[Federal Register Volume 66, Number 50 (Wednesday, March 14, 2001)]
[Notices]
[Pages 14969-14974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6277]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44042; File No.
SR-NASD-99-66]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2, 3, and 4 by the National Association of Securities
Dealers, Inc. Relating to the Implementation of Mandatory Trade
Reporting for PORTAL Securities
March 6, 2001.
I. Introduction
On October 28, 1999, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), filed with the Securities
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change relating to the implementation of mandatory trade reporting for
PORTAL securities. On December 30, 1999, the NASD filed Amendment No.
1.\3\ The proposed rule change, including Amendment No. 1, was
published for comment in the Federal Register on January 13, 2000.\4\
The Commission received one comment letter regarding the proposal.\5\
In response thereto, on April 4, 2000, the NASD filed Amendment No.
2.\6\ On January 23, 2001, the NASD filed Amendment No. 3.\7\ On
February 22, 2001, the NASD filed Amendment No. 4.\8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Suzanne Rothwell, Chief Counsel, Corporate
Financing, NASD, to Katherine A. England, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
December 29, 1999 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 42310 (January 3,
2000), 65 FR 2207. A correction notice was published in the Federal
Register correcting a typographical error in the docket number on
February 14, 2000. See 65 FR 7418.
\5\ See Letter from Douglas L. Williams, Executive Vice
President, Wachovia Securities, Inc., to Secretary, Commission,
dated February 2, 2000.
\6\ See Letter from Suzanne Rothwell, Chief Counsel, Corporate
Financing, NASD, to Katherine A. England, Assistant Director,
Division, Commission, dated April 4, 2000 (``Amendment No. 2''). In
Amendment No. 2, the NASD responded to comments made by a commenter,
and submitted substantive amendments to the proposal. The substance
of Amendment No. 2 is reflected throughout this order.
\7\ See Letter from Suzanne Rothwell, Chief Counsel, Corporate
Financing, NASD, to Katherine A. England, Assistant Director,
Division, Commission, dated January 18, 2001 (``Amendment No. 3'').
In Amendment No. 3, the NASD revised the proposed definition of
``PORTAL Debt Securities'' to conform it to the definition of TRACE-
eligible security approved in File No. SR-NASD-99-65. See Securities
Exchange Act Release No. 43873 (January 23, 2001), 66 FR 8131
(January 29, 2001).
\8\ See Letter from Suzanne Rothwell, Chief Counsel, Corporate
Financing, NASD, to Katherine A. England, Assistant Director,
Division, Commission, dated February 16, 2001 (``Amendment No. 4'').
In Amendment No. 4, the NASD made a technical amendment to the
language of Rule 5350 of the PORTAL Rules and to clarify the
proposed effective date for the PORTAL Rules.
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This order approves the proposed rule change, as amended. In
addition, the Commission is approving on an accelerated basis, and
soliciting comments on, Amendment Nos. 2, 3 and 4.
II. Description
A. Overview
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 (``Securities Act'').\9\ The NASD is proposing 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 in PORTAL-designated equity securities through the
Automated Confirmation Transaction Service (``ACT'') and in PORTAL U.S.
high-yield debt securities through the Trade Reporting And Comparison
Entry Service (``TRACE'').\10\
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\9\ 15 U.S.C. 77(a).
\10\ 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 confirmation services
and forwards confirmed trades to DTC for settlement. TRACE is a
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.
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Under the proposed revisions to the PORTAL Rules, members will be
required to report secondary market transactions in PORTAL equity
securities through ACT, subject to certain exemptions. Members will not
be required to use ACT's automated services for comparison,
confirmation, and the forwarding of confirmed trades to Depository
Trust Corporation (``DTC'') for settlement, however, these services
will remain available for members that chose to use them. 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 NASD intends to amend several of the definitions contained in
Rule 5310 of the PORTAL Rules as well as the Reporting Requirements
contained in Rule 5332 of the PORTAL Rules to mandate reporting of
secondary market transactions in PORTAL debt and equity securities.
NASD has also proposed revisions to the PORTAL Rules governing the
security designation application process. As a result of these
revisions, a majority of the remaining provisions will be obsolete, and
the NASD proposes to delete them.
B. Definitions
As part of its proposal to revise the PORTAL Market, the NASD has
proposed new definitions for the terms ``PORTAL equity security'' and
``PORTAL debt security.'' Under the proposed definition, 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, exercisable or non-exercisable,
callable or non-callable, redeemable or non-redeemable).
[[Page 14970]]
The definition of a PORTAL debt security is proposed to include:
All PORTAL securities that are United States dollar denominated
debt securities issued by United States and/or foreign private
corporations, but shall not include mortgage- or asset-backed
securities, collaterialized mortgage obligations, money market
instruments, or municipal and municipal-derivative securities.\11\
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\11\ See Amendment No. 3, supra note 7.
The NASD has also proposed a definition for ``time of execution.''
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Under the proposal, the ``time of execution'' will be:
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.
According to this definition, the time for reporting a transaction
in a PORTAL equity security or a PORTAL debt security will be the time
of execution. The time of execution will be the time included in
transaction reports.\12\
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\12\ See Proposed NASD Rule 5332(a)(1).
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The NASD has proposed to revise the definition of ``PORTAL Market
System'' to mean 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. Both ACT and TRACE will be
PORTAL Market systems under this definition.
The NASD also proposed to revise the definition of ``PORTAL
transaction report'' to mean a report of a transaction in a PORTAL
security submitted by a member through a designated PORTAL Market
system.\13\
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\13\ 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.
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The PORTAL Rules contain a number of definitions that relate to the
initial concept for the market, which originally included reporting,
comparison, and settlement of PORTAL trades directly through a PORTAL
Market computer. The NASD believes that these rules no longer have any
application under the proposed change to the PORTAL Market, and
therefore has proposed that the following terms and definitions be
deleted in their entirety: ``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, based on the proposed changes to the PORTAL Market,
the NASD believes it is no longer necessary to qualify members as
``PORTAL dealers'' or ``PORTAL brokers'' or to quality investors as
``PORTAL qualified investors'' for the purpose of entering quotations
and viewing quotations in the PORTAL Market. Accordingly, the NASD has
proposed to delete the definitions of: ``PORTAL broker,'' ``PORTAL
dealer,'' ``PORTAL participant,'' and ``PORTAL qualified investor.''
Moreover, the NASD proposed to delete the term ``execution'' as it
believes it would be inconsistent with the proposed definition of the
term ``time of execution.''
C. Reporting Requirements
In place of the current reporting requirements, the NASD has
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.
1. Transaction Which Must Be Reported
Proposed Rule 5332(a) would require that all secondary market
``transactions'' \14\ in PORTAL equity securities be reported through
ACT, subject to certain exceptions discussed below. Members would be
permitted, but not required, to use the confirmation, comparisons, and
settlement features of ACT with respect to secondary market
transactions in PORTAL equity securities.\15\
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\14\ 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.
\15\ The NASD is not amending the definition of an ``ACT
eligible security'' 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.
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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 NASD Rule 6200 Series, which include exceptions
from reporting as discussed below.\16\ All secondary market
transactions in PORTAL debt securities will be required to comply with
all TRACE Rules, including rules mandating reporting and comparison.
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\16\ This rule was approved as part of the TRACE proposal. See
note 7, supra.
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The NASD proposed to renumber subparagraph (d) of Rule 5332
subparagraph (c), and to delete extraneous language from the Rule. The
NASD intends that the Rule, as amended, will clarify that members are
obligated 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, transaction 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.
2. Exceptions to Reporting Requirements
Under the proposal, the exceptions to the transaction reporting
obligations for PORTAL equity and PORTAL debt securities would be the
same. These exceptions are contained in NASD Rule 6320(e)(1)-(4), which
was approved as part of the NASD's TRACE proposal.
3. Submission of Transaction Reports
Under the proposal, PORTAL transaction reports for equity
securities must be submitted to ACT no Later than 6:30 p.m. Eastern
Time, or by the end of the ACT reporting session that is in effect at
the time. Transaction reports for PORTAL debt securities must be
submitted within the time frame proposed for debt securities subject to
mandatory reporting through TRACE.
4. PORTAL Market Fees
Under the proposal, members submitting trade reports to ACT with
respect to secondary market transactions for PORTAL equity securities
would be subject to the same fees currently imposed on other members
reporting through ACT under the NASD Rule 7000 Series.\17\
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\17\ The NASD proposes to delete a general provision in NASD
Rule 5374 of the PORTAL Rules setting out the Association's
authority to impose fees for PORTAL transactions as it is
unnecessary.
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D. Designation of PORTAL Securities
NASD Rule 5321 currently requires that a PORTAL dealer or broker
submit an application for designation of a security as a PORTAL
security. According to the NASD, because it will not be necessary to
qualify brokers and dealers as PORTAL dealers and brokers under the
proposed rule change, the Association proposed to amend Rule
[[Page 14971]]
5321(a) to permit any member of the NASD, or the issuer of a security,
to submit an application for designation of a security as a PORTAL
security. The NASD also proposed conforming changes 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 5323) to require that the
application fee for PORTAL designation be paid by the issuer or member
submitting the application.
In addition, the NASD proposed a requirement that any applicant
seeking PORTAL designation promptly advise the NASD when the issuer has
submitted a registration statement to the Commission 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.\18\ In addition, the applicant would be
required to advise the NASD of the effectiveness of the registration
statement. The NASD intends this provision 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.
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\18\ See Proposed NASD Rule 5321(c).
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Proposed Rule 5321(c) would also require an applicant to advise the
NASD when a CUSIP or CINS security identification is assigned at
issuance to the PORTAL security or any tranch of a PORTAL security
issue. The NASD intends this provision to ensure that it is advised of
additional CUSIP numbers as they are assigned in a timely manner.\19\
The NASD believes that this information will facilitate its ability to
accept trade reports of secondary market transactions in PORTAL
securities. In order to provide flexibility in the operation of this
provision, the NASD proposed that the issuer may provide these
undertakings in lieu of a member-applicant.\20\
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\19\ 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.
\20\ See Proposed NASD Rule 5321(c).
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The NASD further proposed that the qualification requirements for
PORTAL securities in Rule 5322(a)(3) be amended to require that a
PORTAL security be a ``depository eligible security.'' The definition
of this term in Rule 11310 would operate to include only securities
with book-entry services at DTC. Consistent with this change, NASD also
proposes to amend Rule 5322(a)(4) to delete the requirement that PORTAL
securities be in certificated form.
The NASD proposes to relocate that part of Rule 5360 that sets
forth the right of an aggrieved person to seek review by the NASD of a
denial, suspension or termination of PORTAL-designation status 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, the NASD
proposes to delete other provisions in their entirety as obsolete under
the proposed revised rules.
1. 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 NASD proposes
to delete the remnants of this concept that remain in the PORTAL Rules.
Thus, it is proposed that the following rules be deleted that would
register PORTAL dealers, brokers, and qualified investors (together,
PORTAL participants): Rules 5338, 5339, 5340, 5350, 5351, 5352, and
5353. The NASD also proposes to delete Rule 5360, which includes the
procedures for appeal by a PORTAL participant of any denial, suspension
or termination of its registration. The section of Rule 5360 that
related to appeal rights regarding the designation of a PORTAL security
has been incorporated into proposed Rule 5324.
The NASD has proposed that the majority of the current provisions
contained in Rule 5332, which require that PORTAL dealers and brokers
report transactions in PORTAL securities, be deleted. The NASD also
proposes to delete other provisions that relate to the initial concept.
for the reporting, comparison, and settlement of PORTAL trades directly
through a PORTAL Market computer system. 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
5336, 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.
2. 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. The NASD proposes to delete these provisions.
Specifically, the NASD proposes to delete: the provisions that relate
to the quotation of PORTAL securities (Rules 5372, 5373, 5375, 5376,
and 5377) and uniform practice (Rules 5378, 5379, and 5380).\21\
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\21\ 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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G. Examinations and Surveillance
Surveillance of PORTAL equity securities will be encompassed within
parts of the current surveillance procedures for transaction reporting
into ACT. Surveillance of transaction reports submitted with respect to
PORTAL debt securities will be encompassed within the surveillance plan
for TRACE.
III. Summary of Comments
The Commission received one comment letter on the proposed rule
change.\22\ The Commenter expressed opinions on four aspects of the
proposal: the effect the proposed changes may have on the liquidity of
securities eligible for resale under SEC Rule 144A, the continued
existence of the PORTAL Market, proposed Rule 5321(c) relating to who
is responsible for notifying the NASD when a registration statement for
a PORTAL security has been filed with the Commission, and the effect of
the proposed deletion of Rule 5392.
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\22\ See note 5, supra.
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The Commenter first noted that under proposed Rule 5333, NASD
members would be prohibited from entering quotations in PORTAL
securities into any inter-dealer quotation medium.\23\ The Commenter
stated that this prohibition is not required by Rule 144A, or any other
existing federal securities law, that the prohibition would eliminate
virtually all liquidity in the market for high yield 144A eligible
securities and that Rule 144A
[[Page 14972]]
does not prohibit broker/dealer from entering quotations in an inter-
dealer quotation system as long as the offer is made only to QIBs or
dealers reasonably believed to be QIBs. In response to the Commenter,
the NASD acknowledged that this was an unintended effect of the
proposed Rule, and amended the proposed rule to delete the
prohibition.\24\
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\23\ Pursuant to Securities Act Rule 144A, broker/dealers are
permitted to enter quotations in an inter-dealer quotation system as
long as the offer is made to QIBs or persons whom dealers reasonably
believed to be QIBs. The proposed NASD rule would prohibit the entry
of quotations, even if the broker/dealer desires to offer a security
to a QIB.
\24\ See Amendment No. 2, supra note 6.
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Next, the Commenter concurred with the NASD's contention that the
PORTAL Market has not devleoped as anticipated. The Commenter stated
that while the security market in 144A securities has flourished over
the last 10 years, the market-related activities of the PORTAL market
have not. The commenter opined that this is because institutional
investors have found alternative trading venues that offer greater
liquidity than the PORTAL Market. The Commenter therefore recommended
that the NASD eliminate the PORTAL Rules altogether, and incorporate
any rules necessary for the surveillance of resale of Rule 144A
securities into the ACT rules.
The NASD responded to this comment by explaining that it believes
that the specific ``PORTAL'' identity for certain Rule 144A securities
is necessary in order for members to properly distinguish between the
obligations imposed by the ACT and TRACE Rules with respect to Rule
144A/Non-PORTAL and Rule 144A/PORTAL securities, and therefore does not
feel it is appropriate to eliminate the PORTAL Rules in their entirety.
The Commenter next expressed concern regarding proposed Rule
5321(c). This proposed rule would require that a broker/dealer-
applicant, or the issuer of the security, advise the NASD if the issuer
files a registration statement with the Commission, or if a PORTAL
Security is assigned a CUSIP or CINS number. While the Commenter
recognized the NASD's need to be made aware of these activities, it
suggested that instead of requiring the broker/dealer or the issuer to
notify the NASD if a registration statement is filed, the NASD should
place this burden on the lead underwriter of the security. The
Commenter reasoned that the broker/dealer-applicant may no longer be
active in the security at the time a registration statement is filed,
and therefore, the burden would be more properly placed on the lead
underwriter as he or she would be expected to know if and when such a
filing were made.
In response to this comment, the NASD explained that proposed Rule
5321(c) would not apply to all Rule 144A securities. Rather, the Rule
would apply only to PORTAL-designated securities that are assigned a
CUSIP number at issuance and have book-entry services at the DTC.\25\
The NASD represented that it was ``exceedingly rare for the NASD to
receive an application for designation of a PORTAL Security subsequent
to the issuance of the security.'' \26\ The NASD explained that the
proposed Rule was intended to eliminate the requirement that dealers
and brokers register as ``PORTAL'' dealers and brokers, and to permit
any broker/dealer or the issuer to submit an application for
designation of a security in the PORTAL Market.\27\
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\25\ See Amendment No. 2, supra note 6.
\26\ Id.
\27\ Id.
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Lastly, the Commenter questioned the NASD's proposed deletion of
current Rule 5392. The Commenter explained that if the Rule were
deleted, an important exemption from the NASD rule that requires that
broker/dealers obtain quotations from three dealers (or all dealers if
three or less exist) to determine the best inter-dealer market for a
security before executing a trade, even in circumstances where the
broker/dealer already knows of a QIB interested in buying the security.
The Commenter stated that this requirement is not necessary for Rule
144A Securities because the QIBs to whom these securities are sold
generally know as much about the markets and the values of the
securities as the dealers in those securities. The Commenter opined
that the imposition of the aforementioned requirement would be a
``strong incentive for dealers to withdraw most or all of the capital
they currently have committed to securities eligible for resale under
Rule 144A.''
In response to these comments, the NASD has proposed to retain
current Rule 5392 and renumber the provision as Rule 5350.\28\
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\28\ Id.
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IV. Discussion
After carefully considering all of the comments, the Commission
finds, for the reasons discussed below, that the proposed rule change
is consistent with the Act and the rules and regulations applicable to
the NASD. In particular, the Commission finds that the proposal is
consistent with the requirements of section 15A(b)(6) and (11), and
11A(a)(1)(C) of the Act.\29\
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\29\ 15 U.S.C. 78o-3(b)(6) and (11), and 15 U.S.C. 78k-
1(a)(1)(C).
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Section 15A(b)(6) requires that the rules of a registered national
securities association 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 a national market system, and, in general, to
protect investors and the public interest. Section 15A(b)(11) requires
that the rules of a registered national securities association include
rules governing the form and content of quotations relating to
securities sold otherwise than on a national securities exchange, and
the person to whom such quotation may be supplied. These rules must be
designed to produce fair and informative quotations, to prevent
fictitious or misleading quotations, and to promote orderly procedures
for collecting, distributing, and publishing quotations. In Section
11A(a)(1)(C)(iii), Congress found that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure the availability to brokers, dealers, and
investors of information with respect to quotations and transactions in
securities.
The Commission recognizes that the PORTAL Market has not developed
as originally envisioned by the NASD. Over the last ten years, despite
the NASD's efforts to encourage use of the PORTAL Market as a trading
venue for Rule 144A securities, currently, its only function is
reviewing whether issues of privately placed securities meet the
eligibility requirements of Rule 144A. The instant rule filing
represents the NASD's attempt to revitalize the Market by paring down
its rules and regulations regarding who can trade PORTAL securities,
and clarifying the requirements for reporting transactions involving
PORTAL securities.
The Commission believes that the proposed rule change will
significantly simplify the PORTAL Market specifically in that members
will only be required to report secondary market transactions in PORTAL
equity securities through ACT. Members will not be required to use
ACT's automated services for comparison, confirmation, and the
forwarding of confirmed trades to DTC for settlement and may use other
systems that offer greater liquidity and incentives to trade Rule 144A
securities. Also, the proposed rule change eliminates the requirement
that those using the PORTAL Market receive designation as ``PORTAL''
brokers, dealers or investors. All NASD members
[[Page 14973]]
and issuers will now have access to the PORTAL Market. The Commission
believes that this simplification and expansion of access will serve to
remove impediments to the Market, and will help to perfect the
mechanics of the Market in accordance with the goals stated in section
15A(b)(6).
The proposed Rules also make clear exactly what information is
required to be reported with regard to PORTAL Securities, as well as,
the party who is expected to do the reporting. By implementing clear
and concise standards for reporting, the Commission believes that there
will be less opportunity for fraudulent and manipulative practices. As
such, the proposed Rules are consistent with sections 15A(b)(6) and
15A(b)(11).
The Commission believes that the overall changes to the PORTAL
Market proposed by the NASD will assure that brokers, dealers and
qualified investors will continue to have ready access to quotations in
Rule 144A securities. Although the NASD originally proposed to prohibit
members from entering quotations in PORTAL securities in electronic
communication networks or other inter-dealer quotation markets, it
recognized that this prohibition might have a negative effect on
liquidity in the market for high yield Rule 144A eligible securities,
and withdrew the prohibition. The Commission believes that the decision
to withdraw the prohibition was appropriate and consistent with section
11A(a)(1)(C)(iii) in that it assures the availability to brokers,
dealers, and investors of information with respect to quotations and
transactions in securities.\30\
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\30\ In approving the proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission reminds broker/dealers that offers and sales of Rule
144A eligible securities that are made in reliance on Rule 144A must
comply with the conditions of Rule 144A. This includes the requirement
that offers of securities under Rule 144A, through an inter-dealer
quotation system or otherwise, must be made only to a QIB or to an
offeree that the seller reasonably believes is a QIB.
In sum, the Commission believes that the proposal is consistent
with the Commission's efforts to increase secondary market liquidity in
restricted securities eligible to be sold in reliance on Rule 144A,
while providing appropriate controls to protect against violations of
the federal securities laws.
V. Amendment Nos. 2, 3 and 4
The Commission finds good cause for approving Amendment Nos. 2, 3
and 4 to the proposed rule change prior to the thirtieth day after the
date of publication of notice thereof in the Federal Register. In
Amendment No. 2, the NASD proposed to delete proposed Rule 5333, which
would have prohibited members from entering quotations in any PORTAL
security in any electronic communication network or other inter-dealer
quotation system. The NASD explained that this prohibition was not
necessary to fulfill the purpose of the rule filing, and could have the
unintended effect of reducing liquidity in PORTAL securities.
Also, the NASD proposed to retain current Rule 5392, which it had
planned to delete in the original filing, and renumber it Rule 5350.
The NASD explained that this Rule was needed to provide clarity
regarding the application of the NASD Conduct Rules to transactions in
PORTAL securities.
The Commission believes that the changes proposed in Amendment No.
2 strengthen and clarify the proposed rule change, and provide
additional benefits to investors. Therefore, the Commission finds that
granting accelerated approval to Amendment No. 2 is appropriate and
consistent with sections 15A(b)(6), (11) and 19(b)(2) of the Act.\31\
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\31\ 15 U.S.C. 78o-3(b)(6), (11) and 78s(b).
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Amendment No. 3 revises the definition of ``PORTAL Debt
Securities'' contained in NASD Rule 5310(e) in order to conform it to
the amended definition of ``TRACE-eligible securities.'' \32\ The
definition of TRACE-eligible securities was previously approved.\33\
Accordingly, the Commission believes that there is good cause,
consistent with Sections 15A(b)(6) and 19(b)(2) of the Act \34\ to
approve Amendment No. 3 to the proposal on an accelerated basis as
Amendment No. 3 will make the two sets of rules consistent, thus aiding
compliance with the rules.
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\32\ See Amendment No. 4 to SR-NASD-99-65, supra note 7.
\33\ See id.
\34\ 15 U.S.C. 78o-3(b)(6) and 78s(b).
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Finally, the Commission believes that it is appropriate to grant
accelerated approval to Amendment No. 4. In Amendment No. 4, the NASD
proposed effective dates for the amended PORTAL Rules. The NASD
proposed that all proposed amendments to the PORTAL Rules be effective
upon the date of approval of this proposed rule change with the
following exceptions:
(1) The reporting requirements for PORTAL equity securities will be
effective three months after the issuance of a Notice to Members by the
Association; and (2) the reporting requirements for PORTAL debt
securities will be effective on a date announced in a subsequent Notice
to Members regarding implementation of TRACE Rules. The Commission
believes that these time frames are reasonable and should give members
adequate time to prepare for the revised reporting requirements. Other
changes effected by Amendment No. 4 are technical in nature and were
added for clarification only.
For these reasons, the Commission finds good cause, consistent with
sections 15A(b)(6) and 19(b)(2) of the Act,\35\ to accelerate approval
of Amendment No. 4 to the proposed rule change.
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\35\ 15 U.S.C. 78o-3(b)(6) and 78s(b).
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Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2, 3 and 4, including whether the
proposed amendments are consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed amendments that are
filed with the Commission, and all written communications relating to
the amendments 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 at the
Commission's Public Reference Room. Copies of such filing also will be
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 April 4, 2001.
VII. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities association.
It is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-NASD-99-66), as amended be
and hereby is approved.\37\
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\36\ 15 U.S.C. 78s(b)(2).
\37\ Within 60 days of the date of this order, the NASD will
circulate a Notice to Members announcing the approval of the
proposal. Trade reporting obligations for PORTAL Equity Securities
will be effective three months after the Notice to Members is
published. Trade reporting obligations for PORTAL Debt Securities
will be effective in accordance with the implementation schedule set
out in the TRACE approval order. See note 7, supra.
[[Page 14974]]
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-6277 Filed 3-13-01; 8:45 am]
BILLING CODE 8010-01-M