[Federal Register Volume 69, Number 57 (Wednesday, March 24, 2004)]
[Notices]
[Pages 13927-13929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49439; File No. SR-NASD-2004-023]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by National Association of 
Securities Dealers, Inc. To Amend Order Audit Trail System Rules 
Relating to Execution Reports

March 17, 2004.
    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 February 5, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'') 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 NASD. On March 11, 
2004, 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 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 Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated March 10, 
2004 (``Amendment No. 1''). Amendment No. 1 replaces the proposed 
rule change in its entirety.
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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 6954(d) to require that 
members record and report the execution price and firm capacity in 
Order Audit Trail System (``OATS'') Execution Reports. The text of the 
proposed rule appears below. Proposed new text is in italics. Deleted 
text is in brackets.
* * * * *

NASD Systems and Programs

6950. Order Audit Trail System
    6951. through 6953. No Changes.
6954. Recording of Order Information
    (a) through (c) No Changes.
    (d) Order Modifications, Cancellations, and Executions.
    Order information required to be recorded under this Rule when an 
order is modified, canceled, or executed includes the following.
    (1) and (2) No Change.
    (3) When a Reporting Member executes an order, in whole or in part, 
the Reporting Member shall record:
    (A) through (G) No Change.
    (H) the date and time of execution, [and]
    (I) the execution price,
    (J) the capacity in which the member executed the transaction 
(e.g., agency, principal or riskless principal), and
    (K) the national securities exchange or facility operated by a 
registered securities association where the trade was reported.
* * * * *

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
    On March 6, 1998, the Commission approved NASD Rules 6950 through 
6957 (``OATS Rules'').\4\ NASD represents that OATS provides a 
substantially enhanced body of information regarding orders and 
transactions that NASD believes improves its ability to conduct 
surveillance and investigations of member firms for potential 
violations of NASD rules and the federal securities laws.
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    \4\ See Securities Exchange Act Release No. 39729 (March 6, 
1998), 63 FR 12559 (March 13, 1998) (SR-NASD-97-56).
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    When the OATS Rules initially were adopted, it was determined that 
NASD would obtain execution price and firm capacity (i.e., the capacity 
in which the member acted for purposes of the transaction, for example, 
on an agency, principal or riskless principal basis) information from 
trading information rather than from information submitted to OATS. At 
that time, the vast majority of trading in Nasdaq securities was 
reported through Nasdaq's Automated Confirmation Transaction Service 
(``ACT'').\5\ Members are required to input order identifier 
information into ACT trade reports, and NASD systematically matches the 
ACT trade reports with corresponding OATS reports to obtain certain 
trade-related information including execution price and firm capacity. 
Similarly, members using the NASD Alternative Display Facility 
(``ADF'') Trade Reporting and Comparison Service (``TRACS'') are 
required to record OATS order identifier information in TRACS trade 
reports, which also is then matched with OATS information to obtain 
execution price and firm capacity.
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    \5\ ACT is an automated system owned and operated by Nasdaq that 
captures transaction information on a real-time basis.
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    NASD believes that recently, however, the ``ACT/TRACS matching'' 
process has become more and more limited, in part because a percentage 
of trades in Nasdaq securities are no longer reported to ACT or TRACS. 
Furthermore, NASD believes that if there are any errors in the linking

[[Page 13928]]

information provided to ACT, TRACS or OATS, the ACT/TRACS matching 
process is hindered.
    In June 2002, NASD issued Notice to Members 02-31 soliciting 
comments from members and other interested parties on four proposed 
changes to the OATS rules, one of which was intended to address the 
potential gaps in the audit trail associated with the ACT/TRACS 
matching process. Commenters that provided substantive comments about 
the four proposals generally opposed the proposals. NASD represents 
that the commenters' primary concern was that service bureaus and 
member firms already have spent a significant amount of time and 
resources in complying with OATS. NASD represents that commenters 
indicated that current OATS reporting has reached a stage where it 
appears to be working well and commenters, therefore, opposed making 
any significant changes, particularly at a time when there currently 
are a number of other regulatory initiatives placing demands on 
members' technological resources.
    In response to concerns raised by commenters, NASD now is proposing 
only a subset of one of the four proposals, which NASD views as the 
most critical to addressing potential gaps in the audit trail 
information currently collected by NASD. Specifically, NASD is 
proposing to amend the OATS Rules to require members to record and 
report two additional fields, execution price and firm capacity, as 
part of the OATS Execution Report. Because the proposed rule change 
adds two additional data elements that typically are accessible with 
the other information required in an OATS Execution Report, NASD does 
not believe that the proposed rule change will be overly burdensome to 
members. Furthermore, by having this data reported directly in the OATS 
Execution Report, NASD believes that it will not have to rely on 
accessing or matching the trade report to obtain these two data 
elements.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD also believes that the proposed rule change will 
enhance OATS information and will improve NASD's ability to conduct 
surveillance and investigations relating to compliance with NASD and 
other applicable rules.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will impose 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

    NASD published for comment in Notice to Members 02-31 (June 2002) 
(``Notice'') four proposals to the OATS Rules. The comment period 
expired on July 10, 2002. Ten comment letters were received in response 
to the Notice.\7\ Copies of the Notice and the comment letters have 
been provided to the Commission. Of the 10 letters, three were in favor 
of the proposed rule change and seven were opposed to the proposed rule 
change. The majority of the commenters expressed concern that the 
proposed rule change was unnecessarily burdensome.
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    \7\ Comment letters were received from Allen J. Thomas, Vice 
President, Manager of Trade Processing, A.G. Edwards & Sons, Inc.; 
Andrea Psoras; Thomas Murphy, Vice President, Bishop, Rosen & Co., 
Inc.; Kevin M. Foley, Bloomberg Tradebook LLC; W. Leo McBlain, 
Chairman, Financial Information Forum, Michele Samuelson, Compliance 
Trading Specialist, First Allied Securities, Inc.; Gregory M. Power, 
Vice President, Jefferies & Company, Inc.; John L. Keeley, Jr., 
Keeley Investment Corp.; David Wells, Program Trading Corp.; and 
Cindy D. Foster, SunGuard Trading Systems.
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    The Notice requested comment on four proposals, which would require 
that members: (1) Record and report execution price, capacity, ACT 
control number and a special circumstances indicator as part of their 
OATS Execution Reports, but would rescind the requirement that members 
record and report an identical order identifier (referred to as the 
branch/sequence number) on the OATS Execution Report and the related 
ACT trade report (``Execution Report Proposal''); (2) report the 
execution time rather than prior reference price (``.PRP'') time or 
allocation time in OATS Execution Reports; (3) record and report for 
OATS purposes the route of the proprietary order if they comply with 
the SEC Limit Order Display Rule by routing a proprietary order in 
place of a customer order to another market, electronic communications 
networks (``ECN'') or market maker; and (4) provide the trading desk 
receipt time via a Desk Report in addition to the electronic system 
time reported as their order receipt time on New Order Reports in those 
instances when those times differ by more than one second.
    The proposed rule change is two components of the Execution Report 
Proposal described above. NASD believes that it is important to note 
that the proposed rule change does not require the recording and 
reporting of the ACT control number as required under the Execution 
Report Proposal, which several commenters indicated would be the most 
burdensome component of that proposal. A general description of the 
comments is described in the Purpose section.

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 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2004-023. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your 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

[[Page 13929]]

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 No. SR-NASD-2004-023 and should be submitted by 
April 14, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6592 Filed 3-23-04; 8:45 am]
BILLING CODE 8010-01-P