[Federal Register Volume 69, Number 170 (Thursday, September 2, 2004)]
[Notices]
[Pages 53757-53759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2021]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50274; File No. SR-NASD-2004-129]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend, and Provide an Interpretation to, Section 3 of 
Schedule A to NASD By-Laws and Amend NASD's Permanent Self-Reporting 
Form

August 26, 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 August 23, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
NASD. NASD has designated the proposed rule change as constituting a 
``non-controversial'' rule change pursuant to Rule 19b-4(f)(6) under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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\ 17 CFR 240.19b-4(f)(6).
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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 Section 3 of Schedule A to NASD By-Laws 
to remove references to the ``SEC.'' In addition, NASD filed portions 
of a Notice to Members relating to interpretations of Section 3 of 
Schedule A to NASD By-Laws. NASD also filed two self-reporting forms 
that are to be used by members to report trade data that is not 
captured by NASD's trade reporting systems. The text of the proposed 
rule change and the self-reporting forms and the relevant portions of 
the Notice are available at NASD and at the Commission.

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
    Section 31 of the Act \4\ requires that NASD, as a national 
securities association, and the national securities exchanges pay 
transaction fees and assessments to the Commission that are designed to 
recover the costs related to the government's supervision and 
regulation of the securities markets and securities professionals. On 
June 28, 2004, the Commission established new procedures governing the 
calculation, payment, and collection of fees and assessments on 
securities transactions owed by national securities exchanges and 
associations to the Commission pursuant to Section 31 of the Act.\5\ 
The new procedures became effective on August 6, 2004. In accordance 
with the new procedures, NASD must now provide the Commission with 
trade data, which the Commission will use to calculate the amount of 
fees and assessments due by NASD. Accordingly, the calculation of fees 
and assessments owed by NASD pursuant to Section 31 of the Act will now 
be performed exclusively by the Commission. To recover the costs of 
NASD's Section 31 obligation, NASD assesses a transaction fee on its 
member firms under Section 3 of Schedule A to NASD By-Laws.
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    \4\ 15 U.S.C. 78ee.
    \5\ See Final Rule Regarding Collection Practices Under Section 
31, Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR 
41059 (July 7, 2004) (``Adopting Release'').
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    In response to the new procedures adopted by the Commission and 
interpretive guidance provided in the Adopting Release, NASD has filed 
with the Commission: (1) A proposed rule change to amend Section 3 of 
Schedule A to NASD By-Laws to remove references to the ``SEC''; (2) 
portions of a forthcoming Notice to Members relating to interpretations 
of Section 3 of Schedule A; and (3) two self-reporting forms that are 
to be used by members to report trade data that is not captured by 
NASD's trade reporting systems.
    Pursuant to Section 3 of Schedule A, NASD assesses a transaction 
fee on its member firms, the amount of which is determined periodically 
in accordance with Section 31 of the Act, to recover the costs of 
NASD's Section 31 obligation. The current title of Section 3 of 
Schedule A is ``SEC Transaction Fee,'' and the text of Section 3 of 
Schedule A states: ``[e]ach member shall be assessed a SEC transaction 
fee. The amount shall be determined by the SEC in accordance with 
Section 31 of the Act.'' The current title and text of Section 3 of 
Schedule A were filed with the Commission for notice and review in 
2002.\6\
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    \6\ See Securities Exchange Act Release No. 46168 (July 8, 
2002), 67 FR 46558 (July 15, 2002) (notice of filing and immediate 
effectiveness of SR-NASD-2002-65); Securities Exchange Act Release 
No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (order 
approving SR-NASD-2002-148).
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    NASD is proposing to amend Section 3 of Schedule A in response to 
statements made by the SEC in its Adopting Release that ``it is 
misleading to suggest that a customer or [a self-regulatory 
organization] member incurs an obligation to the Commission under 
Section 31.'' \7\ While NASD notes that the Commission has previously 
reviewed Section 3, formerly Section 8, of Schedule A to NASD By-Laws 
and deemed it to be consistent with the Act,\8\ to avoid any possible 
confusion as discussed in the Adopting Release, NASD is now amending 
Section 3 of Schedule A to delete any references to the ``SEC''. In 
addition, in conformity with the Adopting Release, NASD is proposing to 
refer to the transaction fee as a ``Regulatory Transaction Fee'' in the 
title and text of Section 3 of Schedule A. The transaction fee assessed 
by NASD will continue to be set, as it is today, in accordance with 
Section 31 of the Act.\9\ Therefore, NASD is not

[[Page 53758]]

amending the reference to Section 31 in Section 3 of Schedule A to NASD 
By-Laws.
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    \7\ See supra note 5 at 41072.
    \8\ See Securities Exchange Act Release No. 38133 (January 7, 
1997), 62 FR 1940 (January 14, 1997) (notice of filing and immediate 
effectiveness of SR-NASD-96-57); Securities Exchange Act Release No. 
46168 (July 8, 2002), 67 FR 46558 (July 15, 2002) (notice of filing 
and immediate effectiveness of SR-NASD-2002-65); Securities Exchange 
Act Release No. 46416 (August 23, 2002), 67 FR 55901 (August 30, 
2002) (notice of filing and immediate effectiveness of SR-NASD-2002-
98); Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 
34021 (June 6, 2003) (order approving SR-NASD-2002-148).
    \9\ NASD also is amending Section 3 of Schedule A to NASD By-
Laws to reflect that the applicable fee rate assessed by NASD is 
periodically adjusted in accordance with Section 31. In the past, 
NASD has notified members, through Member Alerts or other means, of 
any periodic adjustments to the fee rate made by the Commission. 
NASD will continue to notify members of any such adjustments in the 
future since NASD seeks to recover the costs of its Section 31 
obligation from its members.
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    Though the requirements of Section 31, including the new procedures 
established by the Commission, apply directly to NASD and the national 
securities exchanges, and not their membership, the requirements will 
affect the obligations of member firms under Section 3 of Schedule A to 
NASD By-Laws. Therefore, NASD is issuing a Notice to Members to inform 
member firms of the new procedures relating to Section 31 and to remind 
member firms of their continuing obligation to pay the transaction fees 
assessed by NASD so that it can recover the costs of its Section 31 
obligation. NASD believes that certain provisions in the forthcoming 
Notice may constitute interpretations of Section 3 of Schedule A to 
NASD By-Laws that, due to their nature, should be filed as a proposed 
rule change. The provisions in question relate to: (1) Members' 
obligation to self report securities sales where the buyer and seller 
have agreed to trade at a price substantially unrelated to the current 
market for the security and where consideration is given for the 
securities; (2) members' obligation to submit certain self-reporting 
forms and applicable payments to NASD by certain deadlines; (3) the 
manner in which members should use rounding to calculate the 
transaction fees on self-reported trades; and (4) guidance regarding 
the appropriate terminology when referring to the transaction fees 
assessed by NASD under Section 3 of Schedule A to NASD By-Laws. The 
relevant portions of the Notice to Members are available at NASD and at 
the Commission.
    Finally, NASD has revised its Permanent Self-Reporting Form so that 
going forward members can report covered sales where the buyer and 
seller have agreed to trade at a price substantially unrelated to the 
current market for the security, with the exception of securities 
transactions where no consideration is given for the securities. NASD 
previously had not assessed a transaction fee on such sales because the 
Commission had stated that transactions where the buyer and seller have 
agreed to trade at a price substantially unrelated to the current 
market for the security were not subject to Section 31 fees.\10\ As 
stated in the Adopting Release, however, the Commission now believes 
that such securities sales are subject to Section 31 fees where 
consideration is given for the securities, and, therefore, such covered 
sales must be reported to the Commission.\11\ Accordingly, NASD is 
making conforming changes to the Permanent Self-Reporting Form, and 
filed the form with the Commission. The Permanent Self-Reporting Form 
will become effective on October 1, 2004, and members must use this 
form to report covered sales for the month of September 2004 and for 
each month thereafter. As discussed below, NASD is using a different 
self-reporting form for the collection of certain other trade data.
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    \10\ See Final Rule Regarding Securities Transactions Exempt 
From Transaction Fees, Securities Exchange Act Release No. 38073 
(December 23, 1996), 61 FR 68590, 68592 n.27 (December 30, 1996).
    \11\ Pursuant to SEC Rule 31T, as written, NASD is obligated to 
submit trade data on such covered sales for each of the months in 
the September 2003 to June 2004 period, but NASD has sought an 
exemption from the SEC with respect to NASD's retroactive reporting 
obligation. NASD has requested an exemption so that it would not be 
obligated to report such covered sales on a retroactive basis for 
the September 2003 to June 2004 period, and it would not be 
obligated to report to the SEC such covered sales for the month of 
July 2004 until the September 15, 2004 reporting date.
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    NASD has created an Interim Self-Reporting Form to facilitate the 
collection of trade data and payments for covered sales where the buyer 
and seller have agreed to trade at a price substantially unrelated to 
the current market for the security for the months of July and August 
2004. The Interim Self-Reporting Form will be used once only in 
September 2004. Members must use the Interim Self-Reporting Form to 
report, for the month of August 2004, covered sales in odd-lot 
transactions, covered sales resulting from the exercise of over-the-
counter options that settle by physical delivery, and covered sales 
where the buyer and seller have agreed to trade at a price 
substantially unrelated to the current market for the security. Members 
also must use the Interim Self-Reporting Form to report covered sales 
where the buyer and seller have agreed to trade at a price 
substantially unrelated to the current market for the security for the 
month of July 2004. NASD must receive the Interim Self-Reporting Form, 
including any applicable payment, by September 7, 2004. NASD also filed 
the Interim Self-Reporting Form with the Commission.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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 changes to Section 3 
of Schedule A to the NASD By-Laws and to the manner by which member 
firms refer to the fee assessed by NASD when passing it on to their 
customers is consistent with the protection of investors and the public 
interest in that it will avoid any confusion by members and their 
customers. In addition, the proposed rule change, including the 
portions of the Notice that are intended to assist members in complying 
with Section 3 of Schedule A to the NASD By-Laws, is consistent with 
Section 15A(b)(5) of the Act,\13\ which requires, among other things, 
that NASD's rules provide for the equitable allocation of reasonable 
dues, fees, and other charges among members and issuers and other 
persons using any facility or system that NASD operates or controls.
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    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ 15 U.S.C. 78o-3(b)(5).
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B.Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change would 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 has neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change has been filed by NASD as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A)(i) of the 
Act \14\ and Rule 19b-4(f)(6) thereunder \15\ because it does not:
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    \14\ 15 U.S.C. 78s(b)(3)(A)(i).
    \15\ 17 CFR 240.19b-4(f)(6).
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    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date of filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest; provided that the 
self-regulatory

[[Page 53759]]

organization has given the Commission written notice of its intent to 
file the proposed rule change at least five business days prior to the 
filing date of the proposed rule change.
    NASD has requested that the Commission waive the five-day pre-
filing notice requirement and the 30-day pre-operative period, which 
would make the proposed rule operative immediately.
    The Commission believes that it is consistent with the protection 
of investors and the public interest to waive the five-day pre-filing 
requirement and the 30-day pre-operative period in this case. Allowing 
the rule change to become operative immediately will permit NASD to 
satisfy its obligation under Section 31 of the Act on a timely basis 
and will avoid any confusion on the part of NASD members and their 
customers.\16\
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    \16\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2004-129 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-2004-129. 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-2004-129 and should be submitted on or before September 23, 
2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2021 Filed 9-1-04; 8:45 am]
BILLING CODE 8010-01-P