[Federal Register Volume 68, Number 213 (Tuesday, November 4, 2003)]
[Notices]
[Pages 62483-62490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27661]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48714; File No. SR-NASD-2003-157]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the National Association of Securities 
Dealers, Inc. Relating to Permanent Fee Structure for the Trade 
Reporting and Compliance Engine (TRACE)

October 29, 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 October 14, 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. On 
October 22, 2003, NASD filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, 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 Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katharine A. England, Assistant Director, Division of 
Market Regulation, SEC, dated October 22, 2003 (``Amendment No. 
1''). Amendment No. 1 makes certain technical corrections and 
deletes the phrase ``(including in some cases members)'' in 
describing the proposed rule text providing that certain summary 
market information of Delayed-Time TRACE transaction data may be 
published or distributed by newspapers, press associations, 
newsletters, or similar media sources without charge.
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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) relating to fees for 
the Trade Reporting and Compliance Engine (``TRACE'') prior to the 
expiration of the pilot program for fees on January 31, 2004 and 
seeking permanent approval of the fee structure. Below is the text of 
the proposed rule change. Proposed new language is in italics; proposed 
deletions are in brackets.
* * * * *

[[Page 62484]]

7010. System Services
    (a) through (j) No Change.
(k) Trade Reporting and Compliance Engine (TRACE)
    [(Rule 7010(k) shall expire on January 31, 2004, 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''):

----------------------------------------------------------------------------------------------------------------
             System fees                   Transaction reporting fees                 Market data fees
----------------------------------------------------------------------------------------------------------------
[From 07/01/02 to 12/31/02: Web       [From 07/01/02 to 12/31/02: Trades    BTDS Professional Real-Time Data.
 Browser Access: $85/month for 1       up to and including $200,000 par      Display--$60/month per terminal,
 user ID; $75/month for 2-9 user       value--$0.50/trade; Trades between    except
 IDs; $70/month for 2-10+ user IDs,    $201,000 and $999,999 par value--    [For a period of one calendar month
 except]                               $0.0025 times the number of bonds     to be announced: Waiver of fee
[If less than 25 trades per month,     traded/trade; Trades of $1,000,000    ($0)]
 in October, November, or December     par value or more--$2.50/trade]
 2002--$25/month per user ID]         [From 01/01/03 to 01/31/04:] Trades
[From 01/01/03 to 01/31/04: Level I    up to and including $200,000 par
 Trade Report Only Web Browser         value--$0.475/trade; Trades between
 Access--$25/month per user ID]        $201,000 and $999,999 par value--
[Level II Full Service Web Browser     $0.002375 times the number of bonds
 Access--$85/month per user ID,        traded/trade; Trades of $1,000,000
 except]                               par value or more--$2.375/trade
Level I Trade Report Only Web
 Browser Access--$20/month per user
 ID Level II Full Service Web
 Browser Access--$80/month per user
 ID
[For a period of one calendar month
 to be announced: Level II Full
 Service Web Browser Access--will be
 $25/month per user ID]
CTCI/Third Party--$25/month/per firm  [From 07/01/02 to 12/31/02: Cancel/   BTDS Professional Delayed-Time Data
                                       Correct--$3/trade, except For         Display--$15/month per terminal
                                       October 2002--$1.50/trade, For
                                       November 2002--$2.25/trade]
                                      [From 01/01/03 to 01/31/04:] Cancel/
                                       Correct--$1.50/trade
[Third Party--$25/month]              [From 07/01/02 to 12/31/02: ``As      BTDS Internal Usage Authorization--
                                       of'' Trade Late--$3/trade, except     $500/month per application/service
                                       For October 2002--$1.50/trade, For    for Real-Time and Delayed-Time Data
                                       November 2002--$2.25/trade]
                                      [From 01/01/03 to 01/31/04:] ``As
                                       of'' Trade Late--$3/trade
                                      [Browse & Query--$0.05 after first    BTDS External Usage Authorization--
                                       page]                                 $1,000/month per application/
                                                                             service for Real-Time and Delayed-
                                                                             Time Data
                                      ....................................  BTDS Non-Professional Real-Time Data
                                                                             Display--$1/month per terminal
----------------------------------------------------------------------------------------------------------------

    (1) System Related Fees. There are three methods by which a member 
may report corporate bond transactions that are reportable to NASD 
pursuant to the Rule 6200 Series. A member may choose among the 
following methods to report data to NASD: (a) a TRACE web browser; (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
    [ (i) For the period commencing July 1, 2002 and ending December 
31, 2002, the charge to be paid by a member that elects to report TRACE 
data to NASD 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.]
    [ (ii) For the period commencing January 1, 2003 and ending January 
31, 2004, the charge to be paid by a member that elects to report TRACE 
data to NASD via a TRACE web browser shall be as follows: $25 per 
month, per user ID for Level I Web Trade Report Only Browser Access and 
$85 per month, per user ID for Level II Full Service Web Browser 
Access.] The charge to be paid by a member that elects to report TRACE 
data to NASD via a TRACE web browser shall be as follows: $20 per 
month, per user ID for Level I Web Trade Report Only Browser Access and 
$80 per month, per user ID for Level II Full Service Web Browser 
Access. [Notwithstanding the above sentence, following the effective 
date of increased bond data dissemination as approved by the SEC on 
January 31, 2003, NASD shall announce a period of one calendar month 
during which the charge for Level II Full Service Web Browser Access 
shall be $25 per month, per user ID.]
(B) Computer-to-Computer Interface Access
    The charge to be paid by a member that elects to report TRACE data 
to NASD via a CTCI line shall be $25 per month, per firm[line], 
regardless of whether the line is or is not dedicated exclusively for 
TRACE.[\6\] \1\
(C) Third Party Access--Indirect Reporting
    A member may elect to report TRACE data indirectly to NASD via 
third-party reporting intermediaries, such as vendors, service bureaus, 
or the National Securities Clearing Corporation (``NSCC''). The charge 
to be paid by a

[[Page 62485]]

member shall be $25 per month, per firm. Nothing in this Rule shall 
prevent such third-party intermediaries from charging additional fees 
for their services.
    (2) Transaction Reporting Fees. For each transaction in corporate 
bonds that is reportable to NASD pursuant to the Rule 6200 Series, the 
following charges shall be assessed against the member responsible for 
reporting the transaction:
(A) Trade Reporting Fee
    [(i) For the period commencing July 1, 2002 and ending December 31, 
2002, a member shall be charged a Trade Reporting Fee based upon a 
sliding scale ranging from $0.50 to $2.50 per transaction based on the 
size of the reported transaction. Trades up to and including $200,000 
par value will be charged a $0.50 fee per trade; trades between 
$201,000 par value and $999,999 par value will be charged a fee of 
$0.0025 multiplied by the number of bonds traded per trade; and trades 
of $1,000,000 par value or more will be charged a fee of $2.50 per 
trade.]
    [(ii) For the period commencing January 1, 2003 and ending January 
31, 2004, a]A member shall be charged a Trade Reporting Fee based upon 
a sliding scale ranging from $0.475 to $2.375 per transaction based on 
the size of the reported transaction. Trades up to and including 
$200,000 par value will be charged a $0.475 fee per trade; trades 
between $201,000 par value and $999,999 par value will be charged a fee 
of $0.002375 multiplied by the number of bonds traded per trade; and 
trades of $1,000,000 par value or more will be charged a fee of $2.375 
per trade.
(B) Cancel or Correct Trade Fee
    [For the period commencing July 1, 2002 and ending December 31, 
2002, 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. For the 
period commencing January 1, 2003 and ending January 31, 2004, a]A 
member shall be charged a Cancel or Correct Trade Fee of $1.50 per 
canceled or corrected transaction.
(C) ``As of'' Trade Late Fee
    [For the period commencing July 1, 2002 and ending December 31, 
2002, a]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. For the period commencing January 1, 2003 and ending 
January 31, 2004, a member shall be charged an ``As of'' Trade Late Fee 
of $3.00 per canceled or corrected transaction.]
[(D) Browse and Query Fee
    Members may review their own previously reported transaction data 
through a Browse and Query function. A member shall be charged $0.05 
for each returned page of the query beyond the first page.]
(3) Market Data Fees
    Professionals and non-professionals may subscribe to receive 
R[r]eal-T[t]ime and Delayed-Time TRACE data disseminated by NASD in one 
or more of the following ways for the charges specified. Members, 
vendors and other redistributors shall be required to execute 
appropriate agreements with NASD.
    (A) Professional Fees. Professionals may subscribe for the 
following:
    (i) Bond Trade Dissemination Service (``BTDS'') Professional Real-
Time Data Display Fee of $60 per month, per terminal charge for each 
interrogation or display device receiving R[r]eal-T[t]ime TRACE 
transaction data. [Notwithstanding the above sentence, following the 
effective date of increased bond data dissemination as approved by the 
SEC on January 31, 2003[\7\], NASD shall announce a period of one 
calendar month during which NASD shall waive the $60 per terminal, per 
month charge.]
    (ii) BTDS Professional Delayed-Time Data Display Fee of $15 per 
month, per terminal charge for each interrogation or display device 
receiving Delayed-Time TRACE transaction data; provided, that 
subscribers to the BTDS Professional Real-Time Data Display Fee 
described above shall not be charged this additional fee. Subject to 
the execution of appropriate agreements with NASD, certain summary 
market information of Delayed-Time TRACE transaction data may be 
published or distributed by newspapers, press associations, 
newsletters, or similar media sources without charge.
    (iii) BTDS Internal Usage Authorization Fee of $500 per month, per 
application/service [charge] for internal dissemination of R[r]eal-
T[t]ime and/or Delayed-Time TRACE transaction data used in one or more 
of the following ways in a single application/service: internal 
operational and processing systems, internal monitoring and 
surveillance systems, internal price validation, internal portfolio 
valuation services, internal analytical programs leading to purchase/
sale or other trading decisions, and other related activities.[\8\],\2\
    (iv) BTDS External Usage Authorization Fee of $1,000 per month, per 
application/service [charge] for dissemination of R[r]eal-T[t]ime and/
or Delayed-Time TRACE transaction data used in one or more of the 
following ways in a single application/service: repackaging of market 
data for delivery and dissemination outside the organization, such as 
indices or other derivative products.[\9\],\3\
(B) Non-Professional Fees
    The charge to be paid by a non-professional for each terminal 
receiving all or any portion of R[r]eal-T[t]ime TRACE transaction data 
disseminated through TRACE shall be $1.00 per month, per terminal.
    (C) Definitions
    (i) ``Delayed-Time'' as used in Rule 7010(k)(3) shall mean that 
period of time starting four hours after the time of dissemination by 
NASD of transaction data on a TRACE-eligible security, and ending at 
11:59:59 p.m. Eastern Time that calendar day.
    (ii) ``Non-Professional''--A non-professional subscriber must 
provide certain information to NASD and shall receive TRACE market data 
primarily for his or her personal, non-commercial use. As used in Rule 
7010(k)(3) [A],\a\ ``non-professional'' is a natural person who is 
neither:
    (a) registered nor qualified in any capacity with the Commission, 
the Commodity Futures Trading Commission, any state securities agency, 
any securities exchange or association, or any commodities or futures 
contract market or association, or an employee of the above who uses 
such information primarily for business-related activities; [or]
    (b) engaged as an ``investment adviser'' as that term is defined in 
section 202(a)(11) of the Investment Advisers Act of 1940 (whether or 
not registered or qualified under that Act),

[[Page 62486]]

or an employee of the above who uses such information primarily for 
business-related activities;
    (c) employed by a bank, insurance company or other organization 
exempt from registration under federal or state securities laws to 
perform functions that would require registration or qualification if 
such functions were performed for an organization not so exempt; or
    (d) engaged in, or has the intention to engage in, any 
redistribution of all or any portion of the information disseminated 
through TRACE.
    (iii) ``Real-Time'' as used in Rule 7010(k)(3) shall mean that 
period of time starting from the time of dissemination by NASD of 
transaction data on a TRACE-eligible security, and ending no more than 
four hours thereafter.

(D) Other Requests for Data

    NASD may impose and collect charges for data NASD supplied upon 
request, where there is no provision elsewhere in this Rule 7010(k) for 
charges for such service or sale.
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    [\6\]\1\ The charges that may be imposed by third parties, such 
as CTCI line providers, are not included in these fees.
    [\7\] [On January 31, 2003, the SEC approved amendments to NASD 
Rule 6250 of the TRACE rules that will allow NASD to begin 
disseminating transaction information on more than 4,000 qualifying 
Investment Grade corporate debt securities. See Securities Exchange 
Act Release No. 47302 (January 31, 2003), 68 FR 6233 (February 6, 
2003) (File No. SR-NASD-2002-174).]
    [\8\]\2\ Under this service, R[r]eal-T[t]ime and/or Delayed-Time 
TRACE transaction data may not be used in any interrogation display 
devices, any systems that permit end users to determine individual 
transaction pricing[ in real-time], or disseminated to any external 
source.
    [\9\]\3\ Under this service, R[r]eal-T[t]ime and/or Delayed-Time 
TRACE transaction data may not be used in any interrogation display 
devices or any systems that permit end users to determine individual 
transaction pricing[ in real-time].
* * * * *

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 is proposing the rule change to establish a permanent fee 
structure for the TRACE system. TRACE became effective on July 1, 2002. 
At such time, the Commission approved the original fee structure for 
TRACE on a pilot basis. Since then, NASD staff has been committed to 
reassessing the TRACE fee structure based on actual information 
collected such as the number of participants, debt securities 
transaction volume, and subscribers for transaction data. During the 
last fourteen months, in response to industry concerns and emerging 
trends, NASD staff has revised the TRACE fee structure five times. 
Following more than a year of reassessment of the originally approved 
TRACE fees, NASD believes the fees are reasonable and necessary to 
ensure recovery of developmental costs of the TRACE system, fund 
ongoing operational costs, and fund the regulatory activities necessary 
for surveillance of the market. NASD believes the proposed rule change 
will equitably distribute the costs to participants of the TRACE 
system. While NASD is seeking permanent approval of the TRACE fees, 
NASD remains committed to periodically reassessing the appropriateness 
of TRACE fees.

Background

    In 1998, former SEC Chairman Arthur Levitt requested NASD to 
provide increased transparency in, and better surveillance of, the 
corporate debt market by (i) requiring that NASD members report 
corporate bond transactions to NASD; (ii) developing a system or 
systems to surveill the corporate debt market, including an audit trail 
of reported transactions; and (iii) delivering price and other 
information to large and small investors and other debt market 
participants. At that time, NASD began to develop TRACE and make it 
operational.
    On June 28, 2002, the SEC 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.\4\ 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.
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    \4\ 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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    On November 15, 2002 NASD filed, for immediate effectiveness, a 
rule filing to reduce certain TRACE fees for the 4th quarter of 
2002.\5\ On December 16, 2002, NASD filed for immediate effectiveness, 
a rule filing to extend the pilot program for TRACE fees to February 
28, 2003 and modify certain fees effective January 1, 2003.\6\ On 
February 27, 2003, NASD filed, for immediate effectiveness, a rule 
filing to extend the pilot program for TRACE fees to June 30, 2003.\7\ 
On June 17, 2003 NASD filed, for immediate effectiveness, a rule filing 
to extend the pilot for TRACE fees to January 31, 2004.\8\
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    \5\ See Securities Exchange Act Release No. 46893 (November 22, 
2002), 67 FR 72008 (December 3, 2002) (File No. SR-NASD-2002-167).
    \6\ See Securities Exchange Act Release No. 47056 (December 19, 
2002), 67 FR 79205 (December 27, 2002) (File No. SR-NASD-2002-176).
    \7\ See Securities Exchange Act Release No. 47444 (March 4, 
2003), 68 FR 11602 (March 11, 2003) (File No. SR-NASD-2003-25).
    \8\ See Securities Exchange Act Release No. 48110 (July 7, 
2003), 68 FR 40315 (June 30, 2003) (File No. SR-NASD-2003-97).
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Operational Information

    Since TRACE reporting began on July 1, 2002, approximately 1,800 
NASD member firms have registered for TRACE reporting. Currently, 
approximately 28,000 corporate debt issues are subject to TRACE 
reporting requirements. Dissemination, however, currently occurs for 
approximately 4,700 of these corporate debt issues as TRACE transaction 
data is being disseminated in phases.\9\ In January 2001, the 
Commission initially approved ``Phase I'' dissemination of TRACE 
transaction data.\10\ On the first day of ``Phase I'' dissemination 
(July 1, 2002), approximately 550 corporate bonds became subject to 
dissemination.\11\ In January 2003, the

[[Page 62487]]

Commission approved ``Phase II'' dissemination of TRACE transaction 
data.\12\ On the first day of ``Phase II'' dissemination (March 3, 
2003), an additional approximately 3,800 corporate bonds became subject 
to dissemination, and on April 14, 2003, an additional approximately 
120 triple-B-rated corporate bonds were also disseminated as part of 
``Phase II.''\13\ In addition, in June 2003, reporting time for 
transactions in TRACE-eligible securities was reduced from 75 minutes 
to 45 minutes effective as of October 1, 2003.\14\ In July 2003, the 
disseminated list of high-yield bonds referred to as the ``TRACE 50'' 
was updated.\15\
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    \9\ NASD continues to review proposals to increase the number of 
TRACE-eligible securities that will be subject to dissemination.
    \10\ Specifically, under Rule 6250, transactions in two types of 
securities were subject to the TRACE dissemination requirements that 
took effect on July 1, 2002: (1) Those transactions in 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 as set forth in Rule 6250(a)(1); and (2) those 
transactions in 50 TRACE-eligible debt securities that are actively 
traded, rated Non-Investment Grade, and meet other criteria set 
forth in Rule 6250(a)(2). See Securities Exchange Act Release No. 
46144 (June 28, 2002), 67 FR 44907 (July 5, 2002) (File No. SR-NASD-
2002-46).
    \11\ This group of bonds includes what was previously referred 
to as the FIPs 50 and which are now referred to as the TRACE 50. The 
list of 50 bonds is updated periodically based on criteria 
identified in Rule 6250(a)(2).
    \12\ In ``Phase II'' NASD began to disseminate transaction 
information on two additional categories of securities. On March 3, 
2002, NASD began to disseminate transaction information on any 
TRACE-eligible security that is Investment Grade; is rated by 
Moody's Investors Service, Inc. as ``A3'' or higher, and by Standard 
& Poor's, a division of McGraw Hill Co., Inc., as ``A-'' or higher; 
5 and has an original issue size of $100 million or greater. In 
addition, a security that is required to be disseminated under the 
criteria above, on or after the effective date of this provision, 
will continue to be subject to dissemination unless the security is 
downgraded below ``Baa3/BBB. A specified group of TRACE-eligible 
securities rated Baa/BBB, at the time of designation, were also 
approved for dissemination by the SEC. Originally, 90 securities 
were designated. See Securities Exchange Act Release No. 47302 
(January 31, 2003), 68 FR 6233 (February 6, 2003) (File No. SR-NASD-
2002-174). However, in March 2003, NASD proposed to increase the 
number of ``triple-B-rated'' securities to approximately 120. See 
Securities Exchange Act Release No. 47566 (March 25, 2003), 68 FR 
15490 (March 31, 2003) (File No. SR-NASD-2003-41). The 120 ``triple-
B-rated'' securities were designated after the SEC approved SR-NASD-
2003-41, and transaction information on the designated securities 
began to be disseminated on April 14, 2003.
    \13\ See Securities Exchange Act Release No. 47566 (March 25, 
2003), 68 FR 15490 (March 31, 2003) (File No. SR-NASD-2003-41).
    \14\ See Securities Exchange Act Release No. 48056 (June 18, 
2003), 68 FR 37886 (June 25, 2003) (File No. SR-NASD-2003-78).
    \15\ The list of TRACE 50 bonds is updated periodically based on 
criteria identified in Rule 6250(a)(2).
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    Since the launch of TRACE, NASD has enhanced the system with two 
major and five minor software releases in response to user needs, 
conducted routine monitoring of daily reported transaction data for 
accuracy, and undertaken regulatory activities to surveill the 
corporate debt market. TRACE incurs ongoing operating costs associated 
with shared NASD infrastructure and resources as well as direct charges 
from outsourcing TRACE system support and development. Additionally, 
TRACE is supported by a dedicated team of NASD staff. For the first 
twelve months of operation (period ending June 30, 2003), these 
expenses have totaled approximately $12.4 million including partial 
recovery of the original investment made in the development of 
TRACE.\16\
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    \16\ Under this approach the original investment costs are 
recovered over a 48-month period.
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    As detailed in this filing, revenues are derived from a combination 
of System Fees to access TRACE, Transaction Reporting Fees for trade 
reporting, and Market Data Fees for access and display of aggregated 
TRACE data. For the first twelve months of operation (period ending 
June 30, 2003), TRACE generated revenues of approximately $12.4 million 
reflecting approximately $2.0 million, $8.9 million, and $1.5 million 
for System Fees, Transaction Reporting Fees, and Market Data Fees, 
respectively.
    The proposed fees are also divided into the same three general 
categories: (1) System fees paid by member firms based on the 
technology method chosen by the member to report corporate bond 
transactions; (2) transaction reporting fees paid by members to file 
trade reports and cancel or correct trade reports; and (3) market data 
fees paid by members and non-members that use or distribute the data 
collected through the TRACE system and disseminated by NASD. NASD is 
hereby seeking permanent approval of the fees relating to the TRACE 
system. However, NASD remains committed to reviewing and reassessing 
TRACE fees over time.

System Fees

    A member may report TRACE transaction data to NASD by one of three 
approved methods: (1) Web browser access; (2) direct computer-to-
computer interface (``CTCI''); or (3) indirectly through third-parties, 
such as vendors, service bureaus, clearing firms, or the National 
Securities Clearing Corporation. The member determines the reporting 
method they would like to use based on such factors as volume, size, 
and cost.

Web Browser Access Fees

    In response to requests from the industry, in January 2003, NASD 
introduced a modified web browser and adjusted the fees 
accordingly.\17\ The modified web browser separated reporting 
capabilities from query features that allow access to TRACE transaction 
data. NASD began offering two web browser service levels on January 1, 
2003: (1) Level I Trade Report Only Web Browser access permits a member 
to report TRACE transaction data to NASD over the internet, but does 
not allow access to real-time TRACE data, and (2) Level II Full Service 
Web Browser access permits reporting of TRACE transaction data to NASD 
over the internet and allows access to real-time transaction data 
through a query function. The original charge for Level I service is 
$25 per month, per user ID, and the charge for Level II service is $85 
per month, per user ID.
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    \17\ See Securities Exchange Act Release No. 47056 (December 19, 
2002), 67 FR 79205 (December 27, 2002) (File No. SR-NASD-2002-176).
---------------------------------------------------------------------------

    NASD is proposing to reduce the Level I charge from $25 per month, 
per user ID, to $20 per month, per user ID, and to reduce the Level II 
charge from $85 per month, per user ID, to $80 per month, per user ID. 
The modified web browser allows participants to satisfy their reporting 
obligations to NASD at a base level cost of $20 per month, per user ID. 
Participants that wish to have access to additional services such as 
real-time data query, pay $80 per month, per user ID. In this way, NASD 
believes that cost of delivering this service will be more equitably 
distributed to members that directly use this additional technology for 
their business.
    In March 2003, NASD submitted a rule filing to the Commission 
proposing to (1) temporarily reduce the Level I Full Service Web 
Browser Access Fee, and (2) temporarily waive the BTDS Professional 
Real-Time Data Display Fee for a one-month period to be announced by 
NASD. NASD originally sought these temporary reductions to provide 
subscribers a ``trial month'' to explore the services. However, third-
party vendors have raised concerns with NASD staff that the imposition 
of one ``trial month'' will be difficult for them to administer and may 
not have the desired effect of bringing on new TRACE data subscribers. 
Therefore, NASD is proposing to eliminate these temporary reductions.

CTCI Fees and Third-Party Vendor Fees

    The charge for CTCI service and for reporting data through third-
party vendors will remain the same--$25 per month. NASD had originally 
provided participants the option of reporting TRACE data to NASD 
through a secure, private data network. However, no subscribers 
registered for this service and in a rule filing submitted to the SEC 
on December 16, 2002, NASD proposed to eliminate this service and the 
corresponding fee as of January 1, 2003. NASD proposes to make this 
change permanent.
    NASD believes that the TRACE system fees are reasonable and non-
discriminatory because members may select the technology link that best 
suits their particular needs. The Web Browser Access Fees have been 
significantly

[[Page 62488]]

modified from the original level established in July 2002.\18\ Firms 
that have a smaller volume of TRACE transactions now have a cost-
effective reporting option (e.g., Level I Trade Report Web Browser). 
Larger volume firms have generally been reporting TRACE transaction 
data either through a CTCI line at a charge of $25 per month, or 
through third-parties at a charge of $25 per month.
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    \18\ In the original fee approval order, the Web Browser Access 
Fee for each registered participant was: $85 per month, per user ID, 
for the first user ID; $75 per month for the second through ninth 
user ID; and $70 per month for the second through tenth or more user 
ID, if the participant registers ten or more user IDs. For the 
fourth quarter of 2002, the Web Browser Access Fee was reduced to 
$25 per month, per user ID for participants that reported less than 
25 transactions during the months of October, November, and December 
2002.
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Transaction Reporting Fees

Trade Reporting Fees

    Following the start of operations of TRACE, NASD staff has been 
collecting data on trade reporting fees incurred by participants. The 
revenues generated by this fee were higher than originally forecasted. 
As a result, as of January 1, 2003, NASD reduced trade reporting fees 
by 5% from the original fee levels.\19\ NASD seeks permanent approval 
of the reduced trade reporting fees. Trade Reporting Fees will continue 
to be on a sliding scale, based upon the size of the transaction 
reported, in an effort to distribute the fees more equitably between 
retail oriented firms and institutionally oriented firms.\20\ The range 
for trade reporting fees will be from $0.475 to $2.375 per transaction 
based on the size of the reported transaction. Trades up to and 
including $200,000 par value will be charged a $0.475 fee per trade; 
trades between $201,000 par value and $999,999 par value will be 
charged a fee of $0.002375 multiplied by the number of bonds traded, 
and trades of $1,000,000 par value or more will be charged a fee of 
$2.375 per trade.
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    \19\ The original Trade Reporting Fees were also based on a 
sliding scale that ranges from $0.50 to $2.50 per transaction based 
on the size of the reported transaction. Trades up to and including 
$200,000 par value are charged a $0.50 fee per trade; trades between 
$201,000 par value and $999,999 par value are charged a fee of 
$0.0025 multiplied by the number of bonds traded; and trades of 
$1,000,000 par value or more are charged a fee of $2.50 per trade.
    \20\ In approving the original TRACE fees on a pilot basis, the 
Commission stated that ``[t]he Commission believes that this sliding 
scale structure promotes an equitable distribution of the relevant 
fees while reducing the possibility of unfair discrimination between 
customers, issuers, brokers, or dealers.'' See SEC Approval Order 
File No. SR-NASD-2002-63, Securities Exchange Act Release No. 46145 
(June 28, 2002).
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Corrective Transaction Fees

    NASD proposes to set the permanent Cancel or Correct Fee at $1.50 
per corrected trade and the ``As of'' Trade Late reporting fee at $3.00 
per late trade. Cancel, correct, and ``As of'' transactions are used by 
participants to modify original trade entries. While a certain level of 
corrective transactions will always be necessary, NASD staff 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. Further, continued high levels of corrective transactions 
will increase NASD's technology costs.
    The original charge for the Cancel or Correct Fee and the ``As of'' 
Late Fee was $3.00 for each such reported transaction. However, in the 
original fee proposal, NASD delayed the effectiveness of the Cancel or 
Correct Fee and the ``As of'' Late Fee to October 1, 2002. Based on 
NASD staff review of the data collected on such fees after the first 
three months of TRACE operation, on November 15, 2002, NASD submitted a 
proposed rule change to the SEC to phase in the implementation of the 
two fees during the last quarter of 2002 to allow participants greater 
time to adjust to the new system and focus on methods to reduce the 
likelihood of incurring such fees.\21\ For the month of October 2002, 
the Cancel or Correct Fee and the ``As of'' Late Fee charge assessed to 
each participant were reduced from $3.00 per trade to $1.50 per trade 
(a 50% discount), and for the month of November 2002, the Cancel or 
Correct Fee and the ``As of'' Late Fee were reduced from $3.00 per 
trade to $2.25 per trade (a 25% discount). On December 16, 2002, NASD 
submitted a rule filing to reduce the Cancel or Correct Fee from $3.00 
to $1.50 effective January 1, 2003.
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    \21\ See SR-NASD-2002-167 (November 15, 2002).
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    NASD staff has been working with the industry to determine the 
causes of erroneous transactions as part of a goal of reducing the 
number of corrective transactions reported to TRACE. NASD staff 
believes that over time the number of corrective transactions submitted 
to the system will decline. However, NASD believes that fees for 
corrective transactions are necessary to discourage erroneous reporting 
and to improve the integrity of disseminated data. Therefore, NASD is 
proposing that the SEC permanently approve the current corrective 
transaction fees.

Browse and Query Fees

    NASD is proposing to eliminate the Browse and Query Fee of $0.05 
per page after the first page. This feature allows firms to review 
previously reported transaction data. Firms will continue to have 
access to this service, however, there will no longer be a fee 
associated with such service.

Market Data Fees

    The current market data fees are as follows: (1) BTDS Professional 
Real-Time Data Display Fee--$60 per month, per terminal; (2) BTDS 
Internal Usage Authorization Fee--$500 per month, per application/
service; (3) BTDS External Usage Authorization Fee--$1,000 per month, 
per application/service; and (4) BTDS Non-Professional Real-Time Fee--
$1 per month, per terminal.
    NASD is proposing to define the terms ``Real-Time'' and ``Delayed-
Time'' as they relate to market data fees for TRACE transaction data. 
``Real-Time'' as used in Rule 7010(k)(3) shall mean that period of time 
starting from the time of dissemination by NASD of transaction data on 
a TRACE-eligible security, and ending four hours thereafter. ``Delayed-
Time'' as used in Rule 7010(k)(3) shall mean that period of time 
starting four hours after the time of dissemination by NASD of 
transaction data on a TRACE-eligible security, and ending at 11:59:59 
p.m. Eastern Time that calendar day.
    In addition, NASD is proposing to establish a charge to 
professionals for the use of Delayed-Time TRACE transaction data. 
Discussions with members of the bond industry indicate that there is 
increasing demand for Delayed-Time TRACE transaction data by 
professionals. Market professionals have indicated to NASD staff that, 
as a result of relatively low individual bond trading activity levels 
on any given day, Delayed-Time transaction data is useful to see 
overall patterns and trends, especially in pricing. Because of the time 
lag between trades in less active issues often exceeds four hours, the 
value of the last sale information on a four hour Delayed-Time basis 
often equals that of the real-time information. NASD staff believes 
that professionals who use this data in the course of their business or 
commercial activities should pay for the use of the data. Consequently, 
NASD staff believes that a charge for professionals for Delayed-Time 
data is appropriate.
    The fee for the BTDS Professional Delayed-Time Data Display would 
be $15 per month, per terminal, for each device receiving Delayed-Time 
TRACE

[[Page 62489]]

transaction data.\22\ Professionals subscribing for the BTDS 
Professional Real-Time Data Display Fee of $60 per month, per terminal, 
to receive Real-Time TRACE transaction data would not pay this charge 
for Delayed-Time data in addition to the $60 fee for Real-Time data. 
Subject to the execution of appropriate agreements with NASD, certain 
summary market information of Delayed-Time TRACE transaction data may 
be published or distributed by newspapers, press associations, 
newsletters, or similar media sources without charge. NASD is also 
proposing to clarify that charges for BTDS Internal Usage and BTDS 
External Usage apply to Real-Time and/or Delayed-Time TRACE transaction 
data.
---------------------------------------------------------------------------

    \22\ Transaction data for TRACE-eligible securities disseminated 
by NASD after this time frame will be provided free of charge.
---------------------------------------------------------------------------

    In addition, NASD proposes to clarify the definition of ``non-
professional.'' Since the start of TRACE, numerous individuals have 
questioned whether they qualify as a ``non-professional.'' To clear up 
confusion, NASD is proposing to add language to the definition to state 
that a natural person can qualify as a ``non-professional'' only if 
they receive TRACE market data primarily for personal, non-commercial 
use.
    In the original fee proposal, NASD had provided for a daily list 
fax service that would provide subscribers with daily additions, 
deletions, and modifications to the list of TRACE-eligible securities. 
The charge for this service was $15 per month, per fax number/
addressee. One user subscribed for this service and it was no longer 
cost effective for NASD to continue providing the service. As a result, 
NASD proposed in a rule filing submitted to the SEC on December 16, 
2002 to eliminate this service and the corresponding fee as of January 
1, 2003.\23\ NASD proposes to make this change permanent.
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    \23\ See Securities Exchange Act Release No. 47056 (December 19, 
2002), 67 FR 79205 (December 27, 2002)(File No. SR-NASD-2002-176).
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    NASD believes the market data fees are reasonable and non-
discriminatory. The fees are charged only to market professionals that 
wish to subscribe for these optional services. NASD believes that this 
use-based approach appropriately aligns costs with member usage and is 
consistent with equitable distribution of fees.

Other Requests for Data

    From time to time, members, vendors, and other persons request 
certain ad hoc services or uses of the TRACE system and transaction 
data that are not otherwise covered by Rule 7010(k). NASD believes that 
providing such services to the industry, academia, or others is useful 
and proposes to collect charges when fulfilling these requests. Charges 
would be commensurate with the higher of (a) NASD's associated costs or 
(b) similar products or services available in the marketplace.

Permanent Approval of Fees

    NASD is seeking permanent approval of the TRACE fee structure prior 
to the expiration of the pilot program for TRACE fees that is scheduled 
to expire on January 31, 2004. NASD believes that the proposed fee 
structure for TRACE is reasonable and non-discriminatory. In its 
original approval of the TRACE fees pilot, the Commission stated that 
it believes that the fees allow users great flexibility in how they 
will interact with the system, and are scaled according to objective 
criteria applied across-the-board to all categories of users.\24\
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    \24\ See SEC Approval Order File No. SR-NASD-2002-63, Securities 
Exchange Act Release No. 46145 (June 28, 2002).
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    NASD believes the fee structure is equitable and the charges are 
based on actual usage of the system. For example, trade reporting fees 
are based on a sliding scale that varies depending on the size of the 
transaction reported, with fees ranging from $0.475 (for the smallest 
trades) to $2.375 (for the largest trades). System fees allow 
participants to select the most cost-effective reporting method and web 
browser fees are based on usage (users of the real-time transaction 
query feature pay more for the additional service). Similarly, market 
data fees are lower for users who limit their use of the TRACE 
transaction data to internal distribution, and relatively higher for 
users who use or distribute the data externally.
    For these reasons, NASD believes the fees set forth above are 
reasonably related to the costs of developing the facility and to 
meeting the estimated operating expenses of the TRACE system. The fees 
are also designed to fund the regulatory activities necessary to 
surveil the market. In addition, NASD staff believes that it has 
responded promptly to the concerns of members by reducing TRACE fees.
    As part of the initiative by the Commission to create price 
transparency in the corporate bond market, the NASD has worked 
diligently to develop the TRACE system. NASD staff continues to work 
closely with the Bond Transaction Reporting Committee, which is jointly 
staffed by members designated by NASD and The Bond Market Association. 
In addition, NASD staff has met formally and informally with members of 
the industry and listened to their questions and concerns. Overall, 
NASD believes the TRACE fee structure is reasonable and non-
discriminatory, and that the proposed fees are necessary to achieve a 
practical, market-driven system for processing and disseminating 
reliable and uniform corporate bond data. NASD is committed to taking a 
proactive role in supervising the corporate bond market and promoting 
investor confidence in the fairness of the corporate bond market 
generally.
    NASD remains committed to reviewing and reassessing the 
appropriateness of TRACE fees over time to ensure that the fees are 
reasonable and equitable for participants in the TRACE system.
    Based on the above, the NASD believes the proposed rule change is 
consistent with the provisions of section 15A(b)(5) \25\ of the Act in 
that the proposal provides for the equitable allocation of reasonable 
dues, fees, and other charges among members and other persons using any 
facility or system which the association operates or controls.
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    \25\ 15 U.S.C. 78o-3(b)(5).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act \26\, 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. In addition, NASD believes that the proposed rule 
change is consistent with section 15A(b)(5) of the Act, 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 that NASD 
operates or controls. NASD is seeking permanent approval of the TRACE 
fee structure and believes that the proposed fee structure is 
reasonable.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.

[[Page 62490]]

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 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-2003-157 and should 
be submitted by November 25, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27661 Filed 11-3-03; 8:45 am]
BILLING CODE 8010-01-P