[Federal Register Volume 59, Number 48 (Friday, March 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5646]
[[Page Unknown]]
[Federal Register: March 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33713; File No. SR-NASD-93-68]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change by the National
Association of Securities Dealers, Inc. Eliminating Regulatory
Reporting Requirements for Certain Equity Securities Under Section 2 of
Schedule H to the NASD Bylaws
March 4, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s (b)(1), notice is hereby given that on
November 17, 1993, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') 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 by the NASD.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and simultaneously is
approving the proposal.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to section 19(b)(1) of the Act, and Rule 19b-4 thereunder,
the NASD has filed a proposed rule change to eliminate a regulatory
reporting requirement that now exists for certain equity securities
under Section 2 of Schedule H to the NASD Bylaws. Following is the full
text of the proposal. (Additions are italicized.)
Schedule H
* * *
Sec. 2. Price and Volume Reporting
* * *
(c) The reporting requirements contained in paragraphs (a) and (b)
of this Section shall not apply to any non-NASDAQ security for which
members are required to report individual transactions pursuant to Part
XII of Schedule D to the NASD Bylaws.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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
The NASD hereby proposes an amendment to Section 2 of Schedule H to
the NASD Bylaws to eliminate the obligation of member firms to report
aggregate volume of purchases and sales, price range, and certain
contra party information for principal transactions in equity
securities classified as non-NASDAQ securities. Currently, this
regulatory reporting mechanism extends to over-the-counter (``OTC'')
principal transactions in equity securities that are not listed on The
NASDAQ Stock Market or on a national securities exchange. It also
extends to a small group of equities that are listed on regional
exchanges, but do not qualify as ``eligible securities'' for purposes
of certain national market system plans governing the collection and
dissemination of quotation and transaction information, respectively.
The foregoing categories of securities are subsumed by the
definition of OTC Equity Security (``OTC equity'') in Section 1(b),
Part XII of Schedule D to the NASD Bylaws.\1\ Part XII, which took
effect on December 20, 1993, establishes requirements and procedures
for reporting individual transactions in OTC equities on a real-time
basis (i.e., within 90 seconds of execution). The reporting
requirements and procedures in Part XII closely approximate those that
now apply to NASD members when they effect transactions in NASDAQ-
listed securities.
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\1\Part XII was the subject of File No. SR-NASD-92-48, which was
approved by the Commission in Securities Exchange Act Release No.
32647 (July 16, 1993), 58 FR 39262 (July 22, 1993).
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When Part XII was implemented on December 20, 1993, the NASD began
capturing far more information for regulatory purposes than was
previously captured via Schedule H reporting. Specifically, the NASD
began collecting trade-by-trade information on a real-time basis and
processing that data to form a sequenced audit trail of members'
trading activity in individual OTC equities. Such information has
greater utility to the NASD's market surveillance program than the
aggregate volume and price range data reported for principal
transactions under Section 2 of Schedule H.\2\ In essence, the
regulatory purposes underlying the capture of Schedule H information
are satisfied more effectively by the NASD's collection and processing
of individual trade reports entered in accord with Part XII of Schedule
D. The NASD posits that no regulatory purpose would be served by
continuing Schedule H reporting for OTC equities subject to Schedule D
reporting after December 20, 1993.\3\
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\2\In addition, the reporting requirements of Part XII would
require member firms to report dual agency trades within 90 seconds
of execution. Such trades are not reportable under Section 2 of
Schedule H because its scope is limited to principal transactions.
\3\Recently, the NASD represented to the Commission that members
are complying with the new real-time transaction reporting
requirements, and that other than some minor training needed for
some members' staff, the NASD has found no regulatory or
surveillance problems with respect to member compliance with the new
provisions. Telephone conversation between Michael Kulczak, NASD and
Betsy Prout, Commission, on February 9, 1994.
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2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
sections 11A(a)(1), 15A(b)(2) and (b)(6) of the Act. Section 11a(A)(1)
contains the Congressional findings and policy goals respecting
operational enhancements to the securities markets. Basically, the
Congress found that new data processing and communications techniques
should be applied to improve the efficiency of market operations,
broaden the distribution of market information, enhance the ability of
investors to monitor the quality of executions received, and foster
competition among market participants. Section 15A(b)(2) requires the
NASD, as a registered national securities association, to have the
capacity to enforce members' compliance with all applicable provisions
of the Act as well as the NASD's own rules. Finally, Section 15A(b)(6)
requires that the NASD's rules be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and facilitate transactions in securities.
The NASD submits that elimination of Schedule H reporting
requirements for securities classified as OTC equities--concurrently
with the implementation of real-time trade reporting for those same
securities--will produce operational efficiencies for member firms by
permitting the use of existing reporting techniques and procedures
applicable to NASDAQ-listed securities. From the NASD's perspective, it
will eliminate what has become redundant mechanism for the capture of
regulatory data to surveil trading in OTC equities.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not 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
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The NASD requests that the Commission find good cause, pursuant to
section 19(b)(2) of the Act, for approving the proposed rule change
prior to the 30th day after the publication in the Federal Register.
The NASD grounds its request on the following factors: (1) The December
20, 1993 effective date of real-time trade reporting requirements for
OTC equities, which requirements were approved by the Commission
earlier this year; (2) the more comprehensive and real-time nature of
the transaction data reported under new Part XII of Schedule D versus
the aggregate and historical character of data currently reported under
Section 2 of Schedule H; (3) the NASD's ability to process trade-by-
trade data received under Part XII to form an electronic audit trail
file for surveillance of trading in OTC equities; and (4) in light of
the preceding factors, the lack of any regulatory purpose to be served
by continuing Schedule H price and volume reporting from December 20,
1993, onward.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that approval of the proposed rule change is
consistent with the Act and the rules and regulations thereunder, and
in particular, with the requirements of section 15A(b)(2). Section
15A(b)(2) requires, among other things, the NASD to have the capacity
to enforce compliance by its members and persons associated with its
members with the provisions of the Act and with the NASD's rules.
As the Commission stated in the recent order approving the NASD's
real-time trade reporting provisions for OTC equities, the Commission
believes that by providing the NASD with real-time reports of
transactions in those securities and enabling the construction of audit
trails, the new reporting provisions will improve significantly the
NASD's ability to regulate the market in those securities.\4\ The
Commission also believes that real-time trade reporting in the relevant
securities supersedes the aggregate reporting requirements for
principal transactions found in Schedule H to the NASD By-Laws. The
Commission agrees with the NASD that the regulatory purpose underlying
the capture of Schedule H information is satisfied more effectively by
the NASD's collection and processing of individual trade reports
entered in accord with Part XII of Schedule D, and that no regulatory
purpose is served by continuing Schedule H reporting. Thus, the
Commission believes that the recently approved real-time reporting
requirements, as compared to the Schedule H reporting requirements,
should improve the NASD's capacity to enforce compliance by its members
and persons associated with its members with the provisions of the Act
and with the NASD's rules. Elimination of the redundant, less
informative Schedule H reporting requirements, therefore, is
appropriate and consistent with section 15A(b)(2) of the Act.
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\4\See supra note 1.
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The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publishing notice of
filing thereof. Accelerated approval of the NASD's proposal is
appropriate to avoid member confusion as to whether real-time
transaction reporting and Schedule H reporting are both required, when
dual reporting would serve no regulatory purpose and would create an
unnecessary and unintended expense to NASD members.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by April 1, 1994.
VI. Conclusion
For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with section 15A(b)(2) of the Act.
It is therefore ordered, Pursuant to section 19(b)(2) of the Act,
that the proposed rule change be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5646 Filed 3-10-94; 8:45 am]
BILLING CODE 8010-01-M