Document ID: SEC-2007-0893-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-07-03T04:00Z

[Federal Register: July 3, 2007 (Volume 72, Number 127)]
[Notices]               
[Page 36536-36538]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jy07-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55962; File No. SR-NASD-2007-040]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Clearing Reports for Previously Executed Trades

June 26, 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 June 22, 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 II below, which Items have been substantially prepared by NASD. 
NASD has designated the proposed rule change as ``non-controversial'' 
under section 19(b)(3)(A)(iii)\3\ of the Act 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)(iii).
    \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

    NASD is proposing to amend NASD Rules 6130, 6130A, 6130C, 6130D, 
and 6130E to prohibit members from submitting to an NASD Facility 
(i.e., the Alternative Display Facility (``ADF'') or a Trade Reporting 
Facility (``TRF'')) any report (including but not limited to a report 
of a step-out or a reversal) associated with a previously executed 
trade that was not reported to the NASD Facility, except where such 
report reflects the offsetting ``riskless'' portion of a riskless 
principal transaction. NASD is also proposing to amend NASD Rules 
4632(d), 4632A(e), 4632C(d), 4632D(e), and 4632E(e) to clarify that, 
where the first leg of a riskless principal transaction is reported to 
NASD, the second leg must also be reported to NASD; however, in such 
circumstance, the member is not required to report both legs of the 
transaction to the same NASD Facility.
    The text of the proposed rule change is available at NASD, from the 
Commission's Public Reference Room, and on the NASD's Web site (http://www.nasd.com
).

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
    Proposed Changes Relating to Reports Associated With Previously 
Executed Trades
    Currently, members can use the ADF and the NASD/Nasdaq TRF to 
submit non-tape reports (i.e., the transaction is not reported to the 
tape for publication) and clearing-only reports (i.e., the transaction 
is not reported to the tape but may be submitted for clearing purposes) 
for a variety of reasons, including to reallocate or cancel 
transactions previously executed and reported to the tape by an 
exchange. For example, Firm A buys 1000 shares of ABC security on the 
Nasdaq Exchange and then submits a clearing-only report to the ADF or 
NASD/Nasdaq TRF to allocate those shares to Firm B (referred to as a 
``step-out'').\5\ Similarly, a ``reversal'' is a clearing-only entry 
that allows a participant to cancel the effects of a prior submission 
to the National Securities Clearing Corporation.\6\ Such functionality 
is not prescribed by rule, but rather has been offered as a service to 
members using the ADF and Nasdaq's Automated Confirmation Transaction 
Service (``ACT'').\7\ Such functionality is

[[Page 36537]]

not supported by any other NASD Facility.
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    \5\ A step-out allows a member to allocate all or part of a 
previously executed trade to another broker-dealer. In other words, 
a step-out functions as a position transfer, rather than a trade; 
the parties are not exchanging shares and funds. The step-out 
function was designed and implemented to facilitate the clearing 
process for members involved in these types of transactions. See, 
e.g., NASD Notice to Members 05-11 (February 2005) and NASD Notice 
to Members 98-40 (May 1998).
    \6\ If a participant wants to cancel a previously submitted sell 
trade, it would have to submit a reversal as a buy to effectively 
unwind the position at clearing.
    \7\ ACT has been licensed for use for trade reporting and 
clearing and comparison services through the NASD/Nasdaq TRF and 
also serves as the mechanism for reporting trades that are 
automatically executed through the Nasdaq Market Center. Nasdaq has 
advised NASD that it will submit a proposed rule change proposing to 
allow step-outs on ACT under Nasdaq rules with respect to any trade 
to which a Nasdaq member is a party, regardless of where it 
originated.
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    NASD believes that members' ability to submit non-tape reports 
should be limited across NASD Facilities for several reasons. First, 
where the previously executed transaction associated with a non-tape 
report is reported to an exchange, NASD's audit trail will not include 
the original transaction report. The inclusion of a non-tape report 
that is not related to an NASD transaction report can create confusion 
and impair NASD staff's ability to produce a complete and accurate 
audit trail.
    Second, certain non-tape or clearing-only reports that provide for 
the re-allocation or cancellation of a previously reported transaction 
can make it more difficult for NASD to tabulate accurately the 
aggregate dollar amount of its covered sales for purposes of Section 31 
fees.\8\ Entry of such a transactions in an NASD Facility, when the 
original transaction was reported and assessed a Section 31 fee by an 
exchange, can result in the misalignment of Section 31 fees with the 
appropriate market and market participants.
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    \8\ For example, as explained in NASD Notice to Members 05-11 
(February 2005), as part of the step-out function, ACT provides the 
ability to move the obligation to pay the transaction fee associated 
with the trade to the ultimate seller of the security when the trade 
is allocated.
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    Thus, NASD is proposing to amend NASD Rules 6130 (relating to the 
NASD/Nasdaq TRF), 6130A (relating to the ADF), 6130C (relating to the 
NASD/NSX TRF), 6130D (relating to the NASD/BSE TRF), and 6130E 
(relating to the NASD/NYSE TRF) to provide that a member shall not 
submit to an NASD Facility any report (including but not limited to a 
report of a step-out or reversal) associated with a previously executed 
trade that was not reported to that NASD Facility. For example, a 
clearing-only entry for a step-out relating to a trade reported to the 
Nasdaq Exchange may not be submitted to the NASD/Nasdaq TRF. This 
proposed rule language also clarifies that a member is not permitted to 
report a trade to an NASD Facility for submission to the National 
Securities Clearing Corporation for clearance and settlement purposes, 
if the trade was not reported to that same NASD Facility for public 
dissemination purposes. Thus, for example, a member may not tape report 
a trade to the NASD/NYSE TRF and use the NASD/Nasdaq TRF to clear that 
same trade.
    However, NASD is proposing an exception to this prohibition for 
reports that reflect the offsetting ``riskless'' portion of a riskless 
principal transaction. For purposes of over-the-counter trade reporting 
requirements applicable to equity securities, a ``riskless principal'' 
transaction is a transaction in which a member, after having received 
an order to buy (sell) a security, purchases (sells) the security as 
principal and satisfies the original order by selling (buying) as 
principal at the same price (the offsetting, ``riskless'' leg). A 
riskless principal transaction can be submitted to NASD as a single 
trade report properly marked as riskless principal, or by submitting 
two separate reports: (1) A report that is submitted to the tape to 
reflect the initial leg of the transaction; and (2) a non-tape (or 
clearing-only) report to reflect the offsetting, ``riskless'' leg of 
the transaction. Where a member chooses to report a riskless principal 
transaction to NASD by submitting two separate reports, both the tape 
report and non-tape (or clearing-only) report must be submitted to an 
NASD Facility. Where the initial leg of the transaction is executed on 
and reported through an exchange, a tape report would not be submitted 
to an NASD Facility to reflect the initial leg; however, a member is 
permitted, but not required, to submit a non-tape (or clearing-only) 
report for the second leg of the transaction to an NASD Facility.
    NASD believes it is appropriate to continue to permit a member to 
submit a non-tape (or clearing-only) report for the second leg of a 
riskless principal transaction to an NASD Facility, even where the 
first leg of the transaction has been reported to the tape by an 
exchange, in light of the unique nature of riskless principal 
transactions. A riskless principal transaction is the economic 
equivalent of a single agency trade and therefore the second riskless 
principal report is suppressed from the tape to avoid double reporting 
and overstatement of volume, notwithstanding that, technically, it is a 
separate trade. In addition, the second leg, if appropriately reported 
pursuant to NASD rules, is not subject to Section 31 fees. Accordingly, 
the proposed rule language includes an express carve-out to permit a 
report of an offsetting second leg of a riskless principal transaction 
submitted to an NASD Facility in connection with a first leg executed 
on and reported to an exchange.
    The proposed rule change will ensure consistency across NASD 
Facilities, promote a more complete and accurate audit trail, and 
enable NASD to properly assess applicable transaction-related fees. As 
noted above, currently only the ADF and NASD/Nasdaq TRF offer the 
above-described functionality relating to step-outs and reversals and, 
thus, the proposed rule change would require a systems change only for 
certain members using those facilities. With respect to the other NASD 
Facilities, the proposed rule change would merely codify current 
functionality.
Clarifying Changes to Riskless Principal Reporting Requirements
    Currently, the rules relating to NASD's TRFs require that, where 
the initial leg of a riskless principal transaction was reported to a 
TRF, the second leg must also be reported to that same TRF.\9\ NASD is 
proposing to revise these rules to clarify that, where the first leg of 
a riskless principal transaction was reported to NASD, the second leg 
must also be reported to NASD; however, in that circumstance, the 
member is not required to report both legs to the same TRF. NASD 
believes that the current provisions are too restrictive and could have 
the unintended consequence of requiring members to be participants in 
all TRFs in order to comply with NASD rules.\10\ NASD expects that, 
where possible, a member will report both legs of a riskless principal 
transaction to the same NASD Facility. NASD also is proposing 
conforming changes to NASD Rule 4632A(e)(1)(C)(ii) relating to the ADF.
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    \9\ See NASD Rules 4632(d)(3)(B), 4632C(d)(3)(B), 
4632D(e)(3)(B), and 4632E(e)(3)(B).
    \10\ For example, assume Firm A is only a participant of TRF A 
and it executes the first leg of a riskless principal transaction 
otherwise than on exchange with Firm B, which is only a participant 
of TRF B. Assume further that Firm B has the reporting obligation 
under NASD rules. The initial leg of the riskless principal 
transaction will be reported by Firm B to TRF B. Firm A must report 
the second leg of the riskless principal transaction to NASD, but 
because it is not a participant of TRF B, it cannot report the 
second leg to TRF B. The proposed changes would allow Firm A to 
report the second leg of the transaction to TRF A.
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    NASD is filing the proposed rule change for immediate 
effectiveness. The proposed rule change will not become operative prior 
to the thirtieth day after the date of filing. NASD will announce the 
operative date on its Web site.
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

[[Page 36538]]

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. NASD believes that the proposed rule change 
will promote a more complete and accurate audit trail and enable NASD 
to properly assess applicable transaction-related fees.
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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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the 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 after the date of filing, 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 \12\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\13\
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    \12 \ 15 U.S.C. 78s(b)(3)(A).
    \13 \ 17 CFR 240.19b-4(f)(6).
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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 the 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-2007-040 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-2007-040. 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, 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 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-2007-040 and should be 
submitted on or July 24, 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. E7-12782 Filed 7-2-07; 8:45 am]

BILLING CODE 8010-01-P