MARKET INTEGRITY RISKS ADDRESSED IN UMIR

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1 BACKGROUND CHART FOR THE STRATEGIC REVIEW OF MARKET INTEGRITY RISKS ADDRESSED IN The following is a list of market integrity risks addressed by requirements under. The list was constructed to be specifically applicable to the trading of equity securities in a competitive, multiple-marketplace environment in which dealers and other persons may have access to more than one marketplace. The list of market integrity risks also contemplated that with respect to Canadian equity trading there would not be a market integrator or a formal data consolidator. Reference is also made to comparable provisions under the CSA s and the requirements of other jurisdictions, principally the United States. Examples Policy Rationale CSA Just and Equitable Principles of Trade Not transacting business openly and fairly when dealing with securities that may be traded on a marketplace 2.1 Organizing affairs to avoid the application of rules Pattern of trading based on knowledge of expressions of interest (rather than orders which is precluded by the frontrunning rule) Splitting orders to take advantage of market making facilities on marketplaces A general anti-avoidance rule to catch conduct which is considered unacceptable but which may not violate a specific rule or policy Conduct must not be inconsistent with just and equitable principles of trade. See, for example, SEC duty of fair dealing (implicit in antifraud provisions 1934 Exchange Act ss.9(a), 10(b), 15(c)(1) & (2)), NYSE 401 (members shall adhere to principles of good business practice), NYSE 476(a)(6) (Hearing Panel may discipline unjust and inequitable conduct), and NASD 2110 (members should observe just and equitable principles of trade). Manipulative or Deceptive Method of Engaging in, facilitating or participating in manipulative or deceptive trading activities. 2.2 False appearance of trading activity including: o fictitious trade; o no change in beneficial or economic ownership; o cornering; o artificial long position to facilitate short sales; o entering orders on both sides of the market at substantially the same time and price; and o entering orders that are not intended to be executed Prohibiting manipulative or deceptive trading is the cornerstone of a fair and orderly market For the price discovery mechanism to work, information conveyed to market participants must be based on real activity 3.1 Prohibition of misstatements, misleading omissions, fraudulent/ manipulative acts/ practices in connection with purchase/sale of securities. See, for example, SEC antifraud provisions (1934 Exchange Act ss.9(a): prohibition of manipulation on national exchange, 10(b): catch-all prohibition of any manipulative device/contrivance, 15(c)(1) & (2) prohibition of manipulative, deceptive or fraudulent device and fictitious quotes on OTC markets, Regulation M: prohibition on any device or contrivance to defraud in connection with an offering, and corresponding SEC s 10b-1 to 10b-18, 15c1-1 to 15c1-9, 15c2-1 to 15c2-11), NYSE 435 (prohibition on creating artificial

2 P P P TP P under Examples Policy Rationale CSA Artificial pricing including: o entering a series of orders at progressively higher or lower prices; and o entering orders to establish or maintain the sale price, ask price or bid price appearance of activity to result in artificial price, rumours, manipulative operations), NASD 2120 (prohibition on effecting transactions in or inducing sale or purchase of securities by means of manipulative, deceptive or fraudulent device or contrivance), NASD IM-3310 (prohibition on manipulative and deceptive quotations) and NASD 6440 (improper trading practices including fraud, manipulation, painting the tape, marking the close, and trading ahead of customer orders). Short Selling Sale of a security which the seller does not own at a price below the last sale price 3.1 Inappropriate pricing Precludes undue price pressure as a result of selling by persons who do not own the security Supports the price discovery mechanism Note i Sales of security that seller doesn t own cannot be executed in a declining market. Manipulation is specifically prohibited. Seller must locate stock available for borrowing. See, for example, SEC ii stp the 1934 Exchange Act 3b-3 (def n as sale of a security which the seller does not own), 10a-1 (the uptick rule for exchange listed securities) and 10a-2 (the availability/delivery rule for exchange listed securities), Regulation M 105 (prohibits manipulative shorting in anticipation of an offering) NYSE 440B (uptick) and 440C (failure to deliver), NASD 3350 & IM (the best bid rule: no short sale at or below current best bid when current best bid is below preceding best bid) and NASD 3370 (affirmative determination of ability to borrow securities). Frontrunning in equities or derivatives with specific knowledge of a client order not yet entered on a marketplace, which could reasonably be expected to affect market price of security 4.1 Prior to client s order entry: Principal or non-client orders are entered An order for the security or related security is solicited Information relating to client s order is shared with other person Akin to insider trading in that there is misuse of undisclosed information for personal advantage Precludes a dealer from taking advantage of client information that has not been generally disclosed by means of the entry of an order on a marketplace (where that order is reflected in a consolidated market display) Note Prohibited for trader to take a position in an equity in advance of customer order with the expectation that the order will move the equity s price in a predictable fashion. See, for example, NYSE 92 (members shall not cause proprietary orders if person responsible has knowledge of unexecuted customer order at same price), NASD 6440(f) (members shall not buy security for own account while having an unexecuted market order for a customer) and NASD Policy IM : (inconsistent with just and equitable principles of trade to execute an option order when in possession of material non-public 2

3 Examples Policy Rationale CSA information about imminent block transaction in underlying security or to execute an order in the underlying security when information is about pending block transaction in the related option). Best Execution Obligation Not executing a client order in accordance with traditional fiduciary obligations of an agent to their principal 5.1 Best Execution - Not executing client s order advantageously and expeditiously as practicable under prevailing market conditions Investor confidence in the market requires dealers to act in the best interests of their clients Duty to seek to obtain the most favourable terms available under the circumstances for customer orders. Public disclosure of order execution and routing practices. See, for example, SEC duty of best execution (implicit in antifraud provisions 1934 Exchange Act), SEC 11Ac1-5 (requirement for market centres trading national market system securities to make disclosure of information - e.g. how market orders of various sizes are executed relative to the public quotes - concerning quality of executions on a stock-by-stock basis), SEC 11Ac1-6 (requirement for brokers that route orders on behalf of customers to disclose identity of the market centres to which they route a significant percentage of their orders), SEC Releases # A and # (fiduciary responsibility of broker-dealers to seek most favourable terms reasonably available in order to achieve best execution of customer orders), NYSE Information Memo 97-8 (broker-dealers must periodically assess the quality of competing markets to assure that order flow is directed to markets providing the most beneficial terms for customer orders and must regularly and rigorously examine execution quality likely to be obtained from the different markets or market makers trading a security), and NASD 2320 (reasonable diligence required to ascertain best market and get best price possible under market conditions). 5.2 Best Price - Not taking reasonable efforts to execute client s order at the best bid or ask price, as applicable Investor confidence in the market requires dealers to make reasonable efforts to obtain the best available price for their clients Supports the price discovery 4.2 See above. 3

4 P P Examples Policy Rationale CSA mechanism (such that the last sale accurately represents the market value) 5.3 Client Priority non-client or principal orders are given priority over client orders and client market orders in the same security and on the same side of market Investor confidence in the market requires dealers to act in the best interests of their clients Dealers should not be seen to take advantage of trading opportunities ahead of the orders of their clients No proprietary order with knowledge of unexecuted customer order at same price See, for example, NYSE 92 (Limitation on members trading because of customer orders: no pro order if have knowledge of unexecuted customer order at same price) NYSE 97 (limitation on members trading because of block positioning: prohibits a member firm that holds any part of a long position in its trading account, which resulted from a block transaction with a customer, from effecting within twenty minutes of the close of trading on the Exchange, a purchase on a plus tick in that security at a price higher than the lowest price at which any block was acquired in a previous transaction on that day, if the person responsible for the entry of such order to purchase the security had knowledge of the block position), NASD 6440(f) (members shall not buy security for own account while having an unexecuted market order for a customer) and NASD Policy IM (market makers must handle customer limit orders with due care such that market makers do not trade ahead, ie. at prices equal or superior to that of the limit order without executing limit order). Order Entry and Exposure Entry of Orders to a place contravenes special rules or directions with respect to fractional shares, clearing and distributions 6.1 Orders are entered with price that includes fraction other than ½ cent increments Orders contravene special Exchange/QTRS rules or directions with respect to clearing and distributions Provides for a level playing field for the comparison of trading opportunities where marketplaces trade the same securities Facilitates the construction of a consolidated market display contemplated by the place Operation Instrument Note Decimal price variations. See, for example, SEC Decimal Pricing Order, NYSE 62 (minimum price variation shall be one cent) and NASD 4613(a)(B) (minimum quotation increment for Nasdaq securities authorized for decimal pricing is $0.01). Order does not contain requisite designations 6.2 Incorrect use or lack of proper marketplace identifiers Required to accommodate trading in the same security on multiple Requirement to mark orders. See, for example, SEC 1934 Exchange Act order marking 4

5 Examples Policy Rationale CSA and identifiers Incorrect use or lack of acceptable marketplace designations Lack of required information for Special Terms Order Execution orders not modified to include proper designation Lack of required marketplace disclosure marketplaces Without common designations and identifiers orders entered on one marketplace may not be capable of executing correctly on another marketplace (where marketplaces maintain electronic connections to each other) Facilitates the construction of a consolidated market display contemplated by the place Operation Instrument requirements (new 201(c) requirement to mark exchange-listed and over-the-counter securities as long, short or short exempt ), NYSE s 440B (short sale markers), 123(f) & 132B (requirements and procedures with respect to orders in any security listed on NYSE or originated by a member - mandates sixteen data elements to be recorded for an order) & NASD 3110(b) (marking of customer order tickets) NASD 6130 (order identifier information in trade report) and NASD 6954 (mandates data elements to be recorded for order origination, receipt and transmittal.) See also books and records and audit trail requirements. Exposure of Client Orders Small client orders are not immediately entered on a marketplace 6.3 Delays in entry of small orders or order are withheld for reasons other than market conditions or confirmation of terms Solicitation of requests to withhold orders Non-compliance with obligation to provide best price for client Client s request to withhold order not in writing, specific to the transaction and/or on record for requisite period Supports order transparency - a major objective of the place Operation Instrument (as orders entered on a marketplace will be disclosed in a consolidated market display) Supports the price discovery mechanism by ensuring orders are exposed to the market No directly comparable rule. Trades to be on a place - Principal or agency trades are made by means other than by entry on a marketplace 6.4 Principal or agency orders are not executed on a marketplace and are not otherwise exempt Agreements to trade outside of trading hours of marketplaces are not properly executed on marketplace after opening of marketplace Using related entities, including foreign affiliates, to trade off of a marketplace Using a non-canadian account to trade off of a marketplace, either as principal or agent, when client is Supports trade transparency - a major objective of the place Operation Instrument (as trades executed on or reported to a marketplace will be disclosed in a consolidated market display) Supports the price discovery mechanism by ensuring trades are executed on or reported to a marketplace Trades must be reported. See NASD 6000 series, for example, 6130 requiring participants to transmit reports to ACT (Automated Confirmation Transaction Service) for transactions in Nasdaq securities. 5

6 Examples Policy Rationale CSA resident of Canada Foreign trade time requirement reporting not followed Inaccurate/incomplete foreign trade reports in a place Supervision Obligations 7.1 Inadequate or no written policies and procedures to ensure compliance with rules and policies Inadequate review and approval of order prior to entry on marketplace Head of trading not designated or alternate not designated if head of trading not available Board of Directors lack involvement and understanding of trading and compliance requirements and responsibilities Lack of overall commitment by the firm to supervision and compliance (management) Lack of supervisory controls and systems Employees and/or supervisors failing to follow policies, procedures and supervisory obligations Inadequate compliance monitoring system Inadequate reporting of monitoring by compliance department to management and, where appropriate, to board Compliance department not adequately funded and staffed Lack of training and continuing education programs Inadequate or no on-going review of The primary obligation for ensuring compliance with and securities legislation is imposed on dealers that are trading on behalf of themselves and their clients Clients generally can not be expected to know or to adhere to the various trading rules Broker-dealers are required to establish, maintain, and enforce a system to supervise properly the activities of its employees. The firm's systems and implementation of procedures must reasonably ensure compliance with all securities laws. See, for example, SEC 1934 Exchange Act s. 15(b)(4)(E) (provides a defense to a failure to supervise charge if a firm adopts procedures reasonably designed to prevent and detect violations), NYSE 342 (supervision and control procedures required to ensure compliance with securities laws and regulations), NYSE 405 (members required to diligently supervise all accounts), and NASD 3010 (establishment and maintenance of supervisory system, written procedures and internal inspections reasonably designed to achieve compliance with securities laws, regulations and iii NASD s)tp. NASD 3013 requires each member to designate a Chief Compliance Officer who, together with the Chief Executive Officer, must certify on an annual basis that the member has in place processes to establish, maintain, review, modify and test policies and procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws and regulations. 6

7 Examples Policy Rationale CSA supervision system to ensure effectiveness and efficiency Proficiency 7.2 without appropriate registration, proficiency, training and/or knowledge Inadequate or lack of training programs Liability for Bids, Offers and Trades Contract Record and Official Transaction Record 7.3 Participants/ATS deny responsibility for bids or offers entered into on its terminals/system Access Persons denies responsibility for bids or offers Participant s electronic order information is not stored properly, not retrievable and/or inaccurate 7.4 Discrepancy as to electronic record of marketplace and parties to contract or record of clearing agency place fails to provide vendor with trade contract information, including amendments, accurately and in timely manner Information vendor does not amend/inappropriately amend transaction record Mechanism for ensuring that dealers and their employees are sufficiently trained to meet their supervision and gatekeeper obligations Investor confidence in the market can only be maintained if there is a uniform set of rules regarding liability for bids, offers and trades that applies in all marketplaces Settlement problems could emerge if each marketplace maintained its own rules (e.g. a conflict of rules where an order is entered on one marketplace and executes on another) Investor confidence in the market can only be maintained if there is a uniform set of rules regarding the mechanism to determine best ask, best bid and last sale price Disputes could emerge if each marketplace maintained its own rules (e.g. a conflict of rules where an order is entered on one marketplace and executes on Qualification examinations and mandated continuing education programs must be taken to attain and maintain registrations. See, for example, SEC 1934 Exchange Act s. 15(b)(7) (broker/dealer meet such standards of training, experience, competence, and such other qualifications as the Commission finds necessary or appropriate in the public interest or for the protection of investors), SEC 15b7-1 (registration in accordance with the standards of training, experience, competence, and other qualification standards applicable by exchange, etc.), NYSE s 345, 345A and NASD 1000 series (qualification examinations and continuing education requirements). Participants responsible for trades. See, for example, NASD 4712 (If Nasdaq National Marker execution system (NNMS)participant is shown by NNMS system as constituting a side of a system trade, participant must honour such trade) Participants responsible for trades. See, for example, NASD 4712 (If Nasdaq National Marker Execution System (NNMS) participant is shown by NNMS system as constituting a side of a system trade, participant must honour such trade). 7

8 Inappropriately Recorded Prices Examples Policy Rationale CSA 7.5 Participants, trading as principal or agent, execute a trade at a price recorded on marketplace that is higher than the net cost/net proceeds, as applicable, to the client Cancelled Trades 7.6 As a result of cancellations, subsequent trades may need to be unwound with intervention of RS Restrictions on by Participant during Distribution Restrictions on Restricted Person from during a Take Over Bid 7.7 During a distribution, Participant bids/purchases the distributed security for its own account During a distribution, Participant solicits client orders to purchase a distributed security Participants may have inadequate controls in place to identify when it is involved or deemed involved in distribution or deemed continuation of distribution 7.8 During restricted period, restricted person bids or purchases offered security for its own account During restricted period, restricted person solicits client orders to another) Protects the price discovery mechanism by ensuring that the recorded prices represent true prices Protects the price discovery mechanism by setting out a uniform rule on the impact of a cancelled trade on other subsequent trades For the price discovery mechanism to work, information conveyed to market participants must be based on real activity Precludes undue price pressure from dealers and others who have an interest in increasing the trading price during a distribution of securities For the price discovery mechanism to work, information conveyed to market participants must be based on real activity Precludes undue price pressure iv No directly comparable rule.tp See, for example, NASD 5265 (NASD may declare any transaction arising out of the use or operation of the ITS/CAES System, null and void on the grounds that one or more of the terms of the transaction are clearly erroneous; and the Association may reallocate stock between ITS/CAES Makers to correct an erroneous transaction) NASD (in circumstances where nullification or modification of transactions may be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, a Nasdaq officer may declare any such transaction null and void or modify the terms of v any such transaction)tp. Prevention of those participating in an offering from manipulating the price of the offered security. See SEC Regulation M (rules governing activities of persons with an interest in a securities offering), NASD 2250 (if participant has an interest in primary or secondary distribution, must disclose this to customer in writing before completing transaction in same for customer), NASD 2780 (solicitation of purchase on an exchange to facilitate a distribution), NASD 2790 (restrictions on purchase and sale of initial equity public offerings). during take-over bid restricted under certain circumstances. See, for example, SEC 1934 Exchange Act 14e-5 (dealer-manager may not purchase any subject securities except as part of the tender offer in order to prevent fraudulent, deceptive, manipulative acts). 8

9 P P Examples Policy Rationale CSA purchase offered security Restricted persons (as defined) may have inadequate controls in place to identify when they are involved in security exchange take-over bid from dealers and others who have an interest in increasing the trading price during a take-over bid or similar securities transaction Principal Client Principal (C) Violations 8.1 Lack of reasonable steps to ensure best available price for client with small orders that are executed against principal orders or non-client orders Best execution/best price rules not followed Inappropriate commission payment Required/appropriate advance client consent not obtained Trade confirmations not provided to client Trade confirmations lack required transaction disclosures Conflicts of interest inadequately addressed Inadequate systems (unable to record clients refusal to consent to principal trading) Investor confidence in the market requires dealers to act in the best interests of clients Dealers should be seen to be providing clients with better prices than the prevailing market when the dealer is trading with the client so that the client receives the best available price Note No directly comparable rule. Halts, Delays and Suspensions Regulatory Halts, Delays and suspensions of 9.1 Orders entered/executed on a marketplace for a security that has been cease-traded, halted, suspended or delayed Inadvertent cease trades, halts, suspensions or delays of a security (RS) Provides a level playing field by ensuring that trading in a particular security is halted concurrently on all marketplaces that trade that security Precludes certain market participants from taking advantage of undisclosed material information respecting a security 5.1 When a regulatory halt or delay (ie. when significant news is released) is imposed by a security s primary market, the other U.S. markets that also trade the security honour this halt. A nonregulatory trading halt or delay (ie. for significant imbalances between supply and demand) on one exchange does not preclude other markets from trading this security. See, for example, NASD 3340 (prohibits transactions, publications of quotations or publications of interest during trading halts) Compliance Compliance Requirements Failure 10.1 Non-compliance with place rules and applicable securities General compliance requirement which extends the ambit of to Compliance with securities laws and rules. See, for example, NYSE 476(a)(1) & (3) (Hearing Panel 9

10 Examples Policy Rationale CSA to Adhere to Direction regulatory requirements Failure to report or promptly report marketplace failures to regulatory authorities (RS) include compliance with marketplace requirements and applicable securities legislation As a regulation services provider, RS monitors activities of recognized exchanges and recognized quotation and trade reporting systems but does not regulate them may discipline violations of Securities Exchange Act and its rules/regulations or any Exchange rule), and NASD 8310 (sanctions for violations of Securities Exchange Act and its rules/regulations or any NASD rule). Frontline monitoring of marketplaces on behalf of securities regulatory authorities Impeding Investigations 10.2 Non-qualified or inadequate resources to conduct investigations (RS) Inadequate information or records maintained by regulated person Requested information/statement to facilitate investigations not provided to regulators or not provided on timely basis Power to conduct investigations of possible violations of Necessary for the effective administration of Compels cooperation with investigations. See, for example, NYSE 476 & 467 (sanctions on those who do not comply with Exchange request to submit books and records) and NASD 8210: with regard to any investigation, complaint, etc. staff has the right to (i) require members and associates to provide information and to testify and (ii) inspect all books and records, and members must comply Extension of Responsibility 10.3 Participants or Access Persons deny responsibility for conduct of its directors, officers, partners or employees May be indication of inadequate supervision, controls and/or reporting Ensures that directors, officers, partners and employees are answerable for the conduct of a Participant or Access Person undertaken by them or over which they had supervisory responsibility Necessary for the effective administration of vi No directly comparable rule.tp Extension of Restrictions 10.4 Related entity of Participant, including its directors, officers and employees, fail to comply with RS rules and policies. Participant attempting to circumvent RS rules and policies by having related entity conduct activity which Ensures that directors, officers, partners and employees comply with certain rules that apply to their respective Participant or Access Person Necessary for the effective administration of See above. 10

11 Examples Policy Rationale CSA participant is prohibited from doing directly Related entity may have inadequate controls and/or supervision in place to recognize that is subject to RS rules and policies Inappropriate Short Position Reporting Untimely and/or inaccurate Short Position Reports For the price discovery mechanism to work, information conveyed to market participants must be based on real activity Short positions represent future buying pressure combined with an indication of current market sentiment with respect to a particular security Requirement to record and report short positions. See, for example, NYSE 421 (Periodic reports of short positions) and NASD 3360 (Maintain record of short positions in customer & proprietary accounts & report to NASD) Inappropriate Audit Trails Lack of or inadequate audit trails Untimely transmittal of orders to Regulator Necessary for the effective administration of (in order for the Participant or Access Person to demonstrate compliance with applicable rules) Requirement for accurate, time-sequenced record of orders and transactions from the receipt of an order through its execution. See, for example, SEC 17-a, NYSE s 123(f) and 132A, 132B and 132C (Order Tracking Requirements), NASD s 6990 through 6957 (the Order Audit Trail System OATS s") and 3110(h) (Order Audit Trail Recordkeeping: requirement to record and maintain identification of person who receives, executes and originates order). Unsatisfactory Retention and Inspection of Records and Instructions Inadequate record retention Failure to produce or delay in producing records for Regulator Necessary for the effective administration of (in order for the Participant or Access Person to demonstrate compliance with applicable rules) Broker-dealers must retain records and allow regulatory inspection thereof. See, for example, SEC 17a-3 and 17a-4 (Books and Records s: minimum requirements re: the records that broker-dealers must make, and how long and where those records must be kept, so that regulators may conduct effective examinations), and NYSE 440 and NASD 3110 (Books and records maintenance & retention). 11

12 See But However, Examples Policy Rationale CSA Synchronization Clocks of Inability to construct an audit trail Necessary for the effective Inability to demonstrate compliance administration of (with with best execution and order integrated marketplaces, exposure requirements compliance with rules based on last sale or best price can only be demonstrated if clocks of market participants and marketplaces are synchronized) Requirement to synchronize clocks. See, for example, NYSE 132A (each member shall synchronize its business clocks) and NASD 6953 (requires member firms to synchronize all business clocks, including both computer system clocks and mechanical time stamping devices). i ii iii iv v vi The Canadian Securities Administrators originally proposed that National Instrument contain provisions governing a number of activities including: short selling, frontrunning, order exposure and principal trading. In proposing the final version of National Instrument the CSA indicated the following: We believe that restrictions relating to short selling, frontrunning, insider trading of securities of foreign non-reporting issuers, principal trading and order exposure obligations are important and suitable for all markets. However, we are of the view that identical provisions are not necessarily appropriate for each type of market, marketplace or each type of security. Consequently, when a regulation services provider, exchange or quotation and trade reporting system applies for recognition, we will review its proposed rules to determine if these provisions are included and whether the specific provisions are appropriate in the context of that market, marketplace or security. The provisions related to short selling ( 3.1), frontrunning ( 4.1), order exposure ( 6.3) and principal trading ( 8.1) were approved by the securities regulatory authorities. On June 23, 2004, the SEC voted to adopt Regulation SHO. As a result, 10a-2 will be incorporated into new 203 which will create a uniform SEC rule requiring broker-dealers, prior to effecting short sales in all equity securities, to locate securities available for borrowing. The definition of short sale in 3b-3 will be expanded. As well, the SEC has temporarily suspended the 10a-1 tick test for specified liquid securities in connection with a pilot study of the effect of unregulated short selling in these securities. The SEC has proposed replacing the 10a-1 tick test with a new uniform bid test, but has deferred consideration of this until after the completion of the pilot study. NASD has filed with the SEC proposed NASD 3013 and accompanying IM 3013, which, if adopted, would require every NASD member to designate a chief compliance officer (CCO) and also would require such member s chief executive officer (CEO) and CCO to annually certify to having a process in place to establish, maintain, review, modify, and test policies and procedures reasonably designed to achieve compliance with applicable NASD rules, Municipal Securities making Board rules and the federal securities laws. see generally, for example, NASD 6170 requiring all members using ACT to report unit price, excluding commissions, mark-ups or mark-downs accurately and completely. also Nasdaq proposal to SEC for rule change June 10, Currently, Nasdaq members are not required to notify Nasdaq when parties agree to cancel a trade. Cancelled trades may set a new high or low price. When Nasdaq discovers this, it removes the cancelled trade from highs and lows and corrects audit trail. Nasdaq is proposing new rules mandating that cancelled trades be reported so that it can take actions necessary to correct information disseminated and to correct audit trail. regulators have jurisdiction over members and those affiliated with them. See, for example, NASD 8310 (authorizes the NASD to sanction any member or person associated with a member for violations of the NASD s) and NASD By-Laws Article I (dd) (person associated with a member includes registered natural person, directors/officers of members and any person engaged in the securities business who controls/is controlled by a member, whether or not that person is registered with the NASD, and, for the purposes of provision of information in an investigation, anyone who holds a five percent or greater interest in a member firm.) 12