July 3, 2007
On July 3, 2007, NASD filed for immediate effectiveness proposed rule change SR-NASD-2007-046, which, among other things, adopted new NASD Rule 6130(h) (Inclusion of Transaction Fees in Clearing Reports Submitted to the NASD/NASDAQ Trade Reporting Facility). Rule 6130(h), which will become operative on Monday, July 9, 2007, provides that NASD member firms may agree in advance to transfer a transaction fee charged by one firm to another firm on a trade in NMS stocks effected otherwise than on an exchange through the submission of a clearing report to the NASD/NASDAQ Trade Reporting Facility (the "NASD/NASDAQ TRF").
Use of the NASD/NASDAQ TRF to transfer transaction fees between NASD firms is entirely voluntary. However, firms that opt to use this fee transfer mechanism must comply with the requirements of Rule 6130(h) and all other applicable NASD rules. The report submitted to the NASD/NASDAQ TRF pursuant to Rule 6130(h) shall provide, in addition to all other information required to be submitted by any other rule, a total per share or contract price amount, inclusive of the transaction fee. As a result, members will submit two price amounts as part of their report to the NASD/NASDAQ TRF: one price including the transaction fee, which will be submitted by the NASD/NASDAQ TRF to the National Securities Clearing Corporation (NSCC) for clearance and settlement; and one price exclusive of the transaction fee, which will be reported to the appropriate Securities Information Processor for public dissemination.1 The parties to the trade will know both prices - the price reported for public dissemination and the clearance/settlement price.
Both firms and their respective clearing firms, as applicable, must execute an agreement, as specified by NASD, permitting the facilitation of the transfer of the transaction fee through the NASD/NASDAQ TRF, as well as any other applicable agreement, such as a give up agreement pursuant to Rule 4632(h). Firms must execute and submit such agreement to the NASD/NASDAQ TRF before they can transfer any transaction fee under this rule. As emphasized in NASD's filing with the SEC and as indicated in the agreement, processing of a transaction fee by the NASD/NASDAQ TRF does not mean that NASD has approved the fee, its amount or its appropriateness under NASD rules or federal securities laws. The mere fact that the transaction fee flowed through an NASD facility will not be a defense to any action taken by NASD relating to such fee. The relevant agreements are considered member firm records for purposes of NASD Rule 3110(a), and must be made and preserved by both firms in conformity with applicable NASD rules.
Nothing in Rule 6130(h) relieves firms of their obligations under NASD rules and federal securities laws, including but not limited to, NASD Rule 2230 (Confirmations) and SEC Rule 10b-10. To the extent that any transaction fee is passed onto the customer, firms should review their customer confirmation obligations to ensure that they are disclosing such fees in compliance with all applicable rules and regulations, as well as other NASD rules, including but not limited to, NASD Rules 2320 (Best Execution) and 2440 (Fair Prices and Commissions).2
By its terms, Rule 6130(h) relates solely to transaction fees charged by one NASD firm to another NASD firm. Firms cannot use the NASD/NASDAQ TRF to facilitate the transfer of fees for transactions with a customer (i.e., clients that are not brokers or dealers) or a non-member firm. In addition, the NASD/NASDAQ TRF can only be used to facilitate the transfer of transaction fees; firms cannot use the NASD/NASDAQ TRF to transfer access fees or rebates on transactions.
Finally, pursuant to SR-NASD-2007-040,3 NASD proposed amendments to prohibit firms from submitting to an NASD Facility (i.e., a Trade Reporting Facility or the Alternative Display Facility) any report associated with a previously executed trade that was not reported to that NASD Facility. Thus, firms cannot use the NASD/NASDAQ TRF to transfer transaction fees on trades that were previously reported to any facility other than the NASD/NASDAQ TRF.
1 For example, if B/D 1 purchases from B/D 2 at $10.00 and B/D 1 agrees to pay a transaction fee to B/D 2 of $.01 per share, the trade price that would be publicly disseminated would be $10.00, while the trade would be cleared and settled by NSCC at $10.01. Today, if this transaction were effected on a net basis, the transaction at a price of $10.01 would both be reported to the tape and submitted to NSCC.
2 Pursuant to SR-NASD-2007-046, NASD repealed Interpretive Material (IM)-2230 ("Third Market" Confirmations). As explained in its filing with the SEC, NASD believes that the disclosure required by IM-2230 would provide no or minimal additional information to the customer and could be unduly burdensome on members and potentially reduce the efficacy of the transaction fee transfer mechanism under Rule 6130(h).
3 See Securities Exchange Act Release No. 55962 (June 26, 2007) (notice of filing and immediate effectiveness of SR-NASD-2007-040).