Document ID: SEC-2007-0938-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-07-11T04:00Z

[Federal Register: July 11, 2007 (Volume 72, Number 132)]
[Notices]               
[Page 37807-37809]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy07-133]                         

[[Page 37807]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56007; File No. SR-NASD-2007-046]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Allow NASD Members To Use the NASD/Nasdaq Trade 
Reporting Facility To Process Transaction Fees Charged by One Member to 
Another Member

July 3, 2007.
    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 July 3, 2007, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the NASD. 
NASD has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission.\4\ 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.
    \3\ 17 CFR 240.19b-4.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to (1) amend NASD Rule 6130 (Trade Report Input) 
to allow NASD members to use the NASD/Nasdaq Trade Reporting Facility 
(the ``NASD/Nasdaq TRF'') to process transaction fees charged by one 
member to another member on trades in NMS stocks, as defined in Rule 
600(b)(47) of Regulation NMS under the Act, effected otherwise than on 
an exchange; and (2) repeal NASD Interpretive Material (IM)-2230 
(``Third Market'' Confirmations) to ensure the efficacy of the 
transaction fee transfer mechanism proposed herein.
    The text of the proposed rule change is available at the NASD, the 
Commission's Public Reference Room, and http://www.nasd.com.

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.

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

1. Purpose
Background
    Historically, there has been no mechanism for members to charge 
each other commissions or other explicit transaction fees through the 
NASD trade reporting and clearance submission process. Generally, 
members that want to charge other members an explicit transaction fee 
must bill and collect these fees directly from the other member outside 
the transaction reporting and clearing process.
    Some members, however, trade on a ``net'' basis, meaning that the 
broker-dealer's compensation is implicitly included in the execution 
price disseminated to the tape and reported for clearance and 
settlement to the National Securities Clearing Corporation (``NSCC''). 
For example, broker-dealer 1 (B/D 1) wants to purchase a security at 
$10, with a transaction fee of $.01 per share from broker-dealer 2 (B/D 
2). Rather than selling the security at $10 and then charging a 
separate transaction fee of $.01 per share, B/D 2 will sell the 
security to B/D 1 ``net'' at a price of $10.01. Because $10.01 is the 
reported price, the transaction fee is included as part of the trade 
and is transferred as part of the clearance and settlement process. 
However, with the adoption of the Regulation NMS Order Protection Rule 
(Rule 611 of Regulation NMS under the Act), trades reported on a 
``net'' basis are more apt to trade through protected quotes than those 
reported on a gross basis. For example, in the scenario above, if the 
protected inside market was $9.95 to $10, a trade at $10.01 may 
constitute a trade-through for the purposes of the Regulation NMS Order 
Protection Rule (i.e., the trade is at a price worse than the best 
displayed offer for the security).
    The Securities Industry and Financial Markets Association (SIFMA), 
on behalf of certain NASD member firms, approached Nasdaq and NASD 
concerning this issue and requested that the NASD/Nasdaq TRF facilitate 
the processing of transaction fees between members. They indicated that 
upon the implementation of the Regulation NMS Order Protection Rule, 
many member firms intend to stop trading ``net'' and begin charging an 
explicit transaction fee for each trade.
Proposed Amendments To Allow Inclusion of Transaction Fees in Clearing 
Reports
    NASD is proposing to adopt new paragraph (h) of Rule 6130,\5\ which 
provides that NASD members may agree in advance to transfer a 
transaction fee charged by one member to another member on a 
transaction in NMS stocks, as defined in Rule 600(b)(47) of Regulation 
NMS under the Act, effected otherwise than on an exchange through the 
submission of a clearing report to the NASD/Nasdaq TRF. The report 
submitted to the NASD/Nasdaq TRF shall provide, in addition to all 
other information required to be submitted by any other rule, a total 
per share or contract price amount, inclusive of the transaction fee. 
As a result, members would submit two price amounts as part of their 
report to the NASD/Nasdaq TRF: One price including the transaction fee, 
which would be submitted by the NASD/Nasdaq TRF to NSCC for clearance 
and settlement; and one price exclusive of the transaction fee, which 
would be reported to the appropriate Securities Information Processor 
for public dissemination. For example, if B/D 1 purchases from B/D 2 at 
$10.00 and B/D 1 and B/D 2 agree to a transaction fee of $.01 per 
share, the trade price that would be publicly disseminated would be 
$10.00, while the trade would be cleared and settled by NSCC at 
$10.01.\6\ The parties to the trade would know both prices--the price 
reported for public dissemination and the clearance/settlement price.
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    \5\ In this rule filing, NASD is proposing to redesignate 
current paragraph (h) of Rule 6130 as paragraph (i).
    \6\ Today, if this transaction were effected on a net basis, the 
transaction at a price of $10.01 would both be reported to the tape 
and submitted to NSCC.
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    In addition, the proposed rule provides that both members and their 
respective clearing firms, as applicable, must execute an agreement, as 
specified by NASD, permitting the facilitation of the transfer of the 
transaction fee through the NASD/Nasdaq TRF, as well as any other 
applicable agreement, such as a give up agreement pursuant to Rule

[[Page 37808]]

4632(h). Such agreement must be executed and submitted to the NASD/
Nasdaq TRF before the members can transfer any transaction fee under 
the proposed rule. Among other things, the form of agreement specified 
by NASD would expressly provide that the acceptance and processing by 
the NASD/Nasdaq TRF of the transaction fee as part of a trade report 
shall not constitute an estoppel as to NASD or bind NASD in any 
subsequent administrative, civil or disciplinary proceeding with 
respect to the transaction fee transferred. In other words, processing 
of a transaction fee by the NASD/Nasdaq TRF should not be taken to mean 
that NASD approved that transaction fee or its amount or its 
appropriateness under NASD rules or federal securities laws. The mere 
fact that the transaction fee flowed through an NASD facility will not 
be a defense to any action taken by NASD relating to the fee. The 
proposed rule also provides that the relevant agreements are considered 
member records for purposes of NASD Rule 3110(a) and must be made and 
preserved by both members in conformity with applicable NASD rules.
    Furthermore, the proposed rule expressly provides that it shall not 
relieve a member from its obligations under NASD rules and federal 
securities laws, including but not limited to, NASD Rule 2230 
(Confirmations) and SEC Rule 10b-10. To the extent that any transaction 
fee is passed onto the customer, members should review their customer 
confirmation obligations to ensure that they are disclosing such fees 
in compliance with all applicable rules and regulations, as well as 
other NASD rules, including but not limited to, NASD Rules 2320 (Best 
Execution) and 2440 (Fair Prices and Commissions).
    The proposed rule relates solely to transaction fees charged by one 
NASD member to another NASD member. Members would not be able to use 
the NASD/Nasdaq TRF to facilitate the transfer of fees for transactions 
with a customer (i.e., clients that are not brokers or dealers) or a 
non-member. In addition, the NASD/Nasdaq TRF can only be used to 
facilitate the transfer of transaction fees. Members would not be able 
to use the NASD/Nasdaq TRF to transfer access fees or rebates on 
transactions.
    Pursuant to SR-NASD-2007-040,\7\ NASD proposed amendments to 
prohibit members from submitting to an NASD Facility (i.e., a Trade 
Reporting Facility or the Alternative Display Facility) any report 
associated with a previously executed trade that was not reported to 
that NASD Facility. Thus, members will not be permitted to use the 
NASD/Nasdaq TRF to transfer transaction fees on any trades that were 
previously reported to another NASD Facility.
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    \7\ See Securities Exchange Act Release No. 55962 (June 26, 
2007), 72 FR 36536 (July 3, 2007) (notice of filing and immediate 
effectiveness of SR-NASD-2007-040).
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    NASD also is proposing to amend Rule 6130(d) (Trade Information To 
Be Input) to require that for any transaction for which the NASD/Nasdaq 
TRF is used to transfer a transaction fee between two NASD members, the 
trade report must comply with the requirements of proposed Rule 
6130(h).
    Finally, IM-2230 (``Third Market'' Confirmations) requires any 
member that absorbs a transaction fee transferred pursuant to proposed 
Rule 6130(h) to include a legend to that effect on the customer 
confirmation. However, given that such a transaction fee, by 
definition, has been absorbed by the member and, as appropriate, 
incorporated into the fee paid by and disclosed to the customer on the 
confirmation, such disclosure provides no or minimal additional 
information to the customer. Accordingly, NASD is proposing to repeal 
IM-2230 because it could be unduly burdensome on members and 
potentially reduce the efficacy of the transaction fee transfer 
mechanism proposed herein, in light of the anticipated increase in the 
number of trades for which a transaction fee will be charged, while 
providing only minimal additional information to customers.
    NASD notes that the proposed rule change does not include any 
proposed rules relating to fees for use of the NASD/Nasdaq TRF to 
transfer transaction fees pursuant to proposed new Rule 6130(h). Such 
fees will be the subject of a future rule filing with the Commission.
    NASD has filed the proposed rule change for immediate effectiveness 
and requested a waiver of the 30-day operative delay to allow the 
proposed rule change to become operative on the Regulation NMS Pilot 
Stocks Phase Date, July 9, 2007.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD rules 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 that by automating and improving fee 
transfers as a value-added service, the proposed rule change will 
assist members in complying with their obligations under Regulation 
NMS.
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    \8\ 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 impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    NASD has neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \9\ and subparagraph (f)(6) of Rule 19b- 
4\10\ thereunder because it does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; (iii) become operative for 30 days 
from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ Rule 19b-4(f)(6)(iii) requires that a self-regulatory 
organization submit to the Commission written notice of its intent 
to file the proposed rule change, along with a brief description and 
text of the proposed rule change, at least five business days prior 
to the date of filing of the proposed rule change, or such shorter 
time as designated by the Commission. NASD has satisfied the five-
day pre-filing notice requirement.
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    Under Rule 19b-4(f)(6) of the Act,\12\ the proposal does not become 
operative for 30 days after the date of its filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest. The Commission believes that the 
proposed rule change is beneficial because it will: (1) Make 
transaction fees transparent by virtue of their being separately 
reported; and (2) assist members in conducting their business 
consistent with their obligations under Regulation NMS that commence on 
the Pilot Stocks Phase date of July 9, 2007. Therefore, the Commission 
believes that it is consistent with the protection of investors and the 
public interest to

[[Page 37809]]

waive the 30-day operative date so that the proposal may take effect 
upon filing.\13\
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    \12\ Id.
    \13\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of such proposed 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.

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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-NASD-2007-046 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-046. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing will also be available for 
inspection and copying at the principal office of the 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-2007-046 and should be 
submitted on or before August 1, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-13398 Filed 7-10-07; 8:45 am]

BILLING CODE 8010-01-P