Document ID: SEC-2007-1257-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-09-11T04:00Z

[Federal Register: September 11, 2007 (Volume 72, Number 175)]
[Notices]               
[Page 51880-51882]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11se07-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56345; File No. SR-NASDAQ-2007-058]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Step-Outs and Transfers of Sales Fees

August 31, 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 7, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') 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 prepared primarily by Nasdaq. Nasdaq filed the proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) \4\ thereunder so that the proposal was 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

    Nasdaq proposes to offer functionality to allow Nasdaq members to 
process (i) step-outs and (ii) transferals of Rule 7002 Sales Fees and 
similar fees of other self-regulatory organizations (``SROs'') and 
proposes to establish fees for these services.

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

    In its filing with the Commission, Nasdaq 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. Nasdaq 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
    Nasdaq is proposing to allow Nasdaq members to process step-outs 
and transferals of Rule 7002 Sales Fees and similar fees of other self-
regulatory organizations (``SROs'') through the Nasdaq Exchange and is 
proposing to establish fees for these services.

Step-Outs

    A step-out is a mechanism for transferring a broker's position in a 
security in a manner that does not constitute a trade. In one form of a 
step-out, a party to a previously executed trade transfers its position 
in the trade to one or more other parties. For example, a broker that 
buys a large block of stock on behalf of several broker-dealer 
customers may ``step-out'' of the trade to transfer and allocate its 
position to the customers. Thus, under this form of a step-out, there 
is a single trade on a securities market, coupled with an arrangement 
between one of the trade counterparties and one or more additional 
parties to shift the settlement obligations for the trade to the 
additional parties. In another form of step-out, a broker uses a 
clearing-only report to transfer its position from an account at one 
clearing broker to an account at another clearing broker for its own 
internal accounting purposes.
    Historically, when The Nasdaq Stock Market, Inc. (``Nasdaq Inc.'') 
operated as a facility of the National Association of Securities 
Dealers (``NASD''), step-outs were effected through non-tape, clearing-
only trade report entries into the Automated Confirmation Transaction 
Service (``ACT''). Now that Nasdaq is fully operational as a national 
securities exchange, ACT serves both as the mechanism for reporting 
trades that are automatically executed through the Nasdaq Market Center 
to the tape and has also been licensed for use by the NASD/NASDAQ Trade 
Reporting Facility (``NASD/NASDAQ TRF'') as a technology platform for 
collecting over-the-counter (``OTC'') trade reports and reporting them 
to the tape. In this dual role, ACT continues to accept step-out 
entries regardless of whether the underlying trade occurred on the

[[Page 51881]]

Nasdaq Market Center or was an OTC trade reported to the NASD/NASDAQ 
TRF.
    Since step-outs are not trades, they are not an inherent OTC 
activity. Rather, an exchange may appropriately offer step-out 
capability to its members as a value-added service. Nasdaq notes that 
the New York Stock Exchange (``NYSE'') and the American Stock Exchange 
offer step-out functionality to their members. Nasdaq is proposing to 
allow step-out capability under its rules with respect to any trade to 
which a Nasdaq member is a party regardless of the market on which the 
trade was executed.\5\ However, the parties to a step-out under Nasdaq 
rules must all be Nasdaq members and must be parties to an agreement 
such as the NASD's new Uniform Trade Reporting Facility Service Bureau/
Executing Broker Agreement under which the broker transferring the 
position has received authorization from the transferee broker to act 
on its behalf. Each party to a step-out under Nasdaq rules will pay 
$0.029. If the parties to the step-out also transfer the obligation to 
pay a Sales Fee or similar fee, the party transferring the fee will 
also pay the fee transfer charge discussed below.
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    \5\ The report of a step-out submitted to ACT pursuant to the 
proposed rule will be marked as a Nasdaq Exchange entry so as to 
clearly distinguish it from an NASD/Nasdaq TRF entry, which also is 
reported through ACT. The rule further stipulates that a non-tape, 
clearing-only submission may not be used for the purpose of 
reporting a trade execution.
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    Step-out reporting would also continue to be permitted by NASD 
under the NASD/NASDAQ TRF framework. However, it is Nasdaq's 
understanding that NASD expects to submit a proposed rule change to the 
Commission in the near future under which the NASD/NASDAQ TRF would be 
available for step-outs only when the original trade was reported to 
it. By contrast, Nasdaq members could use the Nasdaq exchange to effect 
step-outs from trades executed in any venue, including trades reported 
to a trade reporting facility.

Transfers of Sales Fees

    Under Rule 7002, Nasdaq charges a sales fee to its members to 
defray the costs of the fees that it must pay to the Commission under 
Section 31(b) of the Act.\6\ Other self-regulatory organizations charge 
similar fees. Nasdaq is proposing to adopt rules under which a member 
may transfer the obligation to pay a sales fee or similar fee 
associated with a particular trade to another member either at the time 
of the step-out or at some other time.\7\ ACT has historically been 
used for transfers of the obligation to pay the fees of other SROs, 
including NASD's transaction fee under Schedule A, Section 3 of the 
NASD By-Laws.\8\ Since Nasdaq became operational as an exchange, ACT 
has also been used for transfers of sales fee obligations but under the 
framework of the NASD/ NASDAQ TRF. Nasdaq believes that transfers of 
obligations to pay sales fees and similar fees may appropriately be 
conducted pursuant to Nasdaq's rules as an exchange since they are not 
inherently an OTC function. Accordingly, the proposed rule recognizes 
that ACT may be used to transfer the obligation to pay sales fees and 
similar fees if the clearing firms for the trades to which the fees 
relate are party to an agreement authorizing such transfers between 
themselves and/or the firms on whose behalf they clear trades. Nasdaq 
will impose a charge equal to 10% of the transferred fee with a minimum 
charge of $0.025 and a maximum charge of $0.25. The fee would be paid 
by the transferring party. An NASD member may continue to use ACT to 
transfer the obligation to pay an NASD transaction fee under the NASD/
NASDAQ TRF framework. However, such action would have to be performed 
pursuant to NASD rules. NASD has informed Nasdaq that it expects to 
file a proposed rule change to permit the transfer of the obligation to 
pay NASD fees under that framework.
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    \6\ 15 U.S.C. 78ee(b).
    \7\ For example, a fee transfer may occur independent of a step-
out in a situation where a party to a riskless principal transaction 
transfers the obligation to pay the resulting Sales Fee to its 
customer.
    \8\ Such transfers are indirect. Thus, if Broker A sold shares 
on Exchange B, Broker A would pay the resulting fee to Exchange B 
but could impose an offsetting obligation on Broker C for 
reimbursement.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act \9\ and in particular with 
Sections 6(b)(4) of the Act \10\ because the proposal provides for the 
equitable allocation of reasonable dues, fees, and other charges among 
members and issuers and other persons using any facility or system 
which Nasdaq operates or controls. Nasdaq believes that offering step-
out and fee transfer functionality benefits its members by enhancing 
the efficiency of their post-trade operations. Nasdaq's proposed fees 
are reasonable and are comparable to Nasdaq Inc.'s prior fees for non-
tape submissions to ACT. Nasdaq also notes that its proposed fee step-
out fee of $0.029 per side compares favorably to NYSE's published step-
out fee of $0.25 per trade.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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 on the proposed rule change were neither solicited 
nor received.

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)(iii) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder \12\ because it 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 from the date on which it was filed or such shorter time as the 
Commission may designate. Nasdaq believes that the filing may 
appropriately be designated as ``non-controversial'' because Nasdaq is 
proposing a clearer framework for offering value-added services that 
have consistently been offered through Nasdaq's ACT system. Nasdaq also 
notes that the NYSE and Amex currently offer their members comparable 
capabilities for conducting step-outs. 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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

[[Page 51882]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2007-058 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-NASDAQ-2007-058. 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at Nasdaq's principal office and on Nasdaq's 
Web site at http://nasdaq.complinet.com/file_store/pdf/rulebooks/NASDAQ_SR-NASDAQ-2007-058.pdf.
 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-NASDAQ-2007-058 and should be submitted on or before 
October 2, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-17783 Filed 9-10-07; 8:45 am]

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