[Federal Register Volume 71, Number 3 (Thursday, January 5, 2006)]
[Notices]
[Pages 634-636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-8283]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53031; File No. SR-NASD-2005-120]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving a Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 1 
Thereto Relating to the Dissemination of TRACE Trade Information

December 28, 2005.

I. Introduction

    On October 14, 2005, 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, which 
addresses dissemination of transaction information collected by NASD's 
Trade Reporting and Compliance Engine (``TRACE''). The proposed rule 
change was published for comment in the Federal Register on November 7, 
2005.\3\ The Commission received one comment letter on the proposal, 
from The Bond Market Association (``BMA'').\4\ On December 14, 2005, 
NASD submitted a response to the BMA Letter \5\ and filed an amendment 
to the proposed rule change (``Amendment No. 1'').\6\ This order 
approves the proposed rule change and issues notice of the filing of, 
and approves on an accelerated basis, Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 52700 (October 28, 
2005), 70 FR 67523 (``Notice'').
    \4\ See letter from Micah S. Green, President and CEO, BMA, to 
Jonathan G. Katz, Secretary, Commission, dated November 29, 2005 
(''BMA Letter'').
    \5\ See letter from Sharon K. Zackula, Associate General 
Counsel, NASD, to Katherine A. England, Assistant Director, Division 
of Market Regulation, Commission, dated December 14, 2005 (``NASD 
Response Letter'').
    \6\ In Amendment No. 1, NASD provided a description of the 
implementation process for the proposed rule change and requested 
accelerated approval of the proposal.
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II. Description of the Proposed Rule Change

Background

    On January 23, 2001, the Commission approved NASD rules to 
establish TRACE, a facility for collecting and disseminating 
information on corporate bond transactions and to eliminate Nasdaq's 
Fixed Income Pricing System (``FIPS'').\7\ The TRACE rules became 
effective on July 1, 2002. 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 (the ``FIPS 50''). On January 
31, 2003, the Commission approved an NASD proposal to expand TRACE 
dissemination to cover roughly 75% of the average daily trading volume 
of investment-grade securities.\8\ On September 3, 2004, the Commission 
approved an NASD proposal to expand dissemination to include most 
secondary market transactions in all TRACE-eligible securities (except

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transactions effected pursuant to Rule 144A of the Securities Act of 
1933 (``Rule 144A transactions'')).\9\ However, that proposal allowed 
for 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. According to NASD, data on approximately 99% of all 
transactions and 95% of par value in TRACE-eligible securities are now 
disseminated immediately upon receipt by TRACE.
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    \7\ 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.
    \8\ See Securities Exchange Act Release No. 47302 (January 31, 
2003), 68 FR 6233 (February 6, 2003).
    \9\ See Securities Exchange Act Release No. 50317 (September 3, 
2004), 69 FR 55202 (September 13, 2004) (``September 2004 Order'').
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Current Proposal

    NASD is proposing to amend NASD Rule 6250 to eliminate all 
remaining delays in the dissemination of information on transactions in 
TRACE-eligible securities (except Rule 144A transactions). Henceforth, 
information on all transactions (except Rule 144A transactions) would 
be disseminated immediately upon receipt of the transaction report. 
This proposed rule change represents the latest in a series of NASD 
proposals to gradually enhance transparency for transactions in TRACE-
eligible securities.

Amendment No. 1

    In Amendment No. 1, NASD described the implementation process for 
the proposed rule change and requested accelerated approval for the 
amended proposal. Upon effectiveness of the proposal, NASD will look to 
the date(s) on which transactions are executed and reported to 
determine the applicable dissemination protocol for TRACE-eligible 
securities that are still subject to delayed dissemination. For 
transactions that are both executed and reported prior to the effective 
date of this proposal, the old dissemination protocols will continue to 
apply, and information on these transactions will not be disseminated 
until the period of delay has run. Any transaction that is executed 
prior to the effective date but reported after the effective date 
(i.e., reported late on an as/of basis) will be subject to the new 
protocols and disseminated immediately.

III. Summary of Comments and NASD's Response

    As noted above, the Commission received one comment letter from the 
BMA on the proposal, to which NASD has filed a response letter. In its 
letter, the BMA expressed its belief that the proposed immediate 
dissemination of transaction information for illiquid, high-yield 
corporate debt securities ``will further harm liquidity for this 
segment of the market.'' \10\ Citing anecdotal evidence from ``many 
U.S. dealers, EU fund managers trading U.S. high yield securities, and 
reported in the press,'' \11\ the BMA claimed that ``TRACE has already 
hampered the ability of dealers and investors to trade large blocks of 
less liquid, lower-rated securities, and has led to increased market 
volatility for these securities.'' \12\ The BMA urged NASD staff to 
continue to monitor the effect of TRACE on liquidity and, if necessary, 
to reconsider the immediate dissemination of TRACE information.\13\ The 
BMA also requested that NASD release historical TRACE data to the 
public so that industry participants can conduct independent analyses 
and research on the effects of transparency on liquidity.\14\
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    \10\ BMA Letter at 2.
    \11\ Id. at 2-3.
    \12\ Id. at 3.
    \13\ See id. at 3.
    \14\ See id. at 3-4.
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    In its response letter, NASD rejected the BMA's claim that the 
proposal would harm liquidity in the high-yield segment of the 
corporate bond market. NASD argued that such claims are not 
substantiated by research. NASD noted, for example, that the Bond 
Transaction Reporting Committee (``BTRC'') \15\ found no evidence that 
TRACE dissemination has harmed liquidity and voted unanimously to 
support the current proposal.\16\ NASD indicated that it will continue 
to assess the impact of dissemination on trading and liquidity in 
TRACE-eligible securities \17\ and stated that consideration of a 
request to provide non-public, historic data held by NASD in its 
capacity as a regulator is not relevant to consideration of the 
proposal.\18\
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    \15\ The BTRC is the advisory committee that was formed to 
advise NASD on liquidity issues and on how dissemination of TRACE 
information should be increased over time. The BTRC has ten members, 
five of whom were recommended by the staff of NASD and the other 
five of whom were recommended by the BMA.
    \16\ See NASD Response Letter at 2.
    \17\ See id.
    \18\ See id. at 3.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 Nancy M. Morris, 
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 January 26, 2006.

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 a national securities 
association.\19\ Specifically, the Commission believes that the 
proposal is consistent with Section 15A(b)(6) of the Act \20\ in that 
it is designed to prevent fraudulent and

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manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \19\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78o-3(b)(6).
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    In the September 2004 Order, the Commission approved a TRACE rule 
to expand transaction dissemination to include secondary market 
transactions in all TRACE-eligible securities (except Rule 144A 
transactions), with information on transactions in certain securities 
disseminated on a delayed basis. In that order, the Commission 
expressed concern that the remaining dissemination delays could 
unnecessarily restrict the availability of useful transaction 
information to investors. The Commission noted that the two studies 
commissioned by NASD to address the relationship between transparency 
and liquidity found no conclusive evidence that TRACE dissemination has 
had an adverse effect on liquidity. Therefore, the Commission stated 
that it expected NASD to submit a proposed rule change to eliminate the 
remaining delays in disseminating TRACE information no later than 
November 1, 2005.\21\ NASD has done so.
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    \21\ See 69 FR at 55204.
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    The Commission believes that this proposal, by eliminating all 
remaining delays in the dissemination of transaction information on 
TRACE-eligible securities (except Rule 144A transactions), should 
provide investors with more up-to-date, and hence more reliable, 
transaction information for these securities and enhance overall 
transparency in the corporate bond market. Enhanced transparency for 
these remaining TRACE-eligible securities should increase the fairness 
and efficiency of the debt markets, thereby promoting the protection of 
investors and the public interest. In regard to the BMA's comment that 
increased transparency has harmed liquidity in high-yield debt 
securities, the Commission notes that the BTRC has reviewed TRACE 
statistical data, econometric analyses, and other information and has 
found no conclusive evidence that the recently increased levels of 
transparency in these securities have adversely affected corporate bond 
market liquidity. Furthermore, the BTRC has recommended to NASD that 
information on all transactions in TRACE-eligible securities (except 
Rule 144A transactions) be disseminated immediately upon NASD's receipt 
of the transaction report. The Commission has not been presented with 
any objective evidence to support the BMA's assertion that immediate 
dissemination of transaction information harms liquidity for high-yield 
debt securities.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register 
pursuant to Section 19(b)(2) of the Act.\22\ Amendment No. 1 does not 
make any substantive changes to the proposal but rather offers 
technical guidance about how transaction data in the affected TRACE-
eligible securities will be disseminated in the few days immediately 
after the rule change becomes effective. Accordingly, the Commission 
believes that the accelerated approval of Amendment No. 1 is 
appropriate.
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    \22\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NASD-2005-120) is approved 
and that Amendment No. 1 thereto is hereby approved on an accelerated 
basis.
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    \23\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
Nancy M. Morris,
Secretary.
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    \24\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-8283 Filed 1-4-06; 8:45 am]
BILLING CODE 8010-01-P