[Federal Register Volume 69, Number 176 (Monday, September 13, 2004)]
[Notices]
[Pages 55202-55204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20588]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50317; File No. SR-NASD-2004-94]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto 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 Certain TRACE-Eligible Securities and Facilitate 
Dissemination of Such Information

September 3, 2004.

I. Introduction

    On June 17, 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 NASD Rule 6250 to 
publicly disseminate transaction information for secondary market 
transactions in all TRACE-eligible securities other than those 
purchased or sold pursuant to Rule 144A under the Securities Act of 
1933 (``Rule 144A Securities''), with information on transactions in 
certain securities dissemination on a delayed basis; make related 
amendments to Rule 6210 regarding classification of securities and Rule 
6260 requiring the managing underwriter or group of underwriters to 
provide certain information to NASD, to facilitate dissemination of 
such transaction information; and delete provisions regarding market 
aggregates, last sale

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data, and treatment of certain transaction reports in NASD Rule 6250.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change was published for comment in the 
Federal Register on July 2, 2004.\3\ The Commission received one 
comment regarding the proposal, from The Bond Market Association 
(``TBMA Letter'').\4\ On August 9, 2004, the NASD submitted a response 
to the TBMA Letter and Amendment No. 1 to the proposed rule change.\5\ 
This order approves the proposed rule change, as amended.
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    \3\ See Securities Exchange Act Release No. 49920 (June 25, 
2004), 69 FR 40429.
    \4\ See letter from Donald R. Mullen, Jr., Goldman, Sachs & Co., 
Chair, Corporate Credit Markets Division, TBMA, to Jonathan G. Katz, 
Secretary, Commission, dated July 23, 2004.
    \5\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, Regulatory Policy and Oversight, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation, 
Commission, dated August 6, 2004. Amendment No. 1, which addresses 
the implementation dates of the proposal, is a technical amendment 
and therefore not subject to notice and comment. See discussion, 
infra, Part III.
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II. Background

    On January 23, 2001, the Commission approved the TRACE Rules to 
establish a corporate bond trade reporting and transaction 
dissemination facility and to eliminate Nasdaq's Fixed Income Pricing 
System (``FIPS'').\6\ The TRACE Rules became effective on July 1, 2002. 
On that day, members began to report transactions in all TRACE-eligible 
securities, and TRACE began the dissemination of certain reported 
information. Initially, TRACE disseminated transaction information only 
on investment grade securities with an initial issuance size of $1 
billion or greater, and on 50 high-yield issues previously reported in 
the FIPS system, called the ``FIPS 50.'' On January 31, 2003, the 
Commission approved an NASD proposal to expand TRACE dissemination to 
cover roughly 75 percent of the average daily trading volume of 
investment grade securities.\7\
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    \6\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001). FIPS, which was operated by 
Nasdaq, collected transaction and quotation information on domestic, 
registered, non-convertible high-yield corporate bonds.
    \7\ See Securities Exchange Act Release No. 47302 (January 31, 
2003), 68 FR 06233 (February 6, 2003).
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    Initially TRACE Rules required a member to report transaction 
information to TRACE within 75 minutes of execution. On June 18, 2003, 
the Commission approved an NASD proposal to reduce the transaction 
reporting interval from 75 minutes to 45 minutes.\8\ More recently, the 
Commission approved an NASD proposal to further reduce the transaction 
reporting interval, from 45 minutes to 30 minutes (effective October 1, 
2004), and later to 15 minutes (effective July 1, 2005).\9\
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    \8\ See Securities Exchange Act Release No. 48056 (June 18, 
2003), 68 FR 37886 (June 25, 2003).
    \9\ See Securities Exchange Act Release No. 49854 (June 14, 
2004), 68 FR 35088 (June 23, 2004).
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III. The Amended Proposal

    As more fully discussed in the Commission's Notice,\10\ NASD 
proposes to amend Rule 6250 to: (1) Expand transaction dissemination to 
include secondary market transactions in all TRACE-eligible securities 
other than Rule 144A Securities, but provide for delays in 
dissemination of transactions in certain securities; (2) prohibit 
dissemination of secondary market transactions in Rule 144A Securities; 
and (3) delete provisions regarding market aggregate and last sale data 
and the treatment of certain transaction reports. NASD also proposes to 
amend Rule 6210 to revise the defined terms ``Investment Grade'' and 
``Non-Investment Grade,'' add a new defined term, ``Split-Rated,'' and 
make clear that NASD may, for purposes of its rules, classify an 
unrated TRACE-eligible security as Investment Grade or Non-Investment 
Grade in certain circumstances. In addition, NASD proposes to amend 
Rule 6260 to require a managing underwriter or group of underwriters to 
provide information to enable NASD to implement the dissemination 
criteria regarding the new issue aftermarket in Rule 6250; and to make 
certain minor, technical changes.
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    \10\ See supra note 3, at 14-32. A full description of the 
proposal is contained in the Notice.
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    With respect to revisions to the dissemination provisions in Rule 
6250, NASD proposes to delay dissemination of transaction information 
in the new issue aftermarket by two business days for bonds rated by an 
NRSRO or classified by NASD as BBB, and by ten business days for bonds 
rated by an NRSRO or classified by NASD as BB or lower. In addition, 
NASD proposes to delay dissemination of transaction information in the 
secondary market other than the new issue aftermarket, for two business 
days for bonds rated by an NRSRO or classified by NASD as BB, and for 
four business days for bonds rated by an NRSRO or classified by NASD as 
B or lower, for transactions greater than $1 million (par value) where 
the security trades, on average, less than one time per day. 
Notwithstanding these delays, 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 on receipt of the transaction information by NASD.
    NASD proposes to implement the dissemination provisions in two 
stages. In Stage One, NASD plans to implement the definitional change 
to Rule 6210 and implement immediate dissemination of TRACE-eligible 
securities other than Rule 144A Securities, except those subject to 
dissemination delays. Stage One will be effective not later than 60 
days after the date of this approval. In Stage Two, NASD plans to 
complete the implementation of the rule changes approved by this Order. 
Stage Two will be effective on February 1, 2005. NASD represents that 
it intends to continue to review the trading and liquidity of TRACE-
eligible securities during the implementation of Stages One and Two. As 
part of this review process, NASD states that, not later than nine 
months after implementation of Stage Two, it will ask the BTRC to 
reconvene to review the proposal. NASD states that, based on this 
review, the BTRC and NASD staff will make recommendations to the NASD 
Board. NASD states that the NASD Board will review the recommendations 
and decide whether to amend the dissemination provisions then in 
effect.

IV. Summary of Comment Letter and NASD's Response Thereto

A. TBMA Letter

    In its letter, TBMA states that, while its representatives on the 
Bond Transaction Reporting Committee (``BTRC'') \11\ participated in 
the development of the proposal, they did not unanimously support it. 
TBMA states that its membership continues to have serious concerns 
about potential harm to liquidity resulting from dissemination of 
transaction data on lower rated, less frequently traded issues. The 
letter states that, while the proposal affords some protection for 
large trades in these issues, TBMA believes the delayed dissemination 
it proposes does not go far enough to protect liquidity. Specifically, 
TBMA states that certain of its members believe there is a set of 
infrequently traded BBB-related bonds that should be subject to the 
same two-business day delay that applies to infrequently traded BB-
related bonds. TBMA also believes that the NASD proposal should count 
only large transactions (over $1 million), as

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opposed to every transaction, in determining trading frequency for a 
given security for purposes of determining whether dissemination delays 
apply to large transactions in that security. TBMA urges NASD to 
monitor the effects of the increased dissemination set forth in the 
proposal, and seek appropriate adjustments to the proposed 
dissemination scheme on an expedited basis should harm to liquidity be 
shown to result. TBMA also recommends that NASD make its consolidated 
transaction data publicly available, so that the industry can assess 
the effects of transparency on liquidity.
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    \11\ The BTRC is a committee on the NASD Board of Governors that 
is responsible for advising the NASD Board on issues relating to 
expansion of dissemination of transaction information through TRACE. 
The BTRC is appointed by the NASD Board and has ten members. Five of 
the ten members were recommended by the NASD staff; the other five 
were recommended by TBMA.
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B. NASD's Response

    In response to the TBMA Letter, NASD states that it believes that 
its proposal strikes a well-reasoned balance between concerns regarding 
liquidity and the substantial benefits of increased transparency. NASD 
notes that the proposal was developed and supported by the BTRC. The 
NASD also notes that, after reviewing the two studies that it 
commissioned to address the relationship of transparency to liquidity, 
the NASD found no conclusive evidence that TRACE transparency has 
adversely affected liquidity, including liquidity of lower-rated bonds. 
In response to the recommendations of TBMA regarding ongoing NASD 
review, the NASD states that the proposal provides for NASD to continue 
to review the trading and liquidity of TRACE-eligible securities during 
the two stages of implementation of the proposal; and that NASD has 
authority to effect necessary amendments to TRACE Rules to protect the 
integrity of the market. In response to the comment of TBMA that NASD 
should make consolidated TRACE transaction data available, NASD states 
that transaction information on all publicly disseminated TRACE 
eligible securities will be available through the NASD Web site, 
vendors, or via an electronic feed directly from NASD.

V. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to be registered securities 
association and, in particular, with the requirements of section 
15A(b)(6) of the Act.\12\ Specifically, the Commission finds that 
approval of the proposed rule change is consistent with section 
15A(b)(6) of the Act in that it is 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.\13\
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    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78(c)(f).
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    The Commission believes that, by expanding dissemination of 
transaction information to, by NASD's estimate, roughly 99 percent of 
all secondary transactions and 95 percent of par value traded in TRACE-
eligible securities, the proposal will substantially increase the 
amount of information available to the public and market participants 
about the corporate bond markets, thereby promoting the protection of 
investors and the public interest. Specifically, under the proposal, 
TRACE will disseminate transaction information on non-investment grade 
bonds (other than the FIPS 50) for the first time, significantly 
enhancing the transparency of this important segment of the corporate 
bond market. The Commission believes that this proposal, in conjunction 
with the NASD's recent proposal reducing transaction reporting times in 
TRACE to 30 minutes (effective October 1, 2004), and then to 15 minutes 
(effective July 1, 2005),\14\ represents a significant incremental 
improvement in the transparency of the corporate bond market. Moreover, 
the Commission believes that the proposed amendments to Rule 6210 
(regarding classification of securities) and Rule 6260 (requiring the 
managing underwriter or group of underwriters to provide certain 
information to NASD) should assist the NASD in implementing the 
proposal.
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    \14\ See Securities Exchange Act Release No. 48056 (June 18, 
2003), 68 FR 37886 (June 25 2003), supra note 9.
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    The Commission notes that the proposal imposes dissemination delays 
for securities rated BBB or lower in the new issue aftermarket, and for 
larger transactions in infrequently traded non-investment grade bonds 
in the secondary market other than the new issue aftermarket. The 
Commission believes that these dissemination delays may unnecessarily 
restrict the availability of this transaction information to investors 
in this market. Moreover, the Commission notes that the two studies 
commissioned by the NASD to address the relationship between 
transparency and liquidity found no conclusive evidence that TRACE 
transparency has adversely affected liquidity.\15\ Accordingly, the 
Commission expects that, not later than November 1, 2005 (nine months 
after the effective date of Stage Two), the NASD will submit a proposed 
rule change eliminating the delays in TRACE information dissemination. 
As previously noted, the Commission received one comment letter, from 
TBMA, on the proposed rule change. In its letter, TBMA argued that the 
delayed dissemination regime in the proposal does not go far enough to 
protect liquidity. As noted above, the Commission notes that economic 
studies commissioned and cited by NASD have shown no conclusive 
evidence that the transparency afforded by TRACE has adversely affected 
market liquidity.
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    \15\ See Commission Notice, supra note 3, at 16.
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    Finally, the Commission believes that amendments to the TRACE Rules 
to prohibit dissemination of secondary market transactions in Rule 144A 
Securities and to delete provisions regarding market aggregate and last 
sale data and the treatment of certain transaction reports, should 
streamline and clarify the TRACE Rules, thus promoting the protection 
of investors and the public interest.

VI. Conclusion

    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, 
that the proposed rule change, as amended (SR-NASD-2004-94), be, and 
hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-20588 Filed 9-10-04; 8:45 am]
BILLING CODE 8010-01-M