would expect the NASD to file with the Commission, pursuant 
to section 19(b)(1) of the Act, proposed changes to the NASD/TRACE 
Rules as necessary and appropriate, based on the suggestions it has 
received.
---------------------------------------------------------------------------

E. Scope of the Proposal

    Several commenters suggested that the NASD significantly expand the 
scope of the TRACE proposal. Some argued that the proposal should 
accommodate fixed income instruments other than corporate debt 
securities, to avoid forcing the industry to support multiple systems 
for similar products.\85\ These comments generally were premised on a 
concern that the proposed mandatory trade comparison feature would 
result in needless duplication of effort and possible inconsistency 
with other trade comparison systems. The NASD has addressed this 
concern by deleting the trade comparison feature of its filing.
---------------------------------------------------------------------------

    \85\ See RMOA Letter; Edward Jones Letter; D.A. Davidson Letter; 
A.G.Edwards Letter; Sloan Letter; and J.C. Bradford Letter, Appendix 
A. For example, two commenters, in response to Amendments 2 and 3, 
urged the NASD to work to ensure that its trade reporting function 
``works within the context of ongoing industry initiatives to 
consolidate and expedite post-trade processing functions across all 
fixed income markets.'' See MSRB Letter, SIA Letter; SIA/Streetside 
Letter, Appendix B.
---------------------------------------------------------------------------

    In response to the NASD's amendments, some commenters argued that 
the NASD should incorporate municipal bond requirements as well as 
corporate bond requirements into a single format.\86\ The Commission 
does not disagree that a single-format approach to fixed income 
transparency could have merit; however, it believes the current 
proposal takes a reasonable first step towards providing public 
investors with current transaction information on corporate bonds in a 
uniform format, consistent with the purposes of the Act. The Commission 
cannot disapprove the current proposal simply because a different or 
more extensive approach might also have been consistent with the Act.
---------------------------------------------------------------------------

    \86\ See MSRB Letter; RMOA Letter; SIA Letter; SIA/Streetside 
Letter, Appendix B.
---------------------------------------------------------------------------

    Finally, one commenter, responding to Amendment Nos. 2 and 3, 
criticized the NASD/TRACE Rules for failing to distinguish between 
real-time and historical data.\87\ This commenter stated that an entity 
other than the NASD could be the distributor of historical data. In 
addition, this commenter urged that final NASD/TRACE Rules recognize 
the economic interest of broker-dealers that report this data to the 
NASD.\88\ In this regard, the Commission understands that the treatment 
of historical data has been the subject of negotiations between the 
NASD and TBMA. Preliminarily, the Commission believes that there is no 
basis in the Act to distinguish between real-time and historical data 
collected by an SRO. However, because the NASD/TRACE Rules do not 
address this issue, it is not addressed here.
---------------------------------------------------------------------------

    \87\ See TBMA Letter, Appendix B.
    \88\ Id.
---------------------------------------------------------------------------

F. Lack of Specificity

    Some commenters argued that the proposal is not specific enough to 
permit informed comment.\89\ One commenter stated that the filing did 
not comport with Form 19b-4 under the Act because it failed to explain 
the competitive implications of the proposal.\90\
---------------------------------------------------------------------------

    \89\ See Morgan Letter; RMOA Letter, Appendix A. See also, J.C. 
Bradford Letter; Freeman Letter; Garban Letter, Appendix A.
    \90\ See Phlx/Bloomberg Letter, Appendix A. One commenter 
repeated this concern in responding to Amendments 2 and 3 to the 
proposal. This commenter said that the NASD's failure to provide 
adequate information concerning the competitive burdens of its 
proposal ``deprives the public of an adequate basis to comment * * * 
and deprives the Commission of an adequate basis for determining 
whether to approve it.'' Bloomberg Letter, Appendix B.
---------------------------------------------------------------------------

    The Commission believes that the NASD's original notice and 
subsequent amendments were sufficiently detailed as to afford 
commenters a meaningful opportunity to comment on their impact on 
competition. The notice and amendments described the scope of TRACE, 
the key reporting requirements, and the general schedule for 
implementation. The Commission raised the issue of competition in its 
notice by specifically asking whether the method of trade report 
dissemination is appropriate, and whether there are ways to improve the 
proposed trade reporting system. The Commission received 39 comments on 
the original proposal, which was published well over one year ago, and 
13 comments on Amendment Nos. 2 and 3, which were published in November 
2000. In fact, Amendment Nos. 2 and 3 were submitted by the NASD in 
part to address certain competitive concerns raised by comments on the 
original proposal. Further, in the original notice, the

[[Page 8140]]

Commission sought comment on whether the proposal is consistent with 
the Act, thus invoking sections 3(f), 15A(b)(6), and 15A(b)(9) of the 
Act regarding burdens on competition and non-discrimination.\91\
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 42201 (December 3, 
1999), 64 FR 69305 (December 10, 1999). See also, Securities 
Exchange Act Release No. 43616 (November 24, 2000), 65 FR 71174 
(November 29, 2000) (requesting comment on the amended TRACE 
proposal).
---------------------------------------------------------------------------

G. Problems with Rule Text

    A few commenters pointed to problems with the text of the rule. For 
example, one commenter stated that the proposal is internally 
inconsistent.\92\ That commenter argued that the narrative of the 
original proposal and the proposed rules themselves are not consistent. 
For example, the narrative described several types of securities that 
would not be reportable, but the proposed rules did not define the 
securities subject to reporting in such a way that excluded those 
securities. The amended proposal addresses this issue by including in 
the NASD/TRACE Rules the types of securities that are excluded from 
reporting.
---------------------------------------------------------------------------

    \92\ See Wachovia Letter, Appendix A.
---------------------------------------------------------------------------

H. Preference for a More Open System

    Several commenters argued that the proposal should use open 
architecture and competitively driven technologies rather than a 
single, proprietary service.\93\ These comments do not appear to take 
into account the NASD's need for central collection of the data to 
create a comprehensive surveillance system. As discussed above, TRACE 
allows for alternative methods for submitting this information to the 
NASD, and does nothing to prevent dissemination of this information 
independently of the NASD. Moreover, as noted above, nothing in the 
amended NASD/TRACE Rules prevents vendors and other market participants 
from receiving unconsolidated information from NASD members or from 
packaging consolidated data from the NASD and marketing that 
information in direct competition with the NASD and others. Further, to 
the extent these comments were directed towards the proposed mandatory 
comparison service, the Commission believes that the NASD's decision to 
delete all provisions relating to trade comparison effectively responds 
to such objections.
---------------------------------------------------------------------------

    \93\ See Thomson Letter, Appendix A. See also McFadden Letter; 
TBMA Letter, Appendix A; Datek Letter; Schwab Letter; Morgan Letter, 
Appendix B.
---------------------------------------------------------------------------

I. Timing

    Several commenters raised concerns about the original proposed 
timeframe for implementing the NASD/TRACE Rules.\94\ Many of the issues 
commenters raised regarding preparations for Y2K, decimalization, and 
OATS are no longer a concern. The NASD/TRACE Rules will be implemented 
180 days after the date the NASD provides technical specifications to 
its members, in accordance with the phase-in schedule discussed above. 
The Commission believes that this timeframe will allow ample time for 
NASD members and other bond market participants to prepare for TRACE 
reporting, and permit the NASD to more fully test TRACE technology.
---------------------------------------------------------------------------

    \94\ See A.G. Edwards Letter; D.A. Davidson Letter; Edward Jones 
Letter; Freeman Letter; Garban Letter; Legg Mason Letter; Liberty 
Letter; Schwab Letter; SIA Letter; Sloan Letter; TBMA Letter; 
Wachovia Letter; Zions Bank Letter, Appendix A.
---------------------------------------------------------------------------

    In response to Amendments 2 and 3, one commenter continued to 
express concerns about the revised implementation schedule for 
TRACE.\95\ This commenter stated that members will be unable to meet 
the requirement to report transactions within 15 minutes after trade 
execution, scheduled to take effect on December 31, 2001. In this 
connection, the Commission notes that there is no 15-minute requirement 
in the rules at this time.\96\ The Commission will have the opportunity 
to reconsider this issue if and when the NASD submits a rule change to 
implement a 15-minute reporting requirement.
---------------------------------------------------------------------------

    \95\ See RMOA Letter, Appendix B.
    \96\ In its Response Letter, the NASD noted that any proposal to 
shorten the one hour reporting period to 15 minutes would require 
the filing of a rule proposal pursuant to Section 19(b)(1) of the 
Act. The NASD represented that in developing such a proposal it will 
give substantial weight to the industry's timeline for implementing 
T+1. See Response Letter, note 47 supra.
---------------------------------------------------------------------------

J. Fees

    Several commenters addressed the issue of fees, urging that fees be 
cost-based and account for costs incurred by NASD members who are 
required to report.\97\ The Commission notes that the NASD/TRACE Rules 
as proposed do not contain proposed fees for distributing reported 
data. Thus, this approval order does not address the issue of fees. As 
noted above, the NASD is required to file a proposed rule change with 
the Commission prior to imposing fees, and the Commission must find 
that those fees are reasonable and not unfairly discriminatory under 
the Act.\98\
---------------------------------------------------------------------------

    \97\ See BAS Letter; Bear Stearns Letter; Freeman Letter; Garban 
Letter; ICI Letter; Lazard Letter; Legg Mason Letter; Merrill 
Letter; Morgan Letter; Schwab Letter; TBMA Letter; Warburg Letter, 
Appendix A; Phlx Letter; Schwab Letter, Appendix B. See also Phlx/
Bloomberg Letter (arguing that proposal would cast the SEC into a 
ratemaking role), Appendix A.
    \98\ See discussion supra, Section V.B.
---------------------------------------------------------------------------

K. Impact on Competition, Efficiency and Capital Formation

    Section 3(f) of the Act requires that the Commission consider 
whether the NASD's proposal will promote efficiency, competition, and 
capital formation.\99\ As described above, the NASD proposal followed a 
Commission staff review of the debt market. Specifically, in 1998 
Commission staff reviewed the market for debt securities in the U.S., 
with particular emphasis on the state of price transparency. One of the 
chief goals of the review was to identify specific inadequacies in the 
availability of pricing information in the various market segments. The 
review focused on five segments of the debt market: U.S. Treasury and 
Federal Agency Bonds; mortgage-backed securities and other structured 
products; corporate bonds; municipal bonds; and foreign sovereign 
bonds. Commission staff interviewed over thirty organizations, 
including trade associations, SROs, government agencies, interdealer 
brokers, information vendors, bond dealers, institutional investors, 
clearing agencies, and electronic trading system operators. The staff 
concluded that the quality of pricing information available in the 
market for government bonds was good, but that information available on 
high yield corporate bonds was relatively poor, and that pricing 
information on investment grade corporate bonds fell between high yield 
corporate bonds and government bonds in terms of quality.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The staff concluded that real-time transaction reporting for 
corporate bonds, in addition to improving the transparency of the 
corporate debt market, would also provide a sound basis for 
surveillance of that market. As a result of the findings of the review, 
Chairman Levitt requested the NASD to undertake the current TRACE 
initiative.
    The Commission believes that the NASD/TRACE Rules represent a 
reasonable effort by the NASD to enhance the quality of the OTC 
corporate debt market by providing more information to investors and 
other market participants, thus increasing overall market transparency. 
While the NASD/TRACE Rules provide for a centralized collection and 
dissemination of bond transaction data, this centralized collection is 
needed to create a complete surveillance database. It does not create 
an exclusive means of collecting and distributing that information to 
investors. The NASD/TRACE Rules also will improve

[[Page 8141]]

surveillance of the OTC corporate debt market. Moreover, they may 
create an opportunity for vendors and broker-dealers to market 
analytical tools to interpret the data. In addition, the Commission 
believes that the NASD/TRACE Rules proposal should promote competition 
and capital formation by encouraging increased participation in the 
corporate bond market by broker, dealers, and investors. Finally, the 
Commission believes that broad public availability of transaction 
information will increase the fairness and efficiency of the debt 
markets and thereby foster investor confidence in those markets. 
Enhanced investor confidence, in turn, may yield increased investor 
participation in the markets, which in turn would lead to greater 
liquidity in the markets.

VI. Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the proposal prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register. First, in response 
to comment, Amendment No. 4 deletes proposed Rule 6231(a) which 
required NASD members to report to TRACE the same transaction 
information that the member provides to its registered clearing agency 
for clearance and settlement, by the time the member transmits that 
information to its clearing agency.
    Second, Amendment No. 4 withdraws the NASD's earlier undertaking to 
register as a securities information processor. As discussed supra, the 
Commission believes that the Act provides it with substantially similar 
oversight of the NASD's operation of TRACE whether it registers as a 
securities information processor or not.
    In addition, Amendment No. 4 adds language to Rule 6260(a) that 
provides for the NASD to immediately disseminate transaction 
information on the ``FIPS 50.'' \100\ This language was inadvertently 
omitted from Rule 6260(a) in the NASD's amended proposal; however, the 
language was included in the notice of the original proposal and in the 
description of transaction dissemination contained in the NASD's 
Amendment No. 2.
---------------------------------------------------------------------------

    \100\ See supra note 16.
---------------------------------------------------------------------------

    The proposed changes to the definition of ``TRACE-eligible 
securities'' in Amendment No. 4 clarify the rules by inserting 
exclusions from reporting that were contained in the narrative of the 
original filing. Amendment No. 4 also narrows the reporting requirement 
so as not to include certain investment grade securities issued 
pursuant to section 4(2) of the 1933 Act, but not sold or traded under 
Rule 144A. The Commission believes that this change will not 
substantially alter the scope of reporting required under the NASD/
TRACE Rules.
    Finally, the revised implementation schedule provides 180 days time 
for the industry to prepare for TRACE after technical specifications 
are made available, rather than 180 days after Commission approval. 
This change responds to commenters suggestions, and the Commission 
believes that commenters would likely welcome the additional time to 
prepare for TRACE.
    Other changes effected by Amendment No. 4 are technical in nature 
and were added for clarification only.
    For these reasons, the Commission finds good cause, consistent with 
sections 15A(b)(6) and 19(b)(2) of the Act, to accelerate approval of 
Amendment No. 4 to the proposed rule change.

VII. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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-99-65 and should be 
submitted by February 20, 2001.

VIII. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-99-65), as amended, be and 
hereby is approved, and that Amendment No. 4 thereto is approved on an 
accelerated basis.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Appendix A--List of Comment Letters NASD's Original Trace Proposal SR-
NASD-99-65

    1. Letter from William T. Dolan, Briggs and Morgan, to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, dated 
January 14, 2000 (``Briggs and Morgan Letter'').
    2. Letter from Thomas Sargant, President, Regional Municipal 
Operations Association, to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, dated January 27, 2000 (``RMOA Letter'').
    3. Letter from Douglas L. Williams, Executive Vice President, 
Wachovia Securities, Inc., to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 4, 2000 
(``Wachovia Letter'').
    4. Letter from Dennis J. Dirks, Chief Operating Officer, The 
Depository Trust & Clearing Corporation, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 8, 
2000 (``DTC Letter'').
    5. Letter from Kreg Jones, Sr. Vice President, and George 
Tootle, Vice President, D.A. Davidson & Co., to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 7, 
2000 (``D.A. Davidson Letter'').
    6. Letter from Thomas J. Westphal, Principal, Operations, Edward 
Jones, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated February 4, 2000 (``Edward Jones Letter'').
    7. Letter from Thomas M. Likovich, Managing Director, U.S. High 
Grade Credit Trading, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 8, 2000 (``Merrill Letter'').
    8. Letter from Louis J. Scotto, President, Liberty Brokerage 
Securities, Inc., to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 7, 2000 (``Liberty Letter'').
    9. Letter from Amy B.R. Lancellotta, Senior Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 8, 2000 (``ICI Letter'').
    10. Letter from Kenneth deRegt, Managing Director, Morgan 
Stanley & Co, Incorporated, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 8, 2000 (``Morgan 
Letter'').
    11. Letter from Mari-Anne Pisarri, Pickard and Djinis LLP, on 
behalf of Thomson Financial, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 8, 2000 
(``Thomson Letter'').
    12. Letter from Rene L. Robert, President, AdvantageData.com, to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
dated February 7, 2000 (``Advantage Letter'').
    13. Letter from Alan M. Green, Managing Partner, McFadden, 
Farrell & Smith, to Jonathan G. Katz, Secretary, Securities and

[[Page 8142]]

Exchange Commission, dated February 7, 2000 (``McFadden Letter'').
    14. Letter from F. Harlan Batrus, Managing Director, Lazard 
Freres & Co, LLC, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 9, 2000 (``Lazard Letter'').
    15. Letter from Richard E. Thornburgh, Vice Chairman of the 
Executive Board, Member of the Credit Suisse Group Executive Board, 
Credit Suisse First Boston, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 8, 2000 (``CSFB 
Letter'').
    16. Letter from Salvatore Trani, President, Garban Corporates 
LLC, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated February 9, 2000 (``Garban Letter'').
    17. Letter from J.P. Lademark, Senior Vice President, Schwab 
Capital Markets & Trading Group, Charles Schwab & Co., Inc., to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
dated February 11, 2000 (``Schwab Letter'').
    18. Letter from James F. Smith, President, Freeman Securities 
Company, Inc., to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 10, 2000 (``Freeman Letter'').
    19. Letter from Noland Cheng, Chairman, Fixed Income 
Transparency Subcommittee of SIA's Operations Committee, Securities 
Industry Association, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 10, 2000 (``SIA Letter'').
    20. Letter from Robert Wolf, Managing Director, Warburg Dillon 
Read LLC, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated February 9, 2000 (``Warburg Letter'').
    21. Letter from Joseph A. Sullivan, Senior Vice President and 
Director, Fixed Income Group, Legg Mason Wood Walker, Incorporated, 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
dated February 10, 2000 (``Legg Mason Letter'').
    22. Letter from Robert G. Knox, Zions Bank Capital Markets, 
Zions First National Bank, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 10, 2000 (``Zions 
Bank Letter'').
    23. Letter from Ronald J. Kessler, Corporate V.P. & Director of 
Operations, and Gregory C. Menne, Sr. V.P. & Director of Fixed 
Income, A.G. Edwards & Sons, Inc., to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated February 10, 2000 (``A.G. 
Edwards Letter'').
    24. Letters from David DeLucia, Managing Director, Donaldson, 
Lufkin & Jenrette, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 9, 2000 and February 23, 2000 
(collectively, ``DLJ Letter'').*
    25. Letter from William H. James III, 1999 Chairman Corporate 
Bond Division; Vincent P. Murray, 2000 Chairman, Corporate Bond 
Division; Ferdinand Masucci, 2000 Vice Chairman, Corporate Bond 
Division, The Bond Market Association, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 9, 
2000 (``TBMA Letter'').
    26. Letter from Joseph W. Sack, Executive Director, and Judith 
D. Donahue, The Capital Group Chairman, The Bond Market Association, 
Asset Managers Forum, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 11, 2000 (``AMF Letter'').
    27. Letter from Robert B. Sloan to Secretary, Securities and 
Exchange Commission, dated February 14, 2000 (``Sloan Letter'').
    28. Letter from Warren J. Spector, Senior Managing Director, 
Bear Stearns & Co., Inc., to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, dated February 10, 2000 (``Bear Stearns 
Letter'').
    29. Letter from Stephen J. Gallagher, Managing Director, Global 
High Grade Trading, Banc of America Securities LLC, to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, dated February 
10, 2000 (``BAS Letter'').
    30. Letter from Steven Berkenfeld, Managing Director, Lehman 
Brothers, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated February 10, 2000 (``Lehman Letter'').
    31. Letter from Brian Riano, Managing Director, Corporate Bond 
Secondary Trading, Salomon Smith Barney, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 23, 
2000 (``Salomon Letter'').
    32. Letter from David Russell, Jr., Cove Hill Consulting, Inc., 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
dated February 10, 2000 (``Cove Hill Letter'').
    33. Letter from Sarah Cohen, Director, Fixed Income Syndicate, 
ABN-AMRO, Incorporated, to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, dated February 9, 2000 (``ABN AMRO 
Letter'').
    34. Letter from Kevin M. Foley, Bloomberg L.P., to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, dated February 
15, 2000 (``Bloomberg Letter'').
    35. Letter from Meyer S. Frucher, Philadelphia Stock Exchange, 
Inc., and Kevin M. Foley, Bloomberg L.P., to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 15, 
2000 (``Phlx/Bloomberg Letter'').
    36. Letter from Peter Fenichel, Senior Vice President, Instinet 
Fixed Income, Instinet Corporation, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated April 4, 2000 (``Instinet 
Letter'').
    37. Letter from Eric Broder, Partner, Director of Operations, 
J.C. Bradford & Co., to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated February 11, 2000 (``J.C. Bradford 
Letter'').
    38. Letter from Dwight D. Churchill, Senior Vice President and 
Bond Group Leader, Fidelity Investments, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated February 28, 
2000 (``Fidelity Letter'').
    * Donaldson, Lufkin & Jenrette submitted two comment 
letters, the second elaborating on points made in the first. For 
ease of reference, both letters are collectively referred to as the 
``DLJ Letter.''

Appendix B--List of Comment Letters: Amendment Nos. 2 and 3 to SR-NASD-
99-65

    1. Letter from Thomas Sargant, President, Regional Municipal 
Operations Association, to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, dated December 13, 2000 (``RMOA Letter'').
    2. Letter from William H. James, III, 1999 Chairman, Corporate 
Bond Division, Vincent Murray, 2000 Chairman, Corporate Bond 
Division, and Thomas Thees, 2001 Chairman, Corporate Bond Division, 
The Bond Market Association, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated December 20, 2000 (``TBMA 
Letter'').
    3. Letter from Barry E. Simmons, Associate Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, dated December 20, 2000 (``ICI Letter'').
    4. Letter from Zoe Cruz, Managing Director, Morgan Stanley Dean 
Witter, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated December 20, 2000 (``Morgan Letter'').
    5. Letter from W. Hardy Callcott, Senior Vice President & 
General Counsel, Charles Schwab & Co., Inc., to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated December 20, 
2000 (``Schwab Letter'').
    6. Letter from Noland Cheng, Chairman, Fixed Income Transparency 
Subcommittee of Securities Industry Association Operations 
Committee, to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated December 21, 2000 (``SIA Letter'').
    7. Letter from Eleanor Davis Ainspan, Chairperson, T+1 
Streetside Fixed Income Working Group, SIA, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated December 21, 
2000 (``SIA/Streetside Letter'').
    8. Letter from Kevin M. Foley, Bloomberg L.P., to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, dated December 
22, 2000 (``Bloomberg Letter'').
    9. Letter from Edward J. Nicoll, Chairman and Chief Executive 
Officer, Datek Online Holdings Corp., to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, undated, received by 
e-mail on December 26, 2000 (``Datek Letter'').
    10. Letter from Meyer S. Frucher, Chairman and Chief Executive 
Officer, Philadelphia Stock Exchange, Inc., to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated December 26, 
2000 (``Phlx Letter'').
    11. Letter from Dennis J. Dirks, Chief Operating Officer, 
Depository Trust & Clearing Corporation, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated December 28, 
2000 (``DTC Letter'').
    12. Letter from Christopher A. Taylor, Executive Director, 
Municipal Securities Rulemaking Board, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated January 3, 2001 
(``MSRB Letter'').
    13. Letter from Peter Rich, Senior Vice President, Government 
and Regulatory Affairs, Instinet Fixed Income, Instinet Corporation, 
Inc., to Jonathan G. Katz,

[[Page 8143]]

Secretary, Securities and Exchange Commission, dated January 5, 2000 
(``IFI Letter'').

[FR Doc. 01-2440 Filed 1-26-01; 8:45 am]
BILLING CODE 8010-01-P