[Federal Register Volume 65, Number 9 (Thursday, January 13, 2000)]
[Notices]
[Pages 2207-2215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-818]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42310; File No. SR-NASD-99-6]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Implementation of Mandatory Trade Reporting for PORTAL Securities
January 3, 2000.
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 October 28, 1999,\3\ the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
as described in Items I, II, and III below, which Items have been
prepared primarily by the NASD. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On December 30, 1999, the NASD submitted Amendment No. 1
clarifying when transactions are exempt from reporting requirements
under the proposed ACT and TRACE rules, among other things. See
Letter from Suzanne E. Rothwell, Chief Counsel, Corporate Financing,
NASD Regulation, Inc., to Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated December 29, 1999. The
substance of the amendment has been incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASD is proposing to amend the rules of The PORTAL Market in
the Rule 5300 Series to implement reporting of transactions in certain
PORTAL securities. Below is the text of the proposed rule change.
Proposed new language is in italics; proposed deletions are in
brackets.
* * * * *
5300. THE PORTAL MARKET
5310. Definitions
For purposes of the PORTAL Market Rules, unless the context
requires otherwise:
(a) ``Association'' means the National Association of Securities
Dealers, Inc. (Association) or its wholly-owned subsidiary, The Nasdaq
Stock Market, Inc., as determined by the Association.
(b) ``Exchange Act'' or ``Act'' means the Securities Exchange Act
of 1934, as amended from time to time.
[(c) ``Execution'' means entering into a purchase, sale or transfer
of a PORTAL security.]
[(d)] (c) ``PORTAL'' or ``PORTAL Market'' means the Association's
market for designated foreign and domestic securities [through an
automated quotation and communications system that facilitates private
offerings, resales, trading, clearance and settlement by PORTAL
participants] that are eligible for resale under SEC Rule 144A.
[(e) ``PORTAL account instruction system'' means one or more
communications systems designated by the Association to transfer
information concerning PORTAL account activities between a PORTAL
qualified investor, its agent providing it access to the PORTAL
depository system, PORTAL dealers and PORTAL brokers].
[(f) ``PORTAL broker'' means any member of the Association that is
currently registered as a PORTAL broker in the PORTAL Market pursuant
to Rule 5339.]
[(g) ``PORTAL clearing organization'' means a clearing organization
that is part of the PORTAL clearing system and is designated by the
Association to perform clearance and settlement functions with respect
to PORTAL securities.]
[(h) ``PORTAL clearing system'' means the system consisting of one
or more organizations designated by the Association to perform
clearance and settlement functions with respect to PORTAL securities.]
[(i) ``PORTAL dealer'' means any member of the Association that is
currently registered as a PORTAL dealer in the PORTAL Market pursuant
to Rule 5338 of the PORTAL Rules, and is thereby also registered as a
PORTAL qualified investor.]
[j) ``PORTAL depository organization'' means a depository
organization that is part of the PORTAL depository system and is
designated by the Association to perform the functions of a securities
depository with respect to PORTAL securities.]
[(k) ``PORTAL depository system'' means the system consisting of
one or more organizations designated by the Association to perform the
functions of a securities depository with respect to PORTAL
securities.]
((l) ``PORTAL Market information'' means quotation, transaction and
other data and information displayed in the PORTAL Market that is
accessed directly through the PORTAL Market system or indirectly
through a third-party distributor of PORTAL Market information.]
(d) ``PORTAL equity security'' means a PORTAL security that
represents an ownership interest in a legal entity, including but not
limited to any common, capital, ordinary, preferred stock, or warrant
for any of the foregoing, shares of beneficial interest, or the
equivalent thereof (regardless of whether voting or non-voting,
convertible or non-convertible, exchangeable or non-exchangeable,
exerciseable or non-exerciseable, callable or non-callable, redeemable
or non-redeemable).
(e) ``PORTAL debt security'' means a fixed income corporate bond
issued by a U.S. company that is not rated or is rated BB+ or lower by
a nationally recognized statistical rating organization, but shall not
include convertible debt instruments, medium term notes, sovereign
debt, Yankee bonds, municipal and municipal-derivative securities, or
asset-backed instruments.
[(m)] (f) ``PORTAL Market system'' or ``PORTAL system'' means [the
PORTAL Market] any computer system(s) [used]
[[Page 2208]]
designated by the Association to accept trade reports on transactions
in PORTAL equity and/or debt securities, or to display transaction,
quotation, [and] or other [data and] information on [designated] PORTAL
securities.
[(n) ``PORTAL non-participant report''means a report submitted by a
member of the Association that is a PORTAL dealer or a PORTAL broker to
the Market Regulation Department of the Association on a monthly basis
that includes the information required Rule 5335.]
[(o) ``PORTAL participant'' means a PORTAL dealer, a PORTAL broker
and a PORTAL qualified investor.]
[(p) ``PORTAL qualified investor'' means any investor that is
currently registered as a PORTAL qualified investor in the PORTAL
Market pursuant to the Rule 5350 Series.]
[(q)] (g) ``PORTAL Rules'' or ``PORTAL Market Rules'' means the
PORTAL Market rules as included in the Rule [5000] 5300 Series.
[(r)] (h) ``PORTAL security'' means a security that is currently
designated by the Association for inclusion in the PORTAL Market
pursuant to the Rule 5320 Series.
[(s) ``PORTAL surveillance report'' means a report submitted by a
PORTAL dealer or PORTAL broker to the Market Regulation Department of
the Association on a monthly basis that includes the information
required by Rule 5336.]
[(t)] (i) ``PORTAL transaction report'' means a report of a
transaction in a PORTAL security submitted by a [PORTAL dealer or
PORTAL broker] member through [the] a designated PORTAL Market system
[within 15 minutes after execution of the transaction that includes the
information required by Rule 5334].
[(u) (j) ``Restricted security'' means a security that meets the
definition of that term contained in SEC Rule 144(a)(3) under the
Securities Act. A PORTAL security continues to be a restricted security
even though it is eligible to be resold pursuant to the provisions of
SEC Rule 144, including SEC Rule 144(k), but has not been so resold.
[(v)] (k) ``SEC'' means the United States Securities and Exchange
Commission.
[(w)] (l) ``SEC Rule 144A'' means SEC Rule 144A adopted under the
Securities Act, as amended from time to time.
[(x)] (m) ``Securities Act'' means the Securities Act of 1933, as
amended from time to time.
[(y) ``Short Sale'' means any sale of a security that meets the
definition of that term contained in SEC Rule 3b-3 adopted under the
Exchange Act.]
(n) ``Time of execution'' means the time when all of the terms of a
transaction in a PORTAL security have been agreed to that are
sufficient to calculate the dollar price of the transaction and a
determination has been made that the transaction is in compliance with
Rule 144A or any other applicable exemption from registration under
Section 5 of the Securities Act.
[(z] (o) ``Transaction'' or ``trade'' means the purchase or sale of
a PORTAL security.
[(aa)] (p) ``United States'' or ``U.S.'' means the United States of
America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its
jurisdiction.
5320. Requirements Applicable to PORTAL Securities
5321. Application for Designation
(a) Application for designation as a PORTAL security shall be in
the form required by the Association and shall be filed by [a PORTAL
participant] the issuer or any member of the Association. Applications
may be made with or without the concurrence of the issuer. The
application shall demonstrate to the satisfaction of the Association
that the security meets or exceeds the qualification requirements set
forth in Rule 5322 and provides the undertakings required by
subparagraph (c) hereof.
(b) Designation of a security as a PORTAL security shall be
declared effective within a reasonable time after determination of
qualification. The effective date of designation as a PORTAL security
shall be determined by the Association giving due regard to the
requirements of the PORTAL Market.
(c) An applicant that submits an application for designation of a
security as a PORTAL security (or the issuer of the security, if the
applicant is a member) under subparagraph (a) above shall undertake to
promptly advise the Association:
(1) That the issuer has submitted to the SEC a registration
statement to register the resale of the PORTAL security, securities to
be exchanged for the PORTAL security, or securities into which the
PORTAL security is exchangeable or convertible;
(2) of the effective date of a registration statement submitted to
the SEC with respect to a PORTAL security, as described in subparagraph
(1) hereof; and
(3) of the assignment of any CUSIP or CINS security identification
to the PORTAL security or any tranch of a PORTAL security issue.
5322. Qualification Requirements for PORTAL Securities
(a) To qualify for initial designation and continued designation in
the PORTAL Market, a security shall:
(1) be:
(A) a restricted security, as defined in SEC Rule 144(a)(3) under
the Securities Act; or
(B) a security that upon issuance and continually thereafter only
can be sold pursuant to Regulation S under the Securities Act, SEC Rule
144A, or SEC Rule 144 under the Securities Act, or in a transaction
exempt from the registration requirements of the Securities Act
pursuant to Section 4 thereof and not involving any public offering;
provided, however, that if the security is a depositary receipt, the
underlying security shall also be a security that meets the criteria
set forth in subparagraphs (A) or (B) hereof;
(2) be eligible to be sold pursuant to SEC Rule 144A under the
Securities Act;
(3) be in negotiable form, be a depository eligible security as
defined in paragraph (d) of Rule 11310, and not subject to any
restriction, condition or requirement that would impose an unreasonable
burden on any [PORTAL participant] member;
(4) be assigned a CUSIP or CINS security identification number that
is different from any identification number assigned to any
unrestricted securities of the same class which do not satisfy
paragraph (a)(1)(B) [; or, if issued in physical certificate form to
investors, have a legend placed on each certificate stating that the
securities have not been registered under the Securities Act and cannot
be resold without registration under the Securities Act or an exemption
therefrom]; and
(5) satisfy such additional criteria or requirements as the
Association may prescribe.
(b) Notwithstanding the provisions of paragraph (a)(1)(B) of this
Rule, if a PORTAL security is sold pursuant to the provisions of Rule
144, including Rule 144(k), it will thereby cease being a PORTAL
security and it must be assigned a CUSIP or CINS security
identification number that is different from the identification number
assigned to a PORTAL security of the same class.
5323. Suspension or Termination of a PORTAL Security Designation
(a) The Association may, in its discretion, suspend or terminate
designation as a PORTAL security if it determines that:
(1) the security is not in compliance with the requirements of the
PORTAL Rules;
[[Page 2209]]
(2) a holder or prospective purchaser that requested issuer
information pursuant to SEC Rule 144A(d)(4) did not receive the
information;
(3) any application or other document relative to such securities
submitted to the Association contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein not misleading; or
(4) failure to withdraw designation of such securities would for
any reason be detrimental to the interests and welfare of [PORTAL
participants] members or the Association.
(b) The Association will promptly notify [PORTAL participants]
members of the suspension or termination of a security's designation as
a PORTAL security through the designated PORTAL Market system through
which the security is reported. [Such notification may be made through
the facilities of the PORTAL Market.] Suspension or termination shall
become effective in accordance with the terms of notice by the
Association. The Association also will promptly notify The Depository
Trust Company of the suspension or termination.
(c) Notwithstanding the suspension or termination of designation of
a security as a PORTAL security, such security shall remain subject to
all rules of the Association applicable to the PORTAL Market until the
security is sold in accordance with the terms of notice by the
Association of the suspension or termination.
5324. Review of Denial, Suspension or Termination of a PORTAL Security
A determination by the Association to deny, suspend or terminate
the designation of a PORTAL security may be reviewed upon application
by the aggrieved person pursuant to the provisions of the Rule 4800
Series.
[5324.] 5325. PORTAL Entry Fees
When [a PORTAL participant] an issuer or member submits an
application for designation of any class of securities as a PORTAL
security, it shall pay to the Association a filing fee of $2,000.00 for
an application covering a security or group of identifiable securities
issuable as part of a single private placement covered by the same
offering documents, plus $200.00 per assigned security symbol that is
in addition to the first symbol assigned.
5330. Requirements Applicable to Members of the Association
5331. Limitations of Transactions in PORTAL Securities
(a) No member shall sell a PORTAL security unless:
(1) the sale is to:
(A) an investor or member that the member reasonably believes is a
``qualified institutional buyer'' in a transaction exempt from
registration under the Securities Act by reason of compliance with Rule
144A;
(B) an investor or member in a transaction that is exempt from
registration under the Securities Act by reason of compliance with an
applicable exemption under the Securities Act other than 144A; or
(C) a member acting as an agent in a transaction that the member
acting as an agent determines is in compliance with subparagraphs (A)
or (B) hereof, and the selling member determines is exempt from
registration under the Securities Act by reason of compliance with SEC
Rule 144A or an applicable exemption under the Securities Act other
than SEC Rule 144A; and (2) the member maintains in its files
information demonstrating that the transaction is in compliance with
Rule 144A or with any other applicable exemption from registration
under the Securities Act.
5332. Reporting Debt and Equity Transactions in PORTAL Securities
[(a) A transaction in a PORTAL security in which a PORTAL dealer or
PORTAL broker participates shall be reported to the PORTAL Market
system in a PORTAL transaction report complying with Rule 5534 by:]
[(1) the seller, if each party in the transaction is either a
PORTAL dealer or PORTAL borker;]
[(2) the PORTAL dealer or PORTAL broker participating in the
transaction, if only one party in the transaction is a PORTAL dealer or
PORTAL broker provided, however, that with respect to transactions that
are part of the initial offering by or on behalf of the issuer or an
affiliate thereof, a PORTAL dealer or PORTAL broker may comply with its
obligation to submit a PORTAL transaction report by submitting,
instead, a PORTAL surveillance report which reports such transaction to
the Market Regulation Department of the Association as set forth in
Rule 5336.]
[(b) A transaction in a PORTAL security in which a member
participates, but in which no PORTAL dealer or PORTAL broker
participates, shall be reported to the Market Regulation Department of
the Association in a PORTAL non-participate report complying with Rule
5335 by:]
[(1) the seller, if each party in the transaction is a member; or]
[(2) the member, if only one party in the transaction is a member.]
[(c) The member responsible for submitting a PORTAL transaction
report shall also submit to the Market Regulation Department of the
Association a PORTAL surveillance report as set forth in Rule 5336.]
(a) Transactions in a PORTAL equity security shall be reported to
the Automated Confirmation Transaction System (``ACT'') in accordance
with this Rule, except for transactions meeting the requirements of
subparagraphs (e)(1)-(4) of Rule 6230.* Each PORTAL transaction report
on a PORTAL equity security shall:
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* Until the Trade Reporting And Comparison Entry Service Rules
are approved by the SEC and made effective, members that are
obligated to report secondary market transactions in PORTAL equity
securities through ACT can rely on the exceptions from reporting in
Rule 6240(c) of the Fixed Income Pricing Service Rules.
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(1) include the information required by paragraph (d) of Rule 6130,
including the time of execution;
(2) be submitted to ACT no later than 6:30 p.m. Eastern Time (or
the end of the ACT reporting session that is in effect at that time);
and
(3) be submitted by the party as required by paragraph (c) of Rule
6130.
(b) Transactions in PORTAL debt securities shall be reported to the
Trade Reporting And Comparison Entry Service (``TRACE'') in accordance
with the Rule 6200 Series.
([d]c) The reporting requirements of this Rule shall apply to [any
transaction in a PORTAL security, including] transactions in reliance
of SEC Rule 144 and sales to or purchases from a non-U.S. securities
market.
(d) Members that submit PORTAL transaction reports shall be subject
to any fees imposed by the particular PORTAL Market system through
which the PORTAL transaction report is submitted, as set forth in the
Rule 7000 Series.
5333. Quotations in PORTAL Securities
Members shall not enter a quotation with respect to any PORTAL
security in a PORTAL Market system, electronic communication network
(as defined in SEC Rule 11Ac-1-(a)(8)), or other interdealer quotation
system.
[PORTAL Settlement]
[(a) Transactions in the PORTAL Market where the PORTAL dealer or
PORTAL broker that enters the PORTAL transaction report in the PORTAL
[[Page 2210]]
Market system designates settlement in the PORTAL clearance and
depository systems will settle five (5) business days after the date of
the execution of the transaction, except as otherwise agreed between
the PORTAL participants, in any currency accepted by the PORTAL
depository organization.]
[(b) PORTAL securities and funds will be transferred on the books
of the PORTAL depository system upon receipt from the PORTAL clearing
system of the necessary settlement instructions designating settlement
in the PORTAL clearance and depository systems from the PORTAL
transaction report entered in the PORTAL Market system by the
appropriate PORTAL dealer or PORTAL broker and subject to the purchaser
meeting the requirements of the relevant PORTAL depository organization
concerning deposit and availability of funds in accordance with the
depository organization's procedures.]
[(c) PORTAL dealers and PORTAL brokers that settle a PORTAL
transaction outside the PORTAL clearance and depository systems
responsibility for the prompt settlement of the transaction in
accordance with the protocols of the settlement methods used and the
transaction will not be compared in the PORTAL Market.]
5334. PORTAL Transaction Reports-to-5390. Miscellaneous--Deleted
[5391.] 5340. Arbitration
The facilities of the Association's Arbitration Department, and the
procedures of the Code of Arbitration Procedure shall be available to
[PORTAL participants] members to resolve disputes arising from PORTAL
transactions and transfers or activities related thereto.
5392. Rules of the Association--Deleted
* * * * *
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 had prepared summaries, set forth in Sections
A, B, and below, of the most significant aspects of such statements.\4\
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\4\ The Commission has modified the text of the summaries
prepared by the NASD.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Purpose
1. Introduction
The Nasdaq Stock Market, Inc. (``Nasdaq'') operates The PORTAL
Market for securities that were sold in private placements and are
eligible for resale under SEC Rule 144A adopted under the Securities
Act of 1933 \5\ (``Securities Act''). The NASD created The PORTAL
Market in 1990,\6\ simultaneously with the SEC's adoption of rule
144A,\7\ for the purposes of quotation, trading, and trade reporting in
securities deemed eligible by the NASD for resale under Rule 144A. SEC
Rule 144A provides an exemption from SEC registration for resales by
investors of privately placed securities to qualified institutional
buyers (``QIBS''), i.e., institutional investors with at least $100
million invested in securities.
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\5\ 15 U.S.C. 77(a).
\6\ Securities Exchange Act Release No. 27956 (April 27, 1990),
55 FR 18781 (May 4, 1990). The PORTAL Rules were subsequently
amended by Securities Exchange Act Release No. 33326 (December 13,
1993), 58 FR 66388 (December 20, 1993) and Securities Exchange Act
Release No. 37317 (June 17, 1996), 61 FR 33156 (June 26, 1996).
\7\ Securities Act Release No. 6862 (April 23, 1990), 55 FR
17933 (April 30, 1990).
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PORTAL designation is required for all Rule 144A security issues,
except investment grade rated debt,\8\ for the security to receive a
CUSIP number and the book-entry services of The Depository Trust
Company (``DTC''). An issuer of an investment grade rated debt issue
can apply directly to DTC for book-entry services under DTC rules
(``Rule 144A investment grade rated debt issues'').
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\8\ Investment grade rated debt is a debt security rated by a
nationally recognized statistical rating organization in one of its
four highest rating categories.
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The market-related activities of The PORTAL (market (i.e.,
quotations, trade reporting, and trade dissemination) have not
developed, even though the PORTAL Rules include requirements that would
regulate all of these activities. In particular, the PORTAL Rules
require trade reporting for all transactions in PORTAL securities
within 15 minutes of execution. However, these reporting requirements
have never been implemented because of technological problems and costs
associated with submitting trade reports through the PORTAL Market
computer system, which was a stand-alone computer system. Currently,
the NASD's only function with regard to The PORTAL Market is reviewing
whether an issue of privately placed securities meets the eligibility
requirements of SEC Rule 144A.
In 1998, the NASD modified its definition of the term ``ACT
Eligible Security'' in Rule 6110(a) of the NASD Rules for ACT to
include an interpretation.\9\ Under the new interpretation and pursuant
to the Rule 5320 Series of the PORTAL rules, any PORTAL security
voluntarily submitted to ACT for reconciliation, comparison, and/or
clearance and settlement would be considered an ``ACT Eligible
Security.'' In addition, the Association submitted a letter to the
Commission advising it that Nasdaq proposed to eliminate the Stratus
computer system that supports The PORTAL Market.\10\
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\9\ See Securities Exchange Act Release No. 40424 (Sept. 10,
1998), 63 FR 49623 (Sept. 16, 1998).
\10\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, The Nasdaq Stock Market to Belinda Blaine and David
A. Sirignano Divisions of Market Regulation and Corporate Finance,
SEC, dated November 16, 1998.
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2. Summary of Proposed Amendments
The NASD proposes to amend the rules governing The PORTAL Market
(``PORTAL Rules'') in the Rule 5300 Series to require that NASD members
submit trade reports of secondary market transactions \11\ in PORTAL-
designated U.S. high-yield debt securities through the Trade Reporting
And Comparison Entry Service (``TRACE'') and in PORTAL equity
securities through the Automated Confirmation Transaction Service
(``ACT'').\12\ ACT is a system, operated by Nasdaq, that accommodates
the reporting and dissemination of last sale reports for secondary
market transactions in equity securities (including preferred stock
issues), and provides automated comparison and
[[Page 2211]]
confirmation services and forwards confirmed trades to DTC for
settlement.
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\11\ See discussion infra. The exception from reporting for a
``primary distribution by an issuer'' in proposed Rule 6230(e)(1)
and (2) is proposed to include the resale under Rule 144A to the
first QIB by a broker/dealer that has purchased the security from
the issuer under Section 4(2) of the Securities Act if the broker/
dealer is acting only as an intermediary. Thus, the first secondary
market transaction in a PORTAL security that would be reportable
would be a resale by an investor that has purchased directly from
the issuer (where a broker/dealer has only acted as an agent) or a
resale by a QIB that has purchased from a broker/dealer that has
purchased the securities from the issuer under Section 4(2) of the
Securities Act.
\12\ It is anticipated that, at any one time, there will be
approximately 900 PORTAL equity securities and approximately 2,000
PORTAL U.S. high-yield debt securities subject to trade reporting as
a result of this proposal. As restricted PORTAL securities are
eligible for resale into the public markets, either through Rule 144
or through registration, they will cease to be treated as PORTAL
securities but will become subject to any applicable reporting
obligations for publicly-traded securities.
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TRACE is a proposed new service to be operated by Nasdaq to provide
services similar to those of ACT for secondary market transactions in
certain SEC registered debt and Rule 144A investment grade rated debt
issues that are eligible for book-entry services at DTC. The NASD's
proposal to establish TRACE to implement trade reporting and
transparency for secondary market transactions in such debt issues has
been submitted to the SEC simultaneously with this proposed rule change
to File No. SR-NASD-99-65.\13\
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\13\ The TRACE Rules will replace the Fixed Income Pricing
System (``FIPS'') Rules in the Rule 6200 Series. See Securities
Exchange Act Release No. 42201 (Dec. 3, 1999), 64 FR 69305 (Dec. 10,
1999) (SR-NASD-99-65).
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Only reporting obligations will be imposed with respect to
secondary market transactions in PORTAL equity securities reported
through ACT. However, members may also use the system's automated
services for comparison, confirmation, and the forwarding of confirmed
trades to DTC for settlement if they choose. Secondary market
transactions in PORTAL U.S. high yield debt securities that are
reported to TRACE will be subject to the mandatory confirmation of
transactions as proposed in File No. SR-NASD-99-65. There will be no
public dissemination of information in trade reports submitted to the
Association with respect to PORTAL securities and depository-eligible
Rule 144A investment grade rated debt issues.
The use of TRACE and ACT for the trade reporting of secondary
market transactions in PORTAL securities will address the technological
and cost problems that were associated with the reporting of such
trades through the stand-alone PORTAL computer system, which is no
longer operational.
The NASD proposes to amend the Definitions section contained in
Rule 5310 of the PORTAL Rules and the Reporting Requirements contained
in Rule 5332 of the PORTAL Rules to mandate reporting of secondary
market transactions in PORTAL U.S. high-yield debt and equity
transactions. Except for the security designation requirements, a
majority of the remaining provisions are proposed to be deleted as
obsolete. Other amendments to the Rules are proposed to revise the
security application process and to eliminate other unnecessary
provisions in the PORTAL Rules.
3. Description of the Proposed Amendments
a. Definitions--Rule 5310
i. PORTAL Equity/Debt Security Two new definitions are proposed for
the terms ``PORTAL equity security'' and ``PORTAL debt security.'' The
definition of a PORTAL equity security will include any:
security that represents an ownership interest in a legal entity,
including but not limited to any common, capital, ordinary,
preferred stock, or warrant for any of the foregoing, shares of
beneficial interest, or the equivalent thereof (regardless of
whether voting or non-voting, convertible or non-convertible,
exchangeable or non-exchangeable, exerciseable or non-exerciseable,
callable or non-callable, redeemable or non-redeemable).
The definition of a PORTAL debt security is proposed to include
any: fixed income U.S. corporate bond that is not rated or is rated
BB+ or lower by a nationally recognized statistical rating
organization, but shall not include convertible debt instruments,
medium term notes, sovereign debt, Yankee bonds, municipal and
municipal-derivative securities, or asset-backed instruments.\14\
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\14\ Hereinafter, the term ``PORTAL debt security'' will be used
to reference only a reportable PORTAL-designated ``fixed income U.S.
corporate bond that is not rated or is rated BB+ or lower by a
nationally recognized statistical rating organization. * * *'' The
definition of a ``TRACE security'' includes PORTAL debt securities.
Because of concerns about the technological difficulties and
exessive costs associated with implementing trade reporting for the
other types of debt securities, the mandatory reporting requirement
will only apply to traditional U.S. high-yield debt securities and not
to other types of securities.\15\
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\15\ The staff will consider whether the scope of the definition
of PORTAL debt security should be revised to include additional
types of debt issues after reporting for debt securities is
implemented with respect to registered debt issues pursuant to File
No. SR-NASD-99-65, in order to be consistent with the types of
issues that will be reportable if registered.
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In addition, The PORTAL Market includes a few issues of Rule `144A
investment grade rated debt, although such debt issues do not require
PORTAL designation to obtain a CUSIP number and book-entry services at
DTC. Any investment grade debt securities that are PORTAL designated
will nonetheless be subject to reporting under the proposed TRACE
reporting requirements.\16\
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\16\ See Securities Exchange Act Release No. 42201 (Dec. 3,
1999), 64 FR 69305 (Dec. 10, 1999) (SR-NASD-99-65).
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ii. Time of Execution The proposed definition of ``time of
execution'' is ``the time when all of the terms of a transaction in a
PORTAL security have been agreed to that are sufficient to calculate
the dollar price of the transaction and a determination has been made
that the transaction is in compliance with Rule 144A or any other
applicable exemption from registration under Section 5 of the
Securities Act.'' Therefore, the time for reporting a transaction in a
PORTAL equity security and a PORTAL debt security will commence at the
time of execution as defined in the PORTAL Rules.\17\ The time of
execution, as determined by this definition, will be the time included
in a trade report.
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\17\ Under the proposed TRACE rules, a member's obligation to
determine whether a transaction is exempted from registration will
not be applicable for transactions in SEC registered debt
securities.
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iii. PORTAL Market System The definition of ``PORTAL Market
system'' is proposed to be revised to identify one or more computer
systems that may be designated by the NASD to accept trade reports or
to display transaction, quotation or other information on PORTAL
securities.\18\
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\18\ Through this filing and File NO. SR-NASD-99-65, the NASD is
designating ACT and TRACE as ``PORTAL Market systems.''
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iv. PORTAL Transaction Report The definition of ``PORTAL
transaction report'' is also proposed to be revised to mean a report of
a transaction in a PORTAL security submitted by a member through a
designated PORTAL Market system. Previously, PORTAL transaction reports
were only to be submitted by a broker/dealer qualified as a PORTAL
broker or PORTAL dealer and such reports were required to be submitted
within 15 minutes of the execution of the transaction.
v. Definitions Proposed to be Deleted A number of the current
definitions that relate to the initial concept for the reporting,
comparison, and settlement of PORTAL trades directly through a PORTAL
Market computer system are proposed to be deleted in their entirety as
no longer necessary. These include the definitions for: ``PORTAL
account instruction system,'' ``PORTAL clearing organization,''
``PORTAL clearing system,'' ``PORTAL depository organization,''
``PORTAL depository system,'' ``PORTAL Market information,'' ``PORTAL
non-participant report,'' ``PORTAL surveillance report,'' and ``Short
Sale.''
In addition, it is no longer necessary for the NASD to qualify
members as PORTAL dealers or PORTAL brokers or to qualify investors as
PORTAL qualified investors for the purpose of entering quotations and
viewing quotations in The PORTAL Market. Therefore, the following
definitions are proposed to be deleted: ``PORTAL broker,'' ``PORTAL
dealer,'' ``PORTAL
[[Page 2212]]
participant,'' and ``PORTAL qualified investor.''
Moreover, the term ``execution'' is proposed to be deleted as it is
largely redundant of the term ``transaction'' and would be inconsistent
with the proposed definition of the term ``time of execution.''
b. Reporting Requirements
i. Deleted Provisions The current provisions of Rule 5332, which
require that PORTAL dealers and brokers report transactions in PORTAL
securities, are mostly proposed to be deleted. Other provisions that
relate to the initial concept for the reporting, comparison, and
settlement of PORTAL trades directly through a PORTAL Market computer
system are proposed to be deleted in their entirety as no longer
necessary. These include Rules 5333 and 5337, which set out the
requirements for PORTAL trade comparison and settlement, and Rule 5334
which sets out the contents of a required trade report and the manner
of reporting and requires that PORTAL trade reports be disseminated.
Also proposed to be deleted are Rules 5335 and 5536, which required
broker/dealers that were not approved as PORTAL dealers or brokers to
submit a separate trade report and required another trade report
(called the ``Surveillance Report'') for reporting the initial sale to
a QIB by the broker/dealer under SEC Rule 144A.
ii. General Reporting Obligation In place of the current reporting
requirements, it is proposed that two new provisions be adopted in Rule
5332 which would obligate members to report secondary market
transactions in PORTAL equity and PORTAL debt securities through ACT
and TRACE, respectively. Proposed Rule 5332(a) would require that all
secondary market ``transactions'' \19\ in PORTAL equity securities be
reported through ACT, subject to certain exceptions discussed below.
The proposed rule incorporates only those provisions currently
contained in Rule 6130 of the ACT Rules that apply to trade reporting.
Members may, at their option, use the confirmation, comparison, and
settlement features of ACT with respect to secondary market
transactions in PORTAL equity securities.\20\
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\19\ The definition of the term ``transaction'' includes any
purchase or sale of a PORTAL security and is only intended to refer
to secondary market transactions. See discussion infra.
\20\ Thus, the definition of an ``ACT eligible security'' is not
proposed to be amended to include PORTAL equity securities. Instead,
as set forth in Securities Exchange Act Release No. 40424 (Sept. 10,
1998), 63 FR 49623 (Sept. 16, 1998), the definition of an ``ACT
eligible security'' will continue to be interpreted to include all
securities designated as PORTAL securities to the extent
transactions in such securities are voluntarily submitted to ACT
solely for comparison, confirmation, and/or clearance and
settlement. See note 3, supra.
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Proposed Rule 5332(b) would require that all secondary market
transactions in PORTAL debt securities be reported to the TRACE in
accordance with the proposed Rule 6200 Series, which include exceptions
from reporting as discussed below.\21\ Under the proposed TRACE Rules,
a PORTAl debt security is included in the definition of a TRACE
security. Thus, all secondary market transactions in PORTAL debt
securities will be required to comply with all TRACE Rules, including
rules mandating reporting and comparison.\22\
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\21\ See Securities Exchange Act Release No. 42201 (Dec. 3,
1999), 64 FR 69305 (Dec. 10, 1999) (SR-NASD-99-65).
\22\ Id. In addition, the definition of a TRACE security will
include all Rule 144A investment grade rated debt issues that are
depository-eligible for book entry services at DTC.
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iii. Exceptions From Reporting Obligation The exceptions to the
transaction reporting obligations in Rule 5332 for PORTAL equity and
debt securities are the same. These exceptions are contained in
proposed Rule 6230(e)(1) through (4) of the TRACE Rules.\23\ Their
application to PORTAL equity securities is found in proposed rule
5332(a) and to PORTAL debt securities is found in proposed Rule
5332(b).
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\23\ Until TRACE Rules are approved by the Commission and made
effective, members obligated to report secondary market transactions
in PORTAL equity securities through ACT can rely on the exceptions
from reporting in Rule 6240(c) of the Fixed Income Pricing Service
Rules.
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Proposed Rules 6230(e)(1) and (2) would exempt from reporting those
PORTAL debt transactions ``which are part of a primary distribution by
an issuer'' or are ``made in reliance on section 4(2) of the Securities
Act of 1933. * * * '' A private placement that is considered a ``Rule
144A placement'' is usually conducted in the following manner: the
issuer sells its securities to a single broker/dealer in reliance on
the private placement exemption from registration in section 4(2) of
the Securities Act. The broker/dealer-purchaser then resells such
securities to the initial QIB in reliance on Rule 144A. In contrast, in
a traditional private placement, the issuer sells its securities to
investors under section 4(2) of the Securities Act, with any
participating broker/dealer acting solely as agent.
Rule 6230(e)(2) would exempt from reporting the sale by the issuer
under section 4(2) of the Securities Act to a broker/dealer acting as
purchaser in a ``Rule 144A placement'' and to the investor that
purchases through a broker/dealer acting solely as placement agent in a
traditional private placement. In addition, however, we propose that
the proposed exemption from reporting for a ``primary distribution by
an issuer'' in Rule 6230(e)(1) include the ``resale'' by the broker/
dealer-purchaser in a ``Rule 144A placement'' to the first QIB
purchaser, so long as the broker/dealer-purchaser is acting as an
intermediary. Thus, the first secondary market transaction in a PORTAL
security (and a TRACE security that is a Rule 144A investment grade
rated debt security) that would be subject to trade reporting would be
a resale by an investor that has purchased directly from the issuer in
a traditional private placement (where a broker/dealer has only acted
as an agent) or a resale by a QIB that has purchased directly from the
broker/dealer-purchaser in a ``Rule 144A placement.''
Where, however, a broker/dealer purchases PORTAL securities from
the issuer in a private placement as an investment or is unable to
immediately sell all of the securities it purchased intending to act as
an intermediary, the broker/dealer were to hold the PORTAL securities,
it would not be obligated to report its purchase of the securities
because two reporting exemptions would apply. However, if the broker/
dealer were to resell these PORTAL securities it would be obligated to
report the resales because no reporting exemption would be available
for the resale transaction.
iv. Information In Trade Reports/Time of Submission Proposed
subparagraphs (a) and (b) of Rule 5332 require that a PORTAL
transaction report include the information required by Rule 6130(d) of
the ACT Rules in the case of a PORTAL equity security, and the
information required by proposed Rule 6230(c) of the TRACE Rules in the
case of a PORTAL debt security.
PORTAL transaction reports for equity securities will be required
to be submitted no later than 6:30 p.m. Eastern Time to ACT or the
currently effective close of the ACT reporting session. As PORTAL
equity transactions are unlikely to be reported within 90 seconds of
execution, the trade report submitted to ACT will normally include the
execution time.
Trade reports for PORTAL debt securities will be required to be
submitted within the time frame proposed for debt securities subject to
mandatory reporting through TRACE, which is initially proposed to be
one hour from the time of execution. However, for purposes of PORTAL
debt
[[Page 2213]]
securities and Rules 144A investment grade rated debt issues that are
eligible for DTC book entry services, the definition of the time of
execution is different from the applicable to SEC registered debt in
that the definition takes into account the member's obligation to make
a determination that an exemption from registration is available for
the transaction.
v. Party Obligated to Submit Trade Report Proposed subparagraphs
(a) and (b) of Rule 5332 would incorporate provisions from the ACT and
TRACE Rules, respectively, that specify which party to a secondary
market transaction in a PORTAL equity or debt security is obligated to
report the transaction. Thus, paragraph (c) of Rule 6130 of the ACT
Rules would apply to PORTAL equity securities in proposed Rule
5332(a)(3) and paragraph (b) of proposed Rule 6230 of the TRACE Rules
would apply to PORTAL debt securities.
vi. Rule 144/Offshore Transactions Provision Subparagraph (d) of
Rule 5332 is proposed to be renumbered as subparagraph (c) and revised
to delete language that applied the reporting requirements to ``any
transaction in a PORTAL security.'' This language restates the
introductory language in paragraphs (a) and (b), and is unnecessary.
The provision, as amended, will clarify that members are obligated
under PORTAL Rules to report the resale of PORTAL securities:
into the U.S. public market under the exemption provided
by SEC Rule 144; and
from the U.S. private market to an offshore market or from
an offshore market to the U.S. private market.
However, transactions in PORTAL securities that have been sold
offshore under the exemption from registration provided by Regulation
S, where the resale transaction is entirely offshore, are not
reportable.
vii. Imposition of Fees for Trade Reporting. Members submitting
trade reports to ACT with respect to secondary market transactions for
PORTAL equity securities will be subject to the same fees currently
imposed on other members reporting through ACT under the Rule 7000
Series pursuant to proposed Rule 5332(d).
With respect to fees for the submission of trade reports to TRACE,
such fees will be proposed in a separate rule filing to be submitted to
the Commission and will be located in the NASD Rule 7000 Series.
A general provision in Rule 5374 of the PORTAL Rules setting out
the Association's authority to impose fees for PORTAL transactions is
proposed to be deleted as unnecessary.
c. Prohibition on Quotations in PORTAL Securities
The NASD is proposing to adopt Rule 5333 to prohibit members from
publishing quotations in PORTAL securities in any PORTAL Market system,
any electronic communication network (``ECN''), or any other
interdealer quotation system. This provision should emphasize the
obligation of members not to quote PORTAL securities, which is
consistent with the restricted nature of these securities.
d. Designation of PORTAL Securities
i. Modification of PORTAL Security Application Process. Rule 5321
currently requires that an application for designation of a security as
a PORTAL security shall be submitted by a PORTAL dealer or broker. As
it is no longer necessary to qualify broker/dealers as PORTAL dealers
and brokers, subparagraph (a) of Rule 5321 is proposed to be amended to
permit any member of the NASD or the issuer of the securities to submit
an application for designation of a security as a PORTAL security.
Conforming changes are proposed to Rule 5323(b) with respect to the
procedures for notification to members if the designation of a PORTAL
security is suspended or terminated and to Rule 5324 (to be
redesignated Rule 5325) to require that the application fee be paid by
the issuer or member submitting the application.
In addition, Rule 5321(a) is proposed to be revised to require that
an application for designation of a PORTAL security include the
undertakings proposed in new subparagraph (c) of Rule 5321. New
subparagraph (c) would require that any applicant promptly advise the
NASD when the issuer has submitted a registration statement to the SEC
to register: (1) The resale of a PORTAL security; (2) securities to be
exchanged for a PORTAL security; or (3) securities into which The
PORTAL security is exchangeable or convertible. In addition, the
applicant would be required to advise the NASD of the effectiveness of
such a registration statement. These provisions are intended to provide
information to the NASD that will allow it to delete a PORTAL security
from its list of current PORTAL securities when the registration
statement is declared effective. At that point, any resale of a former-
PORTAL designated security will be accomplished through the registered
securities.
In addition, Rule 5321(c) would require an applicant to advise the
NASD when a CUSIP or CINS security identification is assigned to the
PORTAL security or any tranch of a PORTAL security issue. This
provision is intended to ensure that the NASD is timely advised of
additional CUSIP numbers as they are assigned to a new tranch of an
issue designated as a PORTAL security.\24\ This information will
facilitate the ability of the NASD to accept trade reports of secondary
market transactions in PORTAL securities.
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\24\ Similar to SEC registered offerings, in some cases a
private placement will describe a debt issuance that will be done in
tranches over a period of time. Each tranch is assigned a different
CUSIP number as it is issued.
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In order to provide flexibility in the operation of this provision,
the issuer may provide these undertakings in lieu of a member-
applicant.
ii. Modification of PORTAL Security Designation Requirements. The
NASD is proposing that the qualification requirements for PORTAL
securities in Rule 5322(a)(3) be amended to require that a PORTAL
security must be a ``depository eligible security.'' The definition of
this term in Rule 11310 would operate to only include securities with
book-entry services at DTC. Consistent with this change, NASD Rule
5322(a)(4) also is proposed to be amended to no longer permit a PORTAL
security to be in physical certificate form. This amendment is
consistent with the limitation of the proposed mandatory reporting of
secondary market transactions U.S. debt securities to those securities
that are depository eligible.\25\
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\25\ See Securities Exchange Act Release No. 42201 (Dec. 3,
1999), 64 FR 69305 (Dec. 10, 1999) (SR-NASD-99-65).
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iii. Review of Association Decision. That part of Rule 5360 which
set forth the right of an aggrieved person to seek review by the NASD
of a denial, suspension or termination of PORTAL-designation status, is
proposed to be relocated to Rule 5324.
e. Deletion of Obsolete Provisions
The NASD is proposing to delete a large number of provisions of the
PORTAL Rules. In addition to the deletions discussed above, other
provisions are also proposed to be deleted in their entirety as
obsolete.
i. Registration of PORTAL Dealers, Brokers, and Qualified
Investors. The original concept of The PORTAL Market was that approved
broker/dealers and investors would trade in a closed system. The
remnants of this concept that remain in the PORTAL Rules are proposed
to be deleted. Thus, it is proposed that the following rules be deleted
that would register PORTAL
[[Page 2214]]
dealers, brokers, and qualified investors (together, PORTAL
participants): Rules 5338, 5339, 5340, 5350, 5351, 5352, and 5353. Rule
5360, which includes the procedures for appeal by a PORTAL participant
of any denial, suspension or termination of their registration, is also
proposed to be deleted. The section of Rule 5360 that related to appeal
rights regarding the designation of a PORTAL security has been
incorporated into proposed Rule 5324.
ii. Quotations, Trading, Uniform Practice. The PORTAL Rules
currently contain a large number of obsolete provisions that were
intended to regulate the quotation and trading of PORTAL securities
between PORTAL participants on a PORTAL-designated computer system.
These provisions are proposed to be deleted. The provisions in the
PORTAL Rules proposed to be deleted relate to the quotation of PORTAL
securities (Rules 5372, 5373, 5375, 5376, and 5377), uniform practice
(Rules 5378, 5379, and 5380),\26\ and the application of other NASD
rules to PORTAL securities (Rule 5392).
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\26\ The NASD's Uniform Practice Code has been amended to apply
to resales of restricted securities as defined in Rule 144(a)(3)
under the Securities Act. See Securities Exchange Act Release No.
38491 (April 9, 1997), 62 FR 18665 (April 16, 1997).
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4. Examination and Surveillance
In 1990, the NASD developed an examination module for Rule 144A
transactions as part of its examination of underwriting arrangements.
The Association has been using that module in its routine member
examination process, where appropriate. Surveillance of PORTAL equity
securities will be encompassed within parts of the current surveillance
procedures for trade reporting into ACT. Surveillance of trade reports
submitted with respect to PORTAL debt securities will be encompassed
within the surveillance plan for TRACE.
5. Request for Separate Approval and Effective of Debt and Equity
Reporting Requirements
The NASD requests that the Commission bifurcate its approval of the
proposed rule change so that the proposed rule changes to implement
mandatory trade reporting of PORTAL equity securities, to modify the
application process for designation of PORTAL securities, and to delete
obsolete provisions is not dependent upon Commission approval and
implementation of the TRACE Rules proposed in SR-NASD-99-65.
a. PORTAL Equity Securities/Other Amendments
It is not anticipated that TRACE will be implemented until Spring
of the year 2000. The NASD, therefore, requests that the Commission
separately approve proposed Rule 5332(a) and all other proposed rule
changes herein except for Rule 5332(b). Approval would implement
mandatory trade reporting of PORTAL equity securities, modify the
application process for designation of PORTAL securities, and delete
obsolete provisions. When so approved by the Commission, the NASD
requests that all rules in this rule filing, except Rule 5332(b),
become effective within sixty days of the issuance of a Notice to
Members by the Association announcing the proposed rule change. That
notice will be issued within 60 days of Commission approval.
b. PORTAL Debt Securities
The NASD requests that proposed Rule 5332(b) which would implement
mandatory trade reporting and confirmation of secondary market
transactions in PORTAL debt securities pursuant to the proposed TRACE
Rules be approved and become effective simultaneously and under the
same conditions as the Commission's approval of the proposed rule
change to establish the TRACE Rules in SR-NASD-99-65.
Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) \27\ of the Act, which requires,
among other things, that the Association's rules must be 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, in general, to protect investors and the
public interest. The NASD believes that the proposed rule change will
facilitate NASD surveillance of secondary market transactions in PORTAL
securities, which currently are not subject to mandatory reporting to
the Association, in the public interest. In addition, the NASD believes
that the proposed rule change will facilitate comparison, confirmation,
and settlement of secondary market transactions in PORTAL securities.
Finally, the NASD believes that the elimination of obsolete provisions
of the PORTAL Rules will remove will remove impediments to the
operation of the secondary market in PORTAL securities.
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\27\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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 the self-regulatory organization consents, the Commission will by
order approve such proposed rule change, except Rule 5332(b),\28\ or
institute proceedings to determine whether the proposed rule change
should be disapproved.
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\28\ The NASD would like the Commission to consider the proposed
rules in this filing in conjunction with the proposed rules noticed
in Securities Exchange Act Release No. 42201 (Dec. 3, 1999), 64 FR
69305 (Dec. 10, 1999) (SR-NASD-99-65).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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
[[Page 2215]]
available for inspection and copying at the principal office of the
NASD.
All submissions should refer to file No. SR-NASD-99-66 and should
be submitted by February 3, 2000.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-818 Filed 1-12-00; 8:45 am]
BILLING CODE 8010-01-M
