[Federal Register Volume 69, Number 15 (Friday, January 23, 2004)]
[Notices]
[Pages 3416-3418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1468]



[[Page 3416]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49086; File No. SR-NASD-2003-157]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto, and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 2 Thereto, by 
the National Association of Securities Dealers, Inc., Relating to the 
Permanent Fee Structure for the Trade Reporting and Compliance Engine 
(TRACE)

January 15, 2004.

I. Introduction

    On October 14, 2003, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change 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. 
NASD amended the proposed rule change on October 22, 2003.\3\ Notice of 
the proposed rule change and Amendment No. 1 thereto, including a 
discussion of the proposal in greater detail, was published for comment 
in the Federal Register on November 4, 2003.\4\ The Commission received 
two comment letters regarding the proposal.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from 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.
    \4\ Securities Exchange Act Release No. 48714 (October 29, 
2003), 68 FR 62483.
    \5\ See letter from Michele C. David, Vice President and 
Assistant General Counsel, The Bond Market Association (``TBMA''), 
to Jonathan G. Katz, Secretary, SEC, dated November 25, 2003 
(``TBMA's Letter'') and letter from Rene L. Robert, President and 
CEO, Advantage Data, Inc. (``Advantage Data''), to Secretary, SEC, 
dated November 20, 2003 (``Advantage Data's Letter'').
---------------------------------------------------------------------------

    On December 30, 2003, NASD filed Amendment No. 2 to the proposed 
rule change and a response to the two comment letters.\6\ This order 
approves the proposed rule change, as amended by Amendment No. 1, 
accelerates approval of Amendment No. 2, and solicits comments from 
interested persons on Amendment No. 2.
---------------------------------------------------------------------------

    \6\ See letter from Marc Menchel, Executive Vice President, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, SEC, dated December 29, 2003 (``Amendment No. 
2''). Amendment No. 2 amends the proposed rule change to provide 
that the proposed BTDS Professional Delayed-Time Data Display Fee 
will operate as a nine-month pilot program.
---------------------------------------------------------------------------

II. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
promulgated thereunder applicable to a registered securities 
association and, in particular, with the requirements of section 
15A(b)(6) of the Act.\7\ Specifically, the Commission finds that 
approval of the proposed rule change is consistent with section 
15A(b)(6) of the Act in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and in general, to protect investors and the 
public interest.\8\ In addition, the Commission finds that approval of 
the proposed rule change is consistent with section 15A(b)(5) of the 
Act,\9\ 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.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    TRACE became effective on July 1, 2002.\10\ Fees proposed by NASD 
for participants and users of the TRACE facility were originally 
approved by the Commission on June 28, 2002 on a six-month pilot 
basis.\11\ The pilot program was modified and extended in four 
subsequent rule filings until January 31, 2004.\12\ During the pilot 
period, NASD has revisited concerns expressed at the time of the 
approval of the initial pilot regarding whether the TRACE fees satisfy 
the statutory standards regarding equitable allocation, unfair 
discrimination, and reasonableness. NASD has adjusted the TRACE fees 
based upon its experience during the pilot period in an effort to make 
the initial fee structure more fair and reasonable.\13\ The Commission 
believes that the fees allow users 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. 
Accordingly, the Commission finds that the TRACE fees satisfy the 
statutory standards regarding equitable allocation, unfair 
discrimination and reasonableness.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 46144 (June 28, 
2002), 67 FR 44907 (July 5, 2002) (File No. SR-NASD-2002-46).
    \11\ See Securities Exchange Act Release No. 46145 (June 28, 
2002), 67 FR 44911 (July 5, 2002) (File No. SR-NASD-2002-63).
    \12\ See Securities Exchange Act Release No. 46893 (November 22, 
2002), 67 FR 72008 (December 3, 2002) (File No. SR-NASD-2002-167); 
Securities Exchange Act Release No. 47056 (December 19, 2002), 67 FR 
79205 (December 27, 2002) (File No. SR-NASD-2002-176); Securities 
Exchange Act Release No. 47444 (March 4, 2003), 68 FR 11602 (March 
11, 2003) (File No. SR-NASD-2003-25); and Securities Exchange Act 
Release No. 48110 (June 30, 2003), 68 FR 40315 (July 7, 2003) (File 
No. SR-NASD-2003-97).
    \13\ Id.
---------------------------------------------------------------------------

    As previously noted, the Commission received two comment letters, 
from TBMA and Advantage Data, on the proposed rule change.\14\ TBMA's 
Comment Letter stated that NASD has failed to establish that (i) the 
developmental and operating costs for TRACE, and therefore the fee 
structure that supports those costs, are reasonable; and (ii) the fees 
equitably allocate the expenses among TRACE users.
---------------------------------------------------------------------------

    \14\ See supra, note 5.
---------------------------------------------------------------------------

    NASD represented in its response to TBMA's Letter that 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, 
and that aggregate revenue was 70 percent higher than had been 
estimated in the pre-launch 2002 forecast. NASD also represented that 
for the first twelve months of operation (period ending June 30, 2003), 
TRACE expenses were approximately $12.4 million. This was comprised of 
$9.8 million in operating expenses plus an accrual for the recovery of 
original investment of $2.6 million (based on a four-year recovery of 
the investment and an appropriate cost of capital). NASD also 
represented that there was an 11 percent or $800 thousand increase in 
the investment costs over the pre-launch 2002 forecast (from an 
estimated $7.2 million to an actual of $8.0 million), and that 
operating expenses were 60 percent higher than the pre-launch 2002 
forecast.
    NASD stated in its response that levels of trade reporting activity 
have been 82 percent higher than anticipated

[[Page 3417]]

in the pre-launch 2002 forecast prepared by NASD, with TRACE currently 
processing approximately 28,000 trades per day. In addition, NASD 
represents that approximately 1,900 NASD member firms have registered 
for TRACE reporting, over 29,000 corporate debt issues are subject to 
TRACE reporting requirements, and approximately 4,900 corporate bonds 
are eligible for dissemination. In addition, NASD stated that the 
service needs of participants and media have been significantly greater 
than NASD anticipated.
    TBMA's Letter also stated that broker-dealers have an economic 
interest in net revenues from the sale of TRACE data, that net revenues 
from the sale of TRACE data should be shared with broker-dealers and 
that NASD should not make a profit on the system and reporting fees of 
TRACE. NASD represented in its response that it is a not-for-profit 
association, owned by its members and dedicated to focusing on its 
primary mission of regulating markets and members. NASD stated that it 
has no profit motivation in operating TRACE.
    NASD stated that it believes the proposed fees for TRACE are 
reasonable and non-discriminatory. Further, NASD believes the proposed 
fees have been reasonably allocated, based on total TRACE revenues 
annually. This allocation is based on NASD's costs to develop and 
operate the system, maintain the system and database, and engage in 
oversight of the fixed income market.
    During the pilot period, NASD submitted four rule filings with the 
SEC to reduce both Transaction Reporting Fees and System Fees to 
reflect actual usage of the new system. The Commission believes that 
NASD has adequately addressed TBMA's concerns regarding whether the 
TRACE fees satisfy the statutory standards regarding equitable 
allocation, unfair discrimination, and reasonableness.\15\ Moreover, 
NASD has agreed to continue to assess the TRACE fee structure to ensure 
that the fees remain reasonable.
---------------------------------------------------------------------------

    \15\ NASD also provided the Commission's Division of Market 
Regulation with additional information in response to questions 
raised by the Division's staff.
---------------------------------------------------------------------------

    Advantage Data's Letter questions the appropriateness of charging 
fees for TRACE transaction data delayed by four hours. NASD stated in 
its response that professional participants in the TRACE system have 
stated to NASD staff that Delayed-Time data is valuable to the bond 
market for pricing thinly traded bonds, spotting trends, and creating 
derivative products. NASD also represented that professional 
subscribers to Real-Time TRACE transaction data will not also be 
charged for Delayed-Time data. In addition, NASD stated that it 
continues to provide Real-Time TRACE transaction data to non-
professionals for $1.00 per month, per user ID. NASD represented that 
Delayed-Time TRACE transaction data will continue to be provided at no 
charge to non-professionals and professionals will continue not to be 
charged for delayed data that is received after 11:59 p.m. Eastern Time 
of the same calendar day in which the transactions are reported and 
disseminated.
    NASD believes that the proposed BTDS Professional Delayed-Time Data 
Display Fee leads to a more equitable allocation of market data fees 
among TRACE participants and that members who use Delayed-Time TRACE 
transaction data should bear some costs for the TRACE system. Amendment 
No. 2 provides that the TRACE BTDS Professional Delayed-Time Data 
Display Fee, which has not previously been charged, will operate as a 
nine-month pilot to enable the Commission to revisit issues relating to 
consistency with the Act at the end of that period.
    Advantage Data's Letter also raised concerns about NASD's mandated 
use of CUSIP data in TRACE reporting, the ongoing review of NASDAQ's 
management of TRACE, delays in disseminating TRACE information and the 
ownership of data derived by NASD. As noted by NASD in its response, 
NASD has addressed those concerns in prior rule filings and the issues 
have been addressed in prior approval orders.\16\ In addition, this 
proposed rule change does not address those issues. The Commission 
expects to continue its review of NASD's operation of TRACE in the 
context of future proposed rule filings filed by NASD as well as the 
Commission's ongoing oversight of NASD as a self-regulatory 
organization.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001), (File No. SR-NASD-99-65); and 
Securities Exchange Act Release No. 47302 (January 31, 2003), 68 FR 
6233 (February 6, 2003), (File No. SR-NASD-2002-174).
---------------------------------------------------------------------------

III. Accelerated Approval of Amendment No. 2

    For these reasons, the Commission finds good cause, consistent with 
sections 15A(b)(6) and 19(b)(2) of the Act, to accelerate approval of 
Amendment No. 2 to the proposed rule change prior to the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. Amendment No. 2 responds to comments and provides 
that the TRACE BTDS Professional Delayed-Time Data Display Fee will 
operate as a nine-month pilot program.\17\ Conversion of the TRACE BTDS 
Professional Delayed-Time Data Display Fee to a pilot program will 
enable the Commission to re-evaluate issues relating to consistency 
with the Act at the end of the pilot program and recommend any needed 
changes to NASD at the end of that time.
---------------------------------------------------------------------------

    \17\ This pilot will begin February 1, 2004 and end on October 
31, 2004. See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division of Market Regulation, SEC, dated January 15, 
2004.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
NASD-2003-157. This file number should be included on the subject line 
if e-mail is used. To help the Commission process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 
February 13, 2004.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the

[[Page 3418]]

proposed rule change (SR-NASD-2003-157), as amended by Amendment No. 1 
be and hereby is approved, and Amendment No. 2 is approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \18\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1468 Filed 1-22-04; 8:45 am]
BILLING CODE 8010-01-P