Document ID: SEC-2006-1663-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-12-20T05:00Z

[Federal Register: December 20, 2006 (Volume 71, Number 244)]
[Notices]               
[Page 76409-76414]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de06-145]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54931; File No. SR-NASD-2006-115]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
to a Proposed Rule Change, as Amended, Relating to an NASD Trade 
Reporting Facility Established in Conjunction With the Boston Stock 
Exchange

December 13, 2006.

I. Introduction

    On September 29, 2006, 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 proposal to establish an NASD trade reporting facility 
(the ``NASD/BSE TRF'') in conjunction with the Boston Stock Exchange, 
Inc. (``BSE''). The proposed rule change was published for comment in 
the Federal Register on October 18, 2006.\3\ The Commission received 
one comment letter regarding the proposal.\4\ The NASD filed Amendment 
No. 1 to the proposed rule change on December 5, 2006.\5\ This

[[Page 76410]]

order approves the proposal, as amended, on an accelerated basis. In 
addition, the Commission is publishing notice to solicit comments on 
the proposed rule change as amended 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. 54591 (October 12, 
2006), 71 FR 61519.
    \4\ See letter from Alden Adkins, Executive Vice President, BSE, 
to Robert Colby, Deputy Director, Division of Market Regulation, 
Commission, dated October 24, 2006 (``BSE Letter'').
    \5\ In Amendment No. 1, the NASD revises the proposal to: (1) 
Provide notice of final action taken by the NASD with respect to the 
proposal; (2) amend NASD Rule 4632D(a) to indicate that the NASD/BSE 
TRF will support the .W and .PRP trade report modifiers; (3) add 
NASD Rule 4632D(g)(2)(G) to define the term ``cancelled'' for 
purposes of determining the deadline for reporting a trade 
cancellation; (4) add NASD Rule 4632D(i) and 6130D(g) to expressly 
prohibit the aggregating of trades for purposes of trade reporting 
to the NASD/BSE TRF; (5) add NASD Rule 6130D(f) to provide trade 
report modifiers for certain transactions reported to the NASD/BSE 
TRF in accordance with Section 3 of Schedule A to the NASD By-Laws; 
and (6) make various technical changes. In addition, in Amendment 
No. 1 the NASD makes conforming changes to the rules of the trade 
reporting facility operated by the NASD and the National Stock 
Exchange, Inc. (the ``NASD/NSX TRF'') by adding NASD Rules 4632C(h) 
and 6130C(g) to expressly prohibit the aggregating of trades for 
purposes of trade reporting to the NASD/NSX TRF.
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II. Description of the Proposal

A. NASD/BSE TRF

    The NASD proposes to establish a new trade reporting facility, the 
NASD/BSE TRF, that will provide NASD members with an additional 
facility for reporting transactions in NMS stocks, as defined in Rule 
600(b)(47) of Regulation NMS under the Act,\6\ that are effected 
otherwise than on an exchange. The NASD/BSE TRF will be operated by the 
NASD/BSE Trade Reporting Facility LLC (``NASD/BSE TRF LLC''). The NASD/
BSE TRF structure and rules are substantially similar to the trade 
reporting facilities established by the NASD and the Nasdaq Stock 
Market, Inc. (the ``NASD/Nasdaq TRF'') and by the NASD and the National 
Stock Exchange, Inc. (the ``NASD/NSX TRF''), which the Commission 
approved in June 2006 \7\ and November 2006,\8\ respectively.
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    \6\ 17 CFR 242.600(b)(47).
    \7\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving File No. SR-
NASD-2005-087) (``NASD/Nasdaq TRF Approval Order''). Although the 
NASD/Nasdaq TRF originally accepted transaction reports only for 
Nasdaq Global Market and Nasdaq Capital Market securities and 
convertible bonds listed on the Nasdaq Stock Market LLC (``Nasdaq 
Exchange''), the Commission recently approved an NASD proposal that, 
among other things, amended the rules of the NASD/Nasdaq TRF to 
allow NASD members to report transactions in NMS stocks to the NASD/
Nasdaq TRF. See Securities Exchange Act Release No. 54798 (November 
21, 2006), 71 FR 69156 (November 29, 2006) (order approving File No. 
SR-NASD-2006-104) (``NASD/Nasdaq TRF November Order'').
    \8\ See Securities Exchange Act Release No. 54715 (November 6, 
2006), 71 FR 66354 (November 14, 2006) (order approving File No. SR-
NASD-2006-115) (``NASD/NSX TRF Approval Order'').
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    The NASD/BSE TRF will be a facility, as defined under the Act,\9\ 
of the NASD, subject to regulation by the NASD and to the NASD's 
registration as a national securities association. NASD members \10\ 
that match and/or execute orders internally or through proprietary 
systems may submit reports of these trades, with appropriate 
information and modifiers, to the NASD/BSE TRF, which will then report 
them to the appropriate exclusive securities information processor 
(``SIP'').\11\ NASD/BSE TRF transaction reports disseminated to the 
media will include a modifier indicating the source of the transactions 
that will distinguish them from transactions executed on or through the 
BSE. The NASD/BSE TRF will provide the NASD with a real-time copy of 
each trade report for regulatory review purposes. At the option of the 
participant, the NASD/BSE TRF may provide the necessary clearing 
information regarding transactions to the National Securities Clearing 
Corporation.
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    \9\ 15 U.S.C. 78c(a)(2).
    \10\ Only NASD members in good standing may participate in the 
NASD/BSE TRF. See NASD Rule 6120D(a)(1). NASD/BSE TRF participants 
also must meet the minimum requirements set forth in NASD Rule 
6120D, including the execution of, and continuing compliance with, a 
Participant Application Agreement; membership in, or maintenance of, 
an effective clearing arrangement with a participant of a registered 
clearing agency registered pursuant to the Act; and the acceptance 
and settlement of each trade that the NASD/BSE TRF identifies as 
having been effected by the participant. NASD Rule 6190D, 
``Termination of Access,'' allows the NASD to terminate access to 
the NASD/BSE TRF if a participant fails to: (1) abide by the rules 
or operating procedures of the trade reporting service of the NASD/
BSE TRF or the NASD; (2) honor contractual agreements entered into 
with the NASD or its subsidiaries or the Participant Application 
Agreement; or (3) pay promptly for services rendered to the trade 
reporting service of the NASD/BSE TRF.
    \11\ The NASD/BSE TRF will have controls in place to ensure that 
transactions reported to the NASD/BSE TRF that are significantly 
away from the current market will not be submitted to the SIP. The 
NASD represents that this is consistent with current practice and 
notes that the Alternative Display Facility (``ADF'') and the NASD/
Nasdaq TRF currently do not submit such trades to the SIP.
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B. Limited Liability Company Agreement of the NASD/BSE TRF LLC

    The NASD and the BSE will jointly own the NASD/BSE TRF LLC, which 
will operate the NASD/BSE TRF. The NASD has filed the Limited Liability 
Company Agreement of the NASD/BSE TRF LLC (the ``LLC Agreement'') as 
part of the current proposal. The LLC Agreement recognizes the NASD as 
having sole regulatory responsibility for the NASD/BSE TRF. The NASD, 
as the ``SRO Member'' under the LLC Agreement, will perform the ``SRO 
Responsibilities'' \12\ for the NASD/BSE TRF. The BSE, as the 
``Business Member'' under the LLC Agreement, will be primarily 
responsible for the management of the facility's business affairs to 
the extent those activities are not inconsistent with the regulatory 
and oversight functions of the NASD. The BSE will pay the cost of 
regulation and provide systems to enable NASD members to report trades 
to the NASD/BSE TRF. The BSE will be entitled to the profits and 
losses, if any, derived from the operation of the NASD/BSE TRF.\13\ 
Under section 9(d) of the LLC Agreement, each Member agrees to comply 
with the federal securities laws and the rules and regulations 
thereunder and to cooperate with the Commission pursuant to its 
regulatory authority and the provisions of the LLC Agreement.
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    \12\ The LLC Agreement defines ``SRO Responsibilities'' as those 
duties or responsibilities of a self-regulatory organization 
(``SRO'') pursuant to the Act and the rules promulgated thereunder, 
including but not limited to those set out in section 9(a) of the 
LLC Agreement. See Schedule A of the LLC Agreement.
    \13\ See section 15 of the LLC Agreement.
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    The NASD/BSE TRF LLC will be managed by, or under the direction of, 
a Board of Directors to be established by the NASD and the BSE. The 
NASD will have the right to designate at least one Director, the SRO 
Member Director, to the NASD/BSE TRF LLC Board of Directors. The SRO 
Director must approve, by consent, all ``Major Actions,'' as defined in 
section 10(e) of the LLC Agreement. In addition, each Director agrees 
to comply with the federal securities laws and the rules and 
regulations thereunder and to cooperate with the Commission and the SRO 
Member pursuant to their regulatory authority.\14\ Further, when 
discharging her or her duties as a member of the Board of Directors, 
each Director must take into consideration whether his or her actions 
as a Director would cause the NASD/BSE TRF or either Member to engage 
in conduct that would be inconsistent with the purposes of the Act.\15\
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    \14\ See section 10(b) of the LLC Agreement.
    \15\ Id.
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    The initial term of the LLC Agreement is three years. During that 
time, until the NASD/BSE TRF reaches ``Substantial Trade Volume'' 
(defined as 250,000 trades or more per day for three consecutive 
months), the BSE may terminate the arrangement for convenience. After 
the NASD/BSE TRF reaches Substantial Trade Volume, either Member may 
terminate the LLC Agreement by providing to the other Member prior 
written notice of at least one year. In addition, the NASD may 
terminate in the event its status or reputation as an SRO is called 
into jeopardy by the actions of the BSE or the NASD/BSE TRF LLC. If the 
NASD/BSE TRF LLC arrangement is terminated, the NASD represents that it 
would be able to fulfill all of its regulatory obligations with respect 
to over-the-counter (``OTC'') trade reporting through its other 
facilities, including the NASD/Nasdaq TRF, the ADF, and the ITS/CAES 
System.

[[Page 76411]]

C. NASD/BSE TRF Rules

1. NASD Rule 4000D and 6000D Series
    The NASD proposes to adopt the NASD Rule 4000D Series, ``The NASD/
BSE Trade Reporting Facility,'' and 6000D Series, ``NASD/BSE Trade 
Reporting Facility Systems and Programs,'' to establish, respectively, 
trade reporting and clearing and comparison rules for the NASD/BSE 
TRF.\16\ The NASD Rule 4000D and 6000D Series are substantially similar 
to the NASD Rule 4000 and 6000 Series governing the NASD/Nasdaq TRF and 
the NASD Rule 4000C and 6000C Series governing the NASD/NSX TRF.\17\
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    \16\ The NASD notes that all other NASD rules that apply to OTC 
trading generally will apply to trades reported to the NASD/BSE TRF.
    \17\ Some differences among the rules governing the governing 
the trade reporting facilities result from differences among the 
trade reporting systems of the facilities. For example, because 
neither the NASD/BSE TRF or the NASD/NSX TRF has a trade comparison 
functionality, the rules governing the NASD/BSE TRF and the NASD/NSX 
TRF contain no provisions relating to trade matching, trade 
acceptance, or aggregate volume matching. The rules governing the 
NASD/Nasdaq TRF contain such provisions.
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D. Amendment No. 1

    Amendment No. 1 makes several changes to the proposal. In the 
original proposal, proposed NASD Rule 4632D(a)(7) indicated that stop 
stock transactions, transactions at prices based on average-weighting 
or other special formulae, and certain transactions that reflected a 
price different from the current market could not be reported to the 
NASD/BSE TRF and had to be reported to the NASD via an alternative 
electronic mechanism. Amendment No. 1 revises NASD Rule 4362D(a) to 
indicate that the NASD/BSE TRF will support these trades and thus will 
support the .W and .PRP trade report modifiers. Specifically, new NASD 
Rules 4632D(a)(4) and (a)(9) require NASD members to append the .W 
trade report modifier to, respectively, transaction reports occurring 
at prices based on average-weighting or other special pricing formulae 
and to reports of stop stock transactions. New NASD Rule 4362D(a)(7) 
will require members to append the .PRP trade report modifier to 
transaction reports that reflect a price different from the current 
market when the execution price is based on a prior reference point in 
time. New NASD Rules 43632D(a)(4), (7), and (9) are substantially the 
same as current NASD Rules 4632(a)(4), (7), and (9), which apply to the 
NASD/Nasdaq TRF.
    In addition, Amendment No. 1 adds NASD Rule 6130D(f), which 
requires the use of specified trade report modifiers for the reporting 
of certain types of transactions that are assessed a regulatory 
transaction fee in accordance with section 3 of Schedule A to the NASD 
By-Laws. Specifically, NASD Rule 6130D(f) provides trade report 
modifiers for the reporting of odd-lot transactions, away from the 
market sales, and purchases or sales of securities effected upon the 
exercise of an over-the-counter option. These transactions are not to 
be reported to the NASD/BSE TRF for purposes of publication.\18\ NASD 
Rule 6130D(f) is substantially similar to NASD Rule 6130(g), which 
became effective on December 1, 2006.\19\
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    \18\ See NASD Rule 4632D(f).
    \19\ See Securities Exchange Act Release No. 53977 (June 12, 
2006), 71 FR 43976 (June 16, 2006) (order approving File No. SR-
NASD-2006-055). See also Securities Exchange Act Release No. 54909 
(December 11, 2006) (notice of filing and immediate effectiveness of 
File No. SR-NASD-2006-129) (proposing a substantially similar rule 
for the NASD/NSX TRF) (``December Notice'').
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    Amendment No. 1 also adds NASD Rules 4632D(i) and 6130D(g) to the 
rules of the NASD/BSE TRF, and makes conforming changes to the rules of 
the NASD/NSX TRF.\20\ These rules add express provisions prohibiting 
the aggregation of trades for purposes of trade reporting to the NASD/
BSE TRF and the NASD/NSX TRF. The NASD notes that the original proposal 
indicated that members would not be permitted to aggregate individual 
executions of orders in a security at the same price into a single 
transaction report submitted to the NASD/BSE TRF. Similarly, the NASD 
notes that aggregation is not permitted for purposes of trade reporting 
to the NASD/NSX TRF.\21\ For the sake of clarity, and to maintain 
consistency among the rules governing its trade reporting facilities, 
the NASD has determined to add an express prohibition on aggregating 
trades to the rules of both the NASD/BSE TRF and the NASD/NSX TRF.
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    \20\ See NASD Rules 4632C(h) and 6130C(g).
    \21\ See NASD/NSX TRF Approval Order, supra note 8.
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    Finally, Amendment No. 1 contains several technical changes. In 
this regard, Amendment No. 1 adds NASD Rule 4632D(g)(2)(G) for purposes 
of determining the deadline for reporting a trade cancellation to the 
NASD/BSE TRF. This paragraph is identical to NASD Rule 4632(g)(2)(G) of 
the NASD/Nasdaq TRF rules and was omitted inadvertently from NASD Rule 
4632D. Amendment No. 1 also replaces an incorrect reference in NASD 
Rule 6190D to the ``Applicant Participation Agreement'' with a 
reference to the ``Participant Application Agreement;'' replaces a 
reference in NASD Rule 4632D(d)(1) to ``Registered ECNs'' with a 
reference to ``Reporting ECNs,'' which is the defined term in NASD Rule 
6110D; revises NASD Rule 6130D(d)(2) to require trade reports to 
include the number of shares or bonds; and revises NASD Rule 4632D to 
clarify a reference to a Non-Reporting Member or other contra party, 
and to refer to a ``Security Identification Symbol'' rather than a 
``stock symbol.''

E. Implementation

    In light of the systems changes necessary for the NASD to implement 
the NASD/BSE TRF for non-Nasdaq exchange-listed securities, the NASD 
proposes to implement the proposal in two phases. Specifically, the 
NASD proposes to implement the proposed rule change with respect to 
Nasdaq-listed equity securities and convertible debt on the first day 
of operation of the NASD/BSE TRF, and to implement the proposed rule 
change with respect to non-Nasdaq exchange-listed securities at a later 
date.
    The NASD will announce the implementation of the first phase of the 
proposed rule change no later than 30 days following Commission 
approval of the proposal, and the second phase no later than 90 days 
following Commission approval.

III. Summary of Comments

    The Commission received one comment letter regarding the 
proposal.\22\ The commenter argued that the NASD/NSX TRF would have an 
unfair competitive advantage over the NASD/BSE TRF if the NASD/NSX TRF 
were approved prior to the NASD/BSE TRF. Specifically, the commenter 
believes that ``the first regional exchange operated TRF [will] capture 
the lion's share of members seeking an alternative to the Nasdaq 
operated TRF.''\23\ Citing the Congressional finding in section 
11A(a)(1)(C)(ii) of the Act \24\ that ``[i]t is in the public interest 
and appropriate for the protection of investors and the maintenance of 
fair and orderly markets to assure * * * fair competition among brokers 
and broker-dealers, among exchange markets, and between exchange 
markets and markets other than exchange markets * * *,'' the commenter 
asked the Commission to approve the current proposal and the NASD/NSX 
TRF proposal simultaneously. In support of this argument, the commenter 
also noted the

[[Page 76412]]

similarities between the NASD/NSX TRF proposal and the current 
proposal.
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    \22\ See BSE Letter, supra note 4.
    \23\ See BSE Letter, supra note 4.
    \24\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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IV. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\25\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with section 15A(b)(6) of the 
Act \26\ in that it is 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 
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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    \25\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78o-3(b)(6).
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    The NASD/BSE TRF will provide NASD members with an additional 
mechanism for reporting transactions in exchange-listed securities 
effected otherwise than on an exchange. Rule 601 of Regulation NMS 
requires the NASD to file a transaction reporting plan regarding 
transactions in listed equity and Nasdaq securities that are executed 
by its members otherwise than on a national securities exchange.\27\ 
Under rule 603 of Regulation NMS,\28\ national securities exchanges and 
national securities associations act jointly pursuant to an effective 
national market system plan to disseminate consolidated information, 
including a national best bid and offer, and quotations for and 
transactions in NMS stocks. Today, the NASD operates the ADF,\29\ NASD/
Nasdaq TRF \30\ and the NASD/NSX TRF,\31\ and the ITS/CAES System \32\ 
for collecting transaction reports. In addition, the NASD is a 
participant in the Nasdaq UTP Plan \33\ with regard to transaction 
reports in Nasdaq-listed securities, and the CTA Plan \34\ with regard 
to securities listed on exchanges other than Nasdaq.
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    \27\ Under Rule 601(b) of Regulation NMS, broker-dealers are 
prohibited from executing a transaction otherwise than on a national 
securities exchange unless there is an effective transaction 
reporting plan. NASD Rule 5000 requires NASD members to report 
transactions in exchange-listed securities effected otherwise than 
on an exchange to NASD.
    \28\ 17 CFR 242.603.
    \29\ Currently, the ADF only accepts quotes and trades in 
Nasdaq-listed securities. The Commission recently approved a 
proposal to extend the ADF to non-Nasdaq exchange-listed securities. 
See Securities Exchange Act Release No. 54537 (September 28, 2006), 
71 FR 59173 (October 6, 2006) (order approving File No. SR-NASD-
2006-091).
    \30\ See NASD/Nasdaq TRF Approval Order and NASD/Nasdaq TRF 
November Order, supra note 7.
    \31\ See NASD/NSX TRF Approval Order, supra note 8.
    \32\ The ITS/CAES System provides a means by which NASD and its 
members can comply with the terms of the Intermarket Trading System 
Plan (``ITS Plan''). The ITS/CAES System reports trades in non-
Nasdaq exchange-listed securities that are effected in the ITS/CAES 
System or in NASD members' proprietary systems. The Commission 
recently approved an NASD proposal to amend the ITS/CAES System to 
reflect the operation of the Nasdaq Exchange as a national 
securities exchange. See NASD/Nasdaq TRF November Order, supra note 
7.
    \33\ Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privileges Basis (``Nasdaq UTP 
Plan'').
    \34\ Consolidated Tape Association Plan (``CTA Plan'').
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    Upon approval of the NASD/BSE TRF, the NASD will operate another 
facility for the purposes of accepting transaction reports from its 
members. The Commission has previously recognized that the Act does not 
prohibit the NASD from establishing multiple facilities for fulfilling 
its regulatory purposes.\35\ Indeed, as noted above, the NASD currently 
operates multiple facilities for fulfilling its regulatory obligations. 
Therefore, the Commission believes that it is consistent with the Act 
for the NASD to establish the NASD/BSE TRF for purposes of fulfilling 
its regulatory obligations. The NASD represented that if the NASD/BSE 
TRF LLC arrangement is terminated, the NASD will be able to fulfill all 
of its regulatory obligations with respect to OTC trade reporting 
through its other facilities, including the NASD/Nasdaq TRF and the 
ADF.
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    \35\ See NASD/Nasdaq TRF Approval Order, supra note 7.
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    The NASD represented that it will have an integrated audit trail of 
all trade reporting facilities, ADF, and ITS/CAES System transactions, 
and will have integrated surveillance capabilities. NASD has 
represented that it expects to automate its integrated audit trail and 
surveillance by the end of the fourth quarter of 2006 for Nasdaq-listed 
securities and by the end of the first quarter of 2007 for non-Nasdaq 
exchange-listed securities. The Commission believes that an integrated 
audit trail and integrated surveillance capabilities are important to 
the NASD's ability to conduct effective surveillance of OTC trading in 
exchange-listed securities when transactions in those securities can be 
reported to one of the NASD's trade reporting facilities, the ADF, or 
the ITS/CAES System.
    A commenter suggested that the Commission approve the current 
proposal simultaneously with the NASD/NSX TRF.\36\ As noted above, the 
Commission has approved the NASD's proposal to establish the NASD/NSX 
TRF.\37\ The Commission stated in the NASD/NSX TRF Approval Order that 
it did not believe that it should delay the operation of the NASD/NSX 
TRF until other trade reporting facilities are ready to operate.\38\ 
The Commission stated, further, that it believed that approving the 
NASD/NSX TRF and allowing it to begin operations immediately could 
enhance competition by providing a new facility, in addition to those 
that are operating currently, for reporting OTC trades in exchange-
listed securities.\39\
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    \36\ See BSE Letter, supra note 4.
    \37\ See NASD/NSX TRF Approval Order, supra note 8.
    \38\ See NASD/NSX TRF Approval Order, supra note 8.
    \39\ See NASD/NSX TRF Approval Order, supra note 8.
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A. NASD/BSE TRF Rules

    Most of the provisions in the new NASD Rule 4000D and 6000D Series, 
which establish the trade reporting and clearing and comparison rules 
for the NASD/BSE TRF, are substantially similar to the NASD Rule 4000 
and 6000 Series and the NASD Rule 4000C and 6000C Series that the 
Commission approved for the NASD/Nasdaq TRF \40\ and the NASD/NSX 
TRF,\41\ respectively. Other provisions in the rules of the NASD/BSE 
TRF are substantially similar to existing NASD rules.\42\ The 
Commission finds that the provisions of the NASD Rule 4000D and 6000D 
Series that are substantially similar to existing NASD rules are 
consistent with Act.
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    \40\ See NASD/Nasdaq TRF Approval Order, supra note 7.
    \41\ See NASD/NSX TRF Approval Order, supra note 8.
    \42\ For example, the two- and three-party trade reporting rules 
in NASD Rules 4632D(c) and (d) are substantially similar to the two- 
and three-party trade reporting rules of the ADF. See NASD Rules 
4632A(c) and (d). Similarly, the provisions of NASD Rule 6130D(f), 
which provide trade report modifiers for certain transactions that 
are assessed a regulatory transaction fee in accordance with Section 
3 of Schedule A to the NASD By-Laws, are substantially similar to 
NASD Rule 6130(g), which governs the NASD/Nasdaq TRF. The NASD also 
adopted substantially similar provisions for the NASD/NSX TRF in 
NASD Rule 6130C(f). See December Notice, supra note 19.
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    In Amendment No. 1, the NASD proposes to adopt rules for the NASD/
NSX TRF and the NASD/BSE TRF that expressly prohibit members from 
aggregating trades for purposes of trade

[[Page 76413]]

reporting to the NASD/NSX TRF and the NASD/BSE TRF.\43\ The NASD notes 
that both its initial NASD/BSE TRF proposal and the NASD/NSX TRF 
proposal \44\ stated this prohibition, which the NASD now proposes to 
include in the rules of the NASD/NSX TRF and the NASD/BSE TRF. The 
Commission finds that these provisions are consistent with the Act 
because they will help to clarify the rules governing the NASD/NSX TRF 
and the NASD/BSE TRF.
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    \43\ See NASD Rules 4632C(h) and 6130C(g) (governing the NASD/
NSX TRF); and 4632D(i) and 6130D(g) (governing the NASD/BSE TRF).
    \44\ See NASD/NSX TRF Approval Order, supra note 8.
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    In addition, Amendment No. 1 revises NASD Rules 4632D(a)(4), (7), 
and (9) to reflect that the NASD/BSE TRF will support the .W and .PRP 
modifiers, and adds NASD Rule NASD Rule 4632D(g)(2)(G), which is 
identical to NASD Rule 4632(g)(2)(G), and was inadvertently omitted. 
Amendment No. 1 also proposes to adopt NASD Rule 6130D(f), which 
provides trade report modifiers for certain transactions and is 
substantially similar to NASD Rules 6130(g) and 6130C(f).\45\ Because 
proposed NASD Rule 6130D(f), and the proposed changes to NASD Rule 
4632D(a) and NASD Rule 4632D(g), adopt rule provisions for the NASD/BSE 
TRF that are identical or substantially similar to existing NASD rules, 
the Commission finds that these changes are consistent with the Act. 
Similarly, Commission finds that the technical changes described in 
Section II.D. above, which correct errors in the text of the NASD/BSE 
TRF's rules, are consistent with the Act because they will help to 
ensure the accuracy of the NASD's rules.
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    \45\ See note 42, supra.
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B. NASD/BSE TRF LLC

    The NASD and the BSE will jointly own the NASD/BSE TRF LLC, which 
will operate the NASD/BSE TRF. The NASD has filed the LLC Agreement as 
part of the current proposal.\46\ The LLC Agreement is substantially 
similar to the limited liability company agreement of the NASD/Nasdaq 
TRF LLC (``NASD/Nasdaq TRF LLC Agreement'') that the Commission 
approved in the NASD/Nasdaq TRF Approval Order \47\ and to the limited 
liability company agreement of the NASD/NSX TRF that the Commission 
approved in the NASD/NSX TRF Approval Order.\48\ Accordingly, for the 
reasons discussed in the NASD/Nasdaq TRF Approval Order with respect to 
the NASD/Nasdaq TRF LLC Agreement, the Commission finds that the LLC 
Agreement is consistent with the Act.\49\
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    \46\ The Commission notes that any changes to the LLC Agreement 
that are stated policies, practices, or interpretations of the NASD, 
as defined in Rule 19b-4 under the Act, must be filed with the 
Commission pursuant to Section 19(b) of the Act and Rule 19b-4 
thereunder.
    \47\ See note 7, supra.
    \48\ See note 8, supra.
    \49\ The Commission incorporates by reference the discussion and 
analysis of the NASD/Nasdaq TRF LLC and NASD/Nasdaq TRF LLC 
Agreement set forth in the NASD/Nasdaq TRF Approval Order, supra 
note 7.
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    The Commission notes that the NASD/BSE TRF LLC, as the operator of 
an NASD facility, is an integral part of a SRO registered pursuant to 
the Act and, as such, is subject to obligations imposed by the Act. The 
Commission underscores that these obligations endure so long as the 
NASD/BSE TRF LLC operates an NASD facility.
    The Commission believes that the LLC Agreement makes clear that the 
NASD will have sole regulatory responsibility for the activities of 
NASD members related to the facility operated by the NASD/BSE TRF LLC 
and provides the NASD with certain rights that are intended to preserve 
its regulatory authority and control.\50\ The Commission believes that 
the provisions of the LLC Agreement will allow the NASD to carry out 
its self-regulatory responsibilities with respect to its facility and 
that both the Commission and the NASD will have sufficient regulatory 
jurisdiction over the controlling parties of the NASD/BSE TRF LLC to 
carry out their responsibilities under the Act.
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    \50\ For example, pursuant to the LLC Agreement, the NASD must 
consent before certain ``Major Actions,'' as defined in the LLC 
Agreement, with respect to the NASD/BSE TRF LLC are effective.
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    For example, under the LLC Agreement, each Member and each director 
of the NASD/BSE TRF LLC agrees to comply with the federal securities 
laws and rules and regulations thereunder and to cooperate with the 
Commission pursuant to its regulatory authority and the provisions of 
the LLC Agreement. In addition, the NASD and the BSE acknowledge in the 
LLC Agreement that--to the extent directly related to the NASD/BSE TRF 
LLC's activities--their books, records, premises, officers, directors, 
governors, agents, and employees will be deemed to be the books, 
records, premises, officers, directors, governors, agents, and 
employees of the NASD itself and its affiliates for the purposes of, 
and subject to oversight pursuant to, the Act. This provision will 
reinforce the Commission's ability to exercise its authority under 
Section 19(h)(4) of the Act \51\ with respect to the officers and 
directors of the NASD/BSE TRF LLC because all such officers and 
directors-to the extent that they are acting in matters related to the 
NASD/BSE TRF LLC's activities-would be deemed to be the officers and 
directors of the NASD itself. Furthermore, under the LLC Agreement, the 
records of the NASD and BSE, to the extent that they are related to the 
NASD/BSE TRF LLC's activities, are deemed to be records of the NASD 
itself and are subject to the Commission's examination authority under 
Section 17(b)(1) of the Act.\52\
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    \51\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) of the Act authorizes 
the Commission, by order, to remove from office or censure any 
officer or director of an SRO if it finds after notice and an 
opportunity for hearing that such officer or director has: (1) 
Willfully violated any provision of the Act or the rules and 
regulations thereunder, or the rules of such SRO; (2) willfully 
abused his or her authority; or (3) without reasonable justification 
or excuse, has failed to enforce compliance with any such provision 
by a member or person associated with a member of the SRO.
    \52\ See Section 17(c) of the LLC Agreement.
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    The LLC Agreement also provides that the NASD and the BSE, and each 
officer, director, agent, and employee thereof, irrevocably submits to 
the jurisdiction of the U.S. federal courts, the Commission, and the 
NASD for the purpose of any suit, action, or proceeding pursuant to the 
U.S. federal securities laws and the rules and regulations thereunder 
arising from, or relating to, the NASD/BSE TRF LLC's activities.
    The Commission also believes that the requirements of Section 19(b) 
of the Act and Rule 19b-4 thereunder provide the Commission with 
sufficient authority over changes in control of the NASD/BSE TRF LLC to 
enable the Commission to carry out its regulatory oversight 
responsibilities with respect to the NASD and its facilities.
    The Commission notes that the NASD is required to enforce 
compliance with the provisions of the LLC Agreement because they are 
``rules of the association'' within the meaning of Section 3(a)(27) of 
the Act.\53\ A failure on the part of the NASD to enforce its rules 
could result in a suspension or revocation of its registration pursuant 
to Section 19(h)(1) of the Act.\54\
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    \53\ 15 U.S.C. 78c(a)(27).
    \54\ 15 U.S.C. 78s(h)(1).
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C. Accelerated Approval of the Proposed Rule Change as Amended by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change as amended by Amendment No. 1 prior to the thirtieth day after 
the date of publication of notice of filing thereof in

[[Page 76414]]

the Federal Register. As described more fully above, the changes to 
NASD Rules 4362D(a), 4632D(g), and 6130D(f) adopt provisions for the 
NASD/BSE TRF that are identical to or substantially the same as 
existing NASD rules. The Commission believes that these changes do not 
raise new regulatory issues and will help to provide consistency in the 
NASD's trade reporting rules. Amendment No. 1 also revises the rules of 
the NASD/NSX TRF and the NASD/BSE TRF to include an express prohibition 
on the aggregating of trades for purposes of trade reporting to these 
facilities. The Commission believes that this change strengthens and 
clarifies the rules governing the NASD/NSX TRF and the NASD/BSE TRF by 
providing an express prohibition on the aggregating of trades for 
purposes of trade reporting to the facilities. Finally, Amendment No. 1 
includes technical changes that correct errors in the text of the NASD/
BSE TRF's rules, thereby helping to ensure the accuracy of the NASD's 
rules. For these reasons, the Commission finds that it is consistent 
with Sections 15A(b)(6) and 19(b) of the Act to approve the proposed 
rule change as amended by Amendment No. 1 on an accelerated basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change as amended by Amendment 
No. 1, including whether it 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-2006-115 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-2006-115. 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 the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. 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-2006-115 and should be submitted on or before January 10, 2007.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\55\ that the proposed rule change (SR-NASD-2006-115), as amended, 
is approved.
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    \55\ 15 U.S.C. 78s(b)(2).
    \56\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\56\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-21660 Filed 12-19-06; 8:45 am]

BILLING CODE 8011-01-P