Document ID: SEC-2006-0445-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-04-06T04:00Z

[Federal Register: April 6, 2006 (Volume 71, Number 66)]
[Notices]               
[Page 17529-17532]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap06-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53580; File No. SR-NASD-2006-040]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change To Expand NASD's Order Audit Trail System 
Exemptive Authority To Include Recording Requirements

March 30, 2006.
    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 March 28, 2006, 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 and II below, which Items have been prepared by NASD. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to approve the 
proposal on an accelerated basis.
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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 expand NASD's current Order Audit Trail System 
(OATS) exemptive authority to include recording requirements. Below is 
the text of the proposed rule change. Proposed new language is in 
italics; proposed deletions are in [brackets].\3\
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    \3\ The proposed changes indicated herein are based on rule text 
approved by the SEC on September 28, 2005, which become effective on 
May 8, 2006. See Securities Exchange Act Release No. 52521 
(September 28, 2005), 70 FR 57909 (October 4, 2005) (File No. SR-
NASD-00-23).
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* * * * *

6950. Order Audit Trail System

* * * * *

6955. Order Data Transmission Requirements

    (a) through (c) No Change.
    [(d) Exemptions]
    [(1) Pursuant to the Rule 9600 Series, the staff, for good cause 
shown after taking into consideration all relevant factors, may exempt, 
subject to specified terms and conditions, a member from the order data 
transmission requirements of this Rule for manual orders, if such 
exemption is consistent with the protection of investors and the public 
interest, and the member meets the following criteria:]
    [(A) the member and current control affiliates and associated 
persons of the member have not been subject within the last five years 
to any final disciplinary action, and within the last ten years to any 
disciplinary action involving fraud;]
    [(B) The member has annual revenues of less than $2 million;]
    [(C) The member does not conduct any market making activities in 
Nasdaq Stock Market equity securities;]
    [(D) The member does not execute principal transactions with its 
customers (with limited exception for principal transactions executed 
pursuant to error corrections); and]
    [(E) The member does not conduct clearing or carrying activities 
for other firms.]
    [(2) An exemption provided pursuant to this paragraph (d) shall not 
exceed a period of two years. At or prior to the expiration of a grant 
of exemptive relief under this paragraph (d), a member meeting the 
criteria set forth in paragraph (d)(1) may request, pursuant to the 
Rule 9600 Series, a subsequent exemption, which will be considered at 
the time of the request, consistent with the protection of investors 
and the public interest.]
    [(3) This paragraph shall be in effect until May 8, 2011.]
* * * * *

6958. Exemption to the Order Recording and Data Transmission 
Requirements

    (a) Pursuant to the Rule 9600 Series, the staff, for good cause 
shown after

[[Page 17530]]

taking into consideration all relevant factors, may exempt, subject to 
specified terms and conditions, a member from the recording and order 
data transmission requirements of Rules 6954 and 6955, respectively, 
for manual orders, if such exemption is consistent with the protection 
of investors and the public interest, and the member meets the 
following criteria:
    (1) The member and current control affiliates and associated 
persons of the member have not been subject within the last five years 
to any final disciplinary action, and within the last ten years to any 
disciplinary action involving fraud;
    (2) The member has annual revenues of less than $2 million;
    (3) The member does not conduct any market making activities in 
Nasdaq Stock Market equity securities;
    (4) The member does not execute principal transactions with its 
customers (with limited exception for principal transactions executed 
pursuant to error corrections); and
    (5) The member does not conduct clearing or carrying activities for 
other firms.
    (b) An exemption provided pursuant to this Rule shall not exceed a 
period of two years. At or prior to the expiration of a grant of 
exemptive relief under this Rule, a member meeting the criteria set 
forth in paragraph (a) above may request, pursuant to the Rule 9600 
Series, a subsequent exemption, which will be considered at the time of 
the request, consistent with the protection of investors and the public 
interest.
    (c) This Rule shall be in effect until May 8, 2011.
* * * * *

9600. Procedures for Exemptions

9610. Application

(a) Where to File
    A member seeking exemptive relief as permitted under Rules 1021, 
1050, 1070, 2210, 2315, 2320, 2340, 2520, 2710, 2720, 2790, 2810, 2850, 
2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 
3230, 3350, 695[5]8, 8211, 8212, 8213, 11870, or 11900, or Municipal 
Securities Rulemaking Board Rule G-37 shall file a written application 
with the appropriate department or staff of NASD and provide a copy of 
the application to the Office of General Counsel of NASD.
    (b) and (c) 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, 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 III 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
    On September 28, 2005, the SEC approved amendments to the OATS 
Rules (NASD Rules 6950 through 6957) which, among other things, 
implement the final phase of OATS (OATS Phase III) relating to manual 
orders and permit NASD to grant exemptive relief from the OATS 
reporting requirements for manual orders.\4\ The amendments become 
effective on May 8, 2006. The new exemptive authority permits NASD to 
grant exemptive relief only to those members that meet specified 
criteria.\5\ The narrow scope is generally intended to permit NASD to 
grant relief only to smaller member firms where the reporting of such 
information would be unduly burdensome or where temporary relief from 
the rules (in the form of additional time to achieve compliance) would 
permit the member to avoid unnecessary expense or hardship.
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    \4\ Id.
    \5\ At a minimum, members must meet the following criteria to be 
eligible to request an exemption to the OATS reporting requirements 
for manual orders: (1) The member and current control affiliates and 
associated persons of the member have not been subject within the 
last five years to any final disciplinary action, and within the 
last ten years to any disciplinary action involving fraud; (2) the 
member has annual revenues of less than $2 million; (3) the member 
does not conduct any market making activities in Nasdaq Stock Market 
equity securities; (4) the member does not execute principal 
transactions with its customers (with limited exceptions for error 
corrections); and (5) the member does not conduct clearing or 
carrying activities for other firms.
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    NASD's exemptive authority is further limited in that it only 
permits NASD to relieve members of their obligations to report OATS 
information to NASD on a daily basis. Thus, while members that are 
granted an exemption are exempt from reporting or submitting 
information required under the OATS Rules to NASD, such members must 
still record and electronically maintain all information required under 
the OATS Rules. Certain smaller member firms that meet the criteria to 
request an exemption from the reporting requirements have raised 
concerns about having to comply with the OATS recording requirements. 
Specifically, such firms have indicated that even if they ultimately 
are granted an exemption from the reporting requirements, complying 
with the OATS recording requirements will impose significant burdens 
and costs on their firms.
    NASD understands the concerns raised by these firms and believes 
that expanding its current exemptive authority to include recording 
requirements will greatly assist these smaller member firms by 
providing such firms more time to determine the best mechanism for 
complying with the OATS requirements. At the same time, NASD does not 
believe that such an exemption will have a material impact on NASD's 
regulatory program because members currently are required to capture 
and maintain much of the data via other NASD and SEC rules (e.g., NASD 
Rule 3110 and Rule 17a-3 under the Act \6\), and any exemption granted 
will be for a limited time period.
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    \6\ 17 CFR 240.17a-3.
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    NASD intends to grant exemptions from the OATS recording and 
reporting requirements for manual orders for a period of six months to 
those members that meet the minimum required criteria. This exemptive 
relief is intended to provide such members additional time to determine 
and implement an effective mechanism for recording and reporting OATS 
information to NASD.
    In this regard, NASD has developed several new enhancements to 
NASD's OATS Web interface, which are designed to significantly reduce 
the OATS recording and reporting burdens for manual firms with limited 
order volume.\7\ Specifically, the upgrades to the OATS Web interface, 
which is available at no cost to members, will greatly improve 
usability and reduce the number of fields users are required to enter 
when recording an OATS event. The enhanced Web interface will enable a 
user to submit the data to OATS, as well as download the data to its 
own system prior to submission, to allow the

[[Page 17531]]

user to maintain on its own system a record of events submitted to 
OATS.\8\
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    \7\ While the enhanced OATS Web interface is designed to reduce 
significantly the OATS recording and reporting burdens for manual 
firms with limited order volume, the enhanced Web interface is 
available as a mechanism for recording and reporting OATS 
information to all eligible member firms, including member firms 
already required to report to NASD during OATS Phase I and Phase II.
    \8\ The testing environment for the Web interface enhancements 
will be available on April 24, 2006, and the production environment 
will be available on May 8, 2006.
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    During the six-month exemption period, NASD will be evaluating the 
enhanced Web interface functionality to determine whether it reduces 
significantly the reporting burdens for smaller member firms. The 
availability of an effective OATS Web interface will be a major factor 
in NASD's decision to grant further exemptions after the initial six-
month exemptive period expires. For this reason, NASD strongly 
recommends that members granted an exemption contact NASD immediately 
to begin testing usage of the Web interface enhancements. As NASD and 
member firms gain experience with the Web interface, NASD will be in a 
better position to evaluate and consider the effectiveness of Web 
interface for OATS requirements and whether any future exemptive relief 
beyond the initial six-month time frame is appropriate. Notwithstanding 
the effectiveness of Web interface, NASD may decide to grant further 
exemptions to certain smaller member firms where complying with the 
OATS recording and reporting requirements for manual orders would 
impose significant burdens and costs on their firms.
    The effective date of the proposed rule change would be May 8, 
2006, if approved prior to that date; otherwise, the effective date 
would be the date of SEC approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 expanding NASD's OATS exemptive 
authority would provide smaller member firms additional time to 
determine an appropriate mechanism for complying with the OATS 
requirements, while not materially impacting NASD's regulatory 
oversight.
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    \9\ 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

    While NASD did not specifically solicit comment on the proposed 
rule change, NASD received one written comment letter regarding the 
scope of the exemptive authority set forth in Rule 6955(d).\10\ The 
commenter requests that NASD broaden its current exemptive authority to 
include recording requirements. Specifically, the commenter argues that 
NASD's exemptive authority was intended to include the requirement to 
record information required under the OATS Rules and maintain such 
information in an electronic format. The commenter contends that its 
firm, as well as other firms, were confused that the current exemption 
from the OATS reporting requirements included only the narrow exemption 
from the requirement to transmit OATS data to NASD. The commenter 
further contends that the distinction between the transmission 
requirement and the electronic retention and collection of information 
was not highlighted nor discussed. As noted above, NASD proposes to 
expand its OATS exemptive authority to include recording requirements.
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    \10\ See Letter to Paul J. McKenney, Assistant Director--OATS, 
NASD, from Bonnie K. Wachtel, CEO, and Wendie L. Wachtel, COO, 
Wachtel & Co., Inc. dated February 1, 2006.
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III. 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-2006-040 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-2006-040. 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-2006-040 and should be submitted on or before April 27, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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 self-regulatory organization.\11\ In 
particular, the Commission believes that the proposal is consistent 
with Section 15A(b)(6) of the Act,\12\ which requires that the rules of 
an association 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.
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    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(6).
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    The NASD's view that the benefits afforded to smaller member firms 
by the proposed rule change seem to be significant, without materially 
impacting the regulatory oversight, seems reasonable. Importantly, the 
Commission notes that smaller firms may be exempt under NASD's current 
exemptive authority from daily reporting requirements with respect to 
OATS information under current rules, so the proposed change would not 
affect the information received by the NASD on a daily basis. 
Additionally, the NASD notes that member firms that may be eligible for 
the proposed expanded

[[Page 17532]]

exemption are required to capture and maintain certain information 
required by the OATS Rules pursuant to other NASD and Commission 
rules.\13\
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    \13\ See e.g., NASD Rule 3110 and 17 CFR 240.17a-3 and page 6, 
supra.
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    The Commission also notes that the NASD initially plans to limit an 
exemption available under this proposal to six months and re-evaluate 
whether to grant further exemptions after the expiration of the six-
month period. The Commission believes that by initially limiting the 
exemption to qualifying member firms to six months, firms may have 
sufficient time to become familiar with NASD's enhanced Web interface 
and to discuss with NASD any problems encountered.
    Finally, the Commission believes that the NASD's proposed 
requirement that a firm receiving an exemption under the proposed rule 
change re-apply after six months and at least every two years should 
help to ensure that firms applying for the exemption are continuing to 
meet the exemption requirements.
    The Commission understands that the NASD wants to provide members 
eligible for an exemption adequate notice as to whether they will be 
required to comply with the OATS recording requirement on May 8, 2006. 
The Commission believes that allowing accelerated approval of this 
proposed rule change would give members eligible for the exemption more 
time to evaluate their options with respect to the OATS Rules and 
hopefully prevent unnecessary hardships or expense that may otherwise 
occur without accelerated approval. The Commission, therefore, finds 
good cause for approving this proposal before the thirtieth day after 
the publication of notice thereof in the Federal Register.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change, as amended (SR-NASD-2006-040), 
is hereby approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    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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Nancy M. Morris,
Secretary.
[FR Doc. E6-4986 Filed 4-5-06; 8:45 am]

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