[Federal Register Volume 66, Number 118 (Tuesday, June 19, 2001)]
[Notices]
[Pages 32971-32974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15363]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44411; File No. SR-NASD-2001-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the National Association of 
Securities Dealers, Inc. To Eliminate the Service Desk Feature of the 
Automated Confirmation Transaction Service

June 12, 2001.

    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 May 16, 2001, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), 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 Nasdaq. Nasdaq amended the proposal on May 31, 2001,\3\ which 
amendment completely replaced and superseded the original proposal. On

[[Page 32972]]

June 7, 2001, Nasdaq again amended the proposal.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See May 30, 2001 letter from Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation (``Division''), 
SEC and attachments (``Amendment No. 1'').
    \4\ See June 6, 2001 letter from Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division, SEC (``Amendment No. 2''). In 
Amendment No. 2, Nasdaq made technical amendments to the proposal 
that were inadvertently omitted from Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend provision (g) of NASD Rule 7010, ``System 
Services,'' to eliminate the Automated Confirmation Transaction 
(``ACT'') Service Desk, the telephonic medium for trade reporting by 
member firms that report five or fewer transactions per day through 
ACT. Additionally, Nasdaq proposes to amend NASD Rules 4632, 4642, 
4652, 6420, 6620, and 6920, all of which are entitled ``Transaction 
Reporting,'' to eliminate references to the ACT Service Desk. The text 
of the proposed rule change is below. Proposed new language is in 
italics; proposed deletions are in brackets.

4632. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No Change.
    (2) Non-Registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT [or the ACT Service Desk (if qualified 
pursuant to Rule 7010(g)),] or if ACT is unavailable due to system or 
transmission failure, by telephone to the Market Operations Department, 
last sale reports of transactions in designated securities executed 
during normal market hours. Transactions not reported within 90 seconds 
after execution shall be designated as late and such trade reports must 
include the time of execution.
* * * * *

4642. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No Change.
    (2) Non-Registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT [or the ACT Service Desk] or if ACT is 
unavailable due to system or transmission failure, by telephone to the 
Market Operations Department, last sale reports of transactions in 
designated securities executed during normal market hours. Transactions 
not reported within 90 seconds after execution shall be designated as 
late and such trade reports must include the time of execution.
* * * * *

4652. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No Change.
    (2) Non-Registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT [or the ACT Service Desk (if qualified 
pursuant to Rule 7010(g)),] or if ACT is unavailable due to system or 
transmission failure, by telephone to the Market Operations Department, 
last sale reports of transactions in designated securities executed 
during normal market hours. Transactions not reported within 90 seconds 
after execution shall be designated as late and such trade reports must 
include the time of execution.
* * * * *

6420. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No Change.
    (2)(A) Non-Registered Reporting Members shall, within 90 seconds 
after execution, transmit through ACT [or the ACT Service Desk (if 
qualified pursuant to Rule 7010(g)),] or if ACT is unavailable due to 
system or transmission failure by telephone to the Nasdaq Market 
Operations Department, last sale reports of transactions in eligible 
securities executed during the trading hours of the Consolidated Tape 
otherwise than on a national securities exchange.
    (B) Non-registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT [or the ACT Service Desk (if qualified 
pursuant to Rule 7010(g)),] or if ACT is unavailable due to system or 
transmission failure, by telephone to the Nasdaq Market Operations 
Department, last sale reports of transactions in eligible securities 
executed in the United States otherwise than on a national securities 
exchange between the hours of 4:00 p.m. and 6:30 p.m. eastern Time; 
trades executed and reported after 4:00 p.m. Eastern Time shall be 
designated as ``.T'' trade to denote their execution outside normal 
market hours. Transactions not reported within 90 seconds after 
execution must include the time of execution on the trade report.
* * * * *

6620. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No change.
    (2) Non-Market Makers shall, within 90 seconds after execution, 
transmit through ACT [or the ACT Service Desk (if qualified pursuant to 
Rule 7010(g)),] or if ACT is unavailable due to system or transmission 
failure, by telephone to the Nasdaq Market Operations Department, last 
sale reports of transactions in OTC Equity Securities executed during 
normal market hours. Transactions not reported within 90 seconds after 
execution shall be designated as late.
* * * * *

6920. Transaction Reporting

(a) When and How Transactions are Reported
    (1) No change.
    [(2) Members that do not have access to an ACT terminal and average 
five or fewer trades per day during the previous calendar quarter may 
use the ACT service desk for trade reporting. Such members shall be 
required to provide all information required by paragraph (c) of this 
Rule to the ACT service desk within the same time frames set forth in 
paragraph (a)(1) above.]
    [(3)] (2) All members shall report to the Market Regulation 
Department in Rockville, Maryland on Form T, reports of transactions in 
DPPs that were not transmitted through ACT, for whatever reason, either 
on the trade date or the next business date. Form T shall be used 
exclusively as a back-up mode whenever electronic entry of trade data 
is not feasible due to system malfunctions or other unusual conditions.
    [(4)] (3) 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 7010. System Services

    (a)-(f) No Change.

(g) Confirmation Transaction Service (ACT):

    Transaction Related Charges:

Comparison................................  $0.0144/side per 100 shares
                                             (minimum 400 shares;
                                             maximum 7,500 shares)

[[Page 32973]]

 
Automated Give-Up.........................  $0.01/side per 100 shares
                                             (minimum 400 shares;
                                             maximum 7,500 shares)
Late Report--T+N..........................  $0.288/side
Browse/query..............................  $0.288/query \1\
Terminal fee..............................  $57.00/month (ACT only
                                             terminals)
CTCI fee..................................  $575.00/month
Nasdaq ACT................................  $300/month (full
                                             functionality) or $150/
                                             month (up to an average of
                                             twenty transactions per day
                                             each month) \2\
[Service desk.............................  $57.00/month \3\]
Trade Reporting...........................  $0.29/side (applicable only
                                             to reportable transaction
                                             not subject to trade
                                             comparison through ACT) <SUP>[4]</SUP>
                                             <SUP>3</SUP>
Risk Management Charges...................  $.035/side and $17.50/month
                                             per correspondent firm
 
 
 Footnotes
\1\ Each ACT query incurs the $0.288 fee; however, the first accept or
  decline processed for a transaction is free, to insure that no more
  than $0.288 is charged per comparison. Subsequent queries for more
  data on the same security will also be processed free. Any subsequent
  query on a different security will incur the $0.288 query charge.
\2\ For the purposes of this service only, a transaction is defined as
  an original trade entry, either on trade date or as-of transaction per
  month.
<INF>[4]</INF> <INF>3</INF> The ACT service desk is available to ACT participants that: (1) do
  not have access to Nasdaq equipment and that average five or fewer
  trades per day during the previous calendar quarter; or (2) utilized
  the Nasdaq Workstation I to report trades as of June 1999, do not have
  access to Nasdaq equipment, and average 20 or fewer trades per day
  during the previous calendar quarter.]
<SUP>[4]</SUP> <SUP>3</SUP> The trade reporting service charge is applicable to these trades
  input into ACT for reporting purposes only, such as NSCC Qualified
  Special Representative reports and reports of internalized
  transactions.

(h)-(p) 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, Nasdaq icluded 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. Nasdaq 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
    Nasdaq proposes to eliminate the ACT Service Desk, and to remove 
from the NASD rules all references to it.
    ACT is the Nasdaq system used by members to report and compare 
trades for clearance and settlement, and transmit trade reports for 
regulatory purposes and public dissemination. After members enter trade 
information into ACT (as required by NASD ACT and trade-reporting 
rules),\5\ the system sends locked-in trades to clearing. Under current 
NASD rules, members must report trades to ACT for certain transactions 
executed in the over-the-counter market, including transactions in 
Nasdaq National Market securities (``NNM''), Nasdaq SmallCap securities 
(``SmallCap''), Over-the-Counter Bulletin Board (``OTCBB'') securities, 
Nasdaq convertible debt securities, exchange-listed securities effected 
in the over-the-counter market, and securities traded exclusively in 
the over-the-counter market (e.g., Pink Sheet securities).\6\
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    \5\ See NASD Rules 4630, 4640, 4650, 6100, 6400, 6600, and 6700.
    \6\ See Id.
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    There generally are five methods to report trades to ACT: (1) 
Ordering a Nasdaq Workstation II service (``NWII''); (2) using the 
Nasdaq ACT Service Desk; (3) agreeing to permit the contra party to a 
trade to report that trade through the NWII trade (commonly known as a 
``give-up'' relationship); (4) utilizing Nasdaq ACT, an internet-based 
service introduced in February of 2001; and (5) contracting with a 
third party to report trades on behalf of the firm (commonly referred 
to as a Qualified Service Representative or ``QSR'' arrangement). Each 
mode of trade-report entry accomplishes the same result, but they have 
different characteristics. In addition, firms have the option of 
operating as introducing brokers, meaning that all trades are sent to 
another member firm for execution and trade reporting.
    The ACT Service Desk was designed as a cost-effective method of 
trade reporting for firms that effect very few transactions in Nasdaq 
securities or other securities traded in the over-the-counter 
market.\7\ As such, NASD rules limit participation in the ACT Service 
Desk to only those members who do not have access to Nasdaq equipment 
and who have effected an average of five or fewer trades per day during 
the previous calendar quarter.\8\ If a firm has reported more than five 
trades per day during the previous calendar quarter, the firm must 
either order a NWII to report trades or enter into a give-up 
arrangement.
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    \7\ The ACT Service Desk is a phone-based service that allows 
firms to report trades over the phone to Nasdaq Market Operations 
staff, who in turn input the trades into the ACT system for 
dissemination to the tape. See generally, Securities Exchange Act 
Release No. 27908 (Apr. 17, 1990), 55 FR 15313 (Apr. 23, 1990) 
(approval order for ACT Service Desk).
    \8\ See NASD Rule 7010(g), footnote 3.
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    Currently, approximately 375 NASD member firms use the ACT Service 
Desk to report trades to ACT. Of those, approximately 60 firms report 
an average of at least one trade per day, another 169 report an average 
of one trade per month, and an additional 146 firms report fewer than 
one trade per month on average. Each of these firms pays $57.00 per 
month for access to the ACT Service Desk, in addition to the fees 
assessed per transaction for the use of specific ACT services, 
including comparison, trade reporting, and risk management.
    In light of the existing alternatives for reporting trades to ACT, 
Nasdaq has decided to eliminate the ACT Service Desk and to redirect 
those resources towards improving the ACT service for the market as a 
whole. When Nasdaq created the ACT Service Desk in 1990, that service 
was the primary low-cost mechanism for trade reporting by member firms 
with a relatively small volume of trades to report. Since that time, 
new options for trade reporting have arisen or become more prevalent in 
the market, including the availability of the give-up relationship \9\, 
the ACT Service Bureau arrangement, and the recent establishment of 
Nasdaq ACT.\10\ The give-up and Service Bureau arrangements are simple 
to establish and maintain and are available to any firm at low or no 
cost outside the standard ACT transaction-based fees. In addition, 
firms may also function as an introducing broker and, thereby,

[[Page 32974]]

completely avoid the obligation of reporting trades through ACT.
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    \9\ In a ``give-up'' arrangement, a member who reports or 
accepts a trade in ACT on behalf of another member would identify in 
the ACT screen give-up box the member on whose behalf the trade was 
being reported or accepted. Where the executing broker accepts a 
trade that has been reported by another member, the reporting member 
would have to report the trade with the executing broker as the 
contra-side and identify the prime brokerage customer as the contra-
side give-up. The executing broker may then accept the trade as 
presented. This would avoid a second trade report and ensure that 
the prime brokerage customer is identified to the NASD.
    \10\ Nasdaq ACT provides the same basic ACT features and 
functions offered through the NWII service. In the case of Nasdaq 
ACT, however, clients that use some but not all ACT functionality 
have the opportunity to reduce their expenses by purchasing a 
scaled-back version of the service.
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    Nasdaq considered and rejected the possibility of increasing the 
monthly fee for the ACT Service Desk to more accurately reflect the 
true costs of providing this service. Nasdaq created the ACT Service 
Desk as a low-cost service and has steadfastly resisted raising the 
price of that service since its inception, in large part due to the 
perception that few alternatives for the service existed. This 
perception no longer reflects reality. Moreover, a fee that accurately 
reflected the cost of providing the ACT Service Desk would not have 
been significantly lower than the cost associated with Nasdaq ACT. ACT 
Service Desk users, which typically need only the trade entry and trade 
query function (and not risk management) can purchase that service for 
$150 per month, $93.00 more than they pay for the ACT Service Desk 
today. For that additional fee, users can report up to 20 trades per 
day (as opposed five per day on the ACT Service Desk), and they can do 
so more efficiently.
    While Nasdaq believes that the elimination of the ACT Service Desk 
will not materially or unduly burden the current users of that service, 
it recognizes the inconvenience to users that have grown accustomed to 
this method of trade reporting. To minimize the disruption of its 
members' operations, Nasdaq will wait 90 days following Commission 
approval of this rule proposal before eliminating the ACT Service Desk. 
Nasdaq will also provide ACT Service Desk users with at least two forms 
of notice of its schedule for eliminating the service, and will provide 
accompanying information about firms' options for establishing new 
trade reporting practices. Finally, Nasdaq will, during this 90-day 
post approval period, offer current ACT Service Desk users the option 
of transitioning to Nasdaq ACT for $57.00 per month to enable them to 
assess whether that service meets their needs. ACT Service Desk users 
that transition to Nasdaq ACT after that 90-day period will be assessed 
the regular fees for Nasdaq ACT, as described in NASD Rule 7010(g).
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\11\ which requires, 
among other things, that the Association's rules must be designed to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Nasdaq believes that the proposed rule change is wholly consistent with 
the purposes of the Act in that it will not materially reduce the 
availability of cost effective and efficient mechanisms to report 
trades, and therefore facilitates clearance and settlement. 
Additionally, Nasdaq believes the proposed rule change will not 
materially detract from the process through which members engage in the 
comparison and clearing of securities transactions.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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

    Nasdaq staff has discussed the substance of this rule filing with 
what Nasdaq believes is a representative sample of current ACT Service 
Desk users that have reported an average of one or more trades per day 
during the last three months. Most of the members that Nasdaq contacted 
indicated that the elimination of the ACT Service Desk would not 
materially detract from the operation of their firms. Only one member 
firm stated that this proposal would have a material impact, and Nasdaq 
has committed to assisting that firm, and any others that may 
experience difficulty in transitioning away from the ACT Service Desk.

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 Exchange 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.
    Nasdaq has requested accelerated approval of the proposed rule 
change. While the Commission will not grant accelerated approval at 
this time, the Commission will consider granting accelerated approval 
of the proposal at the close of an abbreviated comment period of 15 
days from the date of publication of the proposal in the Federal 
Register.

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 20549-0609. 
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 Nasdaq. 
All submissions should refer to file number SR-NASD-2001-36 and should 
be submitted by July 5, 2001.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15363 Filed 6-18-01; 8:45 am]
BILLING CODE 8010-01-M