Self-Regulatory Organizations; Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Electronic Reporting of Transactions Executed Outside Normal Market Hours

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34229; File No. SR-NASD-94-35]

Self-Regulatory Organizations; Proposed Rule Change by the

National Association of Securities Dealers, Inc. Relating to Electronic

Reporting of Transactions Executed Outside Normal Market Hours

June 16, 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 June 2,

1994, 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

Pursuant to the provisions of Section 19(b)(1) of the Act, the NASD

is hereby filing a proposed rule change to strengthen and improve

various trade reporting requirements applicable to trades executed by

the NASD member firms outside normal business hours. The proposed rule

change would establish specific procedures for the electronic entry of

trade data with an eye toward eventually eliminating manually prepared

paper forms as a means of trade reporting.

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

The instant rule change proposes a series of modifications to the

NASD rules governing transaction reporting in Nasdaq National Market

securities, Nasdaq SmallCap securities, Nasdaq convertible debt

securities (``Nasdaq convertibles''), Over-The-Counter Equity

securities (``OTC Equities''), and exchange-listed securities eligible

for inclusion in the Consolidated Quotation Service (``CQS issues'').

Overall, this rule change is intended to replace a manually-prepared

paper form, Form T, with an efficient means of automated data entry for

members to report transactions executed outside normal business hours

(9:30 a.m. to 4:00 p.m. E.T.) and outside the hours of the Automated

Confirmation Transaction Service (``ACT'') (currently, 9:00 a.m. to

5:15 p.m. E.T.).\1\ In lieu of Form T, the proposal would require

electronic submission of the covered transactions through ACT either on

trade date or the next business day (T+1). Member firms will use a

Nasdaq Workstation unit or a computer-to-computer interface to input

the trade reports. The proposal also includes some technical changes to

make the language in the various trade reporting rules consistent.

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\1\In addition to reporting trades effected outside normal

business hours and ACT hours, Form T is used to report transactions

that were executed during normal business hours, but not reported

into ACT through inadvertence or otherwise.

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The rule proposal would substantially reduce the need for reporting

via Form T as a result of the following changes:

(a) The morning ``.T'' window for reporting contemporaneous trades

in Nasdaq National Market issues, Nasdaq SmallCap issues, Nasdaq

convertibles, and domestic OTC Equities (including Canadian issues and

American Depositary Receipts (``ADRs'') will be expanded by 1 hour to

run from 8:00 a.m. to 9:30 a.m. E.T. Trades executed during this

interval shall be reported into ACT within 90 seconds of execution and

be designated .T to denote execution outside normal market hours.

(b) Trades executed between midnight and 8:00 a.m. E.T. in Nasdaq

National Market issues, Nasdaq SmallCap issues, Nasdaq convertibles,

and domestic OTC Equities (including Canadian issues and ADRs) shall be

reported into ACT on trade date during the expanded .T period (8:00

a.m. to 9:30 a.m. E.T.); these trades must be designated .T trades to

denote execution outside normal hours and be accompanied by time of

execution since they are not being reported in realtime.

(c) Trades executed in Nasdaq National Market issues, Nasdaq

SmallCap issues, Nasdaq convertibles, and domestic OTC Equities

(including Canadian issues and ADRs) between 5:15 p.m. and midnight

E.T. shall be reported into ACT on the next business day (T+1) between

8:00 a.m. and 1:30 p.m. E.T.; these entries shall be designated ``as/

of'' trades to denote execution on a prior day and be accompanied by a

time of execution.

(d) Trades executed in foreign OTC Equities (excluding Canadian

issues and ADRs) shall be reported into ACT on T+1 between 8:00 a.m.

and 1:30 p.m. E.T. regardless of the time the trade was actually

executed; a time of execution must also accompany such trade

reports.\2\

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\2\In approving the NASD's trade reporting rules for OTC

Equities, the Commission sanctioned the capture of the trade-by-

trade data on foreign issues (including Canadian issues) and ADRs

for regulatory purposes, but without real-time dissemination. (See

Release No. 34-32647, July 16, 1993; 58 FR 39262, July 22, 1993).

This would not change under the proposed revisions to Section

2(a)(3) of Part XII of Schedule D to the NASD By-Laws. Under the

proposal, member firms would have an expanded period in which to

report transactions in foreign issues (excluding ADRs and Canadian

issues) on T+1, regardless of whether the subject trades were

executed during or outside of normal market hours on trade data.

(Today, members may voluntarily report such trades on a T+1 basis,

between 9:00 and 9:30 a.m. E.T.). This approach is designed to

accommodate the internal processing tasks of member firms, including

conversion of the transactions price to $U.S. before it can be

reported to the NASD. Real-time reporting of trades in foreign

issues (excluding Canadian and ADR issues) will be optional.

Individual transactions in Canadian and ADR issues will also be

collected for regulatory purposes without dissemination over the

Nasdaq or vendor networks. However, the procedures for reporting

trades in Canadian and ADR issues into ACT will continue to track

the procedures for domestic OTC Equities.

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(e) Trades executed in CQS issues outside the hours of 9:30 a.m.

and 5:15 p.m. E.T. shall be reported into Act on T+1 between 8:00 a.m.

and 1:30 p.m. E.T., be designated ``as/of'' trades, and be accompanied

by a time of execution.

The NASD plans to implement these reporting requirements during the

fourth quarter of 1994; the related systems work is ongoing and should

be completed by early October. Thereafter, written notice will be

provided to member firms and vendors prior to implementation in the

fourth quarter.

The foregoing constitutes the first phase of a three phase process

designed to achieve the electronic capture of virtually every round-lot

trade executed by NASD members in the covered securities, regardless of

the execution time. During this initial phase, all trades designated as

.T trades (excepting .T trades in the subset of OTC Equities comprised

of foreign issues, Canadian issues, and ADRs) will be promptly

disseminated to market data vendors and to subscribers of Level 2/3

Nasdaq Workstation service. Entries designated as ``As/of'' trades

under this proposal will be collected solely for audit trail and

regulatory purposes. This category of trade-by-trade information will

not be disseminated--either through vendors' networks or the Nasdaq

network--until the second phase of this project. The NASD staff will

evaluate member firms' overall compliance with the new requirements

during the first phase while examining various alternatives for

instituting dissemination of ``as/of'' trade data in the second phase.

The staff will also consider the feasibility of compressing the time

period for reporting ``as/of'' trades on T+1 to the 8:00 a.m.-9:30 a.m.

time period, thereby allowing more timely dissemination of trades

executed between 5:15 p.m. and midnight E.T. The third and final phase

will focus on the complete elimination of Form T as a trade reporting

vehicle. Form T will be maintained as a back-up mechanism for reporting

last sale information to the NASD for regulatory purposes.

The NASD believes that this proposed rule is consistent with

Sections 11A(a)(1)(C), 15A(b)(2), and 15(A)(b)(6) of the Act. Section

11A(a)(1)(C) states that the goals of investor protection and

maintenance of fair and orderly markets can be advanced through the

broad dissemination of reliable information respecting quotations for

and transactions in securities. Section 15A(b)(2) requires that a

national securities association be appropriately organized and have the

capacity to enforce member firms' compliance with all applicable

provisions of the Act, the rules adopted thereunder, and the

association's own rules. Finally, Section 15A(b)(6) requires that the

association's rules be designed to prevent fraudulent and manipulative

acts and practices, promote just and equitable principles of trade,

foster cooperation and coordination with persons engaged in regulating,

clearing, settling, processing information with respect to and

facilitating transactions in securities.

As noted above, this initiative is intended to substitute

electronic reporting of transactional data for manual reporting via

Form T. This proposal will enable the NASD to incorporate all of the

reported data into its audit trail file for market surveillance

purposes. It will also enable the NASD to compile and publish

comprehensive volume data for individual securities, including block

size and smaller round-lot trades reported electronically by NASD

members. Additionally, the NASD will disseminate the .T category of

trade reports (excluding trade reports in non-domestic OTC Equities)

over the Nasdaq and vendor networks beginning at 8:00 a.m. E.T. on each

business day. Today, there is no mechanism available to systematically

disseminate transaction data received via Form T. Accordingly, the NASD

reiterates its belief that this proposed rule is consistent with the

requirements of Sections 11A(a)(1)(C), 15A(b)(2), and 15A(b)(6) of the

Act.

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

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the NASD consents, the Commission will:

A. by order approve such proposed rule change, or

B. institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. 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 July 14, 1994.

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. 94-15231 Filed 6-22-94; 8:45 am]

BILLING CODE 8010-01-M