[Federal Register Volume 69, Number 127 (Friday, July 2, 2004)]
[Notices]
[Pages 40429-40437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15050]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49920; File No. SR-NASD-2004-094]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Proposed Amendments to TRACE Rule 6250 and Related TRACE Rules To 
Disseminate Transaction Information on TRACE-Eligible Securities and 
Facilitate Dissemination

June 25, 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 June 17, 2004, 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. 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.
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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: (1) Rule 6210 to amend two defined 
terms and add a new defined term; (2) Rule 6250 to expand dissemination 
to include all TRACE-eligible securities \3\ and to delete provisions 
regarding market aggregate and last sale data and the treatment of 
certain transaction reports; and (3) Rule 6260 to amend the 
notification provisions to require information needed to implement 
various dissemination schedules, and to make certain minor, technical 
changes. Rule 6210, Rule 6250 and Rule 6260 are part of the Transaction 
Reporting and Compliance Engine rules (``TRACE Rules''). NASD is also 
proposing that the amendments to Rule 6250 be implemented in two 
stages, and that not later than nine months after the implementation of 
the second stage, NASD review and consider the effects of the 
amendments to Rule 6250 on the trading of TRACE-eligible securities, 
and review the dissemination provisions then in effect.
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    \3\ Other than TRACE-eligible securities that are issued 
pursuant to section 4(2) of the Securities Act of 1933 and purchased 
or sold pursuant to Rule 144A under the Securities Act of 1933.
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)

Rule 6210. Definitions

    (a) through (g) No Change
    (h) The term ``Investment Grade'' shall mean a TRACE-eligible 
security that, if rated by only one nationally recognized statistical 
rating organization (``NRSRO''), is rated in one of the four highest 
generic rating categories; or if rated by more than one NRSRO, is rated 
in one of the four highest generic rating categories by all or a 
majority of such NRSROs; provided that if the NRSROs assign ratings 
that are evenly divided between (i) the four highest generic ratings 
and (ii) ratings lower than the four highest generic ratings, NASD will 
classify the TRACE-eligible security as Non-Investment Grade for 
purposes of TRACE. If a TRACE-eligible security is unrated, for 
purposes of TRACE, NASD may otherwise classify the TRACE-eligible 
security as an Investment Grade security and further classify it as 
being in one of the four highest generic rating categories. [any TRACE-
eligible security rated by a nationally recognized statistical rating 
organization in one of its four highest generic rating categories.]
    (i) The term ``Non-Investment Grade'' shall mean a TRACE-eligible 
security that, if rated by only one NRSRO, is rated lower than one of 
the four highest generic rating categories; or if rated by more than 
one NRSRO, is rated lower than one of the four highest generic rating 
categories by all or a majority of such NRSROs. If a TRACE-eligible 
security is unrated, for purposes of TRACE, NASD may otherwise classify 
the TRACE-eligible security as a Non-Investment Grade security and 
further classify it as being in one of the generic rating categories 
below the four highest such categories. If NASD does not have 
sufficient information to make a judgment regarding the classification 
of an unrated TRACE-eligible security, for purposes of TRACE, NASD will 
classify the TRACE-eligible security as having been rated B (or the 
equivalent rating of one or more NRSROs).\1\ [any TRACE-eligible 
security that is unrated, non-rated, split-rated (where one rating 
falls below Investment Grade), or otherwise does not meet the 
definition of Investment Grade in paragraph (h) above.]

    \1\ ``B'' is a rating of Standard & Poor's, a division of the 
McGraw-Hill Companies, Inc. (``S&P''). S&P is a nationally 
recognized

[[Page 40430]]

statistical rating organization. S&P's ratings are proprietary to 
S&P and are protected by copyright and other intellectual property 
laws. S&P's licenses ratings to NASD. Ratings may not be copied or 
otherwise reproduced, repackaged, further transmitted, transferred, 
disseminated, redistributed or resold, or stored for subsequent use 
for any such purpose, in whole or in part, in any form or manner or 
by any means whatsoever, by any person without S&P's prior written 
consent. (The Commission believes NASD intends for this footnote to 
be a footnote to the rule text.)

    (j) The term, ``split-rated,'' shall mean an Investment Grade or a 
Non-Investment Grade security that is assigned ratings by multiple 
NRSROs that, for an Investment Grade security, are not in the same 
generic Investment Grade rating category, or, for a Non-Investment 
Grade security, are not in the same generic Non-Investment Grade rating 
category. After determining if a security is Investment Grade or Non-
Investment Grade, NASD will disregard any rating, if the security is 
Investment Grade, that is Non-Investment Grade, or, if the security is 
Non-Investment Grade, that is Investment Grade. With respect to an 
Investment Grade security, if multiple NRSROs assign ratings that are 
not in the same generic Investment Grade rating category, or, with 
respect to a Non-Investment Grade security, if multiple NRSROs assign 
ratings that are not in the same generic Non-Investment Grade rating 
category, NASD will classify the TRACE-eligible security for purposes 
of TRACE by the generic rating that a majority or, if no majority, a 
plurality of the NRSROs assigns the security, provided that (i) if the 
NRSROs assign ratings that are evenly divided between two generic 
rating categories, NASD will classify the TRACE-eligible security for 
purposes of TRACE by the lower of the ratings; or (ii) if each NRSRO 
assigns a different generic rating, NASD will classify the TRACE-
eligible security for purposes of TRACE by the lower or lowest of the 
ratings.
* * * * *

6250. Dissemination of [Corporate Bond Trade] Transaction Information

(a) Dissemination of New Issue Aftermarket Transactions

    (1) Transaction information for TRACE-eligible securities rated by 
an NRSRO or classified by NASD for purposes of TRACE as BBB (or the 
equivalent rating of one or more NRSROs) executed during the period 
beginning the day a newly issued security is priced and lasting two 
business days (``New Issue Aftermarket-2'') will not be disseminated 
during the New Issue Aftermarket-2. NASD will disseminate transaction 
information for transactions executed during the New Issue Aftermarket-
2 starting on the next (third) business day, according to dissemination 
protocols established by NASD.
    (2) Transaction information for TRACE-eligible securities rated by 
an NRSRO or classified by NASD for purposes of TRACE as BB (or the 
equivalent rating of one or more NRSROs) or lower executed during the 
period beginning the day a newly issued security is priced and lasting 
10 business days (``New Issue Aftermarket-10'') will not be 
disseminated during the New Issue Aftermarket-10. NASD will disseminate 
transaction information for transactions executed during the New Issue 
Aftermarket-10 starting on the next (eleventh) business day, according 
to dissemination protocols established by NASD.

(b) Dissemination of Secondary Market Transactions

    (1) Immediate Dissemination. NASD will disseminate transaction 
information immediately upon receipt of a transaction report, if the 
report is for a transaction:
    (A) In a TRACE-eligible security rated by an NRSRO or classified by 
NASD for purposes of TRACE above BBB (or the equivalent rating of one 
or more NRSROs); or
    (B) In a TRACE-eligible security rated by an NRSRO or classified by 
NASD for purposes of TRACE as BBB (or the equivalent rating of one or 
more NRSROs) executed other than during the New Issue Aftermarket-2; 
or,
    (C) In a TRACE-eligible security rated by an NRSRO or classified by 
NASD for purposes of TRACE as BB (or the equivalent rating of one or 
more NRSROs) or lower executed other than during the New Issue 
Aftermarket-10 if:
    (i) the size of the transaction is $1 million or less (par value); 
or
    (ii) the size of the transaction is greater than $1 million (par 
value), and the TRACE-eligible security is traded (a) an average of one 
or more times per day, during the New Issue Aftermarket-10; and (b) 
thereafter, an average of one or more times per day over the last 20 
business days of a 90-day period determined each quarter by NASD. Such 
security shall remain subject to immediate dissemination until such 90-
day period in which the security fails to meet the condition set forth 
in this subparagraph (C)(ii)(b), in which case it shall be subject to a 
two-or four-business day delayed dissemination, as applicable.
    (2) Two-or Four-Business-Day Delayed Dissemination. For 
transactions in a TRACE-eligible security rated by an NRSRO or 
classified by NASD for purposes of TRACE as BB (or the equivalent 
rating of one or more NRSROs) or lower executed other than during the 
New Issue Aftermarket-10, NASD will disseminate transaction information 
on a two-or four-business-day delayed basis from the time of execution 
as follows:
    (A) Two-Business-Day Delay. In a TRACE-eligible security rated by 
an NRSRO or classified by NASD for purposes of TRACE as BB (or the 
equivalent rating of one or more NRSROs) if:
    (i) the size of the transaction is greater than $1 million (par 
value); and
    (ii) the security is traded (a) an average of less than one time 
per day, during the New Issue Aftermarket-10; and (b) thereafter, an 
average of less than one time per day over the last 20 business days of 
a 90-day period determined each quarter by NASD. Such security shall 
remain subject to a two-business day delayed dissemination until such 
90-day period in which the security fails to meet the condition set 
forth in this subparagraph (A)(ii)(b), in which case it shall be 
subject to immediate dissemination.
    (B) Four-Business-Day Delay. In a TRACE-eligible security rated by 
an NRSRO or classified by NASD for purposes of TRACE as B (or the 
equivalent rating of one or more NRSROs) or lower if:
    (i) the size of the transaction is greater than $1 million (par 
value) and;
    (ii) the security is traded (a) an average of less than one time 
per day, during the New Issue Aftermarket-10; and (b) thereafter, an 
average of less than one time per day over the last 20 business days of 
a 90-day period determined each quarter by NASD. Such security shall 
remain subject to a four-business day delayed dissemination until such 
90-day period in which the security fails to meet the condition set 
forth in this subparagraph (B)(ii)(b), in which case it shall be 
subject to immediate dissemination.

(c) Rule 144A

    NASD will not disseminate information on a transaction in a TRACE-
eligible security that is issued pursuant to Section 4(2) of the 
Securities Act of 1933 and resold pursuant to Rule 144A under the 
Securities Act of 1933.
    [(a) General Dissemination Standard
    Immediately upon receipt of transaction reports received at or 
after 8:00 a.m. through 6:29:59 p.m. Eastern Time, NASD will 
disseminate transaction information (except that market aggregate 
information and last

[[Page 40431]]

sale information will not be updated after 5:15 p.m. Eastern Time) in 
the securities described below.
    (1) A TRACE-eligible security that is Investment Grade at the time 
of receipt of the transaction report and has an initial issuance size 
of $1 billion or greater.
    (2) A TRACE-eligible security that is Non-Investment Grade at the 
time of receipt of the transaction report and is designated by NASD for 
dissemination according to the following criteria.
    (A) The staff of NASD will designate fifty of the most actively 
traded Non-Investment Grade securities that are TRACE-eligible 
securities for dissemination under this rule, based on (i) the 
security's volume; (ii) the security's price; (iii) the security's name 
recognition; (iv) the research following of the security; (v) the 
security having a minimum number of bonds outstanding; (vi) the 
security being traded routinely by at least two dealers; and (vii) the 
security contributing to a representation of diverse industry groups in 
the group of securities designated for dissemination.
    (B) A Non-Investment Grade security will not be designated, and may 
be immediately withdrawn from designation, for dissemination under this 
rule if the security: (i) has matured; (ii) has been called; (iii) has 
been upgraded to Investment Grade; or (iv) has been downgraded to an 
extent that the security's trading characteristics do not warrant 
designation for dissemination.
    (3) A TRACE-eligible security that is Investment Grade, is rated by 
Moody's Investors Service, Inc. as ``A3'' 1 or higher, and 
by Standard & Poor's, a division of McGraw Hill Co., Inc., as ``A-'' 
2 or higher, and has an original issue size of $100 million 
or greater. If a security is rated under this provision to qualify for 
dissemination at any time on or after the effective date of the rule, 
dissemination of transaction information on the security will continue 
under this paragraph unless the security is downgraded below Baa3/BBB-.

    [1 Moody's Investors Service, Inc. (``Moody's'') is a 
nationally recognized statistical rating organization. Moody's is a 
registered trademark of Moody's Investors Service. Moody's ratings 
are proprietary to Moody's and are protected by copyright and other 
intellectual property laws. Moody's licenses ratings to NASD. 
Ratings may not be copied or otherwise reproduced, repackaged, 
further transmitted, transferred, disseminated, redistributed or 
resold, or stored for subsequent use for any purpose, in whole or in 
part, in any form or manner or by any means whatsoever, by any 
person without Moody's prior written consent.]
    [2 Standard & Poor's, a division of the McGraw-Hill 
Companies, Inc. (``S&P''), is a nationally recognized statistical 
rating organization. S&P's ratings are proprietary to S&P and are 
protected by copyright and other intellectual property laws. S&P's 
licenses ratings to NASD. Ratings may not be copied or otherwise 
reproduced, repackaged, further transmitted, transferred, 
disseminated, redistributed or resold, or stored for subsequent use 
for any such purpose, in whole or in part, in any form or manner or 
by any means whatsoever, by any person without S&P's prior written 
consent.]

    (4) Ninety to 120 TRACE-eligible securities designated by NASD that 
are rated ``Baa/BBB'' at the time of designation, according to the 
following standards.
    (A) Three groups, each composed of up to 50 TRACE-eligible 
securities (Group 1, Group 2, and Group 3), but collectively not 
exceeding 120, shall be designated by NASD. At the time of designation, 
each TRACE-eligible security in Group 1 must be rated ``Baa1/BBB+'' and 
each TRACE-eligible security in Group 2 and Group 3, must be rated, 
respectively, ``Baa2/BBB'' and ``Baa3/BBB-.'' If a TRACE-eligible 
security is rated one of the ``Baa'' ratings by Moody's and one of the 
``BBB'' ratings by S&P and the ratings indicate two different levels of 
credit quality, the lower of the two ratings will be used to determine 
the group to which a debt security will be assigned under this 
paragraph (a)(4).
    (B) A TRACE-eligible security that has a rating from only one 
rating agency will not be designated under paragraph (a)(4).
    (C) Dissemination of transaction information on a TRACE-eligible 
security that is designated under paragraph (a)(4) will not be 
discontinued if one rating is, or both ratings, are downgraded or 
upgraded.]
    [(b) Transactions Excluded From Market Aggregate, Last Sale
    All trade reports in TRACE-eligible securities that are approved 
for dissemination and submitted to TRACE at or after 8:00 a.m. Eastern 
Time and prior to 5:15 p.m. Eastern Time will be included in the 
calculation of market aggregates and last sale except:
    (1) trades reported on an ``as of'' basis;
    (2) ``when issued'' trades executed on a yield basis;
    (3) trades in baby bonds with a par value of less than $1,000;
    (4) trades in which the price is determined by a weighted average 
price; and
    (5) trades in which the price is a ``special price,'' as indicated 
by the use of the special price modifier.]

[(c) Dissemination of Certain Trades Executed on A Business Day

    (1) Reports of transactions in TRACE-eligible securities that are 
subject to dissemination, are executed on a business day at or after 
6:30 p.m. Eastern Time through 11:59:59 p.m. Eastern Time, and are 
reported pursuant to Rule 6230(a)(2) on the next business day and 
designated ``as/of'' will be disseminated beginning at 8:00 a.m. 
Eastern Time on the day of receipt. The reported information will not 
be included in the calculation of the day's market aggregates.
    (2) Reports of transactions in TRACE-eligible securities that are 
subject to dissemination, are executed on a business day at or after 
12:00 a.m. Eastern Time through 7:59:59 a.m. Eastern Time, and are 
reported pursuant to Rule 6230(a)(3) on the same day beginning at 8:00 
a.m. Eastern Time will be disseminated upon receipt. The reported 
information will be included in the calculation of the day's market 
aggregates, except as otherwise provided in Rule 6250(b)(1) through 
(5).]

[(d) Dissemination of Trades Executed on Non-Business Days

    Reports of transactions in TRACE-eligible securities that are 
subject to dissemination, are executed on a non-business day at any 
time during the day, and are reported pursuant to Rule 6230(a)(4) on 
the next business day will be disseminated upon receipt. The reported 
information will not be included in the calculation of the day's market 
aggregates.]
* * * * *

Rule 6260. Managing Underwriter or Group of Underwriters Obligation To 
Obtain CUSIP and Provide Notice

(a) Members Required to Provide Information and Notice

    (1) In order to facilitate trade reporting and dissemination of 
secondary transactions in TRACE-eligible securities, the member that is 
the managing underwriter or the members that are the group of 
underwriters of a distribution or offering, excluding a secondary 
distribution or offering, of a debt security that, upon issuance will 
be a TRACE-eligible security (``new issue''),[of any newly issued 
TRACE-eligible security] must obtain and provide information [by email 
or facsimile]to the TRACE Operations Center as required below.[under 
paragraph (b).] If a managing underwriter is not appointed, the group 
of underwriters must provide the

[[Page 40432]]

information required under this rule. [comply with paragraph (b).]
    (2) The information must be provided by facsimile or e-mail.

(b) Notices

    For such [TRACE-eligible securities]new issues, the managing 
underwriter or group of underwriters must provide to the TRACE 
Operations Center[, by email or facsimile (1) the CUSIP number; (2) the 
issuer name; (3) the coupon rate; (4) the maturity; (5) whether Rule 
144A applies; (6) a brief description of the issue (e.g., senior 
subordinated note, senior note); and, (7) information, as determined by 
NASD, [that is required to determine ]to implement the provisions of 
Rule 6250(a) and such other information NASD deems necessary to 
properly implement the reporting and dissemination of a TRACE-eligible 
security[if a TRACE-eligible security must be disseminated under Rule 
6250 (e.g., size of issue and rating)], or if any of items (2) through 
(7) has not been determined, such other information as NASD deems 
necessary. The managing underwriter or group of underwriters must 
obtain the CUSIP number and provide it and the information listed as 
(2) through (7) not later than 5:00 p.m. Eastern Time on the business 
day preceding the day that the registration statement becomes 
effective, or, if registration is not required, the day before the 
securities will be priced. If an issuer notifies a managing underwriter 
or group of underwriters, or the issuer and the managing underwriter or 
group of underwriters determine, that the TRACE-eligible securities of 
the issuer shall be priced, offered and sold the same business day in 
an intra-day offering under Rule 415 of the Securities Act of 1933 or 
Section 4(2) and Rule 144A of the Securities Act of 1933, the managing 
underwriter or group of underwriters shall provide the information not 
later than 5:00 p.m. Eastern Time on the day that the securities are 
priced and offered, provided that if such securities are priced and 
offered on or after 5:00 p.m. Eastern Time, the managing underwriter or 
group of underwriters shall provide the information not later than 5:00 
p.m. Eastern Time on the next business day. The managing underwriter or 
group of underwriters must make a good faith determination that the 
security is a TRACE-eligible security before submitting the information 
to the TRACE Operations Center.
* * * * *

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
    i. Introduction and Background
    In this proposed rule change, NASD is proposing to amend Rule 6250 
to disseminate publicly transaction information for secondary market 
transactions in all TRACE-eligible securities, and to make related 
amendments to Rule 6210 and Rule 6260 to facilitate dissemination. The 
proposed amendments will result in NASD disseminating all TRACE-
eligible securities transactions, except transactions executed pursuant 
to Rule 144A under the Securities Act of 1933.\4\ Implementation of the 
proposed rule change is estimated to result in immediate dissemination 
of approximately 99 percent of all transactions in TRACE-eligible 
securities and 95 percent of the par value traded in such securities. 
Information on certain transactions, however, will be disseminated on a 
delayed basis. NASD is also proposing to delete provisions regarding 
market aggregates, last sale data, and the treatment of certain 
transaction reports in Rule 6250.
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    \4\ Under Rule 6230(e), certain types of transactions currently 
are exempt from reporting (and therefore dissemination) (e.g., 
qualifying transactions in TRACE-eligible securities that are listed 
on a national securities exchange, when such transactions are 
executed on and reported to the exchange and the transaction 
information is disseminated publicly, and a parallel exemption for 
qualifying transactions in TRACE-eligible securities that are listed 
on The Nasdaq Stock Market, Inc.), and will continue to be exempt 
from reporting (and dissemination) under the proposal.
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    NASD is also proposing amendments to Rule 6210 and Rule 6260. In 
Rule 6210, NASD is proposing to amend the definitions of ``Investment 
Grade'' and ``Non-Investment Grade'' and to add a new defined term, 
``split-rated.'' In Rule 6260, NASD is proposing to amend the 
notification requirements, which will aid NASD in identifying new 
issues of TRACE-eligible securities and the dissemination protocols 
that apply to them.
    NASD is also proposing that the proposed amendments to Rule 6250 
regarding dissemination be implemented in two stages, Stage One and 
Stage Two, because certain aspects of the proposal providing for 
delayed dissemination will require significant operational and 
technical changes to NASD's TRACE System. Finally, not later than nine 
months after the implementation of Stage Two, NASD will review and 
consider the effects of the amendments to Rule 6250 on the trading of 
TRACE-eligible securities, and review the dissemination provisions then 
in effect.
    The dissemination proposal was developed in consultation with the 
Bond Transaction Reporting Committee (``BTRC''), an advisory committee 
to the NASD Board of Governors.\5\ The primary role of the BTRC is to 
make recommendations to the NASD Board concerning the dissemination of 
transaction information under TRACE for secondary market transactions 
in eligible corporate bonds. To develop this proposal, the BTRC and 
NASD staff analyzed significant amounts of TRACE transaction data and 
deliberated on various dissemination approaches.
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    \5\ The Committee is appointed by the NASD Board of Governors 
and has ten members. Five of the members were recommended by the 
staff of NASD and the other five were recommended by The Bond Market 
Association (``TBMA'').
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    Initial concerns of certain market participants focused on the 
possible impact that increased transparency may have on market 
liquidity. After extensive examination of approximately 18 months of 
TRACE data and review of two studies performed by an outside 
econometric team, NASD found no conclusive evidence that TRACE 
transparency has adversely affected liquidity. Accordingly, NASD 
believes full transparency is warranted. As noted above, the proposed 
rule change will result in dissemination of all public secondary market 
transactions in TRACE-eligible securities, with approximately 99 
percent of total transactions and 95 percent of total par value traded 
being immediately disseminated.
    However, there are two areas of possible concern where NASD 
currently believes that a more measured approach toward immediate 
dissemination is in the best interest of investors and the corporate 
bond market. First, both institutional investors and dealers have 
expressed concern that liquidity could be harmed by the immediate

[[Page 40433]]

transparency of large transactions in Non-Investment Grade securities, 
and particularly in such securities that trade infrequently. Second, 
similar liquidity concerns were raised regarding the few transactions 
that are effected in the New Issue Aftermarket-2 or -10 for securities 
rated BBB or lower,\6\ where reduced liquidity could potentially 
increase borrowing cost to issuers. Although there was no conclusive 
proof of harm to the market in these two areas, NASD believes that the 
measured approach reflected by the dissemination delays set forth in 
the proposed rule change will provide additional time to assess the 
impact of transparency on this small number of transactions.
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    \6\ For purposes of this filing, ``BBB,'' a rating of Standard & 
Poors (``S&P'') or any other rating of S&P means the S&P rating and 
the equivalent ratings of Moody's Investors Service, Inc. 
(``Moody's'') and any other NRSRO whose rating may be used for 
purposes of TRACE. Currently, NASD administers the TRACE 
dissemination provisions based on the ratings of S&P's and Moody's. 
The use of a single rating in this rule filing is for the 
convenience of readers only.
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    NASD intends to continue to review the trading and the liquidity in 
TRACE-eligible securities during the implementation of Stages One and 
Two of the proposed rule change. As part of this review process, not 
later than nine months from the implementation of Stage Two, NASD will 
ask the BTRC to reconvene to review the rule and make recommendations 
to the NASD Board of Governors.

ii. The Dissemination Proposal

Current Dissemination Requirements

    In current Rule 6250, NASD requires the dissemination of 
transaction information for four categories of securities: (1) A TRACE-
eligible security that is Investment Grade at the time of receipt of 
the transaction report and has an initial issuance size of $1 billion 
or greater;\7\ (2) approximately 50 Non-Investment Grade TRACE-eligible 
securities that are designated by NASD staff according to the criteria, 
including liquidity, set forth in Rule 6250(a)(2);\8\ (3) any TRACE-
eligible security that is Investment Grade, rated A or higher and has 
an original issue size of $100 million or greater, unless downgraded 
below BBB;\9\ and (4) approximately 120 TRACE-eligible securities rated 
BBB at the time they were designated for dissemination.\10\ All current 
dissemination is ``immediate''; NASD disseminates the transaction 
information as soon as it is reported to NASD.
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    \7\ Rule 6250(a)(1).
    \8\ From time to time, the staff reviews and amends the list of 
50 securities; in between such comprehensive reviews, securities may 
be called or the staff may delete certain securities that no longer 
meet the criteria, at times resulting in the dissemination of less 
than 50 securities. See Rule 6250(a)(2).
    \9\ Rule 6250(a)(3).
    \10\ Rule 6250(a)(4).
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Proposed Dissemination for Transactions During the New Issue 
Aftermarket

    NASD is proposing that dissemination for TRACE-eligible securities 
that are rated by an NRSRO or classified by NASD for purposes of TRACE 
as BBB or lower be subject to special dissemination provisions during a 
brief period beginning with the day a newly issued security is priced, 
and ending, alternatively, after either two business days (``New Issue 
Aftermarket-2'') or ten business days (``New Issue Aftermarket-
10''),\11\ depending on the rating of the TRACE-eligible security.\12\
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    \11\ The first day of the period, New Issue Aftermarket-2 or, 
New Issue Aftermarket-10, is the day that the newly issued security 
is priced.
    \12\ Secondary market transactions in TRACE-eligible securities 
rated by an NRSRO or classified by NASD for purposes of TRACE as A 
or higher are not subject to New Issue Aftermarket dissemination 
delays. Accordingly, NASD will disseminate all such secondary market 
transactions immediately upon receipt of the transaction 
information.
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    Transactions in newly issued TRACE-eligible securities rated by an 
NRSRO or classified by NASD for purposes of TRACE as BBB executed 
during their New Issue Aftermarket-2 will be subject to a dissemination 
delay. NASD will disseminate the withheld transaction information on 
all transactions executed during the New Issue Aftermarket-2 starting 
on the next (third) business day in accordance with NASD dissemination 
protocols.\13\
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    \13\ NASD is developing dissemination protocols for TRACE to 
implement dissemination provisions that require specific system 
enhancements. The dissemination protocols will address primarily the 
delayed dissemination provisions in proposed Rule 6250(b)(2) that 
apply to certain transactions in TRACE-eligible securities rated BB, 
and others rated B or lower. For example, it is currently 
anticipated that TRACE-eligible securities transactions that occur 
during the New Issue Aftermarket-2 will be disseminated prior to 
8:00 a.m. Eastern Time on the next (third) business day in order of 
execution date and time. Market participants will be notified of the 
dissemination protocols prior to their implementation.
---------------------------------------------------------------------------

    Transactions in newly issued TRACE-eligible securities rated by an 
NRSRO or classified by NASD for purposes of TRACE as BB (or the 
equivalent rating of one or more NRSROs) or lower executed during their 
New Issue Aftermarket-10 will also be subject to a dissemination delay. 
NASD will disseminate the withheld transaction information on all 
transactions executed during the New Issue Aftermarket-10 starting on 
the next (eleventh) business day, according to dissemination protocols 
established by NASD. Transaction information that is withheld pursuant 
to proposed Rule 6250(a)(1) and (a)(2) will be disseminated, in the 
order of the date and time of execution of the transactions.

Proposed Dissemination For Secondary Market Transactions Other Than New 
Issue Aftermarket

    NASD is proposing to add new Rule 6250(b)(1) to require that the 
following types of transactions be disseminated immediately upon 
receipt: (i) transactions in any Investment Grade TRACE-eligible 
security rated by an NRSRO or classified by NASD for purposes of TRACE 
as A or higher; (ii) transactions in a TRACE-eligible security rated by 
an NRSRO or classified by NASD for purposes of TRACE as BBB that are 
executed other than during its New Issue Aftermarket-2; and; (iii) 
transactions in a TRACE-eligible security rated by an NRSRO or 
classified by NASD for purposes of TRACE as BB (or the equivalent 
rating of one or more NRSROs) or lower that are executed other than 
during its New Issue Aftermarket-10, if the size of the transaction is 
$1 million or less (par value), or the size is greater than $1 million 
(par value), and the security is traded, on average, one or more times 
per day.\14\ As noted previously, NASD estimates that approximately 99 
percent of all secondary public transactions and 95 percent of par 
value traded in TRACE-eligible securities will be disseminated 
immediately upon NASD's receipt of the transaction information pursuant 
to these proposed dissemination protocols.
---------------------------------------------------------------------------

    \14\ Initially, NASD will determine the average over the 10-
business-day New Issue Aftermarket-10. Thereafter, NASD will 
determine the average based on the last 20 business days of a 90-day 
period determined each quarter by NASD.
---------------------------------------------------------------------------

    NASD is also proposing in Rule 6250(b)(2) that certain transactions 
in TRACE-eligible securities rated by an NRSRO or classified by NASD 
for purposes of TRACE as BB (or the equivalent rating of one or more 
NRSROs) or lower (other than those executed during the subject 
security's New Issue Aftermarket-10) be subject to either a two-
business-day or four-business-day delay before the transaction 
information is disseminated. Under proposed Rule 6250(b)(2)(A), NASD 
will disseminate transaction information two business days from the 
time of execution of the transaction when the transaction meets the

[[Page 40434]]

following three criteria: \15\ (i) the size is greater than $1 million 
(par value); (ii) the TRACE-eligible security is traded, on average, 
less than one time per day;\16\ and (iii) the security is rated by an 
NRSRO or classified by NASD for purposes of TRACE as BB. Under proposed 
Rule 6250(b)(2)(B), NASD will disseminate transaction information four 
business days from the time of execution \17\ on securities rated by an 
NRSRO or classified by NASD for purposes of TRACE as B or lower when 
the transaction falls within criteria (i) and (ii) above.
---------------------------------------------------------------------------

    \15\ For example, if a transaction meeting the three criteria is 
executed on Monday, September 13, 2004, at 10 a.m. eastern time, the 
transaction will be disseminated on Wednesday, September 15, 2004, 
at approximately 10:01 a.m. eastern time.
    \16\ See note 14, supra.
    \17\ For example, if a transaction is executed on Monday, 
September 13, 2004, at 10:30 a.m. eastern time, the transaction will 
be disseminated on Friday, September 17, 2004, at approximately 
10:31 a.m. eastern time.
---------------------------------------------------------------------------

    For purposes of calculating the average daily trading of a security 
pursuant to proposed Rule 6250(b)(1)(C)(ii), Rule 6250(b)(2)(A)(ii) and 
Rule 6250(b)(2)(B)(ii), NASD, where applicable, will review a 
security's trading during its New Issue Aftermarket-10 to determine the 
appropriate dissemination protocol. That dissemination protocol will 
remain in effect for the security, until the next established 
calculation timeframe occurs. That calculation timeframe will be based 
on the trading activity during the last 20 business days of a 90-day 
period determined by NASD (``20/90 period''). Unlike a New Issue 
Aftermarket-10, where the timing is specific to the security, the 20/90 
period will be established quarterly and will apply to all Non-
Investment Grade TRACE-eligible securities.\18\
---------------------------------------------------------------------------

    \18\ An example of the implementation of the dissemination 
protocols under the New Issue Aftermarket and 20/90 periods is as 
follows. A new issue that is rated BB (or the equivalent rating of 
one or more NRSROs) is priced on February 14, 2005. At the end of 
its New Issue Aftermarket-10, which would be March 1, 2005, NASD 
will determine the initial dissemination protocol of either 
immediate dissemination of all transactions or 2-business day 
delayed dissemination of transactions over $1 million. This protocol 
will remain in effect until the next 20/90 period, regardless of 
when it is established. For example, if March 15, 2005, has been 
established as the end of a 90-day period, average daily trading of 
a security would be calculated by looking back 20 business days to 
February 15, 2005, and reviewing the trading that occurred in all 
securities during that period. The BB-rated security in this example 
would be subject to this 20/90-calculation period, which would 
include all but the first day of its New Issue Aftermarket-10. 
Shortly after March 15, 2005, NASD will publish the new 
dissemination protocols for all securities and the next 90-day 
period will commence on or around April 1, 2005. If a newly-issued 
TRACE-eligible security is priced after the first business day of 
the last 20 business days of the 20/90 period, the new issue 
dissemination protocol will apply to the security until the next 20/
90 period.
---------------------------------------------------------------------------

Section 4(2)/Rule 144A TRACE-Eligible Securities

    NASD is proposing to prohibit the dissemination of secondary market 
transactions effected pursuant to Rule 144A under the Securities Act of 
1933. Although subject to TRACE reporting requirements, such 
transactions will not be subject to dissemination. This proposed change 
codifies the staff's position that securities that are resold pursuant 
to Rule 144A, although reported to TRACE for regulatory purposes, are 
not subject to the dissemination provisions of Rule 6250.

iii. Ratings Under the TRACE Rules

Current Rules

    Rule 6210(h) currently defines an ``Investment Grade'' security as 
a TRACE-eligible security rated by an NRSRO ``in one of its four 
highest generic rating categories.'' Rule 6210(i) currently defines 
``Non-Investment Grade'' as a TRACE-eligible security ``that is 
unrated, non-rated, split-rated (where one rating falls below 
Investment Grade), or otherwise does not meet the definition of 
Investment Grade as defined in Rule 6210(h).'' To effectively implement 
the dissemination provisions in proposed Rule 6250, NASD has determined 
to amend the definitions of ``Investment Grade'' and ``Non-Investment 
Grade,'' and to add a new defined term, ``split-rated'' in proposed 
Rule 6210(j).

Proposed Amendments

    As noted above, TRACE rules currently classify TRACE-eligible 
securities as either ``Investment Grade'' or ``Non-Investment Grade,'' 
and, in the current TRACE Rules, ``split-rated'' means that the ratings 
assigned to a TRACE-eligible security are split between those two 
sectors (i.e., the Investment Grade sector and the Non-Investment Grade 
sector) of the market, rather than distributed among some of the nine 
to 12 generic rating categories used by NRSROs.\19\ However, under 
current and proposed dissemination provisions, a method to categorize 
TRACE-eligible securities more specifically is required when, for 
example, a security is assigned two Non-Investment Grade ratings, but 
the Non-Investment ratings are not in the same generic rating category 
(e.g., a security is rated ``Ba'' by Moody's, which is a rating in the 
5th highest generic rating category, and ``B'' by S&P's), which is a 
rating in the 6th highest generic rating category). NASD is proposing 
to clarify that TRACE-eligible securities, although first assigned to 
the universe of Investment Grade or Non-Investment Grade securities, 
are thereafter further classified to a specific generic rating 
category, using, if appropriate, the principles outlined in the new 
defined term, ``split-rated.''
---------------------------------------------------------------------------

    \19\ The term, ``generic rating category'' means the rating 
category, however designated by symbols chosen by various NRSROs, 
that indicates that the bond has a grade or ``quality'' (e.g., the 
``highest quality,'' the second highest quality, the third highest 
quality, and ``medium grade'' are the four Investment Grade 
categories, and ``predominantly speculative,'' ``speculative, low 
grade'' ``poor to default,'' ``highest speculation,'' ``lowest 
quality, no interest,'' which are the fifth through ninth generic 
rating categories, are Non-Investment Grade categories). For 
example, to show that a security falls within the highest generic 
rating category, S&P assigns a rating of ``AAA'' and Moody's assigns 
a rating of ``Aaa.'' Skipping three generic rating categories, 
securities that are rated in the 5th highest generic rating category 
are rated by S&P as ``BB'' and by Moody's as ``Ba.'' See, e.g., 
``Dictionary of Finance and Investment Terms (4th ed.), ed. by 
Downes, J., Goodman, J., 1995, pp. 458-459, for a comparison of 
various comparable NRSRO proprietary symbols used to rate bonds.
---------------------------------------------------------------------------

    First, NASD is proposing to amend the defined terms, ``Investment 
Grade'' and ``Non-Investment Grade,'' in Rule 6210(h) and Rule 6210(i), 
respectively, to state explicitly that when a TRACE-eligible security 
is rated by only one NRSRO, or is rated by several NRSROs and the 
ratings that such NRSROs assign to the security are all in one of the 
four highest generic rating categories (or, conversely, all are in 
rating categories that are lower than the four highest such 
categories), the security will be categorized as Investment Grade (or 
Non-Investment Grade) in accordance with the one rating, or the 
multiple, similar ratings.\20\
---------------------------------------------------------------------------

    \20\ For example, assume that three NRSROs rated XPL Security. 
S&P rated XPL Security as ``A,'' Moody's rated it as ``A,'' and a 
third NRSRO rated it in the fourth highest generic rating category. 
Although the three NRSROs assigned ratings that fall in two generic 
rating categories, all the ratings are within the four generic 
rating categories that are considered ``Investment Grade'' ratings, 
so for purposes of TRACE, the security is considered ``Investment 
Grade.''
---------------------------------------------------------------------------

    If the TRACE-eligible security is rated by more than one NRSRO and 
not all of the ratings are in one of the four highest generic rating 
categories (i.e., the Investment Grade categories), NASD will classify 
the security as Investment Grade if a majority of such NRSROs assigned 
it one of the four highest generic ratings. If the NRSROs assign rating 
that are evenly divided between (i) the four highest generic ratings 
and (ii) ratings lower than the four highest generic ratings, NASD will 
classify the TRACE-eligible security as a Non-Investment Grade security 
for purposes

[[Page 40435]]

of TRACE. As discussed in greater detail below, for purposes of TRACE, 
NASD also proposes to otherwise classify an unrated TRACE-eligible 
security as Investment Grade in certain circumstances.
    Parallel provisions apply to classify TRACE-eligible securities as 
Non-Investment Grade securities. If rated by more than one NRSRO, and 
rated lower than one of the four highest generic rating categories by 
all such NRSROS, as noted above, the security will be classified for 
purposes of TRACE as a Non-Investment Grade security. In addition, if 
rated by more than one NRSRO, and rated lower than one of the four 
highest generic rating categories by a majority of such NRSROs, the 
TRACE-eligible security will be classified as a Non-Investment Grade 
security. Also, as discussed below, NASD is proposing that, for 
purposes of TRACE, NASD may otherwise classify an unrated TRACE-
eligible security as a Non-Investment Grade security in some 
circumstances.
    NASD is proposing Rule 6210(j), ``split-rated,'' to state 
explicitly how NASD will classify an Investment Grade or a Non-
Investment Grade TRACE-eligible security for purposes of TRACE when the 
security is rated by more than one NRSRO and the specific generic 
ratings do not fall uniformly in one generic rating category. NASD 
defines ``split-rated'' to mean ``an Investment Grade or a Non-
Investment Grade security that is assigned ratings by multiple NRSROs 
that, for an Investment Grade security, are not in the same generic 
Investment Grade rating category, or for a Non-Investment Grade 
security, are not in the same generic Non-Investment Grade rating 
category.'' The definition then sets forth principles to apply to 
determine the specific generic rating for purposes of TRACE. First, 
after NASD determines if a security is Investment Grade or Non-
Investment Grade according to the principles set forth in, 
respectively, Rule 6210(h) and (i), NASD then disregards any rating, 
for an Investment Grade security, that is Non-Investment Grade, and, 
for a Non-Investment Grade security, that is Investment Grade. Then, 
with respect to an Investment Grade security, if multiple NRSROs assign 
ratings that are not in the same generic Investment Grade rating 
category, or, with respect to a Non-Investment Grade security, if 
multiple NRSROs assign ratings that are not in the same generic Non-
Investment Grade rating category, the following three principles apply 
to determine the specific rating for purposes of TRACE. First, NASD 
will classify the TRACE-eligible security by the generic rating that a 
majority or, if no majority, a plurality of such NRSROs assigns the 
security.\21\ Second, if the NRSROs assign ratings that are evenly 
divided between two generic rating categories, NASD will classify the 
security by the lower of the ratings. Third, if each of the NRSROs 
assigns a different rating, the TRACE-eligible security will be 
classified for TRACE purposes by the lower or the lowest of the 
ratings.\22\
---------------------------------------------------------------------------

    \21\ For example, assume that four NRSROs rated XPL Security, a 
TRACE-eligible security. S&P rated XPL Security as ``AAA,'' Moody's 
rated it as ``Aaa,'' a third NRSRO rated it in the second highest 
generic rating category, and a fourth NRSRO rated it in the third 
highest generic rating category. The ratings of the NRSROs are 
``split'' among the three highest generic rating categories. For 
purposes of TRACE, NASD will treat the security as having the 
highest credit quality since two of the four NRSROs (a plurality) 
rated the security in the highest generic rating category.
    \22\ For example, assume that three NRSROs rated XPL Security. 
S&P rated XPL Security as ``B,'' Moody's rated it as ``Caa,'' and a 
third NRSRO rated it one generic rating category lower than ``Caa.'' 
The three NRSROs have assigned ratings in three different generic 
rating categories, so NASD will classify the security according to 
the lowest generic rating category.
---------------------------------------------------------------------------

    When TRACE-eligible securities are not rated, NASD is proposing to 
``classify'' the securities as Investment Grade or Non-Investment 
Grade, then more specifically in a generic rating category in order for 
them to be disseminated under the proposed dissemination rules, and any 
other provision of TRACE, if applicable. A determination is necessary 
because the rating (or, otherwise, the classification) of a TRACE-
eligible security is a key dissemination criterion under proposed Rule 
6250. NASD is amending Rule 6210(h) and Rule 6210(i) to provide for 
such classifications.
    First, NASD may make a determination that, for the purposes of 
TRACE dissemination, an unrated TRACE-eligible security should be 
classified ``i.e., considered as though having been assigned one or 
more ratings reflecting a specific generic rating category--when there 
is evidence of the issuer's credit quality available in the bond 
markets. For example, NASD proposes to classify an unrated TRACE-
eligible security that is newly issued if the issuer of the security 
has other, similar debt securities outstanding that are rated by one or 
more NRSROs. In such case, NASD may classify the unrated TRACE-eligible 
security by attributing to the security the same credit quality that is 
indicated by the one or more ratings assigned by the NRSROs to the 
issuer's rated, similar debt securities. In most cases, NASD will look 
to the generic rating(s) that one or more NRSROs assigned to the 
issuer's most recently issued and outstanding, similar debt security as 
the most important factor in determining the classification.\23\ For 
example, if Issuer XPL has four debt securities outstanding that are 
rated AA and a fifth debt security comes to the market and begins 
trading without having received a rating, NASD may classify the TRACE-
eligible security for purposes of TRACE as being in the same generic 
rating category as the four outstanding rated debt securities.
---------------------------------------------------------------------------

    \23\ The classification of a TRACE-eligible security is an 
internal, administrative process of NASD. The staff will classify 
TRACE-eligible securities as necessary and appropriate and solely 
for the purpose of administering TRACE.
---------------------------------------------------------------------------

    However, there may be instances when a TRACE-eligible security is 
unrated and there is not sufficient information available to NASD to 
make a determination, whether the security is newly issued or has been 
outstanding for some time. In such cases, NASD will classify the TRACE-
eligible security as a ``Non-Investment Grade'' security that is rated 
B (or the equivalent rating of one or more other NRSROs) for purposes 
of dissemination. The basis for considering the TRACE-eligible security 
as a B-rated security (or the equivalent rating of one or more other 
NRSROs) is that the security will be disseminated according to the most 
conservative dissemination provisions, as a result of this 
administrative classification. NASD believes that this is a logical 
approach because such unrated securities often are considered 
distressed debt.

iv. Current Notice Provisions in Rule 6260

    Rule 6260 currently requires a managing underwriter of a newly 
issued TRACE-eligible security to obtain and provide certain 
information to NASD's TRACE Operations Center. Rule 6260(b) requires 
the member to provide: ``(1) the CUSIP number [of the new security]; 
(2) the issuer name; (3) the coupon rate; (4) the maturity; (5) whether 
Rule 144A applies; (6) a brief description of the issue; and (7) 
information, as determined by NASD, that is required to determine if a 
TRACE-eligible security must be disseminated under Rule 6250 (e.g., 
size of issue and rating), or if any of items (2) through (7) have not 
been determined, such other information as NASD deems necessary.'' 
Members must provide the information before the registration statement 
becomes effective, or if registration is not required, the day before 
the securities will be priced.\24\

[[Page 40436]]

Providing the information within the time required is an essential step 
in effecting the timely reporting, and, if applicable, dissemination. 
Neither the member providing notice nor any other member engaged in 
secondary market trading in that security is able to report the 
transactions on time if the notice is not provided when required.
---------------------------------------------------------------------------

    \24\ In certain intra-day offerings described in the rule, the 
managing underwriter may be granted additional time to provide such 
notice. Rule 6260(b) provides, in pertinent part:
    If an issuer notifies a managing underwriter, or the issuer and 
the managing underwriter determine, that the TRACE-eligible 
securities of the issuer shall be priced, offered and sold the same 
business day in an intra-day offering under Rule 415 of the 
Securities Act of 1933 or Rule 144A of the Securities Act of 1933, 
the managing underwriter shall provide the information not later 
than 5:00 p.m. on the day that the securities are priced and 
offered, provided that if such securities are priced and offered on 
or after 5:00 p.m., the managing underwriter shall provide the 
information not later than 5:00 p.m. on the next business day.
    All references are to Eastern Time.
---------------------------------------------------------------------------

Proposed Amendments to Rule 6260

    NASD is proposing to amend Rule 6260(b) to require that when NASD 
is notified of a new issue, the managing underwriter or a group of 
underwriters that is required to provide the information (e.g., CUSIP, 
issuer name, etc.) will also be required to provide information, as 
determined by NASD, to implement the New Issue Aftermarket 
dissemination criteria of proposed Rule 6250(a)(1) and (2). For 
example, NASD will require a member to provide the date and time that 
the new TRACE-eligible security was priced. NASD is also proposing 
minor technical amendments to Rule 6260.

v. Miscellaneous

    With the intent of providing transaction information on a more 
flexible basis to better meet the changing needs of the market place, 
NASD is proposing to delete the provisions in Rule 6250 relating to the 
administration, calculation, and dissemination of ``market aggregate'' 
and ``last sale'' data for disseminated securities, and the treatment 
of TRACE-eligible securities traded after the TRACE System has closed 
or on a non-business day. Specifically, NASD is proposing to delete 
current paragraph (b) or Rule 6250, entitled, ``Transactions Excluded 
From Market Aggregate, Last Sale,'' paragraph (c) of Rule 6250, 
entitled, ``Dissemination of Certain Trades Executed on A Business 
Day,'' and paragraph (d) of Rule 6250, entitled, ``Dissemination of 
Trades Executed on Non-Business Day.'' NASD will establish policies for 
the administration, calculation and dissemination of ``market 
aggregate'' and ``last sale'' data that will incorporate the concepts 
set forth in the proposed amendments to Rule 6250 providing for both 
immediate and delayed dissemination of transaction information. NASD 
will publish information concerning the above in various media (e.g., 
Notice to Members, TRACE User's Guide and the NASD website).
    NASD will continue to treat transactions described in paragraphs 
(c) and (d) of Rule 6250 in the same manner as set forth in the Rule, 
provided the treatment is consistent with the proposed amendments to 
Rule 6250 requiring delayed dissemination and continues to meet the 
needs of the market place. The treatment of transactions executed after 
the TRACE System closes, and on weekends and holidays will be set forth 
in a published policy. Again, NASD will publish information concerning 
the above in various media (e.g., Notice to Members, TRACE User's Guide 
and the NASD Web site).

vi. Implementation of Proposed Dissemination Amendments

Staged Implementation

    As noted above, NASD is proposing that the dissemination provisions 
be implemented in two stages because NASD must make significant 
operational and technical enhancements to the TRACE System, to 
implement certain aspects of the proposal.
    Stage One. As Stage One, NASD will implement the following portions 
of the proposed rule change: the proposed amendments to Rule 6210 
(definitions); Rule 6250(b)(1)(A) and (B), requiring immediate 
dissemination of all Investment Grade TRACE-eligible securities 
transactions, except transactions in TRACE-eligible securities rated by 
an NRSRO or classified by NASD for purposes of TRACE as BBB (or the 
equivalent rating of one or more NRSROs) that occur during a New Issue 
Aftermarket-2; under Rule 6250(b)(1)(C)(i), all TRACE-eligible 
securities transactions of $1 million or less (par value) subject to 
dissemination, except those where the subject security does not meet 
the frequency standard set forth in Rule 6250(b)(1)(C)(ii);\25\ Rule 
6250(b)(1)(C)(ii), requiring immediate dissemination of all 
transactions in TRACE-eligible securities rated by an NRSRO or 
classified by NASD for purposes of TRACE as BB (or the equivalent 
rating of one or more NRSROs) or lower that exceed $1 million (par 
value) and meet the frequency test set forth in this subsection; Rule 
6250(c), prohibiting the dissemination of Rule 144A transactions; and 
Rule 6260, providing for new issue notifications. In addition, Stage 
One will include the proposed deletions of current Rule 6250(a) through 
(d). Stage One will become effective on September 1, 2004.
---------------------------------------------------------------------------

    \25\ Rule 6250(b)(1)(C)(i) provides for the immediate 
dissemination of transactions in TRACE-eligible securities that are 
rated by an NRSRO or classified by NASD for purposes of TRACE as BB 
(or the equivalent rating of one or more NRSROs) or lower and are 
executed other than during the New Issue Aftermarket-10, if the size 
of the transaction is $1 million or less. NASD intends to partially 
implement this provision in Stage One. In Stage One, NASD proposes 
to disseminate immediately such transactions in any security for 
which the larger transactions (i.e., ``$1 million plus'' 
transactions) are also disseminated in Stage One (i.e., securities 
that are traded an average of one or more times per day, as more 
fully set forth in Rule 6250(b)(1)(C)(ii)). Securities transactions 
described in Rule 6250(b)(1)(C)(i) that would otherwise be subject 
to immediate dissemination, but occurred in a security that was 
traded an average of less than one time per day and is subject to 
the delayed dissemination provisions in Rule 6250(b)(2)(A)(ii) or 
Rule 6250(b)(2)(B)(ii), will be disseminated in Stage Two, when 
delayed dissemination is functional and all transactions in the 
security will be disseminated. For example, XPL Security is rated BB 
(or the equivalent rating of one or more NRSROs) and trades an 
average of less than one time per day. Under Rule 6250(b)(1)(C)(i), 
a transaction in XPL Security for $100,000 would be disseminated 
immediately if not for the above approach to implementation, but a 
transaction on the same day in XPL Security for $2 million would not 
be disseminated at any time during Stage One. NASD intends to 
withhold the dissemination of the $100,000 transaction in XPL 
Security during Stage One because it believes that all market 
participants will be best served and get a more complete and 
accurate indication of price when transactions of all sizes in a 
security are disseminated.
---------------------------------------------------------------------------

    Stage Two. Stage Two will consist of the implementation of proposed 
Rule 6250(a), providing for delayed dissemination of transaction 
information for transactions occurring during a New Issue Aftermarket-2 
or New Issue Aftermarket-10, as defined above; the portion of proposed 
Rule 6250(b)(1)(C)(i) not fully implemented in Stage One;\26\ and 
proposed Rule 6250(b)(2), providing for delayed dissemination of 
transaction information in certain transactions in TRACE-eligible 
securities rated by an NRSRO or classified by NASD for purposes of 
TRACE as BB (or the equivalent rating of one or more NRSROs) or lower.
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    NASD is implementing these provisions as Stage Two, because the 
provisions cannot become effective until NASD has enhanced the TRACE 
System. By phasing the proposed rules in using two stages, NASD will 
not delay the implementation of nearly all of the dissemination 
provisions in Rule 6250(b)(1), which will have the greatest impact on 
increasing transparency. Stage Two will become effective on December 1, 
2004.

[[Page 40437]]

Planned Review Nine Months After Stage Two Implementation

    Finally, as discussed previously, NASD intends to continue to 
review the trading and the liquidity in TRACE-eligible securities 
during the implementation of Stages One and Two of the proposed rule 
change. As part of this review process, not later than nine months from 
the implementation of Stage Two, NASD will ask the BTRC to reconvene to 
review the rule. Based on the reviews, the BTRC and NASD staff will 
make recommendations to the NASD Board. The NASD Board will review the 
recommendations and will decide whether to amend the dissemination 
provisions then in effect.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\27\ 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 believes that the proposed rule change will 
provide NASD with heightened capabilities to regulate and provide 
surveillance of the debt securities markets to prevent fraudulent and 
manipulative acts and practices, and will improve transparency in the 
debt markets for the benefit of customers and other market participants 
in furtherance of the public interest and for the protection of 
investors.
---------------------------------------------------------------------------

    \27\ 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.

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. Comments may be submitted by any of 
the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-094 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-094. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2004-094 and should be submitted on or before July 23, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15050 Filed 7-1-04; 8:45 am]
BILLING CODE 8010-01-P