Document ID: SEC-2006-1502-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-11-22T05:00Z

[Federal Register: November 22, 2006 (Volume 71, Number 225)]
[Notices]               
[Page 67673-67675]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no06-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54768; File No. SR-NASD-2006-110]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change and Amendment No. 1 Thereto to Establish a 
Two-Year Pilot Program Exempting from TRACE Reporting Transactions in 
Bonds Traded on a Facility of NYSE

November 16, 2006.
    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 September 19, 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 substantially been prepared by 
NASD. On September 27, 2006, NASD filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments \4\ on the proposed rule change, as amended, from interested 
persons and is approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaces and supersedes the original 
filing in its entirety, made various technical changes to the 
proposal and replaced a reference in the proposed rule text to 
NYSE's Automated Bond System with a reference to ``a facility of 
NYSE.''
    \4\ The Commission received one comment on the proposed rule 
change prior to issuance of this notice and order. See comment from 
Ron Klein, Chairman, CEO, General Associates, Inc., dated October 
16, 2006. The commenter asked various questions regarding the status 
of the filing, which are resolved by the Commission's action in this 
notice and order.
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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: (1) NASD Rule 6230, to initiate a two-
year pilot program exempting certain TRACE-eligible securities from 
reporting requirements that otherwise would apply; and (2) NASD Rules 
6210 and 6230, to reflect the registration of The NASDAQ Stock Market 
LLC as a national securities exchange. Below is the text of the 
proposed rule change, as amended. Proposed new language is italicized; 
proposed deletions are in [brackets].
* * * * *

6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)

* * * * *

6210. Definitions

    The terms used in this Rule 6200 Series shall have the same meaning 
as those defined in NASD's By-Laws and Rules unless otherwise 
specified.
    (a) No Change.
    (b) No Change.
    (c) The term ``reportable TRACE transaction'' shall mean any 
secondary market transaction in a TRACE-eligible security except 
transactions in TRACE-eligible securities that are listed on a national 
securities exchange registered under Section 6 of the Securities 
Exchange Act of 1934, when such transactions are executed on, and 
reported to the exchange and the transaction information is 
disseminated publicly[, or transactions in TRACE-eligible securities 
that are listed and quoted on the Nasdaq Stock Market, Inc. (Nasdaq), 
when such transactions are reported to Nasdaq and the transaction 
information is disseminated publicly]. (d)-(j) No Change.
* * * * *

6230. Transaction Reporting

    (a) through (d) No Change.

(e) Transactions Exempt from Reporting

    The following types of transactions shall not be reported:
    (1) Transactions that are part of a primary distribution by an 
issuer.
    (2) Transactions in TRACE-eligible securities that are listed on a 
national securities exchange, when such transactions are executed on 
and reported to the exchange and the transaction information is 
disseminated publicly[, and transactions in TRACE-eligible securities 
that are listed and quoted on Nasdaq, when such transactions are 
reported to Nasdaq and the transaction information is disseminated 
publicly].
    (3) Transactions where the buyer and the seller have agreed to 
trade at a price substantially unrelated to the current market for the 
TRACE-eligible security (e.g., to allow the seller to make a gift).
    (4) For the duration of a two-year pilot program, effective upon 
the later of either: 1) approval of this rule by the Commission, or 2) 
execution by NASD and the New York Stock Exchange (``NYSE'') of a data 
sharing agreement addressing data related to transactions covered by 
this Rule, transactions in TRACE-eligible securities that are executed 
on a facility of NYSE in accordance with NYSE Rules 1400 and 1401 and 
reported to NYSE in accordance with NYSE's applicable trade reporting 
rules and disseminated publicly by NYSE.
    (f) 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.

[[Page 67674]]

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

1. Purpose
    NASD is proposing to amend its Rule 6230 to exempt from Trade 
Reporting and Compliance Engine (``TRACE'') \5\ reporting requirements, 
for a period of two years, transactions in TRACE-eligible securities 
\6\ executed on a facility of the New York Stock Exchange (``NYSE'') in 
accordance with NYSE Rules 1400 and 1401, provided that such 
transactions are reported pursuant to applicable NYSE trade reporting 
rules and publicly disseminated.\7\ NYSE has sought exemptive relief 
from the Commission that would facilitate NYSE's trading of certain 
corporate debt securities that are not listed on NYSE.\8\ NASD has 
proposed to amend its Rule 6230 to address concerns regarding 
duplicative trade reporting that would result from the trading of those 
NYSE-Traded Bonds which otherwise would be subject to both NASD's and 
NYSE's trade reporting requirements.
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    \5\ See NASD Rule 6210(b).
    \6\ See NASD Rule 6210(a).
    \7\ See Securities Exchange Act Release Nos. 51999 (July 8, 
2005), 70 FR 41067 (July 15, 2005) (SR-NYSE-2004-69) (proposing NYSE 
Rules 1400 and 1401) (``NYSE Corporate Debt Proposal'') and 54767 
(November 16, 2006) (SR-NYSE-2004-69) (approving NYSE Corporate Debt 
Proposal).
    \8\ See Securities Exchange Act Release No. 51998 (July 8, 
2005), 70 FR 40748 (July 14, 2005) (File No. S7-06-05). Debt 
securities traded on a facility of NYSE, but not listed on NYSE, are 
herein referred to as ``NYSE-Traded Bonds.''
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    NASD Rule 6230(e)(2) currently exempts transactions in TRACE-
eligible securities that are listed on a national securities exchange 
when such transactions are executed on and reported to the exchange and 
the transaction information is disseminated publicly. However, NYSE-
Traded Bonds will not be listed on NYSE \9\ and the proposed rule 
change would expand the exemption from reporting under NASD Rule 6230 
to transactions in NYSE-Traded Bonds that are TRACE-eligible securities 
that are reported to NYSE and disseminated publicly.
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    \9\ See NYSE Corporate Debt Proposal, 70 FR at 41067, 41068 
(discussing distinction between bonds listed on NYSE and bonds 
traded on a facility of NYSE).
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    NASD notes that the proposed rule change is predicated on NASD's 
receiving certain information from NYSE relating to transactions in 
NYSE-Traded Bonds that are TRACE-eligible and NASD's successful 
integration of this information into its audit trail.\10\ The success 
of the proposed pilot program will be heavily dependent on NASD's 
ability to effectively continue to provide surveillance for corporate 
debt trading in the over-the-counter (``OTC'') market. NASD will 
evaluate the effectiveness of the consolidated audit trail during the 
pendency of the proposed pilot program.
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    \10\ In this regard, NASD and NYSE are in the process of 
negotiating a data-sharing agreement wherein, among other things, 
NYSE will agree to provide NASD, on a T+1 basis, certain information 
related to transactions in NYSE-Traded Bonds that are TRACE-eligible 
securities. In turn, NASD intends to consolidate this information 
into the computer database housing NASD's audit trail. NASD intends 
to provide NYSE regulatory personnel access, strictly for regulatory 
purposes only, to that portion of NASD's database reflecting the 
information submitted by NYSE.
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    Finally, NASD is proposing to delete references to ``Nasdaq'' and 
the ``Nasdaq Stock Market, Inc.'' in NASD Rule 6210 and ``Nasdaq'' in 
NASD Rule 6230 to reflect The NASDAQ Stock Market LLC's registration as 
a national securities exchange.
    The proposed rule change will become effective upon the later of 
either: (1) approval of this proposed rule change by the Commission, or 
(2) execution by NASD and NYSE of a data-sharing agreement addressing 
data related to transactions covered by the proposed rule change.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that NASD's 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. The proposed rule change is being made to enhance 
regulatory efficiency and reduce duplicative trade reporting.
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    \11\ 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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2006-110 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-2006-110. 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 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-2006-110 and should be submitted on or before December 13, 
2006.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities

[[Page 67675]]

 association.\12\ Specifically, the Commission believes that the 
proposal is consistent with Section 15A(b)(6) of the Act \13\ in that 
it is designed to promote just and equitable principles of trade, 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. 
The Commission also believes that the proposal is consistent with 
Section 15A(b)(9) of the Act \14\ in that it does not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
    \14\ 15 U.S.C. 78o-3(b)(9).
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    Any trade in unregistered corporate debt securities on NYSE will 
automatically be captured by NYSE's systems. The Commission understands 
that NYSE will provide data on such trades to NASD for surveillance 
purposes. Therefore, NASD should be able to obtain necessary 
surveillance data without subjecting joint NYSE/NASD members to a 
duplicative reporting requirement. The Commission concludes that it is 
reasonable and consistent with the Act for NASD to eliminate from its 
rules the requirement that a trade executed on NYSE also be reported to 
TRACE.\15\
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    \15\ The Commission will continue to monitor the growth of 
intermarket competition in the corporate bond markets and, in the 
event market fragmentation becomes a concern, will consider 
appropriate means to address the consolidation of market information 
for corporate bonds.
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    Pursuant to Section 19(b)(2) of the Act,\16\ the Commission finds 
good cause for approving the proposed rule change, as amended, before 
the thirtieth day after the date of publication of notice of filing 
thereof. Accelerating approval of this proposed rule change will 
immediately eliminate double-reporting of certain bond trades and 
thereby eliminate an unnecessary burden on NYSE members trading 
corporate bonds pursuant to the terms of an exemption being granted in 
a related action today by the Commission.\17\ The Commission believes 
that NASD's rule change raises no issues of regulatory concern, because 
NASD should have access to sufficient regulatory information relating 
to the exempted bond trades through the information-sharing agreement 
it will enter with NYSE. Therefore, the Commission does not believe it 
is necessary or appropriate to delay approval and implementation of 
this proposal pending a notice-and-comment period.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ See Securities Exchange Act Release No. 54766 (November 16, 
2006) (File No. S7-06-05).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NASD-2006-110), as amended, 
is hereby approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-19728 Filed 11-21-06; 8:45 am]

BILLING CODE 8011-01-P