Document ID: SEC-2007-0285-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-02-27T05:00Z

[Federal Register: February 27, 2007 (Volume 72, Number 38)]
[Notices]               
[Page 8820-8822]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27fe07-149]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55325; File No. SR-NASD-2007-011]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to a New NASD Trade Reporting Facility 
Established in Conjunction with NYSE Market, Inc.

February 21, 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 February 1, 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, II, 
and III below, which Items have been prepared substantially by the 
NASD. The NASD has filed the proposal pursuant to Section 19(b)(3)(A) 
of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \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

    The NASD proposes to adopt rules relating to a new Trade Reporting 
Facility (the ``NASD/NYSE TRF'') to be established by the NASD in 
conjunction with NYSE Market, Inc. (``NYSE''),\5\ that will provide 
members with an additional mechanism for reporting trades in exchange-
listed securities effected otherwise than on an exchange. The proposed 
NASD/NYSE TRF functionality and rules are substantially similar to the 
functionality and rules of the Trade Reporting Facilities established 
by the NASD and the Nasdaq Stock Market, Inc. (the ``NASD/Nasdaq 
TRF''), the NASD and the National Stock Exchange, Inc. (the ``NASD/NSX 
TRF''), and the NASD and the Boston Stock Exchange, Inc. (the ``NASD/
BSE TRF'') (collectively, the ``Approved NASD Trade Reporting 
Facilities''), which were subject to notice and comment and approved by 
the Commission.\6\ The text of the proposed rule change is available at 
the NASD, in the Commission's Public Reference Room, and at http://www.nasd.com
.

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    \5\ NYSE Market, Inc. is the entity to which the New York Stock 
Exchange LLC, a self-regulatory organization, has delegated all non-
regulatory functions involved in conducting the activities of a 
national securities exchange, including the trading functions, the 
listings functions, and market data.
    \6\ See Securities Exchange Act Release Nos. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving File No. SR-
NASD-2005-087) (the ``NASD/Nasdaq TRF Approval Order''); 54715 
(November 6, 2006), 71 FR 66354 (November 14, 2006) (order approving 
File No. SR-NASD-2006-108); and 54931 (December 13, 2006), 71 FR 
76409 (December 20, 2006) (order approving File No. SR-NASD-2006-
115). See also Securities Exchange Act Release No. 54798 (November 
21, 2006), 71 FR 69156 (November 29, 2006) (order approving File No. 
SR-NASD-2006-104) (the ``Phase II Approval Order'').
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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.

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

1. Purpose
    The proposed rule change would establish the new NASD/NYSE TRF on 
substantially the same terms as the Approved NASD Trade Reporting 
Facilities. The NASD/NYSE TRF will provide members with an additional 
mechanism, which has been developed by the NYSE, for reporting locked-
in transactions in exchange-listed securities executed otherwise than 
on an exchange. Members will match and/or execute orders internally or 
through proprietary systems and submit these trades to the NASD/NYSE 
TRF with the appropriate information and modifiers. All trades 
submitted to the NASD/NYSE TRF must be locked-in prior to entry into 
the system and the NASD/NYSE TRF will have no trade comparison 
functionality. Participants wishing to report to the NASD/NYSE TRF on 
behalf of another NASD member may do so only pursuant to a valid give-
up agreement, as specified in the proposed rules.
    The NASD/NYSE TRF will report the trades to the appropriate 
exclusive securities information processor (``SIP'').\7\ As with trades 
reported to the Approved NASD Trade Reporting Facilities, NASD/NYSE TRF 
transactions disseminated to the media will include a modifier 
indicating the source of such transactions that would distinguish them 
from transactions executed on or through the NYSE or another NASD Trade 
Reporting Facility. In addition, the NASD/NYSE TRF will provide the 
NASD with a real-time copy of each trade report for regulatory review 
purposes. Unlike the Approved NASD Trade Reporting Facilities, the 
NASD/NYSE TRF will not at this time submit transactions to clearing.
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    \7\ The NASD/NYSE TRF will have controls in place to ensure that 
transactions that are reported to the NASD/NYSE TRF, but that are 
priced significantly away from the current market, will not be 
submitted to the SIP. The NASD represents that this is consistent 
with current practice, in that neither the NASD's Alternative 
Display Facility nor the Approved NASD Trade Reporting Facilities 
currently submit such trades to the SIP. According to the NASD, this 
practice is designed to preserve the integrity of the tape.
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    Like the Approved NASD Trade Reporting Facilities, the NASD/NYSE 
TRF will be a facility of the NASD, subject to regulation by the NASD 
and the NASD's registration as a national securities association. It 
will not be a service ``for the purpose of effecting or reporting a 
transaction'' on the NYSE; rather, it will be a service for the purpose 
of reporting over-the-counter (``OTC'') transactions in exchange-listed 
securities to the NASD.\8\ Thus, members that meet all applicable 
requirements will have the option of reporting transactions in 
exchange-listed securities executed otherwise than on an exchange to 
the NASD/NYSE TRF, one of the Approved NASD Trade Reporting Facilities, 
the NASD's Alternative Display Facility (``ADF''),\9\ or the NASD's 
Intermarket Trading

[[Page 8821]]

System/Computer Assisted Execution System (``NASD ITS/CAES 
System'').\10\
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    \8\ See NASD/Nasdaq TRF Approval Order, supra note 6.
    \9\ The Commission approved a proposed rule change that expanded 
the ADF's functionality to all exchange-listed securities. See 
Securities Exchange Act Release No. 54537 (September 28, 2006), 71 
FR 59173 (October 6, 2006) (order approving File No. SR-NASD-2006-
091).
    \10\ As part of File No. SR-NASD-2006-104, the NASD proposed 
rule changes providing for the operation of the NASD ITS/CAES 
System, which includes the ability to report OTC transactions in 
non-Nasdaq exchange-listed securities. See Phase II Approval Order, 
supra note 6. The NASD represents that it will have an integrated 
audit trail of all TRF, ADF, and ITS/CAES System transactions, as 
applicable in a particular security, and will have integrated 
surveillance capabilities. The NASD expects that comprehensive audit 
trail and surveillance integration on an automated basis will be 
completed by the end of the first quarter of 2007. Prior to that 
time, the NASD represents that its staff will be able to create an 
integrated audit trail on a manual basis as needed for regulatory 
purposes.
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    The NYSE has developed the system that participants will use to 
access the NASD/NYSE TRF. Technical specifications to connect to the 
NASD/NYSE TRF system are available upon request to NASD and will be 
accessible through NASD's web site at a later date.

NASD/NYSE TRF Limited Liability Company Agreement

    The NASD and the NYSE propose to enter into a Limited Liability 
Company Agreement of the NASD/NYSE Trade Reporting Facility LLC (``the 
NASD/NYSE LLC Agreement''). The terms of the NASD/NYSE LLC Agreement 
are substantially similar to the terms of the LLC agreements relating 
to the Approved NASD Trade Reporting Facilities.
    The NASD will have sole regulatory responsibility for the NASD/NYSE 
TRF, while the NYSE agrees to pay the cost of regulation and will 
provide systems to enable members to report trades to the NASD/NYSE 
TRF. The NYSE will be entitled to the profits and losses, if any, 
derived from the operation of the NASD/NYSE TRF. The provisions of the 
NASD/NYSE LLC Agreement regarding the management of the NASD/NYSE TRF, 
and the respective rights and responsibilities of the NASD, the ``SRO 
Member,'' and the NYSE, the ``Business Member,'' are identical to the 
terms of the LLC agreements relating to the Approved NASD Trade 
Reporting Facilities.
    The termination provisions of the NASD/NYSE LLC Agreement are 
identical to the termination provisions of the LLC agreements relating 
to the NASD/NSX TRF and the NASD/BSE TRF. In the event of termination 
of the NASD/NYSE TRF arrangement, the NASD represents that it will be 
able to fulfill all of its regulatory obligations with respect to OTC 
trade reporting through its other facilities.
    The NASD/NYSE LLC Agreement includes a provision relating to 
Capital Accounts that is not included in the LLC Agreements relating to 
the Approved NASD Trade Reporting Facilities. This provision was added 
for tax purposes only.

NASD/NYSE Trade Reporting Facility Rules

    Members will report locked-in trades in exchange-listed securities 
effected otherwise than on an exchange to the NASD/NYSE TRF pursuant to 
NASD rules. As such, the NASD is proposing the new NASD Rule 4000E and 
Rule 6000E Series relating to the use and operation of the NASD/NYSE 
TRF. The proposed rules are substantially similar to the rules approved 
by the Commission relating to the Approved NASD Trade Reporting 
Facilities.\11\ Discussed below are the differences between the 
proposed rules and the rules that the Commission has approved for one 
or more of the Approved NASD Trade Reporting Facilities.\12\
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    \11\ See the NASD Rule 4000 and Rule 6100 Series relating to the 
NASD/Nasdaq TRF; the NASD Rule 4000C and 6000C Series relating to 
the NASD/NSX TRF; and the NASD Rule 4000D and 6000D Series relating 
to the NASD/BSE TRF.
    \12\ The NASD will submit a separate filing proposing amendments 
to the transaction reporting rules relating to the NASD/NYSE TRF 
consistent with the new requirements of Regulation NMS. The NASD 
intends that such amendments will be substantially similar to the 
amendments the NASD proposed for the NASD/Nasdaq TRF and the ADF in 
File Nos. SR-NASD-2007-002 and SR-NASD-2007-001, respectively. See 
Securities Exchange Act Release Nos. 55101 (January 12, 2007), 72 FR 
2568 (January 19, 2007) (notice of filing and immediate 
effectiveness of File No. SR-NASD-2007-002); and 55088 (January 11, 
2007), 72 FR 2573 (January 19, 2007) (notice of filing and immediate 
effectiveness of File No. SR-NASD-2007-001).
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    First, similar to the NASD/BSE TRF, participants will be able to 
use three-party reports for reporting trades to the NASD/NYSE TRF. 
However, pursuant to proposed NASD Rule 4632E(d), Reporting ECNs, as 
defined in proposed NASD Rule 6110E, are required to use the three-
party trade report when submitting trades to the NASD/NYSE TRF. The 
NASD/BSE TRF rules permit, but do not require, Reporting ECNs to use 
three-party trade reports.
    Second, unlike the Approved NASD Trade Reporting Facilities, the 
NASD/NYSE TRF will not submit any trades to clearing. Pursuant to 
proposed NASD Rules 6130E(a) and 6140E, where appropriate, participants 
must have a valid Qualified Service Representative (``QSR'') agreement 
with the National Securities Clearing Corporation or similar 
arrangement to clear trades submitted to the NASD/NYSE TRF (e.g., 
trades with customers generally do not need to be sent to clearing). 
Accordingly, references to ``clearing only'' reports that appear in the 
rules relating to the Approved NASD Trade Reporting Facilities have 
been omitted from the proposed rules (see proposed NASD Rules 
4632E(e)(3)(B) and 6130E(f)). Additionally, proposed NASD Rule 6130E(a) 
provides that the NASD/NYSE TRF will accept trades reported as other 
than regular way settlement (i.e., Cash, Next-Day, Seller's Option); 
however, the NASD/NYSE TRF will not compare or submit these trades to 
clearing.
    The NASD notes that the proposed rule change does not include any 
proposed rules relating to fees, assessments, and credits specifically 
related to the NASD/NYSE TRF. Fees, assessments, and credits, if any, 
with respect to the NASD/NYSE TRF will be the subject of a future rule 
filing with the Commission.
    The NASD has filed the proposed rule change for immediate 
effectiveness. The NASD proposes that the operative date of the 
proposed rule change will be the date upon which the NASD/NYSE TRF 
commences operation, which is currently anticipated to be in the first 
quarter of 2007.\13\ The NASD will provide notice of that date upon 
successful completion of system testing and certification.
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    \13\ As noted below, a proposed rule change filed pursuant to 
Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder does 
not become operative for 30 days from the date on which the proposal 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
The NASD has not asked the Commission to waive the 30-day operative 
delay for the proposal. Accordingly, the proposal will become 
operative 30 days from the date on which it was filed.
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2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\14\ 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. The NASD 
believes that establishment of the NASD/NYSE TRF is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets because it will provide members 
with another mechanism to report transactions in exchange-listed 
securities effected otherwise than on an exchange.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will not result in any burden on 
competition that

[[Page 8822]]

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (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, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\15\ and Rule 19b-4(f)(6) thereunder.\16\ As required by Rule 19b-
4(f)(6)(iii),\17\ the NASD provided the Commission with 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.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of the 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 an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2007-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2007-011. 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 such 
filing also will 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-2007-011 and should be submitted on or before March 
20, 2007.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3295 Filed 2-26-07; 8:45 am]

BILLING CODE 8010-01-P