Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55243 

19 15 U.S.C. 78s(b)(2). 

20 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 In Amendment No. 1, NASD clarifies that (1) 

The effective date of the proposed rule change will 

be the date upon which The NASDAQ Stock Market 

LLC (‘‘Nasdaq Exchange’’) operates as an exchange 

for non-Nasdaq exchange listed securities, which 

the Nasdaq Exchange anticipates will be in 

November 2006; (2) the NASD’s Market Regulation 

Committee will perform substantially the same 

functions as performed by the Nasdaq’s Quality of 

Markets Committee; and (3) the proposed rule 

change reflects NASD’s continued participation in 

the Intermarket Trading System (‘‘ITS’’) Plan. 

4See Securities Exchange Act Release No. 54084 

(June 30, 2006), 71 FR 38935 (July 10, 2006) (File 

No. SR–NASD–2005–087). 

5The Commission approved the Nasdaq 

Exchange application on January 13, 2006. See 

Securities Exchange Act Release No. 53128 (Jan. 13, 

2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10–131). 

See also Securities Exchange Act Release No. 54085 

(June 30, 2006), 71 FR 38910 (July 10, 2006), which 

modified the conditions set forth in the Nasdaq 

Exchange Approval Order to allow the Nasdaq 

Exchange to operate as a national securities 

exchange solely with respect to Nasdaq-listed 

securities. 

6See Amendment No. 1. 

7See id. 

www.nscc.com/legal/. 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 Numbers SR–FICC–

2006–03 and SR–NSCC–2006–03 and 

should be submitted on or before 

October 12, 2006. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,19 that the 

proposed rule changes (File Nos. SR–

FICC–2006–03 and SR–NSCC–2006–03) 

be and hereby are approved on an 

accelerated basis. 

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.20

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. 06–7844 Filed 9–20–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54451; File No. SR–NASD–

2006–104] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change To Reflect 

Nasdaq’s Complete Separation From 

NASD Upon the NASDAQ Stock Market 

LLC’s Operation as a National 

Securities Exchange for Non-Nasdaq 

Exchange-Listed Securities 

September 15, 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 5, 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. On 

September 14, 2006, NASD submitted 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASD is proposing to: (1) Delete The 

Nasdaq Stock Market Inc.’s (‘‘Nasdaq’’) 

By-Laws and amend the Plan of 

Allocation and Delegation of Functions 

by NASD to Subsidiaries (‘‘Delegation 

Plan’’), NASD By-Laws, NASD 

Regulation, Inc. By-Laws, NASD 

Dispute Resolution, Inc. By-Laws, and 

NASD rules to reflect Nasdaq’s 

separation from NASD upon the 

operation of the Nasdaq Exchange as a 

national securities exchange for nonNasdaq exchange-listed securities; (2) 

amend NASD rules relating to quoting 

and trading otherwise than on an 

exchange in non-Nasdaq exchangelisted securities to reflect changes in the 

services provided by NASD in this 

regard; and (3) expand the scope of the 

NASD/Nasdaq Trade Reporting Facility 

rules to include trade reporting in nonNasdaq exchange-listed securities. 

The text of the proposed rule is 

available on the NASD Web Site 

(http://www.nasd.com), on the 

Commission’s Web Site at (http:// 

www.sec.gov), at the NASD Office of 

Secretary and at the Commission’s 

Public Reference Room. All NASD rules 

that do not have rule text changes 

specified remain unchanged and 

effective for all NASD members. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NASD has prepared 

summaries, set forth in Sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

On June 30, 2006, the Commission 

approved proposed rule change SR–

NASD–2005–087, which, among other 

things, amended NASD’s Delegation 

Plan, By-Laws, and NASD rules to 

reflect the Nasdaq Exchange’s operation 

as a national securities exchange for 

purposes of Nasdaq-listed securities.4

Specifically, to facilitate an orderly 

transition and minimize any potential 

disruption to the marketplace, for a 

transitional period that commenced on 

August 1, 2006, the Nasdaq Exchange 

has been operating as an exchange for 

purposes of Nasdaq-listed securities 

only, while Nasdaq continues to 

perform its current obligations under 

the NASD’s Delegation Plan with 

respect to non-Nasdaq exchange-listed 

securities.5 Pursuant to SR–NASD–

2005–087 and under the Delegation 

Plan, Nasdaq, as a subsidiary of NASD, 

continues to perform during this 

transitional period only those functions 

relating to over-the-counter (‘‘OTC’’) 

quoting, trading, and execution of nonNasdaq exchange-listed securities. As 

such, Nasdaq no longer performs 

functions relating to Nasdaq-listed 

securities pursuant to delegated 

authority from NASD. 

The proposed rule change described 

herein provides amendments to NASD 

rules to reflect Nasdaq’s complete 

separation from NASD upon the 

operation of the Nasdaq Exchange as a 

national securities exchange for 

purposes of non-Nasdaq exchange-listed 

securities in addition to Nasdaq-listed 

securities. In addition, the proposed 

rule change amends the current NASD 

rules for quoting and trading otherwise 

than on an exchange in non-Nasdaq 

exchange-listed securities to reflect the 

manner in which NASD would be 

satisfying its regulatory obligations 

under the Act and the rules thereunder 

on a temporary basis until the 

Alternative Display Facility (‘‘ADF’’) is 

able to satisfy those obligations. Further, 

this proposed rule change reflects 

NASD’s continued participation in the 

ITS Plan.6 This is one of the conditions 

that must be met before Nasdaq can 

operate as an exchange for non-Nasdaq 

exchange-listed securities.7 Finally, the 

proposed rule change expands the scope 

of the NASD/Nasdaq Trade Reporting 


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55244 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 

8This proposed rule change also includes 

corrections of minor grammatical or typographical 

errors and other miscellaneous non-substantive 

changes. 

9This is consistent with NASD’s current clearly 

erroneous authority with respect to Nasdaq and 

OTC equity securities. 

10Currently, Nasdaq fulfills these obligations for 

NASD through the operation of, among other things, 

its SuperIntermarket (‘‘SiM’’) trading platform, 

pursuant to authority delegated to Nasdaq under the 

Delegation Plan. NASD fulfills the obligations with 

respect to Nasdaq-listed securities through the 

operation of the ADF. 

11With respect to the OTC quoting and trading 

facility proposed herein, Nasdaq will be acting 

solely in the capacity of a vendor pursuant to a 

services agreement. 

12By comparison, under current rules, non-ITS/ 

CAES Market Makers (defined as ‘‘Order Entry 

Firms’’) also are not able to display orders or send 

or receive ITS Commitments; however, they are able 

to use the system to send ‘‘immediate or cancel’’

orders to ITS/CAES Market Makers. 

Facility rules to include trade reporting 

in non-Nasdaq exchange-listed 

securities, as well as other technical and 

clarifying changes. 

Proposed Changes Relating to the 

Separation of Nasdaq 

As described in detail in SR–NASD–

2005–087, in 2000, NASD began 

restructuring its relationship with 

Nasdaq, which operates as an 

independent, for-profit company. As the 

result of a two-phase private placement 

of Nasdaq shares, a public offering 

completed in January 2005 and other 

dispositions of NASD shares, NASD no 

longer holds a common stock ownership 

interest in Nasdaq. However, because 

Nasdaq exercises regulatory authority 

under the Delegation Plan, NASD 

retains control of Nasdaq through a 

single share of Series D Preferred Stock 

(the ‘‘Series D Preferred’’) that allows 

NASD to cast a majority of the votes cast 

in any matter submitted to Nasdaq’s 

stockholders, including the election of 

Nasdaq directors. Once the delegation to 

Nasdaq is no longer necessary, the share 

of Series D Preferred Stock would 

automatically lose its voting rights and 

would be redeemed by Nasdaq for 

$1.00. 

Thus, upon the Nasdaq Exchange’s 

operation as a national securities 

exchange for non-Nasdaq exchangelisted securities, Nasdaq and NASD 

would be unaffiliated corporate entities, 

and thus each will have separate rules 

applicable to their respective members. 

Therefore, NASD is proposing to amend 

its rules to reflect this complete 

separation of Nasdaq from NASD. These 

changes include removing references in 

the Delegation Plan to Nasdaq as a 

subsidiary and delegation of authority to 

Nasdaq; revising the NASD By-Laws, 

NASD Regulation, Inc. By-Laws, and 

NASD Dispute Resolution, Inc. By-Laws 

to remove references to Nasdaq as a 

subsidiary of NASD; deleting the 

Nasdaq By-Laws and all Nasdaq-specific 

rules and requirements; replacing 

references to ‘‘Nasdaq’’ with ‘‘NASD’’ or 

‘‘exchange,’’ as applicable; and 

renaming and renumbering certain 

rules.8 The NASD Rule 11890 Series 

(Clearly Erroneous Transactions) has 

been amended to delete those 

provisions relating to Nasdaq’s current 

clearly erroneous authority, including 

the authority to break trades as a result 

of a complaint. The proposed rule 

change reallocates to NASD the 

authority previously delegated to 

Nasdaq to break trades in non-Nasdaq 

exchange-listed securities on its own 

motion.9 Finally, the proposed rule 

change deletes NASD Rule 4400 (Impact 

of Non-Designation of Certain Dually 

Listed Securities), which is no longer 

applicable once Nasdaq is operating as 

a separate entity. 

As part of the proposed amendments 

to the Delegation Plan, NASD is 

proposing to delete Section III of the 

Delegation Plan relating to the Quality 

of Markets Committee, which was a 

Committee appointed by the Nasdaq 

Board. NASD is clarifying that NASD’s 

Market Regulation Committee will 

perform substantially the same 

functions as performed by Quality of 

Markets Committee. The Supplemental 

Delegation Regarding the Market 

Regulation Committee is set forth in 

Section II.C.1 of the Delegation Plan. 

Quoting and Trading of Non-Nasdaq 

Exchange-listed Securities 

As part of the Nasdaq Exchange 

approval order, the Commission 

conditioned the operation of Nasdaq as 

an exchange for non-Nasdaq exchangelisted securities on NASD’s ability to 

represent to the Commission that 

control of Nasdaq through the Series D 

Preferred share is no longer necessary 

because NASD can fulfill through other 

means its obligations with respect to 

non-Nasdaq exchange-listed securities 

under Section 15A(b)(11) of the Act, 

Rules 602 and 603 of Regulation NMS, 

and the national market system plans in 

which NASD participates.10

To meet these obligations under the 

federal securities laws with respect to 

non-Nasdaq exchange-listed securities, 

NASD is proposing amendments to 

provide for the operation of an OTC 

quoting and trading facility in nonNasdaq exchange-listed securities on a 

temporary basis, as well as linkage and 

communications mechanisms necessary 

under the Intermarket Trading System 

(ITS) Plan, as described in more detail 

below. In doing so, NASD is amending 

(or deleting as appropriate) those rules 

relating to Nasdaq and Nasdaq’s 

performance of any functions and 

operation of any systems relating to 

OTC trading in non-Nasdaq exchangelisted securities under the current 

Delegation Plan.11

Specifically, the NASD Rule 4900 

(Brut System) and NASD 4950 (INET 

System) Series have been deleted in 

their entirety, given that the Brut and 

INET Systems will no longer be 

operating pursuant to NASD Rules. 

With respect to the NASD Rule 4700 

Series (ITS/CAES System—Execution 

Services), the NASD Rule 5200 Series 

(Intermarket Trading System/Computer 

Assisted Execution System) and the 

NASD Rule 6300 Series (Consolidated 

Quotation Services (CQS)), the general 

framework under those rule series 

would remain substantially similar to 

the rules in place today, including all 

functionality relating to the outbound 

and inbound ITS linkage; however the 

functionality available to users within 

the ITS/CAES System under those rules, 

particularly the NASD Rule 4700 Series, 

would be more limited in nature as 

described below. 

The proposed ITS/CAES System 

would permit registered ITS/CAES 

Market Makers to (1) Display 

attributable quotes and orders through 

the system; (2) access other ITS/CAES 

Market Makers’ bids and offers using the 

‘‘Preferenced Order’’ functionality 

described below; and (3) interact with 

other ITS exchanges’ bids and offers via 

inbound and outbound ITS 

Commitments. Only ITS/CAES Market 

Makers can display quotes in the system 

and send Preferenced Orders and ITS 

Commitments. Non-ITS/CAES Market 

Makers would not be permitted to 

display interest on the system or send 

orders; however, as described in more 

detail below, non-ITS/CAES Market 

Makers would be able to report lockedin trades through the system.12

Members would be required to 

register with NASD to become ITS/ 

CAES Market Makers (including ECNs 

that choose to register as such). 

Members must meet the minimum 

requirements to be an ITS/CAES Market 

Maker, as described in NASD Rules 

4705, 5220, 6320, and 6330, and all ITS/ 

CAES Market Makers must display and 

maintain continuous two-sided quotes. 

To comply with its two-sided 

quotation requirements, an ITS/CAES 

Market Maker would have the option of 

entering quotations or summary orders. 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55245 

Specifically, an ITS/CAES Market 

Maker may enter a bid quotation and an 

offer quotation, each at a single price 

level, and/or it may choose to enter 

‘‘summary orders’’ at multiple price 

levels into the system. All orders and 

quotes must be in round lots. Both 

quotations and summary orders would 

be treated the same for purposes of 

display and ITS execution purposes. 

Summary orders may be entered with 

the following Time in Force (TIF): 

(1) ‘‘DAY’’ order type, which means 

that after entry into the system, the 

order would remain available for 

potential display and/or execution until 

market close (4 p.m. Eastern Time), after 

which it shall be returned to the 

entering party; and 

(2) Total Day (‘‘X’’) order type, which 

means that after entry into the system, 

the order would remain available for 

potential display between 7:30 a.m. and 

6:30 p.m. and for potential execution 

between market open (9:30 a.m.) and 

6:30 p.m., after which it shall be 

returned to the entering party. 

Where an ITS/CAES Market Maker’s 

quote is exhausted due to an execution 

with a commitment to trade, as 

described in NASD Rule 4710(b)(1)(C) 

and consistent with current practice, the 

bid side of the ITS/CAES Market 

Maker’s quote would be zeroed out and 

then automatically refreshed to establish 

a bid of $0.01 for 100 shares. Similarly, 

if the offer side of the ITS/CAES Market 

Maker’s quote is zeroed out, the system 

would automatically establish an offer 

of two times the system best bid plus 

$0.01 for 100 shares. Although quotes 

would be refreshed automatically in this 

manner, NASD Rule 5230(c) would 

require that the ITS/CAES Market Maker 

enter quotes promptly, but in no event 

later than 15 seconds from when the 

quote(s) were exhausted. 

Quotations displayed through the 

ITS/CAES System would be accessible 

by other ITS Exchanges through 

inbound ITS Commitments, which 

would have a uniform TIF of 5 seconds. 

The system would not provide autoexecution functionality; therefore ITS 

Commitments received by ITS/CAES 

Market Makers would not be responded 

to (or executed) unless the ITS/CAES 

Market Maker provides an affirmative 

response within 5 seconds. If the ITS 

Commitment is not responded to within 

that time period, it would be returned 

to the sending exchange. 

Similarly, ITS/CAES Market Makers 

would be able to send outbound ITS 

Commitments to access quotes 

displayed by other ITS exchanges. All 

outbound ITS Commitments entered by 

an ITS/CAES Market Maker would be 

treated as Immediate or Cancel (‘‘IOC’’

or ‘‘IOX,’’ if it includes the 4 p.m. to 

6:30 p.m. session) and would have a TIF 

of 5 seconds (or 30 seconds in the 

limited circumstance where the ITS 

Commitment is sent to an ITS Exchange 

that can only accept a TIF of 30 

seconds). Once an ITS Commitment is 

entered, it cannot be cancelled by the 

ITS/CAES Market Maker. 

At the end of each trading day, all 

quotes/orders would be cleared from the 

system (returned to the sender). 

Therefore, at the beginning of each 

trading day, an ITS/CAES Market Maker 

must enter new quotes and/or summary 

orders in each security for which it is a 

registered market maker. 

ITS/CAES Market Makers would be 

able to access other ITS/CAES Market 

Maker quotes and ITS Exchanges 

through the use of ‘‘Preferenced 

Orders,’’ which must be entered using 

the IOC or IOX TIF. Preferenced Orders 

may only be sent to another ITS/CAES 

Market Maker when that ITS/CAES 

Market Maker is at the best bid/best 

offer in the system and only in an 

amount equal to or less than the ITS/ 

CAES Market Maker’s displayed quote. 

The system would reject a Preferenced 

Order sent to an ITS/CAES Market 

Maker that is not at the best bid/best 

offer in the system, or where the 

execution of the Preferenced Order 

would result in the violation of the 

Trade-Through Rule under NASD Rule 

5262. 

The proposed rule change deletes all 

rules relating to functionality not 

available in the new system, including 

reserve size, the ability to quote or 

submit orders on a non-attributable 

basis and certain order types such as 

‘‘discretionary,’’ ‘‘non-directed,’’

‘‘sweep’’ and ‘‘fill or return’’ orders. In 

addition, because the system is not an 

‘‘execution’’ system (i.e., it does not 

provide auto-execution functionality, 

only order delivery requiring user 

response), all references to autoexecution functionality or execution 

algorithms have been deleted. Similarly, 

as noted above, members not registered 

as ITS/CAES Market Makers can use the 

system only for trade reporting purposes 

and therefore, rules relating to order 

functionality previously available to 

‘‘order entry firms’’ have been deleted. 

The proposed rule change also deletes 

all rules relating to the ITS Pre-Opening 

Application (e.g., current NASD Rules 

5240 and 5250) functionality. The PreOpening Application is a mechanism 

designed for use by the primary listing 

markets for ITS Securities to open their 

markets at prices that are materially 

different than the previous day’s closing 

prices. The Pre-Opening Application is 

initiated by the New York Stock 

Exchange LLC (‘‘NYSE’’) and the 

American Stock Exchange LLC 

(‘‘Amex’’) for their securities and today, 

NASD, through its delegation to Nasdaq, 

does not provide a mechanism to 

participate in that process via SiM. 

Therefore, NASD would not be offering 

that functionality as part of the 

proposed ITS/CAES System. The 

proposed system, however, would 

provide the ability for ITS/CAES Market 

Makers to view the Pre-Opening 

notifications published by other ITS 

Exchanges. 

With respect to locked/crossed 

markets, the NASD ITS/CAES System 

would reject all quotes that lock or cross 

the NASD BBO or the National BBO. 

Because the system would not permit 

ITS/CAES Market Makers to initiate a 

locking or crossing quote, NASD is 

proposing to delete NASD Rule 5263, 

which provides procedures relating to 

locking and crossing markets, and 

replace it with a general prohibition of 

such quoting activities. 

With respect to the minimum price 

variation (MPV), NASD is retaining the 

current MPV increment ($0.01 for 

quotations priced at or above $1.00 per 

share and $0.0001 for quotations priced 

below $1.00 per share), but is proposing 

to amend NASD Rule 6330(d) to 

prohibit the entry of quotes or orders 

not in compliance with the MPV. NASD 

would not adjust or round such quotes 

or orders, but would reject those not in 

compliance with the MPV. 

If a Preferenced Order or ITS 

Commitment is accepted by an ITS/ 

CAES Market Maker, the ITS/CAES 

System would lock-in the transaction 

and report it to the ‘‘tape’’ for 

dissemination purposes and also would 

provide the necessary clearing 

information regarding the transaction to 

the National Securities Clearing 

Corporation (‘‘NSCC’’). 

With respect to non-ITS/CAES 

transactions (i.e., OTC trades in nonNasdaq exchange-listed securities that 

are not effected through the ITS/CAES 

System), NASD is providing a 

mechanism by which members (both 

ITS/CAES Market Makers and non-ITS/ 

CAES Market Makers) may report those 

trades through the ITS/CAES System. 

Non-ITS/CAES Market Makers that wish 

to use this functionality must register as 

a ‘‘Trade Reporting Only Participant,’’

pursuant to proposed NASD Rule 

4705(a). 

To report transactions through the 

ITS/CAES System, members must 

comply with the requirements of NASD 

Rule 4720, including that members that 

are parties to the trade must agree to all 

trade details prior to submitting the 

report to the system and have in effect, 


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55246 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 

13NASD also is proposing technical changes to 

the NASD Rule 4000 and 6000 Series to replace the 

term ‘‘Trade Reporting Facility’’ with the ‘‘NASD/ 

Nasdaq Trade Reporting Facility’’ to make it clear 

that these rules apply to the Trade Reporting 

Facility operated by the Nasdaq Exchange. 

14NASD will have an integrated audit trail of 

non-Nasdaq exchange-listed securities transactions 

from the ITS/CAES system and the NASD/Nasdaq 

Trade Reporting Facility and will have integrated 

surveillance capabilities. Based on the structure and 

functionality of the system and rules proposed 

herein, NASD expects that comprehensive audit 

trail and surveillance integration on an automated 

basis will be completed by the end of fourth quarter 

2006. Prior to that time, NASD staff will be able to 

create an integrated audit trail on a manual basis 

as needed for regulatory purposes. 

15A 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. 

16NASD is proposing a similar amendment to 

NASD Rule 6420(d)(3)(B) to clarify that members 

can report the second non-media leg of a riskless 

principal transaction to NASD, but should not 

report the first media leg, where such leg has been 

reported by an exchange. 

17See NASD Rule 4632(e)(6), which has been 

amended to provide that transactions reported on 

or through the facilities of an exchange shall not be 

reported to the NASD/Nasdaq Trade Reporting 

Facility for purposes of publication. See Securities 

Exchange Act Release Nos. 54084 (June 30, 2006), 

71 FR 38935 (July 10, 2006) (File No. SR–NASD–

2005–087); 53977 (June 12, 2006), 71 FR 34976 

(June 16, 2006) (File No. SR–NASD–2006–055); and 

54318 (August 15, 2006), 71 FR 48959 (August 22, 

2006) (File No. SR–NASD–2006–098). 

18As defined in NASD Rule 6110(m), ‘‘System’’

includes, inter alia, the NASD/Nasdaq Trade 

Reporting Facility and the trade reporting service of 

the ITS/CAES System. 

and on file with NASD, an NASD 

Service Bureau/Executing Broker 

Supplement to the NASD Services 

Agreement (‘‘Attachment C Agreement’’) 

and an NASD Give-Up Addendum to 

the NASD Services Agreement (‘‘NASD 

Give-Up Agreement’’). In the event that 

the parties do not have such agreements 

in effect and on file with NASD, NASD 

would only facilitate the reporting of the 

transaction pursuant to an effective 

transaction reporting plan; the parties 

must use an alternative mechanism for 

clearing and comparing the transaction, 

as necessary. 

NASD also is proposing to amend 

NASD Rule 4720 to require that all 

transaction reports submitted to the 

system via NASD Rule 4720 comply 

with the requirements contained in the 

NASD Rule 6400 Series, which are 

substantially similar to the non-Nasdaq 

exchange-listed trade reporting 

requirements in place today. NASD is 

also proposing to amend Rule 6400 

(Reporting Transactions in Listed 

Securities) to clarify that transactions 

required or eligible to be reported under 

the Rule 6400 Series must be reported 

through the ITS/CAES System pursuant 

to the provisions of Rule 4720. 

Proposed Changes Relating to the 

NASD/Nasdaq Trade Reporting Facility 

Rules 

Pursuant to SR–NASD–2005–087, 

NASD established the NASD/Nasdaq 

Trade Reporting Facility, which 

provides members another mechanism 

for reporting transactions effected 

otherwise than on an exchange. The 

NASD/Nasdaq Trade Reporting Facility 

is a facility of NASD and subject to 

NASD’s registration as a national 

securities association. As such, NASD 

has regulatory responsibility for the 

trades reported to the NASD/Nasdaq 

Trade Reporting Facility, while Nasdaq 

pays for the cost of regulation and 

provides the systems to enable brokerdealers to report trades to the NASD/ 

Nasdaq Trade Reporting Facility. 

Currently, the NASD/Nasdaq Trade 

Reporting Facility rules apply only to 

reporting transactions in Nasdaq-listed 

securities. The proposed rule change 

amends the NASD Rule 4100, 4200, 

4600, and 6100 Series to combine with 

those provisions the trade reporting 

requirements for exchange-listed 

securities currently found in the NASD 

Rule 6400 Series.13 As a result, the trade 

reporting requirements for Nasdaq and 

other exchange-listed securities reported 

through the NASD/Nasdaq Trade 

Reporting Facility would be uniform 

and found in these rule series.14 In this 

regard, current NASD Rules 6420(e)(6) 

and (7) provide exclusions to the trade 

reporting requirements for non-Nasdaq 

exchange-listed securities; these 

exclusions were specific to exchange 

trading and therefore did not apply to 

trade reporting in Nasdaq securities. 

They have now been incorporated into 

proposed subparagraphs (7) and (8) of 

NASD Rule 4632(e) and would apply to 

all exchange-listed securities reported to 

the NASD/Nasdaq Trade Reporting 

Facility, including Nasdaq securities. 

The NASD/Nasdaq Trade Reporting 

Facility permits participants to enter 

into ‘‘give-up’’ arrangements whereby 

one member reports to the NASD/ 

Nasdaq Trade Reporting Facility on 

behalf of another member. Participants 

must complete and submit to the NASD/ 

Nasdaq Trade Reporting Facility the 

appropriate documentation reflecting 

the arrangement. Proposed NASD Rule 

4632(h) codifies this process and 

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/ 

Nasdaq Trade Reporting Facility are 

responsible for ensuring that the 

information submitted is in compliance 

with all applicable rules and 

regulations. 

Finally, NASD is also proposing an 

amendment to NASD Rule 4632(d)(3)(B) 

relating to requirements for reporting 

‘‘riskless principal’’ transactions to the 

NASD/Nasdaq Trade Reporting 

Facility.15 The proposed rule change 

would clarify that where the media leg 

of the riskless principal transaction is 

reported to the NASD/Nasdaq Trade 

Reporting Facility, the second, nonmedia leg must also be reported to the 

NASD/Nasdaq Trade Reporting Facility. 

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/Nasdaq Trade 

Reporting Facility.16 Members that 

choose to report such transactions to the 

NASD/Nasdaq Trade Reporting Facility 

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/Nasdaq Trade Reporting Facility 

for media purposes, as that would result 

in double reporting of the same 

transaction.17

Finally, NASD is proposing to amend 

the definition of ‘‘Reporting ECN’’ in 

NASD Rule 6110(i) to clarify that the 

term includes alternative trading 

systems, as well as electronic 

communications networks, as those 

terms are defined in Rule 600 of 

Regulation NMS, for purposes of 

reporting transactions to the System.18

Pursuant to NASD Rule 6130(c)(5), a 

Reporting ECN must ensure that 

transactions are reported in accordance 

with one of three methods and must 

provide written notice to NASD of the 

method of trade reporting for each of its 

subscribers. 

Other Related Changes 

Certain trading practice requirements 

relating to exchange-listed securities 

currently found in NASD Rule 6440 

have been moved to NASD Rule 5120 

and would apply to all trading 

otherwise than on an exchange. 

In addition, NASD is proposing to add 

a new NASD Rule 5130 (Obligation to 

Provide Information) to require 

explicitly that members participating in 

any NASD system or facility provide 

information orally, in writing, or 

electronically (if such information is, or 

is required to be, maintained in 

electronic form) to the staff of NASD 

when NASD staff makes an oral, written 

or electronically communicated request 

for information relating to a specific 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55247 

19Proposed NASD Rule 5130 is substantially 

similar to former NASD Rule 4625 (Obligation to 

Provide Information), which imposed obligations 

on members relating to requests from Nasdaq 

MarketWatch and Nasdaq Market Operations staff. 

NASD Rule 4625 was inadvertently deleted as part 

of SR–NASD–2005–087. 

20 15 U.S.C. 78o–3. 

21 15 U.S.C. 78o–3(b)(6). 

22 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 15 U.S.C. 78s(b)(3)(A)(i). 

3 17 CFR 240.19b–4(f)(1). 

NASD rule, Commission rule, or 

provision of a joint industry plan (e.g., 

UTP, CTA, CQA and ITS). A failure to 

comply in a timely, truthful and/or 

complete manner with a request for 

information made pursuant to proposed 

NASD Rule 5130 may be deemed 

conduct inconsistent with just and 

equitable principles of trade.19

Proposed Implementation 

The effective date of the proposed 

rule change will be the date upon which 

the Nasdaq Exchange operates as an 

exchange for non-Nasdaq exchangelisted securities, which Nasdaq 

currently anticipates will be in 

November 2006. 

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A of the Act,20 in general, 

and Section 15A(b)(6) of the Act,21 in 

particular, in that the proposal is 

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 provide an effective mechanism 

and regulatory framework for quoting 

and trading activities otherwise than on 

an exchange in non-Nasdaq exchangelisted securities upon Nasdaq’s 

complete separation from NASD. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASD believes that the proposed rule 

change will not 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 on this proposed 

rule change 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 rulecomments@sec.gov. Please include File 

Number SR–NASD–2006–104 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–2006–104. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of NASD. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to the File 

Number SR–NASD–2006–104 and 

should be submitted on or before 

October 12, 2006. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.22

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. 06–7845 Filed 9–20–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54444; File No. SR–NSCC–

2006–02] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change Relating to Providing 

Financial Reports to Participants 

September 14, 2006. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 notice is hereby given that on 

February 15, 2006, the National 

Securities Clearing Corporation 

(‘‘NSCC’’) filed a proposed rule change 

with the Securities and Exchange 

Commission (‘‘Commission’’) and on 

July 21, 2006, and August 18, 2006, 

amended the proposed rule change as 

described in Items I, II, and III below, 

which Items have been prepared 

primarily by NSCC. NSCC filed the 

proposed rule change pursuant to 

Section 19(b)(3)(A)(i) of the Act 2 and 

Rule 19b–4(f)(1) 3 thereunder so that the 

proposal was effective upon filing with 

the Commission. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The proposed rule change will clarify 

NSCC’s rules that it will provide 

unaudited quarterly financial statements 

to its members for the first three 

quarters of the calendar year only. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NSCC included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 


jlentini on PROD1PC65 with NOTICES