NASD’s Order Audit Trail System Reporting Requirements

Earlier this week, NASD issued Notice to Members (NTM) 06-70 to inform NASD member firms that: (1) the SEC has approved amendments to NASD’s Order Audit Trail System (OATS) Rules that expand the OATS reporting requirements to over-the-counter (OTC) equity securities; and (2) a new version of the OATS Reporting Technical Specifications (Technical Specifications) has been published to reflect these amendments and other technical enhancements required to support OTC equity security reporting to OATS. The effective date of the amendments to the OATS Rules, Technical Specifications, and OATS Production Environment is June 11, 2007. However, the enhanced OATS reporting systems will be accessible to NASD member firms in the OATS Testing Environment on April 30, 2007.

Amendments to the OATS Rules

NASD’s OATS Rules require NASD member firms to electronically record and report to NASD on a daily basis order information relating to equities that are listed and traded on the NASDAQ Stock Market. The amended OATS Rules expand these reporting requirements to OTC equity securities. Specifically, effective June 11, 2007, NASD member firms must record and report order information relating to OTC equity securities, which are defined as equity securities that: (1) are not listed on a national securities exchange; or (2) are listed on one or more regional stock exchanges and do not qualify for dissemination of transaction reports via the facilities of the Consolidated Tape. NTM 06-70 clarifies that this definition includes equity securities quoted on the OTC Bulletin Board Service or on the Pink Sheets Electronic Quotation Service but excludes direct participation programs.

Revision to OATS Rules Regarding Orders with Unavailable Information

According to NTM 06-70, amended Rule 6955 provides that a member firm is not required to transmit an OATS report to NASD until all of the information required to be reported is available. For example, where an NASD member firm receives an order for an OTC equity security that does not have a symbol assigned to it, the NASD member firm is not required to report that order to OATS until the unavailable information is provided (i.e., until after a symbol has been assigned). However, NASD stated that the member firm must still record the order event immediately following its occurrence as required by the OATS Rules. NTM 06-70 also clarifies that order event reports submitted to OATS on an OATS processing date later than the order event date because of unavailable information, such as a security symbol, will not be marked late by OATS.

Changes to the Technical Specifications

NASD also announced the publication of a new version of the Technical Specifications. The primary revision to the Technical Specifications is the expansion of the list of securities that will be reportable to OATS as of June 11, 2007 to include OTC equity securities. Additional changes to the Technical Specifications that will be effective as of June 11, 2007 include the following:

• Addition of new Destination Codes to indicate that an order was routed to a specific U.S. exchange (note the new Destination Code for a NASDAQ route will be “XQ”), a non-U.S. exchange or to a nonmember affiliate of an NASD member firm.
• Addition of a new Member Type Code to indicate that an order was received from a nonmember affiliate of an NASD member firm.
• Addition of new Desk Handling Codes and Special Handling Codes (note the code for Intermarket Sweep Orders—“ ISO”—will become available on implementation of Reg NMS).
• Addition of a new Reporting Exception Code to identify transactions reported to NASD on Form T.

• Addition of new Desk Type Codes.

   

View NTM 06-70

Washington, D.C.
Mark Fitterman
202.739.5019
mfitterman@morganlewis.com

Beth Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com