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88-19 Proposed Amendment to Article VII of the NASD By-Laws Authorizing Mandatory Reporting of Trade Information

IMPORTANT MAIL VOTE

OFFICERS, PARTNERS, PROPRIETORS

TO: All NASD Members

LAST VOTING DATE IS APRIL 10, 1988.

EXECUTIVE SUMMARY

NASD members are invited to vote on a proposed amendment to Article VII, Section l(a) of the NASD By-Laws that would authorize the NASD Board of Governors to require members conducting an interdealer OTC business to report trade data.

The text of the amendment is attached.

BACKGROUND

Since 1983, the NASD has offered the Trade Acceptance and Reconciliation Service (TARS) to members that are participants in a registered clearing corporation. TARS is an on-line trade reconciliation facility that allows both parties of an unresolved trade to view on their NASDAQ terminals uncompared and advisory over-the-counter (OTC) trades that are cleared through the facilities of a registered clearing agency and to enter corrections at once. Corrections entered by one side are immediately displayed to the other side, and this information is automatically transmitted each day to the clearing corporation, eliminating the need to separately prepare and submit trade tickets to the clearing corporation.

Since 1981, when TARS was in its developmental stage, the NASD has contemplated that mandatory trade comparison reporting would be required of all NASD members conducting an interdealer OTC securities business. Currently, 105 TARS subscribers account for 86 percent of all cleared OTC transactions. Since its introduction, TARS has substantially reduced the percentage of uncompared OTC transactions by bringing those transactions into an automated comparison environment.

The proposed amendment was circulated for member comment in Notice to Members 87-79, dated November 24, 1987.

PROPOSED AMENDMENT

The proposed amendment to Article VII, Section l(a) of the NASD By-Laws would authorize the NASD Board of Governors to require members to report all original and supplemental OTC trade data as the Board deems appropriate. Reporting would be administered either by the NASD (or a division or subsidiary) or through the facilities of a registered clearing corporation.

In November 1987, the NASD Board approved in concept the development of rules that would require (l) mandatory participation in TARS by all NASD members that are participants in a registered clearing agency for purposes of clearing OTC transactions and (2) all NASD members conducting an interdealer business in OTC securities to submit trade data as required by the NASD. The NASD is currently studying the most cost-effective methods for allowing members that are not clearing corporation participants to input such trade comparison information.

In January 1988, the Board approved mandatory TARS participation for all clearing participants.

As discussed in Notice to Members 87-79, the proposed amendment as approved by the Board also adds specific authority for the NASD Board to require reporting of trade data, including aggregate volume information, on non-NASDAQ, OTC transactions. This reporting requirement will facilitate the gathering of data on these transactions as requested by the SEC Division of Market Regulation.

SUMMARY OF COMMENTS

The NASD received 16 comments in response to Notice to Members 87-79. Six generally supported the amendment and 10 opposed the amendment. One commentator who supported the amendment suggested that the increased participation in TARS which would be generated by making the service mandatory should be reflected in adjustments to TARS service charges.

Eight commentators opposing the proposal generally believed that the amendment would impose an undue burden on small member firms and would require such firms to incur additional costs which would, in some cases, cause the firms to cease doing an over-the-counter securities business. One commentator said that its current method of comparing OTC transactions through the facilities of a regional clearing corporation should be allowed to continue without having to be a TARS subscriber. Another commentator said that TARS participation should not be required for members using automated service bureau facilities that already efficiently generate trade comparisons.

The NASD Board reviewed the comment letters and concluded that the amendment to the NASD By-Laws should be adopted. The Board notes that the mandatory TARS requirement will not affect many commentators since they are not members of registered clearing corporations. Also, the mandatory trade comparison procedure for non-participants in clearing corporations, when implemented, will be structured in the most cost-effective manner for member firms.

The Board believes that it is important for the NASD to be able to implement these changes, which will result in more efficiency in the over-the-counter marketplace.

The Board of Governors believes that the proposed amendment to the By-Laws is necessary and appropriate and recommends that members vote their approval.

Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than April 10, 1988.

Questions concerning this notice can be directed to T. Grant Callery, NASD Associate General Counsel, at (202) 728-8285, or Donald J. Catapano, Director, NASD Uniform Practice/TARS, at (212) 839-6255 or (212) 858-4000.

Sincerely,
John T. Wall
Executive Vice President
Member and Market Services

Attachment

PROPOSED AMENDMENT TO THE NASD BY-LAWS*

ARTICLE VII

Board of Governors
Powers and Authority of Board of Governors

Sec. 1. (a) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors shall have the authority to:



(7) require the prompt reporting by members of such original and supplementary trade data as the Board deems appropriate. Such reporting requirement may be administered by the Corporation, a division or subsidiary thereof, or a clearing agency registered under the Securities Exchange Act of 1934.

[Current paragraph (7) is renumbered paragraph (8).]


*New language is underlined.



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