Self-Regulatory Organizations: National Association of Securities Dealers, Inc.; Notice of Filing of a Proposed Rule Change Relating to a New NASD Trade Reporting Facility Established in Conjunction With the National Stock Exchange, 56573-56577 [E6-15792]

Download as PDF Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.11 Nancy M. Morris, Secretary. [FR Doc. E6–15799 Filed 9–26–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54479; File No. SR–NASD– 2006–108] Self-Regulatory Organizations: National Association of Securities Dealers, Inc.; Notice of Filing of a Proposed Rule Change Relating to a New NASD Trade Reporting Facility Established in Conjunction With the National Stock Exchange September 21, 2006. 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 September 14, 2006, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to adopt rules relating to a new Trade Reporting Facility (the ‘‘NASD/NSX TRF’’) to be established by NASD, in conjunction with the National Stock Exchange (‘‘NSX’’), that would provide members another mechanism for reporting trades in Nasdaq-listed equity securities effected otherwise than on an exchange. The proposed NASD/NSX TRF structure and rules are substantially similar to the Trade Reporting Facility (‘‘TRF’’) established by NASD and Nasdaq Stock Market, Inc. (the ‘‘NASD/Nasdaq TRF’’) and rules relating thereto, which were approved by the Commission pursuant to proposed rule change SR–NASD– 2005–087.3 Pursuant to the proposed 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (SR– NASD–2005–087) (‘‘Approval Order’’). SR–NASD– 2005–087 became effective upon the date on which The NASDAQ Stock Market LLC (the ‘‘Nasdaq Exchange’’) commenced operation as a national securities exchange for Nasdaq-listed securities, which was August 1, 2006. rwilkins on PROD1PC63 with NOTICES 1 15 VerDate Aug<31>2005 16:48 Sep 26, 2006 Jkt 208001 rule change, NASD is also proposing: (1) Amendments to certain NASD rules to reflect the operation of more than one Trade Reporting Facility established by NASD; and (2) new NASD Rule 5140 relating to the use of multiple Market Participant Symbols by members reporting trades to a Trade Reporting Facility established by NASD. The text of the proposed rule change is available on NASD’s Web site at (http://www.nasd.com), at the principal office of the NASD, at the Commission’s Public Reference Room, and the Commission’s Web site at (http:// www.sec.gov). 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 On June 30, 2006, the Commission approved SR–NASD–2005–087.4 Among other things, the Approval Order proposed: (1) Amendments to the NASD Delegation Plan, NASD By-Laws and NASD rules to reflect a proposed phased implementation strategy for the operation of the Nasdaq Exchange as a national securities exchange with respect to Nasdaq-listed securities during a transitional period; and (2) rules for reporting trades effected otherwise than on an exchange to the NASD/Nasdaq TRF. Pursuant to SR– NASD–2005–087, NASD proposed the NASD Rule 4000 Series (The Trade Reporting Facility) and the NASD Rule 6100 Series (Clearing and Comparison Rules), which generally apply to trade reporting and clearing and comparison services via the NASD/Nasdaq TRF. NASD/NSX Trade Reporting Facility The NASD proposes to establish a new NASD/NSX TRF on substantially the same terms as the NASD/Nasdaq TRF.5 The NASD/NSX TRF will provide 4 Id. 5 In response to comments submitted to the Commission in connection with the Approval PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 56573 members another mechanism, which has been developed by NSX, for reporting transactions in Nasdaq-listed equity securities executed otherwise than on an exchange.6 Members will match and/or execute orders internally or through proprietary systems and submit these trades to the NASD/NSX TRF with the appropriate information and modifiers. The NASD/NSX TRF will report the trades to the appropriate exclusive securities information processor (‘‘SIP’’).7 As with trades reported to the NASD/Nasdaq TRF, NASD/NSX TRF transactions disseminated to the media will include a modifier indicating the source of such transactions that would distinguish them from transactions executed on or through the NSX. In addition, the NASD/NSX TRF will provide 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 also provide the necessary clearing information regarding transactions to the National Securities Clearing Corporation (‘‘NSCC’’). Like the NASD/Nasdaq TRF, the NASD/NSX TRF will be a facility of NASD, subject to regulation by NASD and NASD’s registration as a national securities association. It will not be a service ‘‘for the purpose of effecting or reporting a transaction’’ on the NSX; rather, it will be a service for the purpose of reporting over-the-counter transactions in Nasdaq-listed equity securities to NASD.8 Thus, members that meet all applicable requirements will now have the option of reporting transactions in Nasdaq-listed equity securities executed otherwise than on an exchange to the NASD/NSX TRF, Order, NASD indicated that it was prepared to implement a TRF with any exchange based on whatever technology the exchange has available to it. See Letter to Honorable Christopher Cox, Chairman, Commission, dated May 2, 2006 from Robert Glauber, Chairman and Chief Executive Officer, NASD. As the Commission noted in its Approval Order, the Act does not prohibit NASD from establishing different facilities for purposes of fulfilling its regulatory obligations. See Approval Order. 6 NASD will submit a second proposed rule change relating to reporting to the NASD/NSX TRF of transactions in all exchange-listed securities executed otherwise than on an exchange. 7 The NASD/NSX TRF will have controls in place to ensure that transactions that are reported to the NASD/NSX TRF, but are priced significantly away from the current market, will not be submitted to the SIP. This is consistent with current practice, which is designed to preserve the integrity of the tape; today, such trades are not submitted to the SIP by the ADF or the NASD/Nasdaq TRF. 8 See Approval Order. E:\FR\FM\27SEN1.SGM 27SEN1 56574 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Notices NASD’s Alternative Display Facility (‘‘ADF’’) or the NASD/Nasdaq TRF.9 NSX has developed the system that participants will use to access the NASD/NSX TRF. Technical Specifications to connect to the NASD/ NSX TRF system are available upon request to NASD and will be accessible through the NASD’s Web site at a later date. rwilkins on PROD1PC63 with NOTICES NASD/NSX TRF Limited Liability Company Agreement NASD and NSX propose to enter into a Limited Liability Company Agreement of NASD/NSX Trade Reporting Facility LLC (‘‘the NASD/NSX LLC Agreement’’). The terms of the NASD/ NSX LLC Agreement are substantially similar to the terms of the LLC agreement that NASD entered with Nasdaq Stock Market Inc. (‘‘Nasdaq’’). NASD will have sole regulatory responsibility for the NASD/NSX TRF, while NSX agrees to pay the cost of regulation and will provide systems to enable 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. NASD, the SRO Member under the NASD/NSX LLC Agreement, will perform SRO Responsibilities including, but not limited to: (1) Adoption, amendment and interpretation of policies arising out of and regarding any aspect of the operation of the facility considered material by the SRO Member, or regarding the meaning, administration, or enforcement of an existing rule of the SRO Member, including any generally applicable exemption from such a rule; (2) Approval of rule filings of the SRO Member prior to filing with the Commission; (3) Regulation of the NASD/NSX TRF’s activities of or relating to SRO Responsibilities, including the right to review and approve, in the SRO Member’s sole reasonable discretion, the regulatory budget for the NASD/NSX TRF; (4) Securities regulation and any other matter implicating SRO Responsibilities; and (5) Real-time market surveillance.10 9 NASD will have an integrated audit trail of NASD/Nasdaq TRF, NASD/NSX TRF and ADF transactions and will have integrated surveillance capabilities. NASD expects that comprehensive audit trail and surveillance integration on an automated basis will be completed by the end of the fourth quarter of 2006. Prior to that time, NASD staff will be able to create an integrated audit trail on a manual basis as needed for regulatory purposes. 10 The SRO Member will perform real-time market surveillance related to trades reported to the VerDate Aug<31>2005 16:48 Sep 26, 2006 Jkt 208001 NSX, the ‘‘Business Member’’ under the NASD/NSX 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 NASD. Under Section 9(d) of the NASD/NSX 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 NASD/NSX LLC Agreement. The NASD/NSX TRF will be managed by or under the direction of a Board of Directors to be established by the parties. NASD will have the right to designate at least one Director, the SRO Member Director, who may be a member of NASD’s Board of Governors or an officer or employee of NASD designated by the NASD Board of Governors. The SRO Member Director will have veto power over all major actions of the NASD/NSX LLC Board. Major Actions are defined in Section 10(e) of the NASD/NSX LLC Agreement to include: (1) Approving pricing decisions that are subject to the SEC filing process; (2) Approving contracts between the NASD/NSX TRF and the Business Member, any of its affiliates, directors, officers or employees; (3) Approving Director compensation; (4) Selling, licensing, leasing or otherwise transferring material assets used in the operation of the NASD/NSX TRF’s business outside of the ordinary course of business with an aggregate value in excess of $3 million; (5) Approving or undertaking a merger, consolidation or reorganization of the NASD/NSX TRF with any other entity; (6) Entering into any partnership, joint venture or other similar joint business undertaking; (7) Making any fundamental change in the market structure of the NASD/ NSX TRF from that contemplated by the Members as of the date of the NASD/ NSX LLC Agreement; (8) To the fullest extent permitted by law, taking any action to effect the voluntary, or which would precipitate an involuntary, dissolution or winding up of the Company, other than as contemplated by Section 21 of the NASD/NSX LLC Agreement; NASD/NSX TRF. However, because the NASD/NSX TRF via the Business Member will submit transaction information directly to the SIP, the NASD/NSX TRF via the Business Member also will establish and implement controls to ensure that transactions that are reported to the NASD/NSX TRF, but are priced significantly away from the current market, will not be submitted to the SIP. See supra note 7. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 (9) Conversion of the NASD/NSX TRF from a Delaware limited liability company into any other type of entity; (10) Expansion of or modification to the business which results in the NASD/ NSX TRF engaging in material business unrelated to the business of Non-System Trading; 11 (11) Changing the number of Directors on or composition of the Board; and (12) Adopting or amending policies regarding access and credit matters affecting the NASD/NSX TRF. 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. The principal difference between the NASD/NSX LLC Agreement and the LLC Agreement NASD entered with Nasdaq relates to termination. The initial term of the 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 NASD/NSX Trade Reporting Facility LLC by providing to the other Member prior written notice of at least one year (as in the case with Nasdaq). Neither Member may deliver such notice before the second anniversary of the effective date of the NASD/NSX LLC Agreement. In addition, at any time, NASD may terminate in the event its status or reputation as a preeminent SRO is called into jeopardy by the actions of NSX or the NASD/NSX TRF. In the event of termination of the NASD/NSX TRF arrangement, NASD will be able to fulfill all of its regulatory obligations with respect to over-thecounter trade reporting through its other facilities, including the NASD/Nasdaq TRF and ADF. NASD/NSX Trade Reporting Facility Rules Members will report trades in Nasdaqlisted equity securities effected otherwise than on an exchange to the NASD/NSX TRF pursuant to NASD rules. As such, NASD is proposing rules relating to the use and operation of the NASD/NSX TRF that are substantially similar to the rules approved by the Commission relating to the NASD/ 11 Pursuant to the NASD/NSX LLC Agreement, ‘‘Non-System Trading’’ means trading otherwise than on an exchange of securities for which the SEC has approved a transaction reporting plan pursuant to Rule 601 of Regulation NMS under the Act. E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Notices Nasdaq TRF.12 Specifically, NASD is proposing the new NASD Rule 4000C and NASD Rule 6100C Series, which track the NASD Rule 4000 and NASD Rule 6100 Series adopted pursuant to the Approval Order. Similar to the NASD/Nasdaq TRF rules, to become a participant in the NASD/NSX TRF, an NASD member must meet minimum requirements as outlined in NASD Rule 6120C. These include execution of, and continuing compliance with, a Participant Application Agreement; membership in, or maintenance of an effective clearing arrangement with a participant of a 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. Members that report trades to the NASD/NSX TRF must include the details of the trade, as required by the proposed rules. Participants must also include the unique order identifier assigned for purposes of reporting to the Order Audit Trail System, thus enabling NASD to match the order against the trade that was reported to the tape by the NASD/NSX TRF. As with the NASD/Nasdaq TRF, participants may enter into ‘‘give-up’’ arrangements whereby one member reports to the NASD/NSX TRF on behalf of another member. Participants must complete and submit to the NASD/NSX TRF the appropriate documentation reflecting the arrangement. Proposed NASD Rule 4632C(g) provides that the member with the reporting obligation remains responsible for the transaction submitted on its behalf. Further, 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.13 In addition, participants will be able to submit ‘‘riskless principal’’ transactions 14 to the NASD/NSX TRF. Similar to the NASD/Nasdaq TRF, the 12 See Approval Order. noted above, NASD/Nasdaq TRF participants may enter into ‘‘give-up’’ arrangements; however, the NASD/Nasdaq TRF rules currently do not contain a provision similar to proposed NASD Rule 4632C(g). NASD has submitted a proposed rule change to amend the NASD/Nasdaq TRF rules to include a provision that is identical to proposed NASD Rule 4632C(g). See Securities Exchange Act Release No. 54451 (September 15, 2006) (SR– NASD–2006–104) (Notice). 14 A riskless principal transaction is a transaction in which a member, after having received a customer order, executes an offsetting transaction, as principal, with another customer or broker-dealer to fill that customer order and both transactions are executed at the same price. rwilkins on PROD1PC63 with NOTICES 13 As VerDate Aug<31>2005 16:48 Sep 26, 2006 Jkt 208001 non-media portion of a riskless principal transaction will not be reported to the tape, but will be submitted real-time to NASD for regulatory purposes and, at the option of the user, to NSCC. Proposed NASD Rule 4632C(d)(3)(B) 15 would clarify that where the media leg of the riskless principal transaction is reported to the NASD/NSX TRF, the second, non-media leg must also be reported to the NASD/ NSX TRF. However, where the media leg of the riskless principal transaction was previously reported by an exchange, the member would be permitted, but not required, to report the second, non-media leg to the NASD/ NSX TRF. Members that choose to report such transactions to the NASD/ NSX TRF must include all data elements required under the rules. Members should note, however, that transactions reported by an exchange should not be reported to NASD/NSX TRF for media purposes, as that would result in double reporting of the same transaction.16 Finally, NASD will have the authority to halt trading otherwise than on an exchange reported to the NASD/NSX TRF. The scope of NASD’s authority under proposed NASD Rule 4633C is identical to its authority to halt trading reported to the NASD/Nasdaq TRF and the ADF. As described below, the proposed rules differ from the NASD/Nasdaq TRF rules in certain respects. Currently, NASD Rules 4100 and 4200(a)(2) of the NASD/Nasdaq TRF rules define ‘‘designated securities’’ as all Nasdaq National Market (now Nasdaq Global Market) and Nasdaq Capital Market securities and convertible bonds listed on Nasdaq.17 As defined in proposed 15 Proposed NASD Rule 4632C(d)(3)(B) mirrors recently proposed amendments to NASD Rule 4632(d)(3)(B) of the NASD/Nasdaq TRF rules. See Securities Exchange Act Release No. 54451 (September 15, 2006) (SR–NASD–2006–104) (Notice). 16 Proposed 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. This proposed rule mirrors NASD Rule 4632(e)(6) of the NASD/Nasdaq TRF rules. See Securities Exchange Act Release Nos. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR–NASD–2005–087); 53977 (June 12, 2006), 71 FR 34976 (June 16, 2006) (File No. SR– NASD–2006–055); and 54318 (August 15, 2006), 71 FR 48959 (August 22, 2006) (File No. SR–NASD– 2006–098). 17 On September 5, 2006, NASD filed a proposed rule change that proposes, among other things, to amend the definition of ‘‘designated securities’’ in NASD Rules 4100 and 4200(a)(2) to apply to all NMS stocks as defined in NASD Rule 600(b)(47) of Regulation NMS under the Act. See Securities Exchange Act Release No. 54451 (September 15, 2006) (SR–NASD–2006–104) (Notice). NASD intends to propose a similar amendment to the definition of ‘‘designated securities’’ in proposed PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 56575 NASD Rules 4100C and 4200C(a)(2), ‘‘designated securities’’ for purposes of reporting trades to the NASD/NSX TRF means ‘‘all equity securities listed on the Nasdaq Stock Market LLC.’’ The proposed definition is intended to capture the same universe of Nasdaqlisted securities (except for convertible bonds) in current NASD Rules 4100 and 4200(a)(2), without specifying the various Nasdaq tiers. Second, pursuant to proposed NASD Rule 6120C, only members of NASD may use the NASD/NSX TRF. Nonmembers will not be permitted to submit trade reports to the NASD/NSX TRF. Under very limited circumstances, certain Non-Member Clearing Organizations are granted access to and participation in the NASD/Nasdaq TRF. Third, pursuant to proposed NASD Rule 6140C, all trades submitted to the NASD/NSX TRF must be locked-in prior to entry into the System. The NASD/ NSX TRF will have no trade comparison functionality. Thus, there are no proposed rules relating to trade matching, trade acceptance or aggregate volume matching. Similarly, there will be no ‘‘Browse’’ function, meaning that participants will not be able to review or query for trades in the NASD/NSX TRF identifying the participant as a party to the transaction. Fourth, on the first day of operation, the NASD/NSX TRF will not be able to support trade reporting for certain transactions. Specifically, transactions executed outside of normal market hours cannot be reported to the NASD/ NSX TRF on an ‘‘as/of’’ or next day (T+1) basis, pursuant to NASD Rule 4632C(a)(2). In addition, the NASD/NSX TRF will not support the .W or .PRP modifiers and therefore proposed NASD Rule 4632C(a)(7) provides that Stop Stock Transactions (as such term is defined in NASD Rule 4200C), transactions at prices based on averageweighting or other special pricing formulae, and transactions that reflect a price different from the current market when the execution price is based on a prior reference point in time cannot be reported to the NASD/NSX TRF. Thus, proposed NASD Rules 4632C(a)(2) and (7) expressly require members to report such trades to NASD via an alternative electronic mechanism.18 Similarly, proposed NASD Rule 4632C(a)(3) provides that participants NASD Rules 4100C and 4200C(a)(2) in a separate rule filing. 18 The NASD/NSX TRF is intended to ultimately have much of the same functionality that will be provided by the NASD/Nasdaq TRF. When and if such functionality is developed, NASD will file a proposed rule change to amend the NASD/NSX TRF trade reporting rules accordingly. E:\FR\FM\27SEN1.SGM 27SEN1 56576 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Notices rwilkins on PROD1PC63 with NOTICES must use an alternative electronic mechanism, and comply with all rules applicable to such alternative mechanism, to report transactions to NASD for which electronic submission to the NASD/NSX TRF is not possible. Where last sale reports of transactions in designated securities cannot be submitted to NASD via an alternative electronic mechanism such as the ADF or another Trade Reporting Facility (for example, where the ticker symbol for the security is no longer available or a market participant identifier is no longer active), members shall report such transactions as soon as practicable to the NASD Market Regulation Department on Form T. Transactions that can be reported to NASD electronically, whether on trade date or on a subsequent date on an ‘‘as of’’ basis (T+N), shall not be reported on Form T. Fifth, members will not be permitted to aggregate individual executions of orders in a security at the same price into a single transaction report submitted to the NASD/NSX TRF. Thus, the proposed rule change does not contain a counterpart to NASD Rule 4632(f) or NASD Rule 6100(e) permitting ‘‘bunched’’ trades to be reported to the NASD/Nasdaq TRF. Finally, cancellation of any trade that has been submitted to the NASD/NSX TRF must be reported in accordance with proposed NASD Rule 4632C(f). For trades that are cancelled after the day of execution of the trade or trade cancellations that are not reported on the day of execution of the trade, members must contact Trade Reporting Facility Operations to report the trade cancellation. NASD notes that the proposed rule change does not include any proposed rules relating to fees, assessments and credits specifically related to the NASD/ NSX TRF. Fees, assessments and credits, if any, with respect to the NASD/NSX TRF will be the subject of a future rule filing with the SEC. NASD’s Alternative Display Facility or the Trade Reporting Facility, no member shall effect a short sale in a Nasdaq Global Market Security otherwise than on an exchange at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid. NASD is proposing a technical amendment to NASD Rule 5100 to change the reference to ‘‘the Trade Reporting Facility’’ to ‘‘a Trade Reporting Facility’’ to clarify that the rule applies to trades reported to any Trade Reporting Facility established by NASD. NASD is proposing an identical technical amendment to NASD Interpretive Material (IM)–5100(b) to change the reference to ‘‘the Trade Reporting Facility’’ to ‘‘a Trade Reporting Facility.’’ NASD believes that the current language is too narrow and may suggest that the rule applies only to trades reported to the NASD/Nasdaq TRF. In addition, NASD Rule 6120 currently provides that participation in the System 19 is mandatory for members that are participants of a clearing agency registered with the Commission pursuant to Section 17A of the Act, and for members that have a clearing arrangement with such a participant, unless a member subscribes to TRACS. NASD is proposing to amend this rule to provide that participation in the System is mandatory for any member that has an obligation to report an overthe-counter transaction to NASD, unless the member has an alternative mechanism pursuant to NASD rules for reporting and clearing such transaction. Thus, for example, participation in the System under NASD Rule 6120 for purposes of reporting trades in Nasdaqlisted equity securities would not be mandatory for a member that is a Participant in the NASD/NSX TRF. Proposed Amendments to Certain Existing NASD Rules Although not explicitly detailed herein, it is important to note that all other NASD rules that apply to over-thecounter trading generally will apply to trades reported to the NASD/NSX TRF. However, certain NASD rules must be amended in order to reflect the operation of more than one Trade Reporting Facility. NASD Rule 5100 (Short Sale Rule), which restricts short selling on a ‘‘downbid,’’ will apply to transactions reported to the NASD/NSX TRF. The text of that rule currently provides that, with respect to trades reported to NASD is proposing a new rule in the NASD Rule 5000 Series (Trading Otherwise Than On An Exchange) relating to the use of multiple Market Participant Symbols (‘‘MPIDs’’) by members using a Trade Reporting Facility established by NASD. Proposed NASD Rule 5140 (Multiple MPIDs for Trade Reporting Facility Participants) would provide that any Trade Reporting Facility Participant that wishes to use more than one MPID for purposes of reporting trades to a Trade Reporting VerDate Aug<31>2005 16:48 Sep 26, 2006 Jkt 208001 Proposed New Rule Relating to Multiple Market Participant Symbols 19 ‘‘System’’ is defined in NASD Rule 6110(m) to mean the NASD/Nasdaq Trade Reporting Facility, the trade reporting service of the ITS/CAES System, and the OTC Reporting Facility. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 Facility must submit a written request to, and obtain approval from, NASD Operations for such additional MPID(s). In addition, NASD is proposing new NASD Interpretive Material (IM)–5140 stating that NASD considers the issuance of, and trade reporting with, multiple MPIDs to be a privilege and not a right. A Trade Reporting Facility Participant must identify the purpose(s) for which the multiple MPIDs will be used. If 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, NASD staff retains full discretion to limit or withdraw its grant of the additional MPID(s) to such Trade Reporting Facility Participant for purposes of reporting trades to a Trade Reporting Facility. NASD believes that the proposed new rule and interpretive material are necessary in order to consolidate the process of issuing multiple MPIDs with NASD.20 NASD will announce the effective date of the proposed rule change no later than 30 days following 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,21 which requires, among other things, that NASD rules be 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 protect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. NASD believes that establishment of the NASD/NSX TRF is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets because it will provide members another mechanism to report 20 Currently, members that use the NASD/Nasdaq TRF are able to obtain and use multiple MPIDs upon request. NASD notes that NASD/Nasdaq TRF Participants using existing multiple MPIDs will be grandfathered and will not be required to submit a new form to NASD Operations in order to continue using their MPIDs. However, any such Participant wishing to obtain additional MPIDs after implementation of proposed NASD Rule 5140 would need the approval of NASD Operations. To the extent that a Participant is a member of multiple SROs and intends to use the MPID(s) on multiple SRO systems, NASD will work with the other SRO(s) to coordinate the MPID approval process. 21 15 U.S.C. 78o–3(b)(6). E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Notices transactions in Nasdaq-listed equity securities effected otherwise than on an exchange. B. Self-Regulatory Organization’s Statement on Burden on Competition NASD does not believe that the proposed rule change will 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 the Exchange 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. 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–2006–108 and should be submitted on or before October 18, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.22 J. Lynn Taylor, Assistant Secretary. [FR Doc. E6–15792 Filed 9–26–06; 8:45 am] BILLING CODE 8010–01–P 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 rulecomments@sec.gov. Please include File Number SR–NASD–2006–108 on the subject line. rwilkins on PROD1PC63 with NOTICES 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 VerDate Aug<31>2005 16:48 Sep 26, 2006 Jkt 208001 UNITED STATES SENTENCING COMMISSION Sentencing Guidelines for United States Courts United States Sentencing Commission. ACTION: Notice of final action regarding amendments to Federal sentencing guidelines effective November 1, 2006; correction. AGENCY: SUMMARY: On May 1, 2006, the Commission submitted to Congress amendments to the federal sentencing guidelines and published these amendments in the Federal Register on May 15, 2006. See 71 FR 28063. The Commission has made technical and conforming amendments to commentary provisions related to those amendments and has made a correction to the amendatory language of one amendment. The Commission has specified an effective date of November 1, 2006, for the amendments set forth in this notice. DATES: 22 17 PO 00000 CFR 200.30–3(a)(12). Frm 00110 Fmt 4703 Sfmt 4703 56577 FOR FURTHER INFORMATION CONTACT: Michael Courlander, Public Affairs Officer, telephone: (202) 502–4590. SUPPLEMENTARY INFORMATION: The United States Sentencing Commission, an independent commission in the judicial branch of the United States government, is authorized by 28 U.S.C. 994(a) to promulgate sentencing guidelines and policy statements for federal courts. Section 994 also directs the Commission to review and revise periodically promulgated guidelines and authorizes it to submit guideline amendments to Congress not later than the first day of May each year. See 28 U.S.C. 994(o), (p). Absent an affirmative disapproval by the Congress within 180 days after the Commission submits its amendments, the amendments become effective on the date specified by the Commission (typically November 1 of the same calendar year). 28 U.S.C. 994(p). Unlike amendments made to sentencing guidelines, amendments to commentary may be made at any time and are not subject to congressional review. To the extent practicable, the Commission endeavors to include amendments to commentary in any submission of guideline amendments to Congress. Occasionally, however, the Commission determines that technical and conforming changes to commentary are necessary in order to execute correctly the amendments submitted to Congress. This notice sets forth technical and conforming amendments to commentary related to the amendments submitted to Congress on May 1, 2006, that will become effective date on November 1, 2006. This notice also sets forth a correction to amendatory language. Authority: USSC Rules of Practice and Procedure 4.1. Ricardo H. Hinojosa, Chair. 1. Amendment The Commentary to § 2B1.1 captioned ‘‘Application Notes’’ is amended in Note 7(C) by striking ‘‘§ 2J1.7’’ and inserting ‘‘§ 3C1.3’’. The Commentary to § 2K2.1 captioned ‘‘Application Notes’’, as amended by Amendment 9 submitted to Congress on May 1, 2006 (71 FR 28069.; USSG App. C (amendment 691)), is further amended in Note 3 by inserting ‘‘Definition of ‘Prohibited Person’.—’’ before ‘‘For purposes’’; and in Note 11, as redesignated by Amendment 9 (USSG App. C (amendment 691)), by striking ‘‘Note 8’’ and inserting ‘‘Note 7’’. The Commentary to § 2K2.4 captioned ‘‘Application Notes’’ is amended in E:\FR\FM\27SEN1.SGM 27SEN1

Agencies

[Federal Register Volume 71, Number 187 (Wednesday, September 27, 2006)]
[Notices]
[Pages 56573-56577]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-15792]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54479; File No. SR-NASD-2006-108]


Self-Regulatory Organizations: National Association of Securities 
Dealers, Inc.; Notice of Filing of a Proposed Rule Change Relating to a 
New NASD Trade Reporting Facility Established in Conjunction With the 
National Stock Exchange

 September 21, 2006.
    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 September 14, 2006, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to adopt rules relating to a new Trade Reporting 
Facility (the ``NASD/NSX TRF'') to be established by NASD, in 
conjunction with the National Stock Exchange (``NSX''), that would 
provide members another mechanism for reporting trades in Nasdaq-listed 
equity securities effected otherwise than on an exchange. The proposed 
NASD/NSX TRF structure and rules are substantially similar to the Trade 
Reporting Facility (``TRF'') established by NASD and Nasdaq Stock 
Market, Inc. (the ``NASD/Nasdaq TRF'') and rules relating thereto, 
which were approved by the Commission pursuant to proposed rule change 
SR-NASD-2005-087.\3\ Pursuant to the proposed rule change, NASD is also 
proposing: (1) Amendments to certain NASD rules to reflect the 
operation of more than one Trade Reporting Facility established by 
NASD; and (2) new NASD Rule 5140 relating to the use of multiple Market 
Participant Symbols by members reporting trades to a Trade Reporting 
Facility established by NASD.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (SR-NASD-2005-087) (``Approval 
Order''). SR-NASD-2005-087 became effective upon the date on which 
The NASDAQ Stock Market LLC (the ``Nasdaq Exchange'') commenced 
operation as a national securities exchange for Nasdaq-listed 
securities, which was August 1, 2006.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on NASD's Web 
site at (http://www.nasd.com), at the principal office of the NASD, at 
the Commission's Public Reference Room, and the Commission's Web site 
at (http://www.sec.gov).

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
    On June 30, 2006, the Commission approved SR-NASD-2005-087.\4\ 
Among other things, the Approval Order proposed: (1) Amendments to the 
NASD Delegation Plan, NASD By-Laws and NASD rules to reflect a proposed 
phased implementation strategy for the operation of the Nasdaq Exchange 
as a national securities exchange with respect to Nasdaq-listed 
securities during a transitional period; and (2) rules for reporting 
trades effected otherwise than on an exchange to the NASD/Nasdaq TRF. 
Pursuant to SR-NASD-2005-087, NASD proposed the NASD Rule 4000 Series 
(The Trade Reporting Facility) and the NASD Rule 6100 Series (Clearing 
and Comparison Rules), which generally apply to trade reporting and 
clearing and comparison services via the NASD/Nasdaq TRF.
---------------------------------------------------------------------------

    \4\ Id.
---------------------------------------------------------------------------

NASD/NSX Trade Reporting Facility

    The NASD proposes to establish a new NASD/NSX TRF on substantially 
the same terms as the NASD/Nasdaq TRF.\5\ The NASD/NSX TRF will provide 
members another mechanism, which has been developed by NSX, for 
reporting transactions in Nasdaq-listed equity securities executed 
otherwise than on an exchange.\6\ Members will match and/or execute 
orders internally or through proprietary systems and submit these 
trades to the NASD/NSX TRF with the appropriate information and 
modifiers. The NASD/NSX TRF will report the trades to the appropriate 
exclusive securities information processor (``SIP'').\7\ As with trades 
reported to the NASD/Nasdaq TRF, NASD/NSX TRF transactions disseminated 
to the media will include a modifier indicating the source of such 
transactions that would distinguish them from transactions executed on 
or through the NSX. In addition, the NASD/NSX TRF will provide 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 also 
provide the necessary clearing information regarding transactions to 
the National Securities Clearing Corporation (``NSCC'').
---------------------------------------------------------------------------

    \5\ In response to comments submitted to the Commission in 
connection with the Approval Order, NASD indicated that it was 
prepared to implement a TRF with any exchange based on whatever 
technology the exchange has available to it. See Letter to Honorable 
Christopher Cox, Chairman, Commission, dated May 2, 2006 from Robert 
Glauber, Chairman and Chief Executive Officer, NASD.
    As the Commission noted in its Approval Order, the Act does not 
prohibit NASD from establishing different facilities for purposes of 
fulfilling its regulatory obligations. See Approval Order.
    \6\ NASD will submit a second proposed rule change relating to 
reporting to the NASD/NSX TRF of transactions in all exchange-listed 
securities executed otherwise than on an exchange.
    \7\ The NASD/NSX TRF will have controls in place to ensure that 
transactions that are reported to the NASD/NSX TRF, but are priced 
significantly away from the current market, will not be submitted to 
the SIP. This is consistent with current practice, which is designed 
to preserve the integrity of the tape; today, such trades are not 
submitted to the SIP by the ADF or the NASD/Nasdaq TRF.
---------------------------------------------------------------------------

    Like the NASD/Nasdaq TRF, the NASD/NSX TRF will be a facility of 
NASD, subject to regulation by NASD and NASD's registration as a 
national securities association. It will not be a service ``for the 
purpose of effecting or reporting a transaction'' on the NSX; rather, 
it will be a service for the purpose of reporting over-the-counter 
transactions in Nasdaq-listed equity securities to NASD.\8\ Thus, 
members that meet all applicable requirements will now have the option 
of reporting transactions in Nasdaq-listed equity securities executed 
otherwise than on an exchange to the NASD/NSX TRF,

[[Page 56574]]

NASD's Alternative Display Facility (``ADF'') or the NASD/Nasdaq 
TRF.\9\
---------------------------------------------------------------------------

    \8\ See Approval Order.
    \9\ NASD will have an integrated audit trail of NASD/Nasdaq TRF, 
NASD/NSX TRF and ADF transactions and will have integrated 
surveillance capabilities. NASD expects that comprehensive audit 
trail and surveillance integration on an automated basis will be 
completed by the end of the fourth quarter of 2006. Prior to that 
time, NASD staff will be able to create an integrated audit trail on 
a manual basis as needed for regulatory purposes.
---------------------------------------------------------------------------

    NSX has developed the system that participants will use to access 
the NASD/NSX TRF. Technical Specifications to connect to the NASD/NSX 
TRF system are available upon request to NASD and will be accessible 
through the NASD's Web site at a later date.

NASD/NSX TRF Limited Liability Company Agreement

    NASD and NSX propose to enter into a Limited Liability Company 
Agreement of NASD/NSX Trade Reporting Facility LLC (``the NASD/NSX LLC 
Agreement''). The terms of the NASD/NSX LLC Agreement are substantially 
similar to the terms of the LLC agreement that NASD entered with Nasdaq 
Stock Market Inc. (``Nasdaq'').
    NASD will have sole regulatory responsibility for the NASD/NSX TRF, 
while NSX agrees to pay the cost of regulation and will provide systems 
to enable 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.
    NASD, the SRO Member under the NASD/NSX LLC Agreement, will perform 
SRO Responsibilities including, but not limited to:
    (1) Adoption, amendment and interpretation of policies arising out 
of and regarding any aspect of the operation of the facility considered 
material by the SRO Member, or regarding the meaning, administration, 
or enforcement of an existing rule of the SRO Member, including any 
generally applicable exemption from such a rule;
    (2) Approval of rule filings of the SRO Member prior to filing with 
the Commission;
    (3) Regulation of the NASD/NSX TRF's activities of or relating to 
SRO Responsibilities, including the right to review and approve, in the 
SRO Member's sole reasonable discretion, the regulatory budget for the 
NASD/NSX TRF;
    (4) Securities regulation and any other matter implicating SRO 
Responsibilities; and
    (5) Real-time market surveillance.\10\
---------------------------------------------------------------------------

    \10\ The SRO Member will perform real-time market surveillance 
related to trades reported to the NASD/NSX TRF. However, because the 
NASD/NSX TRF via the Business Member will submit transaction 
information directly to the SIP, the NASD/NSX TRF via the Business 
Member also will establish and implement controls to ensure that 
transactions that are reported to the NASD/NSX TRF, but are priced 
significantly away from the current market, will not be submitted to 
the SIP. See supra note 7.
---------------------------------------------------------------------------

    NSX, the ``Business Member'' under the NASD/NSX 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 NASD. Under Section 9(d) of the 
NASD/NSX 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 NASD/NSX LLC Agreement.
    The NASD/NSX TRF will be managed by or under the direction of a 
Board of Directors to be established by the parties. NASD will have the 
right to designate at least one Director, the SRO Member Director, who 
may be a member of NASD's Board of Governors or an officer or employee 
of NASD designated by the NASD Board of Governors. The SRO Member 
Director will have veto power over all major actions of the NASD/NSX 
LLC Board. Major Actions are defined in Section 10(e) of the NASD/NSX 
LLC Agreement to include:
    (1) Approving pricing decisions that are subject to the SEC filing 
process;
    (2) Approving contracts between the NASD/NSX TRF and the Business 
Member, any of its affiliates, directors, officers or employees;
    (3) Approving Director compensation;
    (4) Selling, licensing, leasing or otherwise transferring material 
assets used in the operation of the NASD/NSX TRF's business outside of 
the ordinary course of business with an aggregate value in excess of $3 
million;
    (5) Approving or undertaking a merger, consolidation or 
reorganization of the NASD/NSX TRF with any other entity;
    (6) Entering into any partnership, joint venture or other similar 
joint business undertaking;
    (7) Making any fundamental change in the market structure of the 
NASD/NSX TRF from that contemplated by the Members as of the date of 
the NASD/NSX LLC Agreement;
    (8) To the fullest extent permitted by law, taking any action to 
effect the voluntary, or which would precipitate an involuntary, 
dissolution or winding up of the Company, other than as contemplated by 
Section 21 of the NASD/NSX LLC Agreement;
    (9) Conversion of the NASD/NSX TRF from a Delaware limited 
liability company into any other type of entity;
    (10) Expansion of or modification to the business which results in 
the NASD/NSX TRF engaging in material business unrelated to the 
business of Non-System Trading; \11\
---------------------------------------------------------------------------

    \11\ Pursuant to the NASD/NSX LLC Agreement, ``Non-System 
Trading'' means trading otherwise than on an exchange of securities 
for which the SEC has approved a transaction reporting plan pursuant 
to Rule 601 of Regulation NMS under the Act.
---------------------------------------------------------------------------

    (11) Changing the number of Directors on or composition of the 
Board; and
    (12) Adopting or amending policies regarding access and credit 
matters affecting the NASD/NSX TRF.
    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.
    The principal difference between the NASD/NSX LLC Agreement and the 
LLC Agreement NASD entered with Nasdaq relates to termination. The 
initial term of the 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 NASD/NSX 
Trade Reporting Facility LLC by providing to the other Member prior 
written notice of at least one year (as in the case with Nasdaq). 
Neither Member may deliver such notice before the second anniversary of 
the effective date of the NASD/NSX LLC Agreement. In addition, at any 
time, NASD may terminate in the event its status or reputation as a 
preeminent SRO is called into jeopardy by the actions of NSX or the 
NASD/NSX TRF. In the event of termination of the NASD/NSX TRF 
arrangement, NASD will be able to fulfill all of its regulatory 
obligations with respect to over-the-counter trade reporting through 
its other facilities, including the NASD/Nasdaq TRF and ADF.

NASD/NSX Trade Reporting Facility Rules

    Members will report trades in Nasdaq-listed equity securities 
effected otherwise than on an exchange to the NASD/NSX TRF pursuant to 
NASD rules. As such, NASD is proposing rules relating to the use and 
operation of the NASD/NSX TRF that are substantially similar to the 
rules approved by the Commission relating to the NASD/

[[Page 56575]]

Nasdaq TRF.\12\ Specifically, NASD is proposing the new NASD Rule 4000C 
and NASD Rule 6100C Series, which track the NASD Rule 4000 and NASD 
Rule 6100 Series adopted pursuant to the Approval Order.
---------------------------------------------------------------------------

    \12\ See Approval Order.
---------------------------------------------------------------------------

    Similar to the NASD/Nasdaq TRF rules, to become a participant in 
the NASD/NSX TRF, an NASD member must meet minimum requirements as 
outlined in NASD Rule 6120C. These include execution of, and continuing 
compliance with, a Participant Application Agreement; membership in, or 
maintenance of an effective clearing arrangement with a participant of 
a 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.
    Members that report trades to the NASD/NSX TRF must include the 
details of the trade, as required by the proposed rules. Participants 
must also include the unique order identifier assigned for purposes of 
reporting to the Order Audit Trail System, thus enabling NASD to match 
the order against the trade that was reported to the tape by the NASD/
NSX TRF.
    As with the NASD/Nasdaq TRF, participants may enter into ``give-
up'' arrangements whereby one member reports to the NASD/NSX TRF on 
behalf of another member. Participants must complete and submit to the 
NASD/NSX TRF the appropriate documentation reflecting the arrangement. 
Proposed NASD Rule 4632C(g) provides that the member with the reporting 
obligation remains responsible for the transaction submitted on its 
behalf. Further, 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.\13\
---------------------------------------------------------------------------

    \13\ As noted above, NASD/Nasdaq TRF participants may enter into 
``give-up'' arrangements; however, the NASD/Nasdaq TRF rules 
currently do not contain a provision similar to proposed NASD Rule 
4632C(g). NASD has submitted a proposed rule change to amend the 
NASD/Nasdaq TRF rules to include a provision that is identical to 
proposed NASD Rule 4632C(g). See Securities Exchange Act Release No. 
54451 (September 15, 2006) (SR-NASD-2006-104) (Notice).
---------------------------------------------------------------------------

    In addition, participants will be able to submit ``riskless 
principal'' transactions \14\ to the NASD/NSX TRF. Similar to the NASD/
Nasdaq TRF, the non-media portion of a riskless principal transaction 
will not be reported to the tape, but will be submitted real-time to 
NASD for regulatory purposes and, at the option of the user, to NSCC. 
Proposed NASD Rule 4632C(d)(3)(B) \15\ would clarify that where the 
media leg of the riskless principal transaction is reported to the 
NASD/NSX TRF, the second, non-media leg must also be reported to the 
NASD/NSX TRF. However, where the media leg of the riskless principal 
transaction was previously reported by an exchange, the member would be 
permitted, but not required, to report the second, non-media leg to the 
NASD/NSX TRF. Members that choose to report such transactions to the 
NASD/NSX TRF must include all data elements required under the rules. 
Members should note, however, that transactions reported by an exchange 
should not be reported to NASD/NSX TRF for media purposes, as that 
would result in double reporting of the same transaction.\16\
---------------------------------------------------------------------------

    \14\ A riskless principal transaction is a transaction in which 
a member, after having received a customer order, executes an 
offsetting transaction, as principal, with another customer or 
broker-dealer to fill that customer order and both transactions are 
executed at the same price.
    \15\ Proposed NASD Rule 4632C(d)(3)(B) mirrors recently proposed 
amendments to NASD Rule 4632(d)(3)(B) of the NASD/Nasdaq TRF rules. 
See Securities Exchange Act Release No. 54451 (September 15, 2006) 
(SR-NASD-2006-104) (Notice).
    \16\ Proposed 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. This proposed rule mirrors 
NASD Rule 4632(e)(6) of the NASD/Nasdaq TRF rules. See Securities 
Exchange Act Release Nos. 54084 (June 30, 2006), 71 FR 38935 (July 
10, 2006) (File No. SR-NASD-2005-087); 53977 (June 12, 2006), 71 FR 
34976 (June 16, 2006) (File No. SR-NASD-2006-055); and 54318 (August 
15, 2006), 71 FR 48959 (August 22, 2006) (File No. SR-NASD-2006-
098).
---------------------------------------------------------------------------

    Finally, NASD will have the authority to halt trading otherwise 
than on an exchange reported to the NASD/NSX TRF. The scope of NASD's 
authority under proposed NASD Rule 4633C is identical to its authority 
to halt trading reported to the NASD/Nasdaq TRF and the ADF.
    As described below, the proposed rules differ from the NASD/Nasdaq 
TRF rules in certain respects. Currently, NASD Rules 4100 and 
4200(a)(2) of the NASD/Nasdaq TRF rules define ``designated 
securities'' as all Nasdaq National Market (now Nasdaq Global Market) 
and Nasdaq Capital Market securities and convertible bonds listed on 
Nasdaq.\17\ As defined in proposed NASD Rules 4100C and 4200C(a)(2), 
``designated securities'' for purposes of reporting trades to the NASD/
NSX TRF means ``all equity securities listed on the Nasdaq Stock Market 
LLC.'' The proposed definition is intended to capture the same universe 
of Nasdaq-listed securities (except for convertible bonds) in current 
NASD Rules 4100 and 4200(a)(2), without specifying the various Nasdaq 
tiers.
---------------------------------------------------------------------------

    \17\ On September 5, 2006, NASD filed a proposed rule change 
that proposes, among other things, to amend the definition of 
``designated securities'' in NASD Rules 4100 and 4200(a)(2) to apply 
to all NMS stocks as defined in NASD Rule 600(b)(47) of Regulation 
NMS under the Act. See Securities Exchange Act Release No. 54451 
(September 15, 2006) (SR-NASD-2006-104) (Notice). NASD intends to 
propose a similar amendment to the definition of ``designated 
securities'' in proposed NASD Rules 4100C and 4200C(a)(2) in a 
separate rule filing.
---------------------------------------------------------------------------

    Second, pursuant to proposed NASD Rule 6120C, only members of NASD 
may use the NASD/NSX TRF. Non-members will not be permitted to submit 
trade reports to the NASD/NSX TRF. Under very limited circumstances, 
certain Non-Member Clearing Organizations are granted access to and 
participation in the NASD/Nasdaq TRF.
    Third, pursuant to proposed NASD Rule 6140C, all trades submitted 
to the NASD/NSX TRF must be locked-in prior to entry into the System. 
The NASD/NSX TRF will have no trade comparison functionality. Thus, 
there are no proposed rules relating to trade matching, trade 
acceptance or aggregate volume matching. Similarly, there will be no 
``Browse'' function, meaning that participants will not be able to 
review or query for trades in the NASD/NSX TRF identifying the 
participant as a party to the transaction.
    Fourth, on the first day of operation, the NASD/NSX TRF will not be 
able to support trade reporting for certain transactions. Specifically, 
transactions executed outside of normal market hours cannot be reported 
to the NASD/NSX TRF on an ``as/of'' or next day (T+1) basis, pursuant 
to NASD Rule 4632C(a)(2). In addition, the NASD/NSX TRF will not 
support the .W or .PRP modifiers and therefore proposed NASD Rule 
4632C(a)(7) provides that Stop Stock Transactions (as such term is 
defined in NASD Rule 4200C), transactions at prices based on average-
weighting or other special pricing formulae, and transactions that 
reflect a price different from the current market when the execution 
price is based on a prior reference point in time cannot be reported to 
the NASD/NSX TRF. Thus, proposed NASD Rules 4632C(a)(2) and (7) 
expressly require members to report such trades to NASD via an 
alternative electronic mechanism.\18\
---------------------------------------------------------------------------

    \18\ The NASD/NSX TRF is intended to ultimately have much of the 
same functionality that will be provided by the NASD/Nasdaq TRF. 
When and if such functionality is developed, NASD will file a 
proposed rule change to amend the NASD/NSX TRF trade reporting rules 
accordingly.
---------------------------------------------------------------------------

    Similarly, proposed NASD Rule 4632C(a)(3) provides that 
participants

[[Page 56576]]

must use an alternative electronic mechanism, and comply with all rules 
applicable to such alternative mechanism, to report transactions to 
NASD for which electronic submission to the NASD/NSX TRF is not 
possible. Where last sale reports of transactions in designated 
securities cannot be submitted to NASD via an alternative electronic 
mechanism such as the ADF or another Trade Reporting Facility (for 
example, where the ticker symbol for the security is no longer 
available or a market participant identifier is no longer active), 
members shall report such transactions as soon as practicable to the 
NASD Market Regulation Department on Form T. Transactions that can be 
reported to NASD electronically, whether on trade date or on a 
subsequent date on an ``as of'' basis (T+N), shall not be reported on 
Form T.
    Fifth, members will not be permitted to aggregate individual 
executions of orders in a security at the same price into a single 
transaction report submitted to the NASD/NSX TRF. Thus, the proposed 
rule change does not contain a counterpart to NASD Rule 4632(f) or NASD 
Rule 6100(e) permitting ``bunched'' trades to be reported to the NASD/
Nasdaq TRF.
    Finally, cancellation of any trade that has been submitted to the 
NASD/NSX TRF must be reported in accordance with proposed NASD Rule 
4632C(f). For trades that are cancelled after the day of execution of 
the trade or trade cancellations that are not reported on the day of 
execution of the trade, members must contact Trade Reporting Facility 
Operations to report the trade cancellation.
    NASD notes that the proposed rule change does not include any 
proposed rules relating to fees, assessments and credits specifically 
related to the NASD/NSX TRF. Fees, assessments and credits, if any, 
with respect to the NASD/NSX TRF will be the subject of a future rule 
filing with the SEC.

Proposed Amendments to Certain Existing NASD Rules

    Although not explicitly detailed herein, it is important to note 
that all other NASD rules that apply to over-the-counter trading 
generally will apply to trades reported to the NASD/NSX TRF. However, 
certain NASD rules must be amended in order to reflect the operation of 
more than one Trade Reporting Facility.
    NASD Rule 5100 (Short Sale Rule), which restricts short selling on 
a ``downbid,'' will apply to transactions reported to the NASD/NSX TRF. 
The text of that rule currently provides that, with respect to trades 
reported to NASD's Alternative Display Facility or the Trade Reporting 
Facility, no member shall effect a short sale in a Nasdaq Global Market 
Security otherwise than on an exchange at or below the current national 
best (inside) bid when the current national best (inside) bid is below 
the preceding national best (inside) bid. NASD is proposing a technical 
amendment to NASD Rule 5100 to change the reference to ``the Trade 
Reporting Facility'' to ``a Trade Reporting Facility'' to clarify that 
the rule applies to trades reported to any Trade Reporting Facility 
established by NASD. NASD is proposing an identical technical amendment 
to NASD Interpretive Material (IM)-5100(b) to change the reference to 
``the Trade Reporting Facility'' to ``a Trade Reporting Facility.'' 
NASD believes that the current language is too narrow and may suggest 
that the rule applies only to trades reported to the NASD/Nasdaq TRF.
    In addition, NASD Rule 6120 currently provides that participation 
in the System \19\ is mandatory for members that are participants of a 
clearing agency registered with the Commission pursuant to Section 17A 
of the Act, and for members that have a clearing arrangement with such 
a participant, unless a member subscribes to TRACS. NASD is proposing 
to amend this rule to provide that participation in the System is 
mandatory for any member that has an obligation to report an over-the-
counter transaction to NASD, unless the member has an alternative 
mechanism pursuant to NASD rules for reporting and clearing such 
transaction. Thus, for example, participation in the System under NASD 
Rule 6120 for purposes of reporting trades in Nasdaq-listed equity 
securities would not be mandatory for a member that is a Participant in 
the NASD/NSX TRF.
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    \19\ ``System'' is defined in NASD Rule 6110(m) 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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Proposed New Rule Relating to Multiple Market Participant Symbols

    NASD is proposing a new rule in the NASD Rule 5000 Series (Trading 
Otherwise Than On An Exchange) relating to the use of multiple Market 
Participant Symbols (``MPIDs'') by members using a Trade Reporting 
Facility established by NASD. Proposed NASD Rule 5140 (Multiple MPIDs 
for Trade Reporting Facility Participants) would provide that any Trade 
Reporting Facility Participant that wishes to use more than one MPID 
for purposes of reporting trades to a Trade Reporting Facility must 
submit a written request to, and obtain approval from, NASD Operations 
for such additional MPID(s).
    In addition, NASD is proposing new NASD Interpretive Material (IM)-
5140 stating that NASD considers the issuance of, and trade reporting 
with, multiple MPIDs to be a privilege and not a right. A Trade 
Reporting Facility Participant must identify the purpose(s) for which 
the multiple MPIDs will be used. If 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, NASD staff retains full discretion to limit or withdraw 
its grant of the additional MPID(s) to such Trade Reporting Facility 
Participant for purposes of reporting trades to a Trade Reporting 
Facility. NASD believes that the proposed new rule and interpretive 
material are necessary in order to consolidate the process of issuing 
multiple MPIDs with NASD.\20\
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    \20\ Currently, members that use the NASD/Nasdaq TRF are able to 
obtain and use multiple MPIDs upon request. NASD notes that NASD/
Nasdaq TRF Participants using existing multiple MPIDs will be 
grandfathered and will not be required to submit a new form to NASD 
Operations in order to continue using their MPIDs. However, any such 
Participant wishing to obtain additional MPIDs after implementation 
of proposed NASD Rule 5140 would need the approval of NASD 
Operations. To the extent that a Participant is a member of multiple 
SROs and intends to use the MPID(s) on multiple SRO systems, NASD 
will work with the other SRO(s) to coordinate the MPID approval 
process.
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    NASD will announce the effective date of the proposed rule change 
no later than 30 days following 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,\21\ which requires, among 
other things, that NASD rules be 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 protect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. NASD believes that 
establishment of the NASD/NSX TRF is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets because it will provide members another mechanism 
to report

[[Page 56577]]

transactions in Nasdaq-listed equity securities effected otherwise than 
on an exchange.
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    \21\ 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 will 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 the Exchange 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 rule-comments@sec.gov. 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 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-2006-108 
and should be submitted on or before October 18, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-15792 Filed 9-26-06; 8:45 am]
BILLING CODE 8010-01-P