SEC Division of Trading and Markets no-action letter: Securities Industry Association

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April 12, 2001

Stuart J. Kaswell Senior Vice President and General Counsel Securities Industry Association 1401 Eye Street, N.W. Washington, D.C. 20005-2225 Re: Request for Temporary Exemption Under Rule 11Ac1-5 Dear Mr. Kaswell: In your letter dated April 11, 2001 on behalf of members of the Securities Industry Association ("SIA"), you requested that the Commission issue a temporary exemption until July 31, 2001 from the reporting requirements of Rule 11Ac1-5 ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act"). The exemption is requested for any broker-dealer with a reporting obligation as a market center under the Rule that did not fall within a previously-granted temporary exemption for smaller Nasdaq market centers. This letter responds to your request. I. Background

Adopted in November 2000, 1 the Rule generally requires a "market center" (as defined in the Rule) that trades national market system securities to make available to the public monthly electronic reports that include uniform statistical measures of execution quality. The Adopting Release established a three-stage phase-in of compliance with the Rule. The first phase-in date was April 2, 2001, on which the Rule was to apply to the 1000 NYSE securities, 1000 Nasdaq securities, and 200 Amex securities with the highest average daily share volume for the quarter ending December 31, 2000. This initial compliance date for the Rule was moved back by one month until May 1, 2001. 2 Accordingly, the first monthly reports (for May 2001) under the Rule must be made available to the public by no later than the end of June 2001. The second phase-in date is July 2, 2001, on which the Rule will apply to the next 1000 NYSE securities, the next 1000 Nasdaq securities, and the next 200 Amex securities with the highest average daily trading volume for the quarter ending March 31, 2001. The third and final phase-in date is October 1, 2001, on which the Rule will apply to all national market system securities. The Adopting Release also stated that market centers, if they believed they would be unable to meet the compliance dates for good cause, could request a temporary exemption from the Commission pursuant to paragraph (c) of the Rule. On March 12, the Commission granted a temporary exemption, until July 31, 2001, from the reporting requirements of the Rule for smaller Nasdaq market centers. 3 Nasdaq is developing a voluntary reporting service that will be available to any broker-dealer with a reporting obligation as a market center under the Rule. The service will not be available, however, until August 2001 because Nasdaq does not currently have systems in place that would collect all of the data elements necessary to prepare reports that meet the Rule's requirements on behalf of other market centers. 4 The temporary exemption was intended primarily to ease the initial burden of compliance for smaller Nasdaq market centers, recognizing that Nasdaq, which already collects a significant amount of data necessary to comply with the Rule through its existing OATS and ACT automated facilities, may be a more cost-effective means for smaller Nasdaq market centers to comply with the Rule. II. Request for Exemption

Your letter notes that the benefits of the Rule include: (1) facilitating an investor's ability to evaluate the quality of executions provided by different market centers and to have meaningful input into how their orders are executed; (2) helping broker-dealers fulfill their duty of best execution; and (3) stimulating competition among market centers to improve the quality of execution as a means to attract order flow. You believe that the intended benefits of the Rule are dependent on an analysis of customer orders across all market centers, and that the absence of all market centers during the initial compliance phase of the Rule would prevent comparisons of execution data and inhibit competition. Your letter represents that larger Nasdaq market centers have been working diligently to comply with the Rule by the May 1 initial compliance date. They are reprogramming their own reporting systems or arranging for outside reporting services, either on a permanent basis or an interim basis if they plan later to use Nasdaq's reporting service. Although many larger market centers are optimistic about being ready to comply by May 1, you state that others are not so confident that they (or the vendors they have chosen to report for them) will be ready. In addition, you note that the securities industry has been in the process of converting to decimals for Nasdaq securities and that five major mergers recently have occurred between securities firms. 5 As a result, you state that there exists a substantial risk of non-compliance with the Rule on the May 1 initial compliance date, despite the firms' best efforts to comply. You believe that a three-month temporary exemption would give larger Nasdaq market centers and their vendors a "quality assurance" period in which to test their data and evaluate their systems to ensure the production of complete and valid statistics. Accordingly, you request a temporary exemption from the reporting requirements of the Rule until July 31, 2001 for all market centers that do not fall within the exemption previously granted smaller Nasdaq market centers. You believe that, if granted, the requested exemption would ensure that all market centers are treated in a non-discriminatory manner, that no market center will incur unnecessary costs or burdens in complying with the Rule, and that the intent of the Rule to provide investors with fair and meaningful statistics across the entire industry will be upheld. III. Exemption

On the basis of your representations and the facts presented, the Commission, by the Division pursuant to delegated authority, 6 is using its exemptive authority under paragraph (c) of the Rule to exempt temporarily, until July 31, 2001, from the reporting requirement of paragraph (b)(1) of the Rule all orders in securities that are qualified for inclusion in the National Market tier of Nasdaq. 7 Accordingly, market centers will not be required to begin collecting the necessary data on covered orders in Nasdaq securities until August 1, 2001. The first monthly reports (for August) that must include Nasdaq securities must be made available to the public by the end of September 2001. The Commission is issuing this temporary exemption for Nasdaq securities primarily to help assure the integrity and accuracy of information made available to the public during the initial months of reporting under the Rule. It is essential that all significant market centers trading Nasdaq securities begin reporting on their order executions at the same time and that the information disseminated to the public be reliable and not materially misleading. With the temporary exemption of orders in Nasdaq securities until July 31, 2001, all market centers should be prepared to report accurately on Nasdaq securities at that time. The Commission's Office of Compliance Inspections and Examinations soon will commence monitoring and inspection procedures to assess the readiness of market centers to meet their responsibilities under the Rule. In this regard, market centers should recognize that they are primarily responsible for complying with the Rule's requirements. To meet these requirements, for example, the raw data on all covered orders (as defined in the Rule) necessary to calculate the Rule's statistics must be collected. If a market center uses several different services for its trading and back office operations, the raw order data necessary to comply with the Rule may have to be collected from a number of different systems and vendors. Failure by a market center to take reasonable steps to assure that the necessary data is collected (and, if the market center is using a vendor to prepare its reports, properly transmitted to the vendor), could cause the market center's monthly reports to be materially misleading and in violation of the Rule. IV. Conclusion

The exemption granted in this letter is subject to modification or revocation at any time if the Commission determines that such action is necessary or appropriate in the public interest or otherwise in furtherance of the purposes of the Exchange Act. If you have questions, please do not hesitate to contact me.

Sincerely,

Annette L. Nazareth

Director

Securities Exchange Act Release No. 43590 (November 17, 2001), 65 FR 75414 ("Adopting Release").

Securities Exchange Act Release No. 44060 (March 9, 2001), 66 FR 15028.

Letter from Annette L. Nazareth, Director, Division of Market Regulation, SEC, to Richard G. Ketchum, President, Nasdaq, dated March 12, 2001.

A majority of the necessary data elements currently are captured by Nasdaq's Order Audit Trail System ("OATS") and the Automated Confirmation Transaction Reporting Service ("ACT"). Information for certain orders, however, is not captured through either system and Nasdaq therefore is developing a distinct system that will capture the missing elements.

Your letter states that, although the merged firms have been working diligently to combine their data files, the systems programming (along with programming for decimals and Rule reporting) involves very complex changes that likely will result in unforeseen technical problems for which a period of testing and evaluation would be beneficial.

17 CFR 200.30-3(a)(69).

This temporary exemption applies only to orders in Nasdaq National Market securities. It does not apply to orders in other national market system securities ( i.e. , those listed on a national securities exchange). Consequently, any market center, whether it trades on an exchange or in the over-the-counter market, that receives orders for execution in these other national market system securities must meet the May 1 initial compliance date for the Rule.

http://www.sec.gov/divisions/marketreg/guidance/sianasdaqexp.htm

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Modified: 02/10/2005