[Federal Register Volume 71, Number 219 (Tuesday, November 14, 2006)]
[Notices]
[Pages 66354-66359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19167]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54715; File No. SR-NASD-2006-108]


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 to a 
Proposed Rule Change Relating to an NASD Trade Reporting Facility 
Established in Conjunction With the National Stock Exchange, Inc.

November 6, 2006.

I. Introduction

    On September 14, 2006, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to establish an NASD trade reporting facility 
(the ``NASD/NSX TRF'') in conjunction with the National Stock Exchange, 
Inc. (``NSX''). The proposed rule change was published for comment in 
the Federal Register on September 27, 2006.\3\ The Commission received 
one comment letter regarding the proposal.\4\ The NASD filed Amendment 
No. 1 to the proposed rule change on November 2, 2006.\5\ This order 
approves the proposal, as amended. In addition, the Commission is 
publishing notice to solicit comments on, and is simultaneously 
approving, 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\ See Securities Exchange Act Release No. 54479 (September 21, 
2006), 71 FR 56573 (``Notice'').
    \4\ See letter from Alden Adkins, Executive Vice President, 
Boston Stock Exchange, Inc. (``BSE''), to Nancy N. Morris, 
Secretary, Commission, dated October 17, 2006 (``BSE Letter'').
    \5\ In Amendment No. 1, NASD proposes to: (1) Allow members to 
report transactions in all NMS stocks, as defined in Rule 600(b)(47) 
of Regulation NMS under the Act; (2) designate NASD Rule 5140 
regarding multiple Market Participant Symbols (``MPIDs'') as a pilot 
set to expire on January 26, 2007 and add language to IM-5140 
regarding members' obligations when using multiple MPIDs for quoting 
and trade reporting purposes; (3) implement the NASD/NSX TRF in two 
phases; and (4) reflect final approval of the proposed rule change 
by the NASD Executive Committee of the Board of Governors.
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II. Description of the Proposal

A. NASD/NSX TRF

    NASD proposes to establish a new trade reporting facility, the 
NASD/NSX TRF, that will provide NASD members with an additional 
facility for reporting transactions in NMS stocks, as defined in Rule 
600(b)(47) of Regulation NMS under the Act,\6\ that are effected 
otherwise than on an exchange. The NASD/NSX TRF will be operated by the 
NASD/NSX Trade Reporting Facility LLC (``NASD/NSX TRF LLC''). The NASD/
NSX TRF structure and rules are substantially similar to the trade 
reporting facility established by the NASD and the Nasdaq Stock Market, 
Inc. (the ``NASD/Nasdaq TRF''), which the Commission approved in June 
2006.\7\
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    \6\ See Amendment No. 1, supra note 5.
    \7\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (``NASD/Nasdaq TRF Approval 
Order''). NASD has proposed to amend the NASD/Nasdaq TRF to permit 
NASD members to report transactions in NMS Stocks as defined in Rule 
600 of Regulation NMS under the Act. Currently, the NASD/Nasdaq TRF 
only accepts transaction reports in Nasdaq Global Market and Nasdaq 
Capital Market securities and convertible bonds listed on The NASDAQ 
Stock Market LLC (``Nasdaq Exchange''). See Securities Exchange Act 
Release No. 54451 (September 15, 2006), 71 FR 55243 (September 21, 
2006) (``Pending NASD/Nasdaq TRF Proposal'').
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    The NASD/NSX TRF will be a facility, as defined under the Act,\8\ 
of the NASD, subject to regulation by the NASD and to the NASD's 
registration as a national securities association. NASD members \9\ 
that match and/or execute orders internally or through proprietary 
systems may submit reports of these trades, with appropriate 
information and modifiers, to the NASD/NSX TRF, which will then report 
them to the appropriate exclusive securities information processor 
(``SIP'').\10\ NASD/NSX TRF transaction reports disseminated to the 
media will include a modifier indicating the source of the transactions 
that will distinguish them from transactions executed on or through the 
NSX. The NASD/NSX TRF will provide the NASD with a real-time copy of 
each trade report for regulatory review purposes. At the option of the 
participant, the NASD/NSX TRF may provide the necessary clearing 
information regarding transactions to

[[Page 66355]]

the National Securities Clearing Corporation.
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    \8\ 15 U.S.C. 78c(a)(2).
    \9\ Only NASD members in good standing may participate in the 
NASD/NSX TRF. See NASD Rule 6120C(a)(1). NASD/NSX TRF participants 
also must meet the minimum requirements set forth in NASD Rule 
6120C, including the execution of, and continuing compliance with, a 
Participant Application Agreement; membership in, or maintenance of, 
an effective clearing arrangement with a participant of a registered 
clearing agency registered pursuant to the Act; and the acceptance 
and settlement of each trade that the NASD/NSX TRF identifies as 
having been effected by the participant.
    \10\ The NASD/NSX TRF will have controls in place to ensure that 
transactions reported to the NASD/NSX TRF that are significantly 
away from the current market will not be submitted to the SIP. The 
NASD represented that this is consistent with current practice and 
noted that the Alternative Display Facility (``ADF'') and the NASD/
Nasdaq TRF currently do not submit such trades to the SIP.
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B. Limited Liability Company Agreement of the NASD/NSX TRF LLC

    The NASD and NSX will jointly own the NASD/NSX TRF LLC, which will 
operate the NASD/NSX TRF. The NASD has filed the Limited Liability 
Company Agreement of the NASD/NSX TRF LLC (the ``LLC Agreement'') as 
part of the current proposal. The LLC Agreement recognizes the NASD as 
having sole regulatory responsibility for the NASD/NSX TRF. The NASD, 
as the ``SRO Member'' under the LLC Agreement, will perform the ``SRO 
Responsibilities'' \11\ for the NASD/NSX TRF. The NSX, as the 
``Business Member'' under the LLC Agreement, will be primarily 
responsible for the management of the facility's business affairs to 
the extent those activities are not inconsistent with the regulatory 
and oversight functions of the NASD. NSX will pay the cost of 
regulation and provide systems to enable NASD members to report trades 
to the NASD/NSX TRF. NSX will be entitled to the profits and losses, if 
any, derived from the operation of the NASD/NSX TRF.\12\ Under Section 
9(d) of the LLC Agreement, each Member agrees to comply with the 
federal securities laws and the rules and regulations thereunder and to 
cooperate with the Commission pursuant to its regulatory authority and 
the provisions of the LLC Agreement.
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    \11\ The LLC Agreement defines ``SRO Responsibilities'' as those 
duties or responsibilities of a self-regulatory organization 
(``SRO'') pursuant to the Act and the rules promulgated thereunder, 
including but not limited to those set out in Section 9(a) of the 
LLC Agreement. See Schedule A of the LLC Agreement.
    \12\ See Section 15 of the LLC Agreement.
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    The NASD/NSX TRF LLC will be managed by, or under the direction of, 
a Board of Directors to be established by the NASD and NSX. The NASD 
will have the right to designate at least one Director, the SRO Member 
Director, to the NASD/NSX TRF LLC Board of Directors. The SRO Director 
must approve, by consent, all ``Major Actions,'' as defined in Section 
10(e) of the LLC Agreement. In addition, each Director agrees to comply 
with the federal securities laws and the rules and regulations 
thereunder and to cooperate with the Commission and the SRO Member 
pursuant to their regulatory authority.\13\ Further, when discharging 
his or her duties as a member of the Board of Directors, each Director 
must take into consideration whether his or her actions as a Director 
would cause the NASD/NSX TRF or either Member to engage in conduct that 
would be inconsistent with the purposes of the Act.\14\
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    \13\ See Section 10(b) of the LLC Agreement.
    \14\ Id.
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    The initial term of the LLC Agreement is three years. During that 
time, until the NASD/NSX TRF reaches ``Substantial Trade Volume'' 
(defined as 250,000 trades or more per day for three consecutive 
months), NSX may terminate the arrangement for convenience. After the 
NASD/NSX TRF reaches Substantial Trade Volume, either Member may 
terminate the LLC Agreement by providing to the other Member prior 
written notice of at least one year. In addition, the NASD may 
terminate in the event its status or reputation as an SRO is called 
into jeopardy by the actions of NSX or the NASD/NSX TRF LLC. If the 
NASD/NSX TRF LLC arrangement is terminated, the NASD represented that 
it would be able to fulfill all of its regulatory obligations with 
respect to over-the-counter (``OTC'') trade reporting through its other 
facilities, including the NASD/Nasdaq TRF and the ADF.

C. NASD/NSX TRF Rules

1. NASD Rule 4000C and 6000C Series
    The NASD proposes to adopt the NASD Rule 4000C Series, ``The NASD/
NSX Trade Reporting Facility,'' and 6000C Series, ``NASD/NSX Trade 
Reporting Facility Systems and Programs,'' to establish, respectively, 
trade reporting and clearing and comparison rules for the NASD/NSX 
TRF.\15\ The NASD Rule 4000C and 6000C Series are substantially similar 
to the NASD Rule 4000 and 6000 Series governing the NASD/Nasdaq 
TRF.\16\
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    \15\ The NASD notes that all other NASD rules that apply to OTC 
trading generally will apply to trades reported to the NASD/NSX TRF.
    \16\ Some differences between the rules governing the NASD/NSX 
TRF and the NASD/Nasdaq TRF result from differences between the 
trade reporting systems of the facilities. For example, because the 
NASD/NSX TRF has no trade comparison functionality, the rules 
governing the NASD/NSX TRF contain no provisions relating to trade 
matching, trade acceptance, or aggregate volume matching. Similarly, 
because the NASD/NSX TRF will not be able to support trade reporting 
for certain transactions on its first day of operation, NASD Rules 
4632C(a)(2) and (a)(7) indicate that certain types of transactions 
may not be reported through the NASD/NSX TRF and must be reported to 
the NASD via an alternative electronic mechanism.
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    The NASD also proposes to adopt a new rule relating to give up 
agreements and provisions designed to clarify the reporting of riskless 
principal transactions.\17\ Specifically, the NASD proposes to adopt 
NASD Rule 4632C(g), which states that a member may agree to allow an 
NASD/NSX TRF participant to report trades on its behalf, provided that 
both parties have completed an agreement to that effect (a ``give up 
agreement'') and submitted the agreement to the NASD/NSX TRF. The NASD 
also proposes to adopt NASD Rule 4632C(d)(3)(B), which sets forth the 
procedures for reporting riskless principal transactions. Specifically, 
NASD Rule 4632C(d)(3)(B) provides that when the media leg of a riskless 
principal transaction is reported to the NASD/NSX TRF, the second, non-
media leg also must be reported to the NASD/NSX TRF. When the media leg 
of the riskless principal transaction has been reported previously by 
an exchange, a member would be permitted, but not required to report 
the second, non-media leg to the NASD/NSX TRF. To avoid double 
reporting of the same transaction, NASD Rule 4632C(e)(6) provides that 
transactions reported on or through an exchange shall not be reported 
to the NASD/NSX TRF for purposes of publication.
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    \17\ The NASD has proposed similar provisions for the NASD/
Nasdaq TRF. See Pending NASD/Nasdaq TRF Proposal, supra note 7.
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    In Amendment No. 1, NASD proposes additional changes to its rules 
to reflect that the NASD/NSX will also accept trade reports in non-
Nasdaq exchange-listed securities. Specifically, NASD proposes to amend 
(e) of Rule 4632C to prohibit members from reporting the following 
transactions: (1) The acquisition of securities by a member as 
principal in anticipation of making an immediate exchange distribution 
or exchange offering on an exchange; and (2) purchases of securities 
off the floor of an exchange pursuant to a tender offer.\18\ These 
exclusions are currently set forth in NASD Rule 6420(e)(6) and (7). In 
addition, NASD made some clarifying changes to reflect that the NASD/
NSX TRF will accept certain trade reports in bonds.
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    \18\ Id.
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2. Amendments to Existing NASD Rules
    The NASD proposes to amend certain NASD rules to reflect the 
operation of more than one trade reporting facility. Specifically, the 
NASD proposes to amend NASD Rule 5100, ``Short Sale Rule,'' and IM-
5100, ``Short Sale Rule,'' to refer to ``a'' trade reporting facility, 
rather than ``the'' trade reporting facility to clarify that the rules 
apply to trades reported to any trade reporting facility established by 
the NASD.
    In addition, the NASD proposes to amend NASD Rule 6120, ``Trade 
Reporting Participation Requirements,'' to provide that participation 
in the

[[Page 66356]]

System \19\ is mandatory for any member with an obligation to report 
OTC trades to the NASD, unless the member has an alternative electronic 
mechanism pursuant to NASD rules for reporting and clearing the 
transaction. Thus, for example, participation in the System would not 
be mandatory for purposes of reporting OTC trades in exchange-listed 
securities for a member that is a participant in the NASD/NSX TRF.
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    \19\ NASD Rule 6110(m) defines ``System'' to mean the NASD/
Nasdaq Trade Reporting Facility, the trade reporting service of the 
ITS/CAES System, and the OTC Reporting Facility.
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3. New NASD Rule 5140 and IM-5140
    The NASD proposes to adopt NASD Rule 5140 and accompanying IM-5140 
on a pilot basis through January 26, 2007.\20\ NASD Rule 5140 and IM-
5140 will allow participants in any NASD trade reporting facility to 
request the use of more than one MPID for purposes of reporting trades 
to a trade reporting facility.\21\ The NASD will require members to 
provide bona fide business and/or regulatory reasons for requesting an 
additional MPID, and the NASD will carefully consider such reasons in 
determining whether to issue additional MPIDs to a member.\22\ The NASD 
stated that it believes that the proposed rules are important to ensure 
that the NASD has a consolidated process for issuing and tracking the 
MPIDs used for each NASD trade reporting facility.
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    \20\ The NASD also has established a pilot program through 
January 26, 2007, to allow electronic communications networks 
(``ECNs'') to use multiple MPIDs for purposes of quoting and trade 
reporting on the ADF. See Securities Exchange Act Release No. 54307 
(August 11, 2006), 71 FR 47551 (August 17, 2006) (notice of filing 
and immediate effectiveness of File No. SR-NASD-2006-096).
    \21\ Although the NASD trade reporting facilities are mechanisms 
used solely for trade reporting and do not permit quoting, a member 
could report a trade to a trade reporting facility as the result of 
a quotation posted on a NASD facility such as the ADF. In that 
instance, the member would be required to use the same MPID for 
quoting and trade reporting purposes (e.g., a member that is both a 
trade reporting facility participant and a Registered Reporting ADF 
ECN would be required to use the same MPID when reporting a trade 
that resulted from its posted quotation on the ADF). See IM-5140 and 
Amendment No. 1, supra note 5.
    \22\ The NASD noted that one bona fide reason for using multiple 
MPIDs would be to facilitate back office operations. For example, a 
member might have multiple MPIDs for trade reporting purposes if it 
clears trades through multiple clearing firms. See Amendment No. 1, 
supra note 5.
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D. Implementation

    In light of the systems changes necessary for the NASD to implement 
the NASD/NSX TRF for non-Nasdaq exchange-listed securities, the NASD 
proposes to implement the proposal in two phases.\23\ Specifically, the 
NASD proposes to implement the proposed rule change with respect to 
Nasdaq-listed equity securities on the first day of operation of the 
NASD/NSX TRF, and to implement the proposed rule change with respect to 
non-Nasdaq exchange-listed securities at a later date.
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    \23\ See Amendment No. 1, supra note 5.
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    The NASD will announce the implementation of the first phase of the 
proposed rule change no later than 30 days following Commission 
approval of the proposal, and the second phase no later than 90 days 
following Commission approval.\24\
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    \24\ See Amendment No. 1, supra note 5.
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III. Summary of Comments

    The Commission received one comment letter regarding the 
proposal.\25\ The commenter supports the proposal and noted that it has 
proposed to develop a trade reporting facility with the NASD.\26\ The 
commenter, however, argues that the Commission needs to consider the 
fair competition requirements of Section 11A(a)(1)(C)(ii) of the Act 
\27\ when deciding whether and on what terms and conditions to approve 
the NASD/NSX TRF proposal. The commenter believes that this section of 
the Act requires the Commission to approve multiple trade reporting 
facilities, assuming the facilities are otherwise consistent with the 
Act.\28\
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    \25\ See BSE Letter, supra note 4.
    \26\ See Securities Exchange Act Release No. 54591 (October 12, 
2006), 71 FR 61519 (October 18, 2006) (``NASD/BSE TRF Proposal'').
    \27\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \28\ See BSE Letter, supra note 4.
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    The commenter argues that the Commission should delay the 
effectiveness of the NASD/NSX TRF to allow the Commission to determine 
whether Section 11A(a)(1)(C)(ii) of the Act requires multiple non-
Nasdaq trade reporting facilities.\29\ Even if the Commission does 
decide to permit multiple non-Nasdaq trade reporting facilities, the 
commenter argues that the Commission should delay effectiveness of the 
NASD/NSX TRF because the commenter believes that the NASD/NSX TRF would 
obtain a competitive advantage if it were able to begin operating prior 
to the NASD/BSE TRF.\30\ The commenter recommends that the Commission 
approve the NASD/NSX TRF but delay the effectiveness of its approval 
until the Commission has determined whether, and on what terms, 
multiple non-Nasdaq trade reporting facilities are appropriate and 
consistent with the Act.\31\
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    \29\ See BSE Letter, supra note 4.
    \30\ See BSE Letter, supra note 4.
    \31\ See BSE Letter, supra note 4.
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IV. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\32\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 15A(b)(6) of the 
Act \33\ in that it is designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.
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    \32\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f)
    \33\ 15 U.S.C. 78o-3(b)(6).
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    The NASD/NSX TRF will provide NASD members with an additional 
mechanism for reporting transactions in exchange-listed securities 
effected otherwise than on an exchange. Rule 601 of Regulation NMS 
requires the NASD to file a transaction reporting plan regarding 
transactions in listed equity and Nasdaq securities that are executed 
by its members otherwise than on a national securities exchange.\34\ 
Under Rule 603 of Regulation NMS,\35\ national securities exchanges and 
national securities associations act jointly pursuant to an effective 
national market system plan to disseminate consolidated information, 
including a national best bid and offer, and quotations for and 
transactions in NMS stocks. Today, NASD operates the ADF,\36\ NASD/
Nasdaq TRF \37\ and the

[[Page 66357]]

ITS/CAES System \38\ for collecting transaction reports. In addition, 
NASD is a participant in the Nasdaq UTP Plan \39\ with regard to 
transaction reports in Nasdaq-listed securities, and the CTA Plan \40\ 
with regard to securities listed on exchanges other than Nasdaq.
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    \34\ Under Rule 601(b) of Regulation NMS, broker-dealers are 
prohibited from executing a transaction otherwise than on a national 
securities exchange unless there is an effective transaction 
reporting plan. NASD Rule 5000 requires NASD members to report 
transactions in exchange-listed securities effected otherwise than 
on an exchange to NASD.
    \35\ 17 CFR 242.603.
    \36\ Currently, the ADF only accepts quotes and trades in 
Nasdaq-listed securities. The Commission recently approved a 
proposal to extend the ADF to non-Nasdaq exchange-listed securities. 
See Securities Exchange Act Release No. 54537 (September 28, 2006), 
71 FR 59173 (October 6, 2006).
    \37\ Currently, the NASD/Nasdaq TRF only accepts trade reports 
in Nasdaq-listed securities. As noted above, the NASD has proposed 
to amend the NASD/Nasdaq TRF to accept transaction reports in non-
Nasdaq exchange-listed securities. See Pending NASD/Nasdaq TRF 
Proposal, supra note 7.
    \38\ The ITS/CAES System provides a means by which NASD and its 
members can comply with the terms of the Intermarket Trading System 
Plan (``ITS Plan''). The ITS/CAES System reports trades in non-
Nasdaq exchange-listed securities that are effected in the ITS/CAES 
System or in NASD members' proprietary systems. The NASD has 
proposed to amend the ITS/CAES System to reflect the operation of 
the Nasdaq Exchange as a national securities exchange. See Pending 
NASD/Nasdaq TRF Proposal, supra note 7.
    \39\ Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privileges Basis (``Nasdaq UTP 
Plan'').
    \40\ Consolidated Tape Association Plan (``CTA Plan'').
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    Upon approval of the NASD/NSX TRF, the NASD will operate another 
facility for the purposes of accepting transaction reports from its 
members. The Commission has previously recognized that the Act does not 
prohibit the NASD from establishing multiple facilities for fulfilling 
its regulatory purposes.\41\ Indeed, as noted above, the NASD currently 
operates multiple facilities for fulfilling its regulatory obligations. 
Therefore, the Commission believes that it is consistent with the Act 
for the NASD to establish the NASD/NSX TRF for purposes of fulfilling 
its regulatory obligations. The NASD represented that if the NASD/NSX 
TRF LLC arrangement is terminated, the NASD will be able to fulfill all 
of its regulatory obligations with respect to OTC trade reporting 
through its other facilities, including the NASD/Nasdaq TRF and the 
ADF.
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    \41\ See NASD/Nasdaq TRF Approval Order, supra note 7.
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    The NASD represented that it will have an integrated audit trail of 
all trade reporting facilities, ADF, and ITS/CAES System transactions, 
and will have integrated surveillance capabilities.\42\ NASD has 
represented that it expects to automate its integrated audit trail and 
surveillance by the end of the fourth quarter of 2006 for Nasdaq-listed 
securities and by the end of the first quarter of 2007 for non-Nasdaq 
exchange-listed securities. The Commission believes that an integrated 
audit trail and integrated surveillance capabilities are important to 
the NASD's ability to conduct effective surveillance of OTC trading in 
exchange-listed securities when transactions in those securities can be 
reported to one of the NASD's trade reporting facilities, the ADF, or 
the ITS/CAES System.
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    \42\ See Amendment No. 1, supra note 5.
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    A commenter suggested that the Commission approve the current 
proposal but delay the effectiveness of its approval until the 
Commission has determined whether multiple non-Nasdaq trade reporting 
facilities are appropriate and consistent with the Act.\43\ In the 
NASD/Nasdaq TRF Approval Order, the Commission noted that the NASD/
Nasdaq LLC Agreement specifically contemplated that the NASD could 
enter into similar arrangements with other national securities 
exchanges. In addition, the Commission noted that the NASD has 
represented that it was prepared to implement a trade reporting 
facility with any exchange based on technology available to the 
exchange. The Commission noted this provision and representation when 
addressing competitive concerns raised by commenters to the NASD/Nasdaq 
TRF. The Commission specifically found that the NASD/Nasdaq TRF did not 
impose an unfair burden on competition and that the ``* * * Act does 
not prevent any other party, including an exchange, from developing 
similar technology for use as a NASD facility.'' Accordingly, the 
Commission does not require additional time to determine whether 
multiple non-Nasdaq trade reporting facilities are consistent with the 
Act and thus declines to delay the effectiveness of the NASD/NSX TRF.
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    \43\ See BSE Letter, supra note 4.
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    The commenter also argues that NASD/NSX TRF could obtain a 
competitive advantage if it commences operations prior to the NASD/BSE 
TRF, with the potential to ``permanently lessen the likelihood of 
multiple Trade Reporting Facilities having a fair chance to obtain 
enough initial print volume to allow them to survive long enough to 
offer the competitive benefits that presumably would underlie any 
Commission decision to allow multiple non-Nasdaq Trade Reporting 
Facilities.'' \44\ The Commission does not believe that it should delay 
the operation of the NASD/NSX TRF until other trade reporting 
facilities are ready to operate. The Commission believes that approving 
the NASD/NSX TRF and allowing it to begin operations immediately could 
enhance competition by providing a new facility, in addition to those 
that are operating currently, for reporting OTC trades in exchange-
listed securities.
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    \44\ See BSE Letter, supra note 4.
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A. NASD/NSX TRF Rules

    Most of the provisions in the new NASD Rule 4000C and 6000C Rule 
Series, which establish the trade reporting and clearing and comparison 
rules for the NASD/NSX TRF, are substantially similar to the NASD Rule 
4000 and 6000 Series that the Commission approved for the NASD/Nasdaq 
TRF,\45\ or to existing NASD Rules.\46\ Accordingly, the Commission 
finds that the NASD Rule 4000C and 6000C Series are consistent with 
Act. In addition, the Commission finds that new NASD Rule 4632C(g), 
relating to give up agreements, and NASD Rule 4632C(d)(3)(B), regarding 
the reporting of riskless principal transactions, are consistent with 
the Act because they clarify the requirements for and operation of 
these procedures. In this regard, NASD Rule 4632C(g) requires, among 
other things, that give up agreements be filed with NASD. In addition, 
NASD Rule 4632C(g) notes that both the member with the reporting 
obligation and the member submitting the trade to the NASD/NSX TRF are 
responsible for ensuring that the information submitted is in 
compliance with all applicable rules and regulations.
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    \45\ See NASD/Nasdaq TRF Approval Order, supra note 7.
    \46\ In this regard, the NASD proposes in Amendment No. 1 to 
adopt NASD Rule 4632C(e)(7) and (e)(8), which will provide that the 
following categories of transactions may not be reported to the 
NASD/NSX TRF for purposes of publication: (1) The acquisition of 
securities by a member as principal in anticipation of making an 
immediate exchange distribution or exchange offering on an exchange; 
and (2) purchases of securities off the floor of an exchange 
pursuant to a tender offer. These provisions are identical to 
current NASD Rule 6420(e)(6) and (e)(7). In addition, NASD has 
proposed to add the same provision to the NASD/Nasdaq TRF rules. See 
Pending NASD/Nasdaq TRF Proposal, supra note 7.
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    Similarly, NASD Rule 4632C(d)(3)(B) clarifies the procedures for 
reporting riskless principal transactions and should facilitate the 
accurate reporting of these transactions. Specifically, NASD Rule 
4632C(d)(3)(B) provides that when the media leg of a riskless principal 
transaction is reported to the NASD/NSX TRF, the second, non-media leg 
also must be reported to the NASD/NSX TRF. When the media leg of the 
riskless principal transaction has been reported previously by an 
exchange, a member would be permitted, but not required to report the 
second, non-media leg to the NASD/NSX TRF. In addition, to avoid double 
reporting of the same transaction, NASD Rule 4632C(e)(6) prohibits the 
reporting of transactions reported on or through an exchange to the 
NASD/NSX TRF for purposes of publication.

[[Page 66358]]

    The Commission finds that the amendments to NASD Rule 5100 and IM-
5100 and NASD Rule 6120 are consistent with the Act because they revise 
the NASD's rules to reflect the operation of multiple trade reporting 
facilities. In this regard, the amendments to NASD Rule 5100 and IM-
5100 make clear that these provisions apply to trades reported to any 
trade reporting facility established by the NASD. Similarly, the 
amendments to NASD Rule 6120 clarify that a member with an obligation 
to report an OTC transaction to the NASD must participate in the System 
\47\ unless the member has an alternative electronic mechanism pursuant 
to NASD rules for reporting and clearing such a transaction. Thus, 
participation in the System under NASD Rule 6120 for purposes of 
reporting transactions in exchange-listed securities would not be 
mandatory for a member that is a participant in the NASD/NSX TRF.
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    \47\ See supra note 19.
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    The NASD proposes to adopt NASD Rule 5140 and accompanying IM-5140 
on a pilot basis through January 26, 2007. NASD Rule 5140 and IM-5140 
will allow participants in any NASD trade reporting facility to request 
the use of more than one MPID for purposes of reporting trades to a 
trade reporting facility so long as the participant has a bona fide 
business and/or regulatory reason for using multiple MPIDs.\48\
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    \48\ The NASD notes that one bona fide reason for using multiple 
MPIDs would be to facilitate back office operations. For example, a 
member might have multiple MPIDs for trade reporting purposes if it 
clears trades through multiple clearing firms. See Amendment No. 1, 
supra note 5.
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    The Commission finds that NASD Rule 5140 and IM-5140 are consistent 
with Section 15A(b)(6) of the Act because they will permit the use of 
multiple MPIDs for bona fide business and/or regulatory reasons while 
providing safeguards designed to address potential misuse of multiple 
MPIDs. In this regard, trade reporting facility participants must 
submit written requests and obtain NASD approval for the use of 
multiple MPIDs. Trade reporting facility participants must identify the 
purpose(s) and system(s) for which the multiple MPIDs will be used.\49\ 
If the NASD determines that the use of multiple MPIDs is detrimental to 
the marketplace, or that a trade reporting facility participant is 
using one or more additional MPIDs improperly or for other than the 
purpose(s) identified by the participant, the NASD retains the 
discretion to limit or withdraw its grant of the additional MPIDs to 
the participant.\50\ Similarly, if a participant misuses its MPID on 
one NASD facility, including the ADF, or on the facility of another 
SRO, the NASD retains the discretion to limit or withdraw the grant of 
the MPID for trade reporting purposes through any NASD trade reporting 
facility.\51\ Finally, the NASD would consider the misuse of an MPID 
for quoting purposes through another system to be grounds for 
withdrawal of the MPID for trade reporting through a trade reporting 
facility.\52\
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    \49\ See IM-5140. The NASD contemplates that a member that 
participates in more than one trade reporting facility would use the 
same MPIDs across trade reporting facilities as well as the ADF, if 
the member is also a participant in the ADF. However, the NASD 
believes that it could be appropriate for a member to obtain, for 
example, one MPID for exclusive use on the NASD/Nasdaq TRF and 
another MPID for exclusive use on the NASD/NSX TRF. As part of the 
NASD Rule 5140 process, the member would be required to specify the 
system(s) for which the MPIDs would be used and the NASD would 
determine whether such use of multiple MPIDs was appropriate under 
the facts and circumstances. See Amendment No. 1, supra note 5.
    \50\ See IM-5140.
    \51\ See Amendment No. 1, supra note 5.
    \52\ See Amendment No. 1, supra note 5.
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B. NASD/NSX TRF LLC

    The NASD and NSX will jointly own the NASD/NSX TRF LLC, which will 
operate the NASD/NSX TRF. The NASD has filed the LLC Agreement as part 
of the current proposal.\53\ The LLC Agreement is substantially similar 
to the limited liability company agreement of the NASD/Nasdaq TRF LLC 
(``NASD/Nasdaq TRF LLC Agreement'') that the Commission approved in the 
NASD/Nasdaq TRF Approval Order.\54\ Accordingly, for the reasons 
discussed in the NASD/Nasdaq TRF Approval Order with respect to the 
NASD/Nasdaq TRF LLC Agreement, the Commission finds that the LLC 
Agreement is consistent with the Act.\55\
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    \53\ The Commission notes that any changes to the LLC Agreement 
that are stated policies, practices, or interpretations of the NASD, 
as defined in Rule 19b-4 under the Act, must be filed with the 
Commission pursuant to Section 19(b) of the Act and Rule 19b-4 
thereunder.
    \54\ See supra note 7.
    \55\ The Commission incorporates by reference the discussion and 
analysis of the NASD/Nasdaq TRF LLC and NASD/Nasdaq TRF LLC 
Agreement set forth in the NASD/Nasdaq TRF Approval Order, supra 
note 7.
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    The Commission notes that the NASD/NSX TRF LLC, as the operator of 
an NASD facility, is an integral part of a SRO registered pursuant to 
the Act and, as such, is subject to obligations imposed by the Act. The 
Commission underscores that these obligations endure so long as the 
NASD/NSX TRF LLC operates an NASD facility.
    The Commission believes that the LLC Agreement makes clear that the 
NASD will have sole regulatory responsibility for the activities of 
NASD members related to the facility operated by the NASD/NSX TRF LLC 
and provides the NASD with certain rights that are intended to preserve 
its regulatory authority and control.\56\ The Commission believes that 
the provisions of the LLC Agreement will allow the NASD to carry out 
its self-regulatory responsibilities with respect to its facility and 
that both the Commission and the NASD will have sufficient regulatory 
jurisdiction over the controlling parties of the NASD/NSX TRF LLC to 
carry out their responsibilities under the Act.
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    \56\ For example, pursuant to the LLC Agreement, the NASD must 
consent before certain ``Major Actions,'' as defined in the LLC 
Agreement, with respect to the NASD/NSX TRF LLC are effective.
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    For example, under the LLC Agreement, each Member and each director 
of the NASD/NSX TRF LLC agrees to comply with the federal securities 
laws and rules and regulations thereunder and to cooperate with the 
Commission pursuant to its regulatory authority and the provisions of 
the LLC Agreement. In addition, the NASD and NSX acknowledge in the LLC 
Agreement that--to the extent directly related to the NASD/NSX TRF 
LLC's activities--their books, records, premises, officers, directors, 
governors, agents, and employees will be deemed to be the books, 
records, premises, officers, directors, governors, agents, and 
employees of the NASD itself and its affiliates for the purposes of, 
and subject to oversight pursuant to, the Act. This provision will 
reinforce the Commission's ability to exercise its authority under 
Section 19(h)(4) of the Act \57\ with respect to the officers and 
directors of the NASD/NSX TRF LLC because all such officers and 
directors--to the extent that they are acting in matters related to the 
NASD/NSX TRF LLC's activities--would be deemed to be the officers and 
directors of the NASD itself. Furthermore, under the LLC Agreement, the 
records of the NASD and NSX, to the extent that they are related to the 
NASD/NSX TRF LLC's activities, are deemed to be records of the NASD 
itself and are subject to the

[[Page 66359]]

Commission's examination authority under Section 17(b)(1) of the 
Act.\58\
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    \57\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) of the Act authorizes 
the Commission, by order, to remove from office or censure any 
officer or director of an SRO if it finds after notice and an 
opportunity for hearing that such officer or director has: (1) 
Willfully violated any provision of the Act or the rules and 
regulations thereunder, or the rules of such SRO; (2) willfully 
abused his or her authority; or (3) without reasonable justification 
or excuse, has failed to enforce compliance with any such provision 
by a member or person associated with a member of the SRO.
    \58\ See Section 17(c) of the LLC Agreement.
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    The LLC Agreement also provides that the NASD and NSX, and each 
officer, director, agent, and employee thereof, irrevocably submits to 
the jurisdiction of the U.S. federal courts, the Commission, and the 
NASD for the purpose of any suit, action, or proceeding pursuant to the 
U.S. federal securities laws and the rules and regulations thereunder 
arising from, or relating to, the NASD/NSX TRF LLC's activities.
    The Commission also believes that the requirements of Section 19(b) 
of the Act and Rule 19b-4 thereunder provide the Commission with 
sufficient authority over changes in control of the NASD/NSX TRF LLC to 
enable the Commission to carry out its regulatory oversight 
responsibilities with respect to the NASD and its facilities.
    The Commission notes that the NASD is required to enforce 
compliance with the provisions of the LLC Agreement because they are 
``rules of the association'' within the meaning of Section 3(a)(27) of 
the Act.\59\ A failure on the part of the NASD to enforce its rules 
could result in a suspension or revocation of its registration pursuant 
to Section 19(h)(1) of the Act.\60\
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    \59\ 15 U.S.C. 78c(a)(27).
    \60\ 15 U.S.C. 78s(h)(1).
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C. Accelerated Approval of Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. In Amendment No. 1, the NASD proposes 
to expand the NASD/NSX TRF to accept transaction reports in non-Nasdaq 
exchange-listed securities. The NASD had noted its intention to accept 
for these trades in the NASD/NSX TRF in its Notice. Because the NASD is 
obligated to collect these transaction reports, and allowing the NASD/
NSX TRF to accept these trade reports may increase competition among 
the trade reporting facilities operated by the NASD, the Commission 
believes there is good cause to accelerate approval of this change to 
the NASD/NSX TRF. Second, the NASD proposes to implement the NASD/NSX 
TRF in two phases to allow it to make necessary systems changes. The 
Commission finds that good cause exists to accelerate approval of this 
implementation schedule as it will allow NASD to incrementally begin 
operations of this new trade reporting facility, as its systems are 
ready. The Commission notes that NASD stated that it expects to 
announce the implementation date of the first phase no later than 30 
days following approval and the second phase no later than 90 days 
following approval. Finally, NASD proposes to designate its Rule 5140 
and IM-5140 regarding multiple MPIDs as a pilot that would expire on 
January 26, 2007 and to add language to clarify that members that use 
an MPID for quoting purposes must use the same MPID for trade reporting 
purposes for transactions that result from the member's quotation. 
Because the changes to its Rule 5140 and IM-5140 are designed to 
prevent potential misuse of MPIDs, the Commission believes that good 
cause exists to accelerate approval of the changes proposed in 
Amendment No. 1. Accordingly, the Commission finds that it is 
consistent with Sections 6(b)(5) and 19(b) of the Act to approve 
Amendment No. 1 on an accelerated basis.

V. 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-2006-108 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 20549-1090.

All submissions should refer to File Number SR-NASD-2006-108. 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 the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. 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-2006-108 and should be submitted on or before December 5, 2006.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\61\ that the proposed rule change (SR-NASD-2006-108), as amended, 
is approved.
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    \61\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-19167 Filed 11-13-06; 8:45 am]
BILLING CODE 8011-01-P