[Federal Register Volume 68, Number 25 (Thursday, February 6, 2003)]
[Notices]
[Pages 6233-6234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2945]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47302; File No. SR-NASD-2002-174]


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

January 31, 2003.

I. Introduction

    On December 6, 2002, the National Association of Securities 
Dealers, Inc. (``NASD'') 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 NASD, which provides for the reporting and dissemination of 
transaction information in eligible corporate debt securities (``TRACE 
Rules''). The proposed rule change would 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. NASD amended the proposed rule change on 
December 18, 2002.\3\ Notice of the proposed rule change and Amendment 
No. 1 thereto was published for comment in the Federal Register on 
December 27, 2002.\4\ The Commission received two comment letters 
regarding the proposal.\5\
---------------------------------------------------------------------------

    \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.
    \4\ See Securities Exchange Act Release No. 47057 (December 19, 
2002), 67 FR 79210.
    \5\ See letter from John M. Ramsay, Vice President and Senior 
Regulatory Counsel, The Bond Market Association (``TBMA''), to 
Jonathan G. Katz, Secretary, SEC, dated January 16, 2003 (``TBMA's 
Letter'') and letter from Rene L. Robert, President and CEO, 
Advantage Data, Inc., to Secretary, SEC, dated January 10, 2003 
(``Advantage Data's Letter''). TBMA's Letter and Advantage Data's 
Letter are described in Section IV, infra.
---------------------------------------------------------------------------

    This order approves the proposed rule change as amended by 
Amendment No. 1.

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'').\6\ 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.\7\ 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.\8\ On June 28, 2002, the Commission approved a proposed rule 
change to establish fees for the use of TRACE on a pilot basis for six 
months,\9\ and also approved proposed amendments to the TRACE Rules to 
make technical changes to the TRACE Rules and clarify certain 
provisions of those Rules prior to implementation of TRACE.\10\
---------------------------------------------------------------------------

    \6\ 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.
    \7\ See Securities Exchange Act Release No. 44039 (March 5, 
2001), 66 FR 14234 (March 9, 2001) (File No. SR-NASD-2001-04).
    \8\ See Securities Exchange Act Release No. 45229 (January 3, 
2002), 67 FR 1255 (January 9, 2002) (File No. SR-NASD-2001-91).
    \9\ See Securities Exchange Act Release No. 46145 (June 28, 
2002), 67 FR 44911 (July 5, 2002) (File No. SR-NASD-2002-63).
    \10\ See Securities Exchange Act Release No. 46144 (June 28, 
2002), 67 FR 44907 (July 5, 2002) (File No. SR-NASD-2002-46).
---------------------------------------------------------------------------

    The TRACE Rules became effective on July 1, 2002. On that day, 
members began to report transactions in TRACE-eligible securities, and 
the TRACE system began the dissemination of certain reported 
information. On November 22, 2002, the Commission issued a notice 
stating that NASD was reducing certain TRACE fees for the fourth 
quarter of 2002.\11\ On December 19, 2002, the Commission issued a 
notice stating that an extension of the pilot program for TRACE fees to 
February 28, 2002 and a modification of the pilot effective January 1, 
2003 had become effective on filing.\12\
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 46893 (November 22, 
2002), 67 FR 72008 (December 3, 2002) (SR-NASD-2002-167).
    \12\ See Securities Exchange Act Release No. 47056 (December 19, 
2002), 67 FR 79205 (December 27, 2002) (File No. SR-NASD-2002-176).
---------------------------------------------------------------------------

III. Description of the Proposal

    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);\13\ 
(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.'' These amendments are discussed in greater detail in the 
Commission's notice soliciting public comment on this proposal.\14\
---------------------------------------------------------------------------

    \13\ The terms ``Investment Grade'' and ``TRACE-eligible 
security'' are defined in TRACE Rule 6210, Definitions, in 
paragraphs (h) and (a), respectively.
    \14\ See supra, note 4.
---------------------------------------------------------------------------

    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.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended by Amendment No. 1, 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).\15\ 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.\16\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ 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).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change will 
substantially increase the amount of information available to the 
public and market participants about the corporate debt markets and 
will clarify other TRACE Rule provisions. NASD stated that if the 
proposed rule change is approved, over 4,000 TRACE-eligible securities 
will be

[[Page 6234]]

subject to dissemination under NASD Rule 6250, which represents 
approximately 75% of the current average daily trading volume of 
Investment Grade TRACE-eligible securities.\17\ 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.\18\ In addition, the proposed 
amendments are crafted to disseminate transactions in a 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.
---------------------------------------------------------------------------

    \17\ Trading volume is the total par value of all Investment 
Grade TRACE-eligible securities traded (and reported) each day.
    \18\ 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, 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.
---------------------------------------------------------------------------

    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.\19\ NASD believes, 
and the Commission agrees, 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.''
---------------------------------------------------------------------------

    \19\ NASD Rule 0120(g) provides generally that the term 
``customer'' shall not include a broker or dealer.
---------------------------------------------------------------------------

    As previously noted, the Commission received two comment letters, 
from TBMA and Advantage Data, on the proposed rule change.\20\ Although 
TBMA generally supported the latest amendments, it proposed one change. 
TBMA noted that as the proposal was originally filed by NASD with the 
Commission, it provided that NASD could exempt a member from particular 
provisions of the TRACE rules for good cause shown, pursuant to NASD's 
Rule 9600 Series. NASD later amended the proposal to delete this 
provision. TBMA requested that the exemptive provision be reinstated. 
After considering TBMA's Letter, the Commission believes that the 
absence of exemptive authority with respect to TRACE reporting does not 
make these rules inconsistent with the statute.
---------------------------------------------------------------------------

    \20\ See supra, note 5.
---------------------------------------------------------------------------

    Advantage Data's Letter raised a number of specific concerns, 
including concerns about NASD's mandated use of CUSIP data in TRACE 
reporting, the ongoing review of NASD's handling of TRACE reporting, 
the implementation of a permanent fee structure for TRACE, certain 
delays in disseminating TRACE information and the ownership of derived 
data. Advantage Data states that vendors and investors should be able 
to receive TRACE information without having to receive CUSIP data 
licensed by Standard & Poor's Corporation, and that Advantage Data 
would like to be allowed to receive TRACE information without receiving 
CUSIP data via a redistribution vendor. However, the proposal does not 
appear to prohibit redistribution vendors from removing CUSIP data from 
the BTDS (TRACE) data feed and providing TRACE data to users and other 
vendors without the requirement to have a CUSIP subscription.
    Advantage Data's Letter also contends that the proposed BTDS Vendor 
Agreement currently requires a four-hour delay for disseminating 
delayed TRACE information and that the NASD claims ownership of the 
TRACE information and ``any derivation thereof'' in the proposed Vendor 
Agreement. These concerns relate to the vendor agreements rather than 
to the TRACE Rules. The TRACE vendor agreements were not included as 
part of this filing. Therefore, the Commission is not approving or 
disapproving the vendor agreements.
    The Commission does consider concerns raised in comments about the 
vendor agreements in determining whether the proposed rules will 
operate in a manner consistent with the statute. The Commission does 
not believe that the impact of the vendor agreement provisions 
challenged by Advantage Data on the operation of the rules is 
sufficient to make the proposed rules inconsistent with the statute. 
The CUSIP license requirement is a relatively narrow limitation on 
receipt of the data.\21\ The dissemination delay and ownership 
assertions are ancillary to the TRACE service proposed in the filing, 
with little collateral effect on its operation.
---------------------------------------------------------------------------

    \21\ Of course, if the vendor agreements are viewed by 
commenters as creating an unreasonable denial of access to TRACE 
services, that claim can be raised in a review process under Section 
19(d) of the Act. 15 U.S.C. 78s(d).
---------------------------------------------------------------------------

    Advantage Data's Letter further states that it does not believe 
that the TRACE fee structure should be made permanent because it 
expects that the fees collected by NASD will dramatically increase in 
the years to come. This proposal does not address the TRACE permanent 
fee structure. Finally, Advantage Data's Letter raised questions about 
NASD's ongoing handling of TRACE. The Commission expects to continue 
its review of NASD's operation of TRACE in the context of future 
proposed rule filings filed by NASD as well as the Commission's ongoing 
oversight of NASD as a self-regulatory organization.

V. 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-2002-174), as amended, be and 
hereby is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2945 Filed 2-5-03; 8:45 am]
BILLING CODE 8010-01-P