20150 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Notices 

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

2 17 CFR 240.19b–4. 3Amendment No. 1 to SR–NASD–2003–141 made 

technical changes to the original rule filing. 

Amendment No. 2 to SR–NASD–2003–141 

superseded the original rule filing in its entirety. 4See Securities Exchange Act Release No. 51338 

(March 9, 2005), 70 FR 12764 (March 15, 2005). 5See letters from Paul Scheurer dated April 5, 

2005; Micah S. Green, President, and Michele C. 

David, Vice President and Assistant General 

Counsel, The Bond Market Association dated April 

5, 2005; William C. Caccamise, General Counsel, 

Banc of America Securities LLC dated April 14, 

2005; Edward F. Greene, General Counsel, 

Corporate and Investment Banking, Citigroup 

Global Markets Inc. (‘‘CGMI’’) dated April 14, 2005; 

John R. Gimand, Chair, Senior Executives Group, 

and David L. Murphy, Chair, Joint Buyside/Sellside 

Regulatory Developments, Senior Executives Group, 

The Asset Manager’s Forum dated June 28, 2005; 

Debbie Cunningham, Chair, Investor Committee, 

and Bianca Russo, Chair, Regulatory Committee, 

American Securitization Forum dated July 26, 2005. 

6See letter from Sharon K. Zackula, Associate 

General Counsel, NASD dated October 4, 2005. 

7Amendment Nos. 3 and 4 made technical 

changes to the rule filing. 

8See Securities Exchange Act Release No. 54799 

(Nov. 21, 2006), 71 FR 68856 (Nov. 28, 2006) (‘‘2006 

Notice’’). 

9See letters from Mary Kuan, Vice President and 

Assistant General Counsel, Securities Industry and 

Financial Markets Association (‘‘SIFMA’’) dated 

January 3, 2007 (‘‘SIFMA 1 Letter’’); Robbin Conner, 

Vice President and Assistant General Counsel, 

SIFMA dated January 4, 2007 (‘‘SIFMA 2 Letter’’); 

Edward F. Greene, General Counsel, Corporate and 

Investment Banking, CGMI dated January 5, 2007 

(‘‘CGMI 2 Letter’’); Robyn A. Huffman, Managing 

Director, Associate General Counsel, Goldman, 

Sachs & Co. (‘‘Goldman Sachs’’) dated January 5, 

2007 (‘‘Goldman Sachs Letter’’). 

10See letter from Sharon Zackula, Associate 

General Counsel, NASD dated January 12, 2007. 

which the individual was gainfully 

employed. 

Other information: The notice we are 

giving here is in addition to any 

individual notice. 

A copy of this notice will be 

furnished to both Houses of Congress 

and the Office of Management and 

Budget. 

Dated: April 17, 2007. 

By Authority of the Board. 

Beatrice Ezerski, 

Secretary to the Board. 

[FR Doc. E7–7653 Filed 4–20–07; 8:45 am] 

BILLING CODE 7905–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Submission for OMB Review; 

Comment Request 

Upon Written Request, Copies Available 

From: Securities and Exchange 

Commission, Office of Filings and 

Information Services, Washington, DC 

20549. 

Extension: Rule 10b–10, SEC File No. 270–

389, OMB Control No. 3235–0444. 

Notice is hereby given that pursuant 

to the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501 et seq.) the Securities 

and Exchange Commission 

(‘‘Commission’’) has submitted to the 

Office of Management and Budget a 

request for extension of the previously 

approved collection[s] of information 

discussed below. 

• Rule 10b–10, Confirmation of 

Transactions 

Rule 10b–10 (17 CFR 240.10b–10) of 

the Securities Exchange Act of 1934 (17 

U.S.C. 78a et seq.) requires brokerdealers to convey basic trade 

information to customers regarding their 

securities transactions. This information 

includes: the date and time of the 

transaction, the identity and number of 

shares bought or sold, and the trading 

capacity of the broker-dealer. Depending 

on the trading capacity of the brokerdealer, Rule 10b–10 requires the 

disclosure of commissions as well as 

mark-up and mark-down information. 

For transactions in debt securities, Rule 

10b–10 requires the disclosure of 

redemption and yield information. Rule 

10b–10 potentially applies to all of the 

approximately 6,014 firms registered 

with the Commission that effect 

transactions on behalf of customers. 

The confirmations required by Rule 

10b–10 are generally processed through 

automated systems. It takes 

approximately 1 minute to generate and 

send a confirmation. It is estimated that 

broker-dealers spend 77.4 million hours 

per year complying with Rule 10b–10. 

The Commission staff estimates the 

costs of producing and sending a paper 

confirmation, including postage to be 

approximately 91 cents. The 

Commission staff also estimates that the 

cost of producing a sending a wholly 

electronic confirmation is 

approximately 52 cents. The amount of 

confirmations sent and the cost of 

sending each confirmation varies from 

firm to firm. Smaller firms generally 

send fewer confirmations than larger 

firms because they effect fewer 

transactions. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

control number. 

General comments regarding the 

estimated burden hours should be 

directed to the following persons: (i) 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Office of Management and Budget, 

Room 10102, New Executive Office 

Building, Washington, DC 20503 or 

send an e-mail to: 

David_Rostker@omb.eop.gov and (ii) R. 

Corey Booth, Director/Chief Information 

Officer, Securities and Exchange 

Commission, c/o Shirley Martinson, 

6432 General Green Way, Alexandria 

VA 22312 or send an e-mail to: 

PRA_Mailbox@sec.gov. Comments must 

be submitted to OMB within 30 days of 

this notice. 

Dated: April 16, 2007. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–7688 Filed 4–20–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55638; File No. SR–NASD–

2003–141] 

Self-Regulatory Organizations: 

National Association of Securities 

Dealers, Inc.; Order Granting Approval 

to Proposed Rule Change Relating to 

Additional Mark-Up Policy for 

Transactions in Debt Securities, 

Except Municipal Securities 

April 16, 2007. 

I. Introduction 

On September 17, 2003, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

adopt an additional mark-up policy for 

transactions in debt securities other 

than municipal securities. NASD filed 

amendments to the proposed rule 

change on June 29, 2004 and February 

17, 2005.3 The Commission published 

the proposed rule change, as amended 

by Amendment Nos. 1 and 2, for 

comment in the Federal Register on 

March 15, 2005.4 The Commission 

received six comments on the proposal.5

NASD submitted a response to these 

comments on October 4, 2005,6 and 

filed Amendment Nos. 3, 4, and 5, 

which also addressed the comments and 

proposed responsive amendments.7

Amendment No. 5 replaced the rule 

filing in its entirety. The proposed rule 

change, as amended, was published for 

comment in the Federal Register on 

November 28, 2006.8 The Commission 

received four additional comments on 

the proposal.9 NASD submitted a 

response to these additional comments 

on January 12, 2007.10 All of the 

comments received by the Commission 

in response to Amendment Nos. 3, 4, 

and 5 are available on the Commission’s 


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11The terms ‘‘mark-up’’ and ‘‘mark-down’’ are 

not found in NASD Rule 2440, but are used in IM–

2440. Statements in this order regarding mark-ups 

also apply generally to mark-downs unless markdowns are discussed specifically in a separate 

statement. 

12For example, IM–2440 provides that an NASD 

member would violate NASD Rule 2440, as well as 

NASD Rule 2110 related to standards of commercial 

honor and principles of trade, if it enters into a 

transaction with a customer in any security at a 

price not reasonably related to the security’s current 

market price (or charges an unreasonable 

commission). 

13Similarly, when a customer sells a security to 

a dealer, the customer’s total proceeds from the 

sale, which were reduced by the mark-down, and 

the mark-down, must be fair and reasonable. 

14NASD also proposes to re-number IM–2440 as 

IM–2240–1. Accordingly, IM–2440 is referred to 

elsewhere in this order as IM–2440–1. 

15MSRB rule G–30, ‘‘Prices and Commissions,’’

applies to transactions in municipal securities, and 

requires a municipal securities dealer engaging in 

a transaction as a principal with a customer to buy 

or sell securities at an aggregate price that is ‘‘fair 

and reasonable.’’

16See Proposed IM–2440–2(b)(1). For these 

purposes, the contemporaneous cost or proceeds 

must be consistent with NASD pricing rules. See id. 

Current IM–2440–1(a)(3) provides: ‘‘In the absence 

of other bona fide evidence of the prevailing 

market, a member’s own contemporaneous cost is 

the best indication of the prevailing market price of 

a security.’’ NASD states that contemporaneous cost 

would not be a reliable indicator of the prevailing 

market price for purposes of determining a markup and mark-down in circumstances where the 

dealer violates NASD Rule 2320 (Best Execution 

and Interpositioning) because in those situations 

the price would not reflect market forces. See 2006 

Notice at n.15. 

17See Proposed IM–2440–2(b)(2). When buying a 

security from a customer, the dealer may look to 

countervailing evidence of the prevailing market 

price only if the dealer made no contemporaneous 

sales in the security or can show that in the 

particular circumstances the dealer’s 

contemporaneous proceeds are not indicative of the 

prevailing market price. See id. 

18See Proposed IM–2440–2(b)(3). 

19See id. 

20See Proposed IM–2440–2(b)(4). 

21See Proposed IM–2440–2(b)(5)(A). 

22See Proposed IM–2440–2(b)(5)(B). 

Contemporaneous dealer sales with those 

institutional accounts would be used to calculate a 

mark-down. 

23NASD has explained that if a dealer has 

overcome the presumption by establishing, for 

example, that the credit quality of the security 

changed significantly after the dealer’s trade, any 

inter-dealer or dealer-institutional trades in the 

same security that occurred prior to the change in 

credit quality would not be valid measures of the 

prevailing market price because such transactions 

would be subject to the same defect. See 2006 

Notice at n.30. 

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

rules/sro.shtml). This order approves 

the proposed rule change, as modified 

by Amendment Nos. 1 through 5. 

II. Background and Description of the 

Proposal 

When a securities dealer acting in a 

principal capacity sells a security to a 

customer, the dealer generally ‘‘marks 

up’’ the security, increasing the total 

price the customer pays. When buying 

a security from a customer, a dealer 

acting as a principal generally ‘‘marks 

down’’ the security, reducing the total 

proceeds the customer receives.11 NASD 

Rule 2440, ‘‘Fair Prices and 

Commissions,’’ requires dealers to buy 

and sell securities at a fair price to 

customers. NASD IM–2440, ‘‘Mark-Up 

Policy,’’ provides additional guidance 

on mark-ups, mark-downs, and fair 

pricing of securities transactions with 

customers.12 Both NASD Rule 2440 and 

IM–2440 apply to all over-the-counter 

transactions, including transactions in 

debt securities, and require that when a 

customer buys a security from a dealer, 

the customer’s total purchase price, and 

the mark-up included in the price, be 

fair and reasonable.13

The Proposed Interpretation, IM–

2440–2, ‘‘Additional Mark-Up Policy for 

Transactions in Debt Securities, Except 

Municipal Securities (‘Proposed 

Interpretation’),’’ 14 would provide 

additional guidance on mark-ups in 

debt securities transactions (other than 

municipal securities transactions).15

The Proposed Interpretation particularly 

addresses a key aspect of determining 

whether a mark-up is fair and 

reasonable—correctly identifying the 

security’s prevailing market price. It sets 

forth a sequence of criteria and 

procedures that a dealer must consider 

when determining the prevailing market 

price. The text of the Proposed 

Interpretation is available on NASD’s 

Web site (www.nasd.com), at NASD’s 

principal office, and at the 

Commission’s Public Reference Room. 

A. Presumptive Use of 

Contemporaneous Cost 

The Proposed Interpretation provides 

that when a dealer calculates a mark-up 

or mark-down, the best measure of the 

prevailing market price of the security 

presumptively is the dealer’s 

contemporaneous cost or proceeds.16

The dealer may look to countervailing 

evidence of the prevailing market price 

only if the dealer, when selling a 

security, made no contemporaneous 

purchases in the security or can show 

that, in the particular circumstances, the 

dealer’s contemporaneous cost is not 

indicative of the prevailing market 

price.17

For purposes of the Proposed 

Interpretation with respect to a mark-up, 

a dealer’s cost is considered 

contemporaneous ‘‘if the transaction 

occurs close enough in time to the 

subject transaction that it would 

reasonably be expected to reflect the 

current price for the security.’’ 18 For a 

mark-down, a dealer’s proceeds are 

contemporaneous ‘‘if the transaction 

from which the proceeds result occurs 

close enough in time to the subject 

transaction that such proceeds would 

reasonably be expected to reflect the 

current market price for the security.’’19

B. Criteria for Overcoming the 

Presumption 

The Proposed Interpretation 

recognizes that in some circumstances a 

dealer may seek to overcome the 

presumption that its own 

contemporaneous cost is the prevailing 

market price of the subject security for 

determining a mark-up. A dealer may 

seek to overcome the presumption, and 

show that contemporaneous cost is not 

indicative of the prevailing market 

price, in the following three instances: 

(i) If interest rates changed enough 

following the dealer’s contemporaneous 

transaction to reasonably cause a change 

in the debt security’s pricing; (ii) if the 

credit quality of the debt security 

changed significantly after the dealer’s 

contemporaneous transaction; or (iii) if 

news was issued or otherwise 

distributed, and known to the 

marketplace, that had an effect on the 

perceived value of the debt security 

after the dealer’s contemporaneous 

transaction.20

C. Pricing Alternatives to 

Contemporaneous Cost 

When the dealer has established that 

its cost no longer is contemporaneous, 

or when the dealer has presented 

evidence that is sufficient to overcome 

the presumption that its 

contemporaneous cost provides the best 

measure of the prevailing market price, 

the Proposed Interpretation sets forth a 

process that the dealer must follow to 

determine the prevailing market price. 

In those circumstances, the dealer must 

first consider a ‘‘Hierarchy’’ of three 

factors in order. The first and most 

important factor is the pricing of any 

contemporaneous inter-dealer 

transactions in the same security.21 In 

the absence of contemporaneous interdealer trades, the second factor provides 

that a dealer must consider the prices of 

contemporaneous dealer purchases in 

the same security from institutional 

accounts with which any dealer 

regularly effects transactions in that 

security.22 If contemporaneous interdealer trades and dealer-institutional 

trades in the same security are not 

available,23 then the third factor 

provides that, for actively traded 

securities, a dealer must look to 

contemporaneous bid quotations for the 

security made through an inter-dealer 

mechanism through which transactions 


jlentini on PROD1PC65 with NOTICES
20152 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Notices 

24For a mark-down, a dealer must look to 

contemporaneous bid offers for the security. See 

Proposed IM–2440–2(b)(5)(C). 

25See Proposed IM–2440–2(b)(5). 

26See Proposed IM–2440–2(b)(6). 

27For this factor and the third factor, the dealer 

should look to purchase transactions with 

institutional accounts when determining mark-ups, 

and to sale transactions with institutional accounts 

when determining mark-downs. 

28For this factor, the dealer should look to interdealer bids when determining mark-ups, and to 

inter-dealer offers when determining mark-downs. 

29See Proposed IM–2440–2(b)(6). 

30See 2006 Notice. 

31See Proposed IM–2440–2(c)(1). Where a 

security has several components, appropriate 

consideration may also be given to the prices or 

yields of the various components of the security. 

See id. 

32See Proposed IM–2440–2(c)(2)(A). 

33See Proposed IM–2440–2(c)(2)(B). 

34See Proposed IM–2440–2(c)(2)(C). 

35See Proposed IM–2440–2(c)(2)(D). 

In some cases, there are no similar securities. 

When a debt security’s value and pricing is based 

substantially on, and is highly dependent on, the 

particular circumstances of the issuer, including the 

issuer’s creditworthiness and its ability and 

willingness to meet the specific obligations of the 

security, in most cases other securities will not be 

sufficiently similar and may not be used to establish 

prevailing market price of the subject security. See 

Proposed IM–2440–2(c)(3). 

36See Proposed IM–2440–2(b)(7). 

37See 2006 Notice. 

38See Proposed IM–2440–2(b)(8). 

39The Proposed Interpretation adopts the 

definition of QIB in Rule 144A of the Securities Act 

of 1933, 17 C.F.R. 230.144A. See Proposed IM–

2440–2(b)(9). 

40See Proposed IM–2440–2(b)(9). 

41See id. For purposes of NASD Rule 2440, IM–

2440–1 and the Proposed Interpretation, ‘‘noninvestment grade debt security’’ shall mean a debt 

security that (i) if rated by only one NRSRO, is rated 

lower than one of the four highest generic rating 

categories; (ii) if rated by more than one NRSRO, 

is rated lower than one of the four highest generic 

rating categories by any of the NRSROs; or (iii) if 

unrated, either was analyzed as a non-investment 

grade debt security by the member and the member 

generally occur at the displayed 

quotations.24

The Proposed Interpretation further 

provides that the relative weight to be 

given to the comparison transactions or 

quotations discussed above depends on 

the facts and circumstances, including 

whether the dealer in the comparison 

transaction was on the same side of the 

market as the dealer is in the subject 

transaction and the timeliness of the 

information.25

D. Additional Alternatives to 

Contemporaneous Cost 

If none of the above three ‘‘Hierarchy’’

factors are available, the Proposed 

Interpretation provides that the dealer 

may then consider a non-exclusive list 

of four factors in trying to establish the 

prevailing market price.26 In contrast to 

the three ‘‘Hierarchy’’ factors, a dealer 

may consider these factors in any order. 

• Prices of contemporaneous interdealer transactions in a ‘‘similar’’

security or prices of contemporaneous 

dealer transactions in a ‘‘similar’’

security with institutional accounts 

with which any dealer regularly effects 

transactions in the ‘‘similar’’ security; 27

• Yields calculated from prices of 

contemporaneous inter-dealer 

transactions in ‘‘similar’’ securities; 

• Yields calculated from prices of 

contemporaneous transactions with 

institutional accounts with which any 

dealer regularly effects transactions in 

‘‘similar’’ securities; and 

• Yields calculated from validated 

contemporaneous inter-dealer bid 

quotations in ‘‘similar’’ securities.28

The Proposed Interpretation provides 

that the relative weight of the pricing 

information obtained from these factors 

depends on the facts and circumstances 

surrounding the comparison 

transaction. These include whether the 

dealer in the comparison transaction 

was on the same side of the market as 

the dealer is in the subject transaction, 

the timeliness of the information, and, 

with respect to the fourth factor listed 

above, the relative spread of the 

quotations in the ‘‘similar’’ security to 

the quotations in the subject security.29

NASD explains that when applying one 

or more of the four factors, a dealer must 

consider that the ultimate evidentiary 

issue is whether use of the factor will 

correctly identify the prevailing market 

price of the security.30

For purposes of these four factors, the 

Proposed Interpretation provides that a 

‘‘similar’’ security should be sufficiently 

similar to the subject security that it 

would serve as a reasonable alternative 

investment. At a minimum, a dealer 

must be able to fairly estimate the 

market yield for the subject security 

from the yields of similar securities.31

The Proposed Interpretation also sets 

forth a list of non-exclusive factors to 

use in identifying similar securities: 

(a) Credit quality considerations, such 

as whether the security is issued by the 

same or a similar entity, bears the same 

or a similar credit rating, or is supported 

by a similarly strong guarantee or 

collateral as the subject security, 

including significant recent information 

of either issuer that is not yet 

incorporated in credit ratings, such as 

changes in ratings outlooks; 32

(b) The extent to which the spread 

(i.e., the spread over U.S. Treasury 

securities of a similar duration) at which 

the similar security trades is comparable 

to the spread at which the subject 

security trades; 33

(c) General structural characteristics 

and provisions of the issue, such as 

coupon, maturity, duration, complexity 

or uniqueness of the structure, 

callability, the likelihood that the 

security will be called, tendered or 

exchanged, and other embedded 

options, as compared with the 

characteristics of the subject security; 34

and 

(d) Technical factors, such as the size 

of the issue, the float and recent 

turnover of the issue, and legal 

restrictions on transferability as 

compared with the subject security.35

E. Use of Economic Models 

If it is not possible to obtain 

information concerning the prevailing 

market price of the subject security by 

applying any of the factors discussed 

above, the Proposed Interpretation 

provides that the dealer or NASD may 

consider as a factor the prices or yields 

derived from economic models that take 

into account measures such as credit 

quality, interest rates, industry sector, 

time to maturity, call provisions and 

any other embedded options, coupon 

rate, and face value, and all applicable 

pricing terms and conventions (e.g., 

coupon frequency and accrual 

methods).36 NASD emphasizes that 

dealers may not use an economic model 

to establish the prevailing market price 

for mark-up purposes except in the 

limited instances when none of the 

factors discussed above apply.37

F. Isolated Transactions or Quotations 

The Proposed Interpretation provides 

that ‘‘isolated transactions or isolated 

quotations generally will have little or 

no weight or relevance in establishing 

prevailing market price.’’ Thus, absent 

extraordinary circumstances, members 

considering the yields of similar 

securities may not rely exclusively on 

isolated transactions or a limited 

number of transactions that are not 

fairly representative of the yields of 

transactions in ‘‘similar’’ securities 

taken as a whole.38

G. QIB Exception 

The Proposed Interpretation would 

except a qualified institutional buyer 

(‘‘QIB’’) 39 that is purchasing or selling 

a non-investment grade debt security 

from the definition of ‘‘customer,’’ when 

the dealer has determined that the QIB 

has the capacity to evaluate 

independently the investment risk and 

in fact is exercising independent 

judgment in deciding to enter into the 

transaction.40 This exception from the 

‘‘customer’’ definition also would apply 

to NASD Rule 2440 and IM–2440–1.41


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retains credit evaluation documentation and 

demonstrates to NASD (using credit evaluation or 

other demonstrable criteria) that the credit quality 

of the security is, in fact, equivalent to a noninvestment grade debt security, or was initially 

offered and sold and continues to be offered and 

sold pursuant to an exemption from registration 

under the Securities Act. See id. 

42See id. 

43See id. 

44See 2006 Notice at n. 46. 

45See SIFMA 1 Letter; SIFMA 2 Letter; CGMI 

Letter; Goldman Sachs Letter. The CGMI and 

Goldman Sachs Letters both expressed general 

support for the comments addressed in both of the 

SIFMA Letters. 

46See Goldman Sachs Letter. While this 

commenter suggested a number of particular 

changes to the proposal, it emphasized the need for 

the Proposed Interpretation to be adopted quickly 

to give more clarity to market participants. The 

commenter also noted that while the Proposed 

Interpretation is an ‘‘important first step’’ in 

developing mark-up guidance, it should not be the 

final stage of the process. The commenter further 

asked the Commission and NASD to continue 

working with the industry to address additional 

issues as they become apparent with the application 

of the Proposed Interpretation. See id. 

47See SIFMA 1 Letter; SIFMA 2 Letter; CGMI 

Letter; Goldman Sachs Letter. 

48See SIFMA 2 Letter; Goldman Sachs Letter. In 

the alternative, SIFMA urged NASD to extend the 

exception to any private bond transactions in a 

securitized product. It also called for more 

flexibility with regard to the use of credit ratings 

and economic models. See SIFMA 2 Letter. 

49See SIFMA 1 Letter. The ‘‘size’’ proposal was 

included in Amendment Nos. 3 and 4. 

Goldman Sachs also commented on the 

withdrawal of the ‘‘size’’ proposal and asked NASD 

to confirm that the premium or discount that may 

occur with a large block trade can be considered 

when using the block trade price to determine 

prevailing for a subsequent trade, noting that it does 

not think the QIB exception adequately addresses 

this issue. See Goldman Sachs Letter. 

50NASD stated that the size proposal raises 

significant investor protection concerns when large 

institutional sized positions are purchased and 

resold in small retail-sized transactions. NASD 

further noted that it had eliminated the size 

proposal in recognition that a dealer that is a market 

maker (as defined in Section 3(a)(38) of the Act) 

may avail itself of the spread before employing a 

mark-up. NASD also reiterated that if the dealer is 

not a market maker, it must use contemporaneous 

cost or other prices as provided in the Proposed 

Interpretation. 

51See SIFMA 1 Letter. In response to initial 

comments on the proposal, NASD provided, 

through Amendment Nos. 3 through 5, that news 

that had an effect on the perceived value of a debt 

security after a dealer’s contemporaneous 

transaction may justify shifting from 

contemporaneous cost to other cost values to 

determine the prevailing market price. 

52See id. 

53See id. 

54See SIFMA 1 Letter; Goldman Sachs Letter. 

55See SIFMA 1 Letter. 

NASD explained that there is less need 

to protect large institutional customers 

because they often have sufficient 

knowledge of the market.42 NASD also 

stated that applying the Proposed 

Interpretation to generally illiquid 

market sectors often may yield little or 

no pricing information useful for 

calculating mark-ups.43

III. Summary of Comments on 

Amendment Nos. 3, 4, and 5 

In soliciting comments on 

Amendment Nos. 3 through 5, the 

Commission stated that it would 

consider comments it previously 

received, and that commenters could 

reiterate or cross-reference these 

previous comments.44 The Commission 

has considered all of the comments it 

received in response to both the original 

proposal, as amended by Amendment 

Nos. 1 and 2, and the proposed rule 

change, as amended by Amendment 

Nos. 3, 4, and 5, including commenters’

reiteration of, and cross-references to, 

previously submitted comments. While 

the summary below refers to some 

comments previously submitted, it 

primarily discusses comments received 

on Amendment Nos. 3 through 5. 

A. General Comments 

All of the commenters commended 

NASD on changes made to the proposed 

rule in Amendment Nos. 3 through 5, 

and expressed particular support for the 

QIB exception.45 One commenter noted 

the significance of the proposal and 

urged the Commission to adopt it as 

quickly as possible.46

B. Comments Related to the Proposed 

QIB Exception 

While all of the commenters 

supported the QIB exception, they also 

urged NASD to extend it to transactions 

in other securities. Commenters 

suggested that the exception should 

apply to privately placed unregistered 

debt securities, stating that those 

securities have less pricing information 

and are less liquid that registered bonds, 

and emphasizing the sophistication of 

QIBs.47 Commenters also suggested 

extending the exception to transactions 

in all securitized products, stating that 

applying the Proposed Interpretation to 

volatile markets could deter dealers 

from providing liquidity.48

In response to these comments, NASD 

stated that it would like to gain 

regulatory experience by monitoring 

how the market adjusts to the use of 

differentiated regulation for QIBs before 

it considers extending the exception to 

transactions in other securities. NASD 

noted in particular that the exception is 

a significant expansion of its approach 

of generally extending the requirements 

of all rules to all customers without 

differentiation. 

C. Comments Related to the Former 

‘‘Size’’ Proposal 

An industry group asked NASD to 

reconsider its ‘‘size’’ proposal, which 

NASD eliminated when it proposed the 

QIB exception in Amendment No. 5.49

The size proposal would have allowed 

a dealer to show that its 

contemporaneous cost was not 

indicative of prevailing market price 

when a large or small transaction was 

executed at a price away from the 

prevailing market price, as evidenced by 

certain contemporaneous transactions. 

The commenter stated that the use of 

discounted or premium price results 

from small or large trades to compute 

subsequent mark-ups would place 

dealers in a difficult position, requiring 

them to sell bonds at a price that is 

lower than the prevailing market price, 

or buy bonds at a price that is higher 

than the prevailing market price. 

NASD responded that it had 

concluded that the size proposal would 

not be an appropriate basis to justify a 

shift from contemporaneous cost to 

determine the prevailing market price, 

in part due to customer protection 

concerns.50

D. Comments on ‘‘News’’

An industry group supported the 

provision in the Proposed Interpretation 

recognizing that news may affect the 

perceived value of a security subsequent 

to a trade, but believed that such news 

could be distributed through a variety of 

channels and may not be widely 

available to the marketplace.51 The 

commenter also stated that news should 

include information that may impact the 

price of an issuer’s debt securities, such 

as news about a different issuer.52

In response, NASD clarified that news 

that may affect the perceived value of a 

debt security may include information 

about other issuers. NASD further 

stated, however, that a dealer may not 

use news that is distributed through 

narrow channels and not broadly 

disseminated to the public because such 

narrowly disseminated information may 

not have a material impact upon market 

pricing. 

E. Comments on Other Issues 

Commenters also discussed a number 

of other issues related to the Proposed 

Interpretation. In particular, 

commenters criticized the ‘‘Hierarchy’’

of factors set forth in the Proposed 

Interpretation as inflexible and 

impractical,53 requested additional 

guidance on the meaning of 

contemporaneous cost,54 and requested 

that NASD clarify in the Proposed 

Interpretation that dealers may be 

market makers in debt markets.55 NASD 


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20154 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Notices 

56See NASD Notice to Members 94–62 (August 

1994) and the comments submitted thereto; 

Securities Exchange Act Release No. 40511 (Sept. 

30, 1998), 63 FR 54169 (Oct. 8, 1998) (soliciting 

comments on SR–NASD–97–61) and comments 

submitted thereto. NASD withdrew SR–NASD–97–

61 when it filed SR–NASD–2003–141. 

It should be noted that in its earlier response to 

comments, NASD provided additional guidance on 

some of these issues. NASD addressed comments 

on contemporaneous cost by amending the 

Proposed Interpretation to provide that the meaning 

of ‘‘contemporaneous’’ turns upon whether the 

transaction was close enough in time to be 

reasonably reflected in the security’s market price. 

NASD also addressed comments on ‘‘market maker’’

status by stating that it adopted the term ‘‘market 

maker’’ as defined in Section 3(a)(38) of the Act for 

purposes of the proposal and that it will apply the 

statutory definition without broadening the limits 

imposed by current legal precedent. 

57 15 U.S.C. 78o–3(b)(6). In approving this 

proposed rule change, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

58See e.g., F.B. Horner & Assocs. v. SEC, 994 F.2d 

61 (2d Cir. 1993) (citing Barnett v. SEC, 319 F.2d 

340 (8th Cir. 1963) (absent evidence to the contrary, 

the Commission is entitled to consider a brokerdealer’s contemporaneous cost as evidence of 

current market price)); In the Matter of Alstead, 

Dempsey & Co., 47 S.E.C. 1034, 1984 SEC LEXIS 

1847 (April 5, 1984); In the Matter of DMR 

Securities, Inc., 47 S.E.C. 350, 1980 SEC LEXIS 1071 

(July 21, 1980); see also Securities Exchange Act 

Release No. 24368 (April 21, 1987), 52 FR 15575 

(April 29, 1987) (notice to broker-dealers 

concerning disclosure requirements for mark-ups 

on zero-coupon securities). 

59NASD similarly provided a practical response 

to requests for clarification of news that may have 

an effect on the perceived value of a debt security. 

NASD clarified that such news may include 

information about other issuers, but drew an 

appropriate line by stating that dealers may not rely 

on news that is not broadly disseminated to the 

public because of the limited market impact of such 

information. NASD also responded reasonably to 

requests for the restoration of the ‘‘size’’ proposal, 

in light of the customer protection concerns it 

identified. 

60For example, NASD took a reasonable position 

stating that is adopts the statutory definition of 

market maker in Section 3(a)(38) of the Act. Under 

current legal precedent, a dealer is not and should 

not be considered a market maker merely because 

the dealer takes risk positions or devotes substantial 

capital to provide liquidity. Rather, to be 

considered a market maker, a dealer must meet the 

legal requirements set forth in the Act, which 

provides, in relevant part, that a dealer must hold 

itself out as being willing to buy and sell a security 

for its own account on a regular or continuous 

basis. See Exchange Act Section 38(a)(38), 15 U.S.C. 

78c(a)(38). 

61 15 U.S.C. 78s(b)(2) 

62 17 CFR 200.30–3(a)(12). 

responded that it believes these issues 

were thoroughly vetted during the 

comment process related to this rule 

filing, noting that in addition to the 

comment periods under this rule filing, 

these issues had been addressed in a 

preceding rule filing that was 

superseded by this proposal.56

IV. Discussion and Commission 

Findings 

The Commission has reviewed 

carefully the Proposed Interpretation, 

the comments on the proposed rule 

change, as amended, and NASD’s 

response to the comments, and believes 

that NASD has responded appropriately 

to the concerns raised by the 

commenters. The Commission finds that 

the Proposed Interpretation, as 

amended, is consistent with the 

requirements of the Act and rules and 

regulations thereunder applicable to a 

national securities association, and, in 

particular, with Section 15A(b)(6) of the 

Act, which requires, among other 

things, that the rules of a national 

securities association 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.57

The Proposed Interpretation is 

designed to provide guidance to dealers 

for calculating fair prices and mark-ups 

in compliance with NASD Rule 2440 in 

a way that is consistent with longstanding Commission and judicial 

precedent regarding fair mark-ups.58

The Proposed Interpretation provides a 

framework that specifically establishes 

contemporaneous cost as the 

presumptive prevailing market price, 

but also identifies certain dynamic 

factors that are relevant to whether 

contemporaneous cost or alternative 

values provide the most appropriate 

measure of prevailing market price. The 

Commission believes that the factors 

that govern when a dealer may depart 

from contemporaneous cost and that set 

forth alternative measures the dealer 

may use are reasonably designed to 

provide greater certainty to dealers and 

investors while providing an 

appropriate level of flexibility for 

dealers to consider alternative market 

factors when pricing debt securities. 

While we are mindful of the 

important issues raised by commenters, 

we believe that NASD has reasonably 

addressed them. For example, the QIB 

exception should provide dealers with 

flexibility for transactions that present 

greater pricing challenges without 

undermining the investor protection 

benefits of the Proposed Interpretation. 

While it declined to expand this 

exception in response to comments at 

this time, NASD committed to monitor 

how the market adjusts to the use of 

differentiated regulation for QIBs in 

relation to mark-ups.59

The Commission also believes NASD 

has adequately addressed and 

responded to other issues raised by 

commenters throughout the comment 

process.60 NASD’s submission of two 

sets of responsive comments and five 

amendments to this rule filing reflects a 

deliberative and collaborative process 

ultimately focused on providing 

comprehensive and flexible mark-up 

guidance that contemplates dealers’

practical experience in the debt markets. 

It is unavoidable that determining the 

baseline for a fair and reasonable markup will be inherently challenging. By 

recognizing the facts-and-circumstances 

nature of the analysis and by setting 

forth a logical series of factors to be used 

when a dealer departs from 

contemporaneous cost, however, NASD 

has proposed an approach for 

identifying the prevailing market price 

of a debt security that is reasonable and 

practical in addressing the interests of 

dealers and investors. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,61 that the 

proposed rule change (SR–NASD–2003–

141), as modified by Amendment Nos. 

1 through 5, be, and it hereby is, 

approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.62

Nancy M. Morris, 

Secretary. 

[FR Doc. E7–7611 Filed 4–20–07; 8:45 am] 

BILLING CODE 8010–01–P 

SOCIAL SECURITY ADMINISTRATION 

Agency Information Collection 

Activities: Proposed Request and 

Comment Request 

The Social Security Administration 

(SSA) publishes a list of information 

collection packages that will require 

clearance by the Office of Management 

and Budget (OMB) in compliance with 

P.L. 104–13, the Paperwork Reduction 

Act of 1995, effective October 1, 1995. 

The information collection packages 

that may be included in this notice are 

for new information collections, 

approval of existing information 

collections, revisions to OMB-approved 

information collections, and extensions 

(no change) of OMB-approved 

information collections. 

SSA is soliciting comments on the 

accuracy of the agency’s burden 

estimate; the need for the information; 

its practical utility; ways to enhance its 

quality, utility, and clarity; and on ways 

to minimize burden on respondents, 

including the use of automated 

collection techniques or other forms of 

information technology. Written 

comments and recommendations 

regarding the information collection(s) 


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