[Federal Register Volume 67, Number 249 (Friday, December 27, 2002)]
[Notices]
[Pages 79210-79213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32735]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47057; File No. SR-NASD-2002-174]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Increasing Dissemination of Debt Securities Transaction Information 
Under the TRACE Rules

December 19, 2002.
    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 December 6, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'') 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. 
NASD filed an amendment to the proposed rule change on December 18, 
2002.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons. For 
the reasons discussed below, NASD is requesting that the Commission 
grant accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katharine A. England, Assistant 
Director, Division of Market Regulation, SEC, dated December 18, 
2002, and enclosures (``Amendment No. 1''). In Amendment No. 1, NASD 
deleted proposed changes to NASD Rule 6230 and NASD Rule 9610(a) 
that would have allowed members to request exemptive relief from 
NASD Rule 6230.
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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: (1) NASD Rule 6250 to provide for the 
dissemination of transaction information on additional Investment Grade 
TRACE-eligible securities under the NASD Rule 6200 Series (also known 
as the Trade Reporting and Compliance Engine (``TRACE'') Rules) \4\ (2) 
NASD Rule 6210(e) to include the term ``customer'' in the defined term, 
``party to the transaction''; (3) NASD Rule 6260 to make minor 
clarifications; and, (4) in the provisions referenced in (1) through 
(3) above, to delete the term ``Association'' and to replace it with 
``NASD.'' Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
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    \4\ The terms ``Investment Grade'' and ``TRACE-eligible 
security'' are defined in TRACE Rule 6210, Definitions, in 
paragraphs (h) and (a), respectively.
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* * * * *

6200. Trade Reporting and Compliance Engine (TRACE)

6210. Definitions

    The terms used in this Rule 6200 Series shall have the same meaning 
as those defined in [the Association's] NASD's By-Laws and Rules unless 
otherwise specified.
    (a) through (d) No change.
    (e) The term ``party to the transaction'' [``parties to the 
transaction''] shall mean [the] an introducing broker-dealer, if any, 
[and the] an executing broker-dealer, or a customer. For the purposes 
of this Rule, customer includes a broker-dealer that is not an NASD 
member.
    (f) through (i) No change.
* * * * *

6250. Dissemination of Corporate Bond Trade Information

(a) General Dissemination Standard
    Immediately upon receipt of transaction reports received at or 
after 8 a.m. through 6:29:59 p.m. Eastern Time, [the Association] NASD 
will disseminate transaction information (except that market aggregate 
information and last sale information will not be updated after 5:15 
p.m. Eastern Time) [relating to transactions] in [:] the securities 
described below.
    (1) [a] A TRACE-eligible security [having an initial issuance size 
of $1 billion or greater] that is Investment Grade at the time of 
receipt of the transaction report and has an initial issuance size of 
$1 billion or greater. [; and]
    (2) [a] A TRACE-eligible security that is [designated for 
dissemination according to the following criteria and is] Non-
Investment Grade at the time of receipt of the transaction report and 
is designated by NASD for dissemination according to the following 
criteria.
    (A) through (B) No change.
    (3) A TRACE-eligible security that is Investment Grade, is rated by 
Moody's Investors Service, Inc. as ``A3'' \5\ or

[[Page 79211]]

higher, and by Standard & Poor's, a division of McGraw Hill Co., Inc., 
as ``A-'' \6\ or higher, and has an original issue size of $100 million 
or greater. If a security is rated under this provision to qualify for 
dissemination at any time on or after the effective date of the rule, 
dissemination of transaction information on the security will continue 
under this paragraph unless the security is downgraded below Baa3/BBB-.
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    \5\ Moody's Investors Service, Inc. (``Moody's'') is a 
nationally recognized statistical rating organization. Moody's is a 
registered trademark of Moody's Investors Service. Moody's ratings 
are proprietary to Moody's and are protected by copyright and other 
intellectual property laws. Moody's licenses ratings to NASD. 
Ratings may not be copied or otherwise reproduced, repackaged, 
further transmitted, transferred, disseminated, redistributed or 
resold, or stored for subsequent use for any purpose, in whole or in 
part, in any form or manner or by any means whatsoever, by an person 
without Moody's prior written consent.
    \6\ Standard & Poor's, a division of the McGraw-Hill Companies, 
Inc. (``S&P''), is a nationally recognized statistical rating 
organization. S&P's ratings are proprietary to S&P and are protected 
by copyright and other intellectual property laws. S&P's licenses 
ratings to NASD. Ratings may not be copied or otherwise reproduced, 
repackaged, further transmitted, transferred, disseminated, 
redistributed or resold, or stored for subsequent use for any such 
purpose, in whole or in part, in any form or manner or by any means 
whatsoever, by any persons without S&P's prior written consent.
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    (4) Ninety TRACE-eligible securities designated by NASD that are 
rated Baa/BBB at the time of designation, according to the following 
standards.
    (A) Three groups composed of 30 TRACE-eligible securities (Group 1, 
Group 2, and Group 3) shall be designated by NASD. At the time of 
designation, each TRACE-eligible security in Group 1 must be rated 
``Baa1/BBB+;'' and each TRACE-eligible security in Group 2 and Group 3, 
must be rated, respectively, ``Baa2/BBB,'' and ``Baa3/BBB-,'' provided 
that if a TRACE-eligible security is rated one of the ``Baa'' ratings 
by Moody's and one of the ``BBB'' ratings by S&P and the ratings 
indicate two different levels of credit quality, the lower of the two 
ratings will be used to determine the group to which a debt security 
will be assigned under paragraph (a)(4).
    (B) A TRACE-eligible security that has a rating from only one 
rating agency will not be designated under paragraph (a)(4).
    (C) Dissemination of transaction information on a TRACE-eligible 
security that is designated under paragraph (a)(4) will not be 
discontinued if one rating is, or both ratings are downgraded or 
upgraded.
    (b) through (d) No change.

6260. Managing Underwriter Obligation To Obtain CUSIP

    (a) No change.
    (b) For such TRACE-eligible securities, the managing underwriter 
must provide to the TRACE Operations Center: (1) The CUSIP number; (2) 
the issuer name; (3) the coupon rate; (4) the maturity; (5) whether 
Rule 144A applies; and (6) a brief description of the issue (e.g., 
senior subordinated note, senior note), or if any of items (2) through 
(6) [such information] has not been determined, such other information 
as [the] NASD deems necessary. The managing underwriter must obtain the 
CUSIP number and provide it and the information listed as (2) through 
(6) not later than 5 p.m. on the business day preceding the day that 
the registration statement becomes effective, or, if registration is 
not required, the day before the securities will be priced. If an 
issuer notifies [an] a managing underwriter, or the issuer and the 
managing underwriter determine, that the TRACE-eligible securities of 
the issuer shall be priced, offered and sold the same business day in 
an intra-day offering under Rule 415 of the Securities Act of 1933 or 
Rule 144A of the Securities Act of 1933, the [member] managing 
underwriter shall provide the information not later than 5 p.m. on the 
day that the securities are priced and offered, provided that if such 
securities are priced and offered on or after 5:00 p.m., the [member] 
managing underwriter shall provide the information not later than 5 
p.m. on the next business day. [A member] The managing underwriter must 
make a good faith determination that the security is a TRACE-eligible 
security before submitting the information to the TRACE Operations 
Center.
* * * * *

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
Increasing Transparency and Dissemination of Information
    The main purpose of the proposed rule change is to provide 
additional transparency in the corporate bond market by increasing the 
categories of TRACE-eligible securities for which transaction 
information is required to be disseminated under NASD Rule 6250.
    NASD currently requires that transaction information in two types 
of TRACE-eligible securities be disseminated upon receipt by TRACE. 
Dissemination is required for: (1) A TRACE-eligible security that is 
Investment Grade at the time of receipt of the transaction report and 
has an initial issuance size of $1 billion or greater (NASD Rule 
6250(a)(1)); and, (2) 50 Non-Investment Grade \7\ TRACE-eligible 
securities that are designated according to volume, price and other 
standards set forth in NASD Rule 6250(a)(2). Under the current 
provision, approximately 520 bonds have been subject to dissemination 
since TRACE began on July 1, 2002.\8\
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    \7\ The term, ``Non-Investment Grade'' is defined in TRACE Rule 
6210(i).
    \8\ Minor fluctuations in the number of bonds disseminated occur 
because newly issued bonds are added if they meet the dissemination 
criteria, and outstanding bonds on which information is disseminated 
may no longer be disseminated, if, at some point, they fail to meet 
the disseminated criteria, or mature or are retired.
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    Under the proposed rule change, NASD will require transaction 
information to be disseminated in two additional categories of 
Investment Grade TRACE-eligible securities. First, Investment Grade 
TRACE-eligible securities of at least $100 million par value (original 
issue size) or greater and rated by Moody's as ``A3'' or higher and S&P 
as ``A-'' or higher will be disseminated. In addition, a security in 
this group will continue to be disseminated even if the rating is 
downgraded, unless the rating decreases below Baa3/BBB-. (The lower of 
two ratings, if ``split,'' will be used to determine if dissemination 
must be discontinued.) Bonds that have a rating from only one agency 
will not be included in this group. See proposed NASD Rule 6250(a)(3).
    Second, a group of 90 Investment Grade TRACE-eligible securities 
rated Baa/BBB (or ``medium grade''), which is the lowest Investment 
Grade category, will be selected by NASD, and transaction information 
on these debt

[[Page 79212]]

securities will be disseminated. NASD will select the securities in 
consultation with independent economists who will use the data from 
these securities as the basis for a study of the effect of price 
transparency on liquidity. The securities will be selected so that each 
of the three ratings subcategories for ``triple-B'' -rated bonds (i.e., 
Baa1/BBB+, Baa2/BBB, and Baa3/BBB-) will be represented by a group of 
30 debt securities. Every such issue shall remain subject to 
dissemination even if downgraded or upgraded. When an issue is ``split-
rated'' so that one rating is one of the 3 ``Baa'' or ``BBB'' ratings 
set forth above and the second rating is a different ``Baa'' or ``BBB'' 
rating, the lower of the two ratings will be used to determine the 
category to which a debt security will be assigned under this 
provision. TRACE-eligible securities that have a rating from only one 
of the selected nationally recognized statistical rating organizations 
will not be selected for inclusion in this group. See proposed NASD 
Rule 6250(a)(4).
    NASD believes the proposed rule change will substantially increase 
the amount of information available to the public and market 
participants about the debt markets. If the proposed rule change is 
approved, over 4,000 TRACE-eligible securities will be subject to 
dissemination under NASD Rule 6250, which represents approximately 75% 
of the current average daily trading volume of Investment Grade TRACE-
eligible securities.\9\ The proposed rule change substantially exceeds 
the anticipated increase in dissemination in the second phase of TRACE, 
``Phase II,'' described in the original regulatory scheme approved by 
the SEC.\10\ In addition, the proposed amendments are crafted to 
disseminate a large, diverse test group of 90 of the lowest rated 
Investment Grade TRACE-eligible debt securities to obtain additional 
empirical data about the impact that dissemination may have on the 
liquidity of a market or a market sector. Finally, the BTRC, a 
committee comprised of industry representatives, fully concurs with the 
proposal and believes it should be adopted.
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    \9\ Trading volume is the total par value of all Investment 
Grade TRACE-eligible securities traded (and reported) each day.
    \10\ See Securities Exchange Act Release No. 43873 (January 23, 
2001); 66 FR 8131 (January 29, 2001) (``Approval Order''). In the 
Approval Order, the SEC approved NASD Rule 6250, which provided that 
initially, transaction information on publicly offered, Investment 
Grade bonds with an initial issuance size of $1 billion or greater, 
and the FIPS 50, would be distributed immediately. The SEC also 
discussed NASD's plans to phase in the dissemination of additional 
securities. Under the phase-in schedule, the Bond Transaction 
Reporting Committee (``BTRC''), an advisory committee of industry 
representatives, was to advise the NASD Board of Governors regarding 
liquidity issues. By the end of Phase I (September 30, 2002), the 
BTRC was obligated to 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.'' (66 FR 8131, 8134. Dissemination of 
these securities was to begin in Phase II. File No. SR-NASD-99-65.
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Other Minor Changes
    NASD is proposing minor changes to NASD Rule 6210(e) and NASD Rule 
6260. In addition, NASD is proposing administrative changes to various 
rules that are the subject of this filing, to reflect recent NASD 
organizational changes.
    In NASD Rule 6210(e), NASD is proposing to add the term, 
``customer,'' to the defined term, ``party to the transaction.'' Under 
the TRACE Rules, a non-NASD-member customer of a broker-dealer, when 
buying or selling a security, is considered a ``party to the 
transaction.'' In addition, for purposes of the Rule, ``customer'' 
includes a broker-dealer that is not an NASD member. NASD believes that 
NASD Rule 6210(e) would be clearer if the term ``customer'' is included 
in the definition of ``party to the transaction,'' and the Rule clearly 
states that broker-dealers that are not NASD members are included in 
the term ``customer.''
    In addition, NASD is proposing minor changes to NASD Rule 6260 to 
use the term, ``managing underwriter'' consistently when referring to a 
member that is responsible for complying with NASD Rule 6260 and to 
clarify that the CUSIP number of a TRACE-eligible security must be 
provided to NASD at all times to comply with NASD Rule 6260(b).
    Finally, in the provisions that are subject to other amendments, 
NASD is deleting the term, ``Association,'' and substituting the term, 
``NASD.'' These are administrative changes only to reflect recent NASD 
organizational changes.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\1\ which requires, among 
other things, that NASD's rules 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. NASD believes that the proposed rule change, if 
approved, will protect investors and the public interest by, among 
other things, increasing transparency in the fixed income markets and 
clarifying other TRACE Rule provisions.
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    \11\ 15 U.S.C. 78o-3(b)(6). 2 submissions should refer to file 
number SR-NASD-2002-174 and should be submitted by January 17, 2003.
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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

    NASD has requested that the Commission find good cause pursuant to 
Section 19(b)(2) for approving the proposed rule change prior to the 
30th day after publication in the Federal Register. Because NASD 
believes investors would benefit and the public interest would be 
served by providing the public access more quickly to substantially 
more real-time transaction information and by adopting clarifying 
changes to the TRACE Rules, and in light of the fact that the public 
and members previously were given the opportunity to comment and did 
provide extensive comments about the dissemination of TRACE-eligible 
securities, NASD has requested that the Commission accelerate the 
effectiveness of the proposed rule change prior to the 30th day after 
its publication in the Federal Register.
    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 (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. Solictation 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

[[Page 79213]]

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-2002-174 and should be 
submitted by January 17, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor
Assistant Secretary
[FR Doc. 02-32735 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-P