Document ID: SEC-2007-0749-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-05-31T04:00Z

[Federal Register: May 31, 2007 (Volume 72, Number 104)]
[Notices]               
[Page 30406-30408]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31my07-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55806; File No. SR-NASD-2007-028]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to the Order Audit Trail System

May 23, 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 April 17, 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 substantially prepared by NASD. On 
May 18, 2007, NASD filed Amendment No. 1 to the proposed rule change. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 Rules 6951 and 6954 to require members 
that transmit an intermarket sweep order (``ISO'') to another member, 
electronic communications network, nonmember, or exchange to record and 
report the fact that the order was an ISO. The text of the proposed 
rule change is available on NASD's Web site at http://www.nasd.com, at 

NASD's principal office, and at the Commission's Public Reference Room.

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 6958 (``OATS Rules'') impose obligations on 
member firms to record in electronic form and report to NASD on a daily 
basis certain information regarding orders in Nasdaq-listed securities 
originated, received, transmitted, modified, canceled, or executed by 
NASD members.\3\ NASD integrates this Order Audit Trail System 
(``OATS'') information 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 members for violations of NASD rules and the federal 
securities laws.
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    \3\ Beginning on February 4, 2008, members also will be required 
to record and report order information regarding all OTC equity 
securities, as defined in NASD Rule 6951. See Securities Exchange 
Act Release No. 54585 (October 10, 2006), 71 FR 61112 (October 17, 
2006) (SR-NASD-2005-101); see also NASD Notice to Members 06-70 
(December 2006) and Securities Exchange Act Release No. 55440 (March 
9, 2007), 72 FR 12852 (March 19, 2007) (SR-NASD-2007-019).
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    On June 9, 2005, the Commission adopted Regulation NMS, which 
established new substantive rules designed to modernize and strengthen 
the regulatory structure of the U.S. equities markets.\4\ Among other 
things, Regulation NMS adopted an Order Protection Rule \5\ that 
requires trading centers to establish, maintain, and

[[Page 30407]]

enforce written policies and procedures reasonably designed to prevent 
the execution of trades at prices inferior to protected quotations 
displayed by automated trading centers, subject to applicable 
exceptions. One of the exceptions from the Order Protection Rule is 
when the transaction that constitutes a trade-through \6\ is ``effected 
by a trading center that simultaneously routed an intermarket sweep 
order to execute against the full displayed size of any protected 
quotation in the NMS stock that was traded through.'' \7\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \5\ 17 CFR 242.611.
    \6\ A ``trade-through'' is ``the purchase or sale of an NMS 
stock during regular trading hours, either as principal or agent, at 
a price that is lower than a protected bid or higher than a 
protected offer.'' See 17 CFR 242.600(b)(77).
    \7\ See 17 CFR 242.611(b)(6). The phrase ``intermarket sweep 
order'' is defined as ``a limit order for an NMS stock that meets 
the following requirements: (i) When routed to a trading center, the 
limit order is identified as an intermarket sweep order; and (ii) 
Simultaneously with the routing of the limit order identified as an 
intermarket sweep order, one or more additional limit orders, as 
necessary, are routed to execute against the full displayed size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order 
to buy, for the NMS stock with a price that is superior to the limit 
price of the limit order identified as an intermarket sweep order. 
These additional routed orders must also be marked as intermarket 
sweep orders.'' The proposed rule change adopts this same definition 
of intermarket sweep order for purposes of the OATS Rules. See 17 
CFR 242.600(b)(30).
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    The purpose of the proposed rule change is to require member firms 
to record the fact that an order in an OATS-eligible security is an ISO 
when the member routes an ISO to another member or non-member. The 
member would be required to include this information in the Route 
Report it submits to NASD pursuant to the OATS Rules.\8\ This 
requirement will ensure that NASD knows that the order was an ISO and 
can utilize that information when reviewing audit trails to ensure 
compliance with Regulation NMS.\9\
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    \8\ When a member transmits an order in an OATS-eligible 
security to another member, electronic communications network, non-
member, or exchange for handling or execution, the routing member is 
required to submit a Route Report to NASD. The categories of 
information that a member must include in a Route Report are set 
forth in NASD Rule 6954(c) and in the OATS Reporting Technical 
Specifications published by NASD.
    \9\ Members are also required to submit New Order Reports when 
they receive an order in an OATS-eligible security. NASD Rule 
6954(b) and the OATS Reporting Technical Specifications set forth 
the information that a member must include in a New Order Report. 
NASD Rule 6954(b)(15) already requires members to include ``special 
handling requests, specified by [NASD] for purposes of this Rule.'' 
Pursuant to that provision, the most recent version of the OATS 
Reporting Technical Specifications includes a new special handling 
code for ISOs in New Order Reports, which would be used when a 
member relies on the exception from the Order Protection Rule for a 
transaction that ``was the execution of an order identified as an 
intermarket sweep order.'' See 17 CFR 242.611(b)(5). Because NASD 
Rule 6954(b) already provides NASD with the authority to establish a 
new code for ISOs in New Order Reports, the proposed rule filing 
does not address that portion of the rule and only seeks to 
establish a new code for ISOs in Route Reports under NASD Rule 
6954(c).
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    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval. The effective date will be February 4, 2008, to 
coincide with the changes to the OATS Rules approved by the Commission 
on October 10, 2006.\10\ Although firms will not be required to begin 
using the ISO routing method code on Route Reports until February 4, 
2008, NASD states that the code will be available for use by firms 
beginning on June 11, 2007. Firms are encouraged to use the ISO code on 
their Route Reports as soon as possible to facilitate NASD's ability to 
determine whether the trade was made in reliance on an ISO exception 
from the Order Protection Rule.\11\ As noted in the December 11, 2006 
version of the OATS Reporting Technical Specifications, firms will be 
required to use the ISO Special Handling Code on New Order Reports upon 
implementation of the Order Protection Rule.\12\
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    \10\ See supra note 3.
    \11\ 17 CFR 242.611.
    \12\ Id.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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 that the proposed rule change will 
enhance OATS data and ensure that NASD is able to monitor compliance 
with Regulation NMS in a more effective manner.
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    \13\ 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.

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

    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 NASD 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-2007-028 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-2007-028. 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

[[Page 30408]]

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-2007-028 and should be 
submitted on or before June 21, 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. E7-10405 Filed 5-30-07; 8:45 am]

BILLING CODE 8010-01-P