Notice To Members 91-21

Amendments to Schedule H Eliminating the Price and Volume Reporting Thresholds, And Expanding the Definition of Non-Nasdaq Security

Published Date:

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EXECUTIVE SUMMARY

On March 1, 1991, the SEC approved an NASD proposal to amend Schedule H to the NASD By-Laws to eliminate the current reporting thresholds of $10,000 or 50,000 shares so that the reporting requirements of Schedule H will apply to all principal transactions in a non-Nasdaq security. The rule change also requires the reporting pursuant to Schedule H of price and volume information for certain transactions in non-NMS Nasdaq and listed securities by expanding the definition of non-Nasdaq security to include (a) over-the-counter (OTC) transactions in non-NMS Nasdaq securities by firms not registered as Nasdaq market makers in such securities; and (b) regional exchange securities traded in the OTC market and not otherwise reported to an exchange or under other NASD Schedules. The amendments to Schedule H are effective June 1, 1991.

The text of the amendments follows this notice.

BACKGROUND AND DISCUSSION

Schedule H requires reporting of price and volume information for principal transactions in all "non-Nasdaq" securities if certain conditions are met. Subsection l(a) of Schedule H defines "non-Nasdaq security" to mean "any equity security that is neither included in the National Association of Securities Dealers Automated Quotations System nor traded on any national securities exchange."

Since the adoption of Schedule H, it has become apparent that substantial trading is being effected in the over-the-counter (OTC) market in certain Nasdaq and regional exchange-listed securities that are not encompassed in the regulatory reporting requirements for non-Nasdaq over-the-counter securities as defined under Schedule H. These trades in Nasdaq and listed stocks being effected in the OTC market are also not required to be reported pursuant to Schedules D or G to the NASD By-Laws for Nasdaq securities or listed securities, respectively.

As amended, Section 1 of Schedule H expands the definition of "non-Nasdaq security" to apply to all OTC principal transactions in securities listed on a regional exchange that are not reported to this exchange and that are not reported pursuant to Schedule G because the security does not meet primary exchange listing requirements. Schedule G requires only reporting of OTC transactions in securities listed on the New York Stock Exchange (NYSE) or the American Stock Exchange (Amex), or securities listed on regional exchanges that meet the original NYSE or Amex listing requirements.

As amended, Section 1 also expands the definition of "non-Nasdaq security" to apply to OTC trades in non-NMS Nasdaq securities if effected by a member or person who acts as or holds himself out to be a market maker in the "pink sheets" or other quotation medium or in any other manner, and if such person is not registered as a Nasdaq market maker in such securities. Transaction reports on these securities are currently not reported under the daily reporting requirements of Section 5(a) of Schedule D to the NASD By-Laws.

The inclusion of these trades under the reporting requirements of Schedule H will allow the NASD to monitor trading and detect abuses regarding OTC transactions in such securities.

As amended, Section 2 to Schedule H eliminates the thresholds for calculating what is required to be reported. Currently, Schedule H requires members to aggregate daily purchases and sales of Nasdaq securities and to report certain price and volume information to the NASD if the aggregated numbers exceed thresholds of $10,000 or 50,000 shares. This is often a cumbersome process for members to follow for each security in order to determine whether trading in the stock has broken the threshold for the day. Also, the NASD cannot gather complete trading information for regulatory purposes if low levels of trading activity are not being reported. Removal of these thresholds will simplify calculations and reporting procedures for members doing a business in non-Nasdaq stocks and will also provide the NASD with a more complete record of non-Nasdaq trading activity for regulatory purposes.

The amendments to Schedule H are effective June 1, 1991. Questions regarding this notice may be directed to Jess Haberman of the NASD Market Surveillance Department at (301) 590-6483.

TEXT OF RULE CHANGE

The following is the full text of amendments to Section 1 and 2, Schedule H to the NASD's By-Laws.

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

Schedule H

Section 1 — Definitions

For purposes of Schedule H, unless the context requires otherwise:

(a) "Non-Nasdaq security" means any equity security that is neither included in the National Association of Securities Dealers Automated Quotations System ("Nasdaq") nor traded on any national securities exchange. For purposes of Sections 2 and 3 of this Schedule, the term "non-Nasdaq security" shall also mean any Nasdaq security, if transactions in that security are effected by market makers that are not registered Nasdaq market makers pursuant to Schedule D of the NASD By-Laws, and any security listed on an exchange, if transactions are not required to be reported pursuant to Schedule G of the NASD By-Laws.

* * * * *

Section 2 — Price and Volume Reporting

(a) [On any day that principal transactions in the non-Nasdaq security exceed an aggregate daily volume of sales or purchases of either a minimum of 50,000 shares or a minimum of $10,000,] Each member shall report through the Non-Nasdaq Reporting System the following information on all principal transactions in non-Nasdaq securities:
(i) the highest price at which it sold and the lowest price at which it purchased each [any] non-Nasdaq security;
(ii) the total volume of purchases and sales executed by it in each [any] non-Nasdaq security; and
(iii) whether the trades establishing the highest price at which the member sold and the lowest price at which the member purchased the security represented an execution with a customer or with another broker-dealer.
The price to be reported for principal sales and purchases from customers shall be inclusive of mark-up or mark-down.

[The following examples illustrate the minimum reporting levels established by paragraph (a) above.

1. Dealer A executes aggregate purchase of 70,000 shares of AAA stock and executes aggregate sales of 20,000 shares of AAA stock. Because the minimum reporting requirement is exceeded by the purchases, Dealer A is required to report aggregate purchases of 70,000 shares, aggregate sales of 20,000 shares of AAA stock, and the highest price at which it sold and lowest price at which it purchased AAA stock, even though the volume of sales did not reach the minimum requirement.
2. Dealer B executes aggregate purchases of 60,000 shares of BBB stock and does not execute any sales of BBB stock. Dealer B is required to report purchases of 60,000 shares, zero volume of sales, and the lowest price at which it purchased BBB stock.
3. Dealer C executes aggregate purchases of 40,000 shares for a total of $8,000 in CCC stock and executes aggregate sales of 49,000 shares for a total of $9,900 in CCC stock. CCC stock is not subject to reporting by Dealer C, as neither the volume nor price of aggregate purchases or sales of CCC stock exceed the minimum requirements for reporting.
4. Dealer D executes aggregate purchases of 45,000 shares in DDD stock for a total of $11,000 and executes aggregate sales of 35,000 shares in DDD stock for a total of $9,000. Dealer D is required to report aggregate purchases of 45,000 shares and sales of 35,000 shares of DDD stock, as well as the lowest purchase price and highest sale price of DDD stock, because the aggregate purchase price exceeds the minimum requirements.]