Additional Guidance Regarding the Automated Reporting of Transactions Subject to a Regulatory Transaction Fee
November 17, 2006
On June 12, 2006, the Securities and Exchange Commission (SEC) approved SR-NASD-2006-055, relating to the automated reporting of transactions subject to the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws (NASD Section 3).1 In August 2006, NASD published Notice to Members 06-39 (NTM 06-39) announcing the approval of SR-NASD-2006-055. This Notice stated, among other things, that member firms are required, pursuant to Rules 6130 and 6130A, to report Section 3 assessable transactions as follows: odd-lot transactions must be submitted with a .RO modifier, away from the market sales must be submitted with a .RA modifier, and the exercise of OTC Options must be submitted with a .RX modifier (collectively, ".R modifier(s)").
To assist members in complying with the new reporting requirements outlined in NTM 06-39, NASD staff is publishing the following questions and answers:
Q. Are all odd lot transactions required to be appended with the .RO modifier?
A. No. Only those odd lot transactions that are subject to a Section 3 fee are to be appended with the .RO modifier. If an odd lot transaction is not subject to an NASD Section 3 Regulatory Transaction Fee (e.g., the second leg of a riskless principal transaction), the .RO modifier should not be appended to the transaction report. As firms will be assessed an NASD Section 3 Regulatory Transaction Fee on any transaction reported with a .R modifier, firms must ensure that only those transactions subject to an NASD Section 3 Regulatory Transaction Fee are reported with such a modifier.
Q. If an odd lot transaction was required to be reported to an NASD trade reporting system prior to December 1, 2006 pursuant to another NASD trade reporting rule and such rule requires a modifier other than the .RO (e.g., .W) to be appended to the transaction report, which modifier should be appended?
A. In general, odd lots that are not otherwise required to be reported to an NASD trade reporting system except pursuant to NASD Rules 6130(g) and 6130A(c) do not require any modifiers other than .RO. However, in instances where odd-lot transactions are required by another NASD trade reporting rule to be reported to NASD and must include a modifier other than the .RO, that modifier, rather than the .RO, should be appended. For example, an odd lot transaction required to be reported with a .W pursuant to NASD Rule 6620(a)(8) should be reported with the .W rather than the .RO. However, when submitting the report of an odd lot transaction with a modifier other than a .RO modifier, the transaction report must be submitted with the media flag reported as "yes" in order for the transaction to be recognized as Section 3 eligible.2 Transactions not reported in such a manner may be viewed to be in violation of NASD Section 3.
Q. If a transaction requires the appending of two different .R modifiers (e.g., an odd lot transaction reported away from the market), which modifier should be used?
A. The priority for reporting multiple .R modifiers is the following:
Q. How should members report fractional share transactions?
A. If the transaction is for less than one share, the trade should be rounded up to one share for reporting purposes. If the transaction is for more than one share, then the transaction should be rounded down to the next whole share for reporting purposes.
Q. If I have no transactions to report for any given day or month, do I need to inform NASD in writing?
A. No. NASD will ensure that firms are reporting in compliance with the new rule requirements through its routine cycle examination program and surveillance activities.
Q. If a contra side (i.e., non-reporting) party to the transaction has an NASD Section 3 obligation, how does it report the modifier if the NASD system to which the trade is reported does not allow the entry of modifiers on the contra side of the trade report?
A. A Firm that is on the contra side of a trade report that requires a .R modifier will need to ensure that the reporting side of the trade appends the appropriate modifier.3 Failure to do so may lead to disciplinary action.
Q. If a .R transaction represents an event subject to the Order Audit Trail System (OATS) Rules, is the transaction report submitted to an NASD trade reporting system with a .R modifier required to be matched to the related OATS Execution Report submitted to OATS?
A. Yes. Members are required to link the .R transaction report submitted to an NASD trade reporting system to the related OATS Execution Report. Members should reference the OATS Technical Specifications for the applicable matching criteria.
Q. Are trades reported solely pursuant to NASD Rule 6130(g) and 6130A(c) required to be within 90 seconds of execution?
A. No. Transactions reported solely pursuant to NASD Rules 6130(g) and 6130A(c) are required to be reported by 6:30 p.m. Eastern Time on the day of execution (or the end of the reporting session that is in effect at that time). However, transactions that are subject to NASD Rules 6130(g) and 6130 (c) and also required pursuant to an NASD trade reporting rule to be reported within 90 seconds, must be reported within 90 seconds.
1 See Securities Exchange Act Release No. 53977 (June 12, 2006), 71 FR 34976 (June 16, 2006) (Approval Order of File No. SR-NASD-2006-055).
2 For odd lot transactions that do not have a .RO modifier, the reporting designation of the entry is used to identify the trade as eligible for the Regulatory Transaction Fee in NASD's billing system. Note that NASD trade reporting systems automatically suppress odd lot transactions from media dissemination. Firms also should note that any odd lot transaction reported to an NASD transaction reporting system that is not subject to the Regulatory Transaction Fee should be entered as "clearing only" to ensure it is not billed by NASD.
3 For more information concerning these obligations see Notice to Members 98-96, at 734 (December 1998). NASD always bills the sell side of the transaction regardless of who reports the trade to the applicable NASD trade reporting system. Therefore, if the contra side of the trade report represents the sell side of the transaction, the contra party will be billed even though they did not submit the trade report.