[Federal Register Volume 68, Number 97 (Tuesday, May 20, 2003)]
[Notices]
[Pages 27605-27608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47856; File No. SR-NASD-2003-78]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
Rule 6230 To Reduce TRACE Reporting Period

May 14, 2003.
    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 May 2, 2003, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change 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.
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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 Rule 6230 to reduce the period to report 
a transaction in a TRACE-eligible debt security from 75 minutes to 45 
minutes. Rule 6230 is one of the Trade Reporting and Compliance Engine 
(``TRACE'') rules. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.\3\
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    \3\ NASD corrected a typographical error in the text of the 
proposed rule change in a telephone conversation between Sharon K. 
Zakula, Assistant General Counsel, Office of General Counsel, 
Regulatory Policy and Oversight, NASD, and Mary N. Simpkins, Special 
Counsel, Division of Market Regulation, Commission, on May 13, 2003.
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* * * * *
6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)
6230. Transaction Reporting
(a) When and How Transactions Are Reported
    A member that is required to report transaction information 
pursuant to paragraph (b) below must report such transaction 
information within [one hour and fifteen]45 minutes of the time of 
execution, except as otherwise provided below, or the transaction 
report will be ``late.'' The member must

[[Page 27606]]

transmit the report to TRACE during the hours the TRACE system is open 
(``TRACE system hours''), which are 8:00 a.m. Eastern Time through 
6:29:59 p.m. Eastern Time. Specific trade reporting obligations during 
a 24-hour cycle are set forth below.
(1) Transactions Executed During TRACE System Hours
    Transactions in TRACE-eligible securities executed on a business 
day at or after 8:00 a.m. Eastern Time through 6:29:59 p.m. Eastern 
Time must be reported within 45[one hour and fifteen] minutes of the 
time of execution. If a transaction is executed on a business day less 
than 45[one hour and fifteen] minutes before 6:30 p.m. Eastern Time, a 
member may report the transaction the next business day within 45[one 
hour and fifteen] minutes after the TRACE system opens. If reporting 
the next business day, the member must indicate ``as/of'' and provide 
the actual transaction date.
(2) Transactions Executed at or After 6:30 P.M. Through 11:59:59 P.M. 
Eastern Time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 6:30 p.m. Eastern Time through 11:59:59 p.m. Eastern 
Time must be reported the next business day within 45[one hour and 
fifteen] minutes after the TRACE system opens. The member must indicate 
``as/of'' and provide the actual transaction date.
(3) Transactions Executed at or After 12:00 A.M. Through 7:59:59 A.M. 
Eastern Time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 12:00 a.m. Eastern Time through 7:59:59 a.m. Eastern 
Time must be reported the same day within 45[one hour and fifteen] 
minutes after the TRACE system opens.
(4) Transactions Executed on a Non-Business Day
    Transactions in TRACE-eligible securities executed on a Saturday, 
Sunday, or a federal or religious holiday on which the TRACE system is 
closed, at any time during that day (determined using Eastern Time), 
must be reported the next business day within 45[one hour and fifteen] 
minutes after the TRACE system opens. The transaction must be reported 
as follows: the date of execution must be the first business day (the 
same day the report must be made); the execution time must be 
``12:01:00 a.m. Eastern Time'' (stated in military time as 
``00:01:00''); and the modifier, ``special price,'' must be selected. 
In addition, the transaction must not be designated ``as/of''. When the 
reporting method chosen provides a ``special price'' memo field, the 
member must enter the actual date and time of the transaction in the 
field.
    (5) Through (6) No Change.
    (b) Through (f) 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
    NASD Rule 6230(a) currently requires a member that is a party to a 
transaction in a TRACE-eligible security to report the transaction 
information to TRACE within 75 minutes of the time of execution.\4\
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    \4\ Limited exceptions to the general requirement are stated in 
Rule 6230(a)(1) through (4), which provide for reporting a 
transaction the next business day that the TRACE system is open in 
certain circumstances. Specifically, in Rule 6230(a)(1), a member 
currently may elect to report a transaction the next business day 
that the TRACE system is open at any time within 75 minutes after 
the TRACE system opens, if the member executed the trade the prior 
business day less than 75 minutes before the TRACE system closed. 
(Currently, on a business day, the TRACE system is open from 8 a.m. 
Eastern Time to 6:30 p.m. Eastern Time to receive reports.) In Rule 
6230(a)(2) through (4), members are directed how to report trades 
that occur (1) after TRACE system hours, (2) before TRACE system 
hours, or (3) on a weekend or a holiday. In each case, the member 
must report the transaction the next business day that the TRACE 
system is open within 75 minutes of the opening.
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    NASD is proposing to reduce the period to report from 75 minutes to 
45 minutes. In Rule 6230(a), the general requirement to report 
transaction information within 75 minutes of the time of execution is 
restated as 45 minutes. In addition, NASD is proposing to amend the 
next-day reporting exceptions in Rules 6230(a)(1) through (4) to 
require that the report be filed within 45 minutes of the time the 
TRACE system opens instead of the current 75 minutes. Specifically, in 
Rule 6230(a)(1), a member could elect to report the next business day 
if a transaction occurs within 45 minutes before the TRACE system 
closing. If the member elects to report the following business day that 
the TRACE system is open, the member must report the transaction within 
45 minutes after the TRACE system opens. In addition, in Rule 
6230(a)(2) through (4), a member would be required to report 
transaction information for specified transactions the next business 
day that the TRACE system is open and would be required to do so within 
45 minutes after the system's opening.
    The proposed rule change, if approved, would result in important 
trade information reaching the market in a timelier manner, furthering 
NASD's goals with respect to improving transparency under TRACE, and 
enhancing specific TRACE reporting provisions. The goal to reduce the 
reporting period in TRACE has been understood by the industry for 
several years and has been noted as a goal in rule filings with the SEC 
since 1999, as well as in the SEC's first order approving the full set 
of the TRACE Rules.\5\
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    \5\ Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131, 8135 (January 29, 2001) (order approving SR-NASD-
99-65).
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    The SEC approved the current 75-minute period after several phases 
of discussion about the appropriate reporting period.\6\ In early TRACE 
discussions occurring in 1998 and 1999, NASD staff recommended that the 
industry prepare for a 15-minute reporting period. In response to 
industry feedback, NASD revised its proposal to include a 60-minute 
period, with the caveat that NASD intended to reduce the reporting 
period to 15-minutes after TRACE became operational and members had 
acquired experience with reporting.\7\
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    \6\ Securities Exchange Act Release No. 46144 (June 28, 2002), 
67 FR 44907 (July 5, 2002) (order approving SR-NASD-2002-46).
    \7\ Currently, NASD staff intends to recommend a further 
reduction in the TRACE reporting period to 15 minutes that would be 
effective mid-year 2004. The reduction in the TRACE reporting period 
would be consistent with the Municipal Securities Rulemaking Board's 
published plan to implement a 15-minute transaction reporting 
requirement for municipal securities that would take effect on July 
1, 2004.
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    Prior to the July 1, 2002 TRACE effective date, the SEC staff 
requested NASD to coordinate with the National Securities Clearing 
Corporation (``NSCC'') regarding the TRACE reporting initiative. 
Certain member firms utilizing NSCC for reporting municipal bond 
transactions to the Municipal Securities Rulemaking Board (``MSRB'') 
requested that NASD and

[[Page 27607]]

NSCC develop a TRACE reporting option so that members could utilize the 
same NSCC functionality for reporting transactions in TRACE-eligible 
securities. Because of NSCC operational issues, it became clear that 
firms would be precluded from reporting through NSCC unless NSCC 
improved its ``batch processing'' to allow for more submissions per 
day, and NASD adopted a slightly longer reporting period. As a result 
the SEC approved the NASD's proposal to extend the reporting period to 
75 minutes for the initial period of reporting under TRACE. The basis 
for extending the period to 75 minutes was that NASD planned to reduce 
the reporting period substantially after TRACE became operational. 
Consistent with the NASD's goal of a reduced reporting period, NSCC has 
publicly committed to support the proposed 45-minute reporting 
requirement.
    The NASD proposal to reduce the reporting period at this time to 45 
minutes is supported by statistical evidence from TRACE data. The data 
indicates that the industry generally has achieved technological 
readiness to implement the proposed rule change. For example, in the 
fourth quarter of 2002, eighty-three percent (83%) of all trades 
reported to TRACE were reported within 45 minutes of execution. NASD 
will work with firms that are currently not able to report trades 
within 45 minutes generally between the date of the SEC's approval of 
the proposed rule change, if so approved, and October 1, 2003, the 
planned date of implementation, to assist such firms to be ready and 
able to comply with a 45-minutes reporting period on October 1, 2003.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act\8\, 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 provide NASD, as the self-regulatory organization 
designated to regulate the over-the-counter markets, with heightened 
capabilities to regulate and provide surveillance of the debt 
securities markets to prevent fraudulent and manipulative acts and 
practices, and will improve transparency by reducing the period between 
the time of execution of a transaction and the dissemination of the 
transaction information, for securities subject to dissemination, for 
the protection of customers and the public interest.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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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. NASD believes that 
accelerated approval will benefit investors and member firms as 
follows. Member firms will receive prior notification, by several 
months, of a clear, fixed, certain deadline to implement a modest 
reduction in the reporting period. Firms will have sufficient notice to 
enable firms' operational staffs to make any necessary systems changes 
or enhancements to comply with the reduced reporting period on October 
1, 2003. As noted above, NASD is aware that some firms may have greater 
operational and technical difficulties in making the operational 
enhancements to support a 45-minute reporting period. NASD is 
interested in working with these firms, and believes that an 
accelerated approval and a fixed implementation date would encourage 
such firms to begin addressing 45-minute reporting concerns earlier in 
2003.
    In addition, NASD believes that approval of this provision on an 
accelerated basis to create a date certain for implementation is likely 
to improve price transparency for the benefit of investors by 
effectively reducing the reporting period prior to the time this rule 
change would take effect on October 1, 2003. Specifically, members have 
indicated that they will begin to modify operations and systems, as 
necessary, as soon as the membership is certain that the reporting 
period will be reduced, and to what extent, and is able to ascertain 
the effective date of the new reporting requirement. As firms reduce 
their reporting windows, reported prices will begin to be disseminated 
more quickly.
    Moreover, NASD believes that members have been aware that the NASD 
would reduce the TRACE reporting period because NASD, the SEC, and the 
industry have publicly discussed reduction of the reporting period for 
several years. TRACE has now been operational for almost nine months, 
and NASD's proposal to reduce the reporting period would not take 
effect until October 1, 2003, which is 15 months from the date of 
implementation of TRACE. The Commission is not, at this time, granting 
accelerated approval of the proposed rule change.
    NASD intends to respond to comments filed with the SEC regarding 
the proposed reduction.
    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. 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 NASD. 
All submissions should refer to file number SR-NASD-2003-78 and should 
be submitted by June 10, 2003.

[[Page 27608]]

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-12611 Filed 5-19-03; 8:45 am]
BILLING CODE 8010-01-P