[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35088-35090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14140]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49854; File No. SR-NASD-2004-057]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the National 
Association of Securities Dealers, Inc. Relating to Proposed Amendments 
To Reduce the Reporting Period for Transactions in TRACE-Eligible 
Securities

June 14, 2004.
    On April 1, 2004, 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 Rule 6230(a) to reduce 
the period to report a transaction in a TRACE-eligible debt security in 
two stages: (i) From 45 to 30 minutes in stage one (``Stage One''), and 
(ii) subsequently, from 30 to 15 minutes in stage two (``Stage Two''). 
Rule 6230 is one of the Trade Reporting and Compliance Engine 
(``TRACE'') rules. On April 16, 2004, NASD filed Amendment No. 1 to the 
proposed rule change.\3\ On April 22, 2004, NASD filed Amendment No. 2 
to the proposed rule

[[Page 35089]]

change.\4\ Notice of the proposed rule change and Amendment Nos. 1 and 
2 thereto were published for comment in the Federal Register on April 
29, 2004.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Sharon K. Zackula, Assistant General 
Counsel, NASD, to Katherine A. England, Assistant Director, Division 
of Market Regulation, SEC, dated April 16, 2004 (``Amendment No. 
1''). Amendment No. 1 clarifies the effective dates that NASD will 
establish for the proposed rule change upon approval by the 
Commission.
    \4\ See letter from Sharon K. Zackula, Assistant General 
Counsel, NASD, to Katherine A. England, Assistant Director, Division 
of Market Regulation, SEC, dated April 22, 2004 (``Amendment No. 
2''). Amendment No. 2 amends the discussion of industry and 
regulatory trends in the securities industry favoring more ``real-
time'' reporting and ``real-time'' transmission of transaction 
information for clearance and settlement.
    \5\ Securities Exchange Act Release No. 49607 (April 23, 2004), 
69 FR 23549.
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    The Commission received two comment letters regarding the 
proposal.\6\ On June 2, 2004, NASD filed a response to the comment 
letters.\7\ This order approves the proposed rule change.
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    \6\ See e-mail letter from Richard F. Seifer, President and 
C.E.O., Bernard, Richards Securities Inc., to [email protected] 
dated May 10, 2004 (``Mr. Seifer's Letter''), and e-mail letter from 
Alan H. Schlesinger, Sage Securities Corp., to [email protected] 
dated May 20, 2004 (``Mr. Schlesinger's Letter'').
    \7\ See letter from Sharon K. Zackula, Associate General 
Counsel, Regulatory Policy and Oversight, Office of General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, SEC, dated June 2, 2004 (``NASD's Response 
Letter'').
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    After careful consideration, the Commission finds that the proposed 
rule change, as amended, 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 \8\, 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.\9\ The Commission believes that the proposed rule 
change, as amended, will provide NASD, as the self-regulatory 
organization for the over-the-counter markets, with appropriate 
capabilities to regulate and provide surveillance of the over-the-
counter debt securities market to prevent fraudulent and manipulative 
acts and practices, and will improve transparency for the benefit of 
investors by reducing the period between the time of execution of a 
transaction and the dissemination of transaction information for 
securities subject to dissemination in furtherance of the public 
interest and for the protection of investors.
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 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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    Both commenters on the proposal opposed any further reduction of 
the period to report a transaction in a TRACE-eligible debt security. 
Mr. Seifer's Letter expressed concern that decreasing the reporting 
period would leave a reporting window insufficient to allow the proper 
reporting of TRACE-eligible securities and would create a market 
environment where the immediate needs of a customer would have to be 
put on hold to comply with the requirements of TRACE reporting. Mr. 
Schlesinger's Letter stated that the mechanics of the corporate bond 
marketplace and the equity marketplace are distinctly different, and 
that reducing the reporting time of trades on TRACE to what is 
appropriate for an equity trade on Nasdaq is mistaken.
    NASD's Response Letter states that current reporting statistics 
support its position that member firms have taken, and continue to 
take, the steps necessary to meet the proposed TRACE requirement of 30-
minute, and subsequently, 15-minute reporting. NASD stated that during 
the first four months of 2004, approximately 84 percent of all 
transactions in TRACE-eligible securities were reported within 30 
minutes, and approximately 73 percent of all TRACE-eligible securities 
transactions were reported within 15 minutes, although a 45-minute 
reporting period was in effect. NASD further stated that both NASD and 
the SEC have provided notice over a period of years that 15-minute 
TRACE reporting was a regulatory goal, pointed out that NASD is 
proposing a two-stage process to allow firms to implement the measures 
necessary to comply with 15-minute reporting, and stated that NASD 
consulted extensively with member firms and industry associations in 
developing this two-stage process. In response to the concern that NASD 
is trying to reduce the TRACE reporting period to one that is feasible 
for equity securities, NASD noted that the current reporting 
requirement for equity securities is 90 seconds, a significant 
difference from the current proposal to reduce the reporting period to 
30 minutes, and later, to 15 minutes.
    Both commenters stated that reducing the TRACE reporting period 
would increase members' costs of trading TRACE-eligible securities. Mr. 
Seifer's Letter stated that TRACE has added layers of expense for both 
clearing and non-clearing firms by expanding the need for additional 
personnel and imposing fines against brokers for late TRACE reporting. 
Mr. Schlesinger's Letter stated that his firm would incur significant 
costs in technology and personnel in order to be compliant with the 
reduced reporting period.
    NASD's Response Letter states that the two-stage process is being 
used to minimize the impact to firms as they make any necessary 
changes, including the costs of such changes. By extending the period 
over which the TRACE reporting period will be reduced, NASD stated that 
it believes that firms should be able to prepare more efficiently to 
make the changes needed to achieve 15-minute reporting.
    NASD's Response Letter respectfully disagreed with Mr. Seifert's 
comment that TRACE does not provide transparency for the general 
public. NASD stated that public investors and other market participants 
have been provided increased transparency in the corporate bond markets 
as a direct result of TRACE. NASD stated that transaction information 
currently is publicly disseminated on approximately 70 percent of the 
total par value traded in investment-grade TRACE-eligible securities. 
NASD further stated that members of the public may access last sale 
pricing at no cost in these debt securities at NASD's Web site, http://www.nasdbondinfo.com, or at other Web sites, such as that of The Bond 
Market Association (http://www.investinginbonds.com). Pricing 
information on these Web sites is delayed at least four hours. 
Information on certain actively traded bonds is also published daily in 
The Wall Street Journal. Members of the public seeking more immediate 
access to transaction data may contract to receive disseminated 
transaction data from commercial vendors. NASD also stated that it 
expects transaction information to be more widely available in the 
future.
    In addition, Mr. Schlesinger's Letter expressed concern that the 
``time of execution'' for a transaction in a TRACE-eligible security 
within the meaning of NASD Rule 6210(a) is not clear. Mr. Schlesinger 
stated that ``a meeting of the minds'' evidencing an executed 
transaction does not occur ``until a report is given and accepted.'' 
NASD's Response Letter states that NASD believes that this is an 
inaccurate description of an execution, and notes that executing a 
transaction precedes the steps described by Mr. Schlesinger, which are 
those generally taken to confirm a trade previously executed.
    In addition, Mr. Seifer recommended that TRACE be funded as part of 
the NASD annual assessment for each member firm and Mr. Schlesinger 
stated that the reporting of agency transactions as if they were 
principal transactions can be confusing and cumbersome. This proposed 
rule change, as amended, does not address those issues.

[[Page 35090]]

    After careful consideration, the Commission believes that NASD's 
reduction in the reporting period for transactions in TRACE-eligible 
securities will enable it to implement TRACE more effectively, thus 
enhancing investor protection by improving the immediacy of information 
reported to TRACE for both regulatory and transparency purposes. For 
the reasons discussed above, the Commission finds that the amended 
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,\10\ that the proposed rule change, as amended, (SR-NASD-2004-057), 
be, and hereby is, approved.
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    \10\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14140 Filed 6-22-04; 8:45 am]
BILLING CODE 8010-01-P