NASD Notice to Members 06-71 - December 2006

Clarification of Exemption for Market Makers Acting in the Capacity of Exchange Market Maker and Interpretive Guidance Relating to Riskless Principal Transactions

Executive Summary

NASD is issuing this Notice to supplement guidance provided in NASD Notice to Members (NTM) 06-44 relating to the application of the Trading Activity Fee (TAF) to members acting in the capacity of an exchange specialist or market maker.

In NTM 06-44, NASD stated that the exemption for proprietary transactions effected on the NASDAQ Exchange in the capacity of a market maker was limited to those transactions effected through a registered market maker’s attributable quote. In response to members’ concerns regarding the complexity of distinguishing between transactions resulting from attributable versus unattributable quotes, NASD is expanding the exemption for proprietary transactions effected on an exchange in the capacity of a market maker to include transactions effected through both attributable and unattributable orders/quotes.

This expansion of the market maker proprietary transaction exemption will be retroactively effective to August 1, 2006. Members that have already calculated and reported their TAF obligations under the previous guidance that do not wish to re-calculate and amend previously submitted TAF Self-Reporting Forms may begin applying the expanded exemption beginning December 1, 2006.

NASD is also providing in this Notice additional guidance regarding the application of the TAF with respect to riskless principal transactions.

Questions concerning this Notice should be directed to the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071; or NASD Finance at (240) 386-5397.