[Federal Register Volume 67, Number 232 (Tuesday, December 3, 2002)]
[Notices]
[Pages 72008-72011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30532]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46893; File No. SR-NASD-2002-167]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Amendments to NASD Rule 7010(k)--
Fees for the Trade Reporting and Compliance Engine (TRACE)

November 22, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 72009]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 15, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by NASD. 
NASD has designated the proposed rule change as ``establishing or 
changing a due, fee, or other charge'' under Section 19(b)(3)(A)(ii) of 
the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. In addition, the 
NASD is changing references in the text of the rule from ``the 
Association'' to ``NASD.'' This change is effective immediately 
pursuant to Section 19(b)(3)(A)(iii) of the Act,\5\ as it is concerned 
solely with the administration of the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR Sec.  240.19b-4(f)(2).
    \5\ 15 U.S.C. 78s(b)(3)(A)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 7010(k) to reduce certain fees 
that are currently in effect for the Trade Reporting and Compliance 
Engine (TRACE). Below is the text of the proposed rule change. Proposed 
new language is underlined; proposed deletions are in brackets.
* * * * *
Rule 7010(k) Trade Reporting and Compliance Engine (TRACE)
    (Rule 7010(k) shall expire on December 28, 2002, unless amended, 
extended, or permanently adopted by NASD pursuant to SEC approval at or 
before such date).
    The following charges shall be paid by participants for the use of 
the Trade Reporting and Compliance Engine (``TRACE''):

------------------------------------------------------------------------
                                   Transaction
         System fees             reporting fees       Market data fees
------------------------------------------------------------------------
Web Browser Access:
    $85/month for 1 user ID;  Trades up to and      BTDS Professional
     $75/month for 2-9 user    including $200,000    Display--$60/month
     IDs; $70/month for 2-     par value--$0.50/     per terminal.
     10+ user IDs.             trade; Trades
    If less than 25 trades     between $201,000
     per month, in October,    and $999,999 par
     November, or December     value--$0.0025
     2002--$25/month per       times the number of
     user ID.                  bonds traded/trade;
                               Trades of
                               $1,000,000 par
                               value or more--
                               $2.50/trade.
CTCI--$25/month/line........  Cancel/Correct--$3/   BTDS Internal Usage
                               trade: For October    Authorization--$500/
                               2002--$1.50/trade.    month per
                               For November 2002--   organization.
                               $2.25/trade.
Third Party--$25/month......  ``As of'' Trade       BTDS External Usage
                               Late--$3/trade: For   Authorization--
                               October 2002--$1.50/  $1,000/month per
                               trade. For November   organization.
                               2002--$2.25/trade.
                                                    Daily List Fax--$15/
                                                     month per fax
                                                     number/addressee.
------------------------------------------------------------------------

    (1) System Related Fees. There are three methods by which a member 
may report corporate bond transactions that are reportable to NASD [the 
Association] pursuant to the Rule 6200 Series. A member may choose 
among the following methods to report data to NASD [the Association]: 
(a) a TRACE web browser (either over the Internet or a secure private 
data network (``PDN'')); (b) a Computer-to-Computer Interface 
(``CTCI'') (either one dedicated solely to TRACE or a multi-purpose 
line); or (c) a third-party reporting intermediary. Fees will be 
charged based on the reporting methodology selected by the member.
    (A) Web Browser Access. The charge to be paid by a member that 
elects to report TRACE data to NASD [the Association] via a TRACE web 
browser shall be as follows: for the first user ID registered, a charge 
of $85 per month; for the next two through nine user IDs registered, a 
charge of $75 per month, per such additional user ID; and for ten or 
more user IDs registered, a charge of $70 per month, per user ID from 
two to ten or more. If a member reports less than 25 trades per month 
to the TRACE system in October, November, or December 2002, the charge 
to be paid by a member for the TRACE web browser shall be $25, per such 
month, per user ID. In addition, a member that elects to report TRACE 
data to the Association via a web browser over a secure PDN rather than 
over the Internet shall pay an additional administrative charge of $100 
per month, per line.\6\
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    \6\ Charges that may be imposed by third parties, such as 
network providers, are not included in these fees.
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    (B) Computer-to-Computer Interface Access. No change.
    (C) Third Party Access `` Indirect Reporting. No change.
    (2) Transaction Reporting Fees. For each transaction in corporate 
bonds that is reportable to NASD [the Association] pursuant to the Rule 
6200 Series, the following charges shall be assessed against the member 
responsible for reporting the transaction:
    (A) Trade Reporting Fee. No change.
    (B) Cancel or Correct Trade Fee. A member shall be charged a Cancel 
or Correct Trade Fee of $3.00 per canceled or corrected transaction. To 
provide firms with time to adjust to the new reporting system, the 
Cancel or Correct Trade Fee will not be charged until the later of 
October 1, 2002 or 90 days after the effective date of TRACE. For the 
month of October 2002, the Cancel or Correct Trade Fee shall be $1.50 
per canceled or corrected transaction. For the month of November 2002, 
the Cancel or Correct Trade Fee shall be $2.25 per canceled or 
corrected transaction.
    (C) ``As of'' Trade Late Fee. A member shall be charged an ``As 
of'' Trade Late Fee of $3.00 per transaction for those transactions 
that are not timely reported ``As of'' as required by these rules. To 
provide firms with time to adjust to the new reporting system, the ``As 
of'' Trade Late Fee will not be charged until the later of October 1, 
2002 or 90 days after the effective date of TRACE. For the month of 
October 2002, the ``As of'' Trade Late Fee shall be $1.50 per such 
transaction. For the month of November 2002, the ``As of'' Trade Late 
Fee shall be $2.25 per such transaction.
    (D) Browse and Query Fee. No change.
    (3) Market Data Fees. No change.

[[Page 72010]]

    (4) Daily List Fax Service. No change.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
    On July 1, 2002, TRACE became effective. On June 28, 2002, the 
Commission approved proposed NASD fees relating to the operation of the 
TRACE system (Rule 7010(k)) on a pilot basis for a six-month period 
expiring on December 28, 2002.\7\ As part of that rule filing 
(Amendment No. 3 to SR-NASD-2002-63), NASD committed to review and 
reassess the proposed TRACE fees as soon as practicable and within six 
months after the effective date of TRACE, based on such factors as 
actual volume, usage, costs, and revenues.
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    \7\ The Commission approved Rule 7010(k) relating to TRACE fees 
on June 28, 2002 on a six-month pilot basis. See Securities Exchange 
Act Release No. 46145 (June 28, 2002), 67 FR 44911 (July 5, 2002) 
(File No. SR-NASD-2002-63).
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    Based on an initial review of the TRACE fees, and concerns raised 
by member firms, NASD is proposing to reduce the Web Browser Access Fee 
for low volume participants, and phase in the implementation of the 
Cancel or Correct Fee and the ``As of'' Trade Late Fee during the 
fourth quarter of 2002. NASD is proposing to make the proposed rule 
change effective as of October 1, 2002.
    Following the effective date of TRACE, a large number of small 
member firms have reported to NASD staff that the Web Browser Access 
Fee is too burdensome for firms that handle a small volume of corporate 
bond transactions per month. In addition, the current fees (approved by 
the SEC on a pilot basis for a six-month period) included a fee holiday 
for the first 90 days after the effective date of TRACE for Cancel or 
Correct Fees and ``As of'' Trade Late Fees to permit firms to adjust to 
the new TRACE rules.\8\ Following operation of the TRACE system, NASD 
staff reviewed the financial impact of these three fees on members. 
This review indicates that full implementation of these fees on October 
1, 2002, at the currently approved rate, will result in a significant 
increase in the fees paid by many firms.
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    \8\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (File No. SR-NASD-1999-65).
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    As a result, NASD is proposing the rule change described herein. 
NASD believes that the proposed rule change will alleviate some of the 
immediate burden on small firms resulting from TRACE reporting 
requirements and grant all firms additional time to adjust to the 
Cancel or Correct Fee and the ``As of'' Trade Late Fee. In addition, 
NASD is in the process of reassessing the entire TRACE fee structure 
and expects to submit additional proposed amendments to TRACE fees to 
the SEC prior to the expiration of the pilot program.

Proposed Amendments to Reduce Web Browser Fee for Period of October 1, 
2002 to December 31, 2002

    Many small member firms have registered to report TRACE 
transactions through the web browser to satisfy their TRACE reporting 
obligations because the alternative reporting methods available under 
the TRACE rules (through a service bureau, clearing firm or a direct 
computer-to-computer interface) are not cost-effective for them. 
Following the effective date of TRACE, small member firms have raised 
concerns regarding the burden of paying the Web Browser Access Fee. 
Small member firms have reported to NASD staff that the small number of 
TRACE transactions that they handle and, therefore, are required to 
report on a monthly basis are not in line with the $85 per month cost 
for one web browser.
    The current Web Browser Access Fee for each registered member is: 
$85 per month for the first user ID; $75 per month for the second 
through ninth user ID; and $70 per month for the second through ten or 
more user ID, if the member registers ten or more user IDs. The web 
browser permits the reporting of transactions into the TRACE system, 
and, through the use of a query feature, allows members access to TRACE 
transactions and real time TRACE market data. At this point in time, 
NASD does not have the capability to separate the real time market data 
access feature from the web browser, although NASD expects this 
capability will be available in early 2003. When such capability does 
become available, NASD expects it will adjust the Web Browser Access 
Fee to allow members to choose whether or not they would like to 
receive the real time TRACE data access through the web browser.
    After carefully reviewing the data collected from the first three 
months of operation of the TRACE system, in particular data on the 
monthly reporting volume of small firms, NASD is proposing that the Web 
Browser Access Fee be amended for the period commencing October 1, 2002 
and ending December 31, 2002 as follows: all registered members that 
report less than 25 trades per month will be charged $25 for such 
month, per user ID. All members registered to report TRACE transaction 
data through the web browser will continue to have access to the real 
time market data feature included in the web browser during this time 
period.

Proposed Amendments to Phase In Cancel, and/or Correct Fee and ``As 
of'' Late Fee for October and November 2002

    To achieve the goal of market transparency mandated by the SEC, 
members must report TRACE transaction data accurately. NASD has 
included Cancel or Correct Fees and ``As of'' Trade Late Fees in the 
overall TRACE fee structure to provide incentives to members to enter 
trade data correctly, and on time, into the TRACE system. Cancel or 
Correct, and ``As of'' transactions (collectively, referred to as 
``corrective transactions'') are used by participants to modify and 
correct original trade entries. While NASD believes that a certain 
level of corrective transactions will always be necessary, NASD 
believes it is very important that trades be entered into the system 
correctly the first time to ensure that data disseminated through the 
TRACE system is accurate and to allow investors to rely on the data 
stream they receive. In addition, a large volume of corrective 
transactions on a regular basis will increase NASD's technology costs 
over time.
    In NASD's original rule filing for TRACE fees, NASD had delayed the 
effectiveness of the Cancel or Correct Fee and the ``As of'' Late Fee 
to October 1, 2002 (effectively granting a 90-day fee holiday) to allow 
firms time to adjust to the new TRACE system. The current charge for 
the Cancel or Correct Fee and the ``As of'' Late Fee is $3.00 for each 
such reported trade. Based on NASD review of the data collected on such 
corrective transactions to date, NASD is proposing to reduce the Cancel 
or

[[Page 72011]]

Correct Fee and the ``As of'' Late Fee charge assessed to each member 
for the month of October 2002 from $3.00 per trade to $1.50 per trade 
(a 50% discount), and to reduce the Cancel or Correct Fee and the ``As 
of'' Late Fee for the month of November 2002 from $3.00 per trade to 
$2.25 per trade (a 25% discount).
    The proposed rule change is based on an analysis by NASD of the 
economic impact of the current fees versus the proposed amended fees on 
TRACE participants. NASD had initially anticipated that the number of 
corrective transactions entered into the TRACE system over time would 
decline as participants grew more familiar with the new system and 
improved their reporting accuracy. However, a review by NASD of the 
unbilled July, August and September 2002 activity in these corrective 
transactions does not evidence the anticipated decline in these 
transactions. Moreover, certain firms have experienced a 
disproportionately high volume of corrective transactions largely 
because of reporting and system coding errors by participants. As a 
result, NASD believes that phasing-in the full fee structure for 
corrective transactions will allow firms greater time to learn to 
effectively use the new TRACE system and focus on methods to reduce 
corrective transactions, while still establishing an incentive for 
firms to report TRACE transactions correctly and on time.
    NASD will continue to review and reassess the impact of the overall 
TRACE fee structure over time to ensure that the fees are reasonable 
and equitable for participants in the TRACE system.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\9\ which requires, among 
other things, that NASD's rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among members and issuers and 
other persons using any facility or system which NASD operates or 
controls. NASD proposes to reduce the Web Browser Access Fee, the 
Cancel or Correct Fee, and the ``As of'' Trade Late Fee during the 
periods described for the TRACE system to allow member firms more time 
to adjust to the new reporting system and focus on methods to decrease 
the likelihood of incurring such charges over time. NASD believes that 
such proposed rule change will more equitably allocate fees to NASD 
members during the early stages of implementing TRACE.
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    \9\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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, as amended.

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

    Written comments were neither solicited nor received.

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

    The proposed rule change is effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \10\ and Rule 19b-4(f)(2) thereunder,\11\ 
because the proposal is ``establishing or changing a due, fee, or other 
charge.'' The rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(2) thereunder, and is 
operational as of October 1, 2002.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal 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 number SR-NASD-2002-167 and should be 
submitted by December 24, 2002. 
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\12\

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30532 Filed 12-2-02; 8:45 am]
BILLING CODE 8010-01-P