Interpretive Letter to Mustafa Fazel, National Financial Services, LLC
July 11, 2003
National Financial Services, LLC
53 State Street, G10G
Boston, MA 02109
Dear Mr. Fazel:
I am responding to your e-mail inquiry dated May 13, 2002, and our subsequent conversations in June 2002, prior to the initiation of the Trade Reporting and Compliance Engine (“TRACE”) on July 1, 2002. You ask for guidance regarding the manner in which National Financial Services, LLC (“NFS”), a registered broker-dealer and an NASD member, or one of its correspondents, may report to TRACE a trade in a TRACE-eligible security in which the member acts in a principal capacity.
(Hereinafter, NFS and its correspondents will be referred to as “NFS.”) In particular, you ask whether NFS may report a price that generally would include any mark-up or mark-down charged, and, for the same transaction, also report a commission. The amounts that would be reported as commission represent certain fee income, which affects the yield, calculated and disclosed for purposes of reporting to TRACE and complying with Rule 10b-10 under the Securities Exchange Act of 1934 (“Exchange Act”).1 You also ask if NFS or one of its correspondents will be subject to a special review or disciplinary action if a member reports a transaction indicating that the member executed the transaction in a principal capacity and also charged a commission.
NASD Rule 6230(c) requires that a member must report to TRACE, among other information, the price, yield, and, for an agency transaction, the commission for each transaction in a TRACE-eligible security. You state that NFS clears transactions for almost 200 correspondents. NFS calculates yield using the TIPS calculator, which you state is software that is the industry standard and is widely used in the securities industry. NFS’s system is programmed to use the yield calculated for two purposes: (1) to report to TRACE and (2) to disclose yield to a customer in a customer confirmation required under Rule 10b-10. You note that the TRACE system verifies the reported yield by performing a yield calculation internally. If the yield reported by NFS (or any other member) in a trade report and the yield calculated internally in the TRACE system do not “match,” the TRACE system will reject the report.
You state that NFS has correspondents that act as principals, and that they have the ability to add some fees (postage, others) to a transaction. You state that NFS’s methodology and its system for disclosing yield to a customer in a Rule 10b-10 confirmation is to include such fees in the calculation of yield, but only if the aggregate amount of the fees exceeds $14.99. For reporting under NASD Rule 6230, NFS has determined to include such fees, but is asking for guidance as to how to include such fees in the reported information. NFS suggests the following. NFS would report the price in the field, “price.” NFS would calculate and report yield, which would include miscellaneous fees (if in excess of $14.99). However, because this yield may fail to “match” the yield that the TRACE system calculates internally, NFS would report the miscellaneous fees (that it included in the calculation of yield), in the “commission” field. In this way, the fees that were part of NFS’s yield calculation would be disclosed to NASD and would allow NASD to determine the total values from which yield had been calculated, if such yield did not match the yield calculated internally in the TRACE system. NFS proposes to report the fees in the “commission” data field, because NFS represents that there is no other field in which to report the fees.
In response to your inquiry, for purposes of reporting to TRACE only, NFS may enter only bona fidecommissions in the “commission” field in the TRACE system, and may charge a commission only in those transactions in which NFS is entitled to assess that type of charge. Thus, NFS should report bona fide commissions in the “commission” field, but should not include miscellaneous fees and charges in that field. Nothing in this letter is intended to address requirements that may arise under the federal securities laws and rules, any release, interpretive or no-action letter issued by the Securities and Exchange Commission (“SEC”) or its staff with respect thereto, or any other rule of NASD.
You also asked if NFS would be subject to review or disciplinary action if NFS reports transactions wherein a member executed a trade in a principal capacity and also received a commission. It is not appropriate for us to determine in advance if NFS will be subject to additional regulatory scrutiny if NFS reports trades executed in a principal capacity that include commissions. In the context of equity securities, NASD previously referred the issue of whether a member acting in a principal capacity may also charge a commission to the SEC. See Special Notice to Members 01-85 (December 2001), Q & A No. 6.
I hope that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by NASD’s Board of Governors. This letter responds only to the issue, when reporting to TRACE, of the appropriate use of the field labeled “commission” in the TRACE system. NASD staff is not addressing any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved, or any other obligation that a member may have under the federal securities laws, based on the facts as you have described them.
Very truly yours,
Sharon K. Zackula
|cc:||Frederick F. McDonald, Jr., District Director, District 11|
1 17 C.F.R. 240.10b-10, Confirmation of Transactions. Rule 10b-10 under the Exchange Act requires a broker-dealer to disclose specified terms of a transaction in writing to a customer at or before completion of the transaction in a confirmation to the customer. For debt securities transaction, yield must be disclosed in the customer’s confirmation.