Document ID: SEC-2007-1449-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-10-17T04:00Z

[Federal Register: October 17, 2007 (Volume 72, Number 200)]
[Notices]               
[Page 58918-58920]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17oc07-119]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56639; File No. SR-NASD-2007-035]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Notice of Filing of Proposed Rule Change Related to Mandated Use of an 
Automated Liability Notification System

 October 11, 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 May 25, 2007, the National Association of Securities Dealers 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II, and 
III below, which items have been prepared primarily by the NASD.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority, 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Exchange Act Release No. 56146 (July 26, 2007); 72 FR 42190 (Aug. 1, 
2007).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Rule 11810(i) to mandate the use of the 
automated liability notification system of a registered clearing agency 
when issuing liability notices in connection with certain securities 
transactions provided both parties to the contract are participants in 
a registered clearing agency that has such an automated system.\4\
---------------------------------------------------------------------------

    \4\ Proposed new rule text is attached to NASD's filing as 
Exhibit 1 and can be found at http://www.finra.org/RulesRegulation/RuleFilings/index.htm
.

---------------------------------------------------------------------------

[[Page 58919]]

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. NASD has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\5\
---------------------------------------------------------------------------

    \5\ The Commission has modified portions of the text of the 
summaries prepared by the NASD.
---------------------------------------------------------------------------

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

(1) Purpose
    NASD Rule 11810(i) sets forth the procedures that must be followed 
when a party is owed securities that have become the subject of a 
voluntary corporate action, such as a tender or exchange offer. Under 
Rule 11810(i), the owed party delivers a liability notice to the owing 
or failing party. The liability notice sets a cut off date for the 
delivery of the securities by the owing party and provides notice to 
the owing party that the counterparty will be held liable for any 
damages caused by its failure to deliver the securities in time for the 
owed party to participate in the voluntary corporate action.
    If the owing party delivers the securities in response to the 
liability notice, it has met its delivery obligation. If the owing 
party fails to deliver the securities in sufficient time for the owed 
party to participate in the voluntary corporate action, it will be 
liable for any damages that may accrue thereby (i.e., in lieu of 
delivering the securities the owing party must deliver proceeds 
equivalent to the proceeds that the owed party would have received if 
it had been able to participate in the offer). The owed party has the 
responsibility to communicate its intentions to the owing party and to 
prove, if necessary, that the owing party received the liability 
notice.
    Rule 11810(i) currently requires broker-dealers to send liability 
notices using ``electronic media having immediate receipt 
capabilities.'' Although there is currently no one acceptable means for 
sending and tracking liability notices, NASD members have advised that 
it is industry practice to send liability notices by fax to the failing 
counterparty. Sending liability notices by fax is a manual, paper-
intensive process that is subject to error. For example, the fax may be 
directed to the wrong department and not timely received by the correct 
department, or sent to the correct department but overlooked by the 
responsible person(s). In other cases, the receiver may not notify the 
sender that the fax has been received, and the sender must follow up 
with another fax or telephone call or both. The financial risk to an 
owing firm that misses or incorrectly processes a liability notice 
relating to a voluntary corporate action can be considerable, since the 
corporate action may involve hundreds of shareholders.
    In response to industry need for a reliable and uniform method of 
transmitting liability notices, The Depository Trust Company (``DTC'') 
developed SMART/Track for Corporate Action Liability Notification 
Service (``SMART/Track''). SMART/Track is a web-based system for the 
communication of corporate action liability notices that allows DTC 
participants and the clearing members of the National Securities 
Clearing Corporation to create, send, process and tract such 
notices.\6\ Transmitting liability notices through SMART/Track 
eliminates paper liability notices and provides firms with an 
electronic, centralized system for the distribution, management and 
control of liability notices and helps reduce the risks, costs, and 
delays resulting from missing or inaccurate information associated with 
paper corporate action liability notices. Specifically, SMART/Track 
provides participants with (1) more timely receipt and distribution of 
corporation action liability notifications; (2) a centralized system to 
manage and control all liability notifications on all issues; (3) 
immediate identification of the security affected by a corporate action 
liability notification; (4) detailed disclosure and clearer explanation 
of the terms and conditions of the corporate action; and (5) an audit 
trail with a complete record of actions taken regarding a liability 
notice.
---------------------------------------------------------------------------

    \6\ Currently DTC is the only registered clearing agency 
operating an automated corporate liability notification service.
---------------------------------------------------------------------------

    As proposed, NASD Rule 11810(i) will mandate the use of the 
automated liability notification system of a registered clearing agency 
when the parties to a contract are both participants in a registered 
clearing agency that has an automated service for corporate action 
liability notices. When either or both parties to a contract are not 
participants in a registered clearing agency that has an automated 
service for corporate action liability notices, Rule 11810(i) will 
continue to require the liability notice to be issued using written or 
comparable electronic media having immediate receipt capabilities.
    NASD proposes to announce the effective date of the proposed rule 
change in a ``Notice to Members'' that will be published no later than 
sixty days following the date of approval of the proposed rule change 
by the Commission. The NASD anticipates that the effective date of the 
proposed rule change will be thirty days following publication of the 
Notice to Members announcing the Commission's approval of the proposed 
rule change.
(2) Statutory Basis
    The statutory basis under the Act for this proposed rule change is 
the requirement under Section 15A of the Act, which requires, among 
other things, that the rules of a national securities association are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to perfect the 
mechanism of a free and open market and a national market system, and 
in general to protect investors and the public interest.\7\ NASD 
believes that the proposed rule change is consistent with the 
provisions of the Act in that SMART/Track will eliminate the use of 
paper corporate action liability notices and will provide firms with an 
electronic, centralized system to distribute, manage, and control 
liability notices. In addition to reducing the risks, costs, and delays 
resulting from missing or inaccurate information associated with paper 
corporate action liability notices, SMART/Track gives firms detailed 
disclosure of the terms and conditions of the corporate action, enables 
firms to more timely receive and distribute corporate action liability 
notices, and provides an audit trail with a complete record of actions 
taken regarding a liability notice.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

(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.

[[Page 58920]]

(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 thirty-five 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 ninety 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-2007-035 in 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-2007-035. 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 Section, 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 filings also will be available for 
inspection and copying at the principal office of the NASD and on 
NASD's Web site, http://www.finra.org/RulesRegulation/RuleFilings/index.htm.
 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-2007-035 and should be submitted on or before November 7, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-20385 Filed 10-16-07; 8:45 am]

BILLING CODE 8011-01-P