[Federal Register Volume 68, Number 149 (Monday, August 4, 2003)]
[Notices]
[Pages 45871-45875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48239; File No. SR-NASD-2003-98]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by National Association of 
Securities Dealers, Inc., Regarding Reporting of Transactions Conducted 
Through Electronic Communications Networks to the Automated 
Confirmation Transaction Service

July 28, 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 June 19, 2003, National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. The Exchange 
submitted an amendment to the proposed rule change on January 27, 
2003.\3\ The Commission is publishing

[[Page 45872]]

this notice, as amended, 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\ See Letter from John Yetter, Associate General Counsel, 
Nasdaq, to Kathy England, Assistant Director, Division of Market 
Regulation, Commission, dated July 10, 2003 (``Amendment No. 1''). 
Amendment No. 1 deletes the reference in NASD Rule 6130(c)(6) to 
subparagraph (3) because this provision would not apply to ECNs.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to clarify the reporting requirements applicable to 
transactions conducted through electronic communications networks 
(``ECNs'') and reported to the Automated Confirmation Transaction 
Service (``ACT''). ECNs would be required to file Automated 
Confirmation Transaction Service (``ACT''). ECNs would be required to 
file notice of their methods for trade reporting under the proposed 
rule change within 30 calendar days after the date of Commission 
approval.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
5400. NASDAQ STOCK MARKET AND ALTERNATIVE DISPLAY FACILITY TRADE 
REPORTING
* * * * *
5430. Transaction Reporting
    (a) No change.
    (b) Which Party Reports Transaction and to Which Facility
    (1) In transactions between two Registered Reporting Nasdaq Market 
Makers, the member representing the sell side shall report the trade 
using ACT.
    (2) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Non-Registered Reporting Member, the Registered Reporting 
Nasdaq Market Maker shall report the trade using ACT.
    (3) In transactions between two Non-Registered Reporting Members, 
the member representing the sell side shall report the trade using ACT 
or TRACS.
    (4) In transactions between a member and a customer, the member 
shall report as follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT;
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS; and
    (C) A Non-Registered Reporting Member shall report the trade using 
ACT or TRACS.
    (5) In transactions between two Registered Reporting ADF Market 
Makers, the member representing the sell side shall report the trade 
using TRACS.
    (6) In transactions between a Registered Reporting ADF Market Maker 
and a Non-Registered Reporting Member, the Registered Reporting ADF 
Market Maker shall report the trade using TRACS.
    (7) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Registered Reporting ADF Market Maker, the member 
representing the sell side shall report as follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT; and
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS.
    (8) If a member simultaneously is a Registered Reporting Nasdaq 
Market Maker and a Registered Reporting ADF Market Maker, and has the 
trade reporting obligation pursuant to paragraphs (1), (2), (4), (5), 
(6), or (7), the member can report the trade using either ACT or TRACS, 
unless the trade is executed using ACES; the Nasdaq National Market 
Execution System (``NNMS''); [the SelectNet Service; the SmallCap Small 
Order Execution System (``SOES'');] or the Primex Auction System 
(``Primex''). A trade executed using ACES must be reported using ACT, 
and trades executed using NNMS[, SelectNet, SOES,] or Primex will be 
reported to ACT automatically.
    (9) In transactions conducted through an ACT ECN (as defined in 
Rule 6110) that are reported to ACT, the ACT ECN shall ensure that 
transactions are reported in accordance with Rule 6130(c). If an ACT 
ECN is also a Registered Reporting ADF ECN (as defined in Rule 4200A), 
Rule 6130(c) shall apply only to transactions conducted through the ECN 
for which trade reports are submitted to ACT.
* * * * *
6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)
6110. Definitions
    (a)-(p) No change.
    (q) The term ``ACT ECN'' shall mean a member of the Association 
that is an electronic communications network that is a member of a 
registered clearing agency for clearing or comparison purposes or has a 
clearing arrangement with such a member, to the extent that 
transactions executed through it are reported to ACT.
* * * * *
6130. Trade Report Input
    (a)-(b) No change.
    (c) Which Party Inputs Trade Reports to ACT.
    ACT Participants shall, subject to the input requirements below, 
either input trade reports into the ACT system or utilize the Browse 
feature to accept or decline a trade within the applicable time-frames 
as specified in paragraph (b) of this Rule. Trade data input 
obligations are as follows:
    (1) in transactions between a Market Maker and an Order Entry Firm, 
the Market Maker shall be required to submit a trade report to ACT;
    (2) in transactions between two Market Makers, the member 
representing the sell side shall be required to submit a trade report 
to ACT;
    (3) in transactions between two Order Entry Firms, the member 
representing the sell side shall be required to submit a trade report 
to ACT[.];
    (4) in transactions between a member and a customer, the member 
shall be required to submit a trade report to ACT;
    (5) in transactions conducted through an ACT ECN that are reported 
to ACT, the ACT ECN shall ensure that transactions are reported in 
accordance with one of the following methods:
    (A) the ACT ECN shall submit the trade reports to ACT and identify 
itself as the reporting party;
    (B) the ACT ECN shall submit the trade reports to ACT on behalf of 
the reporting party and identify the reporting party in accordance with 
the rules for determining reporting parties reflected in paragraphs 
(1), (2), (3), and (4) above; or
    (C) the ACT ECN shall require one of the parties, determined in 
accordance with the rules for determining reporting parties reflected 
in paragraphs (1), (2), (3), and (4) above, to submit the trade reports 
to ACT.
    When an ACT ECN reports transactions in accordance with 
subparagraph (A), the ACT ECN shall be responsible for ensuring that 
the trade reports are accurate and contain all information required by 
subsection (d) of this rule for both the ACT ECN and the identified 
non-reporting party. When an ACT ECN reports transactions in accordance 
with subparagraph (B), both the ACT ECN and the party identified as the 
reporting party shall be responsible for ensuring that the trade 
reports are accurate and contain all information required by subsection 
(d) of this rule for both the ACT ECN and the identified reporting 
party. When an ACT ECN requires reporting of transactions in accordance 
with subparagraph (C), the reporting party shall be responsible for 
ensuring the accuracy and completeness of the trade report.

[[Page 45873]]

    An ACT ECN shall provide written notice to the Association of the 
method of trade reporting used by the ACT ECN for each of its 
subscribers, and may change the method of trade reporting used for a 
subscriber by providing advance written notice of the change to the 
Association;
    (6) in transactions conducted through two ACT ECNs or an ACT ECN 
and an ECN that is not an ACT ECN, an ACT ECN shall be responsible for 
complying with the requirements of paragraph (5) above for reporting a 
transaction executed through its facilities, and an ECN that routed an 
order to it for execution shall be deemed to be a Market Maker and a 
member for purposes of the rules for determining reporting parties 
reflected in paragraphs (1), (2), and (4) above; and
    (7) in transactions conducted through an ACT ECN in which neither 
of the parties is a member, the ACT ECN shall report the transaction in 
accordance with the requirements of subparagraph (5)(A) above.
    (d)-(e) No change.
* * * * *
6400. REPORTING TRANSACTIONS IN LISTED SECURITIES
* * * * *
6420. Transaction Reporting
    (a) No change.
    (b) Which Party Reports Transaction
    (1) Transactions executed on an exchange are reported by the 
exchange and shall not be reported by members.
    (2) In transactions between two Registered Reporting Members, only 
the member representing the sell side shall report.
    (3) In transactions between a Registered Reporting Member and a 
Non-Registered Reporting Member, only the Registered Reporting Member 
shall report.
    (4) In transactions between Non-Registered Reporting Members, only 
the member representing the sell side shall report.
    (5) In transactions conducted through an ACT ECN (as defined in 
Rule 6110), the ACT ECN shall ensure that the transactions are reported 
in accordance with Rule 6130(c).
    (c)-(e) No change.
IM-6420. Transactions in Eligible Securities

                           Summary of Provisions Governing Members' Requirements To Report Transactions in Eligible Securities
                                               Chart I.--General Reporting Requirements Under Rule 6420(b)
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                                                                                             Member reports when contra-party is
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             Member                          Transaction                 [Designated]        Non-[Designated]
                                                                     Registered Reporting       Registered            Exchange            Customer
                                                                            Member           Reporting  Member
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[Designated] Registered          Buys from.........................  No..................  Yes.................  No...............  Yes.
 Reporting Member.
                                 Sells to..........................  Yes.................  Yes.................  No...............  Yes.
Non-[Designated]...............  Buys from.........................  No..................  No..................  No...............  Yes.
Non-[Designated] Registered      Buys from customer and sells to...  No..................  Yes.................  No...............  Yes.
 Reporting Member.
                                 Sells to customer and buys from...  No..................  No..................  No...............  Yes.
Registered Reporting Member....  Sells to..........................  No..................  Yes.................  No...............  Yes.
ACT ECN........................  ..................................  See 6130(c).........  See 6130(c).........  No...............  See 6130(c)
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                              Chart II.--Reporting Requirements for ``Riskless'' Transactions as Defined in Rule 6420(d)(4)
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                                                                                             Member Reports When Contra-Party Is
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             Member                          Transaction                 [Designated]        Non-[Designated]
                                                                     Registered Reporting  Registered Reporting       Exchange            Customer
                                                                            Member                Member
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Designated] Registered          Buys from customer and sells to     Yes                   Yes                   No                 Yes.
 Reporting Member.
                                 Sells to customer and buys from     No                    Yes                   No                 Yes.
--------------------------------------------------------------------------------------------------------------------------------------------------------

* * * * *
6600. REPORTING TRANSACTIONS IN OVER-THE-COUNTER SECURITIES
* * * * *
6620. Transaction Reporting
    (a) No change.
    (b) Which Party Reports Transaction
    (1) In transactions between two OTC Market Makers, only the member 
representing the sell side shall report.
    (2) In transactions between an OTC Market Maker and a Non-Market 
Maker, only the OTC Market Maker shall report.
    (3) In transactions between two Non-Market Makers, only the member 
representing the sell side shall report.
    (4) In transactions between a member and a customer, the member 
shall report.
    (5) In transactions conducted through an ACT ECN (as defined in 
Rule 6110), the ACT ECN shall ensure that the transactions are reported 
in accordance with Rule 6130(c), and the term ``Market Maker'' as used 
in such rule shall be construed to include an OTC Market Maker.
    (c)-(e) No change.
* * * * *
6900. REPORTING TRANSACTIONS IN DIRECT PARTICIPATION PROGRAMS
6920. Transaction Reporting
    (a) No change.
    (b) Which Party Reports Transactions

[[Page 45874]]

    (1) In transactions between two members, only the member 
representing the sell side shall report.
    (2) In transactions between a member and a customer, the member 
shall report.
    (3) In transactions conducted through an ACT ECN (as defined in 
Rule 6110), the ACT ECN shall ensure that the transactions are reported 
in accordance with Rule 6130(c); provided that for purposes of Rule 
6130(c)(5)(B) and (C), the party with the reporting obligation shall be 
as set forth in Rule 6130(c)(3) and the term ``Order Entry Firm'' as 
used in such rule shall be construed to refer to any member.
    (c)-(e) 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, Nasdaq 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. Nasdaq 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
    Nasdaq is proposing to adopt rules to define with greater clarity 
the reporting obligations applicable to transactions executed through 
ECNs that are reported to ACT. The proposal is based on Nasdaq's 
understanding of the different methods used by ECNs today to report 
trades, and in general, the rule filing is not intended to require ECNs 
to modify their current trade reporting practices. Rather, the purpose 
of the filing is to codify these practices in the form of clear, 
enforceable rules that will provide greater guidance to market 
participants.\4\ The proposed rule change would apply to transactions 
in all securities that are executed through an ECN and reported to ACT.
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    \4\ The proposed rules are intended to provide greater certainty 
while Nasdaq remains a subsidiary of the NASD, and do not impact the 
trade reporting rules filed by Nasdaq in its application to register 
as an exchange, which are different from the current proposal.
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    Reporting of transactions executed through ECNs is complex because 
ECNs conduct transactions on an ``agency'' basis, with the ECN standing 
as a central contra party to two offsetting transactions with ECN 
subscribers. However, the substance of the transaction is the 
transference of shares from one ECN subscriber to another, and 
therefore only one transaction is reported to the tape for public 
dissemination.
    Current practices of ECN trade reporting have developed over time 
in conjunction with the growth of the number of ECNs. As each new ECN 
entered the market, it registered with Nasdaq under NASD Rule 4623 and 
informed Nasdaq and NASD of its planned method for reporting 
transactions. Although Nasdaq believes that the use of different 
reporting methodologies by different ECNs has generally allowed ECNs to 
fulfill reporting obligations while tailoring their methodology to 
their own business needs and those of their subscribers, the absence of 
clearly defined rules has, in some circumstances, created confusion as 
to the trade reporting responsibilities of ECNs and their subscribers. 
Nasdaq believes that the proposed rule change will provide members 
greater certainty concerning their trade reporting responsibilities, 
while allowing ECNs to continue using the various methods of trade 
reporting that have developed over time.
    The proposed rule change permits ECNs to use any of three methods 
for reporting transactions.\5\ Each ECN would inform NASD which method 
it would use for reporting trades to ACT for each of its subscribers, 
but it could change its method at any time by providing advance notice 
to NASD.\6\ First, an ECN may assume sole responsibility for reporting 
transactions executed through its facilities and identify itself as the 
reporting party. Second, an ECN may assume sole responsibility for 
transaction reporting, but identify a subscriber as the reporting 
party. In that case, the identified reporting party would be determined 
in accordance with the existing rules for allocating trade reporting 
responsibility. Thus, if the subscribers conducting a transaction 
through the ECN were both market makers or both order entry firms, the 
selling party would be identified as the reporting party; if the 
transaction were between a market maker and an order entry firm, the 
market maker would be identified as the reporting party; and if the 
transaction were between a member (i.e., a broker-dealer) and a non-
member (such as an institutional investor), the member would be 
identified as the reporting party.
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    \5\ As discussed earlier, the three methods are based on ECN 
trade reporting practices. Nasdaq also understands that, at any 
given time, an ECN may utilize more than one of these methods and 
the choice of the method varies depending on the needs of particular 
subscribers. For example, ECN A may use one method for subscriber B 
and another method for subscriber C. This proposal is not intended 
to limit this flexibility. Accordingly, an ECN will be permitted to 
use more than one of the methods described in Rule 6130(c), as long 
as it provides NASD written notice concerning the methods that it 
will use for each subscriber.
    \6\ Notices must be filed with Nasdaq's Market Watch Department 
and NASD's Market Regulation Department.
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    Third, the ECN may impose some or all of the responsibility for 
reporting on its subscribers. In that case, the ECN would notify the 
appropriate reporting party, determined in accordance with the existing 
rules of priority for trade reporting, that it had an obligation to 
submit a report concerning the trade.
    In each case, the party submitting a trade report is responsible 
for ensuring its accuracy and completeness.\7\ In addition, when an ECN 
submits a trade report identifying another party as the reporting 
party, both the ECN and the identified reporting party are responsible 
for ensuring the accuracy and completeness of the report.
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    \7\ Rule 6130(d) specifies the information that is required to 
be included in each ACT report.
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    The proposed rule change also addresses procedures for reporting 
transactions in several unique circumstances associated with ECNs. 
First, the rule provides that when the parties to a transaction 
executed through an ECN are both non-members, the ECN must submit all 
required trade reports and identify itself as the reporting party. This 
is the case because as non-members, the parties to the transaction 
would not be eligible to report trades through ACT. Second, in 
circumstance where one ECN routes an order to another ECN that executes 
the order, the ECN that executes the order would be responsible for 
reporting the transaction, or requiring a subscriber to report the 
transaction, in accordance with one of the three basic methods for 
trade reporting described above. For purposes of the rules for 
allocating trade reporting responsibility between ECN subscribers, the 
routing ECN would be deemed to be a market maker. Thus, if the 
executing ECN uses the second method of trade reporting, and it 
receives an order from a routing ECN that is matched against the order 
of an order entry firm or a non-member customer, the routing ECN would 
be identified as the reporting party. If the executing ECN matched the 
routed order against the order of a market maker or another ECN, 
however, the sell

[[Page 45875]]

side would be identified as the reporting party.
    Finally, it should be noted that the proposed rule change applies 
only to transactions that are reported to ACT, since Nasdaq does not 
have authority to establish rules governing the reporting of trades to 
non-Nasdaq systems. Thus, in circumstances where an ECN has the option 
to report trades to ACT or to another trade reporting system, such as 
the NASD's TRACS system, the rule does not mandate that the ECN use ACT 
for trade reporting. However, to the extent that the ECN or its 
subscribers opt to use ACT to report a particular transaction, all 
provisions of the proposed rule change would apply to that 
transaction.\8\ In addition to the above changes, Nasdaq is also 
removing references to ``Select Net Service'' and the ``SmallCap Small 
Order Execution System'' from NASD Rule 5430(b)(8) because these 
systems are no longer in place.\9\
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    \8\ The proposed rule change also corrects several typographical 
errors in IM-6420.
    \9\ Telephone call between John Polise, Senior Special Counsel, 
Sonia Trocchio, Special Counsel, and Leah Mesfin, Attorney, 
Division, Commission, and John Yetter, Assistant General Counsel, 
and Peter Geraghty, Associated Vice President and Associate General 
Counsel, Office of the General Counsel, Nasdaq on July 9, 2003.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\10\ in general, and with 
section 15A(b)(6) of the Act,\11\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and to protect investors and 
the public interest. Nasdaq purports that the proposed rule change will 
clarify the trade reporting obligations associated with transactions 
conducted through ECNs. Nasdaq believes that the adoption of clear, 
enforceable rules will provide guidance to market participants and 
thereby provide greater assurance of comprehensive reporting of ECN 
transactions.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 15 U.S.C. 78o-3(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    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 NASD 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 proposal, as 
amended, 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-2003-98, and 
should be submitted by August 25, 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-19724 Filed 8-1-03; 8:45 am]
BILLING CODE 8010-01-P