Document ID: SEC-2007-0724-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc
Posted Date: 2007-05-22T04:00Z

[Federal Register: May 22, 2007 (Volume 72, Number 98)]
[Notices]               
[Page 28741-28743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22my07-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55759; File No. SR-NASD-2007-032]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding NASD's Exemptive Authority Relating to Regulation 
NMS Trade Reporting Requirements

May 15, 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 10, 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 III below, which Items have been substantially prepared by NASD. 
NASD has designated this proposal as one constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule under Section 
19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) thereunder,\4\ which 
renders it 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)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to adopt new NASD Rule 5150 to provide NASD with 
authority to exempt members from certain new NASD trade reporting 
requirements for the Alternative Display Facility (``ADF'') and the 
NASD Trade Reporting Facilities (``TRFs'') relating to Regulation NMS. 
The text of the proposed rule change is available at NASD, the 
Commission's Public Reference Room, and http://www.nasd.com.

[[Page 28742]]

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
    On June 29, 2005, the Commission published its release adopting 
Regulation NMS,\5\ which established new substantive rules designed to 
modernize and strengthen the regulatory structure of the U.S. equities 
markets. Pursuant to Regulation NMS, the Commission, among other 
things, adopted Rule 611 (``Order Protection Rule'') to establish 
protection against trade-throughs for NMS stocks.\6\ There currently 
are nine exceptions and two exemptions to the Order Protection Rule.\7\
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    \5\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \6\ NMS stock is defined in Rule 600(b)(47) of Regulation NMS as 
``any NMS security other than an option.'' Rule 600(b)(46) of 
Regulation NMS defines NMS security as ``any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.''
    \7\ See 17 CFR 242.611; Securities Exchange Act Release Nos. 
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (Order 
Granting an Exemption for Qualified Contingent Trades from Rule 
611(a) of Regulation NMS) and 54678 (October 31, 2006), 71 FR 65018 
(November 6, 2006) (Order Exempting Certain Sub-Penny Trade-Throughs 
from Rule 611 of Regulation NMS).
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    NASD does not qualify as a trading center within the meaning of 
Regulation NMS.\8\ However, NASD has a responsibility to enforce 
requirements under the Act that apply to activity within its regulatory 
authority. Unlike exchanges that have direct Regulation NMS obligations 
with respect to the self-regulatory organization trading facilities, 
NASD has indirect Regulation NMS obligations with respect to all over-
the-counter market activity in NMS stocks, including post-trade 
regulation for compliance with the Order Protection Rule with respect 
to trading centers that trade report through the ADF or a TRF.
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    \8\ It should be noted that while NASD is not a trading center, 
market participants that quote in NMS stocks in the ADF are trading 
centers.
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    Consistent with Regulation NMS, NASD amended its rules governing 
trade reporting to the ADF and TRFs to require reporting members to 
append applicable modifiers to last-sale transaction reports for trades 
that fall within Rule 611 exceptions and exemptions.\9\ The amendments 
to the ADF trade reporting rules (specifically, Rule 4632A) became 
operative on March 5, 2007. The amendments to the trade reporting rules 
relating to the TRFs (specifically, Rules 4632, 4632C, 4632D, and 
4632E) will become operative on the Regulation NMS Pilot Stocks Phase 
Date, which is scheduled to occur on July 9, 2007.\10\
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    \9\ See generally, Securities Exchange Act Release Nos. 54537 
(September 28, 2006), 71 FR 59173 (October 6, 2006) (SR-NASD-2006-
091, amending ADF rules); 55088 (January 11, 2007), 72 FR 2573 
(January 19, 2007) (SR-NASD-2007-001, amending ADF rules); 55101 
(January 12, 2007), 72 FR 2568 (January 19, 2007) (SR-NASD-2007-002, 
amending NASD/Nasdaq TRF rules); and 55346 (February 26, 2007), 72 
FR 9807 (March 5, 2007) (SR-NASD-2007-014, amending NASD/NSX TRF 
rules, NASD/BSE TRF rules, and NASD/NYSE TRF rules).
    \10\ Members may submit trade reports to the TRFs in compliance 
with the Regulation NMS requirements on a voluntary basis prior to 
the Pilot Stocks Phase Date.
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    The Financial Information Forum (``FIF'') submitted a comment 
letter in response to these rule changes.\11\ The FIF Letter states 
that implementation of the new NASD trade reporting modifiers relating 
to Regulation NMS (specifically, the self-help modifier, the qualified 
contingent trade modifier, the sub-penny modifier, and the modifier 
used to distinguish between inbound and outbound intermarket sweep 
orders) will require additional development efforts and will present a 
challenge to certain member firms. The FIF Letter further asserts that 
implementation of the self-help modifiers in particular will be a time-
consuming and costly effort and, without substantial development 
changes, some firms may be forced to not implement self-help to the 
detriment of their customers. Finally, the FIF Letter states that, if 
NASD determines that it must have this information for regulatory 
reasons, firms should be given more time to modify their systems and 
requests that the compliance date for the new trade report modifiers 
for purposes of reporting to a TRF be moved to the Regulation NMS 
Completion Date, which is currently anticipated to be October 8, 2007.
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    \11\ See letter from Manisha Kimmel, Executive Director, FIF, on 
behalf of the FIF Regulation NMS Working Group, to Nancy M. Morris, 
Secretary, Commission, dated February 7, 2007, submitted in response 
to SR-NASD-2007-002 (``FIF Letter'').
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    In response to the FIF Letter and in recognition of the 
technological burdens that the new NASD trade report requirements may 
impose on some members, NASD is proposing to adopt new Rule 5150 to 
provide NASD with exemptive authority. Specifically, Rule 5150 would 
allow members that are unable to complete necessary systems changes by 
the applicable compliance date to seek a temporary exemption from the 
new trade report requirements related to Regulation NMS found in Rules 
4632, 4632A, 4632C, 4632D, and 4632E. NASD will grant such an exemption 
only on a firm-by-firm basis, for good cause shown after taking into 
consideration all relevant factors and only if it is consistent with 
the protection of investors and the public interest.
    In general, the new trade reporting requirements provide critical 
information for purposes of NASD's Regulation NMS regulatory program. 
As such, NASD does not intend to grant exemptions under the proposed 
rule except in exceptional circumstances and only where the requester 
has demonstrated that it has made best efforts to comply in a timely 
fashion with the new trade reporting requirements related to Regulation 
NMS and there is a specific, limited problem or issue preventing the 
member from achieving full compliance. A member requesting an exemption 
will be required, among other things, to: (1) Explain why it is unable 
to complete the necessary systems changes by the applicable compliance 
date; (2) identify the specific new Regulation NMS-related trade 
reporting modifier(s) (e.g., self-help) that the firm is unable to 
implement in a timely manner; and (3) provide an estimated completion 
date for the outstanding systems work and full compliance. As set forth 
in the proposed rule, NASD will determine the duration of any 
exemption, which shall not exceed six months. Moreover, since concerns 
raised by the industry relate only to certain Regulation NMS-related 
trade modifiers (the self-help modifier, the qualified contingent trade 
modifier, the sub-penny modifier, and the modifier used to distinguish 
between inbound and outbound intermarket sweep orders), NASD will 
exercise exemptive authority under this rule proposal only to address 
implementation issues related to these particular modifiers.
    NASD intends to exercise the exemptive authority proposed herein on 
a temporary basis and, as such, the proposed rule change will 
automatically

[[Page 28743]]

sunset one year after the Pilot Stocks Phase Date, currently scheduled 
to occur on July 9, 2007. NASD has filed the proposed rule change for 
immediate effectiveness.\12\ The proposed rule change will become 
operative upon filing with the Commission.
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    \12\ NASD is filing this proposed rule change for immediate 
effectiveness to allow NASD to address exemptive requests 
immediately without regard to when the changes to the underlying 
trade reporting rules are operational.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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, and, in general, to protect investors and the 
public interest. NASD believes that the proposed exemptive authority is 
appropriate because it will allow NASD to address certain 
implementation issues as they arise.
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    \13\ 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

    While NASD did not solicit comments on the proposed rule change, as 
discussed above, NASD did receive a comment letter in connection with 
SR-NASD-2007-002.\14\ NASD is filing the proposed rule change 
specifically to address this comment letter and the concerns raised by 
the commenter about the burdens associated with implementation of the 
new Regulation NMS-related trade report modifiers. As noted above, NASD 
has determined that the Regulation NMS-related modifiers required under 
the NASD trade reporting rules are crucial to its regulatory program 
and does not agree with the commenter that the self-help modifier 
should be optional. NASD believes that the proposed exemptive authority 
strikes a fair balance between the needs of NASD's regulatory program 
and member concerns regarding the timing and burdens of the necessary 
systems changes. The proposed rule change should alleviate such burdens 
by affording members additional time, if needed, to make the necessary 
systems changes relating to the self-help modifier, the qualified 
contingent trade modifier, the sub-penny modifier, and the modifier 
used to distinguish inbound and outbound intermarket sweep orders.
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    \14\ See FIF Letter, supra note 11.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has become effective pursuant to 
Section 19(b)(3)(A)(i) of the Act \15\ and subparagraph (f)(1) of Rule 
19b-4 thereunder,\16\ because it constitutes a stated policy, practice, 
or interpretation with respect to the meaning, administration, or 
enforcement of an existing rule. 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 furtherance of the purposes of 
the Act.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(i).
    \16\ 17 CFR 240.19b-4(f)(1).
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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-2007-032 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-2007-032. 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 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-2007-032 and should be submitted on or before June 12, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7-9741 Filed 5-21-07; 8:45 am]

BILLING CODE 8010-01-P