Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Order Audit Trail System, 30406-30408 [E7-10405]

Download as PDF 30406 Federal Register / Vol. 72, No. 104 / Thursday, May 31, 2007 / Notices 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. 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 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–2007–034 and should be submitted on or before June 21, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.7 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–10403 Filed 5–30–07; 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: SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55806; File No. SR–NASD– 2007–028] • 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–2007–034 on the subject line. sroberts on PROD1PC70 with NOTICES Electronic Comments Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Order Audit Trail System May 23, 2007. 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 April 17, Paper Comments 2007, the National Association of Securities Dealers, Inc. (‘‘NASD’’), filed • Send paper comments in triplicate with the Securities and Exchange to Nancy M. Morris, Secretary, Commission (‘‘Commission’’) the Securities and Exchange Commission, proposed rule change as described in 100 F Street, NE., Washington, DC Items I, II, and III below, which Items 20549–1090. have been substantially prepared by All submissions should refer to File NASD. On May 18, 2007, NASD filed Number SR–NASD–2007–034. This file Amendment No. 1 to the proposed rule number should be included on the change. The Commission is publishing subject line if e-mail is used. To help the this notice to solicit comments on the Commission process and review your proposed rule change, as amended, from comments more efficiently, please use interested persons. only one method. The Commission will post all comments on the Commission’s I. Self-Regulatory Organization’s Statement of the Terms of Substance of Internet Web site (http://www.sec.gov/ the Proposed Rule Change rules/sro.shtml). Copies of the submission, all subsequent NASD is proposing to amend Rules amendments, all written statements 6951 and 6954 to require members that with respect to the proposed rule transmit an intermarket sweep order change that are filed with the (‘‘ISO’’) to another member, electronic Commission, and all written communications relating to the 7 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). proposed rule change between the 2 2 17 CFR 240.19b–4. Commission and any person, other than VerDate Aug<31>2005 16:01 May 30, 2007 Jkt 211001 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 communications network, nonmember, or exchange to record and report the fact that the order was an ISO. The text of the proposed rule change is available on NASD’s Web site at http:// www.nasd.com, at NASD’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose NASD Rules 6950 through 6958 (‘‘OATS Rules’’) impose obligations on member firms to record in electronic form and report to NASD on a daily basis certain information regarding orders in Nasdaq-listed securities originated, received, transmitted, modified, canceled, or executed by NASD members.3 NASD integrates this Order Audit Trail System (‘‘OATS’’) information with quote and transaction information to create a time-sequenced record of orders, quotes, and transactions. This information is critical to NASD in conducting surveillance and investigations of members for violations of NASD rules and the federal securities laws. On June 9, 2005, the Commission adopted Regulation NMS, which established new substantive rules designed to modernize and strengthen the regulatory structure of the U.S. equities markets.4 Among other things, Regulation NMS adopted an Order Protection Rule 5 that requires trading centers to establish, maintain, and 3 Beginning on February 4, 2008, members also will be required to record and report order information regarding all OTC equity securities, as defined in NASD Rule 6951. See Securities Exchange Act Release No. 54585 (October 10, 2006), 71 FR 61112 (October 17, 2006) (SR–NASD–2005– 101); see also NASD Notice to Members 06–70 (December 2006) and Securities Exchange Act Release No. 55440 (March 9, 2007), 72 FR 12852 (March 19, 2007) (SR–NASD–2007–019). 4 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 5 17 CFR 242.611. E:\FR\FM\31MYN1.SGM 31MYN1 Federal Register / Vol. 72, No. 104 / Thursday, May 31, 2007 / Notices sroberts on PROD1PC70 with NOTICES enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to protected quotations displayed by automated trading centers, subject to applicable exceptions. One of the exceptions from the Order Protection Rule is when the transaction that constitutes a trade-through 6 is ‘‘effected by a trading center that simultaneously routed an intermarket sweep order to execute against the full displayed size of any protected quotation in the NMS stock that was traded through.’’ 7 The purpose of the proposed rule change is to require member firms to record the fact that an order in an OATS-eligible security is an ISO when the member routes an ISO to another member or non-member. The member would be required to include this information in the Route Report it submits to NASD pursuant to the OATS Rules.8 This requirement will ensure that NASD knows that the order was an ISO and can utilize that information when reviewing audit trails to ensure compliance with Regulation NMS.9 6 A ‘‘trade-through’’ is ‘‘the purchase or sale of an NMS stock during regular trading hours, either as principal or agent, at a price that is lower than a protected bid or higher than a protected offer.’’ See 17 CFR 242.600(b)(77). 7 See 17 CFR 242.611(b)(6). The phrase ‘‘intermarket sweep order’’ is defined as ‘‘a limit order for an NMS stock that meets the following requirements: (i) When routed to a trading center, the limit order is identified as an intermarket sweep order; and (ii) Simultaneously with the routing of the limit order identified as an intermarket sweep order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the NMS stock with a price that is superior to the limit price of the limit order identified as an intermarket sweep order. These additional routed orders must also be marked as intermarket sweep orders.’’ The proposed rule change adopts this same definition of intermarket sweep order for purposes of the OATS Rules. See 17 CFR 242.600(b)(30). 8 When a member transmits an order in an OATSeligible security to another member, electronic communications network, non-member, or exchange for handling or execution, the routing member is required to submit a Route Report to NASD. The categories of information that a member must include in a Route Report are set forth in NASD Rule 6954(c) and in the OATS Reporting Technical Specifications published by NASD. 9 Members are also required to submit New Order Reports when they receive an order in an OATSeligible security. NASD Rule 6954(b) and the OATS Reporting Technical Specifications set forth the information that a member must include in a New Order Report. NASD Rule 6954(b)(15) already requires members to include ‘‘special handling requests, specified by [NASD] for purposes of this Rule.’’ Pursuant to that provision, the most recent version of the OATS Reporting Technical Specifications includes a new special handling code for ISOs in New Order Reports, which would be used when a member relies on the exception from the Order Protection Rule for a transaction that ‘‘was the execution of an order identified as an intermarket sweep order.’’ See 17 CFR VerDate Aug<31>2005 16:01 May 30, 2007 Jkt 211001 30407 NASD will announce the effective date of the proposed rule change in a Notice to Members to be published no later than 60 days following Commission approval. The effective date will be February 4, 2008, to coincide with the changes to the OATS Rules approved by the Commission on October 10, 2006.10 Although firms will not be required to begin using the ISO routing method code on Route Reports until February 4, 2008, NASD states that the code will be available for use by firms beginning on June 11, 2007. Firms are encouraged to use the ISO code on their Route Reports as soon as possible to facilitate NASD’s ability to determine whether the trade was made in reliance on an ISO exception from the Order Protection Rule.11 As noted in the December 11, 2006 version of the OATS Reporting Technical Specifications, firms will be required to use the ISO Special Handling Code on New Order Reports upon implementation of the Order Protection Rule.12 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action 2. Statutory Basis Electronic Comments NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,13 which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change will enhance OATS data and ensure that NASD is able to monitor compliance with Regulation NMS in a more effective manner. • 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–2007–028 on the subject line. 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. 242.611(b)(5). Because NASD Rule 6954(b) already provides NASD with the authority to establish a new code for ISOs in New Order Reports, the proposed rule filing does not address that portion of the rule and only seeks to establish a new code for ISOs in Route Reports under NASD Rule 6954(c). 10 See supra note 3. 11 17 CFR 242.611. 12 Id. 13 15 U.S.C. 78o–3(b)(6). PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which NASD consents, the Commission will: (A) by order approve such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 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–2007–028. 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 the NASD. All E:\FR\FM\31MYN1.SGM 31MYN1 30408 Federal Register / Vol. 72, No. 104 / Thursday, May 31, 2007 / Notices 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–2007–028 and should be submitted on or before June 21, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.14 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–10405 Filed 5–30–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55799; File No. SR–NSX– 2006–16] Self-Regulatory Organizations; National Stock Exchange, Inc.; Order Approving Proposed Rule Change Regarding the Annual Certification of Compliance and Supervisory Processes May 22, 2007. I. Introduction On November 22, 2006, the National Stock Exchange, Inc. (‘‘NSX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change regarding the annual certification of compliance supervisory processes. On April 9, 2007, the NSX filed Amendment No. 1 to the proposed rule change (‘‘Amendment No. 1’’).3 The proposed rule change was published for comment in the Federal Register on April 19, 2007,4 and the Commission received no comments on the proposal. This order approves the proposed rule change, as amended. II. Description of the Proposal The Exchange proposed Rule 5.7 to require each Equity Trading Permit (‘‘ETP’’) Holder to have its Chief Executive Officer (‘‘CEO’’), or equivalent 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 In Amendment No. 1, which supplemented the original filing, the NSX provided more information regarding the certification process and corrected a grammatical error. 4 See Exchange Act Release No. 55631 (April 13, 2007), 72 FR 19733 (April 19, 2007) (SR–NSX– 2006–16). sroberts on PROD1PC70 with NOTICES 1 15 VerDate Aug<31>2005 16:01 May 30, 2007 Jkt 211001 officer, certify annually to having in place processes to establish, maintain, review, modify, and test policies and procedures reasonably designed to achieve compliance with applicable NSX rules and federal securities laws and regulations. The Exchange explains that this will help promote comprehensive and effective compliance policies and written supervisory procedures among NSX ETP Holders, and that compliance with applicable NSX rules and federal securities laws and regulations is the foundation of ensuring investor protection and market integrity and is essential to the efficacy of selfregulation. Similar requirements are already in place for NASD and NYSE member firms, addressing their compliance with the rules of those selfregulatory organizations.5 The proposed rule change also would create a new Interpretation and Policy .01 to NSX Rule 5.7. This interpretation sets forth the language of the required certification.6 The interpretation also sets forth additional guidance for following those requirements, explaining that during the required annual meeting between the CEO and chief compliance officer, the parties should discuss and review the matters that are subject of the certification as 5 See NASD Rule 3013(b) and Interpretative Material 3013 (‘‘IM 3013’’); NYSE Rule 342.30. 6 The certification would state that the ETP Holder has in place processes to: (a) Establish and maintain policies and procedures reasonably designed to achieve compliance with applicable NSX rules and federal securities laws and regulations; (b) modify such policies and procedures as business, regulatory and legislative changes and events dictate; and (c) test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with applicable NSX rules, and federal securities laws and regulations. See Proposed Interpretation and Policy .01, paragraph 1. In addition, the certification would have to state that the CEO or equivalent officer has conducted one or more meetings with the chief compliance officer in the preceding 12 months to satisfy these obligations. See Proposed Interpretation and Policy .01, paragraph 2. The certification further would provide that the ETP Holder’s processes are evidenced in a report that has been reviewed by the CEO or equivalent officer, chief compliance officer, and such other officers as the ETP Holder may deem necessary, and that the final report would be submitted to the ETP Holder’s board of directors and audit committee at the earlier of their next scheduled meetings or within 45 days of the date of execution of the certification. See Proposed Interpretation and Policy .01, paragraph 3. Finally, the certification would provide that the CEO or equivalent officer has consulted with the chief compliance officer and other officers as applicable, as well as such other employees, outside consultants, lawyers and accountants, to the extent deemed appropriate to attest to the statements made in the certification. See Proposed Interpretation and Policy .01, paragraph 4. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 well as the ETP Holder’s compliance efforts to date, and also should identify and address significant compliance problems and plans for emerging business areas.7 ETP Holders must also prepare a report that documents the ETP Holder’s processes for establishing, maintaining, reviewing, testing and modifying compliance policies.8 The report may be combined with compliance reports or similar reports required by other self-regulatory organizations.9 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with Section 6(b) of the Act,10 and, in particular, with Section 6(b)(5) 11 of the Act, which requires, among other things, that the NSX’s rules be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, and, in general, to protect investors and the public interest.12 The proposal that NSX ETP Holders follow procedures to help ensure compliance with NSX rules and the federal securities laws will complement broker-dealers’ obligations under other self-regulatory organization rules, while particularly promoting compliance with rules specific to NSX. By permitting member firms to make the required reports in conjunction with reports required by other self-regulatory organizations, moreover, the proposal should accomplish those aims in an efficient manner. 7 See Proposed Interpretation and Policy .01. id. Any principal designated by the ETP Holder may prepare the report, which must be produced prior to execution of the certification and be reviewed by the CEO or equivalent officer, chief compliance officer and any other officers the ETP Holder deems necessary to make the certification. It must be provided to the ETP Holder’s board of directors and audit committee in final form either prior to execution of the certification or at the earlier of their next scheduled meetings or within 45 days of execution of the certification. The report should include the manner and frequency in which the processes are administered, and identify the officers and supervisors responsible for that administration. The report, however, need not contain any conclusions resulting from following those processes. 9 In that case, the report must be titled in a manner that indicates it is responsive to the requirements of the certification and Rule 5.7; (2) an ETP Holder that submits a report for review in response to a NSX request must submit the report in its entirety; and (3) the ETP Holder must make the report in a timely manner. 10 15 U.S.C. 78(f)(b). 11 15 U.S.C. 78f(b)(5). 12 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 8 See E:\FR\FM\31MYN1.SGM 31MYN1

Agencies

[Federal Register Volume 72, Number 104 (Thursday, May 31, 2007)]
[Notices]
[Pages 30406-30408]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-10405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55806; File No. SR-NASD-2007-028]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to the Order Audit Trail System

May 23, 2007.
    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 April 17, 2007, 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 substantially prepared by NASD. On 
May 18, 2007, NASD filed Amendment No. 1 to the proposed rule change. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 2 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Rules 6951 and 6954 to require members 
that transmit an intermarket sweep order (``ISO'') to another member, 
electronic communications network, nonmember, or exchange to record and 
report the fact that the order was an ISO. The text of the proposed 
rule change is available on NASD's Web site at http://www.nasd.com, at 
NASD's principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Rules 6950 through 6958 (``OATS Rules'') impose obligations on 
member firms to record in electronic form and report to NASD on a daily 
basis certain information regarding orders in Nasdaq-listed securities 
originated, received, transmitted, modified, canceled, or executed by 
NASD members.\3\ NASD integrates this Order Audit Trail System 
(``OATS'') information with quote and transaction information to create 
a time-sequenced record of orders, quotes, and transactions. This 
information is critical to NASD in conducting surveillance and 
investigations of members for violations of NASD rules and the federal 
securities laws.
---------------------------------------------------------------------------

    \3\ Beginning on February 4, 2008, members also will be required 
to record and report order information regarding all OTC equity 
securities, as defined in NASD Rule 6951. See Securities Exchange 
Act Release No. 54585 (October 10, 2006), 71 FR 61112 (October 17, 
2006) (SR-NASD-2005-101); see also NASD Notice to Members 06-70 
(December 2006) and Securities Exchange Act Release No. 55440 (March 
9, 2007), 72 FR 12852 (March 19, 2007) (SR-NASD-2007-019).
---------------------------------------------------------------------------

    On June 9, 2005, the Commission adopted Regulation NMS, which 
established new substantive rules designed to modernize and strengthen 
the regulatory structure of the U.S. equities markets.\4\ Among other 
things, Regulation NMS adopted an Order Protection Rule \5\ that 
requires trading centers to establish, maintain, and

[[Page 30407]]

enforce written policies and procedures reasonably designed to prevent 
the execution of trades at prices inferior to protected quotations 
displayed by automated trading centers, subject to applicable 
exceptions. One of the exceptions from the Order Protection Rule is 
when the transaction that constitutes a trade-through \6\ is ``effected 
by a trading center that simultaneously routed an intermarket sweep 
order to execute against the full displayed size of any protected 
quotation in the NMS stock that was traded through.'' \7\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \5\ 17 CFR 242.611.
    \6\ A ``trade-through'' is ``the purchase or sale of an NMS 
stock during regular trading hours, either as principal or agent, at 
a price that is lower than a protected bid or higher than a 
protected offer.'' See 17 CFR 242.600(b)(77).
    \7\ See 17 CFR 242.611(b)(6). The phrase ``intermarket sweep 
order'' is defined as ``a limit order for an NMS stock that meets 
the following requirements: (i) When routed to a trading center, the 
limit order is identified as an intermarket sweep order; and (ii) 
Simultaneously with the routing of the limit order identified as an 
intermarket sweep order, one or more additional limit orders, as 
necessary, are routed to execute against the full displayed size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order 
to buy, for the NMS stock with a price that is superior to the limit 
price of the limit order identified as an intermarket sweep order. 
These additional routed orders must also be marked as intermarket 
sweep orders.'' The proposed rule change adopts this same definition 
of intermarket sweep order for purposes of the OATS Rules. See 17 
CFR 242.600(b)(30).
---------------------------------------------------------------------------

    The purpose of the proposed rule change is to require member firms 
to record the fact that an order in an OATS-eligible security is an ISO 
when the member routes an ISO to another member or non-member. The 
member would be required to include this information in the Route 
Report it submits to NASD pursuant to the OATS Rules.\8\ This 
requirement will ensure that NASD knows that the order was an ISO and 
can utilize that information when reviewing audit trails to ensure 
compliance with Regulation NMS.\9\
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    \8\ When a member transmits an order in an OATS-eligible 
security to another member, electronic communications network, non-
member, or exchange for handling or execution, the routing member is 
required to submit a Route Report to NASD. The categories of 
information that a member must include in a Route Report are set 
forth in NASD Rule 6954(c) and in the OATS Reporting Technical 
Specifications published by NASD.
    \9\ Members are also required to submit New Order Reports when 
they receive an order in an OATS-eligible security. NASD Rule 
6954(b) and the OATS Reporting Technical Specifications set forth 
the information that a member must include in a New Order Report. 
NASD Rule 6954(b)(15) already requires members to include ``special 
handling requests, specified by [NASD] for purposes of this Rule.'' 
Pursuant to that provision, the most recent version of the OATS 
Reporting Technical Specifications includes a new special handling 
code for ISOs in New Order Reports, which would be used when a 
member relies on the exception from the Order Protection Rule for a 
transaction that ``was the execution of an order identified as an 
intermarket sweep order.'' See 17 CFR 242.611(b)(5). Because NASD 
Rule 6954(b) already provides NASD with the authority to establish a 
new code for ISOs in New Order Reports, the proposed rule filing 
does not address that portion of the rule and only seeks to 
establish a new code for ISOs in Route Reports under NASD Rule 
6954(c).
---------------------------------------------------------------------------

    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval. The effective date will be February 4, 2008, to 
coincide with the changes to the OATS Rules approved by the Commission 
on October 10, 2006.\10\ Although firms will not be required to begin 
using the ISO routing method code on Route Reports until February 4, 
2008, NASD states that the code will be available for use by firms 
beginning on June 11, 2007. Firms are encouraged to use the ISO code on 
their Route Reports as soon as possible to facilitate NASD's ability to 
determine whether the trade was made in reliance on an ISO exception 
from the Order Protection Rule.\11\ As noted in the December 11, 2006 
version of the OATS Reporting Technical Specifications, firms will be 
required to use the ISO Special Handling Code on New Order Reports upon 
implementation of the Order Protection Rule.\12\
---------------------------------------------------------------------------

    \10\ See supra note 3.
    \11\ 17 CFR 242.611.
    \12\ Id.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among 
other things, that NASD rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change will 
enhance OATS data and ensure that NASD is able to monitor compliance 
with Regulation NMS in a more effective manner.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 NASD consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2007-028 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-2007-028. 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 the NASD. All

[[Page 30408]]

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-2007-028 and should be 
submitted on or before June 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10405 Filed 5-30-07; 8:45 am]
BILLING CODE 8010-01-P