[Federal Register Volume 69, Number 68 (Thursday, April 8, 2004)]
[Notices]
[Pages 18660-18661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7970]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49522; File No. SR-NASD-2003-182]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Relating to Proposed Amendments to ``TRACE-Eligible Security'' and 
an Exemption to Trade Reporting

April 1, 2004.
    On December 5, 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: (1) Amend Rule 6210(a) to 
clarify certain terms used in the definition, ``TRACE-eligible 
security'; (2) amend NASD Rule 6230(e)(2) to expand the trade reporting 
exemption to qualifying transactions in any TRACE-eligible security 
that is listed and quoted on the Nasdaq Stock Market, Inc. 
(``Nasdaq''); and (3) make conforming amendments to the defined term, 
``reportable TRACE transaction,'' in Rule 6210(c). Rules 6210 and 6230 
are part of the Trade Reporting and Compliance Engine (``TRACE'') 
rules. Notice of the proposed rule change was published for comment in 
the Federal Register on December 22, 2003.\3\ The Commission received 
two comment letters regarding the proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 48926 (December 15, 
2003), 68 FR 71207.
    \4\ See e-mail letter from Paul Scheurer to [email protected] dated January 12, 2004 (``Mr. Scheurer's Letter'') 
and letter from Michele C. David, Vice President and Assistant 
General Counsel, The Bond Market Association (``TBMA''), to Jonathan 
G. Katz, Secretary, SEC, dated January 16, 2004 (``TBMA's Letter'').
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    On February 13, 2004, NASD filed a response to the two comment 
letters.\5\ On March 10, 2004, NASD provided a supplemental response to 
the comments regarding NASD's proposal.\6\ On March 24, 2004, TBMA 
submitted a letter in response to NASD's Response Letter and NASD's 
Supplemental Response Letter.\7\ On March 29, 2004, NASD filed an 
additional supplemental statement to its earlier two letters.\8\ This 
order approves the proposed rule change.
    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 provisions of section 
15A(b)(6) of the Act,\9\ 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. \10\ The 
Commission believes that the proposed rule change will provide NASD, as 
the self-regulatory organization designated to regulate the over-the-
counter markets, with appropriate capabilities to regulate and provide 
surveillance of the debt securities markets to prevent fraudulent and 
manipulative acts and practices, for the protection of investors and in 
the public interest.
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    \5\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, Regulatory Policy and Oversight, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation, SEC, 
dated February 13, 2004 (``NASD's Response Letter'').
    \6\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, Regulatory Policy and Oversight, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation, SEC, 
dated March 10, 2004 (``NASD's Supplemental Response'').
    \7\ See letter from Michele C. David, Vice President and 
Assistant General Counsel, The Bond Market Association (``TBMA''), 
to Jonathan G. Katz, Secretary, SEC, dated March 24, 2004 (``TBMA's 
Supplemental Letter'').
    \8\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, Regulatory Policy and Oversight, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation, SEC, 
dated March 26, 2004 (``NASD's Supplemental Statement'').
    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ 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).
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    The comment letter filed by Mr. Scheurer expressed concern that 
expanding exemptions from TRACE for certain securities subject to 
Nasdaq bond price reporting would weaken investor protection. The 
proposed amendment to Rule 6230(e)(2) will exempt a member from 
reporting to TRACE a transaction in any TRACE-eligible security that is 
listed and quoted on Nasdaq, rather than only convertible debt 
securities, provided that the other two requirements for the exemption 
are also present (i.e., the transaction is reported to Nasdaq and the 
transaction information is disseminated publicly).
    NASD's Response Letter stated that currently there are very few 
debt securities that are listed on Nasdaq, and only some of the 
transactions occurring in those securities would meet all of the 
conditions for the exemption and thus not be reported to TRACE. NASD 
also stated that while there are certain differences between TRACE and 
Nasdaq reporting via the Automated Confirmation Transaction Service 
(``ACT'') in the reporting and dissemination of debt securities 
transactions, NASD does not believe that requiring members to report a 
transaction to both TRACE and ACT results in a measurable enhancement 
to investor protection or market integrity. NASD stated, for example, 
that it does not believe that it is beneficial to require a transaction 
that will be reported to ACT in 90 seconds also be reported to TRACE 
within 45 minutes.
    NASD also stated that Rule 6230 requires that both sides of a 
transaction report the transaction to TRACE (if both are NASD members) 
and the Rule 4650 Series requires that only one member report such a 
transaction to ACT. After considering Mr. Scheurer's Letter and NASD's 
Response Letter, the Commission believes that the proposed exemption is 
not inconsistent with the Act because the proposed exemption will apply 
to a transaction in a TRACE-eligible security only if the transaction 
in the Nasdaq-listed and Nasdaq-quoted security is already subject to 
regulatory reporting and public dissemination.
    TBMA's Letter focused exclusively on NASD's proposal to clarify the 
term ``TRACE-eligible security'' to include the

[[Page 18661]]

debt securities of all United States and/or foreign private 
``issuers,'' rather than ``corporations.'' TBMA's Letter states that 
the proposal has the effect of extending TRACE reporting beyond NASD's 
mandate for the corporate bond market and potentially brings within 
TRACE securities that were never intended to be included. Further, TBMA 
stated that rather than clarifying the definition of ``TRACE-eligible 
security,'' the proposal introduces new uncertainty into the definition 
by possibly bringing within the definition certain types of structured 
products and asset-backed securities that to date have not been 
included in the TRACE transaction reporting regime. In addition, TBMA 
stated that the integration of new financial instruments into TRACE 
will require significant effort and expenditures by member firms.
    NASD's Response Letter stated that it was always NASD's intention 
that the universe of TRACE-reportable securities would include 
securities issued not only by corporations, but also by entities such 
as limited partnerships and trusts. NASD states that at the earliest 
stages of development of the TRACE regulatory and reporting structure, 
it was understood by market participants and regulators alike that 
securities that were Fixed Income Pricing Service (``FIPS'')-eligible 
would become TRACE-eligible securities. NASD states that securities 
that were reportable to FIPS included capital trust, equipment trust, 
trust, and limited partnership securities. NASD states that is has 
identified more than 100 securities that were not issued by a 
corporation, were routinely reported to FIPS and that, if still traded 
at the initiation of TRACE, were incorporated in TRACE and subject to 
TRACE requirements. NASD's Supplemental Response states that presently 
there is widespread reporting of debt securities issued by entities 
that are not corporations.
    NASD's Response Letter also addressed the concern expressed in 
TBMA's Letter that the proposed clarification of the definition of 
``TRACE-eligible security'' would require members to report to TRACE a 
variety of ``structured'' or ``asset-backed'' securities that are not 
currently being reported to the system. NASD responded that under Rule 
6210(a), ``asset-backed securities'' are specifically excluded from the 
universe of TRACE-eligible securities and that NASD is not seeking to 
amend that exclusion with this proposal.
    TBMA's Supplemental Letter states that NASD's Response Letter and 
Supplemental Response Letter do not address their previously stated 
concerns that the proposal causes confusion and uncertainty and 
potentially expands the universe of TRACE-reportable securities to 
include securities which do not expose bondholders to the credit risk 
of the issuer and were never intended to be included in a corporate 
bond reporting system.
    NASD stated in its Supplemental Statement that NASD proposes to 
delete the word ``corporations'' and replace it with ``issuers'' solely 
to clarify that the securities of issuers using forms of business 
organizations other than the corporate form are included in the 
definition of TRACE-eligible securities. NASD further stated that its 
interpretation of TRACE eligibility will not change after the adoption 
of the proposed rule change. Accordingly, the Commission believes the 
proposal should not cause confusion or require significant effort and 
expenditures by member firms because NASD is not seeking to change its 
existing interpretation of TRACE eligibility.
    The Commission believes that NASD's clarification of the TRACE 
rules in this proposed rule change will enable it to implement TRACE 
more effectively, thus enhancing investor protection by facilitating 
the availability of TRACE. 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,\11\ that the proposed rule change (SR-NASD-2003-182), be, and 
hereby is, approved.
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    \11\ Id.

    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. 04-7970 Filed 4-7-04; 8:45 am]
BILLING CODE 8010-01-P