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94-29 SEC Approves Use Of Market-Maker Identifiers For OTCBB And Elimination Of Certain Schedule H Reporting Requirements


Legal & Compliance

Executive Summary

On March 14, 1994, the Securities and Exchange Commission (SEC) approved an amendment to Section 4 of the OTC Bulletin Board (OTCBB®) rules that requires OTCBB market makers to indicate, by a fifth-character geographic indicator appended to their market-maker identifier (MMID), that the firm's trading desk for a quoted security is located away from the firm's primary trading office.1

Additionally, on March 4, 1994, the SEC approved a new subsection (c) to Section 2 of Schedule H to the NASD By-Laws.2 Subsection (c) eliminates member firms' Schedule H reporting obligations for issues classified as OTC equity securities (OTC equities) and covered by the real-time trade reporting requirements (Part XII of Schedule D to the NASD By-Laws) that became effective December 20, 1993. Essentially, Subsection (c) reflects that trade-by-trade reporting through the Automated Confirmation Transaction (ACTSM) service has superseded the reporting of aggregate volume and price range data under Subsection 2(a) of Schedule H to the NASD By-Laws. The text of the rule change follows the discussion below.

Geographic Identifiers

The amendment to Section 4 of the OTCBB rules requires market-maker participants in the OTCBB to append a fifth-character geographic indicator to their MMIDs when the firm's trading desk for a security quoted on the OTCBB is located away from the firm's primary trading office. If a firm's trading desk for a security quoted on the OTCBB is at the firm's primary trading desk, the geographic indicator is not required. The fifth-character geographic indicators are necessary to avoid confusion and delay by market participants in contacting market makers in securities quoted on the OTCBB. Geographic indicators will ensure that traders will direct their calls to the appropriate location where the market maker for the stock is located and avoid instances where multiple phone calls are needed to access a market maker's quote. The use of geographic indicators took effect April 4, 1994.

In addition, mandatory use of fifth-character geographic indicators is necessary in light of developments associated with the NASD's Nasdaq Workstation IISM service. Specifically, with Nasdaq Workstation II, market makers' telephone numbers will not be displayed on the OTCBB screen but may be recalled separately. Thus, unless fifth-character geographic indicators are used, there would be confusion among market participants concerning the trading location of securities quoted on the OTCBB once Nasdaq Workstation II is in operation. It should be noted that the use of fifth-character geographic indicators already has been mandated for market makers in securities traded on The Nasdaq Stock Market™. Questions regarding this rule change may be directed to Thomas R. Gira, Assistant General Counsel, (202) 728-8957.

Schedule H Reporting

On March 4, 1994, the SEC approved a new Subsection 2(c), Schedule H to the NASD By-Laws that eliminates the requirements to report aggregate volume and price range data for OTC equity securities. Previously, the Schedule H reporting requirements had extended to members' over-the-counter (OTC) principal transactions in equity securities not listed on The Nasdaq Stock Market or on a national securities exchange. Schedule H reporting requirements also extended 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 now subsumed by the definition of OTC Equity Security in Section 1(b), Part XII of Schedule D to the NASD By-Laws, which took effect December 20, 1993. Part XII contains the requirements and procedures for reporting individual transactions in OTC equities on a real-time basis (i.e., within 90 seconds of execution). These reporting requirements and procedures closely approximate those that apply to NASD members when they effect transactions in Nasdaq-listed securities. Since the advent of real-time reporting for OTC equities pursuant to Part XII of Schedule D on December 20, 1993, the NASD captures far more information for regulatory purposes than was captured previously via Schedule H reporting. Accordingly, the regulatory purposes underlying the capture of Schedule H information are now satisfied more effectively by the NASD's collection and processing of individual trade reports entered in accord with Part XII of Schedule D. Under these circumstances, Schedule H reporting is no longer mandated for OTC equities and the addition of Subsection (c) to Section 2 of Schedule H effects the removal of that mandate. This change is deemed effective immediately. Questions regarding this amendment may be directed to Michael J. Kulczak, Associate General Counsel, (202) 728-8811.

1 Release No. 34-33760 (March 14, 1994).

2 Release No. 34-33713 (March 4, 1994).

Text Of Amendments To The OTCBB Rules And Schedule H

(Note: New language is underlined.)

Requirements Applicable to Market Makers

Section 4.

(c) In cases where a market maker has more than one trading location, a fifth-character, geographic indicator shall be appended to the market maker's identifier for that security to identify the branch location where the security is traded. The fifth-character branch indicators are established by the Association and published from time to time in the Nasdaq/COS symbol directory.

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 By-Laws.

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