Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to a Delay in Implementing Changes to Nasdaq Riskless Principal Trade Reporting Rules

[Federal Register Volume 64, Number 197 (Wednesday, October 13, 1999)]
[Notices]
[Pages 55508-55510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26621]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-41974; File No. SR-NASD-99-52)


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to a Delay in Implementing Changes to 
Nasdaq Riskless Principal Trade Reporting Rules

October 4, 1999.
    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 September 29, 1999, the National Association of Securities Dealers 
(``NASDA'' or ``Association''), through its wholly-owned subsidiary, 
Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by Nasdaq. Nasdaq has designated this proposal as one 
constituting a stated policy and interpretation with respect to the 
meaning of an existing rule under Section 19(b)(3)(A)(i) of the Act \3\ 
and Rule 19b-4(f)(1) \4\ thereunder, which renders the rule effective 
upon the Commission's receipt of this filing. 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

    Nasdaq filed with the SEC a re-interpretation to NASD Rules 4632, 
4642, 4652, and 6620, regarding Nasdaq riskless principal trade 
reporting. The purpose of this re-interpretation of NASD Rules 4632, 
4642, 4652, and 6620, is to delay the effective date of the Nasdaq 
riskless principal trade reporting rule changes announced in SR-NASD-
98-59 \5\ and the interpretation thereto file in SR-NASD-99-39.\6\
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    \5\ Securities Exchange Act Release No. 40382 (August 28, 1998), 
63 FR 47337 (September 4, 1998).
    \6\ Securities Exchange Act Release No. 41731 (August 11, 1999), 
64 FR 44983 (August 18, 1999).
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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

    On March 24, 1999, the Commission approved a proposal to amend the 
trade reporting rules relating to riskless principal transactions in 
Nasdaq National Market, Nasdaq Small Cap Market, Nasdaq convertible 
debt, and non-Nasdaq OTC equity securities (``Riskless Principal Rule 
Changes'').\7\ Under the proposed Riskless Principal Rule Changes, a 
``riskless'' principal transaction is one where an NASD member, after 
having received an order to buy (sell) a security, purchases (sells) 
the security as principal at the same price to satisfy the order to buy 
(sell). The proposed rule changes provide that if a transaction is 
``riskless'', the offsetting transaction/leg (i.e., the transaction 
with the customer), does not need to be reported to the tape.
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    \7\ See Securities Exchange Act Release No. 41208 (March 24, 
1999), 64 FR 15386 (March 31, 1999).
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    When the SEC approved the rule change, the Commission asked Nasdaq 
to submit an interpretation giving examples of how mark-ups, mark-
downs, and other fees will be excluded for purposes of the amended 
riskless

[[Page 55509]]

principal rules.\8\ As requested, on August 5, 1999, Nasdaq filed SR-
NASD-99-39 with the Commission, attached to which was Notice to Members 
99-65, which gave examples of how mark-ups and other fees will be 
excluded for purposes of the riskless principal trade reporting rules. 
SR-NASD-99-39 and Notice to Members 99-65 were filed as an 
interpretation to existing NASD Rules 4632, 4642, and 6620.\9\ In 
addition to giving examples of how mark-ups and other fees will be 
excluded for purposes of the riskless principal trade reporting rules, 
Notice to Members 99-65 stated that the rule changes announced in SR-
NASD-98-59 and the interpretations to those rules contained in the 
Notice would become effective on September 15, 1999.
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    \8\ See id. at footnote 15.
    \9\ See Securities Exchange Act Release No. 41731 (August 11, 
1999), 64 FR 44983 (August 18, 1999) (SR-NASD-99-39).
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    Nasdaq is filing this proposal to delay implementation of the 
Nasdaq Riskless Principal Rule Changes until March 1, 2000, because a 
number of NASD members have represented that they are unable to prepare 
their systems for compliance with the changes by the September 30, 1999 
deadline. The firms' inability to meet the September 30, 1999 deadline 
is due (in large part) to Year 2000 (``Y2K'') remediation and testing 
requirements, as well as other code changes. In addition, the firms 
have represented that, due to a Y2K code freeze--which most firms will 
implement from September 30, 1999, until mid-January 2000--they will 
not be able to complete programming for the Riskless Principal Rule 
Changes until the end of the first quarter of 2000.
    Specifically, Nasdaq received a letter dated September 3, 1999 
(``September 3 Letter''),\10\ and a letter dated August 27, 1999 
(``August 27 Letter''),\11\ in which the signatory NASD member firms 
requested a delay of the implementation of the Riskless Principal Rule 
Changes. The August 27 Letter stated that the signatory NASD member 
firms (``Firms'') were requesting a delay because they need additional 
time to implement the sophisticated software changes necessary to 
modify their trading systems. In addition, the August 27 Letter 
represented that most firms in the industry have taken the prudent step 
of imposing freezes on system changes beginning as early as September 
15, 1999, to ensure a smooth Y2K transition. The letter further stated 
that meeting the September 30, 1999 implementation deadline, however, 
could have a significant impact on the Firms' Y2K efforts. The August 
27 Letter represented that the Firms will work closely with the NASD 
and Nasdaq to ensure a smooth implementation of the new reporting 
requirement after the Firms have successfully met the challenges 
presented by the Y2K transition.\12\
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    \10\ The September 3 Letter was submitted to Robert E. Aber, 
Senior Vice President and General Counsel, The Nasdaq Stock Market, 
Inc., from Richard T. Sharp, Solomon, Zauder, Ellenhorn Frischer & 
Sharp, on behalf of the following NASD member firms: Banc of America 
Securities; Cantor Fitzgerald & Co.; Deutsche Bank Securities, Inc.; 
Fidelity Capital Markets; Herzog, Heine, Geduld, Inc.; J.P. Morgan 
Securities, Inc.; Knight Securities L.P.; Mayer & Schweitzer, Inc.; 
OLDE Discount Corporation; Paine Webber Incorporated; Sherwood 
Securities Corp.; Spear, Leeds & Leeds & Kellogg Capital Markets; 
Warburg Dillon Read LLC; and Weeden & Co.
    \11\ The August 27 letter was submitted to Robert E. Aber, 
Senior Vice President and General Counsel, The Nasdaq Stock Market, 
Inc., and was signed by the following NASD member firms: Merrill 
Lynch, Pierce, Fenner & Smith; Morgan Stanley Dean Witter; Salomon, 
Smith Barney; Credit Suisse First Boston Corporation; Donaldson, 
Luftkin & Jenrette Securities; Goldman, Sachs & Co.; and Lehman 
Brothers Inc.
    \12\ The letter also stated that the Firms support the rule 
change because it will reduce transaction fees, including SEC fees.
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    The September 3 Letter stated that, given the complexity of 
programming changes required by the Riskless Principal Rule Changes in 
combination with Y2K approaching, it would be difficult for the 14 
signatory firms to meet the September 30, 1999 implementation date. The 
letter represented that systems personnel at each of the 14 firms have 
indicated that the programming changes necessitated by the Riskless 
Principal Rule Changes are very complicated and would require 
significant programming and testing. The September 3 Letter stated that 
since the adoption of the Riskless Principal Rule Changes, the NASD has 
issued Notice to Members 99-65 (August 1999), which raises several 
issues of application and interpretation, the resolution of which may 
require further programming changes. The September 3 Letter requested 
additional time to reasonably assure that programming changes are 
properly analyzed and implemented.
    Nasdaq believes that a delay in the implementation of the Nasdaq 
Riskless Principal Rule Changes is reasonable in light of the Y2K 
remediation efforts, the code freeze that most NASD members will 
observe, and the programming changes required by the rule change. 
Nasdaq believes it would not be prudent or consistent with Section 15A 
of the Act \13\ to require members to implement substantial system 
changes at a time when they are focusing significant resources and time 
to perform Y2K testing to insure the integrity of their major market 
systems. Thus, Nasdaq believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) \14\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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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    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(b)(6).
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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, as amended.

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

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(i) \15\ of the Act and Rule 19b-4(f)(1) thereunder,\16\ in 
that it constitutes a stated policy and interpretation with respect to 
the meaning of an existing rule.
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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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    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.

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. 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

[[Page 55510]]

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 File No. SR-NASD-99-52, and should be 
submitted by November 3, 1999.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26621 Filed 10-12-99; 8:45 am]
BILLING CODE 8010-01-M