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 Boston Stock Exchange, 61519-61524 [E6-17319]
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Federal Register / Vol. 71, No. 201 / Wednesday, October 18, 2006 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
ISE 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. The ISE 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
The Exchange is proposing to amend
its Schedule of Fees to remove (i) the
surcharge fee previously adopted 5 for
transactions in options on SPDRs, and
(ii) language relating to an expired fee
waiver. The Exchange is proposing to
remove the surcharge fee from its
Schedule of Fees because it no longer
pays a license fee to Standard & Poor’s,
the owner of the index on which SPDRs
are based, in connection with
transactions in options on SPDRs.
Accordingly, there is no longer a need
for this surcharge fee. The Exchange
will, however, continue to charge an
execution fee and a comparison fee for
transactions in options on SPDRs.
Additionally, the Exchange
previously adopted a waiver on the
surcharge for options on the Russell
1000 Index.6 That waiver expired on
September 29, 2006. Therefore, the
Exchange proposes to delete the
reference to the waiver under the Notes
section on its Schedule of Fees.
2. Statutory Basis
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The basis for the proposed rule
change is the requirement under Section
6(b)(4) of the Act 7 that an exchange
have an equitable allocation of
reasonable dues, fees, and other charges
among its members and other persons
using its facilities.
5 See Securities Exchange Act Release Nos. 51901
(June 22, 2005), 70 FR 37455 (June 29, 2005)
(Adopting a $0.10 per contract surcharge for certain
transactions in options on SPDRs); and 52237
(August 10, 2005), 70 FR 48454 (August 17, 2005)
(Applying the $0.10 per contract surcharge
retroactively to January 10, 2005).
6 See Securities Exchange Act Release No. 53608
(April 6, 2006), 71 FR 19222 (April 13, 2006).
7 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose 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
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change establishes or changes a due, fee,
or other charged imposed by the
Exchange, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 8 and Rule 19b–4(f)(2) 9 thereunder.
At any time within 60 days of the filing
of the proposed rule change the
Commission may summarily abrogate
such proposed rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
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:
61519
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://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 No.
SR–ISE–2006–60 and should be
submitted on or before November 8,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.10
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6–17316 Filed 10–17–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54591; File No. SR–NASD–
2006–115]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–ISE–2006–60 on the subject
line.
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
Boston Stock Exchange
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File No.
SR–ISE–2006–60. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
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 29, 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
October 12, 2006.
10 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
8 15
U.S.C. 78s(b)(3)(A).
9 17 CFR 19b–4(f)(2).
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Federal Register / Vol. 71, No. 201 / Wednesday, October 18, 2006 / Notices
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 proposes to adopt rules relating
to a new Trade Reporting Facility (the
‘‘NASD/BSE TRF’’) to be established by
NASD, in conjunction with the Boston
Stock Exchange (‘‘BSE’’), that would
provide members with another
mechanism for reporting trades in
exchange-listed securities effected
otherwise than on an exchange. The
proposed NASD/BSE TRF structure and
rules are substantially similar to the
Trade Reporting Facility established by
NASD and the Nasdaq Stock Market,
Inc. (the ‘‘NASD/Nasdaq TRF’’) and the
rules relating thereto, which the
Commission approved.3
The text of the proposed rule change
is available on NASD’s Web site at
(https://www.nasd.com), at the principal
office of NASD, at the Commission’s
Public Reference Room, and on the
Commission’s Web site (https://
www.sec.gov).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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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.
3 See Securities Exchange Act Release No. 54084
(June 30, 2006), 71 FR 38935 (July 10, 2006) (order
approving File No. SR–NASD–2005–087) (‘‘NASD/
Nasdaq TRF Approval Order’’). The changes
approved in the NASD/Nasdaq TRF Approval Order
became effective on August 1, 2006, the date when
The NASDAQ Stock Market LLC (the ‘‘Nasdaq
Exchange’’) commenced operation as a national
securities exchange for Nasdaq-listed securities. On
September 5, 2006, NASD filed a proposal that,
among other things, expands the scope of the
NASD/Nasdaq TRF rules to include reporting in all
exchange-listed securities. See Securities Exchange
Act Release No. 54451 (September 15, 2006), 71 FR
55243 (September 21, 2006) (notice of filing of File
No. SR–NASD–2006–104) (‘‘September 2006
Proposal’’).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Among other things, the NASD/
Nasdaq TRF Approval Order 4 approved:
(1) Amendments to the NASD
Delegation Plan, NASD By-Laws and
NASD rules to reflect a phased
implementation strategy for the
operation of the Nasdaq Stock Market
LLC 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, including 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/BSE Trade Reporting Facility
The NASD proposes to establish a
new NASD/BSE TRF on substantially
the same terms as the NASD/Nasdaq
TRF.5 The NASD/BSE TRF will provide
members with another mechanism,
which has been developed by the BSE,
for reporting transactions in exchangelisted securities executed otherwise
than on an exchange. Members will
match and/or execute orders internally
or through proprietary systems and
submit these trades to the NASD/BSE
TRF with the appropriate information
and modifiers. The NASD/BSE TRF will
report the trades to the appropriate
exclusive securities information
processor (‘‘SIP’’).6 As with trades
reported to the NASD/Nasdaq TRF,
NASD/BSE TRF transactions
disseminated to the media will include
4 See
note 3, supra.
response to comments submitted to the
Commission in connection with its proposal to
establish the NASD/Nasdaq TRF, NASD indicated
that it was prepared to implement a Trade
Reporting Facility with any exchange based on
whatever technology the exchange has available to
it. See letter from Robert Glauber, Chairman and
Chief Executive Officer, NASD, to the Hon.
Christopher Cox, Chairman, U.S. Securities and
Exchange Commission, dated May 2, 2006. As the
Commission noted in the NASD/Nasdaq TRF
Approval Order, the Act does not prohibit NASD
from establishing different facilities for purposes of
fulfilling its regulatory obligations. See NASD/
Nasdaq TRF Approval Order, supra note 3.
6 NASD represents that the NASD/BSE TRF will
have controls in place to ensure that transactions
that are reported to the NASD/BSE TRF, but priced
significantly away from the current market, will not
be submitted to the SIP. The NASD notes that this
is consistent with current practice in that neither
NASD’s Alternative Display Facility nor the NASD/
Nasdaq TRF submits such trades to the SIP.
According to the NASD, this practice is designed
to preserve the integrity of the tape.
5 In
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a modifier indicating the source of such
transactions that would distinguish
them from transactions executed on or
through the BSE. In addition, the
NASD/BSE 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/BSE TRF may also provide the
necessary clearing information
regarding transactions to the National
Securities Clearing Corporation
(‘‘NSCC’’).
Like the NASD/Nasdaq TRF, the
NASD/BSE 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 BSE;
rather, it will be a service for the
purpose of reporting over-the-counter
(‘‘OTC’’) transactions in exchange-listed
securities to NASD.7 Thus, members
that meet all applicable requirements
will have the option of reporting
transactions in exchange-listed
securities executed otherwise than on
an exchange to an NASD Trade
Reporting Facility (the NASD/BSE TRF,
the NASD/Nasdaq TRF, or the NASD/
NSX TRF 8), NASD’s Alternative Display
Facility (‘‘ADF’’),9 or NASD’s
Intermarket Trading System/Computer
Assisted Execution System (‘‘ITS/
CAES’’) System.10
7 See NASD/Nasdaq TRF Approval Order, supra
note 3.
8 NASD also has filed a proposed rule change to
establish a Trade Reporting Facility in conjunction
with the National Stock Exchange (the ‘‘NASD/NSX
TRF’’). See Securities Exchange Act Release No.
54479 (September 21, 2006), 71 FR 56573
(September 27, 2006) (notice of filing of File No.
SR–NASD–2006–108). If approved by the
Commission, the NASD/NSX TRF would provide
members with another mechanism for reporting
trades in Nasdaq-listed equity securities effected
otherwise than on an exchange. NASD intends to
submit a filing at a later date to expand reporting
to the NASD/NSX TRF to include all exchangelisted securities.
9 NASD has filed a proposed rule change
proposing to expand ADF functionality to all
exchange-listed securities. See Securities Exchange
Act Release No. 54277 (August 4, 2006), 71 FR
46527 (August 14, 2006) (notice of filing of File No.
SR–NASD–2006–091).
10 NASD has filed a proposed rule change to,
among other things, provide for the operation of the
ITS/CAES System, which includes the reporting of
transactions in non-Nasdaq exchange-listed
securities. See September 2006 Proposal, supra note
3. NASD represents that it will have an integrated
audit trail of all TRF, ADF, and ITS/CAES System
transactions, as applicable in a particular security,
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 for Nasdaq-listed securities and by the end of
the first quarter of 2007 for non-Nasdaq exchangelisted securities. Prior to that time, NASD staff will
be able to create an integrated audit trail on a
manual basis as needed for regulatory purposes.
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Federal Register / Vol. 71, No. 201 / Wednesday, October 18, 2006 / Notices
BSE has developed the system that
participants will use to access the
NASD/BSE TRF. Technical
specifications to connect to the NASD/
BSE TRF system are available upon
request to NASD and will be accessible
through the NASD’s Web site at a later
date.
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NASD/BSE TRF Limited Liability
Company Agreement
NASD and BSE propose to enter into
a Limited Liability Company Agreement
of NASD/BSE Trade Reporting Facility
LLC (‘‘the NASD/BSE LLC Agreement’’).
The terms of the NASD/BSE 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/BSE TRF,
while BSE agrees to pay the cost of
regulation and will provide systems to
enable members to report trades to the
NASD/BSE TRF. BSE will be entitled to
the profits and losses, if any, derived
from the operation of the NASD/BSE
TRF.
NASD, the ‘‘SRO Member’’ under the
NASD/BSE 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 SEC;
(3) Regulation of the NASD/BSE
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/BSE
TRF;
(4) Securities regulation and any other
matter implicating SRO
Responsibilities; and
(5) Real-time market surveillance.11
BSE, the ‘‘Business Member’’ under
the NASD/BSE LLC Agreement, will be
primarily responsible for the
management of the facility’s business
11 The SRO Member will perform real-time
market surveillance related to trades reported to the
NASD/BSE TRF. However, because the NASD/BSE
TRF via the Business Member will submit
transaction information directly to the SIP, the
NASD/BSE TRF via the Business Member also will
establish and implement controls to ensure that
transactions that are reported to the NASD/BSE
TRF, but are priced significantly away from the
current market, will not be submitted to the SIP.
See supra note 6.
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affairs to the extent those activities are
not inconsistent with the regulatory and
oversight functions of NASD. Under
Section 9(d) of the NASD/BSE 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.
The NASD/BSE 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’s Board of Governors. The
SRO Member Director will have veto
power over all major actions of the
NASD/BSE LLC Board. Section 10(e) of
the NASD/BSE LLC Agreement defines
‘‘Major Actions’’ to include:
(1) Approving pricing decisions that
are subject to the SEC filing process;
(2) Approving contracts between the
NASD/BSE 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/BSE
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/BSE 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/
BSE TRF from that contemplated by the
Members as of the date of the NASD/
BSE 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/BSE LLC Agreement;
(9) Conversion of the NASD/BSE 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/
BSE TRF engaging in material business
unrelated to the business of Non-System
Trading; 12
12 Pursuant to the NASD/BSE 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.
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61521
(11) Changing the number of Directors
on or composition of the NASD/BSE
LLC Board; and
(12) Adopting or amending policies
regarding access and credit matters
affecting the NASD/BSE 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/BSE 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/BSE TRF
reaches ‘‘Substantial Trade Volume’’
(defined as 250,000 trades or more per
day for three consecutive months), BSE
may terminate the arrangement for
convenience. After the NASD/BSE TRF
reaches Substantial Trade Volume,
either Member may terminate the
NASD/BSE 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/BSE 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
BSE or the NASD/BSE TRF. In the event
of termination of the NASD/BSE TRF
arrangement, 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, ADF, and the ITS/
CAES System.
NASD/BSE Trade Reporting Facility
Rules
Members will report trades in
exchange-listed securities effected
otherwise than on an exchange to the
NASD/BSE TRF pursuant to NASD
rules. As such, NASD is proposing rules
relating to the use and operation of the
NASD/BSE TRF that are substantially
similar to the rules approved by the
Commission relating to the NASD/
Nasdaq TRF. Specifically, NASD is
proposing the new NASD Rule 4000D
and NASD Rule 6100D Series, which
largely track the NASD Rule 4000 and
NASD Rule 6100 Series that the
Commission approved in the NASD/
Nasdaq TRF Approval Order.13
Similar to the NASD/Nasdaq TRF
rules, to become a participant in the
NASD/BSE TRF, an NASD member
must meet minimum requirements as
13 See
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outlined in NASD Rule 6120D. 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/
BSE TRF identifies as having been
effected by the participant.
Members that report trades to the
NASD/BSE 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 pursuant to
the NASD Rule 6950 Series, thus
enabling NASD to match the order
against the trade that was reported to
the tape by the NASD/BSE TRF.
As with the NASD/Nasdaq TRF,
participants may enter into ‘‘give up’’
arrangements whereby one member
reports to the NASD/BSE TRF on behalf
of another member. Participants must
complete and submit to the NASD/BSE
TRF the appropriate documentation
reflecting the arrangement. Proposed
NASD Rule 4632D(h) 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/BSE TRF are
responsible for ensuring that the
information submitted is in compliance
with all applicable rules and
regulations.14
In addition, participants will be able
to submit ‘‘riskless principal’’
transactions 15 to the NASD/BSE 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
4632D(e)(3)(B) 16 would clarify that
14 As noted above, NASD/Nasdaq TRF
participants may enter into ‘‘give up’’ arrangements;
however, the NASD/Nasdaq TRF rules currently do
not speak to such arrangements. NASD has
submitted a proposed rule change to amend the
NASD/Nasdaq TRF rules to include a provision that
is substantially similar to proposed NASD Rule
4632D(h). See September 2006 Proposal, supra note
3.
15 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.
16 Proposed NASD Rule 4632D(e)(3)(B) mirrors
recently proposed amendments to NASD Rule
4632(d)(3)(B) of the NASD/Nasdaq TRF rules. See
September 2006 Proposal, supra note 3.
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where the media leg of the riskless
principal transaction is reported to the
NASD/BSE TRF, the second, non-media
leg must also be reported to the NASD/
BSE 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, nonmedia leg to the NASD/BSE TRF.
Members that choose to report such
transactions to the NASD/BSE 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/BSE TRF for media purposes, as
that would result in double reporting of
the same transaction.17
Finally, NASD will have the authority
to halt trading otherwise than on an
exchange reported to the NASD/BSE
TRF. The scope of NASD’s authority
under proposed NASD Rule 4633D 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 current NASD/
Nasdaq TRF rules in certain respects.
Proposed NASD Rules 4100D and
4200D(a)(2) define ‘‘designated
securities’’ for purposes of reporting
trades to the NASD/BSE TRF as ‘‘all
NMS stocks as defined in Rule
600(b)(47) of Regulation NMS under the
Act.’’ Currently, NASD Rules 4100 and
4200(a)(2) define ‘‘designated
securities’’ for purposes of reporting
trades to the NASD/Nasdaq TRF as all
Nasdaq National Market (now Nasdaq
Global Market) and Nasdaq Capital
Market securities and convertible bonds
listed on Nasdaq. NASD has filed a
proposed rule change to expand
reporting to the NASD/Nasdaq TRF to
include all exchange-listed securities
and to include a definition of
‘‘designated securities’’ in NASD Rules
4100 and 4200(a)(2) that is identical to
the definition proposed herein.18
Pursuant to proposed NASD Rule
6120D, only members of NASD may use
the NASD/BSE TRF. Non-members will
not be permitted to submit trade reports
to the NASD/BSE TRF. Under very
limited circumstances, certain Non17 Proposed NASD Rule 4632D(f)(6) provides that
transactions reported on or through an exchange
shall not be reported to the NASD/BSE TRF for
purposes of publication. This proposed rule mirrors
NASD Rule 4632(e)(6) of the NASD/Nasdaq TRF
rules. See NASD/Nasdaq TRF Approval Order,
supra note 3; Securities Exchange Act Release Nos.
53977 (June 12, 2006), 71 FR 34976 (June 16, 2006)
(order approving File No SR–NASD–2006–055); and
54318 (August 15, 2006), 71 FR 48959 (August 22,
2006) (notice of filing and immediate effectiveness
of File No. SR–NASD–2006–098).
18 See September 2006 Proposal, supra note 3.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
Member Clearing Organizations are
granted access to and participation in
the NASD/Nasdaq TRF.
Pursuant to proposed NASD Rule
6140D, all trades submitted to the
NASD/BSE TRF must be locked-in prior
to entry into the System. The NASD/
BSE 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/BSE
TRF identifying the participant as a
party to the transaction.
The NASD/BSE 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/
BSE TRF on an ‘‘as/of’’ or next day
(T+1) basis, pursuant to NASD Rule
4632D(a)(2). In addition, the NASD/BSE
TRF will not support the .W or .PRP
modifiers and, therefore, proposed
NASD Rule 4632D(a)(7) provides that
Stop Stock Transactions (as defined in
NASD Rule 4200D), 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/BSE TRF. Thus,
proposed NASD Rules 4632D(a)(2) and
(7) expressly require members to report
such trades to NASD via an alternative
electronic mechanism.
Similarly, proposed NASD Rule
4632D(a)(3) provides that participants
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/BSE 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. Members are
not to use Form T to report transactions
that can be reported to NASD
electronically, whether on trade date or
on a subsequent date on an ‘‘as of’’ basis
(T+N).
Unlike the NASD/Nasdaq TRF,
participants will be able to use threeparty reports for reporting trades to the
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NASD/BSE TRF. A three-party trade
report is a single last sale trade report
that denotes one Reporting Member (i.e.,
the member with the obligation to report
the trade under proposed NASD Rule
4632D(b)) and two contra parties.
Registered ECNs may submit three-party
trade reports. In addition, riskless
principal trades may be submitted by
Reporting Members as three-party trade
reports. Proposed NASD Rule 4632D(c)
sets forth the information requirements
for two-party reports, while proposed
NASD Rule 4632D(d) sets forth the
information requirements for three-party
reports. Members currently can use
three-party reports for purposes of
reporting trades to the ADF. Proposed
NASD Rules 4632D(c) and (d) mirror the
existing ADF reporting requirements
relating to two- and three-party trade
reports (see NASD Rules 4632A(c) and
(d)).
As with the NASD/Nasdaq TRF, the
NASD/BSE TRF will only accept nonmedia or clearing-only trade reports for
certain transactions; members cannot
submit reports for these transactions for
publication. Proposed NASD Rule
4632D(f) sets forth the types of
transactions that cannot be reported for
purposes of publication to the NASD/
BSE TRF. Proposed NASD Rule
4632D(f) mirrors current NASD Rule
4632(e) of the NASD/Nasdaq TRF rules
and includes two additional categories
of trades: (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.
NASD’s proposed rule change to expand
reporting to the NASD/Nasdaq TRF for
all exchange-listed securities proposes
to amend NASD Rule 4632(e) to include
these two additional categories of
transactions.19 Thus, proposed NASD
Rule 4632D(f) of the NASD/BSE TRF
will be identical to NASD Rule 4632(e)
of the NASD/Nasdaq TRF rules.
Cancellation of any trade that has
been submitted to the NASD/BSE TRF
must be reported in accordance with
proposed NASD Rule 4632D(g). Unlike
the NASD/Nasdaq TRF, members
cannot electronically report trade
cancellations to the NASD/BSE TRF.
Members must contact NASD/BSE
Trade Reporting Facility Operations,
within the prescribed time periods, to
report the cancellation of any trade
previously submitted to the NASD/BSE
TRF.
Finally, members will not be
permitted to aggregate individual
19 See
September 2006 Proposal, supra note 3.
VerDate Aug<31>2005
15:24 Oct 17, 2006
Jkt 211001
executions of orders in a security at the
same price into a single transaction
report submitted to the NASD/BSE TRF.
Thus, the proposed rule change does not
contain a counterpart to NASD Rule
4632(f) or NASD Rule 6130(e)
permitting ‘‘bunched’’ trades to be
reported to the NASD/Nasdaq TRF.
NASD notes that the proposed rule
change does not include any proposed
rules relating to fees, assessments, and
credits specifically related to the NASD/
BSE TRF. Fees, assessments, and
credits, if any, with respect to the
NASD/BSE TRF will be the subject of a
future rule filing with the Commission.
Proposed Implementation
In light of the systems changes that
are necessary for NASD to implement
the NASD/BSE TRF for non-Nasdaq
exchange-listed securities, NASD is
proposing to implement the proposed
rule change in two phases. Specifically,
NASD proposes to implement the
proposed rule change with respect to
Nasdaq-listed equity securities and
convertible debt on the first day of
operation of the NASD/BSE TRF. NASD
proposes to implement the proposed
rule change with respect to non-Nasdaq
exchange-listed securities at a later date.
NASD will announce the
implementation date of the first phase of
the proposed rule change no later than
30 days following Commission approval
and the second phase no later than 90
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,20 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, and, in general, to protect
investors and the public interest. NASD
believes that establishment of the
NASD/BSE 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 transactions in exchange-listed
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.
20 15
PO 00000
U.S.C. 78o–3(b)(6).
Frm 00067
Fmt 4703
Sfmt 4703
61523
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 self-regulatory
organization 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 https://www.sec.gov/
rules/sro.shtml; or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–NASD–2006–115 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–2006–115. 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 (https://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
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Federal Register / Vol. 71, No. 201 / Wednesday, October 18, 2006 / Notices
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–2006–115 and
should be submitted on or before
November 8, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.21
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6–17319 Filed 10–17–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54592; File No. SR–NYSE–
2006–04]
Self-Regulatory Organizations; New
York Stock Exchange, Inc. (n/k/a New
York Stock Exchange LLC); Notice of
Filing of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto
Relating to NYSE Rule 116 (‘‘Stop’’
Constitutes Guarantee) and NYSE Rule
123B (Exchange Automated Order
Routing Systems)
October 12, 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 February
9, 2006, the New York Stock Exchange,
Inc. (n/k/a New York Stock Exchange
LLC) (‘‘NYSE’’ or ‘‘Exchange’’) 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 the NYSE.3 The
rmajette on PROD1PC67 with NOTICES1
21 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Commission notes that the rule text
submitted by the Exchange contained minor,
technical errors. Exchange staff has committed to
address these errors following publication of this
notice. In addition, certain technical corrections
and clarifications were made throughout the
discussion of the proposed rule change pursuant to
a conversation with NYSE staff. Telephone
conversation between Gillian Rowe, Principal Rule
Counsel, Office of the General Counsel, NYSE
Group, Inc., and Jennifer Colihan, Special Counsel,
and Kate Robbins, Attorney, Division of Market
Regulation, Commission, on October 2, 2006.
VerDate Aug<31>2005
15:24 Oct 17, 2006
Jkt 211001
NYSE filed Amendment Nos. 1 and 2 to
the proposed rule change on April 5,
2006 4 and September 8, 2006,5
respectively. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
In the proposed rule change, the
Exchange seeks to amend NYSE Rule
116 (‘‘Stop’’ Constitutes Guarantee) and
NYSE Rule 123B (Exchange Automated
Order Routing Systems) regarding a
specialist’s ability to ‘‘stop’’ stock and
report such a transaction. The text of the
proposed rule change is available on the
NYSE’s Web site (www.nyse.com), at the
NYSE’s Office of the Secretary, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
NYSE 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. The Exchange 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
The practice of stopping stock by
specialists on the Exchange refers to a
guarantee by the specialist that an order
he or she receives will be executed at no
worse a price than the contra side price
in the market at the time the order was
stopped, with the understanding that
the order may in fact receive a better
price. For example, the Exchange
market in a stock is quoted at 20.00 bid,
offered at 20.10, and the specialist
receives a market order to buy. If the
specialist ‘‘stops’’ the buy order, the
specialist is guaranteeing that the order
will receive no worse a price than 20.10,
4 In Amendment No. 1, the Exchange made
technical and clarifying changes to the rule text and
purpose section.
5 In Amendment No. 2, which replaced the
original filing in its entirety and incorporated
Amendment No. 1, the Exchange proposed
additional changes to NYSE Rule 116 regarding a
specialist’s ability to stop stock in the NYSE’s
Hybrid Market.
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
the then-prevailing offer price. The
specialist would then make a bid on
behalf of the market order to buy at a
price above the prevailing bid, for
example, at 20.05. If a sell order trades
with this bid, the stopped order has
received price improvement (as has the
sell order trading with it). If, however,
another buy order enters the market and
executes at the offer price of 20.10, the
stopped buy order will be executed at
that same price pursuant to the
specialist’s guarantee as evidenced by
the ‘‘stop.’’
The current Hybrid MarketSM is the
result of a series of initiatives, approved
by the Commission, to implement
changes to the operation of the
Exchange’s market to expand access to
automated trading while preserving the
advantages of the agency auction
market.6 Customers and other market
participants will have greater
opportunities for speed and certainty of
execution through the enhanced
electronic trading. Opportunities for
price improvement will continue to be
available.
NYSE Rule 116 generally provides for
the ability of a member to stop stock.
Paragraph .30 in the Rule’s
Supplementary Material provides three
circumstances in which a specialist may
stop stock, including at the opening or
reopening of trading in a stock, when a
broker in the trading crowd is
representing another order at the stop
price or when requested to by another
member. In the latter circumstance, the
provisions of NYSE Rule 116.30 require
that the quotation spread be not less
than twice the minimum variation
(currently one cent), or, if the quotation
spread is the minimum variation, that
the quote conditions (i.e., an imbalance
in the amount of shares bid for or
offered) suggest the likelihood of price
improvement, and that the order be
under 2,000 shares. The rule further
provides a limitation of a total of 5,000
shares for all stopped orders. A
specialist may seek approval of a Floor
Official to override these conditions. In
6 See The Hybrid Market initiative proposed in
SR–NYSE–2004–05 and Amendments Nos. 1, 2, 3,
5, 6, 7 and 8 thereto approved on March 22, 2006.
See Securities Exchange Act Release No. 53539
(March 22, 2006), 71 FR 16353 (March 31, 2006)
(‘‘Hybrid Market Release’’). See also Securities
Exchange Act Release Nos. 52362 (August 30,
2005), 70 FR 53701 (September 9, 2005) (SR–NYSE–
2005–57); 52954 (December 14, 2005), 70 FR 75519
(December 20, 2005) (SR–NYSE–2005–87); 53014
(December 22, 2005), 70 FR 77228 (December 29,
2005) (SR–NYSE–2005–89); 53359 (February 24,
2006), 71 FR 10736 (March 2, 2006) (SR–NYSE–
2006–09); 53487 (March 15, 2006), 71 FR 14278
(March 21, 2006) (SR–NYSE–2006–21); 53780 (May
10, 2006), 71 FR 28398 (May 16, 2006) (SR–NYSE–
2006–24); and 53791 (May 11, 2006), 71 FR 28732
(May 17, 2006) (SR–NYSE–2006–33).
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]]>Agencies
[Federal Register Volume 71, Number 201 (Wednesday, October 18, 2006)]
[Notices]
[Pages 61519-61524]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-17319]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54591; File No. SR-NASD-2006-115]
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
Boston Stock Exchange
October 12, 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 29, 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
[[Page 61520]]
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 proposes to adopt rules relating to a new Trade Reporting
Facility (the ``NASD/BSE TRF'') to be established by NASD, in
conjunction with the Boston Stock Exchange (``BSE''), that would
provide members with another mechanism for reporting trades in
exchange-listed securities effected otherwise than on an exchange. The
proposed NASD/BSE TRF structure and rules are substantially similar to
the Trade Reporting Facility established by NASD and the Nasdaq Stock
Market, Inc. (the ``NASD/Nasdaq TRF'') and the rules relating thereto,
which the Commission approved.\3\
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\3\ See Securities Exchange Act Release No. 54084 (June 30,
2006), 71 FR 38935 (July 10, 2006) (order approving File No. SR-
NASD-2005-087) (``NASD/Nasdaq TRF Approval Order''). The changes
approved in the NASD/Nasdaq TRF Approval Order became effective on
August 1, 2006, the date when The NASDAQ Stock Market LLC (the
``Nasdaq Exchange'') commenced operation as a national securities
exchange for Nasdaq-listed securities. On September 5, 2006, NASD
filed a proposal that, among other things, expands the scope of the
NASD/Nasdaq TRF rules to include reporting in all exchange-listed
securities. See Securities Exchange Act Release No. 54451 (September
15, 2006), 71 FR 55243 (September 21, 2006) (notice of filing of
File No. SR-NASD-2006-104) (``September 2006 Proposal'').
---------------------------------------------------------------------------
The text of the proposed rule change is available on NASD's Web
site at (https://www.nasd.com), at the principal office of NASD, at the
Commission's Public Reference Room, and on the Commission's Web site
(https://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
Among other things, the NASD/Nasdaq TRF Approval Order \4\
approved: (1) Amendments to the NASD Delegation Plan, NASD By-Laws and
NASD rules to reflect a phased implementation strategy for the
operation of the Nasdaq Stock Market LLC 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, including 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\ See note 3, supra.
---------------------------------------------------------------------------
NASD/BSE Trade Reporting Facility
The NASD proposes to establish a new NASD/BSE TRF on substantially
the same terms as the NASD/Nasdaq TRF.\5\ The NASD/BSE TRF will provide
members with another mechanism, which has been developed by the BSE,
for reporting transactions in exchange-listed securities executed
otherwise than on an exchange. Members will match and/or execute orders
internally or through proprietary systems and submit these trades to
the NASD/BSE TRF with the appropriate information and modifiers. The
NASD/BSE TRF will report the trades to the appropriate exclusive
securities information processor (``SIP'').\6\ As with trades reported
to the NASD/Nasdaq TRF, NASD/BSE 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 BSE. In addition, the NASD/BSE 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/BSE 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 its proposal to establish the NASD/Nasdaq TRF, NASD
indicated that it was prepared to implement a Trade Reporting
Facility with any exchange based on whatever technology the exchange
has available to it. See letter from Robert Glauber, Chairman and
Chief Executive Officer, NASD, to the Hon. Christopher Cox,
Chairman, U.S. Securities and Exchange Commission, dated May 2,
2006. As the Commission noted in the NASD/Nasdaq TRF Approval Order,
the Act does not prohibit NASD from establishing different
facilities for purposes of fulfilling its regulatory obligations.
See NASD/Nasdaq TRF Approval Order, supra note 3.
\6\ NASD represents that the NASD/BSE TRF will have controls in
place to ensure that transactions that are reported to the NASD/BSE
TRF, but priced significantly away from the current market, will not
be submitted to the SIP. The NASD notes that this is consistent with
current practice in that neither NASD's Alternative Display Facility
nor the NASD/Nasdaq TRF submits such trades to the SIP. According to
the NASD, this practice is designed to preserve the integrity of the
tape.
---------------------------------------------------------------------------
Like the NASD/Nasdaq TRF, the NASD/BSE 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 BSE; rather,
it will be a service for the purpose of reporting over-the-counter
(``OTC'') transactions in exchange-listed securities to NASD.\7\ Thus,
members that meet all applicable requirements will have the option of
reporting transactions in exchange-listed securities executed otherwise
than on an exchange to an NASD Trade Reporting Facility (the NASD/BSE
TRF, the NASD/Nasdaq TRF, or the NASD/NSX TRF \8\), NASD's Alternative
Display Facility (``ADF''),\9\ or NASD's Intermarket Trading System/
Computer Assisted Execution System (``ITS/CAES'') System.\10\
---------------------------------------------------------------------------
\7\ See NASD/Nasdaq TRF Approval Order, supra note 3.
\8\ NASD also has filed a proposed rule change to establish a
Trade Reporting Facility in conjunction with the National Stock
Exchange (the ``NASD/NSX TRF''). See Securities Exchange Act Release
No. 54479 (September 21, 2006), 71 FR 56573 (September 27, 2006)
(notice of filing of File No. SR-NASD-2006-108). If approved by the
Commission, the NASD/NSX TRF would provide members with another
mechanism for reporting trades in Nasdaq-listed equity securities
effected otherwise than on an exchange. NASD intends to submit a
filing at a later date to expand reporting to the NASD/NSX TRF to
include all exchange-listed securities.
\9\ NASD has filed a proposed rule change proposing to expand
ADF functionality to all exchange-listed securities. See Securities
Exchange Act Release No. 54277 (August 4, 2006), 71 FR 46527 (August
14, 2006) (notice of filing of File No. SR-NASD-2006-091).
\10\ NASD has filed a proposed rule change to, among other
things, provide for the operation of the ITS/CAES System, which
includes the reporting of transactions in non-Nasdaq exchange-listed
securities. See September 2006 Proposal, supra note 3. NASD
represents that it will have an integrated audit trail of all TRF,
ADF, and ITS/CAES System transactions, as applicable in a particular
security, 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 for Nasdaq-listed securities and by the end of the
first quarter of 2007 for non-Nasdaq exchange-listed securities.
Prior to that time, NASD staff will be able to create an integrated
audit trail on a manual basis as needed for regulatory purposes.
---------------------------------------------------------------------------
[[Page 61521]]
BSE has developed the system that participants will use to access
the NASD/BSE TRF. Technical specifications to connect to the NASD/BSE
TRF system are available upon request to NASD and will be accessible
through the NASD's Web site at a later date.
NASD/BSE TRF Limited Liability Company Agreement
NASD and BSE propose to enter into a Limited Liability Company
Agreement of NASD/BSE Trade Reporting Facility LLC (``the NASD/BSE LLC
Agreement''). The terms of the NASD/BSE 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/BSE TRF,
while BSE agrees to pay the cost of regulation and will provide systems
to enable members to report trades to the NASD/BSE TRF. BSE will be
entitled to the profits and losses, if any, derived from the operation
of the NASD/BSE TRF.
NASD, the ``SRO Member'' under the NASD/BSE 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 SEC;
(3) Regulation of the NASD/BSE 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/BSE TRF;
(4) Securities regulation and any other matter implicating SRO
Responsibilities; and
(5) Real-time market surveillance.\11\
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\11\ The SRO Member will perform real-time market surveillance
related to trades reported to the NASD/BSE TRF. However, because the
NASD/BSE TRF via the Business Member will submit transaction
information directly to the SIP, the NASD/BSE TRF via the Business
Member also will establish and implement controls to ensure that
transactions that are reported to the NASD/BSE TRF, but are priced
significantly away from the current market, will not be submitted to
the SIP. See supra note 6.
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BSE, the ``Business Member'' under the NASD/BSE 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/BSE 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.
The NASD/BSE 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's Board of Governors. The SRO Member
Director will have veto power over all major actions of the NASD/BSE
LLC Board. Section 10(e) of the NASD/BSE LLC Agreement defines ``Major
Actions'' to include:
(1) Approving pricing decisions that are subject to the SEC filing
process;
(2) Approving contracts between the NASD/BSE 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/BSE 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/BSE 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/BSE TRF from that contemplated by the Members as of the date of
the NASD/BSE 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/BSE LLC Agreement;
(9) Conversion of the NASD/BSE 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/BSE TRF engaging in material business unrelated to the
business of Non-System Trading; \12\
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\12\ Pursuant to the NASD/BSE 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.
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(11) Changing the number of Directors on or composition of the
NASD/BSE LLC Board; and
(12) Adopting or amending policies regarding access and credit
matters affecting the NASD/BSE 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/BSE 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/BSE TRF reaches ``Substantial Trade Volume'' (defined as
250,000 trades or more per day for three consecutive months), BSE may
terminate the arrangement for convenience. After the NASD/BSE TRF
reaches Substantial Trade Volume, either Member may terminate the NASD/
BSE 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/BSE 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 BSE or the
NASD/BSE TRF. In the event of termination of the NASD/BSE TRF
arrangement, 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, ADF, and the ITS/CAES
System.
NASD/BSE Trade Reporting Facility Rules
Members will report trades in exchange-listed securities effected
otherwise than on an exchange to the NASD/BSE TRF pursuant to NASD
rules. As such, NASD is proposing rules relating to the use and
operation of the NASD/BSE TRF that are substantially similar to the
rules approved by the Commission relating to the NASD/Nasdaq TRF.
Specifically, NASD is proposing the new NASD Rule 4000D and NASD Rule
6100D Series, which largely track the NASD Rule 4000 and NASD Rule 6100
Series that the Commission approved in the NASD/Nasdaq TRF Approval
Order.\13\
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\13\ See note 3, supra.
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Similar to the NASD/Nasdaq TRF rules, to become a participant in
the NASD/BSE TRF, an NASD member must meet minimum requirements as
[[Page 61522]]
outlined in NASD Rule 6120D. 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/BSE TRF identifies as having
been effected by the participant.
Members that report trades to the NASD/BSE 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 pursuant to the NASD Rule
6950 Series, thus enabling NASD to match the order against the trade
that was reported to the tape by the NASD/BSE TRF.
As with the NASD/Nasdaq TRF, participants may enter into ``give
up'' arrangements whereby one member reports to the NASD/BSE TRF on
behalf of another member. Participants must complete and submit to the
NASD/BSE TRF the appropriate documentation reflecting the arrangement.
Proposed NASD Rule 4632D(h) 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/BSE TRF are responsible for
ensuring that the information submitted is in compliance with all
applicable rules and regulations.\14\
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\14\ As noted above, NASD/Nasdaq TRF participants may enter into
``give up'' arrangements; however, the NASD/Nasdaq TRF rules
currently do not speak to such arrangements. NASD has submitted a
proposed rule change to amend the NASD/Nasdaq TRF rules to include a
provision that is substantially similar to proposed NASD Rule
4632D(h). See September 2006 Proposal, supra note 3.
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In addition, participants will be able to submit ``riskless
principal'' transactions \15\ to the NASD/BSE 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 4632D(e)(3)(B) \16\ would clarify that where the
media leg of the riskless principal transaction is reported to the
NASD/BSE TRF, the second, non-media leg must also be reported to the
NASD/BSE 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/BSE TRF. Members that choose to report such transactions to the
NASD/BSE 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/BSE TRF for media purposes, as that
would result in double reporting of the same transaction.\17\
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\15\ 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.
\16\ Proposed NASD Rule 4632D(e)(3)(B) mirrors recently proposed
amendments to NASD Rule 4632(d)(3)(B) of the NASD/Nasdaq TRF rules.
See September 2006 Proposal, supra note 3.
\17\ Proposed NASD Rule 4632D(f)(6) provides that transactions
reported on or through an exchange shall not be reported to the
NASD/BSE TRF for purposes of publication. This proposed rule mirrors
NASD Rule 4632(e)(6) of the NASD/Nasdaq TRF rules. See NASD/Nasdaq
TRF Approval Order, supra note 3; Securities Exchange Act Release
Nos. 53977 (June 12, 2006), 71 FR 34976 (June 16, 2006) (order
approving File No SR-NASD-2006-055); and 54318 (August 15, 2006), 71
FR 48959 (August 22, 2006) (notice of filing and immediate
effectiveness of File No. SR-NASD-2006-098).
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Finally, NASD will have the authority to halt trading otherwise
than on an exchange reported to the NASD/BSE TRF. The scope of NASD's
authority under proposed NASD Rule 4633D 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 current
NASD/Nasdaq TRF rules in certain respects. Proposed NASD Rules 4100D
and 4200D(a)(2) define ``designated securities'' for purposes of
reporting trades to the NASD/BSE TRF as ``all NMS stocks as defined in
Rule 600(b)(47) of Regulation NMS under the Act.'' Currently, NASD
Rules 4100 and 4200(a)(2) define ``designated securities'' for purposes
of reporting trades to the NASD/Nasdaq TRF as all Nasdaq National
Market (now Nasdaq Global Market) and Nasdaq Capital Market securities
and convertible bonds listed on Nasdaq. NASD has filed a proposed rule
change to expand reporting to the NASD/Nasdaq TRF to include all
exchange-listed securities and to include a definition of ``designated
securities'' in NASD Rules 4100 and 4200(a)(2) that is identical to the
definition proposed herein.\18\
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\18\ See September 2006 Proposal, supra note 3.
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Pursuant to proposed NASD Rule 6120D, only members of NASD may use
the NASD/BSE TRF. Non-members will not be permitted to submit trade
reports to the NASD/BSE TRF. Under very limited circumstances, certain
Non-Member Clearing Organizations are granted access to and
participation in the NASD/Nasdaq TRF.
Pursuant to proposed NASD Rule 6140D, all trades submitted to the
NASD/BSE TRF must be locked-in prior to entry into the System. The
NASD/BSE 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/BSE TRF identifying the participant as a party
to the transaction.
The NASD/BSE 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/BSE TRF on an ``as/
of'' or next day (T+1) basis, pursuant to NASD Rule 4632D(a)(2). In
addition, the NASD/BSE TRF will not support the .W or .PRP modifiers
and, therefore, proposed NASD Rule 4632D(a)(7) provides that Stop Stock
Transactions (as defined in NASD Rule 4200D), 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/BSE TRF. Thus, proposed NASD Rules
4632D(a)(2) and (7) expressly require members to report such trades to
NASD via an alternative electronic mechanism.
Similarly, proposed NASD Rule 4632D(a)(3) provides that
participants 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/BSE
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. Members are not to
use Form T to report transactions that can be reported to NASD
electronically, whether on trade date or on a subsequent date on an
``as of'' basis (T+N).
Unlike the NASD/Nasdaq TRF, participants will be able to use three-
party reports for reporting trades to the
[[Page 61523]]
NASD/BSE TRF. A three-party trade report is a single last sale trade
report that denotes one Reporting Member (i.e., the member with the
obligation to report the trade under proposed NASD Rule 4632D(b)) and
two contra parties. Registered ECNs may submit three-party trade
reports. In addition, riskless principal trades may be submitted by
Reporting Members as three-party trade reports. Proposed NASD Rule
4632D(c) sets forth the information requirements for two-party reports,
while proposed NASD Rule 4632D(d) sets forth the information
requirements for three-party reports. Members currently can use three-
party reports for purposes of reporting trades to the ADF. Proposed
NASD Rules 4632D(c) and (d) mirror the existing ADF reporting
requirements relating to two- and three-party trade reports (see NASD
Rules 4632A(c) and (d)).
As with the NASD/Nasdaq TRF, the NASD/BSE TRF will only accept non-
media or clearing-only trade reports for certain transactions; members
cannot submit reports for these transactions for publication. Proposed
NASD Rule 4632D(f) sets forth the types of transactions that cannot be
reported for purposes of publication to the NASD/BSE TRF. Proposed NASD
Rule 4632D(f) mirrors current NASD Rule 4632(e) of the NASD/Nasdaq TRF
rules and includes two additional categories of trades: (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. NASD's proposed rule change to expand
reporting to the NASD/Nasdaq TRF for all exchange-listed securities
proposes to amend NASD Rule 4632(e) to include these two additional
categories of transactions.\19\ Thus, proposed NASD Rule 4632D(f) of
the NASD/BSE TRF will be identical to NASD Rule 4632(e) of the NASD/
Nasdaq TRF rules.
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\19\ See September 2006 Proposal, supra note 3.
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Cancellation of any trade that has been submitted to the NASD/BSE
TRF must be reported in accordance with proposed NASD Rule 4632D(g).
Unlike the NASD/Nasdaq TRF, members cannot electronically report trade
cancellations to the NASD/BSE TRF. Members must contact NASD/BSE Trade
Reporting Facility Operations, within the prescribed time periods, to
report the cancellation of any trade previously submitted to the NASD/
BSE TRF.
Finally, 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/BSE TRF. Thus, the proposed
rule change does not contain a counterpart to NASD Rule 4632(f) or NASD
Rule 6130(e) permitting ``bunched'' trades to be reported to the NASD/
Nasdaq TRF.
NASD notes that the proposed rule change does not include any
proposed rules relating to fees, assessments, and credits specifically
related to the NASD/BSE TRF. Fees, assessments, and credits, if any,
with respect to the NASD/BSE TRF will be the subject of a future rule
filing with the Commission.
Proposed Implementation
In light of the systems changes that are necessary for NASD to
implement the NASD/BSE TRF for non-Nasdaq exchange-listed securities,
NASD is proposing to implement the proposed rule change in two phases.
Specifically, NASD proposes to implement the proposed rule change with
respect to Nasdaq-listed equity securities and convertible debt on the
first day of operation of the NASD/BSE TRF. NASD proposes to implement
the proposed rule change with respect to non-Nasdaq exchange-listed
securities at a later date.
NASD will announce the implementation date of the first phase of
the proposed rule change no later than 30 days following Commission
approval and the second phase no later than 90 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,\20\ 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, and, in general, to protect investors and the
public interest. NASD believes that establishment of the NASD/BSE 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 transactions in
exchange-listed securities effected otherwise than on an exchange.
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\20\ 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 self-regulatory organization 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 https://
www.sec.gov/rules/sro.shtml; or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-NASD-2006-115 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-2006-115. 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 (https://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
[[Page 61524]]
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-2006-115 and should be
submitted on or before November 8, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-17319 Filed 10-17-06; 8:45 am]
BILLING CODE 8011-01-P
