[Federal Register Volume 67, Number 129 (Friday, July 5, 2002)]
[Notices]
[Pages 44907-44911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16850]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46144; File No. SR-NASD-2002-46]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 2 and 3 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc., Relating to the Rule 6200 
Series or the TRACE Rules

June 28, 2002

I. Introduction

    On April 3, 2002, 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 amend the Rule 6200 
Series of the Rules of the NASD, which provides for the reporting and 
dissemination of transaction information in eligible corporate debt 
securities (``TRACE Rules''). The NASD submitted Amendment No. 1 to the 
proposed rule change on May 13, 2002.\3\

[[Page 44908]]

Notice of the proposed rule change and Amendment No. 1 thereto was 
published for comment in the Federal Register on May 22, 2002.\4\ The 
Commission received one comment letter, from The Bond Market 
Association (``TBMA''), regarding the proposal.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NASD revised the language of the 
proposed rule change regarding the time frame in which the managing 
underwriter must deliver CUSIP information to the TRACE Operations 
Center, and a member's obligations in instances in which the member 
is not required to report yield data to the NASD. See letter from 
Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, 
NASD Regulation, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated May 
13, 2002 (``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 45943 (May 16, 
2002), 67 FR 36049.
    \5\ See letter from Michel de Konkoly Thege, Vice President and 
Associate General Counsel, TBMA, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated June 12, 2002 (``TBMA's 
Letter''). TBMA's Letter is described in Section IV, infra.
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    On June 25, 2002, the NASD filed Amendment No. 2 to the proposed 
rule change and a response to TBMA's Letter.\6\ On June 26, 2002, the 
NASD filed Amendment No. 3 to the proposed rule change. This order 
approves the proposed rule change, as amended by Amendment No. 1, 
accelerates approval of Amendment Nos. 2 and 3, and solicits comments 
from interested persons on Amendment Nos. 2 and 3.
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    \6\ Amendment No. 2 is described in Section III, infra.
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II. Background

    On January 23, 2001, the Commission approved the TRACE Rules to 
establish a corporate bond trade reporting and transaction 
dissemination facility and to eliminate Nasdaq's Fixed Income Pricing 
System (``FIPS'').\7\ Subsequently, on March 5, 2001, the Commission 
approved amendments to the TRACE Rules requiring trade reports in 
transactions between two NASD members to be filed by each member.\8\ In 
addition, on January 3, 2002, the Commission issued a notice stating 
that certain other amendments to the TRACE Rules had become effective 
on filing.\9\ Finally, on May 6, 2002, the NASD filed a proposed rule 
change to establish fees for the use of TRACE.\10\ On June 26, 2002, 
the NASD amended that filing to implement the TRACE fee structure on a 
pilot basis. The Commission is approving the TRACE fee filing, and 
granting accelerated approval of the amendment regarding pilot status, 
concurrently with approval of this proposal.\11\
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    \7\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (File No. SR-NASD-1999-65). 
FIPS, which was operated by Nasdaq, collected transaction and 
quotation information on domestic, registered, non-convertible high-
yield corporate bonds.
    \8\ See Securities Exchange Act Release No. 44039 (March 5, 
2001), 66 FR 14234 (March 9, 2001) (File No. SR-NASD-2001-04).
    \9\ See Securities Exchange Act Release No. 45229 (January 3, 
2002), 67 FR 1255 (January 9, 2002) (File No. SR-NASD-2001-91).
    \10\ See Securities Exchange Act Release No. 45960 (May 17, 
2002), 67 FR 36654 (May 24, 2002) (Commission notice seeking public 
comment on NASD proposal).
    \11\ See Securities Exchange Act Release No. [  ], (June 28, 
2002).
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    The TRACE Rules will become effective on July 1, 2002. On that day, 
members must begin to report transactions in TRACE-eligible securities, 
and the TRACE system will begin the dissemination of certain reported 
information.

III. Description of the Proposal

    The proposed amendments to the TRACE Rules are intended to make 
technical changes to the TRACE Rules and clarify certain provisions of 
those Rules prior to implementation of TRACE. Specifically, the 
proposed amendments: extend the reporting period from one hour to one 
hour and 15 minutes; incorporate certain FIPS standards in Rule 6250; 
require members to provide new CUSIP numbers to TRACE at an earlier 
time under Rule 6260; clarify existing provisions in the Rule 6200 
Series, especially Rule 6210(a) regarding ``TRACE-eligible securities'' 
and certain reporting provisions in Rule 6230(c) and (d); and make 
other minor modifications to the existing requirements. These 
amendments are discussed in greater detail in the Commission's notice 
soliciting public comment on this proposal.\12\
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    \12\ See supra, note 4.
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    In Amendment No. 1, the NASD proposed to amend Rule 6260 to require 
that the managing underwriter of any newly issued TRACE-eligible 
security provide CUSIP data to the TRACE Operations Center by 5:00 p.m. 
on the business day preceding the day the registration statement will 
become effective or, if registration is not required, the day the 
securities will be priced initially (``prior day CUSIP notification'').
    In Amendment No. 2, the NASD proposed an exception to prior day 
CUSIP notification for underwriters that offer securities on an intra-
day basis under Rule 415 under the Securities Act of 1933 (``Securities 
Act'') or Rule 144A under the Securities Act. In such offerings, the 
managing underwriter must obtain the CUSIP number and provide it to the 
TRACE Operations Center by 5:00 p.m. on the day the securities are 
priced and offered. The NASD also proposes to require the underwriter 
to provide the following descriptive information relating to the 
security to the TRACE Operations Center in addition to the CUSIP 
number: (1) Issuer name; (2) coupon rate; (3) maturity; (4) whether 
Rule 144A applies; and (5) a brief description of the issue. The NASD 
represents that the additional information will enable it to verify the 
accuracy of the CUSIP numbers provided by the underwriters.
    In Amendment No. 3, the NASD proposed to amend the text of Rule 
6260(b) as submitted in Amendment No. 2. When an intra-day offering 
occurs at or after 5:00 p.m., the underwriter will be required to 
provide the CUSIP number and additional information to the TRACE 
Operations Center not later than 5:00 p.m. on the next business day. In 
addition, the NASD proposed to allow the underwriter to provide NASD 
with information other than the six listed items in Rule 6260(b) to 
comply with the notification requirement, because industry participants 
have stated that some of the required information, such as coupon rate 
and maturity, may not have been fixed at the time the underwriter 
obtains the CUSIP number for the security and would provide it to the 
NASD. In light of this, the NASD proposed to allow underwriters to 
submit alternative types of information, as specified by the NASD, if 
necessary.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended by Amendments Nos. 1, 2, and 3, is consistent 
with the Act and the rules and regulations promulgated thereunder 
applicable to a registered securities association and, in particular, 
with the requirements of section 15A(b)(6).\13\ Specifically, the 
Commission finds that approval of the proposed rule change is 
consistent with section 15A(b)(6) of the Act in that it is 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.\14\ The TRACE Rules, as originally approved by 
the Commission on January 23, 2001 and as further amended, dramatically 
improve the transparency of the corporate bond market. The Commission 
believes that the NASD's clarification of the TRACE Rules in this 
proposed rule change will enable it to implement TRACE more 
effectively, thus enhancing investor

[[Page 44909]]

protection by facilitating the availability of TRACE.
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    \13\ 15 U.S.C. 78o-3(b)(6).
    \14\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    As previously noted, the Commission received one comment letter, 
from TBMA, on the proposed rule change.\15\ Although TBMA's Letter 
generally supported the latest amendments, it raised a number of 
specific concerns. As a result, the NASD entered into discussions with 
TBMA aimed at responding to its comments. On June 25, 2002, the NASD 
filed Amendment No. 2 to the proposal to address the concerns 
articulated in TBMA's Letter.
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    \15\ See supra, note 5.
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    TBMA's Letter noted that the proposed rule change contained a 
number of useful clarifications concerning the workings of the TRACE 
Rules and reflected certain suggestions that TBMA had made in previous 
comment letters on the TRACE Rules and in discussions with the staff of 
the NASD. Nonetheless, TBMA urged further changes to the requirement 
applicable to managing underwriters to provide CUSIPs for new issues, 
requested further clarification and guidance on definitional matters, 
and requested the NASD to resolve pending legal, operational and 
technology matters relating to implementation.
    Rule 6260 as originally adopted stated that the lead underwriter of 
any newly issued TRACE-eligible security was required to provide a 
CUSIP number to the TRACE Operations Center ``no later than on the 
effective date of the offering.'' As initially filed, this proposed 
rule change revised that requirement to require the managing 
underwriter to provide the CUSIP ``not later than 5:00 p.m. on the 
first business day following the day that the registration statement 
becomes effective, or, if registration is not required, the day that 
the securities are first priced.'' Amendment No. 1 required the CUSIP 
to be provided to the TRACE Operations Center not later than 5:00 p.m. 
on the business day preceding such day.
    TBMA stated that frequently an issuer's decision to take advantage 
of a market window and the pricing of an offering occur within the same 
day. TBMA stated that Rule 6260 as amended by Amendment No. 1 would 
prevent the issuer from pricing such a transaction until the next 
business day. TBMA suggested that Rule 6260 should be further revised 
to deal with the case of same-day takedowns under shelf registration 
statements and Rule 144A documentation. In such cases, TBMA suggested 
that Rule 6260 should require a managing underwriter to make reasonable 
efforts to provide the CUSIP by the end of the same business day on 
which the takedown occurs.
    The NASD noted in its response that the deadline for providing 
CUSIPs was moved back to immediately precede the actual offering day to 
address regulatory concerns that the audit trail, especially for those 
bonds that trade infrequently after the initial offering, would contain 
substantial gaps if the underwriter was not required to provide the 
CUSIP until the end of the first day of trading, with the result that 
all first day trading would not be reported. In addition, price 
transparency would be reduced because the first day of trading in a 
debt security is often its most active day.
    In response to TBMA's comments, the NASD proposed Amendment No. 2 
providing for an exception to the prior day CUSIP notification in Rule 
6260 for intra-day offerings. (These offerings are generally referred 
to as ``off-the-shelf'' or ``shelf'' offerings.) The NASD stated that 
when securities are previously registered under Rule 415 of the 
Securities Act or are unregistered securities that may be resold 
pursuant to Rule 144A of the Securities Act,\16\ an issuer and an 
underwriter may decide to take advantage of favorable market conditions 
and offer the issuer's debt securities on that day. The NASD stated 
that when such intra-day offerings occur, it would be impossible for an 
underwriter to price, offer and sell such securities and comply with 
the prior day CUSIP notification. The NASD noted that it was not its 
intent to inhibit same-day access to the capital markets. Therefore, 
the NASD proposed to except from the prior day CUSIP notification 
intra-day unregistered offerings for Rule 144A resales and shelf 
offerings. In such offerings, the underwriter must obtain the CUSIP 
number and provide it to the TRACE Operations Center not later than 
5:00 p.m. on the business day that the securities are priced and 
offered.
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    \16\ 17 CFR 230.415; 17 CFR 230.144A.
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    In Amendment No. 2, the NASD also proposed to amend Rule 6260 to 
require the underwriter to provide information in addition to the CUSIP 
number to the TRACE Operations Center. The additional information is 
the issuer's name, the coupon rate of the security, the maturity, Rule 
144A applicability, and a brief description of the issue (e.g., senior 
subordinated note, senior note). The NASD represented that this 
information will allow the TRACE Operations Center to compare the CUSIP 
and related information about the security with information available 
from vendors, and verify that the CUSIP numbers are accurate before the 
NASD disseminates the CUSIP numbers to the industry that night. The 
NASD stated that it will make the final determination whether a debt 
security is TRACE-eligible.
    In Amendment No. 3, the NASD proposed to amend the text of Rule 
6260(b) as submitted in Amendment No. 2. When an intra-day offering 
occurs on or after 5:00 p.m., the underwriter will be required to 
provide the CUSIP number and additional information to the TRACE 
Operations Center not later than 5:00 p.m. on the next business day. In 
addition, the NASD proposed to allow the underwriter to provide the 
NASD with information other than the six listed items in Rule 6260(b) 
to comply with the notification requirement, because industry 
participants have stated that some of the required information, such as 
coupon rate and maturity, may not have been fixed at the time the 
underwriter obtains the CUSIP number for the security and would provide 
it to the NASD. In light of this, the NASD proposed to allow 
underwriters to submit alternative types of information, as specified 
by the NASD, if necessary.
    The Commission believes that Amendment Nos. 2 and 3 address the 
primary concerns of TBMA with respect to certain intra-day offerings. 
The proposed changes will allow the NASD to balance the interests of 
issuers in obtaining expedited, well-timed access to the capital 
markets and those of investors in enabling the NASD to collect a more 
complete audit trail (and, when dissemination occurs, obtaining more 
complete price information).
    TBMA's Letter also requested further clarification and guidance on 
various definitional matters under the TRACE Rules and items to be 
submitted in trade reports. TBMA noted that the term ``money market 
instrument'' is important because it defines one category of 
instruments that are excluded from the definition of TRACE-eligible 
security. For the purpose of the proposed exclusion, Rule 6210(a) of 
the TRACE Rules defines a money market instrument as a debt instrument 
that ``at issuance has a maturity of one year or less.'' TBMA 
recommended that the definition of money market instrument in Rule 
6210(a) track the definition of Eligible Security contained in Rule 2a-
7(a)(10) under the Investment Company Act of 1940.
    In its response, the NASD stated that it did not believe that it is 
appropriate to revise the definition of money market instrument in the 
TRACE Rules to track the definition of ``Eligible Security'' under Rule 
2a-7(a)(10). First, the NASD noted that the definition of ``Eligible 
Security'' is quite complex, and that

[[Page 44910]]

making use of the definition is inconsistent with the NASD's goal to 
clearly delineate those securities subject to the TRACE Rules. In 
addition, the NASD said that, with respect to a particular security, 
Rule 2a-7(a)(10) applies differently over time. The NASD noted that the 
definition in Rule 2a-7(a)(10) may apply to long and medium term 
securities as they approach maturity. Under the definition proposed by 
the NASD, eligibility under TRACE requires a single determination for 
the life of the security. Thus, the NASD stated that applying the 
definition in Rule 2a-7 would not clarify or simplify a determination 
of whether a debt instrument is TRACE-eligible or excluded as a money 
market instrument and would not make it consistent with instruments 
that are eligible for money market funds. In addition, the NASD noted 
that the term ``Eligible Security'' in the Investment Company Act and 
the term ``TRACE-eligible security'' in the TRACE Rules are applied in 
different contexts. The Commission agrees, and does not believe that 
the definition of money market instrument in the TRACE Rules should be 
revised.
    TBMA stated that the NASD's exclusion of clearing brokers from the 
defined term ``parties to the transaction'' is unclear. In response, 
the NASD stated that it excluded ``clearing broker'' from the 
definition to indicate that a broker that merely clears a transaction 
does not have a reporting obligation under the TRACE Rules. The NASD 
represented that for purposes of TRACE, a broker that performs only a 
clearing function is not considered a party to the transaction and 
should not submit a transaction report, unless the broker has also 
performed the executing function, or the clearing broker is reporting a 
transaction for an actual party to the transaction pursuant to an 
agreement to do so (e.g., where a clearing broker, pursuant to a 
privately negotiated agreement with a correspondent, reports on behalf 
of the correspondent whenever the correspondent has a reporting 
obligation under TRACE).
    TBMA stated that requiring a party to report the lower of yield to 
call or yield to maturity is confusing. The NASD responded that it 
believes that requiring the reporting of the lower of these two yields 
is appropriate and necessary for the protection of investors and the 
integrity of the debt markets. The Commission agrees. The Commission 
believes that the data reported for each trade as ``yield'' must be 
comparable to the data to: (1) Inform buyers and sellers, including 
public investors, of the price and yield of comparable debt securities; 
and (2) create an audit trail in which the price and yield of all 
transactions can be compared. The Commission believes that the NASD is 
correct in requiring that a party report the lower of yield to call or 
yield to maturity because such yields are the benchmarks for comparing 
bonds.
    TBMA expressed concern that the NASD's proposal forces reporting 
firms to incur unnecessary expenses by requiring that transactions, 
including the two transactions that occur in an ``agency cross,'' must 
be reported separately. The NASD responded that the TRACE Rules require 
the reporting of each transaction and that the requirement that both 
transactions be reported individually is in furtherance of a regulatory 
goal. The NASD stated that the TRACE system was so designed based on 
input from market surveillance and market regulation personnel, and 
that it was determined that, in some instances, ``single'' trade 
reporting may raise issues, and creates gaps in the regulatory audit 
trail. The NASD represented that in creating a new bond reporting 
system, it determined not to incorporate certain features that may 
hinder the creation of a complete audit trail and therefore hinder 
efficient oversight of the market. For these reasons, the NASD 
determined that the agency cross transaction should be reported as two 
transactions. The Commission believes that the NASD's decision is 
reasonable, and is consistent with the Act.
    TBMA also asked that the NASD address and clarify certain 
interpretive issues, which include TRACE eligibility questions, the 
trade reporting obligations of broker-dealers that are alternative 
trading systems (``ATSs''), the identification of transactions that do 
not reflect secondary market pricing, and others. The NASD responded 
that these and other interpretive issues will be addressed in NASD 
Notices to Members. In addition, TBMA requested that the NASD address 
several operational and technical issues, and respond to contractual 
and testing issues in a manner that would notify the entire industry. 
The NASD responded that it addresses the operational, technical and 
testing issues raised in TBMA's Letter on the TRACE website, which is 
http://www.nasd.com/trace.asp, and that it has responded to issues 
raised in agreements by revising its agreements.\17\
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    \17\ In this connection the Commission emphasizes its statement 
in the original TRACE approval order, Securities Exchange Act 
Release No. 43873 (January 23, 2001), 66 FR 8131 (January 29, 2001), 
that members that provide data to TRACE are ``free to sell or give 
the same information to information vendors.'' The NASD may not, by 
contract or otherwise, restrict a member's ability to distribute 
data that is has reported to TRACE to information vendors.
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V. Accelerated Approval of Amendment Nos. 2 and 3

    The Commission finds good cause to approve Amendment Nos. 2 and 3 
to the proposal prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. Rule 
6260 would require most but not all underwriters to provide CUSIP 
numbers to the NASD by 5 p.m. Eastern Time on the business day prior to 
the initial sale of securities. This prior day CUSIP notification was 
previously published and subject to comment. The proposed exception to 
the prior day CUSIP notification provides that underwriters that are 
offering securities on an intra-day basis shall provide CUSIP numbers 
to the NASD not later than 5 p.m. Eastern Time on the same day that 
pricing and sales occur, provided that if such securities are priced 
and offered on or after 5 p.m., the member shall provide the 
information not later than 5 p.m. on the next business day. Although 
not previously published, the proposal is an appropriate and narrowly 
drafted exception to the previously published proposal and responds to 
the concerns that Rule 6260 would negatively impact issues that are 
offered and sold in the market on an intra-day basis.
    Amendment No. 2 also requires that an underwriter supply to the 
TRACE Operations Center, in addition to the CUSIP number for each newly 
issued security, the issuer's name, the coupon rate, the maturity, a 
brief description of the security and whether the issue is being resold 
pursuant to Rule 144A. Amendment No. 3 allows the underwriter to 
provide the TRACE Operations Center alternative types of information, 
as specified by the NASD, if necessary. The NASD believes, and the 
Commission agrees, that the acceleration of the approval of these 
provisions are necessary to protect customers and the integrity of the 
audit trail. The NASD will use the information to promptly determine if 
the CUSIP numbers submitted are accurate before the NASD loads the new 
CUSIP numbers in the TRACE system and transmits such numbers to the 
industry. If the CUSIP numbers are inaccurate, transaction activity 
will be incorrect either because a report reflects the wrong security 
or a report was rejected by the TRACE system.
    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

[[Page 44911]]

Amendment Nos. 2 and 3 to the proposed rule change.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are 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-2002-46 and should be submitted by July 26, 2002.

VII. 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-2002-46), as amended, be and 
hereby is approved, and that Amendment Nos. 2 and 3 thereto are 
approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-16850 Filed 7-3-02; 8:45 am]
BILLING CODE 8010-01-P