Document ID: SEC-2007-0917-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-07-09T04:00Z

[Federal Register: July 9, 2007 (Volume 72, Number 130)]
[Notices]               
[Page 37287]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy07-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56003; File No. SR-NASD-2007-028]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Relating to the Order Audit Trail System

July 2, 2007.
    On April 17, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change 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. On May 18, 2007, NASD filed 
Amendment No. 1 to the proposed rule change. The proposed rule change, 
as amended, was published for comment in the Federal Register on May 
31, 2007.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55806 (May 23, 
2007), 72 FR 30406 (the ``Notice'').
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to NASD,\4\ and, in particular, section 15A(b)(6) 
of the Act \5\ 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, to foster cooperation 
and coordination with persons engaged in regulating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \4\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78o-3(b)(6).
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    On June 9, 2005, the Commission adopted Regulation NMS,\6\ which 
among other things, adopted an Order Protection Rule \7\ that requires 
trading centers to establish, maintain, and enforce policies and 
procedures 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 \8\ 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.'' \9\
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    \6\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \7\ 17 CFR 242.611.
    \8\ 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).
    \9\ 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.\10\ This 
requirement should ensure that NASD knows that the order was an ISO and 
can utilize that information when reviewing audit trails.\11\
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    \10\ 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.
    \11\ As discussed in the Notice, firms will not be required to 
begin using the ISO routing method code on Route Reports until 
February 4, 2008, but the code will be available for use by firms 
immediately on approval. Firms are encouraged to use the ISO code 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.
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    The Commission believes that the proposed rule change is consistent 
with the Act and should enhance OATS data and help ensure that the NASD 
is able to more effectively monitor compliance with Regulation NMS.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-NASD-2007-028), as 
amended, be, and hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13201 Filed 7-6-07; 8:45 am]

BILLING CODE 8010-01-P