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92-26 SEC Approval of Trade Reporting for Regular Nasdaq Securities

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EXECUTIVE SUMMARY

On March 10, the Securities and Exchange Commission (SEC) approved amendments to Schedule D regarding trade reporting for regular Nasdaq® equity securities. The trade reporting requirements are similar to those currently in place for Nasdaq National Market System (Nasdaq/NMS®) securities. Trade reporting of all Nasdaq equity issues will enhance the information available to the public and provide investors with instant, up-to-the-minute information on the securities traded in The Nasdaq Stock Market.SM Trade reporting will also greatly improve the NASD's ability to detect or deter manipulative or abusive trading practices.

Beginning June 15, members will be required to report both broker-to-broker and internalized transactions in regular Nasdaq securities to the Automated Confirmation Transaction (ACT)SM service within 90 seconds after execution. Quotations and trade reports in regular Nasdaq securities will be identified by the system with an "s" market center indicator: quotes and last-sale reports of Nasdaq/NMS issues will be identified with a "q" indicator. All Nasdaq securities will be exempt from the SEC's new "penny stock" rules, but transaction reporting for regular Nasdaq securities will not make these issues eligible automatically for margin treatment or for state "blue sky" exemptions. Finally, the new transaction reporting requirements will not apply to transactions in convertible debt securities.

The amendments will be effective on June 15 when end-of-day volume reports for regular Nasdaq equity securities will no longer be necessary. The text of the amendments follows the discussion below.

BACKGROUND AND DESCRIPTION OF AMENDMENTS

The SEC's approval of transaction reporting for regular Nasdaq securities represents a significant evolutionary step that will materially enhance the visibility and integrity of The Nasdaq Stock Market. Transaction reporting increases transparency of information for investors and issuers, facilitates best execution, permits immediate collection and scrutiny of trading information for regulatory purposes, and permits the compilation of historical price and volume data for analysis and research. Moreover, the introduction of trade reporting places regular Nasdaq securities on an equal footing with Nasdaq/NMS and exchange-listed securities in terms of real-time information available to broker/dealers and their customers. The NASD has nine years of experience with real-time reporting of Nasdaq/NMS securities and believes that the increased visibility associated with trade reporting will expand the universe of institutional and public investors interested in purchasing these securities. This will provide increased liquidity in the marketplace for the benefit of all investors.

Real-time transaction reporting and the related regulatory benefits will also permit the exemption of regular Nasdaq securities from the application of the SEC's "Penny Stock Disclosure Rules," some of which will take effect on July 15. Generally, the SEC rules define any stock selling for less than $5 per share as a penny stock and subject those securities to additional regulatory requirements. Exempted from the rules, however, are those lower priced stocks that remain fully qualified for inclusion in the Nasdaq market. The SEC has granted this exemption from the penny stock rules for securities listed on Nasdaq, based, in part, on the significantly enhanced transactional information that will be made available to investors through the trade-reporting function.

From a regulatory perspective, real-time reporting requirements will enhance significantly the automated market surveillance oversight performed by the NASD and provide more immediate and useful information for investigating questionable conduct, such as insider trading and manipulative activity. Presently, NASD Market Surveillance primarily uses end-of-day volume statistics as the source of information for trades in regular Nasdaq securities. Real-time trade reports significantly improve the NASD's ability to effectively monitor trading as it occurs. For example, as real-time trade reporting is fully implemented, the trading data will be available on the NASD's equity audit trail, which integrates last-sale, clearing, and inside quotation data for reported securities. In addition, transaction data will be added to daily quote and trade-comparison reports and to exception-based systems that monitor for marking-the-close violations, trading during trading halts, volume concentrations, late trade reporting, and other activity monitored by Market Surveillance. Collectively, these surveillance advances will reinforce the integrity and image of Nasdaq as a world-class securities market.

The amendments to Schedule D contain trade-reporting requirements that closely parallel those currently in place for Nasdaq/NMS securities. The new rules will require transactions in regular Nasdaq securities to be reported to the NASD within 90 seconds after execution. Members are currently reporting broker-to-broker transactions in regular Nasdaq securities into the ACT service for comparison processing and are reporting total volume of purchases and sales in Nasdaq securities at the end of the day. The new requirements reduce the current time frames for entering transactions into ACT from 15 minutes to 90 seconds and expand the securities eligible for reporting through ACT to include all internalized transactions. Given the implementation of trade-by-trade reporting, the existing requirement for end-of-day volume reporting of regular Nasdaq securities will be eliminated. Members should note, however, that transactions in convertible debt securities will remain subject to end-of-day volume reporting requirements, similar to those currently in place for all regular Nasdaq securities.

The new rules specify which party to a transaction is required to report (in most transactions, the market maker registered in the Nasdaq security is the reporting party). They also provide reporting requirements, such as reporting transactions at the selling or purchasing price, irrespective of markups, markdowns, or commissions. The trade-reporting rules state that aggregating trade reports is allowable under certain circumstances and sets forth permissible aggregation practices. Members should note that for ACT comparison purposes, however, members may need to indicate separate trades with separate contra-parties. These requirements also parallel those currently in place for Nasdaq/NMS securities.

For members that account for five or fewer trades per day, the NASD will provide an alternative means to effectuate trade reports through the ACT service desk. The NASD operates the ACT service desk to facilitate members that account for fewer than five trades a day on average and that do not have Nasdaq Workstation® equipment. For more information on the ACT service desk, contact ACT Operations at (212) 858-4342.

Last-sale information for regular Nasdaq equity securities will be disseminated to the marketplace through information vendors on a real-time basis throughout the trading day. With the advent of trade reporting in regular Nasdaq and the corresponding increase in information that will be provided to members and investors, the NASD will revise the fee schedule for receipt of last-sale information for both Nasdaq/NMS and regular Nasdaq securities. The current service charge of $7.50 will be increased to $9. The modest increase will recover the costs of collecting, processing, and disseminating the additional information.

Vendors will receive the additional data over high-speed lines. A market center identifier, attached to both last-sale data and to quotations, will differentiate regular Nasdaq securities from Nasdaq/NMS securities. Regular Nasdaq quotes and transaction reports will carry an "s" identifier; Nasdaq/NMS quotes and last-sale data will be displayed with the "q" identifier. This information will be generated by the Nasdaq processor and does not require data entry by reporting parties.

Members should note that Nasdaq/NMS equity securities will continue to receive separate regulatory treatment in areas such as margin accounts and state securities commissions' merit review requirements. Transaction reporting in regular Nasdaq issues does not render these stocks automatically eligible for sales to margin account customers nor for exemptions from state "blue sky" regulations. Members should alert their associated persons to maintain the regulatory distinctions between regular Nasdaq and Nasdaq/NMS securities, especially as they pertain to margin and blue-sky treatment.

The new trade-reporting rules become effective June 15. Questions regarding this Notice may be directed to Bernard Thompson, Assistant Director, Market Surveillance, at (301) 590-6436 or to Beth E. Weimer, Associate General Counsel, at (202) 728-6998.

TEXT OF NEW RULES

The rule change adds a new Part XIII to Schedule D to the NASD By-Laws and amends the ACT Rules. (Note: Additions are in italics; deletions are in brackets.)

PART XIII

REPORTING TRANSACTIONS IN NASDAQ SECURITIES

This Part has been adopted pursuant to Article VII of the Corporation's By-Laws and sets forth the applicable reporting requirements for transactions in Nasdaq securities (excluding convertible bonds that are quoted through the Nasdaq system) ("designated securities") that are not classified as Nasdaq National Market System securities. Members shall utilize the Automated Confirmation Transaction Service ("ACT") for transaction reporting.

Section 1 Definitions

(a) Terms used in this Part shall have the same meaning as those defined in the Association's By-Laws and Rules of Fair Practice, unless other wise specified herein.
(b) "Automated Confirmation Transaction service" is the service that, among other things, accommodates reporting and dissemination of last sale reports in designated securities.
(c) "Registered Reporting Market Maker" means a member of the Association that is registered as a Nasdaq market maker in a particular designated security. A member is a Registered Reporting Market Maker in only those designated securities for which it is registered as a Nasdaq market maker. A member shall cease being a Registered Reporting Market Maker in a designated security when it has withdrawn or voluntarily terminated its quotations in that security or when its quotations have been suspended or terminated by action of the Corporation.
(d) "Non-Registered Reporting Member" means a member of the Association that is not a Registered Reporting Market Maker.

Section 2 Transaction Reporting

(a) When and How Transactions are Reported
(1) Registered Reporting Market Makers shall, within 90 seconds after execution, transmit through ACT last sale reports of transactions in designated securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late.
(2) Non-Registered Reporting Members shall, within 90 seconds after execution, transmit through ACT or the ACT service desk (if qualified pursuant to Part IX of Schedule D to the By-Laws), or if ACT is unavailable due to system or transmission failure, by telephone to the Market Operations Department in New York City, last sale reports of transactions in designated securities executed during normal market hours unless all of the following criteria are met:
(A) The aggregate number of shares of designated securities which the member executed and is required to report during the trading day does not exceed 1,000 shares; and
(B) The total dollar amount of shares of designated securities which the member executed and is required to report during the trading day does not exceed $25,000; and
(C) The member's transactions in designated securities have not exceeded the limits of (A) or (B) above on five or more of the previous ten trading days.
Transactions not reported within 90 seconds after execution shall be designated as late. If the member has reason to believe its transactions in a given day will exceed the above limits, it shall report all transactions in designated securities within 90 seconds after execution; in addition, if the member exceeds the above limits at any time during the trading day, it shall immediately report and designate as late any unreported transactions in designated securities executed earlier that day.
(3) Non-Registered Reporting Members shall report weekly to the Nasdaq Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities which are not required by paragraph (2) to be reported within 90 seconds after execution.
(4) Last sale reports of transactions in designated securities executed between the hours of 4:00 pm. and 5:00 p.m. Eastern Time shall be transmitted through the ACT system within 90 seconds after execution; trades reported after 4:10 p.m. Eastern Time shall be designated as ".T" or after hours trades.
(5) All members shall report weekly to the Nasdaq Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of 9:30 a.m. and 5:00 p.m. Eastern Time.
(6) All trade tickets for transactions in eligible securities shall be time-stamped at the time of execution.
(7) A pattern or practice of late reporting without exceptional circumstances may be considered conduct inconsistent with high standards of commercial honor and just and equitable principals of trade, in violation of Article HI, Section 1 of the Rules of Fair Practice.
(b) Which Party Reports Transaction
(1) In transactions between two Registered Reporting Market Makers, only the member representing the sell side shall report.
(2) In transactions between a Registered Reporting Market Maker and a Non-Registered Reporting Member, only the Registered Reporting Market Maker shall report.
(3) In transactions between two Non- Registered Reporting Members, only the Member representing the sell side shall report.
(4) In transactions between a member and a customer, the member shall report.
(c) Information To Be Reported

Each last sale report shall contain the following information:
(1) Nasdaq symbol of the designated security;
(2) Number of shares, excluding odd lots;
(3) Price of the transaction as required by paragraph (d) below;
(4) A symbol indicating whether the transaction is a buy, sell, or cross.
(d) Procedures for Reporting Price and Volume1

Members that are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
(1) For agency transactions, report the number of shares and the price excluding the commission charged.
(2) For dual agency transactions, report the number of shares only once, and report the price excluding the commission charged.
(3) For principal transactions, except as provided below, report each purchase and sale transaction separately and report the number of shares and the price. For principal transactions that are executed at a price which includes a mark-up, mark-down or service charge, the price reported shall exclude the mark-up, markdown or service charge. Such reported price shall be reasonably related to the prevailing market, taking into consideration all relevant circumstances including, but not limited to, market conditions with respect to the security, the number of shares involved in the transaction, the published bids and offers with size at the time of the execution (including the reporting firm's own quotation), the cost of execution and the expenses involved in clearing the transaction.
Exception: A "riskless" principal transaction in which a member that is not a market maker in the security after having received from a customer an order to buy, purchases the security as principal from another member or customer to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to another member or customer to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down.
(e) Transactions Not Required To Be Reported The following types of transactions shall not be reported:
(1) transactions executed through the Computer Assisted Execution System ("CAES"); the Small Order Execution System ("SOES") or the SelectNet service.
(2) transactions which are part of a primary distribution by an issuer or of a registered secondary distribution (other than "shelf distributions") or of an unregistered secondary distribution;
(3) transactions made in reliance on Section 4(2) of the Securities Act of 1933;
(4) transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security, e.g., to enable the seller to make a gift;
(5) purchases or sales of securities effected upon the exercise of an option pursuant to the terms thereof or the exercise of any other right to acquire securities at a preestablished consideration unrelated to the current market.
(f) Aggregation of Transaction Reports
(1) Under the following conditions, individual executions of orders in a security at the same price may be aggregated, for transaction reporting purposes, into a single transaction report.
(A) Orders received prior to the opening of the reporting member's market in the security and simultaneously executed at the opening. Also, orders received during a trading halt in the security and executed simultaneously when trading resumes. In no event shall a member delay its opening for the purpose of aggregating transactions.
(B) Simultaneous executions by the member of customer transactions at the same price, e.g., a number of limit orders being executed at the same time when a limit price has been reached.
(C) Orders relayed to the trading department of the reporting member for simultaneous execution at the same price.
(D) Orders received or initiated by the reporting member which are impractical to report individually and are executed at the same price within 60 seconds of execution of the initial transaction; provided however, that no individual order of 10,000 shares or more may be aggregated in a transaction report and that the aggregated transaction report shall be made within 90 seconds of the initial execution reported therein. Furthermore, it is not permissible for a member to withhold reporting a trade in anticipation of aggregating the transaction with other transactions.
(2) The reporting member shall identify aggregated transaction reports and order tickets of aggregated trades in a manner directed by the Corporation.

• • • Interpretation of the Board of Governors

The Association seeks to emphasize the obligations of members to report transactions in designated securities within 90 seconds after execution. All transactions in designated securities not reported within 90 seconds after execution shall be reported as late, and the Association routinely monitors members' compliance with the 90 second requirement. If the Association finds a pattern or practice of unexcused late reporting, that is, repeated reports of executions in designated securities after 90 seconds without reasonable justification or exceptional circumstances, the member may be found to be in violation of Article 111, Section 1 of the Association's Rules of Fair Practice. Exceptional circumstances will be determined on a case by case basis and may include conditions such as extreme volatility in a designated security, or in the market as a whole. Timely reporting of all transactions in designated [eligible] securities is necessary and appropriate for the fair and orderly operation of the Association's marketplace, and the Association will view noncompliance as a rule violation.

Part XIII renumbered as Part XIV

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RULES OF PRACTICE AND PROCEDURES FOR THE AUTOMATED CONFIRMATION TRANSACTION SERVICE

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(d) Trade Report Input
2. When and how trade reports are submitted to ACT — ACT Participants shall transmit trade reports to the system for transactions in Nasdaq securities [that must be reported to the National Trade Reporting System (e.g., transactions in NMS securities of more than 100 shares)] within 90 seconds after execution, or shall utilize the Browse function in ACT to accept or decline trades within 20 minutes after execution, according to the requirement of paragraph 3 of this section.

[ACT Participants shall transmit trade reports to the system for inter-dealer transactions in all eligible securities that are not required to be reported to the National Trade Reporting system within 15 minutes after execution, or shall utilize the Browse function in ACT to accept or decline trades within 20 minutes after execution, according to the requirements of paragraph 3 of this section.]

1 For examples of reporting procedures, refer to Part XII of this Schedule, "Reporting Transactions in Nasdaq National Market System Securities."


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