SEC Approves New Trade-Reporting Requirements for Late-Trade Reports

Executive Summary

On March 22, 1993, the Securities and Exchange Commission (SEC) approved amendments to Schedule D, and Schedule G, to the By-Laws and to the Rules of Practice and Procedure for the Automated Confirmation Transaction (ACT) service rules to require members to input the time of execution on late-trade reports and to add a section regarding audit-trail data. The amendments are effective immediately. The text of the amendments follows the discussion below.

Background and Description of Amendments

The SEC has approved amendments to Schedules D and G and the ACT Rules to require members to append the time of execution on any trade report that is reported more than 90 seconds after execution. The NASD is also modifying the ACT Rules to reflect the same time-of-execution requirements and to adopt an "audit trail" provision. The proposals will enable the NASD to capture accurate audit trail information for surveillance purposes and will also facilitate market surveillance of member compliance with the proposed Nasdaq short-sale rule or "bid test" should the SEC approve that proposal.¹

• Audit Trail Provision — The NASD has a statutory responsibility to surveil trading in its marketplace for potential violations of the securities laws and the NASD's own rules. To discharge this responsibility, the NASD relies on computerized analyses of trade details reported by member firms through the trade-reporting and trade-clearance processes. Once processed, this transactional data forms the NASD's transaction audit trail, a critical function supporting the NASD's market surveillance and enforcement programs. Hence, members' submission of accurate and complete audit-trail information is essential.

During the past two years, the NASD's ACT service has evolved to permit the capture of trade-by-trade information for virtually all segments of the NASD's marketplace. Designed as the mechanism to compare and lock in the terms of telephonically negotiated trades in Nasdaq securities, the ACT service also processes transactions in exchange-listed (CQS) securities traded over-the-counter, and non-Nasdaq securities that clear through NSCC.² In addition, the trade-reporting systems that were standalone systems before ACT's development are now part of the ACT service, so that members must report into ACT internalized transactions and trades executed and compared in their internal systems. Because ACT facilitates the collection and dissemination of all reportable real-time trade reports for Nasdaq National Market securities, Nasdaq SmallCap securities, and exchange-listed securities, it offers the capability to gather complete audit-trail information for every trade in a single input process. Accordingly, the NASD is amending the ACT rules to provide an audit-trail provision.

• Time of Execution — Ensuring that trade reports are properly time sequenced is critical to constructing an accurate audit trail for surveillance purposes. At present, however, there is no effective manner to sequence properly transactions reported as ".SLD" (i.e., not reported within 90 seconds after execution). The NASD performs many surveillance functions, both on-line and off-line, that require accurate sequencing of trade report data and knowledge of the time of execution for investigations of questionable trading activity. For exchange-listed securities, time of execution appended to late-trade reports will also enable the NASD to respond more expeditiously and completely to inquiries from exchanges dealing with late-trade reports and trade-through allegations.

Knowing the time of trade executions is also crucial to initiate online monitoring for compliance with the proposed Nasdaq bid test. The NASD believes that comprehensive monitoring of member compliance with the bid test is necessary to ensure the credibility of the bid test itself while providing for the capability to respond immediately to situations requiring further investigation and analysis. Accordingly, the NASD has determined that members must report through ACT the time of execution of a transaction not reported within 90 seconds.

Although "time of execution" is an existing ACT field, its use was voluntary. To develop and maintain an accurate audit trail, the NASD has amended the rules to require that members use the time-of-execution field in ACT when submitting trade reports to the NASD more than 90 seconds after an execution.³

Questions regarding this Notice may be directed to the Market Surveillance Department at (301) 590-6080 or to Beth E. Weimer, Associate General Counsel at (202) 728-6998.

¹ The NASD has proposed a short-sale rule for Nasdaq National Market securities (SR-NASD-92-12).

² In File No. SR-NASD-92-5, the NASD obtained SEC approval of the following changes to the ACT Rules:

(1) expanding the definition of "ACT eligible security" to include all OTC securities not traded on Nasdaq that are eligible for clearing with NSCC;

(2) expanding the definition of "reportable ACT transaction" to include internalized trades and transactions effected in members' proprietary execution systems.

³ If, however, a member submits trade reports to the NASD in a timely manner and a system error or computer connection failure causes the trade reports to arrive at the NASD more than 90 seconds after execution, the member may contact the Market Surveillance Department to request an exemption to the time-of-execution requirement.

Text of New Rules

(Note: New language is underlined; deleted text is in brackets.)

Schedule D

Part XII

Reporting Transactions in Nasdaq National Market System Securities

Section 2 — Transaction Reporting

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Part XIII

Reporting Transactions in Nasdaq SmallCap Securities

Section 2 — Transaction Reporting

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Schedule G

Section 2 — Transaction Reporting

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ACT Rules

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