[Federal Register Volume 65, Number 194 (Thursday, October 5, 2000)]
[Notices]
[Pages 59482-59485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25596]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43367; File No. SR-NASD-00-42]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Proposed Recording and Recordkeeping Requirements of Certain 
Quotation Data

September 27, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 3,2000, the National Association of Securities Dealers, Inc. 
(``NASD''), through its wholly owned subsidiary, NASD Regulation, Inc. 
(``NASD Regulation'') 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. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to add new NASD Rule 6630 to require 
members to record and maintain their quotations displayed in certain 
automated, inter-dealer quotation systems, such as the Electronic Pink 
Sheets (``EPS''), and to report such data to NASD Regulation upon 
request.
    Below is the text of the proposed rule change. Additions are 
italicized; deletions are in brackets.
* * * * *

6600. [REPORTING TRANSACTIONS IN] OVER-THE-COUNTER EQUITY 
SECURITIES

    This Rule 660 Series sets forth recording and reporting 
requirements for certain quotations and unpriced indications of 
interest displayed on inter-dealer quotation systems and the trade 
reporting requirements applicable to members' transactions in equity 
securities for which real-time trade reporting is not otherwise 
required (hereinafter referred to as ``OTC Equity Securities''). 
Members shall utilize the Automated Confirmation Transaction Service 
(ACT) for trade reporting in OTC Equity Securities. Rules 6610 and 6620 
No Change.

Rule 6630. Recording of Quotation Information

(a) Quotation Recording Requirements

    (1) Subject to the terms and conditions contained herein, each OTC 
Market Maker that displays priced quotations (bid and/or offer) or 
unpriced indications of interest in OTC Equity Securities in an inter-
dealer quotation system that permits quotation updates on a real-time 
basis shall record each item of information described in paragraph (b) 
of this Rule. This quote activity record must reflect all changes in an 
OTC Market Maker's priced quotation or quotation size displayed or 
unpriced indication of interest, and the time any such change was 
effected.
    (2) Members shall record each item of information required to be 
recorded under this Rule in such form as is prescribed by the 
Association from time to time.
    (3) Maintaining and Preserving Records
    (A) Each member shall maintain and preserve records of the 
information required to be recorded under this Rule for the period of 
time and accessibility specified in SEC Rule 17a-4(a).
    (B) The records required to be maintained and preserved under this 
Rule may be immediately produced or reproduced on ``micrographic 
media'' as defined in SEC Rule 17a-4(f)(1)(i) or by means of 
``electronic storage media'' as defined in SEC Rule 17a-4(f)(1)(ii) 
that meet the conditions set forth in SEC Rule 17a-4(f) and may be 
maintained and preserved for the required time in that form.

(b) Information to be Recorded

    The quotation activity record required pursuant to paragraph (a) of 
this Rule shall contain, at a minimum, the following information for 
every priced quotation (bid and/or offer) or unpriced indication of 
interest displayed by the member during the trading day:
    (1) Submitting firm;
    (2) Inter-dealer quotation system or medium;
    (3) Trade date;
    (4) Time quotation displayed (expressed in hours, minutes and 
seconds);
    (5) Security name and symbol;
    (6) Bid and bid quotation size (if applicable);
    (7) Offer and offer quotation size (if applicable);
    (8) Prevailing Inside Bid; and
    (9) Prevailing Inside Offer
    If no updates were entered to an OTC Market Maker's quotation or 
quotation size for any given trading day, the member must record the 
information in subparagraphs (b)(1) through (7).

(c) Quotations Not Required To Be Recorded

    The recording requirements contained in paragraphs (a) and (b) of 
this Rule shall not apply to quotations of OTC Equity Securities that 
are displayed on an inter-dealer quotation system that is:
    (1) qualified pursuant to Section 17B of the Act; or
    (2) operated by a member of the Association.

(d) Reporting Requirements

(1) General Requirement

    Members shall report information required to be recorded under this 
Rule to the Association upon its request.

[[Page 59483]]

(2) Method of Transmitting Data

    Members shall transmit this information in such form prescribed by 
the Association.

(e) Reporting Agent Agreements

    (1) ``Reporting Agent'' shall mean a third party that enters into 
any agreement with a member pursuant to which such third party agrees 
to fulfill such member's obligations under this Rule.
    (2) Any member may enter into an agreement with a Reporting Agent 
pursuant to which the Reporting Agent agrees to fulfill the obligations 
of such 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.
    (3) All written documents evidencing an agreement described in 
paragraph (e)(2) shall be maintained by each party to the agreement.
    (4) Each member remains responsible for compliance with the 
requirements of this Rule, notwithstanding the existence of an 
agreement described in this paragraph. If a member knows or has reason 
to believe that its Reporting Agent is not complying with the 
requirements of this Rule, the member must immediately withdraw its 
quotations or unpriced indications of interest until such time that the 
member is satisfied that the quotation data is being properly 
maintained and reported.
* * * * *

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

    In its filing with the Commission, NASD Regulation 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

1. Purpose
    In September 1999, EPS, which is operated by the Pink Sheets LLC 
(``Pink Sheets'') began displaying real-time, on-line stock quotations 
for approximately 5,000 securities. Some NASD members may now enter 
quotations in the EPS, which are displayed over the Internet at the EPS 
website on a real-time basis. Prior to the availability of EPS, the 
``pink sheets'' consisted of weekly lists of quotes printed in hard 
copy by Pink Sheets. Pink Sheets updated these non-binding quotations 
by means of a daily facsimile to subscribers. Market participants could 
learn of changes to intra-day quotations only by telephone or similar 
means of communication to market makers in the security.
    Because the EPS now displays quotations on a real-time basis, NASD 
Regulation staff requires access to this quotation data to surveil 
adequately for member compliance with applicable rules and regulations 
and, when necessary, to reconstruct market activity. For example, 
member activities in the EPS are subject to NASD Rule 3320, ``Offers at 
Stated Prices,'' which requires that a member's quotations be ``firm,'' 
i.e., that the member buy or sell at least a normal unit of trading in 
the quoted stock at its then prevailing quotations, unless clearly 
designated otherwise. In addition, NASD Rule 6750 provides that every 
member firm that functions as a market maker in over-the-counter 
(``OTC'') equity securities on an inter-dealer quotation system that 
permits quotation updates on a real-time basis must honor those 
quotations for the minimum size applicable to the market maker's firm 
bid or ask. Although complete trade execution data would be available 
through existing trade reporting requirements and systems, NASD 
Regulation staff does not otherwise have access to historical quotation 
activity at the time of trades.\3\ Therefore, NASD Regulation is 
proposing that members that participate in an inter-dealer quotation 
system,\4\ such as the EPS, that permits quotation updates on a real-
time basis, be required to record and maintain their quotation data.
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    \3\ While quotation data generally is provided directly by the 
exchange or system on which it is displayed, in this instance, the 
operator of the system, Pink Sheets, is not a registered broker-
dealer, a member of the NASD, or a national securities exchange.
    \4\ As defined in Rule 15c2-11(e) of the Act, 17 CFR 240.15c2-
11(e), the term inter-dealer quotation system means any system of 
general circulation to brokers or dealers which regularly 
disseminates quotations of identified brokers or dealers.
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    Under the proposed rule change, members that publish quotations on 
the EPS (or any similar automated quotation system) would be required 
to record and maintain priced quotations and unpriced indications of 
interest data and to report such quotation data to NASD Regulation upon 
its request. The proposed rule change would require members to record 
and report the time of the quotation displayed, the bid and bid 
quotation size, the offer and offer quotation size, and the prevailing 
inside bid and offer in the inter-dealer quotation system at the time 
of the quotation. The member would need to record this information for 
all updates in quotations or quotation size.
    The proposed rule change also would require that members preserve 
such records in accordance with Rule 17a-4(a) under the Act.\5\ 
Specifically, under Rule 17a-4,\6\ members would be required to 
preserve these records for a period of not less than six years, the 
first two years in an accessible place.
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    \5\ 17 CFR 240.17a-4(a).
    \6\ 17 CFR 240.17a-4.
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    The proposed rule change would not apply to quotations provided on 
an inter-dealer quotation system that is qualified pursuant to Section 
17B of the Act,\7\ because by definition, such a system would be 
sponsored and regulated by a registered securities association or 
national securities exchange, and quotation information would be 
available from the system directly. This includes, for example, the OTC 
Bulletin Board, which is sponsored and regulated by the NASD. In 
addition, the proposed rule change would not apply to an inter-dealer 
quotation system that is operated by a member of the NASD because the 
NASD would obtain quotation data (or in some cases, the display of 
limit orders) directly from the member that operates the system.
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    \7\ 15 U.S.C. 78q-2.
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    The proposed rule change would permit a member to use a reporting 
agent to provide the quotation data to NASD Regulation.\8\ NASD 
Regulation believes that most, if not all, members would use the 
services of a reporting agent, which would likely be the operator of 
the system, such as Pink Sheets with respect to the EPS. In this 
regard, NASD Regulation anticipates that the system operator, as 
reporting agent, would provide NASD Regulation all relevant quotation 
data directly on a daily or ongoing basis. The member, however, would 
remain ultimately responsible for compliance with all requirements of 
the proposed rule, notwithstanding the use of a reporting agent. If a 
member knows or has reason to believe that it or its reporting agent is 
not complying with the requirements of the rule, the member would be

[[Page 59484]]

required immediately to withdraw its priced quotations or unpriced 
indications of interest until such time that the member is satisfied 
that the quotation data is being properly maintained and reported. In 
this regard, NASD Regulation would expect a member to periodically 
review or monitor a reporting agent's activities to ensure continued 
compliance.
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    \8\ Proposed Rule 6630(e) provides that a ``Reporting Agent'' 
means a third party that enters into any agreement with a member 
pursuant to which such third party agrees to fulfill such member's 
obligations under this rule.
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\9\ 
which requires, among other things, that the Association's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD Regulation believes 
that the proposed rule change will provide it with the quotation data 
necessary to surveil for and enforce applicable NASD rules and the 
federal securities laws.
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    \9\ 15 U.S.C. 78o(b)(6).
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(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

    The proposed rule change was published for comment in NASD Notice 
to Members 00-17 (March 2000) (``Notice''). The comment period expired 
on April 10, 2000. Six comment letters were received in response to the 
Notice.\10\ Copies of the Notice and the comment letters have been 
provided to the Commission. Of the six comment letters received, two 
supported the proposal and four opposed the proposal. The majority of 
commenters, however, generally supported the concept that regulators 
should have access to the information sought by the NASD, but differed 
on the means of obtaining the information.
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    \10\ Comment letters were received from Thomas Murphy, Bishop, 
Rosen & Co. (``Bishop Rosen''); Elena Fusillo, Clark Dodge and 
Company (``Clark Dodge''); Trish Stone-Damen, IRM Distributors, Inc. 
(``IRM Distributors''); Michael Dorsey, Knight Securities, L.P. 
(``Knight Securities''); Cromwell Coulson, Pink Sheets (``NQB''); 
and Cindy Witt, US Bancorp Piper Jaffray (``Piper Jaffray'').
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    One commenter opposing the proposal stated that the proposed 
requirements were overly burdensome for members and recommended that 
the SEC require that the system operator, not the member, provide the 
information to the NASD. As an initial matter, NASD Regulation does not 
have the authority or jurisdiction to require a system operator to 
provide the necessary information unless the operator is an NASD 
member. In addition, SEC rules currently do not require the system 
operators to provide such information to the NASD. Further, although 
members are ultimately responsible for complying with the proposed 
rule, the proposed rule permits a member to enter into an agreement 
with a reporting agent pursuant to which the reporting agent agrees to 
fulfill the obligations of the member. In this regard, NASD Regulation 
expects that, in most cases, a system operator will transmit the 
quotation data to NASD Regulation pursuant to a reporting agent 
agreement with a member.
    Two commenters opposing the proposal recommended, as an 
alternative, the negotiation of a private contract between NASD 
Regulation and the system operator. Again, because NASD Regulation does 
not have jurisdiction over the system operator, NASD Regulation cannot 
rely on a private contract to obtain the required quotation data, since 
the system operator could at any time refuse to provide the data to 
NASD Regulation. Where the system operator is an NASD member, the 
proposed rule change specifically excludes quotations on such a system 
from the recording and reporting requirements because NASD Regulation 
can obtain the quotation data directly from the system operator.
    Two commenters viewed as excessively strict the requirement that 
members immediately withdraw their quotations in the information 
required by the proposed rule is not furnished to the NASD. In this 
regard, one commenter suggested that, as an alternative to requiring 
members to remove quotations entirely, the proposed rule change permit 
members to maintain unpriced indications of interest. NASD Regulation, 
however, believes that if quotation information, including unpriced 
indications of interest, is not properly recorded, NASD Regulation will 
be unable to ensure that members are in compliance with applicable 
rules. Therefore, the proposed rule requires members to immediately 
withdraw their quotations or unpriced indications of interest until 
such time as the member has obtained assurances that the quotation 
information is being properly recorded.
    In addition, one commenter stated that it is overly burdensome to 
place on a member firm the responsibility of determining whether its 
reporting agent is complying with the requirements of the rule. 
Instead, the commenter suggests that NASD Regulation notify the member 
in writing that the reporting agent is not complying. However, NASD 
Regulation believes that the responsibility should lie with the member 
to determine that, if it chooses to use a reporting agent, the 
reporting agent is reporting properly on the member's behalf.
    Finally, one commenter stated that the proposed rule change lacks 
objective standards for the form or means of delivery of the data to 
NASD Regulation. NASD Regulation has specified in the proposed rule 
change what quotation data and related information must be recorded and 
reported, and will prescribe the form in which this data will be 
required to be transmitted to NASD Regulation in a Notice to Members.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-
0609. 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

[[Page 59485]]

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 No. SR-NASD-00-42 and should be submitted by October 26, 
2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25596 Filed 10-4-00; 8:45 am]
BILLING CODE 8010-01-M