
[Federal Register: July 11, 2008 (Volume 73, Number 134)]
[Notices]               
[Page 40002-40005]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy08-87]                         


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58101; File No. SR-NASDAQ-2008-033]

 
Self-Regulatory Organizations; The NASDAQ Stock Market, LLC; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Thereto Related to Submission of Non-Tape Reports

July 3, 2008.
    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 April 18, 2008, The NASDAQ Stock Market, LLC (``Nasdaq'' or the 
``Exchange'') 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 substantially prepared by the 
Exchange. On July 3, 2008, Nasdaq filed Amendment No. 1 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing a rule change to: (1) Offer functionality 
allowing the submission of non-tape riskless principal reports using 
Nasdaq's Automated Confirmation Transaction Service (``ACT''); (2) 
allow the collection and transfer of fees among Nasdaq members using 
such submissions, as well as for step-outs; and (3) expand the use of 
step-outs to include journal entry position movement.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://nasdaq.complinet.com.
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7038. Step-Outs and Sales Fee Transfers

    (a) A Nasdaq member may enter a non-tape, non-clearing submission 
into the Automated Confirmation Transaction Service (``ACT'') for the 
purpose of transferring all or a portion of the obligation to pay a 
Rule 7002 Sales Fee or similar fee of another self-regulatory 
organization that is associated with a previously executed trade to one 
or more other Nasdaq members.
    (b) A Nasdaq member may enter a non-tape, clearing-only submission 
into ACT for the purpose of [:
    (i) Transferring all or a portion of the member's position in a 
previously executed trade to one or more other Nasdaq members on whose 
behalf the trade was executed;
    (ii) Transferring all or a portion of the member's position in an 
account of the member at one clearing broker to an account of the 
member at another clearing broker] transferring securities from one 
member to another, provided that the transfer does not constitute a 
transaction in securities that is otherwise subject to reporting that 
has not, in fact, been previously and separately reported as a 
transaction. When submitting a non-tape, clearing-only submission that 
is used to transfer a position from one member to another member, the 
submitting member may also indicate that the obligation to pay a Sales 
Fee or similar fee associated with the position should be transferred.
    (c) When ACT is used to transfer a position along with a Sales Fee 
or similar fee, all parties to the transfer must be Nasdaq members and 
[must] may be party to an agreement authorizing the transferring party 
to enter into locked-in trades on its behalf. When ACT is used to 
transfer Sales Fees or similar fees [without the transfer of the 
underlying shares] without an accompanying transfer of a securities 
position, the clearing firms for the trades in question must be 
part[y]ies to an agreement authorizing such transfers between 
themselves and/or the firms on whose behalf they clear trades.
    (d) A Nasdaq member is prohibited from using a non-tape, clearing-
only ACT submission [entered into ACT] for the purpose of [reporting a 
trade execution] effecting a transaction required to be trade reported 
or reporting a trade for regulatory purposes. Submission of non-tape, 
clearing, or non-tape, non-clearing records into ACT by Nasdaq members 
does not satisfy any obligation such members may have to report 
transactions as required by the applicable rules of other self-
regulatory organizations.
    (e)-(f) No Change.
* * * * *

7042. Non-Tape Riskless Submissions

    Nasdaq members may make non-tape submissions into the Automated 
Confirmation Transaction Service (``ACT'') to facilitate riskless 
transactions taking place on national securities exchanges, or over-
the-counter, as follows:
    (a) For riskless transactions in which a member, after having 
received an order to buy a security, purchases the security at the same 
price to satisfy the order to buy or, after having received an order to 
sell, sells the security at the same price to satisfy the order to 
sell, the member may submit, for the offsetting ``riskless'' portion of 
the transaction either:
    i. A clearing-only report with a capacity indicator of ``riskless 
principal,'' ``agency,'' or ``intra-broker'' if a clearing report is 
necessary to clear the transaction; or
    ii. A non-tape, non-clearing report with a capacity indicator of 
``riskless principal,'' ``agency'' or ``intra-broker'' if a clearing 
report is not necessary to clear the transaction.
    (b) Nothing in this Rule shall relieve any member or other party 
from its obligation to fully and properly report transactions as 
required by the applicable rules of other self-regulatory 
organizations.
* * * * *

7043. Inclusion of Transaction Fees in Clearing Reports Submitted to 
ACT

    (a) Nasdaq members may agree in advance to transfer a transaction 
fee charged by one member to another member on a transaction effected 
on an exchange or otherwise through the submission of a clearing report 
to the Automated Confirmation Transaction Service (``ACT''). Such 
report, inclusive of the transaction fee, will be submitted to the 
National Securities Clearing Corporation for processing. To facilitate 
the transfer of the transaction fee, the report submitted to ACT shall 
provide, in addition to all other information required to be submitted, 
a total per share or contract price amount, inclusive of the 
transaction fee. Such reports shall only submitted where there exists a 
written agreement between the members permitting the submission of fee-
inclusive clearing reports between them. Nothing in this paragraph 
shall relieve a member from its obligations under Nasdaq rules and the 
federal securities laws. The ability to transfer transaction fees as 
described above shall be limited to transactions and/or submissions 
made pursuant to Rule 7038 or 7042.
    (b) The fee for submission of the above shall be $0.03 per side.
* * * * *
    (b) Not applicable.
    (c) Not applicable.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.nasdaqtrader.com), at

[[Page 40003]]

Nasdaq's Office of the Secretary, and at the Commission's Public 
Reference Room.

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 Exchange 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 Exchange 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

1. Purpose
    Nasdaq is proposing a rule change to: (1) Allow Nasdaq members to 
submit non-tape, riskless reports using Nasdaq's Automated Confirmation 
Transaction Service (``ACT''); (2) allow Nasdaq members to use ACT to 
collect and transfer fees in connection with non-tape, riskless 
principal submissions and step-outs; and (3) broaden the scope of 
permitted step-outs.
Non-Tape Riskless Submission
    Nasdaq proposes to establish a functionality that will allow Nasdaq 
exchange member submission of non-tape, riskless reports (including the 
non-tape portion of a riskless transaction taking place on other 
national securities exchanges or over-the-counter) to ACT.\4\ These 
reports are intended to facilitate the transfer of information between 
parties to the transactions; make electronically available trade record 
information in the system to parties; and, if requested, the ultimate 
transmission of the transfer records to an appropriate clearing agency.
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    \4\ ACT is a technology asset of Nasdaq. Prior to the 
commencement of operation of the Trade Reporting Facility (now the 
FINRA/Nasdaq TRF) and the start of Nasdaq's operation as a national 
securities exchange in August 2006, it was common for industry 
participants to refer to 'reporting trades to ACT.' Now, ACT 
technology serves multiple SROs/markets and provides an electronic 
system through which certain trades, transfers, and instructions can 
be reported or communicated. Among other functions, ACT connects to 
DTCC's continuous net settlement and trade comparison systems for 
equities, with all clearing submissions being marked to accurately 
reflect the executing market. ACT responds to all entries with 
rejects or acknowledgements, stores all records submitted to it, and 
provides both step-out and sales fee transfer capabilities to users.
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    In defining what constitutes a riskless transfer, Nasdaq has 
determined to follow the general standard for riskless principal 
transactions articulated in Financial Industry Regulatory Authority 
(``FINRA'') Rule 4632(d)(3)(B) and require that the Nasdaq member have 
had an order in hand, and have given the party providing the order the 
same price as the Nasdaq member obtained in the public marketplace, 
prior to the submission of post-trade riskless transfer entry, either 
as principal or agent, into ACT. These riskless submissions into ACT 
are voluntary and do not replace any separate reporting obligation that 
may also be applicable. Under the proposal, Nasdaq members will be 
allowed to submit records for riskless transfers using the following 
capacities: ``Riskless Principal'' where the member acted as principal 
on the open market trade or trades related to the riskless submission; 
``Agent'' where the member acted as agent on the open market trade or 
trades related to the riskless submission; and ``Intra-Broker'' where 
the transfer is occurring strictly within a member Firm.
    In FINRA Notice to Members 2007-38, that SRO allowed, among other 
things, the submission of certain non-tape reports to represent the 
offsetting riskless portion of a previously executed public market 
trade while restricting its members' ability to submit such non-tape 
reports to a FINRA facility if the public trade report was not also 
reported to a FINRA facility. The only exception to this prohibition 
was if the non-tape report was submitted to reflect the offsetting 
portion of a riskless principal transaction or an agency transaction 
where a firm acts as agent on behalf of another member firm. As such, 
FINRA's rule prevents firms from using a market's (FINRA's) 
functionality to facilitate riskless securities transfers between two 
broker units of a single member.\5\ Nasdaq, however, believes that 
using non-tape reports in such a manner is desirable and proposes 
offering an ``Intra-Broker'' non-tape reporting capacity submission for 
use in these circumstances. For example, Firm ABCD and ABCQ are 
entities of ABC Brokerage, but two completely different business units. 
ABCD uses ABCQ's systems to access liquidity in the marketplace. In the 
market, ABCQ is the broker against which clearing of the public market 
trade is submitted. ABCD and ABCQ clear separately. ABCQ needs to get 
the shares to ABCD. It's not a trade, and because they're the same 
broker from a member perspective, they can't move the shares as a 
riskless transfer under FINRA's rules. In this situation, use of the 
``Intra-Broker'' capacity through Nasdaq's ACT system would be 
available.
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    \5\ In effect, FINRA's position prohibits a firm from moving 
riskless share potions to itself. Consolidation through merger and 
acquisition is common in the securities industry, and there are 
environments where, due to lack of integration, it would be 
preferable for firms to move shares between elements of the same 
broker by submitting appropriate non-tape share transfer reports to 
and through a third-party system (like ACT) rather than in-house 
systems--if they exist.
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    The riskless reports may be used for clearing, non-clearing, QSR, 
and Give-Ups. Nasdaq will continue to honor Attachment 2's and Uniform 
Trade Reporting Agreements on file with it or the FINRA/Nasdaq TRF. 
When used with clearing, or otherwise specifically requested, the 
reports shall also be included in Nasdaq Risk Management calculations. 
Submission of non-tape, clearing, or non-tape, non-clearing records 
into ACT by Nasdaq members will not satisfy any obligation the member 
may otherwise have to report or represent the same transactions under 
the rules of any other self-regulatory organization.
Transaction Fees
    Current trade-reporting rules of other SROs allow transaction fees 
to be included in clearing reports. Nasdaq proposes to establish 
similar rules for transaction fees to be included in clearing reports 
that are submitted in connection with non-tape, riskless principal 
submissions and step-outs. Under the proposal, Nasdaq members may also 
seek to impose or transfer to another Nasdaq member such transaction 
fees in the clearing reports that Nasdaq forwards to the National 
Securities Clearing Corporation (``NSCC'') for trade clearance. Nasdaq 
will impose a $0.03 per-side fee for each such clearing report. Nasdaq 
notes that under NASD Rule 7002B, FINRA/Nasdaq TRF participants are 
charged a fee of $0.03 per side for submission of a clearing report to 
transfer a transaction fee charged by one FINRA member to another.
Step-Outs
    Although not defined by rule, a step-out is transfer of all or a 
portion of a broker-dealer's securities position to another broker-
dealer that does not constitute a trade.\6\
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    \6\ For example, one broker might buy a block of securities on 
behalf of several other broker-dealer customers. That broker 
``steps-out'' of the initial trade to transfer all or a portion of 
its position to its broker-dealer customers. In this situation, the 
block transaction effected in a securities market will contain 
instructions for NSCC to allocate certain positions to the stepped-
out broker's customers. In another form of a step-out that occurs 
outside a securities exchange, a broker uses a clearing-only report 
through ACT to transfer some or all of its securities position from 
an account at one clearing broker to an account at another clearing 
broker, for its own internal accounting purposes.

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[[Page 40004]]

    This filing builds upon Nasdaq's previous attempts to provide 
useful step-out parameters for its members. Nasdaq initially offered 
step-out capability in 2007 in light of FINRA rules that restricted 
step-outs to those portions of trades that were originally executed by 
and reported to FINRA facilities.\7\ Nasdaq viewed this requirement as 
overly restrictive because certain broker-dealers wished to engage in 
step-outs but either did not have systems in place to capture the venue 
of the original trade execution and/or may have executed various 
portions of the underlying trade in non-FINRA facilities, thereby 
preventing them from being able to comply with the FINRA requirements. 
Accordingly, Nasdaq allowed step-out capability with respect to any 
trade that a Nasdaq member was a party to regardless of the market on 
which the trade was executed.\8\
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    \7\ See Securities Exchange Act Release No. 56345 (Aug. 31, 
2007), 72 FR 51880 (Sep. 11, 2007).
    \8\ The step-out report submitted to ACT under this rule change 
was marked as a Nasdaq Exchange entry so as to clearly distinguish 
it from an NASD/Nasdaq TRF entry, which also is reported through 
ACT. Also under this rule change, the parties to a step-out under 
Nasdaq rules must all be Nasdaq members and must be parties to an 
agreement such as the NASD's new Uniform Trade Reporting Facility 
Service Bureau/Executing Broker Agreement under which the broker 
transferring the position has received authorization from the 
transferee broker to act on its behalf.
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    Nasdaq amended its step-out rules again in 2007 to specify that an 
authorizing agreement is required between clearing firm members when 
they seek to transfer certain sales fees but not the underlying shares; 
no authorizing agreement is required when Nasdaq members conduct step-
outs when such transfers are accompanied by a transfer of the 
underlying shares only.\9\
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    \9\ See Securities Exchange Act Release No. 56929 (Dec. 7, 
2007), 72 FR 71176 (Dec. 14, 2007).
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    In this filing, Nasdaq proposes to further broaden its step-out 
parameters. First, Nasdaq would expand the scope of step outs to 
include all securities transfers from one Nasdaq member to another 
provided that the transfer does not constitute a reportable trade. 
Thus, under the proposed rule, the step-out could not only be used to 
allocate securities positions originating from a previously executed 
trade \10\ or to transfer securities from one clearing member to 
another clearing member for accounting purposes \11\ but also, for 
example, for stock loan purposes to service a short position.\12\
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    \10\ See Nasdaq Rule 7038(b)(i).
    \11\ See Nasdaq Rule 7038(b)(ii).
    \12\ See Proposed Rule 7038(b).
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    Second, Nasdaq proposes to eliminate the authorizing agreement 
requirement when Nasdaq members use ACT to effect a step-out along with 
a sales or similar fee. Nasdaq states that step-outs are already 
completed pursuant to formal agreements among Nasdaq members or through 
ACT's comparison processes, which renders the current Nasdaq 
requirement unnecessarily duplicative. Nasdaq points out that the 
transaction comparison process requires the implicit acquiescence of 
both parties for the ACT system to complete the step-out transaction. 
In other words, a member will retain an opportunity to manually reject 
or reverse the step-out and fee transfer arrangement if it disagrees 
with their terms when presented to it even after it is initially 
affirmed. As support for this proposed rule change, Nasdaq states that 
it determined through discussions with its member firms that many firms 
preferred to handle step-outs on a match/compare basis, i.e. manually, 
even when they had a fee agreement between them and that it was an 
unnecessary burden for firms to sign separate agreements to move 
Section 31 fees associated with step-out submissions to ACT since this 
functionality already was in place on ACT.
    This proposed rule change would not change the requirement of a 
formal sales fee transfer agreement between firms that wish to use ACT 
to move sales fees without an accompanying transfer of securities. 
Nasdaq believes that it is important to retain the requirement that the 
parties to a fee transfer have a written agreement specifically 
permitting such fee transfers because a sales fee transfer that moves 
no shares is not a step-out and therefore there are no specific share 
movements for firms to readily identify as being associated with the 
fee transfer.
    Finally, Nasdaq proposes to clarify Nasdaq members' reporting 
requirements associated with step-out submissions to ACT. Nasdaq 
proposes to amend Rule 7038(d) by adding language that would state that 
(1) members may not submit step-outs into ACT for the purpose of 
``effecting'' (instead of ``reporting a trade execution'') a 
transaction required to be trade reported; and (2) submitting step-outs 
into ACT does not satisfy any other SRO's requirements that members 
might have to report transactions.
    Nasdaq believes that the above proposals enhance the ability of 
Nasdaq members to transfer securities positions and their associated 
fees in an efficient and transparent manner.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\13\ in general, and with 
Sections 6(b)(4) and (5) of the Act,\14\ in particular, in that the 
proposal provides for the equitable allocation of reasonable dues, fees 
and other charges among members and issuers and other persons using any 
facility or system which Nasdaq operates or controls, and is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. Nasdaq believes that 
enhancing its step-out and fee transfer functionality benefits its 
members by enhancing the efficiency and transparency of their post-
trade operations. Nasdaq's proposed fees are reasonable and comparable 
to other fees for reporting submissions.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(4) and (5).
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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.

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

    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 Nasdaq consents, the Commission will:

[[Page 40005]]

    (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, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-033. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2008-033 and should 
be submitted on or before August 1, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15759 Filed 7-10-08; 8:45 am]

BILLING CODE 8010-01-P
