Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Reflect Nasdaq's Separation From NASD Upon Nasdaq's Anticipated Approval as a National Securities Exchange, 42398-42403 [E5-3912]
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42398
Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
system fails.3 The Exchange believes
that, under the current CBOE
environment, these obligations are now
both unnecessary and unduly
burdensome on DPMs and, accordingly,
should be repealed.
With regard to the non-Hybrid backup
autoquote obligation, because the
Exchange has converted all of its DPM
option classes to the CBOE Hybrid
System, there are no more non-Hybrid
classes and, as such, CBOE Rule
8.85(a)(xi) no longer applies and should
be deleted. Additionally, the Exchange
believes that the recent adoption and
implementation of the electronic DPM
(‘‘e-DPM’’) program 4 on the Exchange
provides a more appropriate and cost
effective safeguard against a DPM’s
inability to generate quotes in option
classes traded on the Exchange in
Hybrid classes and, as such, the Hybrid
backup autoquote obligation under Rule
8.85(a)(xii) is no longer necessary.5 The
deletion of the backup autoquote rules
would not affect a DPM’s separate
obligation to provide continuous market
quotations for each of its allocated
classes and respective series.6
Finally, the Exchange also proposes
removing violations of the non-Hybrid
backup autoquote rule (Rule 8.85(a)(xi))
and the Hybrid backup autoquote rule
(Rule 8.85(a)(xii)) from the Exchange’s
Minor Rule Plan.7
2. Statutory Basis
Because the proposed rule change
will refine and enhance the Exchange’s
rules relating to quoting obligations to
make them more efficient and effective,
the proposed rule change is consistent
with Section 6(b) of the Act,8 in general,
and furthers the objectives of Sections
6(b)(5) and 6(b)(7) in particular,9 in that
it is designed to promote just and
equitable principles of trade, to protect
investors and the public interest, and
enhances the effectiveness and fairness
of the Exchange’s disciplinary
procedures.
3 CBOE Rule 8.85(a)(xii) requires that the Hybrid
backup autoquote system be independent from the
DPM’s proprietary autoquote system.
4 See Exchange Act Release Nos. 49577 (April 19,
2004), 69 FR 22576 (April 26, 2004) (order
approving the process for approving e-DPMs on the
Exchange); 50003 (July 12, 2004), 69 FR 25647 (July
19, 2004) (order approving e-DPM trading rules).
5 Exchange rules now allow CBOE to allocate an
option class that is already allocated to a DPM to
one or more e-DPMs. See supra note 4. See also
CBOE Rules 8.92 and 8.93.
6 See CBOE Rule 8.85(a)(i).
7 See CBOE Rule 17.50(g)(10).
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(5) and 78f(b)(7).
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
This proposed rule change does not
impose 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
No written comments were solicited
or received with respect to the proposed
rule change.
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 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 rulecomments@sec.gov. Please include File
Number SR–CBOE–2005–028 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–CBOE–2005–028. 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
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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
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the CBOE. 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–CBOE–2005–028 and
should be submitted by August 12,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.6
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–3916 Filed 7–21–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52049; File No. SR–NASD–
2005–087]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change To Reflect
Nasdaq’s Separation From NASD Upon
Nasdaq’s Anticipated Approval as a
National Securities Exchange
July 15, 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 July 11,
2005, the National Association of
Securities Dealers, Inc. (‘‘NASD’’) 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 NASD. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
6 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD is proposing to: (1) Amend the
Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries
(‘‘Delegation Plan’’), NASD By-Laws,
NASD Regulation By-Laws, NASD
Dispute Resolution By-Laws, and NASD
rules to reflect the separation of The
Nasdaq Stock Market, Inc. (‘‘Nasdaq’’)
from NASD upon Nasdaq’s anticipated
approval as a national securities
exchange; 3 (2) to make certain changes
to the rules that govern quoting and
trading through the NASD Alternative
Display Facility (‘‘ADF’’); and (3) to
establish rules for the trade reporting of
transactions otherwise than on an
exchange through the new Trade
Reporting Facility.4 The text of the
proposed rule is available on the NASD
Web Site (https://www.nasd.com), on the
Commission’s Web Site at (https://
www.sec.gov), at the NASD Office of
Secretary and at the Commission’s
Public Reference Room. In the proposed
rule text, proposed new language is
underlined; proposed deletions are in
brackets.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASD 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. NASD 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
The purpose of this proposed rule
change is threefold: (1) To amend NASD
rules to reflect the anticipated approval
of Nasdaq as a national securities
3 The Commission has not reached a decision on
Nasdaq’s exchange application. The Commission
understands that Nasdaq will submit an amended
Form 1 application. This amendment to Nasdaq’s
exchange application will be published for public
comment before final action is taken.
4 The facility has been named the ‘‘Trade
Reporting Facility’’ for purposes of this proposed
rule change. The official name of the entity,
however, has not yet been determined.
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exchange 5 and its resultant separation
from NASD; (2) to make certain
clarifying and conforming changes to
the rules governing quoting and trading
through the ADF; and (3) to establish
rules for the trade reporting of
transactions otherwise than on an
exchange through the Trade Reporting
Facility.6
Proposed Changes Relating to the
Separation of Nasdaq
In 2000, NASD began restructuring its
relationship with Nasdaq, which
operates as an independent, for-profit
company. As the result of a two-phase
private placement of Nasdaq shares, a
public offering recently completed in
January 2005 and other dispositions of
NASD shares, NASD’s common stock
ownership interest in Nasdaq has been
reduced to a minority interest. Before
Nasdaq can fully separate from NASD,
it must become registered as a national
securities exchange with the
Commission. Nasdaq has submitted
drafts of proposed additional
amendments to its Form 1 previously
filed with the Commission requesting
exchange registration. NASD continues
to maintain greater than 50% of the
voting control through its ownership of
one outstanding share of Series B
Preferred Stock until exchange
registration is granted. Once Nasdaq
obtains exchange registration, the share
of Series B Preferred Stock would
automatically lose its voting rights and
would be redeemed by Nasdaq for
$1.00.
Thus, upon Nasdaq’s registration as a
national securities exchange, Nasdaq
and NASD would be unaffiliated
corporate entities, and therefore each
will need separate rules applicable to
their respective members. To effectuate
5 Securities Exchange Act Release No. 44396
(June 7, 2001), 66 FR 31952 (June 13, 2001) (File
No. 10–131).
6 On December 7, 2001, NASD filed with the
Commission SR–NASD–2001–90, a proposed rule
change to amend NASD rules to reflect Nasdaq’s
separation from NASD upon its approval as a
national securities exchange and to establish rules
governing trading otherwise than on an exchange,
including transactions effected through the ADF.
On July 24, 2002, the Commission approved SR–
NASD–2002–97, which authorized NASD to operate
the ADF on a pilot basis for nine months, pending
the anticipated approval of SR–NASD–2001–90. See
Securities Exchange Act Release No. 46249 (July 24,
2002), 67 FR 49822 (July 31, 2002) (SR–NASD–
2002–97). NASD subsequently filed for immediate
effectiveness proposed rule changes to extend the
pilot until July 26, 2005. See Exchange Act Release
Nos. 47633 (April 10, 2003), 68 FR 19043 (April 17,
2003) (SR–NASD–2003–67); 49131 (January 27,
2004), 69 FR 5229 (February 3, 2004) (SR–NASD–
2004–12); and 50601 (October 28, 2004), 69 FR
64611 (November 5, 2004) (SR–NASD–2004–160).
NASD intends to withdraw SR–NASD–2001–90,
and this proposed rule change is intended to
replace and update that rule filing.
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42399
that change, NASD must modify
existing NASD rules, effective upon
Nasdaq’s registration as an exchange, to
reflect this separation of Nasdaq from
NASD. These changes include removing
references in the Delegation Plan to
Nasdaq as a subsidiary and delegation of
authority to Nasdaq; revising the NASD
By-Laws, NASD Regulation, Inc. ByLaws and NASD Dispute Resolution,
Inc. By-Laws to remove references to
Nasdaq as a subsidiary of NASD;
deleting Nasdaq-specific rules, such as
listing and qualification requirements;
replacing references to ‘‘Nasdaq’’ with
‘‘NASD’’ or ‘‘exchange,’’ as applicable;
and renaming and renumbering certain
rules.7 Provided below are descriptions
of the more significant proposed rule
changes to reflect Nasdaq’s separation
from NASD.
Deleted NASD Rules
The following rules have been deleted
by NASD in their entirety because they
either relate exclusively to participation
in, and operation of, the Nasdaq Stock
Market or would no longer be applicable
upon the separation of Nasdaq from
NASD: NASD Rules 2852, 2854 and
2870 through 2885 related to Nasdaq
Index Options; NASD Rules 5100
through 5113 and Rule 8212 related to
the Nasdaq International Service; the
NASD Rule 5200 Series related to
Intermarket Trading System/Computer
Assisted Execution System (ITS/
CAES); 8 the NASD Rule 6300 Series
related to the Consolidated Quotations
Service (CQS); 9 the NASD Rule 6400
Series relating to reporting transactions
in exchange-listed securities; 10 the
NASD Rule 6800 Series related to the
Mutual Fund Quotation Service; and
NASD Rule 11890 related to Clearly
Erroneous Transactions.
NASD Rule 2840 Series Related to
Trading in Index Warrants
The proposed rule change would
delete language in the NASD Rule 2840
Series related to index warrants listed
on the Nasdaq Stock Market. The
existing rule series was promulgated
because Nasdaq intended to list such
7 This proposed rule change also includes
corrections of minor grammatical or typographical
errors and other miscellaneous non-substantive
changes.
8 NASD is considering the appropriate quoting
and trading structure and rules that would be
applicable to exchange-listed securities other than
Nasdaq securities. Its current intention is to permit
quoting and trade reporting of these securities
through the ADF and to permit trade reporting
through the Trade Reporting Facility. Accordingly,
proposed changes relating to quoting and trading in
these securities will be addressed in a future
submission with the Commission.
9 Id.
10 Id.
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Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
index warrants. The remainder of NASD
Rule 2840 Series remains unchanged, as
it has continued applicability to NASD
members that are not also members of
an exchange on which they trade index
warrants.
NASD Rules 2850 Through 2885 Related
to Position Limits and Options Trading
To reflect Nasdaq’s separation from
NASD, the proposed rule change deletes
from NASD Rules 2850 through 2885 all
language related to position limits and
transactions in index warrants and
options traded on Nasdaq. However, the
rule change retains all provisions
related to options trading in the listed
and over-the-counter (‘‘OTC’’) markets.
NASD Rule 5300 Series Related to
PORTAL Securities
The current NASD Rule 5300 Series
provides qualification and transaction
reporting requirements relating to
PORTAL securities, which are foreign
and domestic securities that are eligible
for resale under Rule 144A under the
Securities Act of 1933.11 The proposed
rule change deletes the PORTAL
requirements relating to the
qualification or designation of PORTAL
securities, as that function would be
performed by Nasdaq. Transactions in
PORTAL securities, however, would be
reported to NASD; therefore, the
proposed rule change retains those rules
and has relocated them to the NASD
Rule 6700 Series.
NASD Rules 6500 Through 6700 Series
Related to OTC Equity Securities
The proposed rule change would
combine the existing NASD Rule 6600
and 6700 Series into a single NASD
Rule 6600 Series that governs
transactions in ‘‘OTC equity securities,’’
as that term is defined in the rules. The
proposed combination is intended to
eliminate redundancies in the existing
rules, while maintaining all of the
regulatory requirements for trading and
reporting transactions in such securities.
The proposed rule change also
includes separate definitions for a ‘‘nonexchange listed security’’ and ‘‘OTC
Equity Security,’’ with the latter
including certain exchange-listed
securities that do not otherwise qualify
for real-time reporting. NASD believes
this is necessary given that the trade
reporting obligations under the NASD
Rule 6600 Series apply to certain
exchange-listed securities that do not
otherwise qualify for real-time trade
reporting, while other NASD
requirements, such as current NASD
Rule 6740, do not apply to such
11 17
CFR 230.144A.
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securities. In addition, because NASD
would continue to operate the OTC
Bulletin Board, the proposed rule
change retains the NASD Rule 6500
Series. Throughout these rules,
references to Nasdaq and Nasdaq
systems have been replaced with NASD,
NASD systems or the OTC Reporting
Facility 12 as appropriate.
NASD Rule 6900 Series Related to
Direct Participation Programs (DPPs)
The NASD Rule 6900 Series governs
trade reporting of secondary market
transactions by members in DPP
securities other than transactions
executed on a national securities
exchange. The proposed rule change
amends the NASD Rule 6900 Series to
reflect the fact that, upon the separation
of Nasdaq and NASD, DPPs would no
longer be reported to the Nasdaq Market
Center, but would be reported to NASD.
NASD Rule 6950 Series Related to Order
Audit Trail System (OATS)
Requirements
Upon Nasdaq’s registration as an
exchange, orders routed by members to
Nasdaq would be subject to the OATS
order transmittal requirements in NASD
Rule 6954(c)(6), relating to routes to
non-members, including national
securities exchanges. To ensure that
NASD continues to receive from its
members the same OATS data and
linkage information that it receives
today, the proposed rule change amends
NASD Rule 6954(c)(6) to require that
members record the routed order
identifier or other unique identifier
required by the non-member receiving
the order, as applicable. As a result, it
is our understanding that Nasdaq’s
exchange rules would require that
orders transmitted to the Nasdaq Market
Center continue to provide a routed
order identifier. As such, the proposed
rule change would require that members
record that same routed order identifier
in their transmittal reports, as they do
today.
The proposed rule change also
clarifies existing requirements related to
routed order identifiers, specifically that
members are permitted to use a routed
order identifier that is different from the
order identifier used for order
origination purposes and that a member
transmitting an order to another member
must provide the routed order identifier
to the member receiving the order.13
12 The service by which members can trade report
OTC equity securities has been named the ‘‘OTC
Reporting Facility’’ for purposes of this proposed
rule change. The official name of that system,
however, has not yet been determined.
13 The Commission notes that NASD has also
proposed to require members to identify the
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NASD Rule 9700 Series Related to
Grievances Concerning Automated
Systems
NASD is proposing to delete in its
entirety the NASD Rule 9700 Series,
which sets forth procedures to address
unspecified general grievances related
to any automated quotation, execution
or communication system operated by
NASD or Nasdaq. Several of the
provisions relate to the authority of the
Nasdaq Listing and Review Council,
which no longer would be part of NASD
upon Nasdaq exchange registration.
Moreover, this rule series is very general
in nature, as it ostensibly is a ‘‘catchall’’ for all potential grievances not
otherwise provided for in NASD rules,
including the Code of Procedure (NASD
Rule 9000 Series) and the Uniform
Practice Code (NASD Rule 11000
Series). NASD believes that whatever
residual application this rule series may
have served at some point, it has since
been superceded by additional rules
that provide redress for specific
grievances, such as denial of access to
services under NASD Rule 9555 and
denial of access complaints related to
the ADF under NASD Rule 4400A.
Proposed Changes Related to the
Alternative Display Facility
The ADF is a quotation collection,
trade comparison, and trade reporting
facility developed by NASD in
accordance with the Commission’s
SuperMontage Approval Order 14 and in
conjunction with Nasdaq’s anticipated
registration as a national securities
exchange. The ADF, which currently is
operating on a pilot basis, provides ADF
market participants (market makers and
ECNs) the ability to post quotations in
Nasdaq securities and provides all
members that participate in the ADF the
ability to view quotations and report
transactions in Nasdaq securities to the
exclusive securities information
processor (‘‘SIP’’) for Nasdaq-listed
issues for consolidation and
dissemination of data to vendors and
ADF market participants. The facility
provides for trade comparison through
the Trade Reporting and Comparison
Service (‘‘TRACS’’) and further provides
for real-time data delivery to NASD for
national securities exchange or registered securities
association to which an order is transmitted. See
proposed NASD Rule 6954(c)(6)(I). In its
submission, NASD inadvertently neglected to
underline the proposed rule text to indicate that it
was new language. Telephone call between
Stephanie Dumont, Vice President, Associate
General Counsel, NASD and Kelly M. Riley,
Assistant Director, Division of Market Regulation
(‘‘Division’’), Commission on July 15, 2005.
14 Securities Exchange Act Release No. 43863
(January 19, 2001), 66 FR 8020 (January 26, 2001)
(SR–NASD–99–53).
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Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
regulatory purposes, including
enforcement of firm quote and related
rules.
NASD is proposing several clarifying
and conforming changes to the ADF
rules including: (1) Clarification that
certain ADF requirements apply not
only to Registered Reporting ADF
market makers, but to Registered
Reporting ADF ECNs as well; (2)
amendments to the ADF trade reporting
requirements to make them more
consistent with current Nasdaq trade
reporting rules, including requiring that
execution time be included in all ADF
trade reports; (3) clarification that all
applicable trade modifiers must be
included in ‘‘as/of’’ trades; (4)
amendments to the trade halt rule to
include halt authority if there is
extraordinary market activity in a
security; and (5) deletion of the
provisions in the ADF rules relating to
passive market making, since passive
market making would not be available
on the ADF.
Proposed Changes Related to the Trade
Reporting Facility
Establishment of the Trade Reporting
Facility
NASD is proposing to establish the
Trade Reporting Facility, which would
provide members another mechanism
for reporting transactions effected
otherwise than on an exchange. In this
regard, Nasdaq and NASD propose to
enter into a Limited Liability Company
Agreement of The Trade Reporting
Facility LLC between Nasdaq and NASD
(‘‘the LLC Agreement’’), a copy of which
is available on the NASD’s Web Site
(https://www.nasd.com) and the
Commission’s Web Site (https://
www.sec.gov). The Trade Reporting
Facility would be a facility of NASD and
subject to NASD’s registration as a
national securities association. Trades
by members in Nasdaq-listed and other
exchange-listed securities 15 executed
otherwise than on an exchange (‘‘NonSystem Trading’’) may be reported to
the Trade Reporting Facility. NASD
would continue to have regulatory
responsibility for the Non-System
Trading reported to the Trade Reporting
Facility, while Nasdaq agrees to pay the
cost of regulation and would provide
systems to enable broker-dealers to
report trades to the Trade Reporting
Facility. Nasdaq would be entitled to
the economic interests derived from the
Non-System Trading reported to the
Trade Reporting Facility. This proposed
structure would be in place for at least
three years.
15 See
supra note 7.
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Pursuant to the LLC Agreement,
NASD, as the ‘‘SRO Member’’ of the
Trade Reporting Facility, would have
the sole regulatory responsibility for the
activities of the Trade Reporting
Facility. The SRO Member would
perform SRO Responsibilities including,
but not limited to:
(1) Adoption, amendment and
interpretation of policies arising out of
and regarding the operation of the
facilities of the SRO, or regarding the
meaning, administration, or
enforcement of an existing rule of the
SRO, including any generally applicable
exemption from such a rule;
(2) Approval of rule filings of the SRO
prior to filing with the Commission;
(3) Regulation of the Trade Reporting
Facility’s activities, including the right
to review and approve the regulatory
budget for the Trade Reporting Facility;
(4) Securities regulation and any other
matter implicating SRO
Responsibilities; and
(5) Real-time market surveillance
(Nasdaq Marketwatch).
Nasdaq, as the ‘‘Business Member,’’
would be primarily responsible for the
management of the Trade Reporting
Facility’s business affairs to the extent
those activities are not inconsistent with
the regulatory and oversight functions of
NASD. Under Section 9(d) of the LLC
Agreement, each Member agrees to
comply with the Federal securities laws
and the rules and regulations
thereunder and to cooperate with the
Commission pursuant to its regulatory
authority.
The Trade Reporting Facility would
be managed by or under the direction of
a Board of Directors to be established by
the parties. NASD would have the right
to designate at least one Director, the
SRO Member Director, who may be a
member of NASD’s Board of Governors
or an officer or employee of NASD
designated by the NASD Board of
Governors. The SRO Member Director
would have veto power over all major
actions of the LLC Board. Major actions
are defined in Section 10(e) of the LLC
Agreement to include:
(1) Approving pricing decisions that
are subject to the Commission filing
process;
(2) Approving contracts between the
Trade Reporting Facility and the
Business Member, any of its affiliates,
directors, officers or employees;
(3) Approving Director compensation;
(4) Selling, licensing, leasing or
otherwise transferring material assets
used in the operation of the Trade
Reporting Facility’s business outside of
the ordinary course of business with an
aggregate value in excess of $3 million;
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42401
(5) Approving or undertaking a
merger, consolidation or reorganization
of the Trade Reporting Facility with any
other entity;
(6) Entering into any partnership,
joint venture or other similar joint
business undertaking;
(7) Making any fundamental change
in the market structure of the Trade
Reporting Facility from that
contemplated by the Members as of the
date of the LLC Agreement;
(8) To the fullest extent permitted by
law, taking any action to effect the
voluntary, or which would precipitate
an involuntary, dissolution or winding
up of the Company, other than as
contemplated by Section 20 of the LLC
Agreement;
(9) Conversion of the Trade Reporting
Facility from a Delaware limited
liability company into any other type of
entity;
(10) Expansion of or modification to
the business which results in the Trade
Reporting Facility engaging in material
business unrelated to the business of
Non-System Trading;
(11) Changing the number of Directors
on or composition of the Board; and
(12) Adopting or amending policies
regarding access and credit matters
affecting the Trade Reporting Facility.
In addition, each Director agrees to
comply with the federal securities laws
and the rules and regulations
thereunder and to cooperate with the
Commission and the SRO Member
pursuant to their regulatory authority.
Either Member may dissolve the
Trade Reporting Facility LLC by
providing to the other Member prior
written notice of at least one year.
Neither Member may deliver such
notice before the second anniversary of
the effective date of the LLC Agreement.
After notice, the Members must
negotiate in good faith to (i) allow the
Business Member to continue to operate
the LLC under NASD’s SRO registration,
(ii) restructure the LLC to allow the
Business Member to operate the facility
under Nasdaq’s SRO registration, or (iii)
sell the LLC or the business of the LLC
to the SRO Member based on an agreed
valuation. If the parties cannot agree on
any of (i), (ii) or (iii), the LLC Agreement
provides in Section 20(b) a mechanism
for an appraisal process.
Proposed Rules Relating to the Trade
Reporting Facility
NASD also is proposing rules relating
to the use and operation of the Trade
Reporting Facility. Members now would
have the option of trade reporting
transactions executed otherwise than on
an exchange either to the Trade
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Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
Reporting Facility or the ADF.16 For
purposes of these requirements, the
proposed rule change would define the
term ‘‘otherwise than on an exchange’’
to mean a trade effected by an NASD
member in an exchange-listed security
otherwise than on or through the
facilities of a national securities
exchange. The determination of what
constitutes a trade ‘‘on or through’’ a
national securities exchange would be
left to the respective exchanges and
applicable statutes, rules and
regulations, as approved by the
Commission.
The proposed rule change replaces
the existing Nasdaq trade reporting rules
in the Rule 4000 and 6100 Series in
their entirety with rules applicable to
the Trade Reporting Facility.17
However, the proposed rules relating to
the Trade Reporting Facility track, with
certain limited exceptions, the
requirements and general organization
of the current Nasdaq trade reporting
rules.
The proposed rule change combines
the trade reporting requirements in the
current NASD Rule 4630, 4640 and 4650
Series (Nasdaq National Market, Nasdaq
SmallCap and Nasdaq Convertible Debt
Securities, respectively) into one rule
series (proposed NASD Rule 4630
Series), which then applies the
proposed trade reporting requirements
uniformly to all securities listed on
Nasdaq. Because no quoting or issuer
listing and qualifications activities
would occur on or through the Trade
Reporting Facility, all rules in the
current NASD Rule 4000 Series
pertaining to such activities have not
been included. In addition, the current
rule relating to customer confirmations
for transactions in Nasdaq SmallCap
securities (NASD Rule 4643) has not
been included because it is duplicative
of Rule 10b–10 under the Act.18 Finally,
the proposed rule change does not
include rules relating to the risk
management functionality currently
provided through Nasdaq’s ACT, as that
service would not be provided through
the Trade Reporting Facility.
As a result of these rule deletions,
there are several gaps in the numbering
of proposed rules (e.g, NASD Rule 4200
is followed by NASD Rule 4616).
However, NASD believes it is preferable
at this time to have these ‘‘gaps in
16 NASD will have an integrated audit trail of
Trade Reporting Facility and ADF transactions and
will have integrated surveillance capabilities.
17 The clearing and comparison requirements in
the NASD Rule 6100 Series apply both to the Trade
Reporting Facility and the NASD system that would
be used for purposes of transaction reporting of
OTC equity securities and DPPs.
18 17 CFR 240.10b–10.
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19:28 Jul 21, 2005
Jkt 205001
numbering’’ to maintain consistency
with the ADF trade reporting rules and
to retain continuity with respect to prior
guidance that has been disseminated
relating to Nasdaq trade reporting rules.
In this regard, NASD intends to
interpret and apply the Trade Reporting
Facility rules in the same manner in
which the Nasdaq trade reporting rules
currently are interpreted and applied.
In addition, NASD is proposing NASD
Rule 4633, which would give NASD the
authority to halt trading otherwise than
on an exchange reported to the Trade
Reporting Facility. The proposed
trading halt rule would impose
mandatory trade halts when a primary
market halts for certain defined
regulatory reasons and grants NASD
discretion to halt when there is
extraordinary market activity in a
security or the primary market halts for
operational reasons. The proposal also
provides NASD the authority to halt
trading in the event that the facility
cannot transmit real-time trade
reporting information to the SIP. NASD
believes it must have this authority to
ensure that necessary and reliable
information would be disseminated
from the Trade Reporting Facility to the
marketplace. However, the proposal
would not necessarily restrict, in the
event of a halt due to operational
problems limited only to the Trade
Reporting Facility, continued trading
otherwise than on an exchange outside
of the Trade Reporting Facility, for
example, through the ADF. This is
similar in application to the ADF
trading halt rule.19
NASD also is proposing a new NASD
Rule 5000 Series relating to trading
otherwise than on an exchange. In the
new NASD Rule 5000 Series, NASD is
proposing rules that would apply
uniformly to trading in the ADF and the
Trade Reporting Facility.20 First,
proposed NASD Rule 5000 provides that
members are required to report
transactions effected otherwise than on
or through a national securities
exchange to NASD through either the
Trade Reporting Facility, pursuant to
the NASD Rule 4000 and 6000 Series, or
the ADF, pursuant to the NASD Rule
4000A and 6000A Series.
Second, NASD is proposing to
renumber current NASD Rule 3350 (the
‘‘Short Sale Rule’’) as NASD Rule 5100
and apply its requirements to
19 As such, under the proposal, NASD Rule 3340
would not prohibit a member from quoting or
trading through another market if NASD closes
trading pursuant to its authority under proposed
NASD Rule 4633(a)(3) or NASD Rule 4120A(a)(3).
20 Rules that previously resided in the NASD Rule
5000 Series, and have not otherwise been deleted,
have been moved.
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
transactions reported to either the ADF
or the Trade Reporting Facility. Similar
to the current application of NASD Rule
3350 to trades reported to the ADF, the
proposed rule change would require
members to comply with the Short Sale
Rule based on the national best bid for
Nasdaq National Market Securities.21 In
all other respects, the Short Sale Rule
would be consistent with the current
short sale rule, including an exemption
for registered market makers engaged in
bona fide market making activity. The
proposed rule change also clarifies that
the term ‘‘customer’’ as used in the
Short Sale Rule applies to non-member
broker-dealers and makes other
conforming changes in light of the
Commission’s adoption of Regulation
SHO.
Finally, NASD is proposing NASD
Rule 5200 that would prohibit members
from executing a transaction otherwise
than on an exchange in a security
subject to an initial public offering until
such security has first opened for
trading on the national securities
exchange listing the security, as
indicated by the dissemination of an
opening transaction in the security by
the listing exchange. This is similar to
the requirement currently in NASD Rule
6440(g), applicable to OTC transactions
in exchange-listed securities.
Based on discussions with
Commission staff, NASD also is noting
that it intends to work with the
appropriate parties to ensure that Trade
Reporting Facility and ADF transactions
are disseminated to the media with a
modifier indicating the source of such
transactions that would distinguish
them from transactions executed on or
through the Nasdaq Stock Market.
This rule proposal does not include
any proposed fees or assessments
specifically related to the Trade
Reporting Facility. Fees or assessments
with respect to the Trade Reporting
Facility will be the subject of a future
submission with the Commission.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of Section 15A of the Act,22 in general,
and Section 15A(b)(6) of the Act,23 in
particular, in that the proposal is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. NASD
21 Telephone call between Phil Shaikun,
Associate General Counsel, NASD and Kelly M.
Riley, Division, Commission on July 15, 2005.
22 15 U.S.C. 78o–3.
23 15 U.S.C. 78o–3(b)(6).
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Federal Register / Vol. 70, No. 140 / Friday, July 22, 2005 / Notices
believes that the proposed rule change
will provide an effective mechanism
and regulatory framework for quoting
and trading activities otherwise than on
an exchange upon Nasdaq’s separation
from NASD.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD believes that the proposed rule
change will not 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 on this proposed
rule change 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 NASD 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 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 rulecomments@sec.gov. Please include File
Number SR–NASD–2005–087 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–NASD–2005–087. This file
number should be included on the
subject line if e-mail is used. To help the
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19:28 Jul 21, 2005
Jkt 205001
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
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of 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 the File
Number SR–NASD–2005–087 and
should be submitted on or before
August 12, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.24
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–3912 Filed 7–21–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52035; File No. SR–OCC–
2002–16]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Granting Approval of a Proposed Rule
Change Relating to Unsegregation of
Long Option Positions
July 14, 2005.
I. Introduction
On July 9, 2002, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule change
SR–OCC–2002–16 pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’).1 On December 12,
2002, and January 11, 2005, OCC
amended the proposed rule change.
Notice of the proposal was published in
the Federal Register on March 14,
PO 00000
24 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
Frm 00105
Fmt 4703
Sfmt 4703
42403
2005.2 No comment letters were
received. For the reasons discussed
below, the Commission is granting
approval of the proposed rule change.
II. Description
OCC Rule 611 permits a clearing
member to issue instructions to OCC to
release from segregation a long position
in options contracts carried in a
customers’ account or firm non-lien
account provided that the clearing
member is simultaneously carrying in
such account for such customer a short
position in option contracts and the
margin requirement of the customer has
been reduced as a result of carrying the
long option position. The proposed rule
change amends Rule 611(c) to permit a
clearing member to issue such
instructions where one leg of the spread
is a long option position and the other
is a long or short position in a security
futures contract.
The proposed rule change was
submitted in light of joint margin rules
that were adopted by the Commission
and by the Commodity Futures Trading
Commission (‘‘CFTC’’) on August 1,
2002,3 pursuant to Section 7(c)(2) of the
Act and related provisions of the
Commodity Exchange Act governing the
setting of margin requirements for
security futures. The proposed rule is
drafted in such a way that its operation
is dependent on the joint margin rules
and the rules of the exchanges and
security futures markets adopted
thereunder. Only if a particular spread
position involving a long option
qualifies for reduced margin treatment
under those rules could the option be
unsegregated pursuant to Rule 611.
With approval of this proposed rule
change, consistency between the joint
margin rules and Rule 611(c) will be
assured.4
Section 7(c)(2)(B) of the Act requires
that the margin requirements for
security futures products be consistent
with the margin requirements for
comparable options contracts traded on
any exchange registered pursuant to
section 6(a) of the Act.5 Clearing
members are permittedunder the joint
margin rules 6 and exchange and
2 Securities Exchange Act Release No. 51331,
(March 8, 2005), 70 FR 12525.
3 Securities Exchange Act Release No. 46292, 67
FR 53146 (August 14, 2002) [File No. S7–16–01].
4 OCC has requested a no action position from the
Commission’s Division of Market Regulation that a
clearing member that gives an instruction to
unsegregate long option positions pursuant to this
amended rule will not be deemed to be in violation
of Rules 15c3–3, 8c–1, and 15c2–1 under the Act.
Supra, note 12.
5 15 U.S.C. 78g(c)(2)(B)(iii)(I).
6 Supra, note 3.
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]]>Agencies
[Federal Register Volume 70, Number 140 (Friday, July 22, 2005)]
[Notices]
[Pages 42398-42403]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3912]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52049; File No. SR-NASD-2005-087]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Reflect
Nasdaq's Separation From NASD Upon Nasdaq's Anticipated Approval as a
National Securities Exchange
July 15, 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 July 11, 2005, the National Association of Securities Dealers, Inc.
(``NASD'') 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 NASD. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 42399]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to: (1) Amend the Plan of Allocation and
Delegation of Functions by NASD to Subsidiaries (``Delegation Plan''),
NASD By-Laws, NASD Regulation By-Laws, NASD Dispute Resolution By-Laws,
and NASD rules to reflect the separation of The Nasdaq Stock Market,
Inc. (``Nasdaq'') from NASD upon Nasdaq's anticipated approval as a
national securities exchange; \3\ (2) to make certain changes to the
rules that govern quoting and trading through the NASD Alternative
Display Facility (``ADF''); and (3) to establish rules for the trade
reporting of transactions otherwise than on an exchange through the new
Trade Reporting Facility.\4\ The text of the proposed rule is available
on the NASD Web Site (https://www.nasd.com), on the Commission's Web
Site at (https://www.sec.gov), at the NASD Office of Secretary and at
the Commission's Public Reference Room. In the proposed rule text,
proposed new language is underlined; proposed deletions are in
brackets.
---------------------------------------------------------------------------
\3\ The Commission has not reached a decision on Nasdaq's
exchange application. The Commission understands that Nasdaq will
submit an amended Form 1 application. This amendment to Nasdaq's
exchange application will be published for public comment before
final action is taken.
\4\ The facility has been named the ``Trade Reporting Facility''
for purposes of this proposed rule change. The official name of the
entity, however, has not yet been determined.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD 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. NASD 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
The purpose of this proposed rule change is threefold: (1) To amend
NASD rules to reflect the anticipated approval of Nasdaq as a national
securities exchange \5\ and its resultant separation from NASD; (2) to
make certain clarifying and conforming changes to the rules governing
quoting and trading through the ADF; and (3) to establish rules for the
trade reporting of transactions otherwise than on an exchange through
the Trade Reporting Facility.\6\
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\5\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66
FR 31952 (June 13, 2001) (File No. 10-131).
\6\ On December 7, 2001, NASD filed with the Commission SR-NASD-
2001-90, a proposed rule change to amend NASD rules to reflect
Nasdaq's separation from NASD upon its approval as a national
securities exchange and to establish rules governing trading
otherwise than on an exchange, including transactions effected
through the ADF. On July 24, 2002, the Commission approved SR-NASD-
2002-97, which authorized NASD to operate the ADF on a pilot basis
for nine months, pending the anticipated approval of SR-NASD-2001-
90. See Securities Exchange Act Release No. 46249 (July 24, 2002),
67 FR 49822 (July 31, 2002) (SR-NASD-2002-97). NASD subsequently
filed for immediate effectiveness proposed rule changes to extend
the pilot until July 26, 2005. See Exchange Act Release Nos. 47633
(April 10, 2003), 68 FR 19043 (April 17, 2003) (SR-NASD-2003-67);
49131 (January 27, 2004), 69 FR 5229 (February 3, 2004) (SR-NASD-
2004-12); and 50601 (October 28, 2004), 69 FR 64611 (November 5,
2004) (SR-NASD-2004-160). NASD intends to withdraw SR-NASD-2001-90,
and this proposed rule change is intended to replace and update that
rule filing.
---------------------------------------------------------------------------
Proposed Changes Relating to the Separation of Nasdaq
In 2000, NASD began restructuring its relationship with Nasdaq,
which operates as an independent, for-profit company. As the result of
a two-phase private placement of Nasdaq shares, a public offering
recently completed in January 2005 and other dispositions of NASD
shares, NASD's common stock ownership interest in Nasdaq has been
reduced to a minority interest. Before Nasdaq can fully separate from
NASD, it must become registered as a national securities exchange with
the Commission. Nasdaq has submitted drafts of proposed additional
amendments to its Form 1 previously filed with the Commission
requesting exchange registration. NASD continues to maintain greater
than 50% of the voting control through its ownership of one outstanding
share of Series B Preferred Stock until exchange registration is
granted. Once Nasdaq obtains exchange registration, the share of Series
B Preferred Stock would automatically lose its voting rights and would
be redeemed by Nasdaq for $1.00.
Thus, upon Nasdaq's registration as a national securities exchange,
Nasdaq and NASD would be unaffiliated corporate entities, and therefore
each will need separate rules applicable to their respective members.
To effectuate that change, NASD must modify existing NASD rules,
effective upon Nasdaq's registration as an exchange, to reflect this
separation of Nasdaq from NASD. These changes include removing
references in the Delegation Plan to Nasdaq as a subsidiary and
delegation of authority to Nasdaq; revising the NASD By-Laws, NASD
Regulation, Inc. By-Laws and NASD Dispute Resolution, Inc. By-Laws to
remove references to Nasdaq as a subsidiary of NASD; deleting Nasdaq-
specific rules, such as listing and qualification requirements;
replacing references to ``Nasdaq'' with ``NASD'' or ``exchange,'' as
applicable; and renaming and renumbering certain rules.\7\ Provided
below are descriptions of the more significant proposed rule changes to
reflect Nasdaq's separation from NASD.
---------------------------------------------------------------------------
\7\ This proposed rule change also includes corrections of minor
grammatical or typographical errors and other miscellaneous non-
substantive changes.
---------------------------------------------------------------------------
Deleted NASD Rules
The following rules have been deleted by NASD in their entirety
because they either relate exclusively to participation in, and
operation of, the Nasdaq Stock Market or would no longer be applicable
upon the separation of Nasdaq from NASD: NASD Rules 2852, 2854 and 2870
through 2885 related to Nasdaq Index Options; NASD Rules 5100 through
5113 and Rule 8212 related to the Nasdaq International Service; the
NASD Rule 5200 Series related to Intermarket Trading System/Computer
Assisted Execution System (ITS/CAES); \8\ the NASD Rule 6300 Series
related to the Consolidated Quotations Service (CQS); \9\ the NASD Rule
6400 Series relating to reporting transactions in exchange-listed
securities; \10\ the NASD Rule 6800 Series related to the Mutual Fund
Quotation Service; and NASD Rule 11890 related to Clearly Erroneous
Transactions.
---------------------------------------------------------------------------
\8\ NASD is considering the appropriate quoting and trading
structure and rules that would be applicable to exchange-listed
securities other than Nasdaq securities. Its current intention is to
permit quoting and trade reporting of these securities through the
ADF and to permit trade reporting through the Trade Reporting
Facility. Accordingly, proposed changes relating to quoting and
trading in these securities will be addressed in a future submission
with the Commission.
\9\ Id.
\10\ Id.
---------------------------------------------------------------------------
NASD Rule 2840 Series Related to Trading in Index Warrants
The proposed rule change would delete language in the NASD Rule
2840 Series related to index warrants listed on the Nasdaq Stock
Market. The existing rule series was promulgated because Nasdaq
intended to list such
[[Page 42400]]
index warrants. The remainder of NASD Rule 2840 Series remains
unchanged, as it has continued applicability to NASD members that are
not also members of an exchange on which they trade index warrants.
NASD Rules 2850 Through 2885 Related to Position Limits and Options
Trading
To reflect Nasdaq's separation from NASD, the proposed rule change
deletes from NASD Rules 2850 through 2885 all language related to
position limits and transactions in index warrants and options traded
on Nasdaq. However, the rule change retains all provisions related to
options trading in the listed and over-the-counter (``OTC'') markets.
NASD Rule 5300 Series Related to PORTAL Securities
The current NASD Rule 5300 Series provides qualification and
transaction reporting requirements relating to PORTAL securities, which
are foreign and domestic securities that are eligible for resale under
Rule 144A under the Securities Act of 1933.\11\ The proposed rule
change deletes the PORTAL requirements relating to the qualification or
designation of PORTAL securities, as that function would be performed
by Nasdaq. Transactions in PORTAL securities, however, would be
reported to NASD; therefore, the proposed rule change retains those
rules and has relocated them to the NASD Rule 6700 Series.
---------------------------------------------------------------------------
\11\ 17 CFR 230.144A.
---------------------------------------------------------------------------
NASD Rules 6500 Through 6700 Series Related to OTC Equity Securities
The proposed rule change would combine the existing NASD Rule 6600
and 6700 Series into a single NASD Rule 6600 Series that governs
transactions in ``OTC equity securities,'' as that term is defined in
the rules. The proposed combination is intended to eliminate
redundancies in the existing rules, while maintaining all of the
regulatory requirements for trading and reporting transactions in such
securities.
The proposed rule change also includes separate definitions for a
``non-exchange listed security'' and ``OTC Equity Security,'' with the
latter including certain exchange-listed securities that do not
otherwise qualify for real-time reporting. NASD believes this is
necessary given that the trade reporting obligations under the NASD
Rule 6600 Series apply to certain exchange-listed securities that do
not otherwise qualify for real-time trade reporting, while other NASD
requirements, such as current NASD Rule 6740, do not apply to such
securities. In addition, because NASD would continue to operate the OTC
Bulletin Board, the proposed rule change retains the NASD Rule 6500
Series. Throughout these rules, references to Nasdaq and Nasdaq systems
have been replaced with NASD, NASD systems or the OTC Reporting
Facility \12\ as appropriate.
---------------------------------------------------------------------------
\12\ The service by which members can trade report OTC equity
securities has been named the ``OTC Reporting Facility'' for
purposes of this proposed rule change. The official name of that
system, however, has not yet been determined.
---------------------------------------------------------------------------
NASD Rule 6900 Series Related to Direct Participation Programs (DPPs)
The NASD Rule 6900 Series governs trade reporting of secondary
market transactions by members in DPP securities other than
transactions executed on a national securities exchange. The proposed
rule change amends the NASD Rule 6900 Series to reflect the fact that,
upon the separation of Nasdaq and NASD, DPPs would no longer be
reported to the Nasdaq Market Center, but would be reported to NASD.
NASD Rule 6950 Series Related to Order Audit Trail System (OATS)
Requirements
Upon Nasdaq's registration as an exchange, orders routed by members
to Nasdaq would be subject to the OATS order transmittal requirements
in NASD Rule 6954(c)(6), relating to routes to non-members, including
national securities exchanges. To ensure that NASD continues to receive
from its members the same OATS data and linkage information that it
receives today, the proposed rule change amends NASD Rule 6954(c)(6) to
require that members record the routed order identifier or other unique
identifier required by the non-member receiving the order, as
applicable. As a result, it is our understanding that Nasdaq's exchange
rules would require that orders transmitted to the Nasdaq Market Center
continue to provide a routed order identifier. As such, the proposed
rule change would require that members record that same routed order
identifier in their transmittal reports, as they do today.
The proposed rule change also clarifies existing requirements
related to routed order identifiers, specifically that members are
permitted to use a routed order identifier that is different from the
order identifier used for order origination purposes and that a member
transmitting an order to another member must provide the routed order
identifier to the member receiving the order.\13\
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\13\ The Commission notes that NASD has also proposed to require
members to identify the national securities exchange or registered
securities association to which an order is transmitted. See
proposed NASD Rule 6954(c)(6)(I). In its submission, NASD
inadvertently neglected to underline the proposed rule text to
indicate that it was new language. Telephone call between Stephanie
Dumont, Vice President, Associate General Counsel, NASD and Kelly M.
Riley, Assistant Director, Division of Market Regulation
(``Division''), Commission on July 15, 2005.
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NASD Rule 9700 Series Related to Grievances Concerning Automated
Systems
NASD is proposing to delete in its entirety the NASD Rule 9700
Series, which sets forth procedures to address unspecified general
grievances related to any automated quotation, execution or
communication system operated by NASD or Nasdaq. Several of the
provisions relate to the authority of the Nasdaq Listing and Review
Council, which no longer would be part of NASD upon Nasdaq exchange
registration. Moreover, this rule series is very general in nature, as
it ostensibly is a ``catch-all'' for all potential grievances not
otherwise provided for in NASD rules, including the Code of Procedure
(NASD Rule 9000 Series) and the Uniform Practice Code (NASD Rule 11000
Series). NASD believes that whatever residual application this rule
series may have served at some point, it has since been superceded by
additional rules that provide redress for specific grievances, such as
denial of access to services under NASD Rule 9555 and denial of access
complaints related to the ADF under NASD Rule 4400A.
Proposed Changes Related to the Alternative Display Facility
The ADF is a quotation collection, trade comparison, and trade
reporting facility developed by NASD in accordance with the
Commission's SuperMontage Approval Order \14\ and in conjunction with
Nasdaq's anticipated registration as a national securities exchange.
The ADF, which currently is operating on a pilot basis, provides ADF
market participants (market makers and ECNs) the ability to post
quotations in Nasdaq securities and provides all members that
participate in the ADF the ability to view quotations and report
transactions in Nasdaq securities to the exclusive securities
information processor (``SIP'') for Nasdaq-listed issues for
consolidation and dissemination of data to vendors and ADF market
participants. The facility provides for trade comparison through the
Trade Reporting and Comparison Service (``TRACS'') and further provides
for real-time data delivery to NASD for
[[Page 42401]]
regulatory purposes, including enforcement of firm quote and related
rules.
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\14\ Securities Exchange Act Release No. 43863 (January 19,
2001), 66 FR 8020 (January 26, 2001) (SR-NASD-99-53).
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NASD is proposing several clarifying and conforming changes to the
ADF rules including: (1) Clarification that certain ADF requirements
apply not only to Registered Reporting ADF market makers, but to
Registered Reporting ADF ECNs as well; (2) amendments to the ADF trade
reporting requirements to make them more consistent with current Nasdaq
trade reporting rules, including requiring that execution time be
included in all ADF trade reports; (3) clarification that all
applicable trade modifiers must be included in ``as/of'' trades; (4)
amendments to the trade halt rule to include halt authority if there is
extraordinary market activity in a security; and (5) deletion of the
provisions in the ADF rules relating to passive market making, since
passive market making would not be available on the ADF.
Proposed Changes Related to the Trade Reporting Facility
Establishment of the Trade Reporting Facility
NASD is proposing to establish the Trade Reporting Facility, which
would provide members another mechanism for reporting transactions
effected otherwise than on an exchange. In this regard, Nasdaq and NASD
propose to enter into a Limited Liability Company Agreement of The
Trade Reporting Facility LLC between Nasdaq and NASD (``the LLC
Agreement''), a copy of which is available on the NASD's Web Site
(https://www.nasd.com) and the Commission's Web Site (https://
www.sec.gov). The Trade Reporting Facility would be a facility of NASD
and subject to NASD's registration as a national securities
association. Trades by members in Nasdaq-listed and other exchange-
listed securities \15\ executed otherwise than on an exchange (``Non-
System Trading'') may be reported to the Trade Reporting Facility. NASD
would continue to have regulatory responsibility for the Non-System
Trading reported to the Trade Reporting Facility, while Nasdaq agrees
to pay the cost of regulation and would provide systems to enable
broker-dealers to report trades to the Trade Reporting Facility. Nasdaq
would be entitled to the economic interests derived from the Non-System
Trading reported to the Trade Reporting Facility. This proposed
structure would be in place for at least three years.
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\15\ See supra note 7.
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Pursuant to the LLC Agreement, NASD, as the ``SRO Member'' of the
Trade Reporting Facility, would have the sole regulatory responsibility
for the activities of the Trade Reporting Facility. The SRO Member
would perform SRO Responsibilities including, but not limited to:
(1) Adoption, amendment and interpretation of policies arising out
of and regarding the operation of the facilities of the SRO, or
regarding the meaning, administration, or enforcement of an existing
rule of the SRO, including any generally applicable exemption from such
a rule;
(2) Approval of rule filings of the SRO prior to filing with the
Commission;
(3) Regulation of the Trade Reporting Facility's activities,
including the right to review and approve the regulatory budget for the
Trade Reporting Facility;
(4) Securities regulation and any other matter implicating SRO
Responsibilities; and
(5) Real-time market surveillance (Nasdaq Marketwatch).
Nasdaq, as the ``Business Member,'' would be primarily responsible
for the management of the Trade Reporting Facility's business affairs
to the extent those activities are not inconsistent with the regulatory
and oversight functions of NASD. Under Section 9(d) of the LLC
Agreement, each Member agrees to comply with the Federal securities
laws and the rules and regulations thereunder and to cooperate with the
Commission pursuant to its regulatory authority.
The Trade Reporting Facility would be managed by or under the
direction of a Board of Directors to be established by the parties.
NASD would have the right to designate at least one Director, the SRO
Member Director, who may be a member of NASD's Board of Governors or an
officer or employee of NASD designated by the NASD Board of Governors.
The SRO Member Director would have veto power over all major actions of
the LLC Board. Major actions are defined in Section 10(e) of the LLC
Agreement to include:
(1) Approving pricing decisions that are subject to the Commission
filing process;
(2) Approving contracts between the Trade Reporting Facility and
the Business Member, any of its affiliates, directors, officers or
employees;
(3) Approving Director compensation;
(4) Selling, licensing, leasing or otherwise transferring material
assets used in the operation of the Trade Reporting Facility's business
outside of the ordinary course of business with an aggregate value in
excess of $3 million;
(5) Approving or undertaking a merger, consolidation or
reorganization of the Trade Reporting Facility with any other entity;
(6) Entering into any partnership, joint venture or other similar
joint business undertaking;
(7) Making any fundamental change in the market structure of the
Trade Reporting Facility from that contemplated by the Members as of
the date of the LLC Agreement;
(8) To the fullest extent permitted by law, taking any action to
effect the voluntary, or which would precipitate an involuntary,
dissolution or winding up of the Company, other than as contemplated by
Section 20 of the LLC Agreement;
(9) Conversion of the Trade Reporting Facility from a Delaware
limited liability company into any other type of entity;
(10) Expansion of or modification to the business which results in
the Trade Reporting Facility engaging in material business unrelated to
the business of Non-System Trading;
(11) Changing the number of Directors on or composition of the
Board; and
(12) Adopting or amending policies regarding access and credit
matters affecting the Trade Reporting Facility.
In addition, each Director agrees to comply with the federal
securities laws and the rules and regulations thereunder and to
cooperate with the Commission and the SRO Member pursuant to their
regulatory authority.
Either Member may dissolve the Trade Reporting Facility LLC by
providing to the other Member prior written notice of at least one
year. Neither Member may deliver such notice before the second
anniversary of the effective date of the LLC Agreement. After notice,
the Members must negotiate in good faith to (i) allow the Business
Member to continue to operate the LLC under NASD's SRO registration,
(ii) restructure the LLC to allow the Business Member to operate the
facility under Nasdaq's SRO registration, or (iii) sell the LLC or the
business of the LLC to the SRO Member based on an agreed valuation. If
the parties cannot agree on any of (i), (ii) or (iii), the LLC
Agreement provides in Section 20(b) a mechanism for an appraisal
process.
Proposed Rules Relating to the Trade Reporting Facility
NASD also is proposing rules relating to the use and operation of
the Trade Reporting Facility. Members now would have the option of
trade reporting transactions executed otherwise than on an exchange
either to the Trade
[[Page 42402]]
Reporting Facility or the ADF.\16\ For purposes of these requirements,
the proposed rule change would define the term ``otherwise than on an
exchange'' to mean a trade effected by an NASD member in an exchange-
listed security otherwise than on or through the facilities of a
national securities exchange. The determination of what constitutes a
trade ``on or through'' a national securities exchange would be left to
the respective exchanges and applicable statutes, rules and
regulations, as approved by the Commission.
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\16\ NASD will have an integrated audit trail of Trade Reporting
Facility and ADF transactions and will have integrated surveillance
capabilities.
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The proposed rule change replaces the existing Nasdaq trade
reporting rules in the Rule 4000 and 6100 Series in their entirety with
rules applicable to the Trade Reporting Facility.\17\ However, the
proposed rules relating to the Trade Reporting Facility track, with
certain limited exceptions, the requirements and general organization
of the current Nasdaq trade reporting rules.
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\17\ The clearing and comparison requirements in the NASD Rule
6100 Series apply both to the Trade Reporting Facility and the NASD
system that would be used for purposes of transaction reporting of
OTC equity securities and DPPs.
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The proposed rule change combines the trade reporting requirements
in the current NASD Rule 4630, 4640 and 4650 Series (Nasdaq National
Market, Nasdaq SmallCap and Nasdaq Convertible Debt Securities,
respectively) into one rule series (proposed NASD Rule 4630 Series),
which then applies the proposed trade reporting requirements uniformly
to all securities listed on Nasdaq. Because no quoting or issuer
listing and qualifications activities would occur on or through the
Trade Reporting Facility, all rules in the current NASD Rule 4000
Series pertaining to such activities have not been included. In
addition, the current rule relating to customer confirmations for
transactions in Nasdaq SmallCap securities (NASD Rule 4643) has not
been included because it is duplicative of Rule 10b-10 under the
Act.\18\ Finally, the proposed rule change does not include rules
relating to the risk management functionality currently provided
through Nasdaq's ACT, as that service would not be provided through the
Trade Reporting Facility.
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\18\ 17 CFR 240.10b-10.
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As a result of these rule deletions, there are several gaps in the
numbering of proposed rules (e.g, NASD Rule 4200 is followed by NASD
Rule 4616). However, NASD believes it is preferable at this time to
have these ``gaps in numbering'' to maintain consistency with the ADF
trade reporting rules and to retain continuity with respect to prior
guidance that has been disseminated relating to Nasdaq trade reporting
rules. In this regard, NASD intends to interpret and apply the Trade
Reporting Facility rules in the same manner in which the Nasdaq trade
reporting rules currently are interpreted and applied.
In addition, NASD is proposing NASD Rule 4633, which would give
NASD the authority to halt trading otherwise than on an exchange
reported to the Trade Reporting Facility. The proposed trading halt
rule would impose mandatory trade halts when a primary market halts for
certain defined regulatory reasons and grants NASD discretion to halt
when there is extraordinary market activity in a security or the
primary market halts for operational reasons. The proposal also
provides NASD the authority to halt trading in the event that the
facility cannot transmit real-time trade reporting information to the
SIP. NASD believes it must have this authority to ensure that necessary
and reliable information would be disseminated from the Trade Reporting
Facility to the marketplace. However, the proposal would not
necessarily restrict, in the event of a halt due to operational
problems limited only to the Trade Reporting Facility, continued
trading otherwise than on an exchange outside of the Trade Reporting
Facility, for example, through the ADF. This is similar in application
to the ADF trading halt rule.\19\
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\19\ As such, under the proposal, NASD Rule 3340 would not
prohibit a member from quoting or trading through another market if
NASD closes trading pursuant to its authority under proposed NASD
Rule 4633(a)(3) or NASD Rule 4120A(a)(3).
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NASD also is proposing a new NASD Rule 5000 Series relating to
trading otherwise than on an exchange. In the new NASD Rule 5000
Series, NASD is proposing rules that would apply uniformly to trading
in the ADF and the Trade Reporting Facility.\20\ First, proposed NASD
Rule 5000 provides that members are required to report transactions
effected otherwise than on or through a national securities exchange to
NASD through either the Trade Reporting Facility, pursuant to the NASD
Rule 4000 and 6000 Series, or the ADF, pursuant to the NASD Rule 4000A
and 6000A Series.
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\20\ Rules that previously resided in the NASD Rule 5000 Series,
and have not otherwise been deleted, have been moved.
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Second, NASD is proposing to renumber current NASD Rule 3350 (the
``Short Sale Rule'') as NASD Rule 5100 and apply its requirements to
transactions reported to either the ADF or the Trade Reporting
Facility. Similar to the current application of NASD Rule 3350 to
trades reported to the ADF, the proposed rule change would require
members to comply with the Short Sale Rule based on the national best
bid for Nasdaq National Market Securities.\21\ In all other respects,
the Short Sale Rule would be consistent with the current short sale
rule, including an exemption for registered market makers engaged in
bona fide market making activity. The proposed rule change also
clarifies that the term ``customer'' as used in the Short Sale Rule
applies to non-member broker-dealers and makes other conforming changes
in light of the Commission's adoption of Regulation SHO.
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\21\ Telephone call between Phil Shaikun, Associate General
Counsel, NASD and Kelly M. Riley, Division, Commission on July 15,
2005.
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Finally, NASD is proposing NASD Rule 5200 that would prohibit
members from executing a transaction otherwise than on an exchange in a
security subject to an initial public offering until such security has
first opened for trading on the national securities exchange listing
the security, as indicated by the dissemination of an opening
transaction in the security by the listing exchange. This is similar to
the requirement currently in NASD Rule 6440(g), applicable to OTC
transactions in exchange-listed securities.
Based on discussions with Commission staff, NASD also is noting
that it intends to work with the appropriate parties to ensure that
Trade Reporting Facility and ADF transactions are disseminated to the
media with a modifier indicating the source of such transactions that
would distinguish them from transactions executed on or through the
Nasdaq Stock Market.
This rule proposal does not include any proposed fees or
assessments specifically related to the Trade Reporting Facility. Fees
or assessments with respect to the Trade Reporting Facility will be the
subject of a future submission with the Commission.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A of the Act,\22\ in general, and Section
15A(b)(6) of the Act,\23\ in particular, in that the proposal is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. NASD
[[Page 42403]]
believes that the proposed rule change will provide an effective
mechanism and regulatory framework for quoting and trading activities
otherwise than on an exchange upon Nasdaq's separation from NASD.
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\22\ 15 U.S.C. 78o-3.
\23\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD believes that the proposed rule change will not 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 on this proposed rule change 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 NASD 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 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-2005-087 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-NASD-2005-087. 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 Room. Copies of such
filing also will be available for inspection and copying at the
principal office of 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 the File Number SR-NASD-2005-
087 and should be submitted on or before August 12, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3912 Filed 7-21-05; 8:45 am]
BILLING CODE 8010-01-P
