31820 Federal Register / Vol. 63, No. 111 /Wednesday, June 10, 1998 / Notices

5 15 U.S.C. 78f(b)(6).

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

net capital requirement during the

preceding 12 months. NASD Regulation

staff have received several requests from

members asking for a waiver or

interpretation to relieve the member

from this requirement in certain

circumstances. For example, if a fullservice member changed its business by

divesting itself of clearing

responsibilities so that it no longer

holds customer funds or securities, it

would still be required to maintain bond

coverage that is based on the higher net

capital requirement that applied during

the preceding year. Currently, Rule 3020

does not permit the staff to provide any

relief to the member.

NASD Regulation is proposing to

amend Rule 3020 to permit the staff to

exempt a member from the requirements

of the rule in circumstances similar to

those described above and upon a

showing of good cause. This authority

will permit the staff to adjust the fidelity

bond requirements applicable to a

member to better tailor the requirements

to changes in a member’s business. In

addition, the proposed rule change will

also permit the staff to include

conditions in an exemption to ensure

that any subsequent increase in capital

requirements is accompanied by a

corresponding increase in coverage.

The rule change applies a ‘‘good

cause’’ standard that will require a

member to demonstrate that a

modification from the bonding

requirement is justified by the level of

loss exposure that may be expected from

the member. NASD Regulation notes

that the fidelity bonding premiums are

set for certain net capital thresholds on

the basis of loss experience. The

premiums are changed from time to

time to reflect changes in loss

experience and to ensure that sufficient

funds are available to pay any losses

reported to the insurer. In addition,

generally losses incurred in a prior year

are reported against the firm’s current

year. NASD Regulation intends to apply

this authority only where it is clear that

an exemption will not have any

unintended impact on the insurance

pool, and the modified coverage would

adequately protect the member against

potential losses.

Request for exemption would be

considered under recently adopted

Procedures for Exemption in the 9600

Series of Rules in the Code of

Procedure. Under the procedures, the

staff issues written determinations that

are subject to review by the National

Adjudicatory Council.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

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

the Act,5 in that the proposed

amendments are designed to

accommodate members whose financial

circumstances have changed so that

they could obtain an exemption from

maintaining fidelity bond coverage at

higher previous levels if they can show

that there is no regulatory reason for the

higher coverage required by Rule 3020,

without otherwise compromising

investor protection.

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

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Act

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 NASD consents, the

Commission will:

(A) by order approved 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, NW,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, 450 Fifth Street, NW,

Washington, DC 20549. 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–98–

33 and should be submitted by July 1,

1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–15418 Filed 6–9–98; 8:45 am]

BILLING CODE 8010–01–M

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 whollyowned 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.

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
Federal Register / Vol. 63, No. 111 /Wednesday, June 10, 1998 / Notices 31821

3See Exchange Act Release No. 39729 (March 6,

1998) 63 FR 12559 (March 3, 1998) (order

approving file SR–NASD–97–56).

43The 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.

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) ø(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)ø(1)¿ an

identification of each registered person

who receives the order directly from a

customer; (B)ø(2)¿ an identification of

each registered person who executes the

order; and (C) ø(3)¿ øwhere¿ 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 nonmember, (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.

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 orderrouting 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’’
31822 Federal Register / Vol. 63, No. 111 /Wednesday, June 10, 1998 / Notices

5 15 U.S.C. 78o–3(b)(6).

6 15 U.S.C. 78s(b)(3)(A).

7 17 CFR 19b–4(e)(3).

has a more accurate meaning in the

context of the sentence in which it

appears.

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 nonmember, 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 recordkeeping 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.

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

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.
Federal Register / Vol. 63, No. 111 /Wednesday, June 10, 1998 / Notices 31823

8 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Amendment 1 clarifies the purpose section of

the filing by noting that fines over $2,500 are

subject to higher reporting requirements than fines

of $2,500 or less. See Letter from Michael D.

Pierson, Senior Attorney, Regulatory Policy, PCX, to

Lisa Henderson, Attorney, SEC, dated May 26,

1998.

4Rule 19d–1(c)(2) under the Act authorizes

national securities exchanges to adopt minor rule

violation plans for the summary discipline and

abbreviated reporting of minor rule violations by

exchange members and member organizations. See

Securities Exchange Act Release No. 21013 (June 1,

1984), 49 FR 23828 (June 8, 1984) (order approving

amendments to paragraph (c)(2) of Rule 19d–1

under the Act). Pursuant to PCX Rule 10.13, the

Exchange may impose a fine on any member or

member organization for any violation of an

Exchange rule that has been deemed to be minor in

nature and approved by the Commission for

inclusion in the MRP. PCX Rule 10.13(h)–(j) sets

forth the specific Exchange rules deemed to be

minor in nature.

5As noted in PCX Rule 10.13(e), pursuant to

Securities Exchange Act Release No. 30958, any

person or organization found in violation of a minor

rule under the MRP is not required to report such

violation on SEC Form BD, provided that the

sanction imposed consists of a fine not exceeding

$2,500 and the sanctioned person or organization

has not sought an adjudication, including a hearing,

or otherwise exhausted the administrative remedies

available with respect to the matter. Accordingly,

any fine imposed in excess of $2,500 will be subject

to reporting on SEC Form BD in addition to the

immediate, rather than periodic, reporting

requirement of Section 19(d)(1) of the Act. See

Securities Exchange Act Release No. 32080 (January

22, 1992), 57 FR 3452 (noting that fines in excess

of $2,500, assessed under New York Stock

Exchange, Inc. (‘‘NYSE’’) Rule 476A, are not

considered pursuant to the NYSE’s minor rule

violation plan and are thus subject to the current

reporting requirements of Section 19(d)(1) of the

Act).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–15419 Filed 6–9–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40063; File No. SR–PCX–

98–21]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment 1 Thereto by the Pacific

Exchange, Inc., Relating to Fines for

Disruptive Action on the Options Floor

June 3, 1998.

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 April 16,

1998, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’), filed with the Securities

and Exchange Commission

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

rule change as described in Items I, II

and III below, which Items have been

prepared by the Exchange. On May 28,

1998, the Exchange filed Amendment 1

to the proposal with the Commission.3

The Commission is publishing this

notice to solicit comments on the

proposed rule change, as amended, from

interested persons.

I. Self-Regulatory Organization’s

Statement of the Term of Substance of

the Proposed Rule Change

PCX is proposing to increase its

recommended fines under the Minor

Rule Plan (‘‘MRP’’) for disruptive action

involving physical contact between

members while on the options trading

floor. Proposed new language is in

italics; proposed deleted language is in

brackets.

6133 Minor Rule Plan

Rule 10.13(a)–(j)—No change.

(k) Minor Rule Plan: Recommended

Fine Schedule.

(i) Options Floor Decorum and Minor Trading Rule Violations

Fines

1st

violation

2nd

violation

3rd

violation

1.–16. No change

17. Disruptive action involving physician contact while on the trading floor. (Rule 6.2) ......................... [$500.00]

1,500.00

[$1,000.00]

3,000.00

[$2,500.00]

5,000.00

18.–34. No change.

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

Exchange 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

Exchange 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

The Exchange is proposing to increase

the recommended fines under the MRP 4

for disruptive action involving physical

contact between members while on

PCX’s Options Trading Floor. These

fines are currently set at $500, $1,000

and $2,500 for first, second and third

violations, respectively, during a

running two-year period. The Exchange

is proposing to increase these fines at

$1,500, $3,000, and $5,000, respective.5

The purpose of the rule change is to

deter future incidents of disruptive

conduct involving physical contact. The

Exchange notes that there has been a

moderate increase recently in the

number of such cases, and the Exchange

intends that the proposed rule change

will serve to reverse that trend.