Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto by the National Association of Securities Dealers, Inc. To Modify Nasdaq's Clearly Erroneous Rule, 30508-30512 [E5-2674]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 101 (Thursday, May 26, 2005)]
[Notices]
[Pages 30508-30512]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2674]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51722; File No. SR-NASD-2004-009]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, 3, and 4 Thereto by the National 
Association of Securities Dealers, Inc. To Modify Nasdaq's Clearly 
Erroneous Rule

May 20, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 21, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On August 23, 
2004, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ 
On May 5, 2005, Nasdaq submitted Amendment No. 2 to the proposed rule 
change.\4\ On May 11, 2005, Nasdaq submitted Amendment No. 3 to the 
proposed rule change.\5\ On May 16, 2005, Nasdaq submitted Amendment 
No. 4 to the proposed rule change.\6\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated August 20, 2004 (``Amendment No. 1''). Amendment No. 1 
replaced the original rule filing in its entirety.
    \4\ See Form 19b-4, dated May 5, 2005 (``Amendment No. 2''). 
Amendment No. 2 replaced Amendment No. 1 in its entirety.
    \5\ See Partial Amendment, dated May 11, 2005 (``Amendment No. 
3''). Amendment No. 3 revised incorrect cross-references in the rule 
text.
    \6\ See Partial Amendment, dated May 16, 2005 (``Amendment No. 
4''). Amendment No. 4 revised an incorrect paragraph designation in 
the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 11890 to better serve the 
current market environment. Nasdaq proposes to implement the proposed 
rule change immediately upon approval by the Commission. Below is the 
text of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in [brackets].\7\
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    \7\ The proposed rule change, as amended, is marked to show 
changes from the rule as it appears in the electronic NASD Manual 
available at www.nasd.com.
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* * * * *

11890. Clearly Erroneous Transactions

    (a) Authority to Review Transactions Pursuant to Complaint of 
Market Participant.
    (1) Scope of Authority.
    (A) Subject to the limitations described in paragraph (a)(2)(C) 
below, o[O]fficers of Nasdaq designated by its President shall, 
pursuant to the procedures set forth in paragraph (a)(2) below, have 
the authority to review any transaction arising out of the use or 
operation of any execution or communication system owned or operated by 
Nasdaq and approved by the Commission, including transactions entered 
into by a member of a national securities exchange with unlisted 
trading privileges in Nasdaq-listed securities (a ``UTP Exchange'') 
through such a system; provided, however, that the parties to the 
transaction must be readily identifiable by Nasdaq through its systems. 
A Nasdaq officer shall review transactions with a view toward 
maintaining a fair and orderly market and the protection of investors 
and the public interest. Based upon this review, the officer shall 
decline to act upon a disputed transaction if the officer believes that 
the transaction under dispute is not clearly erroneous. If the officer 
determines the transaction in dispute is clearly erroneous, however, he 
or she shall declare that the transaction is null and void or modify 
one or more terms of the transaction. When adjusting the terms of a 
transaction, the Nasdaq officer shall seek to adjust the price and/or 
size of the transaction to achieve an equitable rectification of the 
error that would place the parties to a transaction in the same 
position, or as close as possible to the same position, as they would 
have been in had the error not occurred. For the purposes of this Rule, 
the terms of a transaction are clearly erroneous if the transaction is 
eligible for review under the Rule and if [when] there is an obvious 
error in any term, such as price, number of shares or other unit of 
trading, or identification of the security.
    (2) Procedures for Reviewing Transactions
    (A) Any member, member of a UTP Exchange, or person associated with 
any such member that seeks to have a transaction reviewed pursuant to 
paragraph (a)(1) hereof shall submit a written complaint to Nasdaq 
MarketWatch in accordance with the following time parameters:
    (i) for transactions occurring at or after 9:30 a.m., eastern time, 
but prior to 10 a.m., eastern time, complaints must be received by 
Nasdaq by 10:30 a.m., eastern time; and
    (ii) for transactions occurring prior to 9:30 a.m., eastern time 
and at or after 10 a.m., eastern time, complaints must be received by 
Nasdaq within thirty minutes of execution time.
    (B) Once a complaint has been received in accord with 
[sub]paragraph (a)(2)(A) above[:], [(i)] the complainant shall have up 
to thirty (30) minutes, or such longer period as specified by Nasdaq 
staff, to submit any supporting written information concerning the 
complaint necessary for a determination under paragraph (a)(1)[;]. Such 
supporting information must include the approximate time of 
transaction(s), security symbol, number of shares, price(s), contra 
broker(s) if the transactions are not anonymous, Nasdaq system used to 
execute the

[[Page 30509]]

transactions, and the reason the review is being sought. If Nasdaq 
receives a complaint that does not contain all of the required 
supporting information, Nasdaq shall immediately notify the filer that 
the complaint is deficient.
    (C) Following the expiration of the period for submission of 
supporting material, a Nasdaq officer shall determine whether the 
complaint is eligible for review. A complaint shall not be eligible for 
review under paragraph (a) unless:
    (i) The complainant has provided all of the supporting information 
required under paragraph (a)(2)(B), and
    (ii) The price of transaction to buy (sell) that is the subject of 
the complaint is greater than (less than) the best offer (best bid) by 
an amount that equals or exceeds the minimum threshold set forth below:


Inside price                        Minimum threshold
 
$0-$0.99                            $0.02 +
                                    (0.10 x Inside Price)
$1.00-$4.99                         0.12 +
                                    (0.07 x (Inside Price - $1.00))
$5.00-$14.99                        $0.40 +
                                    (0.06 x (Inside Price - $5.00))
$15 or more                         $1.00
 


    For a transaction to buy (sell) a Nasdaq listed security, the 
inside price shall be the best offer (best bid) in Nasdaq at the time 
that the first share of the order that resulted in the disputed 
transaction was executed, and for a transaction to buy (sell) an 
exchange-listed security, the inside price shall be the national best 
offer (best bid) at the time that the first share of the order that 
resulted in the disputed transaction was executed.
    (D) If a complaint is determined to be eligible for review, [(ii)] 
the counterparty to the trade shall be notified of the complaint via 
telephone by Nasdaq staff and shall have up to thirty (30) minutes, or 
such longer period as specified by Nasdaq staff, to submit any 
supporting written information concerning the complaint necessary for a 
determination under paragraph (a)(1)[; and]. [(iii)] [e]Either party to 
a disputed trade may request the written information provided by the 
other party pursuant to [this] [sub]paragraph (a)(2).
    (E) [(C)] Notwithstanding [sub]paragraphs (a)(2)(B) and (D) above, 
once a party to a disputed trade communicates that it does not intend 
to submit any further information concerning a complaint, the party may 
not thereafter provide additional information unless requested to do so 
by Nasdaq staff. If both parties to a disputed trade indicate that they 
have no further information to provide concerning the complaint before 
their respective thirty-minute information submission period has 
elapsed, then the matter may be immediately presented to a Nasdaq 
officer for a determination pursuant to paragraph (a)(1) above.
    (F) [(D)] Each member, member of a UTP Exchange, or person 
associated with any such member involved in the transaction shall 
provide Nasdaq with any information that it requests in order to 
resolve the matter on a timely basis notwithstanding the time 
parameters set forth in [sub]paragraphs (a)(2)(B) and (D) above.
    (G) [(E)] Once a party has applied to Nasdaq for review and the 
transaction has been determined to be eligible for review, the 
transaction shall be reviewed and a determination rendered, unless (i) 
both parties to the transaction agree to withdraw the application for 
review prior to the time a decision is rendered pursuant to paragraph 
(a)(1), or (ii) the complainant withdraws its application for review 
prior to the notification of counterparties pursuant to paragraph 
(a)(2)(D).
    (b) No change.
    (c) Review by the Market Operations Review Committee (``MORC'')
    (1) Subject to the limitations described in paragraph (c)(2), a [A] 
member, member of a UTP Exchange, or person associated with any such 
member may appeal a determination made under subsection (a) to the 
MORC. A member, member of a UTP Exchange, or person associated with any 
such member may appeal a determination made under subsection (b) to the 
MORC unless the officer making the determination also determines that 
the number of the affected transactions is such that immediate finality 
is necessary to maintain a fair and orderly market and to protect 
investors and the public interest. An appeal must be made in writing, 
and must be received by Nasdaq within thirty (30) minutes after the 
person making the appeal is given notification of the determination 
being appealed, except that if Nasdaq notifies the parties of action 
taken pursuant to paragraph (b) after 4:00 p.m., the appeal must be 
received by Nasdaq by 9:30 a.m. the next trading day. Once a written 
appeal has been received, the counterparty to the trade that is the 
subject of the appeal will be notified of the appeal and both parties 
shall be able to submit any additional supporting written information 
up until the time the appeal is considered by the [Committee] MORC. 
Either party to a disputed trade may request the written information 
provided by the other party during the appeal process. An appeal to the 
[Committee] MORC shall not operate as a stay of the determination being 
appealed, and the scope of the appeal shall be limited to trades to 
which the person making the appeal is a party. Subject to the 
limitations described in paragraph (c)(2), o[O]nce a party has appealed 
a determination to the [Committee] MORC, the determination shall be 
reviewed and a decision rendered, unless (i) both parties to the 
transaction agree to withdraw the appeal prior to the time a decision 
is rendered by the [Committee]MORC, or (ii) the party filing the appeal 
withdraws its appeal prior to the notification of counterparties under 
this paragraph (c)(1). Upon consideration of the record, and after such 
hearings as it may in its discretion order, the [Committee] MORC, 
pursuant to the standards set forth in this section, shall affirm, 
modify, reverse, or remand the determination.
    (2) If a Nasdaq officer determines under paragraph (a)(2)(C) that a 
transaction is not eligible for review, a party appealing such 
determination must allege in its appeal a mistake of material fact upon 
which it believes the officer's determination was based. If the MORC 
concludes that an appeal of such a determination does not allege a 
mistake of material fact, the determination shall become final and 
binding. If the MORC concludes that an appeal of such a determination 
alleges a mistake of material fact, Nasdaq shall notify the 
counterparty to the transaction and the determination shall be reviewed 
by the MORC as provided under paragraph (c)(1). If the MORC then finds 
that the determination was based on a mistake of material fact, the 
MORC shall remand the matter for adjudication under paragraph (a); 
otherwise, the determination shall become final and binding.
    (3) [(2)] The decision of the [Committee] MORC pursuant to an 
appeal, or a determination by a Nasdaq officer that is not appealed, 
shall be final and binding upon all parties and shall constitute final 
Association action on the matter in issue. Any determination by a 
Nasdaq officer pursuant to paragraph (a) or (b) or any decision by the 
[Committee] MORC pursuant to paragraph (c)[(1)] shall be rendered 
without prejudice as to the rights of the parties to the transaction to 
submit their dispute to arbitration.
    (d) Communications
    (1) All materials submitted to Nasdaq or the MORC pursuant to this 
Rule shall be submitted [via facsimile machine and] within the time 
parameters specified herein via such telecommunications procedures as

[[Page 30510]]

Nasdaq may announce from time to time in an NASD Notice to Members or 
Nasdaq Head Trader Alert [; provided, however, that if requested, 
Nasdaq staff may authorize submission of material via electronic mail 
on a case-by-case basis]. Materials shall be deemed received at the 
time indicated by the telecommunications equipment ([i.e.]e.g., 
facsimile machine or computer) receiving the materials. Nasdaq, in its 
sole and absolute discretion, reserves the right to reject or accept 
any material that is not received within the time parameters specified 
herein.
    (2) Nasdaq shall provide affected parties with prompt notice of 
determinations under this Rule via facsimile machine, electronic mail, 
or telephone (including voicemail); provided, however, that if an 
officer nullifies or modifies a large number of transactions pursuant 
to subsection (b), Nasdaq may instead provide notice to parties via 
[the] Nasdaq [Workstation II Service] telecommunications protocols, a 
press release, or any other method reasonably expected to provide rapid 
notice to many market participants.
    IM-11890-1. No change.
    IM-11890-2. Review by Panels of the MORC. For purposes of Rule 
11890 and other NASD rules that permit review of Nasdaq decisions by 
the MORC, a decision of the MORC may be rendered by a panel [of three 
or more members] of the MORC. In the case of a review of a 
determination by a Nasdaq officer under Rule 11890(a)(2)(C) that a 
transaction is not eligible for review (including a review of the 
sufficiency of allegations contained in an appeal regarding such a 
determination), the panel may consist of one or more members of the 
MORC, provided that no more than 50 percent of the members of any panel 
are directly engaged in market making activity or employed by a member 
whose revenues from market making activity exceed ten percent of its 
total revenues. In all other cases, the panel shall consist of three or 
more members of the MORC, provided that no more than 50 percent of the 
members of any panel are directly engaged in market making activity or 
employed by a member firm whose revenues from market making activity 
exceed ten percent of its total revenues.
    IM-11890-3. Application of Rule 11890(a)(2)(C). The following 
example is intended to assist market participants in understanding the 
minimum price deviation thresholds in subparagraph (a)(2)(C) and their 
effect on the eligibility of transactions for review under Rule 11890.
    ABCD, a Nasdaq listed security, has an inside market of (bid) 
$12.00-$12.05 (ask). Market Maker A (MMA) enters a market order to buy 
10,000 shares, although it had intended a market order for 1,000 
shares. The size of the order is such that the order `sweeps' the 
Nasdaq Market Center order file, which reflects 1,000 shares of 
liquidity offered at each of ten prices ranging from $12.05 to $12.95. 
Executions occur, moving through the depth of file, as follows:]

     Trade #1--1000 shares @ $12.05 (9000 remaining)
     Trade #2--1000 shares @ $12.10 (8000 remaining)
     Trade #3--1000 shares @ $12.15 (7000 remaining)
     Trade #4--1000 shares @ $12.25 (6000 remaining)
     Trade #5--1000 shares @ $12.35 (5000 remaining)
     Trade #6--1000 shares @ $12.45 (4000 remaining)
     Trade #7--1000 shares @ $12.55 (3000 remaining)
     Trade #8--1000 shares @ $12.65 (2000 remaining)
     Trade #9--1000 shares @ $12.90 (1000 remaining)
     Trade #10--1000 shares @ $12.95 (complete)

    The inside offer at the time the first share of the order was 
executed is $12.05, so the minimum price deviation threshold is 
determined using the following formula:

$0.40 + (0.06 x (Inside Price - $5.00)) = $0.40 + (0.06 x ($12.05 - 
$5.00)) = $0.82

    Thus, to be eligible for review, a transaction must be at a price 
that is at least $0.82 higher than the original best offer price (i.e., 
$12.05 + $0.82 = $12.87). MMA could petition for review of trades #9 
and #10, priced at $12.90 and $12.95 respectively, but trades #1 
through #8 would not be eligible for review. The sole basis for an 
appeal to the MORC of the determination that trades #1 through #8 are 
not eligible for review would be an assertion of a mistake of material 
fact. For example, an appeal could be based upon an assertion that the 
Nasdaq officer had made an arithmetical error in determining the 
minimum price deviation threshold, or had erred in determining the 
applicable inside price.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In April 1990, the Commission approved an NASD proposal to add 
Section 70 to the Uniform Practice Code (now NASD Rule 11890) to permit 
the NASD to declare clearly erroneous transactions null and void if 
they arise out of the use or operation of any automated quotation, 
execution or communication system owned or operated by the NASD.\8\ 
Previously, the NASD had no authority to cancel a transaction, even if 
one or more terms of the transaction clearly was in error. NASD Rule 
11890 gives Nasdaq the ability to resolve, in an expeditious manner, 
disputes involving obvious errors.
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    \8\ See Securities Exchange Act Release No. 27867 (Apr. 2, 
1990), 55 FR 12978 (Apr. 6, 1990) (SR-NASD-90-6).
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    In 1998, an amendment to NASD Rule 11890 was approved which 
provided additional specificity regarding declarations of clearly 
erroneous transactions. The amendment clarified procedures and provided 
Nasdaq officials with the authority to modify the price or size of an 
erroneous transaction, alter the period in which to submit complaints 
and subsequent appeals, and cancel or modify clearly erroneous 
transactions on their own motion during system disruptions or 
malfunctions.\9\ In January 2003, NASD Rule 11890 was amended, to its 
current state, to further clarify procedures and the scope of Nasdaq 
officials' authority to cancel or modify clearly erroneous transactions 
on their own motion to maintain fair and orderly markets and protect 
investors and the public interest.\10\
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    \9\ See Securities Exchange Act Release No. 39550 (Jan. 14, 
1998), 63 FR 4333 (Jan. 28, 1998) (SR-NASD-96-51).
    \10\ See Securities Exchange Act Release No. 47233 (Jan. 22, 
2003), 68 FR 4525 (Jan. 29, 2003) (SR-NASD-2002-127).
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    In June 2003, Nasdaq MarketWatch assumed responsibility for 
administering Rule 11890.\11\ As a corollary to assuming 
responsibilities, MarketWatch and Nasdaq staff

[[Page 30511]]

undertook a review of the clearly erroneous process and its application 
in an automated order execution environment. Nasdaq staff researched 
NASD Rule 11890 with respect to erroneous trades as well as erroneous 
trade procedures used by other exchanges and ECNs.\12\ As a result of 
the review, Nasdaq is proposing the following changes to NASD Rule 
11890: (1) Clarifying the requirements for complaint documentation; (2) 
establishing minimum price deviation thresholds for seeking a review; 
(3) stipulating that complaints failing to meet documentation 
requirements or minimum price deviation thresholds would be rejected, 
and limiting the grounds for review of such rejections by the MORC; and 
(4) making several other clarifying changes to the rule text.
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    \11\ The rule had previously been administered by Nasdaq's 
Market Operations Department.
    \12\ See PCX Equities, Inc. Rule 7.11 and www.tradearca.com/
exchange/pdfs/ErroneousExecutionPolicy.pdf; instinetgroup.com/legal/
trade--policy--guidelines.shtml. Telephone conversation between John 
M. Yetter, Senior Associate General Counsel, Nasdaq, David Hsu, 
Special Counsel, Division, Commission, on May 11, 2005 (clarifying 
that the correct citation is PCX Equities, Inc. Rule 7.11 and not 
Pacific Exchange Inc. Rule 7.11).
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Clarify Requirements for Complaint Documentation

    The proposed rule change would amend NASD Rule 11890 to require 
that a complaint, to be eligible for review, include the following 
information: Approximate time of transaction(s), security symbol, 
number of shares, price(s), contra broker(s) if transactions are not 
anonymous, the Nasdaq system used to execute the transactions, and the 
reason that the review is being sought. Nasdaq believes that the 
proposed changes provide clarity for market participants as to the 
minimum data necessary to seek review, allowing for meaningful review 
as well as providing a better understanding of the issues in question 
to the contra (non-requesting) participant of the situation. Nasdaq 
also believes that requiring a member to assert a basis for seeking a 
review increases transparency in the process and provides clarity to 
market participants.

Establish Minimum Price Deviation Thresholds

    The proposed rule change establishes a minimum price deviation 
threshold that would provide a ``bright line'' rule standard for 
determining when transactions are considered eligible for review. A 
transaction price that meets these thresholds does not automatically 
trigger a clearly erroneous determination, but, if the transaction 
price does not meet these thresholds, the transaction would not be 
considered for clearly erroneous review. Thus, there would be a 
conclusive presumption that a transaction to buy (sell) is not clearly 
erroneous unless its price is greater than (less than) the best offer 
(best bid) by an amount that equals or exceeds the minimum threshold 
set forth below:

Inside price                        Minimum threshold
$0-$0.99                            $0.02 +
                                    (0.10 x Inside Price)
$1.00-$4.99                         $0.12 +
                                    (0.07 x (Inside Price - $1.00))
$5.00-$14.99                        $0.40 +
                                    (0.06 x (Inside Price - $5.00))
$15 or more                         $1.00
 


    For a transaction to buy (sell) a Nasdaq listed security, the 
inside price shall be the best offer (best bid) in Nasdaq at the time 
that the first share of the order that resulted in the disputed 
transaction was executed, and for a transaction to buy (sell) an 
exchange-listed security, the inside price shall be the national best 
offer (best bid) at the time that the first share of the order that 
resulted in the disputed transaction was executed.\13\ Nasdaq is also 
proposing to adopt IM-11890-3 to assist market participants in 
understanding the minimum price deviation thresholds by providing an 
example of their application.
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    \13\ Trades in exchange-listed securities are reviewed under 
NASD Rule 5265, which incorporates Rule 11890 by reference.
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    Nasdaq believes that the threshold at each price tier is set at a 
level that would protect normal trading activity from challenge and 
thereby allow a focus on trades whose distance away from the inside 
market may be seen to support a claim as to their inadvertence. Nasdaq 
believes that this approach would better balance the goals of rapid and 
efficient execution and price discovery while protecting market 
participants from inadvertent price volatility and market confusion 
that can result from a mis-priced or mis-sized quote/order. As 
authority under NASD Rule 11890 is exercised ``with a view toward 
maintaining a fair and orderly market and the protection of investors 
and the public interest,'' Nasdaq believes that establishing price 
deviation thresholds for review offers guidance to defining ``clearly 
erroneous'' and, as such, provides clarity, transparency, and 
consistency for review. Nasdaq also believes that certainty in pricing 
is crucial to an orderly market.

Reject, as Ineligible, Non-Conforming Clearly Erroneous Petitions

    In conjunction with providing guidelines as to required minimum 
documentation and minimum thresholds, the proposed rule sets out 
clearly defined consequences for failing to meet minimum filing 
requirements. Except as provided below, members failing to meet the 
minimum documentation requirements within the initial 30-minute filing 
time frame or failing to meet the minimum price deviation parameters 
would not be eligible to maintain an action under NASD Rule 11890. The 
reviewing Nasdaq staff would notify the filer immediately of any 
deficiencies in the filing so that the filer can revise and submit, if 
possible, within the 30-minute time frame. In cases where a claim is 
not eligible for review because the transaction does not meet the 
minimum price deviation thresholds or because the complaint does not 
include the supporting documentation required by paragraph (a)(2)(B), 
the party appealing to the MORC must allege a mistake of material fact 
upon which it believes the officer's determination was based. The MORC 
would not substantively \14\ review an appeal of such a determination 
that does not allege a mistake of material fact. Accordingly, if a 
panel of the MORC comprised of one or more non-market-making member 
finds that a mistake has not been alleged in an appeal, Nasdaq is not 
required to notify the counterparty to the trade concerning the appeal 
or to submit the decision for further review by the MORC. If the panel 
of the MORC concludes that the appeal alleges a mistake of material 
fact, the counterparty would be notified and the determination would be 
reviewed by the same panel.\15\ If the MORC then finds that the 
determination was based on a mistake of material fact, the MORC shall 
remand the matter for adjudication under paragraph (a); otherwise, the 
determination shall become final and binding.
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    \14\ Telephone conversation among John M. Yetter, Senior 
Associate General Counsel, Nasdaq, Terri Evans, Special Counsel, 
Division, Commission, and David Hsu, Special Counsel, Division, 
Commission, on May 9, 2005 (clarifying that the MORC would not 
substantively review an appeal of a determination that does not 
allege a mistake of material fact).
    \15\ Id. (clarifying that panels may consist of more than one 
member of the MORC).
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Other Proposed Changes

    In order to clarify the Rule text and expedite procedures under the 
Rule, Nasdaq is proposing the following additional changes:

[[Page 30512]]

     The text of IM-11890-2 would be amended to reflect the 
proposed use of panels of one or more members \16\ of the MORC for 
purposes of reviewing determinations under proposed NASD Rule 
11890(a)(2)(C) that a transaction is not eligible for review.
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    \16\ Id.
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     The rule would be amended to provide that adjudication of 
a complaint or an appeal is not required if the party submitting the 
complaint or appeal withdraws it prior to the notification of 
counterparties.
     The rule would be amended to provide that appeals are 
focused solely on trades to which the party submitting the appeal is a 
party. Thus, for example, if Broker A submits a complaint regarding two 
separate trades with Broker B and Broker C, the trades are broken, and 
Broker B appeals but Broker C does not, the appeal would focus solely 
on the trade between Broker A and Broker B.
     The rule currently provides that facsimile machines are 
the preferred method for submitting materials regarding clearly 
erroneous adjudications. Nasdaq proposes to amend the rule to provide 
that parties should use such telecommunications methods as are 
announced from time to time through an NASD Notice to Members or a 
Nasdaq Head Trader Alert. Pursuant to this change, Nasdaq proposes to 
make electronic mail the preferred method, and may, in the future, 
develop a web-based form for use in submitting complaints and appeals. 
In light of the upcoming retirement of the Nasdaq Workstation II 
Service, Nasdaq is also proposing to replace a reference to that 
service with a more general reference to Nasdaq telecommunications 
protocols.
     Cross references in the rule would be amended to reflect 
preferred NASD style, and references to the ``Committee'' would be 
replaced with references to the ``MORC.''
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\17\ in general, and with 
Section 15A(b)(6) of the Act,\18\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Nasdaq believes that the proposed rule change would provide market 
participants with clearer information about Nasdaq's requirements for 
filing a clearly erroneous petition. In Nasdaq's view, this in turn 
would ensure that Nasdaq staff and the MORC would have more complete 
information when adjudicating a clearly erroneous petition, and would 
also provide Nasdaq staff with clearer bases for rejecting clearly 
erroneous petitions that fail to provide complete information or that 
relate to transactions at prices sufficiently close to the inside 
market that they should not be deemed clearly erroneous.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2004-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-009. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2004-009 and should be submitted on or before June 16, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2674 Filed 5-25-05; 8:45 am]
BILLING CODE 8010-01-P