Document ID: SEC-2005-0120-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-10-18T04:00Z

[Federal Register: October 18, 2005 (Volume 70, Number 200)]
[Notices]               
[Page 60592-60594]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc05-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52581; File No. SR-NASD-2005-101]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Expansion of OATS Reporting Requirements to OTC Equity Securities

October 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 25, 2005, the National Association of Securities 
Dealers, Inc. (``NASD'') 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 NASD. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 6951 and 6952 to require 
members to record and report to the Order Audit Trail System (``OATS'') 
order information relating to OTC equity securities. Below is the text 
of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in brackets.
* * * * *
6950. Order Audit Trail System
6951. Definitions
    For purposes of Rules 6950 through 6957:
    (a) through (i) No change.
    (j) ``Order'' shall mean any oral, written, or electronic 
instruction to effect a transaction in a Nasdaq Stock Market equity 
security or OTC 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.
    (k) ``Order Audit Trail System'' shall mean the automated system 
owned and operated by the Association that is designed to capture order 
information reported by members for integration with trade [information 
reported to the Nasdaq Market Center] and quotation information 
[disseminated by members in order] to provide the Association with an 
accurate time sequenced record of orders and transactions.
    (l) ``OTC equity security'' shall mean:
    (1) any equity security that is not listed on The Nasdaq Stock 
Market or a national securities exchange;
    (2) any equity security that is listed on one or more regional 
stock exchanges and does not qualify for dissemination of transaction 
reports via the facilities of the Consolidated Tape; or
    (3) any Direct Participation Program as defined in Rule 6910 that 
is not listed on The Nasdaq Stock Market or a national securities 
exchange.
    [(l)] (m) ``Program Trade'' shall mean a trading strategy involving 
the related purchase or sale of a group of 15 or more securities having 
a total market value of $1 million or more, as further defined in New 
York Stock Exchange Rule 80A.
    [(m)] (n) ``Reporting Agent'' shall mean a third party that enters 
into any agreement with a member pursuant to which the Reporting Agent 
agrees to fulfill such member's obligations under Rule 6955.
    [(n)] (o) ``Reporting Member'' shall mean a member that receives or 
originates an order and has an obligation to record and report 
information under Rules 6954 and 6955.

[[Page 60593]]

6952. Applicability
    (a) through (b) No change.
    (c) Unless otherwise indicated, the requirements of Rules 6953 
through 6957 shall apply to all executed or unexecuted orders [for 
equity securities traded in The Nasdaq Stock Market].
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. NASD 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
    NASD Rules 6950 through 6957 (the ``OATS Rules'') impose 
obligations on member firms to record in electronic form and report to 
NASD on a daily basis certain information with respect to orders 
originated, received, transmitted, modified, canceled or executed by 
NASD members relating to equity securities listed and traded on The 
Nasdaq Stock Market, Inc. (``Nasdaq''). OATS captures this order 
information and integrates it with quote and transaction information to 
create a time-sequenced record of orders, quotes and transactions. This 
information is critical to NASD in conducting surveillance and 
investigations of member firms for violations of NASD rules and federal 
securities laws.
    To enhance the effectiveness of OATS as a regulatory tool, NASD is 
proposing to amend the OATS Rules to require members to record and 
report order information relating to OTC equity securities. For 
purposes of the proposed rule change, an ``OTC equity security'' is 
defined as (1) any equity security that is not listed on Nasdaq or a 
national securities exchange; (2) any equity security that is listed on 
one or more regional stock exchanges and does not qualify for 
dissemination of transaction reports via the facilities of the 
Consolidated Tape; or (3) any Direct Participation Program as defined 
in NASD Rule 6910 that is not listed on Nasdaq or a national securities 
exchange. This definition would include, inter alia, equity securities 
quoted on the OTC Bulletin Board Service and the Pink Sheets Electronic 
Quotation Service.
    Currently, the OATS requirements do not apply to OTC equity 
securities and as a result, NASD is unable to recreate, on an automated 
basis, an order and transaction audit trail for these securities. NASD 
believes that expansion of OATS requirements to these securities would 
enhance its ability to review and examine for member compliance with 
certain trading rules, including, but not limited to, NASD Rule 2320 
(Best Execution and Interpositioning), NASD Rule 6541 (Limit Order 
Protection) and NASD Rule 3320 (Offers at Stated Prices). NASD 
recognizes that the trading in OTC equity securities is often more 
manual than Nasdaq securities and this may result in additional burdens 
on member firms to capture this data electronically. NASD, however, 
believes capturing and reporting this information electronically to 
NASD is critical to NASD's surveillance program.
    In recognition of the technological and systems changes the 
proposed rule change will require, NASD is proposing an effective date 
of 120 days following publication of revised OATS Technical 
Specifications, which will be published no later than 60 days following 
Commission approval. The effective date will be announced in a Notice 
to Members.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\3\ which requires, among 
other things, that NASD 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. NASD believes the proposed rule change is consistent 
with the Act because it will enhance NASD's ability to conduct 
surveillance and investigations of member firms for violations of 
NASD's rules and federal securities laws.
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    \3\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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

    The proposed rule change was published for comment in NASD's Notice 
to Members 04-80 (November 2004) (``NTM''). In the NTM, NASD solicited 
comment from members regarding several proposals, only one of which is 
encompassed by the proposed rule change.\4\ Eight comment letters were 
received with respect to this proposal in response to the NTM.\5\
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    \4\ Three other proposals were discussed in the NTM, but are not 
part of this proposed rule change. The first would require members 
to record and report to OATS order information relating to exchange-
listed securities. The second would require enhanced information, 
including execution data, relating to orders routed to non-members 
or exchanges. The third would require members to record and report 
to OATS proprietary orders generated in the ordinary course of 
market making activities. NASD is still analyzing these proposals 
and therefore is not proposing amendments related to these proposals 
at this time. Accordingly, NASD is not addressing herein the 
comments received in response to these three proposals.
    \5\ See letters from Emily Vitale dated November 24, 2004; 
Joseph P. Traba on behalf of ML Stern & Co., LLC dated January 14, 
2005 (``ML Stern Letter''); Caroline F. Langner, Director, Corporate 
Compliance, Ameritrade, Inc. dated January 18, 2005 (``Ameritrade 
Letter''); Deborah Mittelman, First Vice President, Instinet Group 
dated January 20, 2005; Stuart Bowers, Chairman, Operations 
Committee of the Securities Industry Association dated January 20, 
2005 (``SIA Letter''); Jess Haberman, Chief Compliance Officer and 
Vice President, royalblue Financial Corporation dated January 20, 
2005 (``royalblue Letter''); Jed Bandes dated January 20, 2005 
(``Bandes Letter''); and Rob Schroeder, FIF Program Director, The 
Financial Information Forum dated January 21, 2005 (``FIF Letter'').
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    Two commenters expressed support for the proposal to expand OATS 
requirements to OTC equity securities.\6\ One commenter noted that it 
would not be difficult to extend OATS reporting to such securities.\7\ 
Another commenter noted that such a change would be relatively 
straightforward, but indicated that service bureaus will need adequate 
time to make the required system changes.\8\ One commenter stated that 
expanding OATS requirements to OTC equity securities would be 
problematic because the nature of that business is manual, not 
electronic.\9\ The commenter indicated that the proposal would require 
manual recording of data at all locations through which the order may 
pass, which would result in delays in executions and a high rate of 
errors if order information is communicated orally.\10\
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    \6\ See Ameritrade Letter and royalblue Letter.
    \7\ See royalblue Letter.
    \8\ See FIF Letter.
    \9\ See SIA Letter.
    \10\ Id.

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[[Page 60594]]

    One commenter noted the significant burdens of the proposal and 
suggested that NASD allow at least six months for implementation of the 
proposed rule change.\11\ Another commenter noted the other significant 
industry initiatives that require management and development resources 
and requested a reasonable time to implement the proposed changes.\12\ 
Two commenters opposed the OATS rules generally, without specifically 
commenting on any of the proposals.\13\ These commenters cited the 
additional costs and burdens to member firms of complying with the OATS 
requirements.\14\
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    \11\ See Ameritrade Letter.
    \12\ See FIF Letter.
    \13\ See ML Stern Letter and Bandes Letter.
    \14\ Id.
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    Although it understands that the proposed rule change may impose 
additional costs and burdens on members, in part due to the more manual 
nature of trading in OTC equity securities, NASD believes that this 
additional OATS data is critical to NASD's surveillance and regulatory 
program. To address the concerns raised by commenters, as described 
above, NASD has proposed an extended implementation period, which NASD 
believes will provide members adequate time to make the necessary 
technological and systems changes.

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 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-101 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-101. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 the 
filing also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2005-101 and should be submitted on or before November 8, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-5718 Filed 10-17-05; 8:45 am]

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