[Federal Register Volume 66, Number 151 (Monday, August 6, 2001)]
[Notices]
[Pages 41076-41078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19580]



[[Page 41076]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44623; File No. SR-NASD-2001-47]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Audit Trail and Trading Halt Requirements for Alternative Trading 
Systems That Trade Security Futures

July 30, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 30, 2001, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary, 
NASD Regulation, Inc. (``NASD Regulation'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Regulation. The Commission is publishing this 
notice to solicit comments on the proposed rule change for interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to add NASD Rule 3115 and to amend 
NASD Rule 3340 to establish record-keeping requirements for Alternative 
Trading Systems (``ATSs'') that trade security futures, and to require 
ATSs to coordinate trading halts with markets trading the underlying 
securities and markets trading related securities. Below is the text of 
the proposed rule change.
    Proposed new language is in italics; proposed deletions are in 
[brackets].

Rule 3115.  Requirements for Alternative Trading Systems to Record 
and Transmit Order and Execution Information for Security Futures

    (a) Alternative Trading Systems' Recording Requirements
    (1) Each alternative trading system that accepts orders for 
security futures (as defined in section 3(a)(55) of the Act) shall 
record each item of information described in paragraph (b) of this 
Rule. For purposes of this Rule, the term ``order'' includes a broker/
dealer's proprietary quotes that are transmitted to an alternative 
trading system.
    (2) Alternative trading systems shall record each item of 
information required to be recorded under this Rule in such form as is 
prescribed by the Association from time to time.
    (3) Maintaining and Preserving Records
    (A) Each alternative trading system shall maintain and preserve 
records of the information required to be recorded under this Rule for 
the period of time and accessibility specified in SEC Rule 17a-4(b).
    (B) The records required to be maintained and preserved under this 
Rule may be immediately produced or reproduced on ``micrographic 
media'' as defined in SEC Rule 17a-4(f)(1)(i) or by means of 
``electronic storage media'' as defined in SEC Rule 17a-4(f)(1)(ii) 
that meet the conditions set forth in SEC Rule 17a-4(f) and may be 
maintained and preserved for the required time in that form.
    (b) Information to be Recorded. The records required pursuant to 
paragraph (a) of this Rule shall contain, at a minimum, the following 
information for every order:
    (1) Date and time (expressed in terms of hours, minutes, and 
seconds) that the order was received;
    (2) Security future product name and symbol;
    (3) Number of share to which the order applies;
    (4) An identification of the order as related to a program trade or 
an index arbitrage trade as defined in New York Stock Exchange Rule 
80A;
    (5) the designation of the order as a buy or sell order;
    (6) The designation of the order as a market order, limit order, 
stop order, stop limit order, or other type of order;
    (7) Any limit or stop price prescribed by the order;
    (8) The date on which the order expires and, if the time in force 
is less than one day, the time when the order expires;
    (9) The time limit during which the order is in force;
    (10) Any instructions to modify or cancel the order;
    (11) Date and time (expressed in terms of hours, minutes, and 
seconds) that the order was executed;
    (12) Unit price at which the order was executed; excluding 
commissions, mark-ups or mark-downs;
    (13) Size of the order executed; and
    (14) Identity of the alternative trading system's subscribers that 
were intermediaries or parties in the transaction.
    (c) Reporting Requirements
    (1) General Requirement
    Alternative trading systems shall report information required to be 
recorded under this Rule to the Association on the next business day 
following the date the alternative trading system accepted the order or 
executed the trade, or at such other time period as the Association 
shall specify.
    (2) Method of Transmitting Data
    Alternative trading systems shall transmit this information in such 
form as prescribed by the Association.
* * * * *

3340.  Prohibition on Transactions, Publication of Quotations, or 
Publication of Indications of Interest During Trading Halts \3\
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    \3\ The text of NASD Rule 3340 includes the recently approved 
changes to this rule that prohibit members from publishing 
quotations or indications of interest in a security during a trading 
halt. The Commission approved this rule change on June 5, 2001. See 
Securities Exchange Act Release No. 44390, 66 FR 31262 (June 11, 
2001). The rule change becomes effective on August 13, 2001. See 
NASD Notice to Members 01-47.
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    (a) No member of person associated with a member shall, directly or 
indirectly, effect any transaction or publish a quotation, a priced bid 
and/or offer, an unpriced indication of interest (including ``bid 
wanted'' and ``offer wanted'' and name only indications), or a bid or 
offer, accompanied by a modifier to reflect unsolicited customer 
interest, in any security as to which a trading halt is currently in 
effect.
    (b) No member or person associated with a member shall, directly or 
indirectly, effect any transaction or publish a quotation, a priced bid 
and/or offer, an unpriced indication of interest (including ``bid 
wanted'' and ``offer wanted'' and name only indications), or a bid or 
offer, accompanied by a modifier to reflect unsolicited customer 
interest, in:
    (1) a future for a single security when the underlying security has 
a regulatory trading halt that is currently in effect; and
    (2) a future on a narrow based securities index when one or more 
underlying securities that constitute 30% or more of the market 
capitalization of the index has a regulatory trading halt that is 
currently in effect.

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

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of, and basis for, the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these

[[Page 41077]]

statements may be examined at the places specified in Item IV below. 
NASD Regulation has prepared summaries, set forth in Sections (A), (B), 
and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The NASD is proposing a rule change to establish requirements 
relating to ATSs for the trading of futures on single securities and 
narrow-based security indices. The Commodity Futures Modernization Act 
of 2000 \4\ (``CFMA'') ends the nearly 20-year ban on single stock 
futures and futures on narrow-based stock indices and puts in place a 
new framework of regulations that will allow both broker/dealers and 
futures commission merchants (``FCMs'') the ability to trade these 
instruments.
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    \4\ The CFMA was signed into law on December 21, 2000. Pub. L. 
106-554, 114 Stat. 2763 (2000).
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    The CFMA defines a ``security future'' as a contract of sale for 
future delivery of a single security or of a narrow-based security 
index. Under the CFMA, security futures are defined as ``securities'' 
under the Act, thus making the federal securities laws generally 
applicable to them. The CFMA also specifies the requirements that both 
securities exchanges and futures contract markets must satisfy in order 
to list and trade security futures. Under this new regime, broker/
dealers that wish to effect transactions in security futures are 
required to register with the Commodity Futures Trading Commission 
(``CFTC'') by filing a written notice with the CFTC.\5\ Likewise, FCMs 
and other intermediaries registered with the CFTC that wish to effect 
transactions in security futures are required to notice register with 
the SEC.
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    \5\ When a broker/dealer files its written notice, the CFTC is 
to give immediate effectiveness to the registration if: (1) The 
broker/dealer is a member of a national securities association, such 
as the NASD; (2) it limits its futures business to security futures 
products; and, (3) it has not had its registration as a broker or 
dealer suspended by the SEC. See Section 4f(a)(2) of the Commodity 
Exchange Act; 7 U.S.C. 6f(a)(2).
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    As discussed below, the NASD's proposed rule change will establish 
requirements for ATSs that will trade security futures. In the coming 
months, NASD Regulation intends to file with the SEC a second proposed 
rule change that will address several additional issues raised by the 
introduction of security futures trading in the United States.
    a. Requirements for Alternative Trading Systems. The CFMA requires 
the NASD, as a national securities association, to meet several 
requirements with respect to preparing for the trading of security 
futures by ATSs.\6\ Specifically, the CFMA requires the NASD to have 
rules in place that require ATSs to: (1) Have audit trails necessary to 
facilitate coordinated surveillance; and (2) coordinate trading halts 
with markets trading the underlying securities and markets trading 
related securities.\7\
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    \6\ ATSs generally are systems that maintain a marketplace for 
bringing together purchasers and sellers of securities or otherwise 
perform the functions commonly performed by a securities exchange 
and do not perform self-regulatory functions. See Regulation ATS 
Rule 300(a), 17 CFR 242.300(a); Securities Exchange Act Release No. 
40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998).
    \7\ See 15 U.S.C. 78f(h)(5).
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    Accordingly, with respect to audit trails, the proposed rule change 
would require ATSs to record and report audit trail information on a 
T+1 basis in such form as NASD Regulation requires. NASD Regulation has 
based the required elements of the audit trail rule on the existing 
recordkeeping rule for ATSs, Regulation ATS Rule 302.\8\ The form of 
the reports will be designed to facilitate NASD Regulation's sharing 
the reports with members of the Intermarket Surveillance Group, an 
organization whose purpose is to coordinate surveillance among 
financial markets. The proposed rule change would require that ATSs 
preserve such records in accordance with Rule 17a-4(b) under the 
Act,\9\ which requires preservation of records for at least three 
years, the first two years in an accessible place.
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    \8\ 17 CFR 242.302(c).
    \9\ 17 CFR 240.17a-4(b).
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    b. Amendments to NASD Rule 3340. With respect to coordinated 
trading halts, the proposed rule change would amend the NASD's existing 
rule prohibiting trading during a halt. Currently, NASD Rule 3340 
broadly prohibits broker/dealers and associated persons from effecting 
a ``transaction * * * in any security as to which a trading halt is 
currently in effect.'' NASD Regulation proposes to amend this rule by 
adding a provision that prohibits member firms, including ATSs, from 
trading, publishing quotes or indications of interest for: (a) A future 
on a single stock when the underlying stock is subject to regulatory 
trading halt, and (b) a future on a narrow based securities index when 
one or more underlying securities that constitute 30 percent or more of 
the market capitalization of the index are subject to a regulatory 
trading halt. Further, by limiting application of new NASD Rule 3340(b) 
to regulatory trading halts, NASD Regulation intends to exclude halts 
resulting from events such as an order imbalance or a systems failure.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\10\ 
which requires, among other things, that the Association's rule must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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    NASD Regulation further believes that the proposed rule change is 
consistent with the requirements of the CFMA.\11\ The CFMA requires a 
national securities association, such as NASD, to adopt rules to 
require ATSs to provide ``audit trails necessary or appropriate to 
facilitate'' coordinated surveillance among ATSs, the market trading 
the securities underlying the security future products, and other 
markets trading related securities in order to detect manipulation and 
insider trading, and to require ATSs ``to coordinate trading halts with 
markets trading the securities underlying the security future products 
and other markets trading related securities.'' \12\ These provisions 
of the CFMA are the basis for the proposed new audit trail rule for 
ATSs and the proposed amendment to the NASD's trading halt rule.
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    \11\ See note 4, supra.
    \12\ See 15 U.S.C. 78f(h)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    Written comment were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or

[[Page 41078]]

(ii) as to which the self-regulatory organization consents, the 
Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the SR-NASD-2001-47 and should be 
submitted by August 21, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19580 Filed 8-3-01; 8:45 am]
BILLING CODE 8010-01-M