[Federal Register Volume 69, Number 183 (Wednesday, September 22, 2004)]
[Notices]
[Pages 56806-56808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2290]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50376]


Order Granting Exemption to National Association of Securities 
Dealers, Inc. From Certain Reporting Requirements Under Section 31 of 
the Exchange Act

September 14, 2004.

I. Introduction

    Section 36 of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ authorizes the Securities and Exchange Commission 
(``Commission'')--by rule, regulation, or order--to conditionally or 
unconditionally exempt any person, security, transaction (or any class 
or classes of persons, securities, or transactions) from any provision 
or provisions of the Exchange Act or any rule or regulation thereunder, 
to the extent such exemption is necessary or appropriate in the public 
interest and is consistent with the protection of investors. By this 
Order, the Commission is exempting the National Association of 
Securities Dealers, Inc. (``NASD'') from certain reporting 
requirements, described below, that are imposed by Rules 31 and 31T and 
Form R31,\2\ which implement Section 31 of the Exchange Act.\3\
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    \1\ 15 U.S.C. 78mm.
    \2\ 17 CFR 240.31, 240.31T, and 249.11. The Commission 
established Rules 31 and 31T and Form R31 in June 2004. See 
Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR 
41060 (July 7, 2004) (``Rule 31 Adopting Release'').
    \3\ 15 U.S.C. 78ee.
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II. Background

    Section 31, among other things, requires NASD to pay the Commission 
fees based on the aggregate dollar amount of certain sales of 
securities. Rules 31 and 31T and Form R31 established a procedure for 
the calculation and collection of Section 31 fees on the ``covered 
sales'' of NASD and the national securities exchanges.\4\ Paragraph 
(b)(1) of Rule 31 requires NASD to submit a completed Form R31 for each 
month by the tenth business day of the following month. NASD must 
provide on Form R31 the aggregate dollar amount of its covered sales 
having a ``charge date'' \5\ in the month of the report. The first Form 
R31 required by Rule 31 covers the month of July 2004 and was due on 
August 13, 2004. Paragraph (b) of temporary Rule 31T requires NASD to 
submit a completed Form R31 for each of the months September 2003 to 
June 2004, inclusive; these forms also were due on August 13, 2004. 
Based on the data provided by NASD, the Commission will calculate the 
amount of Section 31 fees owed and send a bill to NASD.
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    \4\ For NASD, a covered sale is the sale of a security (other 
than an exempt sale or a sale of a security future) that occurs by 
or through any NASD member otherwise than on a national securities 
exchange, if the security is registered on a national securities 
exchange or is subject to prompt last sale reporting pursuant to 
NASD rules. See 15 U.S.C. 78ee(c); 17 CFR 240.31(a)(6).
    \5\ The charge date is the date on which a covered sale occurs 
for purposes of determining the liability of a national securities 
exchange or national securities association pursuant to Section 31 
of the Exchange Act. See 17 CFR 240.31(a)(3).
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    For NASD, the charge date for most covered sales is the trade date 
(rather than the settlement date).\6\ NASD has requested, however, that 
it be permitted to use a charge date other than the trade date for 
certain covered sales that are reported on an ``as-of'' basis.\7\ NASD 
rules generally require its members, during normal market hours, to 
report securities transactions within 90 seconds after execution. There 
are situations in which a member fails to report a transaction on the 
trade date during normal market hours, although NASD trade reporting 
systems were open, and the member was obligated to do so within 90 
seconds. These trades are reported as ``as-of'' trades.\8\ NASD 
considers such ``as-of'' trades to be late and in violation of NASD 
rules.\9\ An ``as-of'' report also could result when a trade is 
executed when NASD trade reporting systems are not open. The trade, 
therefore, must be reported on the next business day when NASD systems 
re-open. NASD trade reporting rules allow for the next-day reporting of 
these transactions; NASD does not consider these trades to be reported 
late or in violation of NASD rules. NASD reviewed the ``as-of'' trades 
reported by its members over a selected period and found that, during 
the review period, the percentage of trades reported ``as-of'' was 
relatively consistent on a month-to-month basis, and the vast majority 
of ``as-of'' trades were reported to NASD in the same month that the 
trades occurred.\10\
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    \6\ The only covered sales for which NASD does not incur 
liability based on the trade date are those resulting from the 
exercise of options that are not listed or registered on a national 
securities exchange, in which case the charge date is the exercise 
date. See 17 CFR 240.31(a)(3)(ii).
    \7\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, NASD, to Margaret McFarland, Deputy Secretary, 
Commission, dated August 11, 2004.
    \8\ An ``as-of'' trade is a trade that is reported to NASD after 
the date that the actual trade occurred.
    \9\ See NASD Rules 4632, 4642, 5430, 6420, 6550, 6620, and 
related interpretive material.
    \10\ See letter from Patrice M. Gliniecki, Senior Vice President 
and Deputy General Counsel, NASD, to Margaret McFarland, Deputy 
Secretary, Commission, dated August 18, 2004. NASD also found that, 
during the review period, the number of ``as-of'' trades represented 
a de minimus percentage of the total number of trades.
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    NASD has stated that it considered making adjustments to its 
internal systems to track ``as-of'' covered sales by trade date but 
determined that it could not do so prior to August 13, 2004. Even if 
NASD could make these changes, another problem would arise: a 
previously submitted Form R31 would be rendered inaccurate if an ``as-
of'' trade were reported in a month different from the month in which 
the trade was actually effected.\11\ Therefore, NASD has requested 
relief to be permitted to report ``as-of'' covered sales based on the 
report date rather than the trade date, as would otherwise be required.
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    \11\ For instance, assume that an ``as-of'' covered sale is 
effected in July 2004 but not reported to NASD until December 2004. 
In the absence of this Section 36 exemption, the July 2004 Form R31 
would no longer contain an accurate tabulation of NASD's aggregate 
dollar amount of covered sales for that month.
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    NASD also has requested relief from the requirement, for the months 
September 2003 to June 2004, to report on Form R31 covered sales with a 
price substantially unrelated to the current market price.\12\ Rules 31 
and 31T and Form R31 require NASD to include the aggregate dollar 
amount of such ``away-from-the-market'' covered sales in Part III of 
its Form R31. NASD's rules \13\ currently do not require members to 
report such trades to the Automated Confirmation Transaction Service

[[Page 56807]]

(``ACT'').\14\ Because away-from-the-market covered sales are not 
captured in ACT, the only way that NASD could obtain data on them would 
be to require its members to report them manually.
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    \12\ See letter from Marc Menchel, Executive Vice President and 
General Counsel, NASD, to Annette L. Nazareth, Director, Division of 
Market Regulation, Commission, dated August 5, 2004.
    \13\ See NASD Rules 4632(e)(5), 4642(e)(4), 6420(e)(5), and 
6920(e)(2).
    \14\ ACT is the automated system owned and operated by the 
Nasdaq Stock Market which compares trade information entered by ACT 
participants and submits ``locked-in'' trades to National Securities 
Clearing Corporation for clearance and settlement; transmits reports 
of the transactions automatically to the National Trade Reporting 
System, if required, for dissemination to the public and the 
industry; and provides participants with monitoring and risk 
management capabilities to facilitate participation in a ``locked-
in'' trading environment. See NASD Rule 6110(d). ACT is a ``trade 
reporting system'' as defined in Rule 31(a)(18), 17 CFR 
240.31(a)(18).
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    Presently, NASD does not require its members to manually report 
data on away-from-the-market covered sales, and NASD members do not 
have practices and procedures in place for collecting such data. NASD 
argues that, in the absence of such practices and procedures and in 
light of an earlier Commission interpretation with respect to away-
from-the-market covered sales,\15\ requesting historical information 
from NASD member firms on away-from-the-market covered sales for the 
period from September 2003 to June 2004--which would enable NASD to 
carry out its reporting obligations under temporary Rule 31T--would be 
unduly burdensome. NASD believes that the number of away-from-the-
market covered sales is de minimis, while the cost associated with 
requiring all member firms to search for such historical data would be 
high. Therefore, NASD has requested relief from the obligation imposed 
by Rule 31T to report the aggregate dollar amount of away-from-the-
market covered sales on its Form R31 submissions for the months 
September 2003 to June 2004.
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    \15\ In a 1996 release wherein the Commission adopted amendments 
to prior Rule 31-1 under the Exchange Act, the Commission stated 
that ``no transaction fee will arise from transactions where the 
buyer and the seller have agreed to trade at a price substantially 
unrelated to the current market price for the securities, e.g., to 
enable the seller to make a gift.'' Securities Exchange Act Release 
No. 38073 (December 23, 1996), 61 FR 68590, 68592 n.27 (December 30, 
1996).
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    With respect to its ongoing obligations under Rule 31, NASD has 
represented that it will promptly amend its ``self-reporting'' form 
\16\ to solicit information from NASD member firms on away-from-the-
market covered sales prospectively. However, NASD has stated that its 
members would not be able to provide data on away-from-the-market 
covered sales for the July 2004 reporting period before August 13, 
2004. NASD has represented, however, that it will report away-from-the-
market covered sales occurring in July 2004 on its August 2004 Form 
R31.\17\ Therefore, NASD also has requested relief from the obligation 
to report the aggregate dollar amount of its away-from-the-market 
covered sales occurring in July 2004 in its Form R31 for that month, 
and instead to report such covered sales along with its August 2004 
Part III covered sales in its August 2004 Form R31.
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    \16\ NASD currently uses this form to collect data from its 
members on covered sales that: (1) occur in odd lots (i.e., for less 
than 100 shares), where the trade is not captured by ACT; or (2) 
result from the exercise of non-exchange-traded options that settle 
by physical delivery of the underlying securities.
    Because these two types of covered sales are not captured in a 
trade reporting system, NASD must include the aggregate dollar 
amount of such trades in Part III of Form R31.
    \17\ The August 2004 Form R31 is due to the Commission by 
September 15, 2004, the tenth business day of September.
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III. Discussion

    After careful consideration, the Commission believes that 
exercising its exemptive authority under Section 36 of the Exchange Act 
to grant NASD the relief it has requested is necessary or appropriate 
in the public interest and consistent with the protection of investors.
    As discussed below, the Commission believes that, in view of the 
structure of the over-the-counter (``OTC'') markets, using the report 
date rather than the trade date for ``as-of'' covered sales is a 
practical solution that should have no net impact on the Commission's 
ability to collect the appropriate amount of Section 31 fees from NASD. 
While some OTC trading occurs through NASD's facilities (such as the 
Nasdaq Stock Market), other trading activity results from direct 
negotiation between NASD members or their customers. NASD must rely on 
its members to report these trades in a timely fashion. While the 
Commission expects NASD to zealously enforce its trade reporting rules 
to minimize the instances of late reporting by members, sometimes late 
reporting will occur.
    Based on the NASD representations noted above, the Commission 
believes that, in most instances, using the report date rather than the 
trade date as the charge date of these ``as-of'' covered sales will not 
affect the aggregate dollar amount of NASD's covered sales reported on 
Form R31 in a given month.\18\ In the limited circumstances when the 
trade date and the report date are not in the same month, the aggregate 
dollar amounts of covered sales reported by NASD in the affected months 
will change, but the Commission will still collect the same amount of 
Section 31 fees unless there is a fee rate change in the intervening 
period.\19\ Furthermore, the Commission believes that, in the very 
limited circumstances when a fee rate change occurs between the trade 
date and the report date, allowing NASD to report ``as-of'' trades 
using report date should not materially affect the amount of Section 31 
fees that the Commission collects.\20\ On this basis, the Commission 
believes that granting NASD's request for an exemption with respect to 
``as-of'' covered sales is necessary or appropriate in the public 
interest and consistent with the protection of investors.
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    \18\ For example, assume that an OTC covered sale is effected on 
May 3 but is reported ``as-of'' to NASD on May 13 and there is no 
fee rate change in the intervening period. The Commission will 
collect exactly the same amount of Section 31 fees from NASD because 
NASD's aggregate dollar amount of covered sales for the month of May 
is unchanged.
    \19\ For example, assume that the covered sale occurs on May 13 
but is reported ``as-of'' to NASD on June 13 and that no fee rate 
change occurs in the intervening period. Although the dollar amount 
of this ``as-of'' covered sale will be included in the June rather 
than the May Form R31 figures, the fees due in the billing period 
will be unchanged because May and June are in the same billing 
period. See 17 CFR 240.31(a)(2).
    \20\ NASD has reported that, in a sample period, the number of 
``as-of'' trades reported to ACT is relatively consistent on a 
month-to-month basis. Therefore, the ``as-of'' covered sales that 
are ``lost'' to a future period where a different fee rate applies 
(i.e., the trade is effected in the current period but the ``as-of'' 
report to NASD is not made until the next period) should be roughly 
offset by the ``as-of'' trades ``gained'' from a previous period 
(i.e., the trade was effected in a prior period but was reported to 
NASD ``as-of'' in the current period).
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    With respect to away-from-the-market covered sales, NASD previously 
has not obtained data on such trades, and NASD members do not have 
practices and procedures to provide NASD with such data. The Commission 
believes that, based on NASD's representations,\21\ the minimal 
aggregate dollar amount of such covered sales--and the correspondingly 
limited Section 31 fees on such covered sales--does not justify the 
substantial cost of collecting the historical data from NASD (through 
its members). Therefore, the Commission believes that granting NASD's 
request for relief from the requirements of Rules 31 and 31T and Form 
R31 with respect to away-from-the-market covered sales occurring 
between September 2003 and June 2004 is necessary or appropriate in the 
public interest and consistent with the protection of investors. The 
Commission further believes that reporting July 2004 away-from-the-
market covered sales along with NASD's August 2004 data is a practical 
solution. NASD will have additional time to obtain this information 
from its members, and the delayed reporting of one month's worth of 
this data will not

[[Page 56808]]

affect the amount of Section 31 fees that NASD will owe the 
Commission.\22\ Therefore, the Commission believes that granting NASD's 
request for relief from the requirements of Rules 31 and 31T and Form 
R31 with respect to away-from-the-market covered sales occurring in 
July 2004 is necessary or appropriate in the public interest and 
consistent with the protection of investors. After August 2004, NASD 
must report away-from-the-market covered sales occurring in a given 
month in the Form R31 due by the tenth business day of the following 
month, as required by Rule 31.
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    \21\ See supra note 12.
    \22\ July 2004 and August 2004 are in the same billing period 
and the same fee rate applies to covered sales occurring in these 
months.
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IV. Conclusion

    It is hereby ordered, pursuant to section 36 of the Exchange Act, 
that NASD: (1) May use the report date rather than the trade date as 
the charge date of any covered sale reported to NASD ``as-of''; (2) is 
not required to include in its Form R31 submissions for the months 
September 2003 to July 2004, inclusive, the aggregate dollar amount of 
any away-from-the-market covered sales; and (3) may report in its 
August 2004 Form R31 the aggregate dollar amount of away-from-the-
market covered sales that occurred in July 2004 and August 2004.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2290 Filed 9-21-04; 8:45 am]
BILLING CODE 8010-01-P