Document ID: SEC-2008-1297-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-09-24T04:00Z

[Federal Register: September 24, 2008 (Volume 73, Number 186)]
[Notices]               
[Page 55192-55194]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24se08-155]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58569; File No. SR-NASDAQ-2008-033]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change as Modified by Amendment Nos. 1 and 2 
Related to Submission of Non-Tape Reports

September 17, 2008.

I. Introduction

    On April 18, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change related to submission of non-tape reports. On July 3, 2008, 
Nasdaq filed Amendment No. 1 to the proposed rule change. The proposed 
rule change was published for comment in the Federal Register on July 
11, 2008.\3\ Two comments were received in support of the proposed rule 
change.\4\ On August 11, 2008, Nasdaq filed Amendment No. 2 to the 
proposed rule change to make certain technical, non-substantive 
modifications to the original rule filing. This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58101 (July 3, 
2008), 73 FR 40002.
    \4\ See e-mail from Kirk Allen, Managing Director, Trading, NWQ 
Investment Management, dated August 1, 2008 (``NWQ Investment 
Letter'') and letter from William D. Edick, Pickard and Djinis LLP, 
to Florence E. Harmon, Acting Secretary, Commission, dated September 
11, 2008 (``Pickard Letter'').
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II. Description of the Proposal

    The proposed rule change would: Expand the scope of step-outs \5\ 
to include all securities transfers from one Nasdaq member to another 
provided the transfer does not constitute a reportable trade,\6\ 
eliminate the requirement for an authorizing agreement when Nasdaq 
members use the Automated Confirmation Transaction service (``ACT'') to 
effect a step-out along with the transfer of a sales fee or similar 
fee,\7\ describe riskless transactions,\8\ state that members may not 
use the step-out function in lieu of reporting a trade,\9\ and 
establish a fee for the use of the step-out function to transfer a 
transaction fee.\10\
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    \5\ Nasdaq states that a step-out is a clearing entry used to 
transfer a broker's position in a security to another broker, or 
within accounts at a firm.
    \6\ Rule 7038(b).
    \7\ Rule 7038(c).
    \8\ Rule 7042. Nasdaq states that this requirement follows the 
general standard for riskless principal transactions articulated in 
Financial Industry Regulatory Authority (``FINRA'') Rule 
4632(d)(3)(B).
    \9\ Rule 7038(d), 7042(b) and 7043(a).
    \10\ Rule 7043.
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    Nasdaq will allow members to submit records for riskless transfers 
using the following capacities: ``Riskless Principal'' where the member 
acted as principal on the trade or trades related to the riskless 
submission; ``Agent'' where the member acted as agent on the trade or 
trades related to the riskless submission; and ``Intra-Broker'' where 
the transfer is occurring strictly within a member firm.

Transaction Fees

    According to Nasdaq, trade reporting rules of other SROs allow 
transaction fees to be included in clearing reports. Nasdaq proposes to 
permit members to include transaction fees in clearing reports 
submitted under Rule 7038 or 7042, if the members agree in advance to 
transfer the transaction fee and if they are parties to a written 
agreement

[[Page 55193]]

permitting the submission of fee-inclusive clearing reports. Nasdaq 
would allow members to transfer to another Nasdaq member transaction 
fees using the clearing reports that Nasdaq forwards to the National 
Securities Clearing Corporation (``NSCC'') to clear a trade. Nasdaq 
will impose a fee of $0.03 per-side for each such clearing report.\11\
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    \11\Nasdaq states that under NASD Rule 7002B, FINRA/Nasdaq TRF 
participants are charged a fee of $0.03 per side for submission of a 
clearing report to transfer a transaction fee charged by one FINRA 
member to another.
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Step-Outs

    A step-out is a transfer of all or a portion of a broker-dealer's 
securities position to another broker-dealer which transfer does not 
constitute a trade. According to Nasdaq, this proposal builds upon 
previous attempts to provide step-out parameters for its members. 
Nasdaq initially offered step-out capability in 2007 because FINRA 
rules restricted the use of step-outs to those portions of trades that 
were originally executed by, and reported to, FINRA facilities.\12\ 
Certain broker-dealers wished to engage in step-outs but did not have 
systems in place to capture the venue of the original trade execution 
and/or they may have executed various portions of the underlying trade 
in non-FINRA facilities. FINRA rules do not permit the use of step-outs 
under these conditions. Accordingly, Nasdaq amended its rules to allow 
the use of step-outs in connection with any trade to which a Nasdaq 
member was a party regardless of the market on which the trade was 
executed.\13\
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    \12\ See Securities Exchange Act Release No. 56345 (August 31, 
2007), 72 FR 51880 (September 11, 2007).
    \13\ Id.
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    Nasdaq amended its step-out rules again in 2007 to require clearing 
member firms that wanted to transfer certain sales fees without 
transferring the underlying shares to have an authorizing agreement. No 
authorizing agreement is required when Nasdaq members conduct step-outs 
if the transfers are limited to transfer of the underlying shares.\14\
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    \14\ See Securities Exchange Act Release No. 56929 (December 7, 
2007), 72 FR 71176 (December 14, 2007).
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    Nasdaq is again expanding its step-out parameters: first, it 
proposes to expand the scope of step-outs to include all securities 
transfers from one Nasdaq member to another provided that the transfer 
does not constitute a reportable trade; second, Nasdaq is eliminating 
the requirement for an authorizing agreement when Nasdaq members use 
ACT to effect a step-out along with the transfer of a sales or similar 
fee.\15\ Third, Nasdaq is reiterating in its rules that step-outs are 
not trade reports and cannot be used as such and reminding members of 
the need to comply with trade reporting rules of other SROs governing a 
particular transaction.\16\ Finally, Nasdaq is implementing a fee for 
step-outs that also transfer a transaction fee.
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    \15\ Nasdaq represents that step-outs are already completed 
pursuant to formal agreements among Nasdaq members or through ACT's 
comparison processes, which renders the current requirement for an 
authorizing agreement duplicative.
    This proposed rule change would not change the requirement of a 
formal sales fee transfer agreement between firms that wish to use 
ACT to move sales fees without an accompanying transfer of 
securities. Nasdaq believes that it is important to retain the 
requirement that the parties to a fee transfer have a written 
agreement specifically permitting the fee transfers because a sales 
fee transfer that moves no shares is not a step-out and therefore 
there are no specific share movements for firms to readily identify 
as being associated with the fee transfer.
    \16\ See Rules 7038(d), 7042(b) and 7043(a).
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    Nasdaq believes that the above changes will enhance the ability of 
Nasdaq members to transfer securities positions and their associated 
fees in an efficient and transparent manner.

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \17\ and, in particular, the requirements of Section 6 of the 
Act.\18\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\19\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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's proposal to expand the use of step-outs, as described above 
should enhance the efficiency and transparency to members of their 
post-trade operations.
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    \17\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission received two comment letters on the proposed rule 
change.\20\ One commenter expressed support for Nasdaq's proposal and 
stated it believes Nasdaq's proposal will bring added transparency.\21\ 
The other commenter questioned the impact this proposed rule change may 
have on Exchange Act Rule 10b-10 \22\ disclosure requirements.\23\
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    \20\ See supra note 4.
    \21\ See NWQ Letter, supra note 4.
    \22\ 17 CFR 240.10b-10.
    \23\ See Pickard Letter, supra note 4. The Commission believes 
that this comment raises an interpretive question regarding the 
applicability of Exchange Act Rule 10b-10 and is outside of the 
scope of NASDAQ's proposed rule change. Procedures applicable to 
requests for no-action and interpretive letters from the Division of 
Trading and Markets are available in Securities Act Release No. 6269 
(December 5, 1980) (available at: http://www.sec.gov/rules/other/33-
6269.pdf).
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    Nasdaq's proposal to allow submission of non-tape, riskless 
principal reports through ACT should facilitate the transfer of 
information between parties to the transaction and make the trade 
record information electronically available. It can facilitate the 
ultimate transmission of the transfer records to the appropriate 
clearing agency.\24\ The Commission notes that Nasdaq members can not 
satisfy any trade reporting obligations by submitting non-tape, 
clearing, or non-tape, non-clearing records to ACT. Furthermore, the 
Commission expects Nasdaq to monitor the expanded use of the step-out 
functionality to ensure that its members use these position movements 
as specified in the rule, and not to effect trades.
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    \24\ The Commission notes that Nasdaq represents it will 
continue to honor Attachment 2's and Uniform Trade Reporting 
Agreements on file with it or the FINRA/Nasdaq TRF.
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    Nasdaq's proposal to allow the transfer of fees in conjunction with 
the step-out is analogous to rules of other SROs which allow 
transaction fees to be included in clearing reports.\25\ The Commission 
understands that although Nasdaq no longer requires members to have 
agreements in place for step-out transactions, the transaction 
comparison process itself requires the acquiescence of both parties for 
the ACT system to complete the transaction. A member retains the 
opportunity to manually reject or reverse the step-out and fee transfer 
arrangement if it disagrees with their terms when the terms are 
presented to the member even after the

[[Page 55194]]

step-out and fee transfer had initially been affirmed.\26\
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    \25\ When a firm uses this function the fee will be 
electronically billed and collected.
    \26\ Nasdaq represents that it determined through discussions 
with its member firms that many firms preferred to handle step-outs 
on a match/compare basis, i.e. manually, even when they had a fee 
agreement between them and that it was an unnecessary burden for 
firms to sign separate agreements to move fees associated with step-
out submissions to ACT since this functionality already was in place 
on ACT.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 6 of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NASDAQ-2008-033), as 
modified by Amendments No. 1 and 2, be and hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E8-22379 Filed 9-23-08; 8:45 am]

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