47096 Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices

1The proposal was originally filed on July 29,

1997, but was subsequently amended on August 25,

1997.

change if organized by the member for

its own associated persons. Some

commenters who responded felt that

when a broker-dealer conducts training

and educational seminars with offeror

participation it should not constitute

non-cash compensation, because the

broker-dealer is fully aware of the

offeror’s participation, because the

broker-dealer’s supervisory control is

not diminished or undermined, because

this is not typically an area of abuse, or

because flexibility is needed to arrange

meetings at locations convenient to

attendees and within the budgets

available (Comments 2, 7, 20, 23, 26, 27,

28).

Other commenters stated that mere

offeror participation, as long as the

offeror does not provide any monetary

contributions, should not result in the

meeting being treated as non-cash

compensation (Comments 3, 4, 5, 8).

4. The Tully Committee identified the

practice of payment of higher

commission to registered representatives

for proprietary products than for nonproprietary products as an arrangement

that can create conflicts of interest. The

proposed rule change would not

prohibit or regulate this practice. The

proposed rule change would, however,

prohibit a contest granting cash awards

if the contest gives greater weight to

certain securities than others.

Commenters are invited to address

whether the proposed rule change

should be extended to cover ordinary

compensation practices in addition to

incentive compensation practices. Most

commenters who responded stated that

the proposed rule change should not

cover ordinary compensation practices

because the regulatory objectives cited

in the proposed amendments are

unrelated to the payment of

commissions, such an approach would

have anti-competitive implications,

such an approach would delay the date

of effectiveness of the proposed rules, or

it would result in duplicative,

overlapping regulation (Comments 2, 3,

6, 7, 8, 12, 13, 16, 23, 26, 27).

One commenter, however, stated that

he could see barring differentials in cash

compensation, since cash compensation

is the strongest possible incentive

(Comment 4). Another commenter

stated that The Tully Committee’s report

on compensation practices voiced

concern over possible conflicts of

interest created by both higher

commission payments for proprietary

products and narrowly focused

incentive sales contests. If such

practices genuinely create conflicts of

interest, the effect of the proposed rule

change is to allow higher commissions

to be paid year round under a general

period. We fail to see the distinction.

The ultimate issue for regulatory

consideration should be suitability.

Regulatory authorities should determine

whether or not a conflict of interest is

created by higher payments, regardless

of the duration of the program and

provide consistent proposals for rule

changes accordingly (Comment 5).

[FR Doc. 97–23540 Filed 9–4–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38990; File No. SR–NASD–

97–56]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to the Creation of

New Rules 6900 Through 6970 or an

Audit Trail System Owned and

Operated by the National Association

of Securities Dealers, Inc.

August 28, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on August 25, 1997,1

the National Association of Securities

Dealers, Inc. (‘‘NASD’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by NASD Regulation, Inc.

(‘‘NASDR’’). 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 Regulation is proposing new

Rules 6900 through 6970 of the Conduct

Rules of the NASD, relating to an audit

trail system owned and operated by the

NASD that is designed to capture order

information reported by members for

integration with The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) quote

information and trade information

reported to the Automated Confirmation

Transaction Service (‘‘ACT’’) in order to

provide the Association with an

accurate time sequenced record of

orders and transactions. Below is the

text of the proposed rule change.

Proposed new language is underlined.

3110. Books and Records

* * * * *

(c) Each member that acts as a market

maker in an equity security quoted in

the Nasdaq system shall record, with

respect to each order for such security

that is received and executed at its

trading department, an identification of

each registered person who executes the

order.

* * * * *

6900. Order Audit System

6910. Definitions

For purposes of the Rules 6900

through 6970:

(a) Terms shall have the same

meaning as those defined in the ByLaws and other rules of the Association,

unless otherwise specified.

(b) ‘‘Association’’ shall mean the

National Association of Securities

Dealers, Inc. and its two subsidiaries,

NASD Regulation, Inc. and The Nasdaq

Stock Market, Inc.

(c) ‘‘Customer’’ shall mean a person

other than a broker or dealer.

(d) ‘‘ACT’’ shall mean the Automated

Confirmation Transaction Service

operated by Nasdaq, Inc.

(e) ‘‘Index Arbitrage Trade’’ shall

mean an arbitrage trading strategy

involving the purchase or sale of a

‘‘basket’’ or group of securities in

conjunction with the purchase or sale,

or intended purchase or sale, of one or

more cash-settled options or futures

contracts on index stock groups, or

options on any such futures contracts in

an attempt to profit by the price

difference, as further defined in New

York Stock Exchange Rule 80A.

(f) ‘‘Order’’ shall mean any oral,

written, or electronic instruction to

effect a transaction in a Nasdaq equity

security that is received by a member

from another person for handling or

execution, or that is originated by a

department of a member for execution

by the same or another member, other

than any such instruction to effect a

proprietary transaction originated by a

trading desk in the ordinary course of a

member’s market making activities.

(g) ‘‘Order Audit System’’ shall mean

the automated system owned and

operated by the Association that is

designed to capture Order information

reported by members for integration

with trade information reported to ACT

and quotation information disseminated

by members in order to provide the

Association with an accurate time

sequenced record of orders and

transactions.

(h) ‘‘Program Trade’’ shall mean a

trading strategy involving the related

purchase or sale of a group of 15 or
Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices 47097

more securities having a total market

value of $1 million or more, as further

defined in New York Stock Exchange

Rule 80A.

(i) ‘‘Reporting Agent’’ shall mean a

member that enters into any agreement

with another member pursuant to which

the Reporting Agent agrees to fulfill

such member’s obligations under Rule

6950.

(j) ‘‘Reporting Member’’ shall mean a

member that receives or originates an

Order.

6920. Applicability

(a) Unless otherwise indicated, the

requirements of Rules 6910 through

6970 are in addition to the requirements

contained in the By-Laws and other

rules of the Association.

(b) Unless otherwise indicated, the

requirements of Rules 6910 through

6970 shall apply to all brokers and

dealers admitted to membership in the

Association and to their associated

persons.

(c) Unless otherwise indicated, the

requirements of Rules 6910 through

6970 shall apply to all executed or

unexecuted Orders for equity securities

traded in The Nasdaq Stock Market.

6930. Synchronization of Member

Business Clocks

Each member shall synchronize its

business clocks that are used for

purposes of recording the date and time

of any event that must be recorded

pursuant to the By-Laws or other rules

of the Association, with reference to a

time source as designated by the

Association, and shall maintain the

synchronization of such business clocks

in conformity with such procedures as

are prescribed by the Association.

6940. Recording of Order Information

(a) Procedures:

(1) Subject to the terms and

conditions contained in Rules 6910

through 6970, each Reporting Member

shall:

(A) immediately following receipt or

origination of an Order, record each

item of information described in

paragraph (b) of this Rule that applies

to such Order, and record any

additional information described in

paragraph (b) immediately after such

information is received or becomes

available; and

(b) immediately following the

transmission of an Order to another

member, or from one department to

another within the same member, record

each item of information described in

paragraph (b) of this Rule that applies

with respect to such transmission.

(2) Each required record of the time of

an event shall be expressed in terms of

hours, minutes and seconds.

(3) Each Reporting Member shall, by

the end of each business day, record

each item of information required to be

recorded under this Rule in such

electronic form as is prescribed by the

Association from time to time.

(b) Order information required to be

recorded under this Rule includes:

1. an order identifier assigned to the

Order by the Reporting Member that

uniquely identifies the Order for the

date it was received;

2. the identification symbol assigned

by the Association to the security to

which the Order applies;

3. the member identification symbol

assigned by the Association to the

Reporting Member;

4. the identification of any

department and any registered person

who receives the Order directly from a

customer;

5. where the Order is originated by a

Reporting Member, the identification of

the department of the member that

originates the Order;

6. where the Reporting Member is a

party to an agreement described in Rule

6950(c), the identification of the

Reporting Agent;

7. the number of shares to which the

Order applies;

8. the designation of the Order as a

buy or sell order;

9. the designation of the Order as a

short sale order;

10. the designation of the Order as a

market order, limit order, stop order or

stop limit order;

11. any limit or stop price prescribed

in the Order;

12. the date on which the Order

expires;

13. the time limit during which the

Order is in force;

14. any request by a customer that an

order not be displayed, or that a block

size order be displayed, pursuant to

Rule 11Ac1–4(c) under the Securities

Exchange Act of 1934;

15. any minimum quantity of shares

required for execution;

16. special handling requests,

specified by the Association for

purposes of this Rule;

17. the date and time the Order is

originated or received by a Reporting

Member;

18. an identification of the Order as

related to a Program Trade or an Index

Arbitrage Trade;

19. the type of account, i.e., retail,

wholesale, employee, or proprietary, for

which the Order is submitted;

20. where a Reporting Member

transmits an Order to another

department within the member: (A) the

order identifier assigned to the Order by

the Reporting Member, (B) the member

identification symbol assigned by the

Association to the Reporting Member,

(C) the date the Order was first

originated or received by the Reporting

Member, (D) an identification of the

department to which the Order was

transmitted, and (E) the date and time

the Order was received by that

department;

21. when a Reporting Member

transmits an Order to another member:

(A) the order identifier assigned to the

Order by the Reporting Member, (B) the

member identification symbol assigned

by the Association to the Reporting

Member, (C) the member identification

symbol assigned by the Association to

the member to which the Order is

transmitted, (D) the date the Order was

first originated or received by the

Reporting Member, (E) the date and time

the Order is transmitted, and (F) the

number of shares to which the

transmission applies.

22. when a Reporting Member receives

an Order from another member, in

addition to all other applicable

information items that apply with

respect to such Order: (A) the order

identifier assigned to the Order by the

member that transmits the Order, (B) the

member identification symbol assigned

by the Association to the member that

transmits the Order, and (C) the date the

Order was first originated or received by

the member that transmits the Order;

23. when a Reporting Member

modifies or receives a modification to

the terms of the Order, in addition to all

other applicable information items

(including a new order identifier) that

would apply as if the modified Order

were originated or received at the time

of the modification: (A) the order

identifier assigned to the Order by the

Reporting Member prior to the

modification, (B) the date and time the

modifications was originated or

received, and (C) the date the Order was

first originated or received by the

Reporting Member.

24. when the Reporting Member

cancels or receives a cancellation of an

Order, in whole or in part: (A) the order

identifier assigned to the Order by the

Reporting Member, (B) the member

identification symbol assigned by the

Association to the Reporting Member,

(C) the date the Order was first

originated or received by the Reporting

Member, (D) the date and time the

cancellation was originated or received,

(E) if the open balance of an Order is

canceled after a partial execution, the

number of shares canceled, and (F)

whether the Order was canceled on the
47098 Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices

2See, In the Matter of National Association of

Securities Dealers, Inc., SEC Release No. 34–37538

(August 8, 1996); Administrative Proceeding File

No. 3–9056 (‘‘SEC Order’’).

instruction of a customer or the

Reporting Member; and

25. when an Order is executed, in

whole or in part: (A) the order identifier

assigned to the Order by the Reporting

Member, (B) the member identification

symbol assigned by the Association to

the Reporting Member, (C) the date the

Order was first originated or received by

the Reporting Member, (D) the Reporting

Member’s number assigned for purposes

of identifying transaction data in ACT,

(E) the designation of the Order as fully

or partially executed, (F) the number of

shares to which a partial execution

applies and the number of unexecuted

shares remaining, (G) an identification

of each registered person who executed

the Order, and (H) the date and time of

execution.

6950. Order Data Transmission

Requirements

(a) General Requirement

All applicable order information

required to be recorded under Rule 6940

shall be transmitted to the Order Audit

System by each Reporting Member or by

a Reporting Agent pursuant to an

agreement described by paragraph (c) of

this Rule.

(b) Method of Transmitting Data

(1) Order information shall be

transmitted in electronic form, as may

be prescribed by the Association from

time to time, to a receiving location

designated by the Association.

(2) Each Reporting Member shall

transmit to the Order Audit System a

report containing each applicable item

of Order information identified in Rule

6940(b) whenever an Order is

originated, received, executed, canceled,

modified, or transmitted to another

member or another department within

the member. Each report shall be

transmitted on the day such event

occurred, or with respect to any such

information that is not available on

such day, on the day that such

information fist becomes available.

Order information reports may be

aggregated into one or more

transmissions, during such business

hours as may be prescribed by the

Association.

(c) Reporting Agent Agreements

(1) Any Reporting Member may enter

into an agreement with a Reporting

Agent pursuant to which the Reporting

Agent agrees to fulfill the obligations of

such Reporting Member under this Rule.

Any such agreement shall be evidenced

in writing, which shall specify the

respective functions and responsibilities

of each party to the agreement that are

required to effect full compliance with

the requirements of this Rule.

(2) All written documents evidencing

an agreement described in paragraph (1)

shall be maintained by each party to the

agreement.

(3) Each Reporting Member remains

primarily responsible for compliance

with the requirements of this rule,

notwithstanding the existence of an

agreement described in this paragraph.

6960. Violation of Order Audit System

Rules

Failure of a member or person

associated with a member to comply

with any of the rules or requirements of

Rule 6910 through Rule 6970 may be

considered conduct that is inconsistent

with high standards of commercial

honor and just and equitable principles

of trade, in violation of Rule 2110.

6970. Effective Date

The requirements of the Order Audit

System shall be effective in accordance

with the following schedule:

(a) The requirements of Rule 6930

shall be effective on February 2, 1998.

(b) The requirements of the Order

Audit System shall be effective on

August 8, 1998 with respect to Orders

that are captured by members in

electronic form upon or promptly after

receipt (‘‘electronic order’’).

(c) The requirements of the Order

Audit System shall be effective on

January 1, 1999 for Orders other than

electronic Orders that: (i) are received at

the trading department of market

makers in the securities that are the

subject of the Orders, and (ii) are

executed on the same day on which they

are received, provided that only

information items (1), (2), (3), (6)

through (17), (19), (22), (23), (24), and

(25) (other than 25(G)), specified in Rule

6940(b) shall be required to be recorded

and reported with respect to such

Orders.

(d) The requirements of the Order

Audit System shall be effective on

January 31, 2000 in all respects with

respect to all Orders.

(e) The requirements of Rule 3110(c)

shall be effective from January 1, 1999

to January 31, 2000.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

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 Regulation 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

a. Summary

The NASDR is proposing a series of

rule changes (‘‘Proposed Rule’’) to create

a new order audit trail system (‘‘Order

Audit System’’) that would impose

obligations on member firms to retain in

electronic form and to report to NASDR

certain items of information with

respect to orders received by members

relating to equity securities traded in

Nasdaq. This information would be

integrated with transaction data

currently reported by members through

ACT and quotation information

disseminated by members. In addition,

related to the operation of the Order

Audit System, the Proposed Rules

would require that member firms

maintain synchronization of their

member clocks with a specific time

source designated by the Association.

The Order Audit System will be

operated by NASDR as the operating

subsidiary of the Association that is

responsible for regulating member firms

and conducting surveillance of the

Nasdaq Market. NASDR will obtain ACT

transaction data from, which is

responsible for receiving ACT

transaction information, on a daily basis

for purposes of constructing an

integrated audit trail of transaction and

order data, and members will be

required to transmit ACT identifying

information to the Order Audit System.

The combination of order data received

by the Order Audit System and ACT

data is discussed further below.

The Order Audit System would

provide a substantially enhanced body

of information regarding orders and

transactions that would improve the

NASDR’s ability to conduct surveillance

investigations of member firms for

violations of Association rules. In

addition, the implementation of the

Order Audit System would directly

fulfill one of the undertakings contained

in the order issued by the SEC relating

to the effectuation of the Association’s

regulatory responsibilities.2 Pursuant to

the SEC Order, the Association agreed to

undertake to design and implement by

August 8, 1998 (or as specified by

further order of the Commission) an
Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices 47099

audit trail sufficient to enable the

Association to reconstruct markets

promptly, conduct efficient surveillance

and enforce its rules. The audit trail is

required, subject to the Commission’s

approval, at a minimum, to (a) provide

an accurate time-sequenced record of

orders and transactions, beginning with

the receipt of an order at the first point

of contact between the broker-dealer

and the customer or counterparty and

further documenting the life of the order

through the process of execution, and

(b) provide for market-wide

synchronization of clocks utilized in

connection with the audit trail.

In general, the Proposed Rules would

require that each member receiving an

order relating to equity securities traded

in the Market must electronically

capture specified information related to

the order and electronically transmit

this information to the Order Audit

System. These requirements would

apply both to orders originated by

customers and to proprietary orders

originated by a department of a member

firm and sent to its trading desk or to

another member for execution. Further,

for both a customer order and an order

originated by a department, or desk, of

a member firm, the requirement to

capture and transmit information would

apply whenever the order is passed to

another department of the same firm.

Order information would be required

to be submitted in either single or

multiple electronic file transmissions on

the same day that the order, or the

specific information pertaining to the

order, was received, originated,

canceled, modified, transmitted, or

executed. Where information containing

a particular order is not complete or

changes, because for example, the order

is only partially executed on the day

that it is received, but the order remains

outstanding, or if the order is canceled,

the additional information would be

required to be transmitted on the day

that the information first becomes

available.

The Proposed Rules contain a special

provision that allows a firm to enter into

an arrangement with another member

pursuant to which such member agrees

to report order information on its behalf,

in the same way that firms now contract

with other members to report

transaction data to ACT. In each case,

however, the member that actually

receives or originates the order would

remain primarily responsible for

fulfilling each of its obligations under

the Proposed Rules.

In addition to the recording and

transmission requirements, the

Proposed Rules would require that

members synchronize their business

clocks used for purposes of recording

order or trade data to the Association

with reference to a single time

designated by the Association for this

purpose, and that they adopt such

procedures as may be necessary to

maintain such synchronization during

each trading day. This provision is

designed to ensure that the times of

various events that are reported

pursuant to the Proposed Rules are

reported in conjunction with a single

and verifiable reference point.

The implementation schedule for the

Proposed Rules would require all

members to synchronize their business

clocks that record times for regulatory

purposes pursuant to Rule 6930 by

February 2, 1998. The implementation

schedule for the Proposed Rules

contemplates that the requirements

would apply to all orders that are

received electronically, or captured in

electronic form promptly after receipt,

as of August 8, 1998. In addition, the

Proposed Rules would apply January 1,

1999, a slightly later implementation

date, to all orders in an equity security

that are received by other than

electronic means at the trading desk of

a market maker in the security and that

are executed on the same day on which

they are received. With respect to this

group of orders, however, the

information required to be electronically

recorded and transmitted to the Order

Audit System is limited to items of

information that are expected to be

readily available at the trading desk.

These items are enumerated in Rule

6970(c). The proposed implementation

schedule would be completed on

January 31, 2000, when the Proposed

Rules would apply in all respects to all

Orders.

Based on extensive consultation with

members and regulators and on its own

analysis, NASDR believes that, given the

substantial initial investments that will

be required by member firms to comply

with the proposed requirements, and in

light of other substantial systems costs

that members have been and will be

required to make during the next several

years, it is appropriate to limit the

initial application of the rules. Where

members already are capturing order

information electronically, the proposal

will require that members alter their

data processing systems as necessary in

order to permit recording all the items

required by the rules and to transmit

this information to the Order Audit

System.

The proposed January 1, 1999

inclusion of orders received by market

makers at their trading desks is based on

the critical role that market makers play

in the market for Nasdaq securities, and

the important regulatory interest in

assuring that the processing of orders by

market makers complies with all

applicable requirements. The limitation

of the elements that must be recorded

recognizes, however, that some

information may not be readily available

at the trading desk, and that an orderly

and efficient implementation of the

Order Audit System with respect to

market maker telephone orders could be

impeded by immediately requiring the

manual recordation of all the data

elements. In connection with market

maker orders, one item of information,

the identity of the trader who executes

a market maker order, is not being

required initially because of the

additional time that would be required

to manually input long identification

numbers in connection with each

transaction. However, a temporary

amendment to Rule 3110 is being

proposed that would require that the

member record the identity of traders

executing orders sent to market maker

trading desks. This provision would

ensure that information that could be

important for regulatory purposes will

be available to regulators upon request.

The limitation to orders that are

received and executed on the same day

reflects the expectation that compliance

burdens will be relatively less when

members are contemporaneously being

required to provide transaction reports

related to the same security following

the availability of such additional

information.

Rule 6970 proposes to apply the

Order Audit System requirements on

January 31, 2000 in all respects to all

orders. NASDR solicits comment on this

issue, based on system changes or other

factors that would apply to members

that do not presently maintain systems

for electronic receipt and routing, and

on any associated cost estimates.

b. Section by Section Discussion

Rule 6910—Definitions. Rule 6910

prescribes the definitions that apply to

each of the other rules pertaining to the

Order Audit System. Paragraph (a)

provides that, unless otherwise defined,

terms have the same meanings assigned

to them in the By-Laws and other rules

of the Association.

The term Order is defined by

paragraph (f) to include any oral,

written, or electronic instruction to

effect a transaction in a Nasdaq equity

security that is either originated by a

member or received by a member for

handling or execution. The definition is

not intended to apply to

communications that involve only

‘‘indications of interest’’ or discussions

that are prefatory to the determination
47100 Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices

3See Proceedings of the Institute of Electrical and

Electronics Engineers, Time and Frequency

Information in Telecommunications Systems

Standardized by Federal Standard 1002A, Volume

79, No. 7 (July 1991).

4For example, a member or investor can obtain

through the Internet information concerning the

NIST’s Automated Computer Time Service. This

service provides to users the ability to synchronize

business clocks programmatically with time

maintained by NIST. The NIST Website can be

accessed at http://www.bldrdoc.gov/timefreq/

service/acts.htm.

of the sender of the order to instruct the

member to execute or attempt to execute

a transaction. At the same time, because

the definition includes orders that are

received for ‘‘handling,’’ it would

include instructions that may not be

capable of being executed immediately

or fully executed at one time, but may

instead require negotiation with market

makers or other firms, or may require

execution in a series of separate

transactions.

The definition applies to orders that

are received from public customers and

from other broker-dealers. It would

include orders originated by affiliates of

a member and sent to that member,

including for example, an order

originated by a registered investment

company sent to its affiliated brokerdealer. In addition, it applies to orders

that are originated by one department of

a member and transmitted to another

department of the member, e.g., an order

that is originated by an institutional

sales desk and transmitted to a trading

desk or sent to another member. The

definition would include, among others,

all orders that member firms are

obligated to execute under the terms of

the ‘‘Firm Quote Rule’’ (Rule 11Ac1–1

under the Securities Exchange Act of

1934). The term expressly would not

include, however, a proprietary

transaction originated by a trading desk

in the ordinary course of a member’s

market making activities.

The definition of Reporting Member

in paragraph (j) describes the members

who are subject to the requirements

simply as members that receive or

originate Orders. The definition

includes members who receive Orders

from public customers as well as from

other members. In conjunction with the

definition of ‘‘Order’’, this definition

makes clear that all Orders from public

customers, from other securities firms,

and those that are originated in-house

are subject to the requirements of the

Proposed Rules.

Paragraph (e) defines the term Index

Arbitrage Trade to refer to an arbitrage

trading strategy involving the purchase

or sale of a group of securities in

conjunction with the actual or intended

purchase or sale of one or more cashsettled options, futures contracts on

stock indexes, or options on such

futures contracts in an attempt to profit

by the price difference. The term

Program Trade in paragraph (h) is

defined to refer to a trading strategy

involving the related purchase or sale of

a group of 15 or more securities with a

market value of at least $1 million. Both

definitions generally track the related

definitions in, and are further defined

by reference to, New York Stock

Exchange Rule 80A. The definitions are

relevant to the information recording

requirements of Rule 6940, described

below, that pertain to Orders that are

part of an index arbitrage or program

trade.

The term Report Agent is defined to

include members that agree with other

members to fulfill the reporting

obligations of Rule 6950 on the other

member’s behalf and is specifically

relevant to Rule 6950(c), discussed

further below, which permits the use of

such agreements, subject to certain

conditions.

Rule 6930—Synchronization of

member business clocks. The reliability

and usefulness of the Order Audit

System will depend on the ability of

NASDR to require that the business

clocks of member firms that are required

to record audit trail data are

appropriately synchronized. The

requirement for such synchronization is

a specified element of the undertakings

contained in the SEC Order. Because the

determination of whether members have

complied with various rules and

standards to which they are subject,

including among others, best execution

obligations, compliance with the

obligation to honor firm quotes, and

prohibitions on frontrunning customer

orders, depends critically on

establishing with reasonable confidence

the time at which Order information is

received, the synchronization

requirement is a necessary and integral

part of the Order Audit System. This

requirement is important both with

respect to synchronization of clocks

within a member firm as well as with

respect to market-wide synchronization

across member firms.

Proposed Rule 6930 provides that

each member shall synchronize its

business clocks that are used for

purposes of recording and reporting

Order, transaction, or related data

required by the By-Laws or other rules

of the Association, with reference to a

specific time source as designated by

the Association. The rule further

requires that each member firm

maintain the synchronization of such

clocks in conformity with such

procedures as the Association may

prescribe. Accordingly, the rule would

apply the synchronization requirement

to recording and reporting of

information to the Order Audit System,

to ACT, or to other requirements that

the Association may adopt pertaining to

transmission of Order and transaction

data.

Presently, members and electronic

communication networks and service

bureaus use a variety of methods for

synchronizing business clocks. These

methods range from manual

synchronization based on time derived

from local time sources to subscription

to commercial providers of satellite

services that programmatically update

computers with accurate time.

Accordingly, the degree of accuracy of

recorded times may vary significantly

among member firms.

In implementing this requirement,

NASDR would designate, through

Notices to Members or other appropriate

means, as appropriate sources one or

more satellite time scales that are

generally recognized and widely

followed for commercial purposes. For

example, the National Institute of

Standards and Technology (NIST) and

U.S. Naval Observatory maintain time

scales that are essentially equivalent,

i.e., they are maintained within a very

small fraction of a second of each

other.3 The designation of reference

sources such as these should provide to

both members and investors an efficient

means for confirming the accuracy and

reliability of business clocks that are

used for trading and reporting

purposes.4

The obligation to maintain the

synchronization of business clocks will

be ongoing. It is intended that any

policies and procedures adopted by

NASDR in this respect will require that

the accuracy of clocks be

resynchronized on at least a daily basis.

NASDR also anticipates that compliance

examinations would include a review

for the existence of adequate procedures

and checks to fulfill this obligation, as

well as testing the degree of accuracy of

clocks that are used for providing audit

trail information against the time

reference that is designated by NASDR.

Pursuant to the proposed rule, each

such recorded time would need to be

synchronized with a designated time

and recorded in hours, minutes, and

seconds. NASDR will provide further

guidance, prior to the effective date of

the Proposed Rules, as to the specific

standard of accuracy that will need to be

maintained, given existing technology

and the requirement that times be

recorded in seconds. NASDR expects to

review carefully member firms’

compliance with these requirements,
Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices 47101

5See NASD Bylaws, Article I(q); 15 U.S.C.

§ 78c(a)(18).

given the importance of accurate time

recordation to the integrated audit trail.

As discussed below, the proposed

effective date of the synchronization

requirement is February 2, 1998, prior to

the effectiveness of the other Proposed

Rules.

Rule 6940—Recording of Order

information. Rule 6940 prescribes the

specific items of Order data that are

required to be recorded by each

Reporting Member. Paragraph (a)(1)(A)

specifically requires that each Reporting

Member shall, immediately following

receipt of origination of an Order, record

each applicable item of information

listed in paragraph (b) of the rule. In

addition, where specified information is

not available at the time that the Order

is received, or if information that has

been received changes, the rule would

require that such information be

immediately recorded when it is

received. For example, if the Order is

canceled, this information would

necessarily need to be separately

recorded when received.

Paragraph (a)(1)(B) provides that

when a member transmits an Order to

another member, or from one

department to another, each item of

information described in paragraph (b)

that applies with respect to such

transmission must be recorded.

Under paragraph (a)(2), each required

record of the time of an event, including

the time of receipt or transmission

within a member or to another member,

must be expressed in terms of hours,

minutes, and seconds. The recorded

times will be subject to the

synchronization requirements,

described above.

Finally, pursuant to paragraph (a)(3),

each item of information that is not

initially recorded electronically, or that

is not recorded electronically in an

appropriate form, must be recorded in

such electronic form as is prescribed by

the Association, before the end of the

business day on which the information

is received. The rule would not

preclude recording Order information

by paper means, provided that the

information is translated into electronic

form intra-day in order to permit the

daily reporting of this information to the

Order Audit System. In many cases,

efficiencies may dictate initially

recording Order information in

electronic form at the point of receipt,

but the rule does not mandate this

method.

As noted, the rule would require that

specified information that pertains to

each Order be recorded ‘‘immediately’’

following receipt. The rule does not

attempt to specify a time limit between

receipt and recordation, since the factor

may differ marginally based on the

volume or Orders that are received at

any one time, and whether a particular

Order in communicated electronically

or orally. Where Order information is

not received and processed

electronically, it is expected that the

time required will be defined by

reference to the time practically

required to react to the information

received and either enter it into an

electronic database or manually record

it for later translation into electronic

form. Whether an Order is received

electronically or manually, members

would be required to accurately time

stamp thee Orders on receipt to comply

with the requirements of the Rule. The

rule would not permit the ‘‘bunching’’

or aggregating of Orders for these

purposes but instead would require that

information pertaining to each Order be

entered sequentially as it is received.

Paragraph (b) of the rule lists the

various items of information that are

required to be recorded under the rule.

We note that this list does not

necessarily reflect all of the information

that may prove to be necessary or useful

for audit trial purposes, and that other

or additional items of information could

be sought after NASDR has acquired

experience with the Order Audit

System. For purposes of understanding

the different recording requirements in

various situations, the following

description categories the recording

requirements in the following ways:

basic identifying information pertaining

to the Order itself, or to members,

departments or individuals who handle

the Order; the terms of the Order as

specified by the customer; other

information related to the Order;

information that is required to be

recorded whenever an Order is routed

within a member or is passed from one

member or another; information that is

related to modifications or

cancellations; and information

pertaining to a complete a partial

execution of an Order.

Identifying information. At the point

that an Order is received or originated,

certain identifying information is

required to be recorded, including a

unique order identifier assigned by the

member firm, the member identification

symbol assigned by the Association to

the member, and the date on which the

Order was received or originated. The

combination of these three elements

will uniquely identify an Order from all

other Orders received or originated by

any member on any day. In assigning

order identifies, it is intended that

members may use identification

numbering methods that they presently

employ, consistent with any specific

requirements imposed by NASDR.

Additional identifying information

includes the identification symbol

assigned by the Association to the

security issue; an identification of the

department and any registered person

who receives an Order from a customer;

where an Order is originated by a

member firm, an identification of the

department where the Order originated;

and where a member is using a

Reporting Agent to help fulfill is

reporting obligations under Rule 6950,

the member identification symbol

assigned by the Association to that firm.

As noted below, additional information

will be required to be recorded when a

member routes or passes an Order

within the firm or to another member.

With respect to departments and

individuals who receive Orders, the rule

limits coverage to persons who receive

Orders directly from customers, rather

than from other members. Rule 6910

defines the term ‘‘customer’’ to exclude

members or other broker-dealer firms.

This formulation results from the

significant compliance burden that

could result from identification of each

individual person who receives an

Order from any source, and the

relatively greater importance for

surveillance purposes attached to

identifying persons who receive

communications from public customers

with respect to their Orders. NASDR

specifically solicits comment on the

appropriateness of this limitation.

In addition, the rule requires

identification of persons who are

registered with the Association, rather

than extending the coverage to

‘‘associated persons.’’ 5 Because all

persons handling orders relating to

securities are required to be registered

with the Association, we believe that

this requirement should not create a

significant problem for members. In

addition, because all registered persons

are assigned a number by the

Association’s Central Registration

Depository (‘‘CRD’’), and many members

may use these numbers currently for

purposes of identifying registered

persons in their data processing

systems, we believe that the limitation

to registered persons will significantly

lessen the compliance burdens that

would be imposed.

Terms of the Order. The following

items of information will be required

with respect to the terms of the Order

that are specified by the party placing

the Order: the number of shares to

which the Order applies; designation as
47102 Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices

6Transaction data for trades that are part of a

program trade or index arbitrage strategy is required

by the New York Stock Exchange to be transmitted

to ACT with respect to securities listed on that

exchange.

a buy or sell order; designation as a

market order, limit order, stop order or

stop limit order; any limit or stop price

prescribed in the Order; designation as

a short sale order; designation of the

time limit during which the Order is to

remain in force; any special handling

requests contained in the Order; any

minimum number of shares required for

execution; and the date on which the

Order expires.

Prior to the effective date of the

Proposed Rules, NASDR will prescribe

the types of special handling requests

that would need to be recorded. The

order type designations, e.g., market or

limit order, are not intended to be

exclusive, and other designations of

Order types that may be prescribed by

NASDR based on current commercial

practice may also be required. Each

such item of information is required to

be recorded at the time the Order is

placed. As described below, where a

customer modifies an existing Order,

the modification is treated as a new

Order, and the modified information is

required to be recorded when the

modification is received.

Other information related to the

Order. Other information directly

related to the Order itself includes: the

date and time on which the Order was

received; the type of customer account

for which the Order is placed; whether

the Order is related to a Program Trade

or Index Arbitrage Trade 6; and any

special instructions required by the

customer under the Commission’s Order

Handling Rules.

As noted above, recording of the date

and time on which the Order was

received is of paramount importance for

reviewing compliance with a number of

regulatory requirements, because of the

importance of the timing of market

developments and activities by the

member in relation to Order receipt

time. The time of receipt must be

accurately recorded, with reference to

the synchronized time that is required

to be maintained under Rule 6930. For

purposes of defining the type of account

for which the Order was placed, the rule

describes four categories: retail,

wholesale, employee, or proprietary. A

separate designation for ‘‘institutional’’

accounts has not been included because

of our understanding that firm record

keeping procedures do not make use of

this classification for most purposes,

and there is no clear test that is applied

for purposes of differentiating

‘‘institutional’’ from other public

customer accounts. NASDR solicits

comment on whether the prescribed

categories are appropriate and useful.

The Rule would require identification

of situations in which a customer

provides special instructions with

respect to display of limit orders,

pursuant to Rule 11Ac1–4(c) under the

Exchange Act. That rule expressly

excepts from the requirement to display

limit orders: (i) block orders, unless

customers request that they be

displayed; and (ii) those situations in

which customers request that limit

orders not be displayed.

Orders routed within a firm. When an

Order is routed to another department of

the member for execution or for other

purposes, item 20 of Rule 6940

prescribes information that is required

with respect to this event. Specifically,

the information required includes the

order identifier assigned to the Order by

the member, the member identification

symbol, the date the Order was first

received or originated by the member,

an identification of the department to

which the Order was transmitted, and

the date and time the Order was

received by that department.

Orders routed to another firm. When

an Order is sent to another firm, for

execution or any other purpose, items

21 and 22 prescribe the information that

is required on the part of both the

sending and receiving members in order

to accurately track the Order. With

respect to the sending firm, the

following elements are required in order

for the Order Audit System to track the

Order: the unique order identifier

assigned by that firm; the firm’s member

identification symbol; the date on which

the Order was originally received or

originated by the member; the date and

time the Order is transmitted; the

identification symbol of the member to

which the Order is transmitted; and the

number of shares that are routed. The

requirement to record the member

identification symbol assigned by the

Association to the receiving firm will

require that each Reporting Member

retain a list of symbols assigned to all

members by the Association for

electronic reporting purposes.

Where an Order is transmitted to

another member, the receiving firm is

required to capture all of the elements

prescribed in Rule 6940(b) that apply

whenever an Order is received. For

example, it is required to assign its own

unique order identifier and to record all

the other terms pertaining to the Order,

regardless of whether the Order is

originated by the transmitting member

or by a third party. In addition to these

requirements, other elements pertaining

to the sending firm are required.

Specifically, the receiving firm will be

required to record the unique order

identifier assigned by the sending firm,

that firm’s member identification

symbol, and the date the Order was

originally received or originated by the

transmitting firm. In aggregate, this

information will be used to link the

Order from firm to firm for purposes of

accurately tracking each Order that is

passed. NASDR requests comment as to

the burdens involved in requiring each

receiving firm to record this identifying

information with respect to each

telephoned Order between members.

Modifications and cancellations.

Whenever a member modifies the terms

of an Order that it has originated, or

receives a modification of terms from a

customer or from another member, the

Order Audit System will treat the

modification effectively as a

cancellation of the original Order and its

replacement by the modified Order.

Accordingly, in this circumstance, all of

the other information items prescribed

by the rule, including a new order

identifier, would need to be recorded as

if the Order was modified were

originated or received at the time of the

modification. In addition, to permit the

linkage by the Order Audit System of

this ‘‘new’’ Order to the previous one,

item 23 requires that the following

elements be recorded: the order

identifier that was assigned prior to the

modification; the date and time the

modification was originated or received;

and the date the original Order was first

originated or received by the member.

In the case of a ‘‘true’’ cancellation of

an existing Order, whether it is a total

or partial cancellation, the following

elements are required to be recorded:

the order identifier assigned by the

Reporting Member; its member

identification symbol; the date the

Order was first originated or received by

the Reporting Member; the date and

time the cancellation was originated or

received; if the open balance of an Order

is canceled after a partial execution, the

number of shares canceled; and whether

or not the Order was canceled at the

instruction of the Reporting Member, or

a customer.

Executions. One of the most critical

functions of the Order Audit System

will be to link information reported to

the Order Audit System with

transaction data that members are now

required to report to ACT. This linkage

is central to the construction of a wholly

integrated audit trail that incorporates

the new requirements with existing

information for purposes of tracking

each Order from the time that it arises

until it is executed, modified, or

canceled. This linkage is accomplished
Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices 47103

principally by requiring that the

executing member firm record, and

report to the Order Audit System under

Rule 6950, the Branch Sequence number

included in each report to ACT for a

trade associated with the Order. The

member firm reporting to ACT must

include, in the Branch Sequence field of

the ACT report, and Order identifier

that is unique for that firm throughout

the reporting day. In addition, for

purposes of linking transaction and

order data, members will be required to

record and report the unique order

identifier assigned by the firm, the

firm’s member identification symbol;

and the date the Order was first

originated or received.

In addition to these elements, item 25

of Rule 6940(b) prescribes the following

elements: a designation of the Order as

fully or partially executed; the number

of shares to which a partial execution

applies and the number of unexecuted

shares remaining; an identification of

each registered person who executed the

Order; and the date and time of

execution. Because the rule would

prescribe identification of each

registered person who receives an Order

from a customer (see ‘‘Identifying

Information’’ above), in tandem with

this requirement, the Order Audit

System will be able to identify each

individual involved at the inception of

the receipt of an Order from a customer,

and each individual who actually

executes every Order. As noted above,

the identity of traders who execute nonelectronic Orders at market maker

trading desks is not being required, but

instead NASDR is proposing an

amendment to Rule 3110 to require that

this identifying information be recorded

in connection with each such Order that

is executed so that the information will

be available for regulatory purposes.

The requirements of the proposed

amendment to Rule 3110 will be

effective only from January 1, 1999 until

January 31, 2000, at which time the

identity of all registered persons who

execute an Order will be required to be

recorded with the other information

items listed under Rule 6940(b)(25).

Rule 6950—Order data transmission

requirements. Rule 6950 prescribes the

requirements that apply to transmitting

to the Order Audit System information

that is recorded under rule 6940.

Paragraph (a) states the general

requirement that all applicable

information that is required to be

recorded with regard to a particular

Order must be transmitted to the Order

Audit System by the Reporting Member,

or by a Reporting Agent that agrees to

send reports on behalf of the Recording

Member.

Paragraph (b) sets forth the means by

which a data is required to be

transmitted. Subparagraph (1) provides

that all Order information shall be

transmitted in electronic form, as may

be prescribed by the Association from

time to time, to a receiving location

designated by the Association.

Compliance with the reporting

requirements of the Proposed Rules

generally will require member firms to

modify existing systems to permit

efficient and timely transmission of

information,or in some cases, to create

new data capturing and reporting

systems. Based on the final

requirements contained in the Proposed

Rules following their approval by the

Commission, NASDR will consult with

and provide notices to members as

necessary in order to further clarify the

changes that will be required and to

assist member firms in making these

modifications in the most cost-efficient

way possible. In circumstances where

the cost of such changes appears to be

disproportionate based on the size of the

firm or the nature of its trading activity,

paragraph (c) as discussed below would

permit the reporting responsibility to be

assumed by another member that

maintains the technological capability

to perform this function. NASDR

specifically solicits comment from

member firms on this issue, to the

extent that they have information that

would permit an estimate of the costs

that would be required based on the

configuration of the Order Audit system

defined by the Proposed Rules.

Subparagraph (b)(2) prescribes other

requirements for transmitting reports.

Each Reporting Member would be

required to transmit, on the day that the

Order is received, originated, canceled,

modified, transmitted, or executed, each

applicable item of Order data required

to be recorded in electronic form under

Rule 6940 that is available on that day,

including information pertaining to

modifications, cancellations or

executions that occur on that day.

Where information that initially is

recorded changes later in the same day

because, for example, a customer

determines to modify the terms of the

Order due to changing market

conditions, consistent with the

requirements noted above (see

‘‘Modifications and Cancellations’’), the

member would report the modified

Order as if it were a new Order, along

with the other information required to

be recorded when Orders are modified.

With respect to Orders that are not

fully executed on that day that they are

received, any additional information

pertaining to the Order, including

execution information, would be

transmitted on the day that it first

becomes available. The rule provides

that Order reports will be transmitted in

either single or multiple files during

such business hours as may be

prescribed by the Association. This

provision is intended to provide

members with the flexibility to provide

reports in the most time and costefficient way. Particularly during

periods of heavy volume, it may be

desirable to transmit groups of report at

various intervals during the course of

the day. In addition, this flexibility is

intended to avoid delays or other

problems in processing information by

the Order Audit System that could be

caused by the transmission of reports by

member firms at or near the same point

in time.

Based on further development of the

Order Audit System and determinations

relating to system capacity and other

factors, NASDR will prescribe the hours

during which information may be

transmitted. The prescribed hours likely

will extend past the end of the trading

day. The proposal contemplates that all

Order information, along with

corresponding ACT data that has been

integrated with such information, will

be available to NASDR staff at the

beginning of the trading day following

the day on which the information has

been transmitted.

Paragraph (c) provides the conditions

to use agreements between members

and Reporting Agents, by which these

agents agree to fulfill reporting

obligations under the Rule. Each

agreement is required to be set forth in

writing, specifying the respective

functions and responsibilities of each

party. Further, each agreement is

required to be maintained by each party.

Subparagraph (c)(3) provides that the

Reporting Member in each case remains

primarily responsible for compliance

with the reporting obligations. It is

expected therefore that each member

that is a party to such an agreement will

exercise appropriate diligence to insure

that the Reporting Agent is discharging

the member’s obligations.

NASDR believes that the ability to

rely on reporting relations is important

to the practicability of the Order Audit

System from the standpoint of many

small and medium-size firms. Presently,

clearing relationships often include the

responsibility to report trade

information to ACT on behalf of

member firms. It is intended that these

existing relationships can also be used

for purposes of Order Audit System

reports. NASDR specifically solicits

comment on costs or difficulties that

could be involved in amendment

existing clearing and reporting
47104 Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices

7See also Rule 476A and Supplementary Material

of the New York Stock Exchange Guide for

comparable rules of the New York Stock Exchange.

relationships to encompass reporting

obligations under Rule 6950.

Rule 6960—Violation of order audit

system rules. Rule 6960 provides that

failure to comply with any of the

requirements set forth in the Proposed

Rules may be considered conduct that is

inconsistent with high standards of

commercial honor and just and

equitable principles of trade, in

violation of NASD Rule 2110. This

provision emphasizes the importance of

the Order Audit System to the

regulatory mission of the Association

and NASDR. NASDR believes that

violations of the Proposed Rules that

may be deemed to be violations of Rule

2110 of the Conduct Rules would

include patterns of persistent or

repeated violations, or submissions of

inaccurate reports. Ordinarily, cases of

isolated or inadvertent violations would

not be considered to be violations of

Rule 2110 but could be subject to

specified fines imposed in an expedited

process. In this regard, NASDR

specifically solicits comment on

whether the Proposed Rules should be

included among the rules subject to the

disciplinary penalties and procedures

contained Rule 9217 and IM–9217 of the

NASD Code of Procedure.7

Rule 6970—Effective date. NASDR is

proposing that the requirements of Rule

6930 be effective for all members on

February 2, 1998. This proposed

effective date pre-dates by

approximately six months the proposed

application to certain Orders of the

other Proposed Rules. Because the

synchronization requirement is

designed to ensure the accuracy of times

of events that are recorded for regulatory

purposes, including under current

regulations, the requirement has a

purpose that is broader that the accurate

recordation of times pursuant to the

Proposed Rules. Accordingly, NASDR

preliminarily believes that it may be

appropriate to implement this

requirement as soon as is feasible. In

addition, an earlier implementation of

the requirement could provide NASDR

with experience that could be useful in

preparing for the implementation of the

Order Audit System. NASDR

specifically solicits comment on the

feasibility of this implementation date,

based on any necessary enhancements

to existing systems that would be

required. In particular, comments

should address the extent to which

manual or ‘‘punch’’ clocks current are in

use for purposes of complying with

regulatory requirements, and the extent

to which business clocks now record in

seconds, or the timetable for any

existing plans to upgrade these clocks.

Because of the substantial compliance

burdens that will be associated with

systems and other changes in order to

permit member firms to record and

report all the information that would be

required under the Proposed Rules, as

noted above, NASDR is proposing to

apply the requirements on August 8,

1998 only to Orders that are captured by

members in electronic form upon or

promptly after receipt (‘‘electronic

orders’’). Where Orders presently are

communicated by telephone or some

other means but are routinely entered

into an electronic data base as soon they

are received, NASDR preliminarily

believes that its is appropriate to treat

these Orders in the same way as if they

were transmitted directly in electronic

form. NASDR solicits comment on

whether this treatment is appropriate.

In addition, a January 1, 1999

implementation date would apply to

Orders that are not communicated or

routinely entered electronically (‘‘nonelectronic orders’’), where they are

received at the trading desk by members

that are market makers in the subject

securities. Under this provision, only

certain information items initially

would be required to be recorded and

reported to the Order Audit System.

These information items in general

correspond to those items that are

expected to be generally available at the

trading desk at the time that Orders are

received. Specifically, the required

items include: the order identifier

assigned to the Order by the market

maker; the date and time on which the

Order was originated or received; the

member identification symbol assigned

by the Association; the identification of

the Reporting Member’s Reporting

Agent, where applicable; the symbol

assigned by the Association to the

securities that are the subject of the

Order; where applicable, the

designation of the order as a short sale;

whether the Order is to buy or sell; the

quantity of shares; the designation of the

time in force that applies to the Order;

the expiration date; the type of account

for which the Order is submitted; any

request by a customer that a limit order

not be displayed or that a block order

be displayed pursuant to Rule 11Ac1–

4(c) of the Exchange Act: the

designation of the type of Order (market,

limit, stop, or stop limit); the

designation of any stop or limit price;

any designation of a minimum number

of shares that must be executed; any

special handling instructions; where a

member receives an Order from another

member, the order identifier assigned to

the Order by the member that transmits

the Order, the member identification

symbol assigned by the Association to

the member that transmits the Order,

and the date the Order was first

originated or received by the member

that transmits the Order; and other

relevant information when the order is

executed, canceled, modified or

transmitted to another member. As

noted above, data concerning all Orders

that are not received electronically will

be required to be captured manually

immediately after receipt and recorded

intra-day in electronic form.

NASDR is not proposing to require

initially that the identification of each

trader who executes non-electronic

Orders received at the trading desk of a

market maker be recorded. However,

NASDR is proposing an amendment to

Rule 3110 to require that this item be

recorded in some form, so that this

information can be available for

regulatory purposes on request.

As noted above, the proposed

inclusion of these Orders in the Order

Audit System by January 1, 1999 reflects

the important role that market makers

play in the market for Nasdaq securities

and the paramount regulatory and

surveillance interest in assuring that

market makers comply with all of their

obligations. At the same time, the

proposal to reduce the number of

elements that must be captured initially

by market makers when receiving

telephone or other non-electronic orders

recognizes that requiring the manual

transcription of all data elements,

including those that may not be

immediately available to a registered

person at the trading desk, in a form that

can be reported to the Order Audit

System could impede an orderly and

efficient implementation of the Order

Audit System. In particular, this

provision recognizes the unique nature

of market maker trading desks, in terms

of the volume of Orders processed and

the attendant difficulties that could

result in attempting to record and report

the specified information during periods

of high volume and changing market

conditions.

Following finalization of the system

configuration and requirements based

on Commission approval, substantial

systems development and testing will be

required prior to August 8, 1998.

NASDR may seek a representative group

of member firms to participate in early

testing and in a voluntary pilot program

in advance of the effective date in order

to identify problems and gain insight

into reporting patterns and volumes.

NASDR will provide periodic notices to

its members prior to the effective date
Federal Register / Vol. 62, No. 172 / Friday, September 5, 1997 / Notices 47105

8 15 U.S.C. § 78o–3. 9 17 CFR 200.30–3(a)(12).

with regard to these development

activities.

Rule 6970 propose to apply the Order

Audit System requirements on January

31, 2000 to all Orders. Accordingly,

non-electronic Orders, whether

recorded at a market maker trading desk

or at another location would be fully

subject to all of the recording and

reporting requirements of the Proposed

Rules on such date. NASDR solicits

comment on this issue and on the

implementation schedule generally,

based on system changes or other factors

that would apply to members that do

not presently maintain systems for

electronic receipt and routing, and on

any associated cost estimates.

NASDR believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) of the

Act 8 in that it is designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest by creating an Order

Audit System that would provide a

substantially enhanced body of

information regarding orders and

transactions that would improve the

NASDR’s ability to conduct surveillance

and investigations of member firms for

violations of Association rules. In

addition, the implementation of the

Order Audit System would directly

fulfill one of the undertakings contained

in the SEC Order relating to the

effectuation of the Association’s

regulatory responsibilities. Pursuant to

the SEC Order, the Association agreed to

undertake to design and implement by

August 8, 1998 (or as specified by

further Order of the Commission) an

audit trail sufficient to enable the

Association to reconstruct markets

promptly, conduct efficient surveillance

and enforce its rules.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation 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, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

In the process of developing the

proposed rule change, NASDR

consulted generally with industry

representatives and received a number

of comment letters in connection with

this consultation. Such comment letters

are available from NASDR upon request.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. By order approve such proposed

rule change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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 will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to file number

SR–NASD–97–56 and should be

submitted by September 26, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Jonathan G. Katz,

Secretary.

[FR Doc. 97–23602 Filed 9–4–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Applications of Custom Air Transport,

Inc., for Certificate Authority

AGENCY: Department of Transportation.

ACTION: Notice of order to show cause

(Order 97–8–29) Dockets OST–97–2255

and OST–97–2256.

SUMMARY: The Department of

Transportation is directing all interested

persons to show cause why it should

not issue an order finding Custom Air

Transport, Inc., fit, willing, and able,

and awarding it certificates of public

convenience and necessity to engage in

interstate and foreign charter air

transportation of persons, property, and

mail.

DATES: Persons wishing to file

objections should do so no later than

September 15, 1997.

ADDRESSES: Objections and answers to

objections should be filed in Dockets

OST–97–2255 and OST–97–2256 and

addressed to Department of

Transportation Dockets, U.S.

Department of Transportation, 400

Seventh Street, S.W., Rm. PL–401,

Washington, D.C. 20590, and should be

served upon the parties listed in

Attachment A to the order.

FOR FURTHER INFORMATION CONTACT: Ms.

Carol A. Woods, Air Carrier Fitness

Division (X–56, Room 6401), U.S.

Department of Transportation, 400

Seventh Street, S.W., Washington, DC

20590, (202) 366–2340.

Dated: August 29, 1997.

Charles A. Hunnicutt,

Assistant Secretary for Aviation and

International Affairs.

[FR Doc. 97–23511 Filed 9–4–97; 8:45 am]

BILLING CODE 4910–62–P

DEPARTMENT OF TRANSPORTATION

Privacy Act of 1974; Notice To Amend

System of Records To Include New

Routine Uses

AGENCY: Department of Transportation.

ACTION: Notice to amend system of

records to include new routine uses.

SUMMARY: In accordance with the

Privacy Act (5 U.S.C. 552a(e)(11)), the

Department of Transportation is issuing

notice of our intent to amend the system

of records entitled DOT/ALL 11,

Integrated Personnel and Payroll System

(IPPS) to include new routine uses. We

invite public comment on this

publication.

EFFECTIVE DATE: October 6, 1997.