[Federal Register Volume 63, Number 111 (Wednesday, June 10, 1998)]
[Notices]
[Pages 31820-31823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15419]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40069; File No. SR-NASD-98-38]


Self-Regulatory Organizations; Notice of Filing and Partial 
Immediate Effectiveness of a Proposed Rule Change by the National 
Association of Securities Dealers, Inc., Relating to NASD Order Audit 
Trail System and Record-Keeping Rules

June 4, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1935 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 22, 1998, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') through its wholly-owned subsidiary, NASD 
Regulation, Inc., (``NASDR'') 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 the NASDR. 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

    The NASDR is proposing to amend NASD Books and Records Rule 3110 
and NASD Order Audit Trail System (``OATS'') Rules 6954 and 6957 to: 
require members to record certain information when an order is 
transmitted to a non-member; explicitly detail the recordkeeping 
requirements that will apply to OATS data; require members to record 
and maintain

[[Page 31821]]

information related to ``orders'' as that term in defined is the OATS 
rules; indicate effective dates for compliance with the proposed 
amendments to Rule 3110; and make three nonsubstantive, technical 
revisions to Rules 3110 and 6957. Below is the text of the proposed 
rule change. Proposed new language is italicized; proposed deletions 
are in brackets.

CONDUCT RULES

3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION

3110. Books and Records

    (h) [(c)] Order Audit Trail System Record-Keeping Requirements
    (1) Each member that is a Reporting Member, as that term is defined 
in Rule 6951(n), Shall record and maintain with respect to each order, 
as that term is defined in Rule 6941(j), for such security that is 
received or executed at its trading department: (A)[(1)] an 
identification of each registered person who receives the order 
directly from a customer; (B)[(2)] an identification of each registered 
person who executes the order; and (C) [(3)]  [where] an order is 
originated by the member and transmitted manually to another 
department, an identification of the department that originated the 
order.
    (2) Each Reporting Member shall maintain and preserve records of 
the information required to be recorded under paragraph (h)(1) of this 
Rule for the period of time and accessibility specified in SEC Rule 
17a-4(b).
    (3) The records required to be maintained and preserved under 
paragraph (h)(1) of this Rule may be immediately produced or reproduced 
on ``micrographic media'' as defined as 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 meets the conditions set forth in SEC Rule 17a-4(f) 
and be maintained and preserved for the required time in that form.

NASD SYSTEMS AND PROGRAMS

6950. ORDER AUDIT TRAIL SYSTEM

6954. Recording of Order Information

    (a) Procedures
    (1) through (3): No change:
    (4) (A) Each Reporting Member shall maintain and preserve [retain] 
records of the information required to be recorded under this Rule for 
the period of time and accessibility specified in SEC Rule 17a-4(b) [in 
accordance with Rule 3110].
    (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 be 
maintained and preserved for the required time in that form.
    (b) No change.
    (c) Order Transmittal
    (1) through (5): No change
    (6) When a member transmits an order to a non-member, the Reporting 
Member shall record: (A) the fact that the order was transmitted to a 
non-member, (B) the order identifier assigned to the order by the 
Reporting Member, (C) the market participant symbol assigned by the 
Association to the Reporting Member, (D) the date the order was first 
originated or received by the Reporting Member, (E) the date and time 
the order is transmitted, (F) the number of shares to which the 
transmission applies, and (G) for each manual order to be included in a 
bunched order, the bunched order route indicator assigned to the 
bunched order by the Reporting Member.

6957. Effective Date

    (a) through (c): No change
    (d) Rule 3110
    The requirements of Rule 3110(h)(1)(A) [Rule 3110(c)(1)] and Rule 
3110(h)(1)(B) [Rule 3110(c)(2)] shall be effective on March 1, 1999, 
and the requirements of Rule 3110(h)(1)(C) [Rule 3110(c)(3)] shall be 
effective on July 31, 2000. The requirements of Rule 3110(h)(2) and 
Rule 3110(h)(3) shall be effective on March 1, 1999.

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 NASDR 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 NASDR 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
    Background. The Commission approved NASD OATS Rules 6950 through 
6957 on March 6, 1998.\3\ The OATS rules require member firms to 
capture and record specific information related to the handling or 
execution of orders for equity securities in The Nasdaq Stock Market 
(``Nasdaq''). Relevant information regarding those orders must be 
specified to the hour, minute, and second. Firms must then report that 
information to OATS. The rules also require members to synchronize 
their business clocks to one time source. The Commission also approved 
new Rule 3110(c), which requires members to record and maintain certain 
information that is relevant to the OATS data reporting requirements.
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    \3\ See Exchange Act Release No. 39729 (March 6, 1998) 63 FR 
12559 (March 3, 1998) (order approving file SR-NASD-97-56).
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    OATS reporting will be implemented in phases. By March 1, 1999, 
electronic orders received by Electronic Communications Networks 
(``ECNs'') or at the trading departments of market makers are subject 
to reporting. Electronic orders are defined as orders that are captured 
in an electronic order-routing or execution system. By August 1, 1999, 
all electronic orders are subject to reporting. By July 31, 2000, all 
manual or non-electronic orders are subject to reporting.
    The types of orders that must be reported under the OATS rules 
include those received from a customer for handling or execution, those 
received from another member firm for handling or execution, and those 
originated by a department or desk within a firm for execution by 
another department or desk within that same member firm. Order events 
that must be reported under the rules include the receipt, 
modification, cancellation, execution, or routing of an order to 
another member firm, another department of the same firm, or an ECN. 
Orders for a proprietary account generally are exempted.
    Discussion. The NASDR proposes to amend the OATS Rules and the 
books and records requirements that apply specifically to OATS data. 
The first three amendments are non-substantive, technical revisions to 
Rules 3110 and 6957. The first amendment would renumber Rule 3110(c) to 
Rule 3110(h).\4\ The second amendment would revise Rule 6957(d) to 
refer to Rule 3110(h) instead of to Rule 3110(c). Rule 3110(c) is 
hereinafter referred to as Rule 3110(h). The third amendment would 
revise Rule 3110(h) to change the word ``where'' to ``when'' because 
``when''

[[Page 31822]]

has a more accurate meaning in the context of the sentence in which it 
appears.
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    \4\3 The Commission notes that the new Rule 3110(h) was not 
intended to replace existing Rule 3110(c), which does not deal with 
OATS. That paragraph is not affected by this filing.
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    The fourth amendment would revise OATS Rule 6954(c) by adding a new 
paragraph (6). Rule 6954(c) sets forth the order information that must 
be recorded under the OATS rules when an order is transmitted, either 
from one department to another within a member firm or to another 
member. Rule 6954(c) does not, however, contain a requirement that a 
member record information when an order is transmitted to a non-member, 
such as a foreign broker/dealer or a foreign exchange. The NASDR 
proposes to add new paragraph (6) to require members to record certain 
information when an order is transmitted to a non-member, including the 
fact that it was so transmitted. NASD members will be required to 
report this information to OATS pursuant to Rule 6955. This new 
information will allow the NASDR to track what has happened to an order 
that a member has received and reported to OATS that is then routed to 
a non-member. Without this new requirement, there is no way to track 
this information.
    The fifth amendment would revise both OATS Rule 6954(a)(4) and Rule 
3110(h) to set forth specific record-keeping requirements. OATS Rules 
6954(a)(1) and 6954(a)(4) require members to record specified 
information and to retain records of that information; Rule 3110(h) 
requires members to record and maintain information required by OATS. 
However, those rules do not specify how long the records must be 
maintained or the requirements that apply when members wish to utilize 
micrographic media or electronic storage media to maintain the records. 
To provide certainty to member firms on record retention requirements 
related to OATS data, the NASDR proposes to add new language to both 
Rule 6954(a)(4) and Rule 3110(h) to make explicit the record-keeping 
requirements related to OATS data. The rules have been revised to 
specifically reference the record retention period specified in SEC 
Rule 17a-4(b) and the conditions set forth in SEC Rule 17a-4(f) for 
reproducing records on micrographic media or by means of electronic 
storage media.
    The sixth amendment would revise Rule 3110(h)(1) to require members 
to record and maintain information related to an ``order,'' as that 
term is defined in OATS Rule 6951(j). As stated above, new rule 3110(h) 
was adopted to require members to record and maintain information 
relevant to the OATS data recording and reporting requirements. The 
OATS rules require firms to record and report to OATS information 
related to an ``order.'' For purposes of the OATS rules, the term 
``order'' as defined in Rule 6951(j) means ``any oral, written, or 
electronic instruction to effect a transaction in a Nasdaq Stock Market 
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.'' 
The NASDR proposes to similarly limit Rule 3110(h) to require members 
to record and maintain information only with respect to ``orders'' in 
Nasdaq equity securities.
    Finally, the seventh amendment would revise Rule 6957(d) to 
indicate the effective dates for compliance with the proposed 
amendments to Rule 3110(h).
2. Statutory Basis
    The NASDR believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\5\ which requires, 
among other things, that the Association's rules must 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. The NASDR believes that requiring 
members to record certain information when an order is transmitted to a 
non-member and to record and maintain information related to an 
``order'' as defined in the OATS rules and explicitly detailing the 
record-keeping requirements that apply to OATS data will further these 
requirements.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASDR does not believe that the proposed rule change will 
impose a 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 reviewed by the NASDR National 
Adjudicatory Council (``NAC'') and the NASD Small Firm Advisory Board 
(``SFAB''). The NAC did not have any comments on the proposal. The SFAB 
did not have any comments on the proposed rules, but did express its 
concerns about the costs that will be required for compliance by small 
firms with the OATS rules that already have been approved by the SEC 
and are scheduled to be implemented starting in March 1999.

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

    With respect to amendments one through three (i.e., (1) renumber 
Rule 3110(c) to Rule 3110(h); (2) revise Rule 6957(d) to refer to Rule 
3110(h) instead of Rule 3110(c); and (3) revise Rule 3110(h) to change 
the word ``where'' to ``when.''): The foregoing rule change is 
concerned solely with the administration of the NASD and, therefore, 
has become effective pursuant to Section 19(b)(3)(A) of the Act \6\ and 
subparagraph (e)(3) of Rule 19b-4 thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 19b-4(e)(3).
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    At any time within 60 days of the filing of such rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
    With respect to amendments four through seven (i.e., (4) add new 
paragraph (6) to Rule 6954(c); (5) revise Rules 6954(a)(4) and 3110(h) 
to set forth specific record-keeping requirements related to OATS data, 
referencing SEC Rule 17a-4; (6) revise Rule 3110(h)(1) to require 
members to record and maintain information related to an ``order'' as 
defined in Rule 6951(j); and (7) revise Rule 6957(d) to establish the 
effective dates for compliance with the proposed amendments to Rule 
3110(h)): 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.

[[Page 31823]]

Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549. Copies of the submissions, 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, 450 Fifth Street, NW, Washington, DC. Copies of such 
filing also will be available for inspection and copying at the NASD. 
All submissions should refer to File No. SR-NASD-98-38 and should be 
submitted by July 1, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15419 Filed 6-9-98; 8:45 am]
BILLING CODE 8010-01-M