71174 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

42See November 20 Conversation, supra note 22.

43 15 U.S.C. 78s(b)(2).

44 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42201

(Dec. 3, 1999), 64 FR 69305.

4The NASD previously submitted Amendment

No. 1 to reflect the Association’s receipt of written

comments from the Regional Municipal Operations

Association. After consultation with the

Commission staff, the NASD withdrew Amendment

No. 1 and has incorporated RMOA’s comments and

the NASD’s response in Amendment No. 2. As

explained in the original proposal, the NASD

represents that it will file a separate proposal to

establish appropriate fees and charges for TRACE

prior to implementation.

5The NASD represents that it will rename

TRACE. When a new name is selected, the NASD

will amend the TRACE Rules prior to

implementation of the service to reflect that name

change.

securities. The Commission finds that

the proposed amendments to NASD

Rules 2710 and 2810 will protect

investors and the public interest by

helping to ensure that investors in DPPs

and REITs that are sold in a public

offering receive ongoing valuation

information concerning their

investments.

G. Implementation of the Proposed Rule

Change

The NASD has requested that the

proposed rule change become effective

three months after the NASD notifies its

members of Commission approval of the

proposal.42 The Commission believes

that the proposed period for

implementing the proposal will provide

NASD members and service

organizations with time to modify their

computer systems to comply with the

proposal, thereby helping to ensure that

NASD members are adequately prepared

to implement the proposed changes.

H. Accelerated Approval of Amendment

Nos. 1 and 2

The Commission finds good cause for

approving Amendment Nos. 1 and 2

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. Amendment

No. 1 clarifies that an NASD member is

not obligated to guarantee the accuracy

of an estimated value obtained from a

third-party source. Amendment No. 2

strengthens the proposal by prohibiting

a member from using an estimated

valuation on a customer account

statement if the member can

demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate. Accordingly,

the Commission finds that it is

consistent with Sections 15A(b)(5) and

19(b) of the Act to approve Amendment

Nos. 1 and 2 on an accelerated basis.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendments

Nos. 1 and 2, including whether

Amendment Nos. 1 and 2 are 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, DC 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

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–00–13 and should be

submitted by December 20, 2000.

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,43 that the

proposed rule change (File No. SR–

NASD–00–13), as amended, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.44

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30374 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43616; File No. SR–NASD–

99–65]

Self-Regulatory Organizations; Notice

of Filing of Amendment Nos. 2 and 3

to Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to the Creation of

a Corporate Bond Trade Reporting and

Transaction Dissemination Facility and

the Elimination of Nasdaq’s Fixed

Income Pricing System

November 24, 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 November

17, 2000 and November 22, 2000, the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

Amendment Nos. 2 and 3 to the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the NASD. The

proposed rule change was published for

comment in the Federal Register on

December 10, 1999.3 The Commission is

publishing this notice to solicit

comments on Amendment Nos. 2 and 3

to the proposed rule change from

interested persons.4

Amendment No. 2 reflects certain

changes proposed by the commenters in

response to the proposed rule change, as

originally noticed, or changes suggested

by the NASD staff after additional

review. Amendment No. 3 sets forth the

statutory basis of the proposed rule

change. For convenience, the proposed

NASD Rules in Amendment No. 2 are

referred to as the TRACE Rules, in

reference to the proposed facility, which

is currently referred to as the Trade

Reporting and Comparison Entry

Service (TRACE).5

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD proposes the following

amendments to the rule text (as

originally proposed) in response to

comment letters or suggestions by the

NASD staff after additional review.

Proposed additions are italicized;

proposed deletions are in brackets.

* * * * *

6200. Trade Reporting and Comparison

Entry Service (TRACE)

6210. Definitions

The terms used in this [paragraph]

Rule 6200 Series shall have the same

meaning as those defined in the

Association’s By-Laws and Rules unless

otherwise specified.

(a) The term [‘‘TRACE eligible

Security’’] ‘‘TRACE-eligible security’’

shall mean all United States dollar

denominated debt securities that are

registered with the Securities and

Exchange Commission and issued by

United States and/or foreign private

corporations and that are depository

eligible securities as defined in Rule

11310(d); all debt securities qualified as

PORTAL securities pursuant to the Rule

5000 Series; all investment-grade rated

debt securities that are issued pursuant

to Section 4(2) of the Securities Act of

1933 and that are depository eligible

securities pursuant to Rule 11310(d).

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71175

(b) The term ‘‘Trade Reporting And

Comparison Entry Service’’ or ‘‘TRACE’’

shall mean the automated system owned

and operated by the the NASD [The

Nasdaq Stock Market, Inc.] that, among

other things, accommodates reporting[,

comparison,] and dissemination of

transaction reports where applicable in

TRACE-eligible securities [Securities]

and which may submit ‘‘locked-in’’

trades to National Securities Clearing

Corporation for clearance and

settlement and provide participants

with monitoring and risk management

capabilities to facilitate a ‘‘locked-in’’

trading environment.

(c) The term ‘‘reportable TRACE

transaction’’ shall mean [all] any

transaction[s] in a TRACE-eligible

security [Eligible Security as required by

this rule].

(d) The term ‘‘time of execution’’ for

a transaction in a TRACE-eligible

security shall be the time when the

parties agree to all of the terms of the

transaction [are agreed to which] that

are insufficient to calculate the dollar

price of the trade. The time of execution

for transactions involving TRACEeligible securities that are trading

‘‘when issued’’ on a yield basis shall be

when the yield for the transaction has

been agreed to by the parties.

(e) The term [‘‘Parties to the

Transaction’’] ‘‘parties to the

transaction’’ shall mean the executing

broker/dealer, introducing broker/

dealer, and clearing brokers, if any.

(f) The term ‘‘TRACE Participant’’

shall mean any NASD member [in good

standing] that uses the TRACE system.

[(g) The term ‘‘TRACE Reporting

Party’’ shall mean a member of the

Association that is registered as a

TRACE participant with the Association

and obligated to report a TRACE

transaction pursuant to TRACE system

rules and who is member of a registered

clearing agency for clearing or

comparison purposes or has a clearing

arrangement with such a member.]

[(h) The term ‘‘TRACE Non-Reporting

Party’’ shall mean a member of the

Association that is registered as a

TRACE participant with the Association

who is not obligated to report under

TRACE system rules for a particular

transaction to which it is a party and

who is member of a registered clearing

agency for clearing or comparison

purposes or has a clearing arrangement

with such a member. It shall also mean

any customer who is not a member of

the Association.]

[(i) The term ‘‘Clearing Broker/Dealer’’

or ‘‘Clearing Broker’’ shall mean the

member firm that has been identified in

the TRACE system as principal for

clearing and settling a trade, whether for

its own account or for a correspondent

firm.]

[(j) The term ‘‘Correspondent

Executing Broker/Dealer’’ or

‘‘Correspondent Executing Broker’’ shall

mean the member firm that has been

identified in the TRACE system as

having a correspondent relationship

with a clearing firm whereby it executes

trades and the clearing function is the

responsibility of the clearing firm.]

[(k)(g) The term [‘‘Introducing Broker/

Dealer’’ or ‘‘introducing broker’’]

‘‘Introducing Broker’’ shall mean the

member firm that has been identified in

the TRACE system as a party to the

transaction, but does not execute or

clear trades.

[(l) The term ‘‘Browse’’ shall mean the

functions of TRACE that permit a

Participant to review (or query) for

trades in the system identifying the

Participant as a party to the transaction,

subject to the specific uses contained in

the TRACE Users Guide.]

[(m) The term ‘‘Gross Dollar

Thresholds’’ in the risk management

application of TRACE shall mean the

daily dollar amounts for purchases and

sales that a clearing broker establishes

in the TRACE system for each

correspondent executing broker that

may be raised or lowered on an interday or intra-day basis. If the value of a

correspondent’s trades equals or

exceeds the gross dollar thresholds, the

system will alert the clearing broker.]

[(n) The term ‘‘Pre-alert’’ shall mean

the alert notifying the correspondent

executing broker and the clearing broker

that the correspondent executing broker

has equaled or exceeded 70% of the

purchase or sale gross dollar limits

established by the clearing broker. The

Association reserves the right to modify

the percentage of the pre-alert as

necessary and upon prior notification to

the TRACE Participants.]

[(o) The term ‘‘Single Trade Limit’’

shall mean the dollar amount

established by the Clearing Broker for a

single trade that enables a TRACE

clearing firm to review the trade before

it is obligated to clear the trade. When

a correspondent executing broker

negotiates a trade that equals or exceeds

the Single Trade Limit, its clearing

broker shall have a period of thirty (30)

minutes to review and agree to decline

to act as principal for clearing that trade.

If a Clearing Broker fails to set a single

trade limit the TRACE system will

automatically set a default single trade

limit of $0 for the Correspondent

Broker. The Association reserves the

right to modify the minimum/maximum

dollar amount of the Single Trade Limit

as well as the time frame for clearing

broker review as necessary and upon

prior notification to the TRACE

Participants.]

[(p)] (h) [For purposes of these rules,

the] The term ‘‘Investment Grade’’ shall

mean any TRACE-eligible security rated

by a nationally recognized statistical

rating organization in one of its four

highest generic rating categories.

[(q)] (i) [For purposes of these rules,

the] The term ‘‘Non-Investment Grade’’

shall mean any TRACE-eligible security

that is unrated, non-rated, split-rated

(where one rating falls below

investment grade), or does not meet the

definition of [investment grade]

Investment Grade in paragraph [(p)]

(h)[,] above.

6220. Participation in TRACE

(a) Mandatory Member Participation [for

Clearing Agency Members]

(1) Pursuant to Article VII, Section

1(a)(vi) and (vii) of the By-Laws,

participation in TRACE is mandatory for

all brokers/dealers that are members of

a clearing agency registered with the

Commission pursuant to Section 17A of

the Act, and for all brokers that have a

clearing arrangement with such a

broker. Such participation shall include

the reconciliation of all over the counter

clearing agency eligible transactions

involving TRACE securities.] Member

participation in TRACE for trade

reporting purposes is mandatory. Such

mandatory participation obligates

members to submit transaction reports

in TRACE-eligible securities in

conformity with the Rule 6200 Series.

(2) Participation in TRACE shall be

conditioned upon the TRACE

Participant’s initial and continuing

compliance with the following

requirements:

(A) execution of, and continuing

compliance with, a TRACE Participant

Application Agreement and all

applicable rules and operating

procedures of the Association and the

Commission; and

[(B) membership in, or maintenance

of, an effective clearing arrangement

with a member of a clearing agency

registered pursuant to the Act;]

[(C)] (B) maintenance of the physical

security of the equipment located on the

premises of the TRACE Participant to

prevent unauthorized entry of

information into TRACE.[; and]

[(D) acceptance and settlement of each

trade that TRACE identifies has having

been effected by such TRACE

Participant, or if settlement is to be

made through a clearing member,

guarantee the acceptance and settlement

of each TRACE identified trade by the

clearing member on the regularly

scheduled settlement date.]

71176 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

[(3) Participation in TRACE as a

Clearing Broker shall be conditioned

upon the Clearing Broker’s initial and

continuing compliance with the

following requirements:]

[(A) execution of, and continuing

compliance with, a TRACE Participant

Application Agreement and all

applicable rules and operating

procedures of the Association and the

Commission;]

[(B) membership in a clearing agency

registered pursuant to the Act;]

[(C) maintenance of the physical

security of the equipment located on the

premises of the TRACE Clearing Broker

to prevent the unauthorized entry of

information into TRACE; and]

[(D) acceptance and settlement of each

trade that TRACE identifies as having

been effected by itself or any of its

correspondents on the regularly

scheduled settlement date.]

[(4)] (3) Each TRACE Participant shall

be obligated to inform the Association of

non-compliance with, or changes to, any

of the participation requirements set

forth above.

(b) Participant Obligations in TRACE

(1) Access to TRACE

Upon execution and receipt by the

Association of the TRACE Participant

Application Agreement, a TRACE

Participant may commence input and

validation of trade information in

TRACE-eligible securities. TRACE

Participants may access the service via

an NASD-approved facility during the

hours of operation.

(2) Clearing Obligations

If at any time a TRACE Participant

fails to maintain a clearing arrangement,

it shall be removed from the TRACE

system until such time as a clearing

arrangement is reestablished and notice

of such arrangement is provided to the

Association. If, however, the

Association finds that the TRACE

Participant’s failure to maintain a

clearing arrangement is voluntary, the

withdrawal will be considered

voluntary and unexcused. This section

shall not apply to TRACE Participants

whose trading activity obviates the need

for maintaining a clearing relationship.

[(3) Clearing Broker Obligations]

[(A) Clearing brokers may cease to act

as principal for a correspondent

executing broker at any time provided

that notification has been given to,

received and acknowledged by the

TRACE Operations Center and

affirmative action has been completed

by the Center to remove the

correspondent broker from TRACE. The

clearing broker’s obligation to accept

and clear trades for its correspondents

shall not cease prior to the completion

of all of the steps detailed in this

subparagraph (3).]

[(B) TRACE Clearing brokers shall

establish for each correspondent

executing broker daily Gross Dollar

Thresholds and may raise or lower the

thresholds on an inter-day or intra-day

basis. TRACE clearing brokers will

receive a system alert when a

correspondent executing broker equals

or exceeds its gross dollar thresholds

and will also receive a system pre-alert

when a correspondent executing broker

equals or exceeds 70% of the daily

thresholds.]

[(C) For trades effected by a

correspondent executing broker that

equal or exceed the correspondent’s

Single Trade Limit set by the clearing

broker in TRACE, clearing brokers have

30 minutes from the time of trade report

input to TRACE to review the trade and

accept or decline to act as principal to

the trade. If the clearing broker does not

make an affirmative acceptance or

declination of the trade report within 30

minutes, the trade report will be subject

to normal TRACE processing and the

clearing broker will be obligated to act

as principal for the trade.]

6230. Transaction Reporting

(a) When and How Transactions Are

Reported

(1)(A) [All NASD members] Members

that are required to report transaction

information pursuant to paragraph (b)

below shall, within 1 hour after trade

execution, transmit through TRACE

during system hours, or if TRACE is

unavailable due to system or

transmission failure, by telephone to the

TRACE Operations Center, reports of

transactions in TRACE-eligible

securities [Securities] executed between

8:00 a.m. and 6:30 p.m. Eastern Time [or

shall utilize the Browse function in

TRACE to accept or decline trades

within 30 minutes after execution

according to paragraph (b) of this rule].

Transactions not reported within 1 hour

after execution shall be designated as

late; provided, however, that if [unless]

inadequate time remains prior to system

close to allow a timely report[. In this

situation], the member may report [must

be made] the transaction the next day at

system open as designated ‘‘as/of.’’

(B) Members have an ongoing

obligation to report transaction

information promptly, accurately, and

completely. The member may employ

an agent for the purpose of submitting

transaction information; however, the

primary responsibility for the timely,

accurate, and complete reporting of

TRACE information remains the

nondelegable duty of the member

obligated to report the transaction.

(2) Transaction Reporting Between 6:30

p.m. and 8:00 a.m. Eastern Time

(A) Reports of transactions in TRACEeligible securities [Securities] executed

after 6:30 p.m. Eastern Time and before

12:00 a.m. Eastern Time shall be

reported on the next day and be

designed ‘‘as/of.’’[.] Such trade reports

will not be included in daily market

aggregates and will be disseminated

beginning at 8:00 a.m. Eastern Time on

the day of receipt.

(B) Report of transaction in TRACEeligible securities [Securities] executed

after 12:00 a.m. Eastern Time and before

8:00 a.m. Eastern Time shall be reported

that same day beginning at 8:00 a.m.

Eastern Time[.] within the maximum

time frame mandated. Such trade

reports will be included in that day’s

market aggregates and disseminated

upon receipt.

[A pattern or practice of late reporting

without exceptional circumstances may

be considered inconsistent with high

standards of commercial honor and just

and equitable principles of trade, in

violation of Rule 2110.]

(b) Which Party Reports Transaction

[Both parties executing a transaction

shall, subject to the input requirements

below, either input trade reports into

the TRACE system or utilize the Browse

feature to accept or decline a trade

within the applicable time frames as

specified in paragraph (a)(1) of this

Rule.] Trade data input obligations are

as follows:

(1) [in] In transactions between two

[TRACE Participants] members, the

member representing the sell side shall

submit a trade report to TRACE;

(2) [in] In transactions [between]

involving a[n NASD] member and a nonmember including a customer, the

[NASD] member shall [be required to]

submit a trade report to TRACE.

(c) Trade Information To Be Reported

Each TRACE trade report shall

contain the following information:

(1) CUSIP number or NASD symbol;

(2) Number of bonds as required by

paragraph (d) below;

(3) Price of the transaction as required

by paragraph (d) below;

(4) A symbol indicating whether the

transaction is a buy, sell or cross;

(5) Date of Trade Execution (as/of

trades only);

(6) Contra-party’s identifier;

(7) Capacity—Principal or Agent (with

riskless principal reported as principal)

as required by paragraph (d) below;

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71177

(8) Time of trade execution;

(9) Reporting side executing broker as

‘‘give up’’ (if any);

(10) Contra side [introducing broker]

Introducing Broker in case of ‘‘give up’’

trade;

(11) Stated commission;

(12) Such trade modifiers as required

by either: (a) the TRACE [System] Rules;

and/or (b) the TRACE Users Guide[.];

and

(13) Yield as required by SEC Rule

10b–10.

(d) Procedures for Reporting Price,

Capacity, Volume

(1) For agency and principal

transactions, report the price, including

the mark-up, mark-down or commission

(commission entered separately). Do not

include accrued interest.

(2) For agency and principal

transactions, report the actual number of

bonds traded. Baby bonds (those with a

face value of less than $1,000) should be

reported expressed as a decimal.

(3) For in-house [In house] cross

transactions, report [should be reported]

as follows: Agency cross—report once as

an agency trade; Principal cross—report

twice, once as an individual principal

buy and once as an individual principal

sell.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be required to be reported:

(1) Transactions [which] that are part

of a primary distribution by an issuer;

(2) Transactions made in reliance on

Section 4(2) of the Securities Act of

1933;

(3) Transactions in listed securities

that are both executed on, and reported

to, a national securities exchange;

(4) Transactions where the buyer and

the seller have agreed to trade at a price

substantially unrelated to the current

market for the TRACE-eligible security

(e.g., to allow the seller to make a gift).

(f) Compliance With Reporting

Obligations

A pattern or practice of late reporting

without exceptional circumstances may

be considered conduct inconsistent with

high standards of commercial honor

and just and equitable principles of

trade, in violation of Rule 2110.

Rule 6231. Reporting of Transaction

Information Sent to Clearing Agency

(a) When and How Transactions Are

Reported

Each NASD member shall submit to

TRACE the same transaction

information (for transactions in TRACEeligible securities) that the member

supplies to its registered clearing agency

for clearance and settlement. Such

information shall be submitted to

TRACE by the time the member

transmits the information to its

registered clearing agency.

(b)[(b)]

(1) In transactions between two

members, both the member representing

the sell side and the member

representing the buy side shall submit

the transaction information specified in

Paragraph (a) above to TRACE.

(2) In transactions involving a

member and a non-member, including a

customer, the member shall submit the

transaction information specified in

paragraph (a) above to TRACE.

[6240. TRACE Processing]

[Locked-in trades may be determined

in the TRACE system by matching the

trade information submitted by the

reporting parties through one of the

following methods:]

[(a) Trade by Trade Match]

[Both parties to the trade submit

transaction data and the TRACE system

performs an on-line match;]

[(b) Trade Acceptance]

[The TRACE reporting party enters its

version of the trade into the system and

the TRACE non-reporting contra party

reviews the trade report and accepts or

declines the trade. An acceptance

results in a locked-in trade; a declined

trade report is purged from the TRACE

system at the end of trade date

processing;]

[(c) Post Trade Date Processing]

[T+N entries may be submitted during

system hours each business day. At the

end of daily matching, all declined trade

entries will be purged from the TRACE

system. TRACE will not purge any open

trade (i.e., unmatched or unaccepted) at

the end of its entry day, but will carryover such trades to the next business

day for continued comparison and

reconciliation. TRACE will

automatically lock in and submit to

NSCC as such any carried-over T to

T+21 (calendar day) trade if it remains

open as of 2:30 p.m. on the next

business day. TRACE will not

automatically lock in T+22 (calendar

day) or older open ‘‘as-of’’ trades that

were carried-over from the previous

business day; these will be purged by

TRACE at the end of the carry-over day

if they remain open. Members may resubmit these T+22 or older ‘‘as-of’’

trades as a comparison-only entry into

TRACE on the next business day for

continued comparison and

reconciliation for up to one calendar

year.]

[6250. TRACE Risk Management

Functions]

[The TRACE system will provide the

following risk management capabilities

to clearing brokers:]

[(a) Trade File Scan]

[Clearing brokers will be able to scan

the trading activities of their

correspondent executing brokers

through the TRACE system.]

[(b) Gross Dollar Threshold]

[Clearing brokers will be able to

establish, on an inter-day or intra-day

basis, gross dollar thresholds for

purchases and sales for their

correspondent executing brokers, and

the TRACE system will alert the clearing

broker and its correspondent if the

correspondent’s trading activity equals

or exceeds either threshold.]

[(c) Gross Dollar Threshold Pre-Alert]

[In addition to the gross dollar

threshold alert, the TRACE system will

also alert the clearing broker and its

correspondent when the

correspondent’s trading activity equals

or exceeds 70% of either gross dollar

threshold.]

[(d) On-line Review]

[Clearing brokers that access TRACE

through a computer interface will be

able to receive intra-day activity of their

correspondents as it is reported.]

[(e) Single Trade Limit]

[Clearing brokers will have 30

minutes from trade report input to

TRACE to review any single trade

executed by their correspondent

executing brokers that equals or exceeds

an amount set by the clearing broker for

that correspondent in order to decide to

act as principal. If, however, the

clearing broker does not affirmatively

accept or decline the trade, at the end

of 30 minutes, the system will subject

the trade to normal TRACE processing

and the clearing broker will be obligated

to act as principal to clear the trade.]

[(f) Super Cap]

[The Super Cap will be set as an

amount to be determined by the

Clearing Broker, but in no event less

than the gross dollar threshold. When a

correspondent’s Super Cap is reached,

notice will be furnished to TRACE

participants, and no trade in excess of

an amount set by the clearing broker for

that correspondent will be accepted for

TRACE processing unless the clearing

broker accepts the trade within 30

minutes of execution.]

71178 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

[6260. Obligation to Honor Trades]

[If a TRACE Participant is reported by

TRACE as a party to a trade that has

been treated as locked-in and sent to

NSCC, notwithstanding any other

agreement to the contrary, that party

shall be obligated to act as a principal

to the trade and shall honor such trade

on the scheduled settlement date.]

[6261. Compliance with TRACE Rules

and Trade Reporting Requirements]

[Failure of an NASD member, or

person associated with a member, to

comply with any of the rules or

requirements of TRACE, or failure of a

member or associated person to comply

with any of the transaction reporting

requirements for TRACE-Eligible

Securities may be considered conduct

inconsistent with high standards of

commercial honor and just and

equitable principals of trade, in

violation of Rule 2110.]

[6270] 6240. Audit Trail Requirements

The data elements specified in Rule

[6220(c)] 6230(c) are critical to the

Association’s compilation of a

transaction audit trail for regulatory

purposes. As such, all member firms

[utilizing] using the TRACE [Service]

service have an ongoing obligation to

input [6220(c)] Rule 6230(c) information

accurately and completely.

[6280] 6250. Termination of TRACE

Service

The Association may, upon notice,

terminate TRACE service to a

[Participant] member in the event that

a[[n] TRACE Participant] member fails

to abide by any of the rules or operating

procedures of the TRACE service or the

Association, or fails to honor

contractual agreements entered into

with the Association or its subsidiaries,

or fails to pay promptly for services

rendered by the TRACE [Service] service

[6290] 6260. Dissemination of

Corporate Bond Trade Information

[Trade reports entered into TRACE

will be collected, processed and

disseminated on a real-time basis

between 8 a.m. and 6:30 p.m. Eastern

Time.]

(a) The Association will disseminate

transaction information immediately

upon receipt of transaction reports

between 8 a.m. and 6:30 p.m. Eastern

Time relating to transactions in

Investment Grade corporate bonds

having an initial issuance size of $1

billion or greater.

(b) All trade reports in TRACE-eligible

securities approved for dissemination

and submitted to TRACE prior to 5:15

p.m. Eastern Time will be included in

the calculation of market aggregates and

last sale except 1)[.] trades reported on

an ‘‘as of’’ basis, 2) ‘‘when issued’’

trades executed on a yield basis, or 3)

trades in baby bonds with a par value

of less than $1,000.

[6291] 6270. Lead Underwriter

Information Obligation

In order to facilitate trade reporting of

secondary transactions in TRACEeligible securities, the member that is

the lead underwriter of any newly[-

]issued TRACE-eligible security shall

provide to the TRADE Operations

Center the CUSIP number of any debt

issue no later than on the effective date

of the offering.

* * * * *

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. The NASD has

prepared summaries, set forth in

Sections (A), (B), and (C) below, of the

most significant aspects of such

statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

In 1998, SEC Chairman Arthur Levitt,

in recognition of the relative lack of

transparency in the corporate debt

market, called upon the NASD to do the

following: (1) Adopt rules requiring

NASD members to report all

transactions in corporate bonds to the

NASD and to develop systems to receive

and distribute transaction prices on an

immediate basis; (2) create a database of

transactions in corporate bonds to

enable regulators to take a proactive role

in supervising the corporate debt

market; and (3) create a surveillance

program, in conjunction with the

development of a database, to better

detect fraud and foster investor

confidence in the fairness of the

corporate debt market. The NASD notes

that after extensive consultation with

industry professionals, it filed SR–

NASD–99–65. The NASD also states

that it consulted extensively with

industry professionals again before

filing Amendment Nos. 2 and 3.

TRACE has generated significant

comment. The NASD has identified the

following common areas in the

comment letters: (a) TRACE ownership,

operation, and governance; (b) the

proposed comparison function; (c)

collection and dissemination of data; (d)

TRACE data; (e) implementation

schedules; and (f) T + 1 clearance and

settlement and straight-throughprocessing (STP) issues. These issues

are addressed below. In addition, the

NASD is proposing to add bond yield as

a mandatory element of reporting,

which is discussed as item (g) below.

a. TRACE Ownership, Operation and

Governance

As noted above, at the request of the

SEC, the NASD has proposed to create

a system for the reporting,

dissemination and surveillance of fixed

income transactions. Many commenters

expressed concern about, or requested

further information regarding, the roles

and responsibilities of NASD and

Nasdaq in this initiative. In response to

those concerns, the NASD states that it

will take the following steps to clarify

the roles of NASD, NASD Regulation,

and Nasdaq:

(1) The NASD will amend proposed

TRACE Rule 6210 to clarify that it is the

owner and operator of the facility,

TRACE, to collect information on fixed

income transactions and to disseminate

such information;

(2) The NASD will file an application

with the SEC to become registered as a

exclusive securities information

processor (ESIP) under Section 11A of

the Act;

(3) The NASD, with the approval of

the NASD Board of Governors, will

establish a body of rules and policies

that will be the bases on which NASD

staff will administer the reporting and

dissemination facility and assure

compliance with the TRACE Rules;

(4) NASD Regulation will aid the

NASD in establishing appropriate

regulatory rules and policies and in

performing all the regulatory functions

associated with TRACE; and

(5) Nasdaq will provide technology

and operational support pursuant to a

contractual arrangement.

The NASD believes that the structure

outlined above is responsive to many of

the concerns raised by commenters. The

NASD, the sole self-regulatory

organization (‘‘SRO’’) for the over-thecounter (OTC) markets, represents that

it will exercise full ownership and

operational control over the TRACE

project, including day-to-day

administration and the information

collection process. The NASD states that

it will become an ESIP under Section

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71179

11A of the Act, providing appropriate

regulatory oversight by the SEC of the

NASD’s operations, administration, and

fees. The NASD also represents that it

will be able to employ Nasdaq as its

vendor of information processing

services. The NASD believes that this

will allow it to take advantage of

Nasdaq’s prior experience, yet exercise

appropriate regulatory and

administrative control over the

collection of the information, the fees

charged, the selection of vendors, and

other important administrative and

regulatory matters. The NASD believes

that this structure parallels the structure

used by other registered ESIPs under

Section 11A, such as the Consolidated

Tape Association (CTA) and Options

Price Reporting Authority (OPRA). For

example, the NASD represents that

CTA, for purposes of Networks A and B,

and OPRA, for purposes of options

information, obtain information

processing services by agreement with

SIAC, and do so without decreasing

their control or ceding such control to

SIAC.

Although ultimate statutory authority

will reside with the NASD Board of

Governors, to more fully incorporate

bond market expertise into TRACE

operations and decision-making, the

NASD proposes to create a new

committee, the Bond Transaction

Reporting Committee (BTRC), to advise

the NASD Board. BTRC would consist

of 8 persons selected by the NASD

Board. Four of the members will be

recommended by the staff of the NASD,

and the other four members will be

recommended by the Bond Market

Association (TBMA). Selections would

not include current staff or officers of

either the NASD or TBMA. Both the

NASD and TBMA would commit to

having their selections consist of a

broad range of bond market participants

and include public representation.

BTRC would provide significant input

to the NASD Board on issues related to

the operation of TRACE, including

future NASD proposals to phase in

dissemination and the setting of fees for

dissemination of real-time TRACE data

to the public. In addition, BTRC will be

tasked with reviewing the effects upon

liquidity associated with the

dissemination of fixed income

transaction information. BTRC will

make recommendations to the NASD

Board concerning appropriate time

frames for public dissemination of

smaller, less-actively traded issues.

The NASD represents that the NASD

Board will give significant weight to the

advice and recommendations of the

BTRC. The NASD represents, however,

that the formation and operation of

BTRC shall in no way limit or hinder

the responsibility and ability of the

NASD Board to make final decisions, as

required in accordance with the

statutory obligations and responsibility

articulated in Section 15A of the Act

and the NASD By-Laws. In addition, the

NASD represents that its staff may

continue to make independent

recommendations or proposals to the

NASD Board concerning bond market

issues.

In addition to concern expressed by

some commenters about the role of

Nasdaq in the TRACE initiative, other

commenters suggested that a superutility, rather than the NASD or Nasdaq,

be used to collect fixed income

transaction information. Others

suggested the creation of a new SRO or

vesting that authority in the NSCC.

Since the NASD is the SRO charged

with regulating the OTC markets and

95% of corporate bond transactions

occur in the OTC market, the NASD

believes that it is the SRO most

appropriately situated to undertake this

regulatory initiative and to assure

compliance with it. It believes that

creating a super-utility or a new SRO

would not be cost-effective, would

result in regulatory duplication and

duplicative fees to the industry, and

would delay greatly the implementation

of reporting and dissemination.

Finally, one set of commenters,

consisting of a data vendor and

securities exchange, urged the

Commission to adopt a de-centralized,

multiple SRO-collector and

disseminator model for fixed income

transaction reporting. These

commenters assert that such a model

would encourage innovation and

competition among organizations for the

collection, comparison and

dissemination of corporate bond trade

data. While the NASD agrees that

competition is an important goal, the

NASD believes that the Commission and

Congress have long recognized that in

the area of collection, consolidation,

and dissemination of market data

information, other factors, such as

equality of access, reasonableness of

fees, and sufficient system capacity and

security, are equally important.

b. Trade Comparison

Some commenters expressed concern

that the proposal would mandate that

all corporate bond trade comparison

take place within TRACE. Among other

things, commenters objected to

mandated comparison through TRACE

because, they argued, it would result in

Nasdaq having an exclusive franchise

over the provision of comparison

services for corporate bond trades.

The NASD believes that the proposal

to require mandatory comparison

through TRACE was intended to ensure

that the corporate bond trade data

reported to and disseminated by the

NASD was as accurate as possible, as

evidenced by the acceptance of the trade

by both parties. In addition to the fact

that the NASD, not Nasdaq, will own

and control TRACE, to further alleviate

concerns expressed by the commenters,

the NASD proposes to delete the TRACE

Rules regarding trade comparison. (The

NASD also proposes to delete the risk

management provisions contained in

the initial proposal.) Although NASD

plans to offer voluntary comparison

services to NASD members, firms will

be free to select other entities to

compare their transactions in TRACEeligible securities. The NASD represents

that elimination of mandatory

comparison through TRACE will

provide an opportunity for other entities

to offer competing value-added

comparison services for fixed income

transactions.

As a result of Amendment No. 2, both

compared and un-compared corporate

bond trade data will be disseminated by

the NASD. The NASD represents that it

will amend the proposal further to

require TRACE participants, whether

reporting or non-reporting members, to

provide to the NASD the same data on

TRACE-eligible securities transactions

that is provided to the member’s

registered clearing agency, within the

same time frame, and, to the extent

possible, in the same format. (Proposed

TRACE Rule 6231.) This requirement is

in addition to a member’s obligation, if

any, to report a fixed income transaction

on a real-time basis under proposed

TRACE Rule 6230. The NASD believes

that this will improve considerably the

quality of the data for surveillance

purposes, while imposing minimal

additional burdens on the firms.

c. Collection and Dissemination of

TRACE Data

The NASD originally proposed a

reporting plan that began first with high

yield and convertible debt securities,

followed by an alphabetical phase-in of

all other TRACE-eligible corporate

bonds. The initial time frame proposed

for reporting trades would be no later

than 1 hour after trade execution, which

subsequently would be reduced to 15

minutes. After a brief start-up period

during which the NASD would conduct

a data integrity review, all eligible trade

reports received would thereafter be

disseminated immediately, subject to

TRACE’s proposed limitations on

reporting the actual size of large

71180 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

6Trade reports for Rule 144A securities will not

be considered as part of the total average daily

volume of the TRACE system for purposes of Phase

II. In addition, the NASD notes that the proposed

Phase II formula will result in an overlap with

Phase I securities that may reduce the number of

newly disseminated bonds in the second phase. The

NASD represents that it will ask BTRC to review the

Phase II dissemination formula in more detail to

determine if a different approach to expanding the

universe of disseminated bonds in Phase II is

appropriate.

7Securities Exchange Act Release No. 42208 (Dec.

9, 1999), 64 FR 70613 (Dec. 17, 1999).

8 64 FR 70613, 70615.

9 Id.

transactions to the public through data

vendors.

Some commenters raised concerns

that this plan failed to take into account

the potential negative impact on

liquidity that immediate dissemination

of bond transaction reports could have

on smaller, less-activity traded issues.

Additional concerns were raised

regarding likely confusion relating to

trade reporting obligations in a plan that

involved multiple phases and categories

of fixed income securities. In response,

the NASD has determined to propose a

new phase-in methodology. Under this

new approach, a member’s obligation to

report and the NASD’s initial

dissemination of reports in TRACEeligible securities will take place as

follows:

Phase I—Three Months in Length

• NASD members will be required to

report all transactions in TRACE-eligible

securities within 1 hour of trade

execution.

• NASD will immediately

disseminate transaction reports to the

public and data vendors of all

transactions in publicly offered,

investment grade corporate bonds

having an initial issuance of $1 billion

or greater. If applicable, these reports

will be disseminated using the large

volume trade dissemination cap

identifiers (i.e., ‘‘1MM+’’ for high yield

securities and ‘‘5MM+’’ for investment

grade corporate bonds) that were

proposed in NASD’s original TRACE

filing.

• Transaction reports in the high

yield debt securities denominated as the

‘‘FIPS 50’’ at the time of filing becomes

effective will also be disseminated—also

using the ‘‘1MM+’’ large volume trade

dissemination cap identifiers.

• The BTRC will commence its

examination of the impact of TRACE’s

transaction dissemination on liquidity.

By the end of Phase I (three months after

the start of TRACE reporting), the BTRC

will provide its recommendations for

appropriate dissemination protocols

covering those investment grade bonds,

starting with the largest issuance size,

that, when combined together, make up

the top 50% (by dollar volume) of such

bonds.

Phase II—Six Months in Length

• NASD members will continue to be

required to report all transactions in

TRACE-eligible securities within 1 hour

of trade execution.

• NASD will disseminate transaction

reports to the public and data vendors

of all transactions in the top 50% (by

dollar volume) of investment grade

bonds consistent with the

recommendations of the BTRC (subject

to the approval of the NASD Board and

the SEC.6 If applicable, these reports

will be disseminated, subject to using

the large-volume trade dissemination

cap identifiers (i.e., ‘‘1MM+’’ for high

yield securities and ‘‘5MM+’’ for

investment grade securities) that were

proposed in NASD’s original TRACE

filing.

• Three months after the start of

Phase II (six months after the start of

TRACE reporting), the 1 hour maximum

time period to submit TRACE trade

reports will be reduced to 15 minutes,

subject to the ability of firms to comply

technologically and operationally.

• Transaction reports in the ‘‘FIPS

50’’ will continue to be disseminated—

also using the large volume trade

dissemination cap identifiers (i.e.,

‘‘1MM+’’).

• The BTRC will continue its

evaluation of the impact that

dissemination of transaction

information has on liquidity. By the end

of Phase II (9 months after the start of

TRACE reporting), the BTRC will

provide recommendations for

appropriate dissemination protocols for

all remaining TRACE issues eligible for

public dissemination.

During all phases, the NASD

represents that the BTRC continually

will evaluate industry technological

readiness with a view to reducing

further the post-execution deadlines for

submitting trade reports to TRACE. The

NASD believes that this new approach

to collecting and disseminating realtime market data draws an appropriate

balance between the Commission’s

desire for quick and measurable

progress in improving transparency in

the corporate bond market and industry

concerns about liquidity. Moreover, the

NASD believes that the new approach

captures more information for

regulatory purposes in a shorter time

frame than under NASD’s earlier

TRACE transaction reporting plan. In

turn, the NASD believes that the new

approach will allow it to more quickly

to develop and refine its surveillance

plan for the fixed income market.

d. TRACE Data

Many commenters raised concerns

that TRACE would grant the NASD

exclusive control over corporate bond

trade data. The NASD, in response to

concerns raised regarding such

exclusive control, intends to register as

an ESIP under Section 11A of the Act.

The NASD states that, as explained in

the SEC’s release entitled Regulation of

Market Information Fees and

Revenues, 7 in furtherance of national

market system goals, the SEC recognizes

the structure in which one central

information processor receives and

consolidates market ‘‘information into a

single stream for dissemination to the

public.’’ 8 Regarding this consolidated

data stream, the NASD notes that the

SEC stated, ‘‘the practical effect of

comprehensive federal regulation of

market information is that proprietary

interests in this information are

subordinated to the Exchange Act’s

objectives for a national market

system.’’ 9

The NASD represents that the SEC

exercises oversight over the information

consolidator by requiring registration of

the consolidator as an ESIP under

Section 11A of the Act, and regulating

the registered ESIP’s conduct. Under

Section 11A, the NASD, as the

registered ESIP, will be obligated to

deliver market information on terms

that are fair and reasonable, and to meet

all other obligations imposed on ESIPs,

including capacity, redundancy, audit

trail, and surveillance capabilities. The

NASD represents that it will be solely

responsible for establishing rules and

fees related to the sale of real-time data

dissemination, subject to SEC oversight

Nasdaq, which will not be the ESIP, will

not possess any ownership rights in

TRACE data, and will not exercise any

control over the TRACE project.

Nasdaq’s role will be that of a

contractor, providing to the NASD the

collection and dissemination systems

that will enable the NASD to perform its

SRO functions.

e. Implementation Schedules

The NASD states that it has discussed

TRACE’s implementation with various

members, vendors, and industry groups

to understand the likely amount of time

necessary to implement the regulatory

reporting and transparency aspects of

TRACE. After discussions with

corporate bond market participants, the

NASD represents that it has determined

to modify its original filing and seek

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71181

SEC approval to begin phase I of TRACE

180 days following SEC approval of the

service. The NASD believes that this

additional time will allow its members

to better prepare for the advent of

TRACE trade reporting as well as give

the NASD sufficient time to more fully

test TRACE technology.

f. T+1 Clearance and Settlement and

STP Issues

Many commenters raised concerns

about how TRACE fits into ongoing

industry initiatives to facilitate a T+1

clearance and settlement cycle

anticipated in 2004 and later, straightthrough processing (STP). The NASD

believes that TRACE provides

significant tools to the fixed income

industry to assist them in moving to a

T+1 settlement cycle. The NASD

represents that when implemented,

TRACE’s real-time comparison and

forwarding features will give market

participants a fast, efficient way to enter

their ‘‘locked-in’’ trade reports into the

trade processing system and allow for

faster settlement. The NASD believes

that TRACE’s open system architecture

provides multiple ways of entering trade

reports and also ensures that these

powerful tools will be available to all

firms regardless of size. The NASD

represents that it is committed to the

concept of interoperability between its

systems and others operated by national

and international clearing entities. In

the final analysis, however, it believes

that the pressing need for improved

transparency in the corporate bond

market cannot be subordinated to the

much more complex and long-term

goals of global straight-through

processing. The NASD represents that it

will continue to take action to ensure

that its systems remain the most flexible

and open possible, as well as being

capable of quickly and efficiently

adapting to whatever STP standards and

protocols are adopted in the future.

g. Addition of a Yield Value to TRACE

Trade Reports

As a result of further internal NASD

review regarding the proper elements of

a fixed income transaction report, the

NASD has determined to add a yield

requirement to TRACE trade reports.

The NASD believes that the addition of

a yield value, determined in conformity

with Rule 10b–10 under the Act,

provides a valuable mechanism to

match, verify, and analyze pricing of

corporate bonds. The NASD notes that

firms are already required to provide

this information to customers as part of

the transaction confirmation process

and believes that any additional burden

on firms to enter such information is

more than offset by the regulatory value

of such information. Specifically, the

NASD represents that yield information

will enable the NASD to identify

potentially erroneous fixed income

transactions on a real time basic,

thereby promoting the integrity of the

transactions reports.

The NASD’s principal goal in

developing TRACE is to meet the

mandate of the SEC to provide greater

transparency to investors and to

enhance the NASD’s regulatory

oversight of corporate bond trading. The

NASD believes it has responded in a

flexible and proactive manner to various

industry concerns regarding TRACE.

2. Statutory Basis

The NASD represents that it believes

that the proposed rule change is

consistent with the provisions of

Section 15A(b)(6) of the Act, which

requires, among other things, that the

NASD’s rules must be designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

in securities, and, in general, to protect

investors and the public interest.

The NASD states that the proposed

rule change, if approved, will establish

rules for the reporting and

dissemination of information on fixed

income transactions that will provide

the NASD, as the self-regulatory

organization designed to regulate the

over-the-counter markets, with

heightened capabilities to regulate the

fixed income markets in order to

prevent fraudulent and manipulative

acts and practices. The NASD also

represents that the proposed structure to

collect the information, with the NASD

as the proposed exclusive securities

information processor under Section

11A of the Act, is consistent with other

information processing structures that

have been proposed and approved by

the SEC, and will foster cooperation and

coordination with persons engaged in

regulating, clear4ing, settling, and

processing information with respect to

fixed income securities and among

persons facilitating transactions in fixed

income securities. Finally, the NASD

believes that the proposed rule change,

by requiring reporting and

dissemination of such transaction

information, will protect investors and

the public interest by, among other

things, increasing transparency in the

fixed income market.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

(c) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate, up to

90 days of such date, if it finds such

longer period to be appropriate and

publishes its reasons for so finding, or

(ii) as to which 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 Amendment Nos.

2 and 3, including whether Amendment

Nos. 2 and 3 are 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, DC 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

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 Amendment

Nos. 2 and 3 to file number NASD 99–

65 and should be submitted by

December 20, 2000.

71182 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

10 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 43447

(October 16, 2000), 65 FR 63278 (October 23, 2000).

3Letters from Harold H. Morley, Chairman and

Chief Executive Officer, Morley Financial Services,

Inc., to Jonathan G. Katz, Secretary, Commission

(May 10, 2000); Joan K. Hall, Senior Vice President

and Director, Morley Financial Services, Inc., to

Jonathan G. Katz, Secretary, Commission (August

15, 2000). 4Addendum D of NSCC’s Rules and Procedures. 5 15 U.S.C. 78q–1(b)(3)(F).

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30452 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43606; File No. SR–NSCC–

00–05]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Order Granting

Accelerated Approval of a Proposed

Rule Change Relating to Processing

Mutual Fund Services

November 21, 2000.

On April 7, 2000, the National

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

a proposed rule change (File No. SR–

NSCC–00–05) pursuant to Section

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

of 1934 (‘‘Act’’) 1 and on April 19, 2000,

and May 8, 2000, amended the proposed

rule change to modify its rules to allow

additional types of investment products

to be processed through NSCC’s Mutual

Fund Services. Notice of the proposal

was published in the Federal Register

on October 23, 2000. 2 Two comment

letters were received from one

commenter. 3 For the reasons discussed

below, the Commission is granting

accelerated approval of the proposed

rule change.

I. Description

Several NSCC participants who utilize

NSCC’s Defined Contribution Clearance

and Settlement Service of NSCC’s

Mutual Fund Services have requested

that NSCC permit additional types of

investment products regulated under

state insurance laws or federal or state

banking laws to be eligible for

processing through NSCC’s Mutual

Fund Services. Examples of such

investment products include stable

value funds, separate account group

guaranteed investment contracts (which

are regulated as group annuities), and

bank collective investment trusts.

To accommodate their participants’

request, NSCC will create a new class of

securities defined as Investment Funds.

Pursuant to the rule filing NSCC will:

(1) Add Investment Funds as a class of

securities eligible for processing through

Mutual Fund Services; (2) make

corresponding changes to the rules

relating to the entities eligible to process

Investment Funds transactions through

the Mutual Fund Services; (3) establish

standards of financial responsibility and

operational capability for those

participants wishing to process

Investment Funds through NSCC’s

Mutual Fund Services; and (4) make

conforming changes to the existing rules

where necessary.

Investment Funds will be defined as

any fund or investment entity that is

subject to regulation under applicable

federal and state banking and/or

insurance laws. Investment Funds will

include such things as bank collective

investment trusts, separate account

guaranteed investment contracts, and

other similar pooled investment

vehicles. All Invested Fund products

will be subject to regulation under

federal or state banking laws or state

insurance laws. Only Investment Funds

that have been assigned a CUSIP

number would be eligible for processing

through NSCC’s Mutual Fund Services.

For the purpose of processing

transactions in Investment Funds, NSCC

also will expand the types of entities

that may qualify as a Fund Member

under Rule 51 of NSCC’s Rules so that

insurance companies, banks, and trust

companies as packagers and sponsors of

such funds may apply to become a Fund

Member. As with other entities seeking

to become Fund Members, any of these

new eligible entities seeking to process

Investment Fund transactions through

NSCC’s Mutual Fund Services will be

required to enter into an agreement with

NSCC that sets forth the entity’s rights

and obligations as a Fund Member,

including that it will limit its use of

NSCC’s services to use of Mutual Fund

Services (or Insurance Processing

Services, as the case may be), it will

comply with NSCC’s rules and

procedures, and will permit NSCC to

inspect its books and records. Moreover,

as with all other transactions in Mutual

Fund Services, transactions involving

Investment Funds will not be

guaranteed by NSCC. As currently

provided in NSCC’s Rules, if one side

fails to pay for a transaction, the contra

side will be required to return to NSCC

any funds received from NSCC. 4

Under the rule change, NSCC’s Rule

2 will be amended to permit an

insurance company to become a mutual

fund member or insurance services

member in order to transmit Investment

Fund Purchases, exchanges, and

redemption orders to a fund member

and to engage in other customer-related

transactions with a funds member. In

addition to the standards of financial

responsibility and operational capability

set forth in Addenda B and I of NSCC’s

Rules currently applicable to Mutual

Fund Service members, insurance

services members, and Fund Members,

entities seeking to process Investment

Fund transactions through Mutual Fund

Services will be required to meet the

rating and capital requirements set forth

in new Addendum V, Financial

Standards for Applicants and

participants Processing investment

Funds Transactions Through Mutual

Fund Services.

Since NSCC will make a new category

of securities eligible for Mutual Fund

Services processing, the rule change

will also make conforming changes to

certain existing rules in order to include

a reference to Investment Funds as

applicable.

NSCC believes the proposed rule

change is consistent with Section 17A of

the Act because it will make a new class

of products eligible for processing

through NSCC’s Mutual Fund Services

and thereby should facilitate the prompt

and accurate clearance and settlement of

these transactions in these products.

II. Discussion

Section 17A(b)(3)(F) 5 of the Act

requires that the rules of a clearing

agency be designed to promote the

prompt and accurate clearance and

settlement of securities transactions and

to assure the safeguarding of securities

and funds which are in the custody or

control of the clearing agency or for

which it is responsible. The primary

purpose of NSCC’s rule change is to

expand the types of products processed

by and the types of entities processing

through NSCC’s Mutual Fund Services

that should facilitate the prompt and

accurate clearance and settlement of

transactions in these instruments.

Investment products such as Investment

Funds are typically included in defined

contribution retirement plans and thus

their inclusion in Mutual Fund Services

should benefit third party administrator

(‘‘TPA’’) members and other

participants by standardizing the

processing of these Investment Funds in

the same manner as mutual funds are

now processed in NSCC’s Mutual Fund