[Federal Register Volume 61, Number 124 (Wednesday, June 26, 1996)]
[Notices]
[Pages 33156-33159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16291]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37317; File No. SR-NASD-95-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
PORTAL Market Pilot of Member's Reporting Obligations

June 17, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October 
4, 1995 the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association'') 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 NASD. 
On November 22, 1995, the NASD filed Amendment No. 1 to advise the 
Commission that the NASD's Board of Governors approved this rule filing 
to adopt a pilot of the PORTAL reporting requirements.\1\ On June 12, 
1996, the NASD filed Amendment No. 2 to revise a footnote to the 
proposed rule change.\2\ Initially, this footnote stated that the 
investor status information requirement concerning 144A transactions in 
the U.S. private market would be satisfied if the member provided the 
requisite information with respect to the member's direct customer. The 
revision clarifies the circumstances in which the contra-party would be 
required to provide investor status information and affirms industry 
reliance on these representations in determining whether the buyer is a 
qualified institutional buyer (``QIB'').\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ See, letter from Suzanne E. Rothwell, Associate General 
Counsel, NASD, to Mark P. Barracca, Branch Chief, Division of Market 
Regulation, SEC, dated November 22, 1995.
    \2\ See, letter from Suzanne E. Rothwell, Associate General 
Counsel, NASD, to Elizabeth MacGregor, Branch Chief, Division of 
Market Regulation, SEC, dated June 12, 1996.
    \3\ Infra note 16.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Schedule I to the NASD By-Laws 
(``PORTAL Rules'') \4\ that regulates The PORTAL Market to establish a 
pilot for one year for the reporting of the initial placement 
(``primary transactions'') and secondary transactions in securities 
designated in the PORTAL Market as PORTAL securities.\5\ The pilot will 
apply to members of the NASD that are designated in the PORTAL Market 
as PORTAL dealers and PORTAL brokers \6\ and to other members of the 
NASD that transact business in PORTAL securities.
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    \4\ In connection with the recent reorganization of the NASD 
Manual, The PORTAL Market Rules that were set forth in Schedule I to 
the NASD By-Laws are now set forth in the Rule 5300 series of the 
Market Rules. When adopted, the rule change proposed herein will be 
modified to comply with the new Manual form. See, NASD Notice to 
Members 96-24 (April 1996).
    \5\ NASD Manual, Schedules to the By-Laws, Schedule I, Part II, 
Sec. 2 (CCH para. 1953 (outlining the requirements for the 
designation of securities in the PORTAL Market).
    \6\ NASD Manual, Schedules to the By-Laws, Schedule I, Part III, 
Secs. 8 and 9 (CCH) Paras. 1962-1963 (setting forth the requirements 
for registration of an NASD member as a PORTAL dealer and PORTAL 
broker).
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    PORTAL dealers and PORTAL brokers will be required to provide a 
weekly transaction report to the PORTAL system of secondary market 
transactions in securities designated in the PORTAL Market. The weekly 
PORTAL transaction report by PORTAL dealers and PORTAL brokers of such 
secondary market transactions will include all trade report information 
and surveillance information as to the status of the investor \7\ and 
will be required to be submitted no later than the Friday of the 
following week with respect to the prior calendar week's transactions. 
PORTAL dealers and PORTAL brokers will also be required to submit a 
monthly PORTAL Surveillance Report to the PORTAL system that includes 
trade report and investor status information, but only with respect to 
primary market transactions in PORTAL securities.\8\ The monthly report 
will be required to be submitted by the tenth business day of the month 
with respect to the primary offerings that occurred in the prior 
calendar month.
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    \7\ ``Investor status information'' includes information on 
whether the contra-party was a QIB under Rule 144A, a non-QIB 
institution, or an individual or, alternatively, whether the 
transaction is to an offshore market or is into the U.S. public 
market.
    \8\ NASD Manual, Schedules to the By-Laws, Schedule I, Part III, 
Secs. 4(a) and 6(b) (CCH) Paras. 1958, 1960 (describing certain 
information required to be included in the weekly transaction report 
and the monthly Surveillance Report submitted to the NASD by PORTAL 
dealers and PORTAL brokers).
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    The NASD is not proposing to modify the current reporting 
requirements with respect to other NASD members who are not designated 
as PORTAL dealers and PORTAL brokers. Such members are required to 
submit by the fifth business day of each month a PORTAL Non-Participant 
Report that includes trade and investor status information with respect 
to primary and secondary market transactions that occurred in the prior 
month in which no PORTAL dealer or broker participated. It is 
anticipated that the PORTAL Non-Participant Report will be submitted in 
paper form.
    The NASD will provide a report to the SEC analyzing the information 
generated from weekly transaction reports submitted by PORTAL dealers 
and PORTAL brokers during the first six months of the pilot to 
determine whether there is an identifiable group of securities that 
have sufficient liquidity and volume in the secondary market to permit 
some form of last sale or other display of transactions in order to 
enhance price discovery.\9\ With respect to the reporting of primary 
transactions submitted in the monthly PORTAL Surveillance Report, the 
NASD will review such reports to determine whether they provide 
sufficient support to the NASD's surveillance function to justify their 
continued submission. The pilot will also provide necessary 
surveillance of transactions in PORTAL securities.
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    \9\ Because the PORTAL Non-Participant Report includes both 
primary and secondary market data, this data will not be used to 
develop statistics regarding secondary market trading in PORTAL 
securities.
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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.

[[Page 33157]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(a) Background
    The Nasdaq Stock Market operates The PORTAL Market for the trading 
of privately placed securities that qualify under Rule 144A under the 
Securities Act of 1933. The PORTAL Market is the only SEC-authorized 
system to provide a trading market for the resale of restricted 
securities. Securities that are designated PORTAL securities are 
eligible to receive a CUSIP number and to be settled through the 
Depository Trust Company (``DTC''). Participants in the PORTAL Market 
include PORTAL dealers, PORTAL brokers, and PORTAL qualified investors 
(``PORTAL participants''). Any member of the NASD that is registered as 
a general securities firm can become a PORTAL dealer if the member 
meets the $10 million investment in securities test under Rule 144A or 
as a PORTAL broker, where the member cannot meet the $10 million 
test.<SUP>10 Investors that meet the $100 million investment in 
securities test under Rule 144A can be registered as PORTAL qualified 
investors.<SUP>11 There are currently 115 participants in The PORTAL 
Market.
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    \10\ See, supra note 6.
    \11\ NASD Manual, Schedules to the By-Laws, Schedule I, Part IV, 
Sec. 1 (CCH) para. 1965 (setting forth the requirements for 
registration of institutional investors as PORTAL qualified 
investors).
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    The PORTAL Market accepts quotations from PORTAL dealers and PORTAL 
brokers that are one- or two-sided, firm or indicative. The PORTAL 
Market requires neither firm quotations nor market making. NASD members 
may sell PORTAL securities to any customers, regardless of whether the 
customer is a participant in the PORTAL market, so long as the 
transaction is in compliance with Rule 144A or any other available 
exemption from registration.
    On December 13, 1993, the SEC approved SR-NASD-91-05, which adopted 
significant amendments to The PORTAL Market Rules (formerly in Schedule 
I to the NASD By-Laws).<SUP>12 The amendments were immediately 
effective on the date of approval, with the exception of the new 
reporting rules which were to be effective on a date announced by the 
NASD within six months following publication in the Federal Register. 
The NASD has not announced a date of effectiveness for the new 
reporting rules.
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    \12\ Securities Exchange Act Rel. No. 33326 (Dec. 13, 1993); 58 
FR 66388 (Dec. 20, 1993).
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    The reporting requirements approved by the SEC required that 
members of the NASD registered as PORTAL dealers and PORTAL brokers 
enter a PORTAL transaction report in the PORTAL Market within 15 
minutes of a secondary market transaction. The PORTAL transaction 
report included the standard items of information relative to a 
securities trade. PORTAL dealers and PORTAL brokers were also required 
to submit by the fifth business day of a month a PORTAL Surveillance 
Report that included the same trade data with respect to the prior 
month's primary and secondary market transactions of PORTAL securities 
and, with respect to each such transaction, information on whether the 
contra-party was a QIB under Rule 144A, a non-QIB institution, or an 
individual (``investor status information''). NASD members that are not 
registered as PORTAL dealers or PORTAL brokers were also required to 
submit a monthly PORTAL Non-Participant Report including the same 
information with respect to primary and secondary transactions that 
occurred in the prior month.
    The SEC's December 13, 1993 approval order reflected in footnotes 
48 and 49 thereof the concerns of several commentators, including the 
Securities Industry Association, regarding the need for and the 
technological, staffing, and costs related to the requirement that 
PORTAL transaction reports for secondary market transactions in PORTAL 
securities be submitted to the NASD within 15 minutes of the 
transaction and that such reports would be subject to last sale 
display. In addition, the approval order referenced in footnote 62 the 
undertaking of the NASD that it would meet with members of the 
International Operations Association to determine the extent to which 
broker/dealer firms have decentralized computer and trade processing 
systems operating in different areas of their businesses, and to 
determine further the views of market participants regarding the timing 
of the secondary market reporting requirements.
Description of Proposed Rule Change
    Commencing in February 1994, the NASD entered into discussions with 
its members that are currently PORTAL brokers and PORTAL dealers. 
During such meetings, members discussed the unique problems associated 
with trade reporting of primary and secondary market transactions in 
restricted securities designated in the PORTAL Market. As a result of 
these concerns of member firms, the implementation of the reporting 
requirements approved by the SEC has been delayed and the NASD is 
proposing to establish a pilot for one year for the reporting of 
primary and secondary market transactions in securities designated in 
the PORTAL Market as PORTAL securities. The pilot will apply to members 
of the NASD that are designated in the PORTAL Market as PORTAL dealers 
and PORTAL brokers and to members of the NASD that are not PORTAL 
dealers or PORTAL brokers.\13\
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    \13\ THe NASD issued Notice to Members 95-34 in May 1995 to 
survey its members with respect to their transactions in PORTAL 
securities. The purpose of the survey was to identify members of the 
NASD that were not already PORTAL dealers and PORTAL brokers that 
transact business in PORTAL securities and, with respect to such 
members, obtain information on the level of transactions. Only nine 
members of the NASD submitted a survey form, of which, only three 
indicated that they had conducted transactions in PORTAL securities 
in the prior six months. Moreover, of the three, only one member had 
transacted business in an amount of at least $250 million.
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Reporting Obligations of PORTAL Dealers and PORTAL Brokers
    Transactions in PORTAL securities will be subject to the reporting 
requirements set forth in Section 2(a) to Part III of the PORTAL Market 
Rules. Pursuant to Section 2(a), if both the buyer and the seller to a 
transaction are PORTAL dealers or PORTAL brokers, the seller is 
obligated to report the transaction to the PORTAL System. If only one 
party to a transaction in PORTAL securities is a PORTAL dealer of 
PORTAL broker, that party is obligated to report the transaction to the 
PORTAL System. Where the reporting party is the buyer, the PORTAL 
dealer or PORTAl broker is required to provide the investor status 
information with respect to his status as a buyer.
Reporting Obligations of NASD Members That Are Not PORTAL Participants
    The NASD is not proposing to modify the reporting requirements with 
respect to other NASD members who are not designated as PORTAL dealers 
and PORTAL brokers. Such members are required by Section 2(b) and 
Section 5 of Part III of the PORTAL Rules to submit by the fifth 
business day of each month a PORTAL Non-Participant Report to the 
Market Surveillance Department of the NASD that includes trade and 
investor status information with respect to primary and secondary 
market transactions that occurred in the prior month. A member who is 
not a PORTAL dealer or broker will only be required to submit a PORTAL 
Non-

[[Page 33158]]

Participant Report if it is the only member participating in the 
transaction or if the contra-party is a member that is also not a 
PORTAL dealer or broker. Pursuant to Section 2(b), the report must be 
submitted by the seller, if both parties to the transaction are 
members. If only one party to the transaction is an NASD member, the 
member is responsible for filing the report. Because the PORTAL Non-
Participant Report includes both primary and secondary market data, 
this data will not be used to develop statistics regarding secondary 
market trading in PORTAL securities.
Securities Subject to Reporting
    The pilot reporting requirements will apply to all reportable 
PORTAL-designated securities. Reportable PORTAL-designated securities 
include all securities designated in the PORTAL Market, except for 
nonconvertible debt securities and nonconvertible preferred stock 
issued prior to December 13, 1993 which are rated in one of the top 
four generic rating categories by a nationally recognized statistical 
rating organization for which a request for deletion from the list of 
reportable securities has been made as set forth below.\14\ On December 
13, 1993, the SEC approved amendments to the rules of the DTC that 
permitted DTC to make such investment grade securities eligible for its 
book-entry delivery and other depository services without the need for 
the securities to also be designated for inclusion in The PORTAL 
Market. Thus, subsequent to that date, issuers of such investment grade 
securities have the option of not being PORTAL designated. To the 
extent issuers have nonetheless determined to obtain PORTAL designation 
of their securities, transactions in such securities will be subject to 
the PORTAL pilot reporting requirements unless a procedure is followed 
that would result in termination of the PORTAL designation of the 
security.
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    \14\ See, Securities Exchange Act Release No. 33327 (Dec. 13, 
1993), 58 FR 67878 (Dec. 21, 1993).
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    With respect to investment grade securities issued on or after 
December 13, 1993, such securities will be included in the list of 
reportable securities, unless PORTAL designation of the issue has been 
terminated as a result of the submission of an appropriate modified 
letter of representation by the issuer to DTC to qualify for the 
investment grade exemption from PORTAL designation under DTC rules. 
This procedure would require that the issuer agree to amend its 
original letter of representation to provide information on the 
investment grade rating of the issue and to request that the security 
be approved in DTC under the exemption from PORTAL designation for 
investment grade securities. Upon acceptance by DTC of the issuer's 
modified letter of representation, a letter must be submitted to The 
PORTAL Market by a PORTAL dealer or PORTAL broker that is signed by an 
associated person of the member with supervisory authority. The letter 
must request that a security's designation be terminated and include a 
copy of the letter of representation by the issuer to DTC (as well as 
any other documentation) to qualify for the investment grade exemption 
from PORTAL designation under DTC rules. DTC and the PORTAL Market will 
coordinate to promptly set a date for termination of the security as a 
PORTAL-designated security.
    With respect to investment grade securities designated in the 
PORTAL Market prior to December 13, 1993, such securities will be 
included in the list of reportable PORTAL securities unless a PORTAL 
dealer or PORTAL broker submits a letter of representation signed by an 
associated person of a member with supervisory authority that 
identifies each security that the member believes is rated investment 
grade and provides with respect to each such security: (1) A statement 
whether the security is a nonconvertible debt security or a 
nonconvertible preferred stock; (2) the rating of the security and/or 
the lowest rating of any tranche of the security; \15\ and (3) the date 
the offering was issued. Upon acceptance of this submission by the 
PORTAL Market, the security will be deleted from the list of securities 
subject to the PORTAL pilot reporting requirements, but the security 
will not be terminated as a PORTAL-designated security.
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    \15\ If separate tranches of a security are rated individually, 
the security does not qualify for the exemption from the reporting 
requirements if any tranche is rated below investment grade.
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    The PORTAL Market is currently developing a list of PORTAL 
securities in order for PORTAL brokers and dealers and other members to 
be able to identify those securities subject to the PORTAL pilot 
reporting requirements. All securities designated in the PORTAL Market 
will be included in the list, unless: (1) a member has requested to not 
include a security that is an investment grade rated nonconvertible 
debt security or preferred stock issued prior to December 13, 1993; or 
(2) the security's designation has been terminated pursuant to the 
procedures set forth above for investment grade rated nonconvertible 
debt or preferred stock issued on or after December 13, 1993 or is 
terminated for another reason.
Investor Status Information
    The PORTAL pilot will require that the weekly transaction report 
and monthly Surveillance Report of PORTAL dealers and brokers include 
investor status information. In reviewing this requirement, which is 
drawn from the provisions of the PORTAL Rules, the NASD determined that 
there are two situations where the investor status information is not 
relevant; the first is in connection with sales to an offshore market 
and the second relates to sales into the U.S. public market (pursuant 
to a registration statement, Rule 144 or any other applicable 
exemption). The NASD believes that the request of SEC staff for 
information on investor status in the reporting of a transaction to the 
PORTAL system was intended to be applicable to transactions within the 
U.S. private market. The NASD, therefore, determined that the required 
reports by PORTAL dealers and PORTAL brokers will permit the investor 
status information field to accept two alternative entries of either 
``Offshore'' or ``U.S. Public Market'' to indicate that the transaction 
is not in the U.S. private market. Thus, with respect to each reported 
transaction, members may either enter the requisite investor status 
information on the contra-party or indicate that such information is 
not applicable as the transaction is to an offshore market or the U.S. 
public market.\16\
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    \16\ While the identity of the contra-party is only required 
with respect to the party with whom the member is engaged in the 
transaction consistent with Section 4 to Part III of the PORTAL 
Rules, investor status information is required with respect to the 
buyer or buyers in the transaction consistent with Section 6 of Part 
III of the PORTAL Rules. If the contra-party is purchasing as 
principal, the investor status information would be provided with 
respect to the contra-party. If the contra-party is purchasing as 
agent, the investor status information would be required with 
respect to the account(s) on whose behalf the contra-party is 
purchasing. In providing the investor status information, it is the 
understanding of the NASD that it is industry practice for members 
to rely on representations of the agent/contra-party as to whether 
the buyer is a qualified institutional buyer, a non-QIB institution, 
or an individual.
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Time of Execution
    The PORTAL reporting requirements under the pilot are triggered 
when a trade is ``executed.'' The term ``execution'' is defined in the 
PORTAL Rules as ``entering into a purchase, sale or transfer of a 
PORTAL security.'' Members have requested clarification of when a 
transaction in a PORTAL security is considered executed in light of the 
fact that transactions in restricted

[[Page 33159]]

securities may require negotiation of the transaction price, agreement 
on the currency of settlement and time to obtain Rule 144A compliance 
documentation.
    The NASD has determined that the time of ``execution'' with respect 
to a transaction in a PORTAL security shall be the point when all of 
the terms of the trade have been agreed to and the parties are ready to 
send the transaction to clearance and settlement. So long as the terms 
of the transaction remain outstanding, the transaction would not be 
deemed to be executed because the parties are not ready to enter ``into 
a purchase, sale or transfer of a PORTAL security.'' With respect to 
the transfer of documents demonstrating compliance with Rule 144A or 
any other applicable exemption, it appears that the transfer of such 
documentation may occur at some later time although the seller would 
have previously determined the exemption to be relied on. Thus, the 
time when documentation supporting reliance on Rule 144A or any other 
applicable exemption is completed would not affect the time when an 
``execution'' of a transaction in a PORTAL security is deemed to occur.
    (b) The NASD believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act in that the 
establishment of a pilot to develop criteria for designation of 
securities that should be subject to last sale display and to initiate 
trade reporting under the pilot will allow the NASD to surveil 
transactions in restricted securities that are designated in The PORTAL 
Market and will prevent fraudulent and manipulative acts and practices, 
will promote just and equitable principles of trade, and will remove 
impediments to and prefect the mechanism of a free and open 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, 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 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 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 in Washington, D.C. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to the file 
number in the caption above and should be submitted by July 17, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16291 Filed 6-25-96; 8:45 am]
BILLING CODE 8010-01-M