[Federal Register Volume 70, Number 214 (Monday, November 7, 2005)]
[Notices]
[Pages 67523-67525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-6137]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52700; File No. SR-NASD-2005-120]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Dissemination of Information on TRACE-Eligible Securities Transactions

October 28, 2005.
    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 October 14, 2005, 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 Rule 6250 of the Trade Reporting and 
Compliance Engine (``TRACE'') rules to disseminate immediately upon 
receipt transaction information on TRACE-eligible securities (except 
transactions effected pursuant to Rule 144A of the Securities Act of 
1933 (``Rule 144A transactions'')). The text of the proposed rule 
change is available on NASD's Web site (http://www.nasd.com), at NASD's 
principal office, and at the Commission's Public Reference Room.

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
    NASD is proposing to amend Rule 6250 to eliminate all delays in the 
dissemination of information on transactions in TRACE-eligible 
securities (``TRACE information''). The proposed amendments to NASD 
Rule 6250 provide that TRACE information on all transactions (except on 
Rule 144A transactions) be disseminated immediately upon receipt of the 
transaction report. The proposed rule change represents the last stage 
of a series of NASD regulatory actions to gradually increase 
transparency, by phases, for all transactions in TRACE-eligible 
securities (except Rule 144A transactions) for the benefit of all 
market participants.\3\ The proposed amendments also meet the 
Commission's expectations as set forth in its September 2004 approval 
order for the third phase of TRACE dissemination (``Phase III'') 
(``Phase III Approval Order'').\4\ In the Phase III Approval Order, the 
Commission stated that it expected NASD to submit a proposal 
eliminating the remaining delays in TRACE information dissemination not 
later than November 1, 2005.
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    \3\ Information on Rule 144A transactions in TRACE-eligible 
securities is not disseminated because securities sold pursuant to 
Rule 144A are subject to restrictions on transfer and are not freely 
tradable in the public secondary market.
    \4\ See Securities Exchange Act Release No. 50317 (September 3, 
2004), 69 FR 55202 (September 13, 2004).
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Background

    Prior to the approval of the initial TRACE Rule 6200 Series, NASD 
structured TRACE to phase in the dissemination of TRACE information 
gradually. As of July 1, 2002, when TRACE became operational, it was 
agreed that public dissemination of TRACE information on these 
corporate bond transactions would be implemented over three phases.\5\
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    \5\ NASD proposed that dissemination of TRACE information be 
implemented in phases as the TRACE Rules were developed. See 
Securities Exchange Act Release No. 43873 (January 23, 2001), 66 FR 
8131 (January 29, 2001) (order approving NASD's proposed rules 
creating TRACE, the corporate bond trade reporting and transaction 
dissemination facility) (``SEC 2001 Approval Order''). In the SEC 
2001 Approval Order, the SEC discussed and approved the NASD's 
proposal to increase transparency in phases. See id. at 8133.
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    Bond Transaction Reporting Committee. In addition, before TRACE 
became operational on July 1, 2002, NASD formed the Bond Transaction 
Reporting Committee (``BTRC'') to

[[Page 67524]]

advise NASD on liquidity issues and how dissemination of TRACE 
information should be increased over time to improve transparency in 
the corporate bond market.\6\ The BTRC reviewed TRACE statistical data 
and econometric analyses as well as other information prior to 
developing recommendations for improving and broadening TRACE 
transparency. The increases in transparency that took place in Phases 
II and III, as discussed in greater detail below, as well as this final 
phase providing for full immediate dissemination of TRACE information 
on all transactions (except Rule 144A transactions) were all 
recommended by the BTRC.
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    \6\ The role and composition of the BTRC is explained fully in 
the SEC 2001 Approval Order. See id.
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    Phase I. During Phase I, which began on July 1, 2002, TRACE 
information (except on Rule 144A transactions) was disseminated 
immediately for the larger and generally higher-credit quality issues--
Investment Grade debt securities having an initial issue of $1 billion 
or greater--and 50 liquid Non-Investment Grade (``high-yield'') 
securities disseminated under the Fixed Income Pricing System 
(``FIPS'') that were transferred to TRACE.\7\ Under these criteria, 
NASD disseminated TRACE information on approximately 550 securities by 
the end of 2002.
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    \7\ The terms ``Investment Grade'' and ``Non-Investment Grade'' 
as used herein are defined, respectively, in NASD TRACE Rules 
6210(h) and 6210(i). The FIPS 50 were 50 Non-Investment Grade 
securities designated under the now rescinded FIPS Rules for limited 
price dissemination.
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    Phase II. The SEC approved the Phase II proposal on January 31, 
2003.\8\ Phase II dissemination expanded the universe of transparent 
transactions to include all transactions (except Rule 144A 
transactions) in the following two groups of Investment Grade 
securities: (1) any TRACE-eligible security that is Investment Grade 
(i.e., is rated by Moody's \9\ as ``A3'' or higher, and by S&P's \10\ 
as ``A-'' or higher) and has an original issue size of $100 million or 
greater (``Single A Transactions''); and (2) 120 TRACE-eligible 
securities rated ``Baa/BBB'' at the time of designation, with the bonds 
being identified in three subgroups to represent the ``Baa/BBB'' credit 
spectrum (i.e., ``Baa1/BBB+,'' ``Baa2/BBB,'' and ``Baa3/BBB-'') 
(``Triple B Transactions'').\11\ In addition, dissemination would 
continue with respect to the Investment Grade bonds and the group of 50 
liquid Non-Investment Grade TRACE-eligible securities subject to 
dissemination during Phase I.
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    \8\ See Securities Exchange Act Release No. 47302 (January 31, 
2003), 68 FR 6233 (February 6, 2003) (order approving the Phase II 
proposal). On March 17, 2003, NASD proposed minor modifications to 
the Phase II proposal, which were effective upon filing. See 
Securities Exchange Act Release No. 47566 (March 25, 2003), 68 FR 
15490 (March 31, 2003).
    \9\ Moody's Investors Service, Inc. (``Moody's'') is a 
nationally recognized statistical rating organization (``NRSRO''). 
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.
    \10\ Standard & Poor's (``S&P''), a division of the McGraw-Hill 
Companies, Inc., is an NRSRO. 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 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.
    \11\ Baa, Baa1, Baa2, and Baa3 are ratings of Moody's; BBB+, 
BBB, and BBB- are ratings of S&P.
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    Phase II was implemented in two stages. On March 3, 2003, NASD 
began disseminating TRACE information on the Single A Transactions, 
and, on April 14, 2003, NASD began disseminating TRACE information on 
the Triple B Transactions. As Phase II was implemented, the number of 
disseminated bonds increased to approximately 4,200 bonds.
    Phase III. The SEC approved NASD's Phase III proposal on September 
3, 2004.\12\ Phase III provided for immediate dissemination of TRACE 
information on all TRACE-eligible securities transactions (except on 
Rule 144A transactions) except for: (1) new issues rated Baa/BBB or 
below, which would be subject to delayed dissemination of two or ten 
business days immediately following issuance; and (2) larger 
transactions (over $1 million) in Non-Investment Grade TRACE-eligible 
securities, where the security traded on average less than one time per 
day over a specified period, which would be subject to delayed 
dissemination of two or four business days.
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    \12\ See Phase III Approval Order.
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    Phase III was implemented in two stages. Stage One was implemented 
on October 1, 2004, and TRACE information on substantially all TRACE-
eligible securities transactions that were subject to immediate 
dissemination under the Phase III rule amendments began to be 
disseminated on that day. Stage Two, implementing dissemination of 
TRACE information on TRACE-eligible securities transactions subject to 
delayed dissemination, took effect on February 7, 2005. Under Phase III 
as fully implemented, approximately 99% of all transactions and 95% of 
par value in the TRACE-eligible securities market are disseminated 
immediately.
    In its Phase III Approval Order, the SEC noted that the TRACE 
information dissemination delays for certain high-yield transactions 
and new issue transactions rated Baa/BBB or below ``may unnecessarily 
restrict the availability of this transaction information to investors 
in this market.'' \13\ Moreover, the Commission noted that two studies 
commissioned by NASD to address the relationship between transparency 
and liquidity ``found no conclusive evidence that TRACE transparency 
has adversely affected liquidity.'' \14\ ``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.'' 
\15\
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    \13\ Phase III Approval Order, 69 FR at 55204.
    \14\ Id. (footnote omitted).
    \15\ Id.
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    BTRC Recommendations Regarding Proposed Rule Change. In its Phase 
III proposed rule filing, NASD stated that it intended to review the 
trading and liquidity in TRACE-eligible securities during the 
implementation of Stages One and Two of Phase III.\16\ In addition, as 
part of this review process, NASD stated that, not later that nine 
months from Stage Two implementation, NASD would ask the BTRC to 
reconvene to review the rule and make recommendations to the NASD Board 
of Governors. Consistent with this stated intention, after Phase III 
was fully implemented, the BTRC met several times to review TRACE 
statistical data, econometric analyses and other information, and to 
discuss the impact of Phase III transparency on liquidity in the 
corporate bond market. As a result of this review process, neither the 
BTRC nor NASD found conclusive evidence that Phase III transparency 
adversely affected corporate bond market liquidity. On September 12, 
2005, the BTRC recommended that information on all transactions in 
TRACE-eligible securities (except Rule 144A transactions) be 
disseminated immediately upon NASD's receipt of the transaction report. 
In addition, the BTRC recommended that NASD and the SEC continue to 
monitor the part of the fixed income market made up of transactions in 
TRACE-eligible securities and, if NASD or the SEC

[[Page 67525]]

identify evidence that immediate dissemination has a negative impact on 
the liquidity of the fixed income markets, the BTRC encourages NASD and 
the SEC to re-consider immediate dissemination of TRACE information.
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    \16\ Phase III Approval Order, 69 FR at 55203.
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Proposed Rule Change

    Based on NASD's experience with TRACE of more than three years, 
specifically the experience gained from its measured, gradual 
implementation of full transparency, it is NASD's strong belief that 
immediate dissemination of TRACE information on all TRACE transactions 
(except Rule 144A transactions) is warranted. This belief is consistent 
with the BTRC's recommendation of September 12, 2005 as well as the 
Commission's expectation set forth in the Phase III Approval Order. 
Accordingly, NASD proposes that TRACE information on all transactions 
in TRACE-eligible securities (except Rule 144A transactions) be 
disseminated immediately upon receipt of the transaction report. In 
addition, NASD intends to continue to monitor the effects of 
transparency on the corporate bond market.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 30 days following 
Commission approval. The effective date will be not later than 30 days 
following publication of the Notice to Members announcing Commission 
approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among 
other things, that NASD 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 
improve transparency in the corporate debt market and facilitate price 
discovery for the benefit of investors and all participants in the debt 
securities markets in furtherance of the public interest and for the 
protection of investors.
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    \17\ 17 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change would result in 
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

    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 NASD 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-2005-120 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-120. 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-2005-120 and should be submitted on or before November 28, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6137 Filed 11-4-05; 8:45 am]
BILLING CODE 8010-01-P