Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 Relating to Amendments to the NASD's Rules Following the Nasdaq Exchange's Operation as a National Securities Exchange for Nasdaq UTP Plan Securities, 38935-38948 [06-6083]
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Federal Register / Vol. 71, No. 131 / Monday, July 10, 2006 / Notices
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–2006–068 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASD–2006–068. 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 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–2006–068 and
should be submitted on or before July
31, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.30
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–6038 Filed 7–7–06; 8:45 am]
BILLING CODE 8010–01–M
30 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54084; File No. SR–NASD–
2005–087]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Order Approving
Proposed Rule Change and Notice of
Filing and Order Granting Accelerated
Approval to Amendment No. 1 Relating
to Amendments to the NASD’s Rules
Following the Nasdaq Exchange’s
Operation as a National Securities
Exchange for Nasdaq UTP Plan
Securities
June 30, 2006
I. Introduction
On July 11, 2005, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’),1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend various NASD rules to
reflect the Nasdaq Stock Market, Inc.’s
(‘‘Nasdaq’’) separation from the NASD
following the commencement of
operations of the Nasdaq Stock Market
LLC (‘‘Nasdaq Exchange’’) as a national
securities exchange.
Prior to 2000, Nasdaq was whollyowned by the NASD. The NASD
currently retains voting control of
Nasdaq through an outstanding share of
Nasdaq Series D preferred stock.3 The
NASD and Nasdaq began restructuring
their relationship in 2000 with the goal
of completely separating Nasdaq from
the NASD. As part of this restructuring,
Nasdaq filed with the Commission an
application to register one of its
U.S.C. 78s(b)(1).
CFR 240.19B–4.
3 The share of Series D preferred stock gives the
NASD the right to cast one more than one-half of
all votes entitled to be cast at an election by all
holders of capital stock of Nasdaq. When Nasdaq
ceases to operate pursuant to the NASD’s Plan of
Allocation and Delegation of Functions by NASD to
Subsidiaries (the ‘‘Delegation Plan’’), the Series D
preferred share will expire automatically. See
Securities Exchange Act Release No. 53022
(December 23, 2005), 70 FR 77433 (December 30,
2005). To reflect this change, the NASD will file a
proposed rule change to revise the Delegation Plan
to remove references to Nasdaq as a subsidiary of
the NASD. Because this change to the Delegation
Plan would terminate the NASD’s control under the
Series D preferred share, the NASD cannot file this
proposed rule change until it can represent to the
Commission that its control of Nasdaq is no longer
necessary because the NASD can fulfill through
other means its obligations with respect to
securities reported to the Consolidated Transaction
Association Plan (‘‘CTA Plan Securities’’) See Order
Modifying Nasdaq Exchange Conditions, infra note
6.
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2 17
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38935
subsidiaries, the Nasdaq Exchange, as a
national securities exchange.4
The Commission approved the
Nasdaq’s Exchange’s registration as a
national securities exchange on January
13, 2006.5 In the Nasdaq Exchange
Order, the Commission conditioned the
Nasdaq Exchange’s operation as a
national securities exchange on the
satisfaction of certain enumerated
requirements. The Nasdaq Exchange
Order and the conditions therein
reflected the Nasdaq Exchange’s
intentions to begin operations as a
national securities exchange for CTA
Plan Securities as well as securities
listed on Nasdaq and reported to the
Joint Self-Regulatory Organization Plan
Governing the Collection, Consolidation
and Dissemination of Quotation and
Transaction Information for NasdaqListed Securities Traded on Exchanges
on an Unlisted Trading Privileges Basis
(‘‘Nasdaq UTP Plan Securities’’).
The Commission modified the
conditions set forth in the Nasdaq
Exchange Order on June 30, 2006, to
allow the Nasdaq Exchange to operate as
a national securities exchange solely
with respect to Nasdaq UTP Plan
Securities.6 During this period, the
NASD will continue to control Nasdaq
through the Series D preferred share and
Nasdaq will continue to perform
obligations under the Delegation Plan
with respect to CTA Plan Securities.
Accordingly, the NASD filed
Amendment No. 1 to modify the
proposed rule change to reflect the
Nasdaq Exchange’s operational plan.
II. NASD Proposal
In the proposed rule change, the
NASD proposed to: (1) Delete certain
NASD rules that pertain to the operation
of the Nasdaq Exchange and thus reflect
Nasdaq’s separation from the NASD; 7
(2) modify certain NASD rules to clarify
the NASD’s continued regulation of the
over-the-counter (‘‘OTC’’) market upon
the Nasdaq Exchange’s operation as an
exchange; 8 (3) amend the NASD’s Order
Audit Trail System (‘‘OATS’’) to reflect
the use of OATS by Nasdaq Exchange
members; 9 (4) make technical and
clarifying changes to the rules governing
the NASD’s Alternative Display Facility
4 In connection with the Nasdaq Exchange
registration, Nasdaq became a holding company
with the Nasdaq Exchange as its wholly-owned
subsidiary.
5 See Securities Exchange Act Release No. 53128,
71 FR 3350 (January 23, 2006) (‘‘Nasdaq Exchange
Order’’).
6 See Securities Exchange Act Release No. 54085
(June 30, 2006) (‘‘Order Modifying Nasdaq
Exchange Conditions’’).
7 See infra note 44 and accompanying section.
8 See infra notes 46–53 and accompanying text.
9 See infra note 55 and accompanying text.
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(‘‘ADF’’); 10 and (5) establish rules
governing the NASD’s proposed new
trade reporting facility (‘‘Trade
Reporting Facility’’).11
The proposed rule change was
published for comment in the Federal
Register on July 22, 2005.12 The
Commission received 14 comment
letters from 12 commenters regarding
the proposal.13 On November 23, 2005,
and May 3, 2006, the NASD submitted
responses to the comment letters.14
The NASD filed Amendment No. 1 to
the proposal on June 15, 2006. In
addition to making several technical
corrections and conforming changes,15
10 See infra notes 77–84 and accompanying
section.
11 See infra notes 85–101 and accompanying text.
12 See Securities Exchange Act Release No. 52049
(July 15, 2005), 70 FR 42398 (July 22, 2005).
13 See letters to Jonathan G. Katz, Secretary,
Commission, from Mary Yeager, Assistant
Secretary, New York Stock Exchange, Inc.
(‘‘NYSE’’), dated August 12, 2005 (‘‘NYSE Letter I’’)
and November 10, 2005 (‘‘NYSE Letter II’’); Edward
S. Knight, Executive Vice President and General
Counsel, Nasdaq, dated October 13, 2005 (‘‘Nasdaq
Letter’’); John Boese, Vice President and Chief
Regulatory Officer, Boston Stock Exchange, Inc.
(‘‘BSE’’), dated November 4, 2005 (‘‘BSE Letter’’);
and Kevin J.P. O’Hara, Chief Administrative Officer
and General Counsel, Archipelago Holdings, Inc.
(‘‘Archipelago’’), dated November 10, 2005
(‘‘Archipelago Letter’’); letters to The Honorable
Christopher Cox, Chairman, Commission, from Bart
J. Ward, Chief Executive Officer, Ward & Company,
dated February 10, 2006 (‘‘Ward Letter’’); John A.
Thain, Chief Executive Officer, NYSE Group, Inc.,
dated April 27, 2006 (‘‘NYSE Letter III’’). See also
letters to The Honorable Christopher Cox,
Chairman, Commission, from The Honorable Geoff
Davis, U.S. House of Representatives, dated
February 9, 2006 (‘‘Davis Letter’’); The Honorable
Melissa L. Bean, U.S. House of Representatives,
dated January 16, 2006 (‘‘Bean Letter’’); The
Honorable Edolphus Towns, U.S. House of
Representatives, dated January 12, 2006 (‘‘Towns
Letter’’); The Honorable Michael E. Capuano, U.S.
House of Representatives, dated January 3, 2006
(‘‘Capuano Letter’’); The Honorable Patrick T.
McHenry, U.S. House of Representatives, dated
December 22, 2005 (‘‘McHenry Letter’’); The
Honorable Jim Gerlach, U.S. House of
Representatives, dated December 14, 2005
(‘‘Gerlach Letter’’); and The Honorable Richard H.
Baker, Chairman, Subcommittee on Capital
Markets, Insurance and Government Sponsored
Enterprises, U.S. House of Representatives, dated
December 13, 2005 (‘‘Baker Letter’’). The comment
letters are available in the Commission’s Public
Reference Room and on the Commission’s Internet
Web site (https://www.sec.gov). The Commission
notes that the Archipelago Letter and NYSE Letter
II also were submitted as comment letters in
response to the Nasdaq Exchange’s application to
register as a national securities exchange.
14 See letter to Jonathan G. Katz, Secretary,
Commission, from Barbara Z. McSweeney, Senior
Vice President and Corporate Secretary, NASD,
dated November 23, 2005 (‘‘NASD Response Letter
I’’); letter to the Honorable Christopher Cox,
Chairman, Commission from Robert R. Glauber,
Chairman and Chief Executive Officer, NASD, dated
May 2, 2006 (‘‘NASD Response Letter II’’).
15 For example, the NASD proposes to: (1) Revise
NASD Rule 5100, ‘‘Short Sale Rule,’’ to indicate
that the NASD’s Short Sale Rule will continue to
operate as a pilot program; (2) retain the NASD Rule
9700 Series, ‘‘Procedures on Grievances Concerning
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the NASD proposes in Amendment No.
1 to revise its proposal to: (1) Amend
the Delegation Plan to retain the
delegation to Nasdaq of obligations with
respect to CTA Plan Securities, while
eliminating Nasdaq’s regulatory
authority with respect to Nasdaq UTP
Plan Securities; 16 (2) amend the Nasdaq
Bylaws to reflect changes that were
approved in the Nasdaq Exchange
Order; 17 (3) retain amended versions of
the rules governing Nasdaq’s BRUT and
INET trading systems; 18 (4) provide that
members may continue to quote and
trade CTA Plan Securities and
participate in the Intermarket Trading
System (‘‘ITS’’) through an NASD
facility by retaining in the NASD’s rules
revised versions of relevant rules; 19 (5)
revise an existing NASD rule to make
clear that certain securities that will be
listed on the Nasdaq Exchange will
continue to be treated as CTA Plan
Securities; 20 and (6) delete from NASD
Rule 6120 a provision allowing a
national securities exchange that trades
Nasdaq securities on an unlisted trading
privileges basis (‘‘UTP Exchange’’) to
participate in the Trade Reporting
Facility. In addition, the NASD has
requested that this proposal become
effective only when the Nasdaq
Exchange begins operations as a
national securities exchange for Nasdaq
UTP Plan Securities.
Finally, in Amendment No. 1, the
NASD also proposed to renumber NASD
Rule 6440(i) as NASD Rule 5110,
‘‘Transactions Related to Initial Public
Offerings’’ and to extend its application
to transactions in Nasdaq UTP Plan
Securities.
After careful consideration and for the
reasons discussed below, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to the NASD,
and, in particular, with the
requirements of Sections 15A(b)(2), (6),
the Automated Systems’’ for appeals of OTC
Bulletin Board eligibility determinations and retain
NASD Rule 11890, ‘‘Clearly Erroneous
Transactions,’’ and IM–11890–1 and IM–11890–2;
(3) make additional technical changes to the ADF
Rules; (4) incorporate NASD rules that have been
approved since the NASD filed the proposal; (5)
clarify the termination provision in the Trade
Reporting Facility LLC agreement to correctly
reflect that Nasdaq is not registered as a selfregulatory organization (‘‘SRO’’); and (6) retain
references to Nasdaq in NASD’s Delegation Plan,
bylaws and rules to reflect that Nasdaq remains a
controlled subsidiary.
16 See infra notes 40–41 and accompanying text.
17 See infra note 42 and accompanying text.
18 See infra notes 72–74 and accompanying text.
19 See infra notes 58–70 and accompanying text.
20 See infra note 57 and accompanying text.
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and (11) of the Exchange Act.21 Section
15A(b)(2) of the Exchange Act requires
a registered national securities
association to be so organized and have
the capacity to be able to carry out the
purposes of the Exchange Act. Section
15A(b)(6) of the Exchange Act requires
that the rules of a registered national
securities association be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to and facilitating transactions
in securities, to remove impediments to
and protect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
Section 15A(b)(11) of the Exchange Act
requires that the rules of a registered
national securities association be
designed to produce fair and
informative quotations, to prevent
fictitious or misleading quotations, and
to promote orderly procedures for
collecting, distributing, and publishing
quotations.
In addition, the Commission is
publishing notice to solicit comments
on, and is simultaneously approving, on
an accelerated basis, Amendment No. 1.
Many of the changes proposed in
Amendment No. 1 reflect the new
implementation strategy for the Nasdaq
Exchange and are necessary for the
NASD to fulfill its obligations under the
Exchange Act with regard to CTA Plan
Securities.
Specifically, the NASD proposes to
retain its rules that govern its members’
quoting, trading, and transaction
reporting of CTA Plan Securities and its
ITS rules related to the NASD’s and its
members’ compliance with the
requirements of the ITS Plan. In this
regard, in Amendment No. 1, the NASD
proposes to retain the portions of the
NASD’s Rule 4700 Series relating to the
NASD’s participation in the ITS Plan.
The NASD also proposes to amend the
Rule 4700 Series to delete rules that
relate to the operation of the Nasdaq
Market Center trading system, while
retaining the current rules that relate to
the operation of the SuperIntermarket
functionality, which facilitates NASD
members’ compliance with the ITS Plan.
In addition, the NASD proposes to
retain its Rule 6300 Series and Rule
5200 Series, which, among other things,
allow NASD members to enter
21 15 U.S.C. 78o–3(b)(2), (6), and (11). In
approving the proposed rule change, the
Commission has considered the proposal’s impact
on efficiency, competition, and capital formation.
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quotations in CTA Plan Securities by
registering as Consolidated Quote
System (‘‘CQS’’) market makers and as
ITS/Computer Assisted Execution
System (‘‘ITS/CAES’’) market makers.
Finally, the NASD proposes to retain its
6400 Series, which governs the
reporting of transactions in CTA Plan
Securities that do not occur in the
SuperIntermarket. The retention of these
rules, with changes that reflect the
Nasdaq Exchange’s operation as an
exchange for Nasdaq UTP Plan
Securities, maintains the current
framework for OTC trading of CTA Plan
Securities. Accordingly, the
Commission finds good cause to
accelerate approval of these changes.
To reflect the new implementation
strategy of the Nasdaq Exchange, in
Amendment No. 1, the NASD proposes
to retain in the NASD’s rules the Nasdaq
By-Laws and, rather than remove all
references to Nasdaq in the Delegation
Plan, to only eliminate Nasdaq’s
responsibility under the Delegation Plan
with respect to Nasdaq UTP Plan
Securities. By retaining references to
Nasdaq in the Delegation Plan, the
NASD retains control over Nasdaq
pursuant to the Series D preferred
share.22 The Commission finds good
cause to accelerate approval of these
changes to the Delegation Plan because
they allow Nasdaq to continue to
perform the same functions it does
today regarding CTA Plan Securities
and appropriately limit Nasdaq’s
delegated authority once it begins
operations as a national securities
exchange so that it will not be delegated
responsibility regarding OTC activities
in Nasdaq UTP Plan Securities. Further,
these changes ensure that the NASD
retains control over Nasdaq so that the
NASD will have the means by which to
fulfill its obligations through the use of
Nasdaq systems with regard to CTA
Plan Securities.
In addition, the NASD proposes, in
Amendment No. 1, to retain the rules
that govern executions of CTA Plan
Securities on BRUT and INET. The
Commission finds good cause to
accelerate approval of these changes
because these systems must continue to
operate pursuant to NASD rules until
the Nasdaq Exchange begins trading
CTA Plan Securities.
Finally, the NASD proposes to amend
NASD Rule 4400 relating to securities
that are dually listed on the NYSE and
the Nasdaq Exchange. The revised rule,
which reflects language currently found
in NASD IM–4400, makes clear that
these dually listed securities will
continue to be treated as CTA Plan
22 See
supra note 3.
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Securities under the NASD’s rules and
applicable national market system
plans. The Commission finds good
cause to accelerate approval of this
change because it will ensure that these
securities are handled in the same
manner as they are today.
In Amendment No. 1, the NASD
proposes to renumber NASD Rule
6440(i) as NASD Rule 5110 and to
extend its application to Nasdaq UTP
Plan Securities. This rule prohibits
members from executing transactions in
securities that are subject to an initial
public offering until such security has
opened for trading on the listing
exchange, which is indicated by the
dissemination of an opening transaction
by the listing exchange via the
Consolidated Tape.23 The Commission
finds good cause to accelerate approval
of extending this rule to Nasdaq UTP
Plan Securities because it will result in
uniform regulation of securities that are
subject to an initial public offering.
In Amendment No. 1, the NASD also
proposes to retain the NASD Rule 9700
Series, relating to grievances concerning
automated systems, and NASD Rule
11890, relating to clearly erroneous
transactions. Because the NASD will
continue to operate the OTC Bulletin
Board (‘‘OTCBB’’), it must retain the
NASD Rule 9700 Series, which governs
the review of requests for OTCBB
eligibility determinations. Accordingly,
the Commission finds good cause to
accelerate approval of NASD’s proposal
to retain this rule. The Commission
notes that the NASD only proposed to
eliminate reference to a Nasdaq
committee that is currently required in
the NASD Rule 9700 Series. The NASD
replaced the Nasdaq committee with an
NASD committee designated by the
Board that must be comprised of at least
50% non-industry committee members.
The current Nasdaq committee requires
at least five non-industry members on
its committee that may consist of
between 8 and 18 members. The
Commission finds good cause to
accelerate approval of this change
because it reflects the NASD’s
responsibility over the OTCBB.
The NASD also proposes to retain
amended paragraph (a) of Rule 11890 so
that its application will be limited to
transactions in CTA Plan Securities. The
NASD originally proposed to delete this
rule, which provides Nasdaq with
23 The Commission notes that the NASD
committed to file a proposed rule change to amend
this rule to reflect that transactions in Nasdaq UTP
Plan Securities are reported to the Nasdaq UTP
Plan. Telephone call between Kelly Riley, Assistant
Director, Division of Market Regulation
(‘‘Division’’), Commission and Lisa Horrigan,
Assistant General Counsel, NASD on June 28, 2006.
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38937
authority to review any transaction
arising from the use of any execution or
communication system owned or
operated by Nasdaq. After the Nasdaq
Exchange commences operations as an
exchange for Nasdaq UTP Plan
Securities, the only communication
systems of the NASD that will be
covered by Rule 11890(a) will be the
SuperIntermarket, BRUT, and INET.
Accordingly, the Commission finds
good cause to accelerate approval of this
change that limits Nasdaq’s authority
under this rule to CTA Plan Securities.
With regard to the Trade Reporting
Facility, the NASD proposes in
Amendment No. 1 to delete the
provision in NASD Rule 6120 that
would have allowed a UTP Exchange to
participate in the Trade Reporting
Facility. This provision is unnecessary
because a UTP Exchange would not
require a means for reporting
internalized trades. Accordingly, the
Commission finds good cause to
accelerate the deletion of this provision.
The NASD also proposes to amend the
termination provision of the Trade
Reporting Facility LLC agreement to
reflect that Nasdaq is not a registered
SRO. The Commission finds good cause
to accelerate approval of this change
because the agreement, as amended,
accurately reflects Nasdaq’s status.
In Amendment No. 1, the NASD also
proposes several technical changes. For
example, the NASD proposes to indicate
that its Short Sale Rule is a pilot. In
addition, the NASD proposes to
incorporate rule changes that have been
approved or have otherwise become
effective since it filed its proposed rule
change. The Commission finds good
cause to accelerate approval of these
changes so that the proposal accurately
reflects the NASD’s current rules.
Finally, the NASD proposes that its
proposed rule change become effective
upon the operation of the Nasdaq
Exchange as an exchange for Nasdaq
UTP Plan Securities. The Commission
finds good cause to accelerate approval
of this proposal because the NASD must
retain its current rules until such time
as the Nadsaq Exchange begins
operation for Nasdaq UTP Plan
Securities in order to continue to fulfill
its obligations under the Exchange Act.
For the reasons discussed above, the
Commission finds good cause for
approving Amendment No. 1 to the
proposal prior to the 30th day after the
date of publication of notice of filing
thereof in the Federal Register.
Accordingly, the Commission finds that
it is consistent with Sections 15A(b)(6)
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and 19(b)(2) of the Exchange Act 24 to
approve Amendment No. 1 on an
accelerated basis.
III. Discussion
A. The NASD’s Obligations Under the
Exchange Act and Commission Rules
The NASD is a registered national
securities association and SRO. One of
its statutory obligations as a registered
national securities association is to
supervise the activities of its members
that occur otherwise than on an
exchange. In particular, Section
15A(b)(11) of the Exchange Act requires
the NASD to have rules that govern the
‘‘form and content of quotations relating
to securities sold otherwise than on a
national securities exchange. * * *’’ 25
These rules also must be designed to
produce fair and informative quotations
and to promote orderly procedures for
collecting, distributing, and publishing
quotations.26 Rule 602 of Regulation
NMS also requires the NASD to collect
bids, offers, quotation sizes, and
aggregate quotation sizes from those
members who are responsible broker or
dealers.27 The NASD must then make
available to vendors, at all times when
last sale information is reported,
information about the best bids, best
offers, and quotation sizes
communicated otherwise than on an
exchange by its members that act as
OTC market makers, and their identity.
Rule 601 of Regulation NMS 28
requires the NASD to file a transaction
reporting plan regarding transactions in
listed equity and Nasdaq securities that
are executed by its members otherwise
than on a national securities
exchange.29 Under Rule 603 of
Regulation NMS,30 national securities
exchanges and national securities
associations act jointly pursuant to an
effective national market system plan to
disseminate consolidated information,
including a national best bid and offer,
and quotations for and transactions in
NMS stocks.
The means by which the NASD
complies with these requirements today
is through operation of its Nasdaq
24 15
25 15
U.S.C. 78o–3(b)(6) and 15 U.S.C. 78s(b)(2).
U.S.C. 78o–3(b)(11).
26 Id.
27 17
CFR 242.602.
CFR 242.601.
29 Under Rule 601(b) of Regulation NMS, brokerdealers are prohibited from executing a transaction
otherwise than on a national securities exchange
unless there is an effective transaction reporting
plan. New NASD Rule 5000 requires NASD
members to report transactions in exchange-listed
securities effected otherwise than on an exchange
to the NASD.
30 17 CFR 242.603.
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facility 31 and the ADF,32 and by
participating in the Consolidated
Quotation System Plan (‘‘CQ Plan’’) and
CTA Plan for CTA Plan Securities, and
the Nasdaq UTP Plan for Nasdaq UTP
Plan Securities.
The NASD proposes to continue to
operate the ADF for the collection of
quotes and transaction reports in
Nasdaq UTP Plan Securities.33 In
addition, the NASD’s rules will
continue to provide for the collection of
quotes and transaction reports in CTA
Plan Securities.34 Nasdaq systems,
however, are currently the exclusive
means by which NASD members enter
quotations and report trades in CTA
Plan Securities. Under the proposal, as
amended, the NASD will continue, via
its delegation to Nasdaq, to use Nasdaq
systems for collecting quotations and
transaction reports in CTA Plan
Securities.
Finally, Rule 608 of Regulation NMS
requires the NASD to comply with and
enforce compliance with the terms of
each national market system plan of
which it is a sponsor or participant.35 In
addition to the CQ Plan, CTA Plan and
Nasdaq UTP Plan, the NASD is a
member of the ITS Plan. The ITS Plan
contains the rules pursuant to which
ITS Participants interact and contains a
trade-through rule.36 Accordingly, most
31 Nasdaq systems collect quotations and
transaction reports from NASD members, including
registered market makers and electronic
communication networks (‘‘ECNs’’), for both
Nasdaq UTP Plan Securities and CTA Plan
Securities. The quotations and transaction reports
in Nasdaq UTP Plan Securities are reported by
Nasdaq systems to the Nasdaq UTP Plan, pursuant
to the NASD’s participation in the plan for
dissemination to vendors. The quotations and
transaction reports in CTA Plan Securities are
reported by Nasdaq systems to the CQ and CTA
Plans, pursuant to the NASD’s participation in
these plans for dissemination to vendors.
32 See Securities Exchange Act Release No. 46249
(July 24, 2002), 67 FR 49822 (July 31, 2002) (File
No. SR–NASD–2002–97) (order approving the ADF
on a pilot basis). See also Securities Exchange Act
Release No. 53699 (April 21, 2006), 71 FR 25271
(April 28, 2006) (notice of filing and immediate
effectiveness of File No. SR–NASD–2006–050)
(extending the ADF pilot program through January
26, 2007). The ADF was developed to provide
NASD members with an alternative to the Nasdaq
systems for the reporting of quotations and
transaction reports in Nasdaq UTP Plan Securities.
These quotations and trade reports are provided to
the Nasdaq UTP Plan for dissemination to vendors.
33 See NASD Rule 4000A Series and Rule 5000
Series. As discussed more fully below, transaction
reports for Nasdaq UTP Plan Securities also may be
submitted to the new Trade Reporting Facility.
34 See NASD Rules 4000 Series, 4700 Series, 5000
Series, 5200 Series, 6300 Series, and 6400 Series.
35 17 CFR 242.608(c).
36 In June 2005, the Commission adopted
Regulation NMS, which included the new Rule 611.
17 CFR 242.611. This rule requires a trading center
to establish, maintain and enforce written policies
and procedures that are reasonably designed to
prevent trade-throughs of protected quotations in
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OTC transactions in CTA Plan
Securities regulated by the NASD are
subject to the requirements of the ITS
Plan. The NASD expects to remain a
member of the ITS Plan for the purpose
of providing access to OTC quotations
communicated by its members through
NASD facilities and to provide its
members with access to exchanges’
quotations.
Current NASD rules reflect the
NASD’s participation in the ITS Plan.37
In Amendment No. 1, the NASD also
proposes to retain the rules that allow
its members to enter quotations in CTA
Plan Securities by registering as CQS
market makers 38 and ITS/CAES market
makers.39 Accordingly, as discussed
further below, the Commission finds
that these rules, as amended, are
consistent with Section 15A(b)(11) of
the Exchange Act and the Commission
also believes that these changes should
enable the NASD to satisfy its obligation
under Rule 602 of Regulation NMS.
B. Changes to the NASD’s Governing
Documents
The proposal, as amended, revises the
Delegation Plan to eliminate Nasdaq’s
responsibility for operating the OTC
market for Nasdaq UTP Plan Securities,
while continuing to delegate to Nasdaq
the responsibility for operating the OTC
market for CTA Plan Securities.40 This
change to the Delegation Plan will
accurately reflect the scope of the
delegation to Nasdaq after the Nasdaq
Exchange begins to operate as a national
securities exchange for Nasdaq UTP
Plan Securities and will ensure that the
NASD continues to have the ability to
fulfill its obligations with respect to
CTA Plan Securities, as described
above. Further, eliminating Nasdaq’s
NMS stocks. Rule 611 became effective on August
29, 2005; compliance with this rule has been
extended to a series of five dates beginning on
October 16, 2006. See Securities Exchange Act
Release No. 53829 (May 18, 2006), 71 FR 100 (May
24, 2006).
37 See NASD Rule 5200 Series and 4700 Series.
38 See NASD Rule 6320.
39 See NASD Rule 5220.
40 Among other things, the Delegation Plan, as
amended, delegates to Nasdaq the responsibility for:
(1) Operating the OTC market for CTA Plan
Securities and the automated systems supporting it;
(2) providing and maintaining a
telecommunications network infrastructure linking
market participants for the efficient processing and
handling of quotations, orders, transaction reports,
and comparisons of transactions in the OTC market
for CTA Plan Securities; (3) developing and
adopting rules applicable to the collection,
processing, and dissemination of quotation and
transaction information for securities traded in the
OTC market for CTA Plan Securities; (4) developing
and adopting other rules and policies for the OTC
market for CTA Plan Securities; and (5) establishing
standards for participation in the OTC market for
CTA Plan Securities. See Delegation Plan, Section
III, A.1.
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delegation of regulatory authority with
regard to Nasdaq UTP Plan Securities
satisfies one of the conditions for the
Nasdaq Exchange to begin trading
Nasdaq UTP Plan Securities.41
Because Nasdaq will continue to be
controlled by the NASD when the
Nasdaq Exchange begins to operate as a
national securities exchange for Nasdaq
UTP Plan Securities, the proposal
retains Nasdaq’s By-Laws in the NASD’s
rules.42 The Nasdaq By-Laws that the
NASD proposes to retain in its rules
reflect changes made to the Nasdaq ByLaws as part of the Nasdaq Exchange
application and that were approved by
the Commission in the Nasdaq
Exchange Order.43 The Commission
finds that these changes are consistent
with the Exchange Act because they
ensure that Nasdaq’s By-Laws are
accurately reflected in the NASD’s rules,
while also ensuring that Nasdaq’s
governing documents reflect its status as
a parent company of an SRO.44
C. Deleted Rules
The NASD also proposes to delete
several rules in their entirety because
the NASD will no longer require them
after the Nasdaq Exchange commences
operation as a national securities
exchange for Nasdaq UTP Plan
Securities. In this regard, the NASD
proposes to delete in their entirety
NASD Rules 2870 through 2885, relating
to the listing and trading of Nasdaq
index options. Similarly, the NASD
proposes to delete NASD Rules 2852
and 2854 relating, respectively, to
reporting requirements and trading halts
or suspensions for index warrants listed
on Nasdaq and reported to the Nasdaq
UTP Plan.
In addition, the NASD proposes to
delete from NASD Rules 2841, 2850,
and 2851 provisions relating to index
warrants listed on Nasdaq, while
retaining provisions in those rules
relating to index warrant trading in the
OTC market. Similarly, the NASD
proposes to delete provisions in NASD
Rule 2860 relating to standardized
options displayed on Nasdaq, and to
retain provisions relating to options
trading in the OTC market.
Because the NASD will not list or
trade index options or list warrants after
the Nasdaq Exchange commences
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41 See
Order Modifying Nasdaq Exchange
Conditions, supra, note 6.
42 See Amendment No. 1.
43 See supra, note 5.
44 In Amendment No. 1, the NASD also proposes
to retain the references to Nasdaq in the By-Laws
of NASD Dispute Resolution, NASD Regulation,
and the NASD to reflect that Nasdaq will continue
to be controlled by the NASD when the Nasdaq
Exchange begins to operate as an exchange for
Nasdaq UTP Plan Securities.
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operations as a national securities
exchange, the NASD will no longer
require these rules. Accordingly, the
Commission finds that it is consistent
with Section 15A(b)(6) of the Exchange
Act for the NASD to delete from its rules
provisions governing the listing and
trading of index options and warrants
listed on Nasdaq.
The NASD also proposes to delete the
NASD Rule 6800 Series relating to the
Mutual Fund Quotation Service because
the Nasdaq Exchange will operate this
service. Finally, the NASD proposes to
delete the NASD Rule 5100 Series,
‘‘Nasdaq International Service Rules,’’ to
reflect the expiration of the Nasdaq
International Service pilot program.45
Because the Nasdaq Exchange, rather
than the NASD, will operate the Mutual
Fund Quotation Service, the
Commission finds that the deletion of
the Mutual Fund Quotation Service
rules from the NASD’s rules is
consistent with Section 15A(b)(6) of the
Exchange Act. Similarly, the
Commission finds that the NASD’s
deletion of the Nasdaq International
Service pilot program rules, which
reflects the expiration of the pilot
program, is consistent with Section
15A(b)(6) of the Exchange Act.
D. OTC Reporting Facility
The NASD proposes to establish the
OTC Reporting Facility. NASD members
will use this facility to report trades in
PORTAL Securities,46 OTC Equity
Securities,47 and Direct Participation
Program (‘‘DPP’’) Securities.48
Currently, the NASD uses Nasdaq
systems to accept these trade reports.
According to the NASD, it plans to enter
into a contract with Nasdaq so that the
NASD may continue to use Nasdaq’s
Automated Confirmation Transaction
Service (‘‘ACT’’) 49 as its facility to
collect these transaction reports.50
1. PORTAL Securities
The current NASD Rule 5300 Series
provides qualification and transaction
45 The Nasdaq International Service pilot program
was most recently extended through October 9,
2003. See Securities Exchange Act Release No.
46589 (October 2, 2002), 67 FR 63001 (October 9,
2002) (notice of filing and order granting
accelerated approval of File No. SR–NASD–2002–
130).
46 See NASD Rule 6732.
47 See NASD Rule 6600 Series.
48 See NASD Rule 6900 Series.
49 In 2004, Nasdaq generally discontinued its use
of the term ‘‘ACT’’ and replaced it with the term
‘‘Nasdaq Market Center’’ or ‘‘service.’’ See
Securities Exchange Act Release No. 50074 (July 23,
2004), 69 FR 45866 (July 30, 2004) (notice of filing
and immediate effectiveness of File No. SR–NASD–
2004–076). To be consistent with the commenters
to this proposal, this order also will use the term
‘‘ACT.’’
50 See Amendment No. 1.
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38939
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. The NASD
proposes to delete from the NASD Rule
5300 Series rules relating to the
qualification requirements for, or
designation of, PORTAL Securities, a
function that the Nasdaq Exchange will
perform.51 The new NASD Rule 6700
Series will govern transaction reporting
in PORTAL Securities and other
requirements applicable to the trading
of PORTAL Securities.52 Because these
changes will more accurately reflect the
NASD’s proposed activities with regard
to PORTAL Securities after the Nasdaq
Exchange begins to operate as an
exchange for Nasdaq UTP Plan
Securities, the Commission finds them
consistent with Section 15A(b)(5) of the
Exchange Act.
2. OTC Equity Securities
The NASD proposes to combine its
current NASD Rule 6600 and 6700
Series into a single NASD Rule 6600
Series, which will govern reporting
requirements for certain quotations and
transactions in OTC Equity Securities. 53
The NASD’s rules define OTC Equity
Securities as any equity security not
traded on an exchange and certain
exchange-listed securities that do not
qualify for real-time trade reporting.
Because these changes will maintain the
regulatory requirements for trading and
reporting transactions in OTC Equity
Securities, the Commission believes that
they are consistent with Section
15A(b)(6) of the Exchange Act.
3. DPP Securities
The NASD Rule 6900 Series governs
the trade reporting of off-exchange
secondary market transactions in DPP
Securities. The NASD proposes to
amend these rules to reflect that such
transactions will be reported to the
NASD’s OTC Reporting Facility rather
than the Nasdaq Market Center. The
Commission finds these changes
consistent with the Exchange Act
because the substantive requirements of
the NASD Rule 6900 Series will remain
unchanged.
51 See
Nasdaq Exchange Rule 6500 Series.
the new NASD Rule 6700 Series
incorporates existing NASD Rules 5330,
‘‘Requirements Applicable to Members of the
Association,’’ 5331, ‘‘Limitations on Transactions in
PORTAL Securities,’’ 5332, ‘‘Reporting Debt and
Equity Transactions in PORTAL Securities,’’ 5340,
‘‘Arbitration,’’ and 5350, ‘‘Rules of the
Association.’’
53 The NASD also proposes to make minor
changes designed to reflect Nasdaq’s separation
from the NASD and to identify the NASD as the
operator of the OTCBB.
52 Specifically,
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E. NASD Rule 9700 Series and 11890
Series
In the original proposal, the NASD
proposed to delete in its entirety the
NASD Rule 9700 Series, ‘‘Procedures on
Grievances Concerning the Automated
Systems.’’ Because the NASD Rule 9700
Series governs the review of requests for
OTCBB eligibility determinations under
NASD Rule 6530, ‘‘OTCBB–Eligible
Securities,’’ the NASD proposes in
Amendment No. 1 to retain a revised
version of the NASD Rule 9700 Series.
The NASD Rule 9700 Series, as
amended, replaces references to Nasdaq,
the Nasdaq Listing and Review Hearing
Council, and systems owned by Nasdaq
with references to, respectively, the
NASD, a committee designated by the
NASD’s Board of Governors, and NASD
systems. Because these changes to the
NASD Rule 9700 Series provide for the
continued availability of existing
procedures for reviewing OTCBB
eligibility determinations, the
Commission finds that they are
consistent with Section 15A(b)(6) of the
Exchange Act.
In addition, Amendment No. 1 revises
NASD Rule 9740, ‘‘Consideration of
Applications,’’ to permit applicants
seeking redress pursuant to the NASD
Rule 9700 Series to be heard
telephonically by a hearing panel, as
well as in person. The Commission
believes that this change is consistent
with Section 15A(b)(6) of the Exchange
Act because it will provide additional
flexibility for applicants seeking redress
under the NASD Rule 9700 Series.
In its original proposal, the NASD
proposed to delete NASD Rule 11890,
‘‘Clearly Erroneous Transactions,’’ in its
entirety. In Amendment No. 1, the
NASD proposes to retain a modified
version of NASD Rule 11890. NASD
Rule 11890(a), ‘‘Authority to review
Transactions Pursuant to Complaint of
Market Participant,’’ currently provides
Nasdaq with the authority to review any
transaction arising from the use of any
execution or communication system
owned or operated by Nasdaq. Because
Nasdaq will no longer operate an
execution or communication system for
the NASD for Nasdaq UTP Plan
Securities pursuant to the Delegation
Plan after the Nasdaq Exchange begins
to operate as an exchange for Nasdaq
UTP Plan Securities, the NASD is
amending NASD Rule 11890(a) to
eliminate Nasdaq’s authority under the
rule to review complaints regarding
transactions in Nasdaq UTP Plan
Securities. NASD Rule 11890(a) will
continue to provide Nasdaq with
authority to review complaints
regarding transactions in CTA Plan
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Securities arising from the use of an
execution or communication system
owned or operated by Nasdaq.54 For the
same reason, NASD Rule 11890(b)(1), as
amended, will continue to allow Nasdaq
to review, on its own motion, any
transaction in a CTA Plan Security in
the event of extraordinary market
conditions or a disruption or
malfunction in the use or operation of
any quotation, execution,
communication, or trade reporting
system owned or operated by Nasdaq,
while eliminating this authority with
respect to Nasdaq UTP Plan Securities.
The Commission finds that these
changes are consistent with Section 15A
of the Exchange Act because Nasdaq
will no longer operate, or be delegated
authority with respect to, an NASD
execution facility for Nasdaq UTP Plan
Securities after the Nasdaq Exchange
begins to operate as an exchange for
Nasdaq UTP Plan Securities.
In addition, the NASD proposes to
amend NASD Rule 11890(b)(2) to allow
it to review, on its own motion, any
transaction in a Nasdaq UTP Plan
Security or an OTC Equity Security in
the event of extraordinary market
conditions or a disruption or
malfunction in the use or operation of
any quotation, communication, or trade
reporting system owned or operated by
the NASD. Thus, NASD Rule
11890(b)(2), as amended, will allow the
NASD to declare clearly erroneous
transactions in Nasdaq UTP Plan
Securities reported to the ADF or to the
Trade Reporting Facility. The NASD
believes that this authority may be
appropriate in very limited
circumstances, for example, when an
extraordinary event occurs and multiple
SROs are canceling or modifying trades.
The Commission finds that NASD
Rule 11890(b)(2), as amended, is
consistent with Section 15A of the
Exchange Act because the expansion of
the NASD’s authority under NASD Rule
11890(b)(2) replaces authority
previously delegated to Nasdaq and
should facilitate the fair and efficient
resolution of disputes involving clearly
erroneous transactions in Nasdaq UTP
Plan Securities and OTC Equity
Securities.
F. OATS
The NASD proposes to revise its
OATS rules regarding orders routed to
non-members, including the Nasdaq
Exchange, to ensure that the audit trail
for transactions executed on the Nasdaq
54 As noted above, Nasdaq will continue to
operate the SuperIntermarket pursuant to a
delegation from the NASD after the Nasdaq
Exchange begins to operate as an exchange for
Nasdaq UTP Plan securities.
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Exchange continues in the same manner
as it does today, when transactions are
executed on Nasdaq systems that are
NASD facilities. Specifically, the NASD
proposes that orders routed to nonmembers, which includes national
securities exchanges, be identified with
a routed order identifier or other unique
identifier required by the non-member
receiving the order, and to indicate the
national securities exchange or
registered securities association to
which the order is transmitted.55 In
addition, the NASD proposes to clarify
existing requirements by providing that
members are permitted to use a routed
order identifier that is different from the
order identifier used for origination
purposes and that a member
transmitting an order to another member
must provide the routed order identifier
to the member receiving the order. The
Commission finds that the proposed
changes are consistent with Section
15A(b)(2) of the Exchange Act 56 in that
they are designed to ensure that the
NASD and the Nasdaq Exchange can
conduct surveillance and investigations
of their members for potential violations
of NASD rules, Nasdaq Exchange rules,
and the federal securities laws.
G. OTC Trading of CTA Plan Securities
1. Dually Listed Securities
The NASD proposes to eliminate
current NASD Rule 4400 and to modify
NASD IMZ–Rule 4400, which will
become its new Rule 4400. New NASD
Rule 4400 describes the treatment of
securities that are dually listed on the
Nasdaq Exchange and the NYSE.
Specifically, the rule indicates that such
dually listed securities will continue to
be subject to the CQ and CTA Plans and
will continue to be treated as CTA Plan
Securities under the NASD’s rules.57The
Commission finds that new NASD Rule
4400 is consistent with Section 15A of
the Act because it clarifies that the
NASD will treat these securities in the
same manner as it does today.
2. SuperIntermarket Facility
Through its delegation to Nasdaq
under the Delegation Plan, the NASD
55 See
NASD Rule 6954(c)(6).
U.S.C. 78o–3(b)(2).
57 Among other things, new NASD Rule 4400
indicates the NASD will continue to send all quotes
and transaction reports in dually listed securities to
the processor for the CTA Plan while such
securities continue to trade through the facilities of
the NASD. In addition, the rule notes that market
makers in dually listed securities will retain all of
the obligations imposed by the NASD Rule 5200,
6300, and 6400 Series regarding quoting, trading,
and transaction reporting of CQS securities, and
that the NASD will continue to honor the trade halt
authority of the primary market under the CQ and
CTA Plans.
56 15
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will continue to use technology owned
by Nasdaq, i.e., the SuperIntermarket, as
its facility to collect OTC quotes and
transaction reports in CTA Plan
Securities. In addition, the
SuperIntermarket will continue to
permit NASD members quoting in the
facility to participate in ITS and satisfy
the NASD’s obligations under the ITS
Plan.58
a. Quotations
In Amendment No. 1, the NASD
proposes to retain its rules that allow its
members to register as CQS market
makers 59 and ITS/CAES market
makers.60 These rules are essential to
the NASD’s ability to fulfill its
statutory 61 and regulatory
obligations,62and to NASD members’
ability to fulfill their regulatory
obligation to submit their OTC
quotations to the NASD.63 The NASD
must collect quotations in subject
securities that OTC market makers
communicate otherwise than on an
exchange.64 NASD rules currently
provide that members that communicate
quotations off an exchange in CTA Plan
Securities must register as CQS market
makers and ITS/CAES market makers.65
The NASD has only proposed minor
changes to the rules for CQS market
makers and ITS/CAES market makers,
including replacing references to the
Nasdaq Market Center with references to
Nasdaq. The NASD also proposes to
adopt NASD Rule 6431, ‘‘Trading
Halts,’’ to provide a trading halt rule for
CTA Plan Securities.66
58 See
supra notes 25–39 and accompanying text.
NASD Rule 6300 Series. NASD members
that submit quotes in CQS securities must be
registered as CQS market makers. See NASD Rule
6320(a). CQS market makers must also register as
ITS/CAES market makers. See NASD Rule 6320(e).
See also NASD Rule 5210(e).
60 See NASD Rule 5200 Series. NASD members
that participate in ITS must register as ITS/CAES
market makers. See NASD Rule 5220. ITS/CAES
market makers must also register as CQS market
makers. See NASD Rule 5220(a). See also NASD
Rule 6320(e).
61 15 U.S.C. 78o–3(b)(11). See supra notes 25–39
and accompanying text.
62 See Rule 602(a) under the Exchange Act, 17
CFR 242.602(a).
63 See Rule 602(b) of Regulation NMS under the
Exchange Act, 17 CFR 242.602(b).
64 See Rule 602(b) of Regulation NMS under the
Exchange Act, 17 CFR 242.602(b).
65 See NASD Rules 6320(a) and 5210(e). An
NASD member that does not communicate
quotations off an exchange, but that executes a
transaction in a CTA Plan Security off an exchange,
may report its transaction to the NASD through
ACT, which Nasdaq will operate for the NASD
under the Delegation Plan.
66 NASD Rule 4120 currently contains Nasdaq’s
authority to halt OTC trading of Nasdaq UTP Plan
Securities and CTA Plan Securities. The proposal
revises NASD Rule 4120 and renumbers it as NASD
Rule 4633, ‘‘Trading Halts,’’ which now relates
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59 See
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The Commission finds that the
NASD’s proposal to retain, with minor
clarifying changes, its rules governing
CQS and ITS/CAES market makers is
consistent with Section 15A of the
Exchange Act because it will allow the
NASD to continue to fulfill its statutory
and regulatory obligations,67 and allow
NASD members to continue to fulfill
their regulatory obligation to submit
their OTC quotations to the NASD.68 In
addition, the Commission finds that the
proposal to adopt NASD Rule 6431 is
consistent with Section 15A of the
Exchange Act because it could help the
NASD to maintain a fair and orderly
market.
b. Executions
As noted above, the NASD will
remain a member of the ITS Plan. As
such, the NASD is required to comply
with, and enforce compliance by its
members with, the provisions of the ITS
Plan.69 Currently, the NASD uses its
Nasdaq SuperIntermarket facility to
provide its members with access to ITS
participant exchanges and to provide
ITS participant exchanges with access to
ITS/CAES market makers’ quotations.
The NASD proposes to continue to use
the SuperIntermarket system as its
facility for these purposes through its
delegation to Nasdaq.
In Amendment No. 1, the NASD
proposes to retain certain parts of its
Rule 4700 Series that relate to the
SuperIntermarket, and to eliminate from
the 4700 Series those rules that pertain
to the trading of Nasdaq UTP Plan
Securities on the Nasdaq Market Center.
The Commission finds that these
changes are consistent with the
requirements of the Exchange Act
because they will permit the NASD and
its members to continue to participate in
ITS as they do today.70 The Commission
also finds that the elimination of rules
that pertain to the trading of Nasdaq
UTP Plan Securities is consistent with
the Exchange Act because the NASD
will no longer be operating an execution
facility for Nasdaq UTP Plan Securities.
c. Transaction Reporting
Members effecting trades in CTA Plan
Securities off an exchange, yet outside
solely to the Trade Reporting Facility. New NASD
Rule 6431, which includes the same provisions as
NASD Rule 4633, applies to CTA Plan Securities.
67 See supra notes 61 and 62.
68 See note 63, supra, and accompanying text.
69 See Rule 608(c) of Regualtions NMS under the
Exchange Act, 17 CFR 242.608(c).
70 See Securities Exchange Act Release No. 49349
(March 2, 2004), 69 FR 10775 (March 8, 2004)
(order approving the use of SuperMontage for
trading ITS securities). The Commission notes that
required participation in the ITS Plan is of limited
duration. See supra note 36.
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38941
of the SuperIntermarket facility, will
continue, as they do today, to submit
trade reports to ACT. Nasdaq will have
delegated responsibility under the
Delegation Plan to operate ACT for the
NASD for this purpose. Accordingly, the
NASD proposes to retain its 6400 Series,
‘‘Reporting Transactions in Listed
Securities,’’ with minor changes,
including replacing references to the
Nasdaq Market Center with references to
Nasdaq.71
The Commission finds that these
changes are consistent with the
Exchange Act. With respect to CTA Plan
Securities, the only means currently
available to the NASD to fulfill its
statutory and regulatory obligations is
through NASD facilities owned by
Nasdaq. The Commission believes that
the NASD Rule 6400 Series, as
amended, will enable the NASD to
continue to satisfy its obligations under
Rules 601 and 603 of Regulation NMS
and the CTA Plan to collect its
members’ transaction reports for OTC
trades of CTA Plan Securities.
3. BRUT and INET Rules
Because the Nasdaq Exchange will not
commence trading in CTA Plan
Securities at this time, any trading of
these securities that occurs in BRUT and
INET would occur over-the-counter.
Accordingly, the NASD has proposed in
Amendment No. 1 to retain its current
rules that govern the operation of the
BRUT 72 and INET 73 systems with
regard to CTA Plan Securities. These
trading platforms will continue to be
facilities of the NASD for CTA Plan
Securities that are operated by Nasdaq
pursuant to the Delegation Plan. The
NASD has proposed to make some
changes to these rules to reflect that
NASD members may not use these
systems to execute OTC trades in
Nasdaq UTP Plan Securities.74 The
Commission finds that these changes are
consistent with the Exchange Act
because they clarify and appropriately
limit the use of these systems by NASD
members after the Nasdaq Exchange
begins to operate an exchange for
Nasdaq UTP Plan Securities.
71 As described more fully above, the NASD also
proposes to adopt NASD Rule 6431, relating to
trading halts for CTA Plan Securities.
72 See NASD Rule 4900 Series.
73 See NASD Rule 4950 Series.
74 Once the Nasdaq Exchange begins operations
as a national securities exchange in Nasdaq UTP
Plan Securities, transactions in Nasdaq UTP Plan
Securities that occur in Brut and INET will be
Nasdaq Exchange trades subject to the Nasdaq
Exchange’s rules and regulatory jurisdiction.
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H. OTC Trading of Nasdaq UTP Plan
Securities
1. NASD Rule 5110
The NASD proposes to renumber
NASD Rule 6440(i) as NASD Rule 5110,
‘‘Transactions Related to Initial Public
Offerings,’’ which prohibits a member
from executing, directly or indirectly, a
transaction otherwise than on an
exchange in a security subject to an
initial public offering until the security
has first opened for trading on the
national securities exchange listing the
security, as indicated by the
dissemination, via the Consolidated
Tape, of an opening transaction in the
security by the listing exchange. In
addition, the NASD proposes to extend
its application to transactions in Nasdaq
UTP Plan Securities. New NASD Rule
5110 is substantially the same as current
NASD Rule 6440(i).75 The Commission
finds that new NASD Rule 5110 is
consistent with the Exchange Act
because it is substantially the same as
current NASD Rule 6440(i). In addition,
the Commission believes that the
application of NASD Rule 5110 to
Nasdaq UTP Plan Securities, as well as
CTA Plan Securities, after the Nasdaq
Exchange begins to operate as a national
securities exchange is consistent with
the Exchange Act because it will
provide consistent treatment for all
exchange-traded securities.76
2. Changes to the ADF Rules
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The ADF is an NASD facility for
members to quote and report offexchange trades in Nasdaq UTP Plan
Securities. NASD members that use the
ADF must comply with the NASD Rule
4000A Series, ‘‘NASD Alternative
Display Facility,’’ and the NASD Rule
6000A Series, ‘‘NASD ADF Systems and
Programs.’’
The NASD proposes to make the
following changes to its ADF rules.
First, the NASD proposes to clarify that
the following ADF rules apply to
Registered Reporting ECNs as well as
Registered Reporting ADF Market
Makers: NASD Rules 4613A(b), relating
to firm quote requirements, and
4613A(c), requiring quotations to be
reasonably related to the prevailing
market; NASD Rule 4617A, relating to
normal business hours; NASD Rule
4618A, relating to clearance and
75 NASD Rule 6440(i) prohibits members from
executing, directly or indirectly, an OTC transaction
in a security subject to an initial public offering
until the security has first opened for trading on the
national securities exchange listing the security, as
indicated by the dissemination, via the
Consolidated Tape, of an opening transaction in the
security by the listing exchange.
76 See supra note 23.
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settlement requirements; and NASD
Rules 4621A and 4622A, relating to the
NASD’s ability to suspend or terminate
quotations or ADF services. The
Commission finds that these changes are
consistent with Section 15A(b)(6) of the
Exchange Act 77 because they will apply
ADF rules consistently to Registered
Reporting ADF Market Makers and
Registered Reporting ECNs.
Second, the NASD proposes to revise
NASD Rule 4632A, ‘‘Transactions
Reported by Members,’’ to incorporate
the trade reporting requirements
currently set forth in NASD Rule 5430,
‘‘Transaction Reporting,’’ which is being
deleted. The NASD proposes to delete
the NASD Rule 5400 Series, ‘‘Nasdaq
Stock Market and Alternative Display
Facility Trade Reporting.’’ NASD Rule
5410 states that the NASD will operate
two facilities for collecting trade reports,
the Nasdaq Stock Market and the ADF,
and notes that the NASD Rule 5400
Series establishes rules governing which
member must report a trade and
whether the trade must be reported to
the Nasdaq Market Center or to the ADF.
The provisions in the NASD Rule 5400
Series relating to the reporting of
transactions to the Nasdaq Market
Center will be no longer relevant after
the Nasdaq Exchange commences
operations as a national securities
exchange for Nasdaq UTP Plan
Securities and, accordingly, the NASD
proposes to delete these provisions.
Therefore, the Commission finds that
elimination of these rules is consistent
with the Exchange Act.
The NASD proposes to relocate the
provisions in the NASD Rule 5400
Series relating to the ADF to NASD
Rules 4630A, ‘‘Reporting Transactions
in ADF-Eligible Securities,’’ and 4632A,
‘‘Transactions Reported by Members,’’
which will govern the reporting of
transactions in ADF-eligible securities
through the NASD’s Trade Reporting
and Comparison System (‘‘TRACS’’).
The Commission believes that the
proposal to move the NASD Rule 5400
Series to the ADF rule series should
clarify the applicability of the NASD’s
rules and, therefore the Commission
finds that these changes are consistent
with Section 15A(b)(6) of the Exchange
Act.78 The Commission believes that
this change will help to consolidate the
ADF’s trade reporting requirements
while substantially preserving the
current requirements of NASD Rule
5430.
Third, the NASD proposes to make
the ADF’s trade reporting requirements
more consistent with the trade reporting
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77 15
U.S.C. 78o–3(b)(6).
78 Id.
Frm 00101
Fmt 4703
Sfmt 4703
rules that apply to Nasdaq systems. For
example, the NASD proposes to require
that the execution time in hours,
minutes, and seconds based on Eastern
Time in military format be included in
all ADF trade reports,79 to add certain
trade report modifiers,80 and to establish
provisions relating to the reporting of
cancelled trades.81 The NASD also
proposes to clarify that all applicable
trade modifiers must be included in ‘‘as/
of’’ trades.82 In addition, the NASD
proposes to add to NASD Rule 4632A a
provision stating that a pattern or
practice of late reporting without
exceptional circumstances may be
considered conduct inconsistent with
high standards of commercial honor and
just and equitable principles of trade.83
The Commission finds that these
changes, which currently apply to
Nasdaq trade reports, are consistent
with Section 15A(b)(6) of the Exchange
Act in that they are designed to protect
investors and the public interest by
helping to ensure the timeliness and
accuracy of the transaction reports
submitted to the ADF.
Fourth, the NASD proposes to revise
NASD Rule 4120A to provide that it will
halt trading in an ADF-eligible security
in the OTC market when there is
extraordinary market activity in a
security that is likely to have a material
effect on the market for the security and
the NASD determines, or determines
after consultation with a national
securities exchange trading the security,
that the activity is caused by the misuse
or malfunction of an NASD or exchange
quotation, communication, reporting, or
execution system. The Commission
believes that this authority may help the
NASD to maintain a fair and orderly
market. In addition, the Commission
notes that current NASD Rule 4120(a)(6)
provides the NASD with comparable
trading halt authority.
Finally, the NASD proposes to
eliminate the availability of passive
market making on the ADF and
therefore is deleting ADF rules that
relate to passive market making.84
According to the NASD, passive market
making rules for the ADF are
unnecessary because only Registered
Reporting ECNs participate in the ADF.
The NASD notes that if a market maker
were, in the future, to quote in the ADF
and participate in a secondary offering
79 See NASD Rules 4632A(c)(2)(I) and
4632A(d)(2)(D). These changes were proposed in
Amendment No. 1.
80 See NASD Rule 4632A(a)(7), (8), and (9).
81 See NASD Rule 4632A(m). This was proposed
in Amendment No. 1.
82 See NASD Rule 4632A(a)(10).
83 See NASD Rule 4632A(a)(6).
84 See NASD Rule 4619A.
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of a security, the ADF market maker
would be required to stop quoting in the
ADF in order to comply with Regulation
M. The Commission finds that these
changes are consistent with the
Exchange Act because these rules are
not used currently and Rule 103 of
Regulation M does not require the
NASD to make passive market making
available in the ADF.
3. The Trade Reporting Facility
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The NASD proposes to establish a
new facility, the Trade Reporting
Facility, which will provide NASD
members with another facility, in
addition to the ADF,85 for reporting
transactions in Nasdaq UTP Plan
Securities executed otherwise than on
an exchange.86 The Trade Reporting
Facility will allow NASD members that
currently internalize customer orders
through the Nasdaq Stock Market
facility of the NASD to continue to
internalize such orders pursuant to
NASD rules and to report trades to the
new Trade Reporting Facility of the
NASD.
The Trade Reporting Facility will be
operated by the Trade Reporting Facility
LLC (‘‘TRF LLC’’), which is owned by
the NASD and Nasdaq. The TRF LLC
proposes to contract with the Nasdaq
Exchange to use its technology, i.e.,
ACT, to accept OTC trade reports from
NASD members in Nasdaq UTP Plan
Securities. Accordingly, this proposal is
intended to maintain the status quo
with respect to the technology used by
NASD members to report OTC
transactions in Nasdaq UTP Plan
Securities. Further, the NASD proposes
to maintain its current rules for
accepting transaction reports in Nasdaq
UTP Plan Securities. By keeping its
current rules, NASD members will be
able to continue to choose between two
facilities, the Trade Reporting Facility
and the ADF, for submitting transaction
reports for OTC trades in Nasdaq UTP
Plan Securities.87
85 As noted above, the ADF currently accepts
quotes and transaction reports only for Nasdaq UTP
Plan Securities.
86 See NASD Rule 4000 Series. See also NASD
Rule 5000. New NASD Rule 4000 would permit
NASD members to report transactions in Nasdaq
UTP Plan Securities executed otherwise than on an
exchange to the NASD through the new Trade
Reporting Facility. Members also may report
transactions in Nasdaq UTP Plan Securities to the
ADF. These transaction reports will then be
reported to the Nasdaq UTP Plan for dissemination
pursuant to the NASD’s participation in this Plan.
The Commission finds that this proposed change is
consistent with Rule 601 under Regulation NMS.
See also NASD Rule 4100.
87 The NASD represents that it will have an
integrated audit trail and integrated surveillance
facilities for members reporting trades on both the
ADF and the Trade Reporting Facility. See
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The NASD proposes that its new Rule
4000 Series 88 and Rule 6100 Series,89
which contain clearing and comparison
rules, will govern the reporting of trades
to its Trade Reporting Facility.
Specifically, the NASD proposes to
combine in the new NASD Rule 4630
Series the trade reporting requirements
in the current NASD Rule 4630, 4640,
and 4650 Series (Nasdaq National
Market securities, Nasdaq Capital
Market securities, and Nasdaq
convertible debt securities,
respectively). The Commission believes
that the new NASD Rule 4630 Series
retains the requirements and general
organization of the NASD’s current
trade reporting rules. In addition, the
NASD represents that it intends to
interpret and apply the trade reporting
rules of the Trade Reporting Facility in
the same manner in which it interprets
and applies its current trade reporting
rules.
The Commission finds that the
NASD’s rules governing the reporting of
trades to the Trade Reporting Facility
are consistent with the Exchange Act.
The NASD’s proposal is designed to
allow the NASD and its members to
continue to fulfill their obligations
under the Commission’s rules and the
national market system plans with
regard to Nasdaq UTP Plan Securities.
The Commission also believes that the
establishment of the Trade Reporting
Facility is consistent with the
Congressional finding in Section
11A(a)(1)(C)(iii) of the Exchange Act
that it is in the public interest and
appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure the
availability of information with respect
to transactions in securities.
Amendment No. 1. The Commission believes that
an integrated audit trail and integrated surveillance
capabilities are important to the NASD’s ability to
conduct effective surveillance of OTC trading in
Nasdaq UTP Plan Securities when transactions in
those securities can be reported to both the ADF
and the Trade Reporting Facility.
88 The proposal deletes from the current NASD
Rule 4000 Series rules that relate to Nasdaq,
including listing standards, trading rules for the
Nasdaq National Market Center, and Nasdaq market
maker registration requirements. The proposal
retains an amended version of the NASD Rule 4700
Series, which will govern ITS/CAES members’ use
of the SuperIntermarket.
89 The current NASD Rules 6100 Series, which is
being deleted, contains rules for the reporting of
trades that are executed on the Nasdaq Market
Center and ACES. The Commission believes that it
is consistent with the Exchange Act to eliminate the
NASD Rule 6100 Series because these rules relate
solely to the Nasdaq systems that will no longer be
NASD facilities after the Nasdaq Exchange begins
to trade Nasdaq UTP Plan Securities.
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Fmt 4703
Sfmt 4703
38943
a. TRF LLC
As noted above, the NASD and
Nasdaq will jointly own the TRF LLC,
which will operate the Trade Reporting
Facility. The NASD has filed the limited
liability company agreement (‘‘LLC
Agreement’’) for the TRF LLC as part of
the current proposal.90 The LLC
Agreement makes clear that the NASD
will have sole regulatory responsibility
for the activities of NASD members
related to the facility operated by the
TRF LLC. The LLC Agreement identifies
the NASD as the ‘‘SRO Member’’ of the
LLC and provides the NASD with
certain rights that are intended to
preserve its regulatory authority and
control. Specifically, pursuant to the
LLC Agreement, the NASD must
consent before certain ‘‘Major Actions’’
with respect to the TRF LLC are
effective. The LLC Agreement defines a
‘‘Major Action’’ as: (1) Approving
pricing decisions that are subject to the
Commission filing process; (2)
approving contracts between the TRF
LLC and Nasdaq; (3) approving director
compensation; (4) selling, licensing,
leasing, or otherwise transferring
material assets used in the operation of
the TRF LLC outside the ordinary
course of business with an aggregate
value in excess of $3 million; (5)
approving or undertaking a merger or
other reorganization of the TRF LLC
with another 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 TRF LLC; (8)
voluntary or involuntary dissolution of
the TRF LLC other than termination as
provided for in the LLC Agreement;91
(9) conversion of the TRF LLC to any
other type of entity; (10) expanding or
modifying the business, which would
90 The Commission notes that any changes to the
LLC Agreement that are stated policies, practices,
or interpretations of the NASD, as defined in Rule
19b–4 under the Exchange Act, must be filed with
the Commission pursuant to Section 19(b) of the
Exchange Act and Rule 19b–4 thereunder.
91 As set forth in Section 20 of the LLC
Agreement, two years after the effective date of the
LLC Agreement, either the NASD or Nasdaq may
dissolve the TRF LLC by providing the other with
prior written notice of at least one year (unless such
notice is revoked). If the NASD provides the notice
of dissolution, the NASD and Nasdaq will negotiate
in good faith to: (i) Allow Nasdaq to continue to
operate the TRF LLC or the business of the TRF LLC
under the NASD’s SRO registration; (ii) restructure
the TRF LLC so that Nasdaq can operate the TRF
LLC or its business under its SRO registration or
that of any of its affiliates, as the case may be; or
(iii) sell the TRF LLC or its business to the NASD
based on a valuation of the TRF LLC’s business and
assets as set forth in the LLC Agreement, and
consideration for the sale may include a contract for
Nasdaq to provide services to the NASD relating to
the operation of the TRF LLC and the business of
the TRF LLC.
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result in a material change in the
business of the TRF LLC; (11) changing
the number of directors or composition
of the TRF LLC Board; and (12) adopting
or amending policies regarding access
and credit matters affecting the TRF
LLC.92
Nasdaq will be primarily responsible
for the management of the TRF LLC’s
business affairs to the extent that those
activities are not inconsistent with the
regulatory and oversight functions of the
NASD. All profits and losses from the
TRF LLC will be allocated to Nasdaq.93
Although the TRF LLC itself will not
carry out any regulatory functions, all of
its activities must be conducted in a
manner that is consistent with the
Exchange Act. In this regard, under
Section 9(d) of the LLC Agreement, each
member of the TRF LLC agrees to
comply with the federal securities laws
and rules and regulations thereunder
and to cooperate with the Commission
pursuant to its regulatory authority and
the provisions of the LLC Agreement.
Section 10(b) of the LLC Agreement
imposes similar obligations on each
director of the TRF LLC. Under Section
10(b), each director agrees to comply
with the federal securities laws and the
rules and regulations thereunder and to
cooperate with the Commission and the
NASD in carrying out their regulatory
authority and the provisions of the LLC
Agreement. In addition, Section 10(b)
states that each director agrees that in
discharging his or her responsibilities as
a member of the TRF LLC Board, each
director will take into consideration
whether his or her actions as a director
would cause the TRF LLC or either
member to engage in conduct that
would be inconsistent with the
purposes of the Exchange Act.
The Commission believes that these
provisions reinforce the notion that the
TRF LLC, as the operator of an NASD
facility, is not solely a commercial
enterprise; it is an integral part of an
SRO registered pursuant to the
Exchange Act and, as such, is subject to
obligations imposed by the Exchange
Act. The Commission underscores that
these obligations endure so long as the
TRF LLC operates an NASD facility.
The LLC Agreement includes
additional provisions that make special
accommodations for the NASD as the
SRO responsible for the NASD facilities
operated by the TRF LLC. For example,
Section 10(a) of the LLC Agreement
provides that the TRF LLC Board shall,
at all times, include at least one director
(the ‘‘SRO Member Director’’)
designated by the NASD. Under Section
92 See
93 See
Section 10(e) of the LLC Agreement.
Section 15 of the LLC Agreement.
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17:10 Jul 07, 2006
Jkt 208001
10(e) of the LLC Agreement, no ‘‘Major
Action,’’ as defined in the LLC
Agreement, will be effective unless
approved by consent of the SRO
Member Director.94 Section 19 of the
LLC Agreement prohibits either the
NASD or Nasdaq from transferring or
assigning its interest in the TRF LLC
except to an affiliate, as defined in the
LLC Agreement, and the NASD may
transfer its interest only to an affiliate
that has proper authority to perform the
self-regulatory responsibilities of the
NASD.
The Commission believes that the
provisions described above will allow
the NASD to carry out its self-regulatory
responsibilities with respect to its
facilities operated by the TRF LLC.
Moreover, the Commission believes that
the limits in Section 19 of the LLC
Agreement on transfers of interest in the
TRF LLC, together with the
requirements of Section 19(b) of the
Exchange Act and Rule 19b–4
thereunder, provide the Commission
with sufficient authority over changes in
control of the TRF LLC to enable the
Commission to carry out its regulatory
oversight responsibilities with respect to
the NASD and its facilities.
The Commission also believes that, as
highlighted by the terms of the LLC
Agreement, the Commission and the
NASD have sufficient regulatory
jurisdiction over the controlling parties
of the TRF LLC to carry out their
responsibilities under the Exchange Act.
In Section 17(b) of the LLC Agreement,
the NASD and Nasdaq acknowledge
that—to the extent directly related to the
TRF LLC’s activities—their books,
records, premises, officers, directors,
governors, agents, and employees will
be deemed to be the books, records,
premises, officers, directors, governors,
agents, and employees of the NASD
itself and its affiliates for the purposes
of, and subject to oversight pursuant to,
the Exchange Act. This provision will
reinforce the Commission’s ability to
exercise its authority under Section
19(h)(4) of the Exchange Act 95 with
respect to the officers and directors of
the TRF LLC because all such officers
and directors-to the extent that they are
supra text accompanying notes 90–92.
U.S.C. 78s(h)(4). Section 19(h)(4) of the
Exchange Act authorizes the Commission, by order,
to remove from office or censure any officer or
director of an SRO if it finds after notice and an
opportunity for hearing that such officer or director
has: (1) Willfully violated any provision of the
Exchange Act or the rules and regulations
thereunder, or the rules of such SRO; (2) willfully
abused his or her authority; or (3) without
reasonable justification or excuse, has failed to
enforce compliance with any such provision by a
member or person associated with a member of the
SRO.
PO 00000
94 See
95 15
Frm 00103
Fmt 4703
Sfmt 4703
acting in matters related to the TRF
LLC’s activities-would be deemed to be
the officers and directors of the NASD
itself. Furthermore, under Section 17(b)
of the LLC Agreement, the records of the
NASD and Nasdaq, to the extent that
they are related to the TRF LLC’s
activities, are deemed to be records of
the NASD itself and are subject to the
Commission’s examination authority
under Section 17(b)(1) of the Exchange
Act.96
In addition, under Section 17(c) of the
LLC Agreement, the NASD and Nasdaq,
and each officer, director, agent, and
employee thereof, irrevocably submits
to the jurisdiction of the U.S. Federal
courts, the Commission, and the NASD
for the purpose of any suit, action, or
proceeding pursuant to the U.S. federal
securities laws and the rules and
regulations thereunder arising from, or
relating to, the TRF LLC’s activities. In
addition, each Member, and each
officer, director, agent, and employee
thereof, waives and agrees not to assert
by way of motion, as a defense or
otherwise, in any suit, action, or
proceeding, any claim that it is not
personally subject to the jurisdiction of
the Commission; that the suit, action, or
proceeding is an inconvenient forum;
that the venue of the suit, action, or
proceeding is improper; or that the
subject matter of the suit, action, or
proceeding may not be enforced in or by
such courts or agency. Moreover,
Section 17(e) of the LLC Agreement
states that the TRF LLC, the NASD, and
Nasdaq will cause their respective
affiliates, officers, directors, governors,
employees, representatives, and agents
to comply with these requirements.
The Commission also believes that,
even in the absence of these provisions
of the LLC Agreement, under Section
20(a) of the Exchange Act, 97 any person
with a controlling interest in the TRF
LLC would be jointly and severally
liable with and to the same extent that
the TRF LLC is liable under any
provisions of the Exchange Act, unless
the controlling person acted in good
faith and did not directly or indirectly
induce the act or acts constituting the
violation or cause of action. In addition,
Section 20(e) of the Exchange Act 98
creates aiding and abetting liability for
any person who knowingly provides
substantial assistance to another person
for violation of any provision of the
Exchange Act or rule thereunder.
Further, Section 21C of the Exchange
Act 99 authorizes the Commission to
96 15
U.S.C. 78q(b)(1).
U.S.C. 78t(a).
98 15 U.S.C. 78t(e).
99 15 U.S.C. 78u–3.
97 15
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enter a cease-and-desist order against
any person who has been ‘‘a cause of’’
a violation of any provision of the
Exchange Act through an act or
omission that the person knew or
should have known would contribute to
the violation.
The Commission believes that,
together, these provisions grant the
Commission sufficient jurisdictional
authority over the controlling parties
and Members of the TRF LLC.
Moreover, the NASD is required to
enforce compliance with the provisions
of the LLC Agreement because they are
‘‘rules of the association’’ within the
meaning of Section 3(a)(27) of the
Exchange Act.100 A failure on the part
of the NASD to enforce its rules could
result in a suspension or revocation of
its registration pursuant to Section
19(h)(1) of the Exchange Act.101
4. Comments
The Commission received 13
comment letters from 12 commenters
opposing the NASD’s proposal to
establish the TRF LLC.102 In light of its
interest in the TRF LLC, Nasdaq
submitted a comment letter to address
the issues raised by the NYSE.103 In
addition, because the Archipelago Letter
and the NYSE Letter II also were
submitted in response to the Nasdaq
Exchange’s application to register as a
national securities exchange, Nasdaq
also addressed the comments raised in
those letters in its response to comments
concerning its exchange application.104
The NASD also responded to the issues
raised by the commenters.105 The
principal issues raised by commenters
are discussed below.
a. Trade Reporting Facility is a Facility
of the NASD
Because of the affiliation between the
Nasdaq Exchange and the TRF LLC,
several commenters argue that the Trade
Reporting Facility would not truly be a
facility of the NASD, but instead would
be a facility of the Nasdaq Exchange.106
These commenters argue that the Trade
Reporting Facility is a facility of the
100 15
U.S.C. 78c(a)(27).
U.S.C. 78s(h)(1).
102 See Archipelago Letter, BSE Letter, NYSE
Letters I, II and III, Ward Letter, Davis Letter, Bean
Letter, Towns Letter, Capuano Letter, McHenry
Letter, Gerlach Letter, and Baker Letter, supra note
13.
103 See Nasdaq Letter, supra note 13.
104 See letter from Edward Knight, Executive Vice
President and General Counsel, Nasdaq, to Jonathan
G. Katz, Secretary, Commission, dated December
13, 2005 (‘‘Nasdaq Letter II’’).
105 See NASD Response Letters I and II, supra
note 14.
106 See Archipelago Letter, supra note 13. See
also NYSE Letter I, BSE Letter, Bean Letter, Towns
Letter, Gerlach Letter, supra note 13.
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Nasdaq Exchange because the Nasdaq
Exchange’s parent company controls the
board of the TRF LLC, directs all
business decisions, provides
technology, and will reap the economic
benefits of the TRF LLC. Based on the
premise that the Trade Reporting
Facility is a facility of the Nasdaq
Exchange, these commenters believe
that approval of the Trade Reporting
Facility would be inconsistent with
what they view as the Commission’s
policy that an exchange must provide an
opportunity for all exchange orders to
interact with each other.107
Several commenters also argue that
the Trade Reporting Facility, as a
facility of the Nasdaq Exchange, would
allow an exchange to take credit and
receive remuneration for trades that do
not occur on that exchange, which these
commenters maintain is inconsistent
with current law.108 One commenter
said that allowing Nasdaq to take credit
for off-exchange trades would reduce
transparency and lead to a mistaken
sense of an exchange’s liquidity and
depth of market.109
Commenters also argue that approval
of the Trade Reporting Facility as
operated by the TRF LLC will result in
the proliferation of print facilities
because other markets will seek to
establish similar arrangements.110 One
commenter argued that this would
result in less order interaction.111
Several commenters also argue that
providing revenue and trade
information to markets that have no
nexus with the actual trades may
contravene the public interest.
Section 3(a)(2) of the Exchange Act 112
defines the term ‘‘facility’’ of an
exchange to include ‘‘its premises,
tangible or intangible property whether
on the premises or not, any right to the
use to such premises or property or any
service thereof for the purpose of
effecting or reporting a transaction on an
exchange (including, among other
things, any system of communication to
or from the exchange, by ticker or
otherwise, maintained by or with the
consent of the exchange), and any right
of the exchange to the use of any
property or service.’’ While the Trade
Reporting Facility plainly is an affiliate
107 See Bean Letter, Archipelago Letter, NYSE
Letter I, BSE Letter, and Towns Letter, supra note
13. See also Ward Letter, supra note 13.
108 See Davis Letter, Bean Letter, Archipelago
Letter, NYSE Letter I, BSE Letter, Towns Letter,
McHenry Letter, Baker Letter, Gerlach Letter, supra
note 13.
109 See Ward Letter, supra note 13.
110 See Ward Letter, Bean Letter, Towns Letter,
Capuano Letter, Gerlach Letter, Baker Letter,
Archipelago Letter, BSE Letter, supra note 13.
111 See Archipelago Letter, supra note 13.
112 15 U.S.C. 78c(a)(2).
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Frm 00104
Fmt 4703
Sfmt 4703
38945
of Nasdaq, the Commission does not
believe that the Trade Reporting Facility
is a facility of the Nasdaq Exchange
within the terms of the Exchange Act.
Nasdaq owns the system that the TRF
uses for reporting trades; however, the
Trade Reporting Facility is not a service
‘‘for the purpose of effecting or reporting
a transaction’’ on the Nasdaq Exchange.
Instead, the Trade Reporting Facility is
a service for the purpose of reporting
transactions to the NASD. Therefore, the
Commission believes that the Trade
Reporting Facility is a facility of the
NASD and not a facility of the Nasdaq
Exchange.113
NASD members would report trades
to the Trade Reporting Facility pursuant
to NASD rules. In addition, transactions
reported to the Trade Reporting Facility
will be disseminated with a modifier
indicating that they are NASD trades,
which will clearly distinguish them
from transactions executed on or
through the Nasdaq Exchange. Because
the Trade Reporting Facility is an NASD
facility, the NASD will have the
responsibility under the Exchange Act
to regulate its members’ activities
related to the Trade Reporting
Facility.114 The Commission believes
that the LLC Agreement provides the
NASD with sufficient authority to carry
out its SRO responsibilities because the
LLC Agreement provides, among other
things, that the NASD will have sole
regulatory responsibility for the
activities of the TRF LLC, including the
right to review and approve the
regulatory budget, approve rule
proposals relating to the activities of the
TRF LLC prior to their filing with the
113 The Commission has previously approved
arrangements similar to the Trade Reporting
Facility in which a third party technology provider
operates an SRO’s facility in return for payment of
related revenues. For example, the Pacific
Exchange’s equity trading facility was for several
years operated by an unaffiliated third party—
ArcaEx. See Securities Exchange Act Release No.
44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (order approving the Archipelago Exchange
as the equities trading facility of PCX Equities, Inc.,
a subsidiary of the Pacific Exchange, Inc.) (‘‘ArcaEx
Order’’). Under the Agreement, PCX paid the parent
of ArcaEx market data revenue and transaction and
listing fees. See Archipelago Holdings, Inc. Annual
Report on Form 10-K for fiscal year ended
December 31, 2004. In September 2005, the parent
of ArcaEx—Archipelago—acquired the Pacific
Exchange. Accordingly, the exchange and the
facilities operator became affiliated. See Securities
Exchange Act Release No. 52497 (September 22,
2005), 70 FR 56949 (September 29, 2005). Recently,
the NYSE and Archipelago merged, and the Pacific
Exchange was renamed NYSE Arca.
114 Similar arrangements that have been approved
by the Commission provided for the same
obligations with respect to such facilities. See
Securities Exchange Act Release Nos. 49067
(January 13, 2004), 69 FR 2761 (January 20, 2004)
(order approving the Boston Options Exchange as
a facility of the Boston Stock Exchange, Inc.); and
Arca Ex Order, supra note 113.
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Commission, adopt and interpret
policies regarding NASD facilities, and
perform real time market surveillance.
In addition, under the LLC Agreement
no ‘‘Major Action,’’ as defined in the
LLC Agreement, may become effective
without the NASD’s consent.115
To the extent that approval of the
Trade Reporting Facility results in other
markets seeking to establish similar
arrangements with the NASD, the
Commission notes that the NASD would
have to file any proposed rule change
generated by such proposals pursuant to
Section 19 of the Exchange Act, and the
Commission would be required to
determine that such proposed rule
change complied with the requirements
of the Exchange Act. The Commission
notes, however, that the Exchange Act
does not prohibit the NASD from
establishing different facilities for
purposes of fulfilling its regulatory
obligations. Indeed, the Commission
notes that the NASD currently operates
two facilities for the reporting of OTC
trades in Nasdaq-listed securities—the
ADF and the Nasdaq Market Center.
sroberts on PROD1PC70 with NOTICES
b. Impact on Internalization Practices
Based on the premise that the Trade
Reporting Facility is a facility of the
Nasdaq Exchange, commenters
conclude that the Trade Reporting
Facility would allow Nasdaq Exchange
members to execute and report trades
without regard to orders resident on the
Nasdaq Exchange book and thereby
increase the internalization of orders.116
One commenter objects to NASD
members’ current ability to execute
trades in the OTC market without
interacting with other better-priced
orders on exchanges.117 Another
Commenter suggests that NASD
members would not be required to
provide the best prices in the market.118
Commenters also contend that approval
of the NASD’s Trade Reporting Facility
would result in a different standard for
the Nasdaq Exchange as compared to
other exchanges because, unlike other
exchanges, the Nasdaq Exchange would
not be required to have a consolidated
limit order book.119
As discussed above, the Commission
does not believe that the Trade
Reporting Facility is a facility of the
Nasdaq Exchange. Moreover, the
Commission does not believe that the
Trade Reporting Facility will increase
115 See supra text accompanying note 92 for the
LLC Agreement’s definition of ‘‘Major Action.’’
116 See Archipelago Letter, BSE Letter, NYSE
Letter I, supra note 13.
117 See BSE Letter, supra note 13.
118 See Capuano Letter, supra note 13.
119 See Archipelago Letter, BSE Letter, NYSE
Letter I, supra note 13.
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17:10 Jul 07, 2006
Jkt 208001
the internalization of orders. The Trade
Reporting Facility simply preserves the
ability of an NASD member, who may
also be a member of the Nasdaq
Exchange or another exchange, to report
trades executed otherwise than on an
exchange to the NASD through the
Trade Reporting Facility without regard
to the orders on the Nasdaq Exchange or
any other exchange’s consolidated limit
order book. The Commission notes that
the ability to report internalized trades
to an NASD facility exists and is widely
used today. In this regard, an NASD
member today may report internalized
trades to the Nasdaq facilities of the
NASD without regard to the priority
rules of the Nasdaq’s SuperMontage
system or any exchange of which it is
a member. There is no reason to expect
the Trade Reporting Facility to increase
such practices.
Finally, the Commission notes that a
broker-dealer has a legal duty to seek to
obtain the best execution of customer
orders.120 This duty requires brokerdealers to execute customers’ trades at
the most favorable terms reasonably
available under the circumstances.121
Further, the NASD noted that its
members are subject to, among other
things, NASD Rule 2320, which would
prohibit an NASD member from
disregarding the market.122 Accordingly,
the Commission does not agree with the
commenters that argued that the Trade
Reporting Facility would permit NASD
members to ignore disseminated quotes
and their best execution obligations.123
c. Unfair Competition
Several commenters object to the
NASD’s payment to Nasdaq of the
120 See, e.g., Newton v. Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 135 F.3d 266, 269–70 (3d
Cir.), cert denied, 525 U.S. 811 (1998); Certain
Market Making Activities on Nasdaq, Securities
Exchange Act Release No. 40900 (Jan. 11, 1999)
(settled case) (citing Sinclair v. SEC, 444 F.2d 399
(2d Cir. 1971)); Arleen Hughes, 27 SEC 629, 636
(1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 969
(D.C. Cir. 1949). See also Order Execution
Obligations, Securities Exchange Act Release No.
37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12,
1996) and NASD Rule 2320, ‘‘Best Execution and
Interpositioning.’’
121 Newton, 135 F.3d at 270. Newton also noted
certain factors relevant to best execution—price
order size, trading characteristics of the security,
speed of execution, clearing costs, and the cost and
difficulty of executing an order in a particular
market. Id. at 270 n. 2 (citing Payment for Order
Flow, Securities Exchange Act Release No. 33026
(Oct. 6, 1993), 58 FR 52934, 52937–38 (Oct. 13,
1993) (Proposed Rules)). See In re E.F. Hutton & Co.
(‘‘Manning’’), Securities Exchange Act Release No.
25887 (July 6, 1988). See also Securities Exchange
Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006
at 55008–55009 (Nov. 6, 1994) (Payment for Order
Flow Final Rules).
122 See Amendment No. 1.
123 See BSE Letter, supra note 13. See also
Capuano Letter, supra note 13.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
market data revenue generated by trades
reported to the Trade Reporting Facility
operated by the TRF LLC.124 One
commenter argues that the transfer of
market data revenue from the NASD to
Nasdaq through the TRF LLC is
inconsistent with Section 11A of the
Exchange Act and Regulation NMS.125
Others state that payment of market
revenue would amount to a subsidy of
the Nasdaq Exchange by the NASD,
which would provide the Nasdaq
Exchange with an unfair economic
advantage over other national securities
exchanges.126 One commenter also
maintains that the Nasdaq Exchange
would be able to use revenue generated
by off-exchange trades to defray its
business and exchange surveillance
expenses, thereby discriminating against
other exchanges.127
One commenter raises competitive
issues regarding the technology that will
be used by the Trade Reporting Facility
to collect trade reports.128 Specifically,
the commenter argues that Nasdaq’s
ACT is an industry utility because
virtually all market participants use the
system for reporting OTC trades. This
commenter argues that Nasdaq’s
competitors should have equal access to
ACT and the Trade Reporting Facility to
eliminate the unfair competitive
advantage the commenter believes exists
due to Nasdaq’s monopoly on ACT.
Section 15A(b)(9) of the Exchange
Act 129 prohibits the NASD from having
rules that impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. The
Commission finds that the proposal
does not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. As the
NASD and Nasdaq note, the LLC
Agreement does not preclude the NASD
from entering into similar arrangements
with other national securities
exchanges.130 For this reason, the
Commission believes that the Trade
Reporting Facility does not impose any
unfair burden on competition, as
required by the Exchange Act.
The NASD notes that an exchange
may develop its own proprietary system
for reporting trades, and the NASD
124 See NYSE Letters I, II, and III, supra note 13.
See also Gerlach Letter, Ward Letter, supra note 13.
125 See NYSE Letters I, supra note 13.
126 See NYSE Letters I and II, Ward Letter, and
Gerlach Letter, supra note 13.
127 See NYSE Letters I and II, supra note 13.
128 See NYSE Letter III, supra note 13.
129 15 U.S.C. 78o–3(b)(9).
130 See NASD Response Letters I and II, supra
note 14 and Nasdaq Letter, supra note 13. See also
Amendment No. 1.
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sroberts on PROD1PC70 with NOTICES
represents that it is prepared to
implement a trade reporting facility
with any exchange based on the
technology available to the exchange.131
The NASD represents that it has, in fact,
discussed trade reporting facility
arrangements with a number of
exchanges.132 Because another exchange
may develop a proprietary trade
reporting system and enter into a similar
trade reporting facility arrangement
with the NASD, the Commission does
not believe that the unavailability of
ACT to other exchanges imposes a
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The Commission notes that the NASD
bears the responsibility for overseeing
the entities that report trades to the
Trade Reporting Facility and for
providing regulatory services to the
Trade Reporting Facility. The TRF LLC
will pay the NASD for these services
using revenues generated by the Trade
Reporting Facility. Under the LLC
Agreement, Nasdaq must ensure that the
TRF LLC has funds sufficient to satisfy
its regulatory obligations and must
guarantee the TRF LLC’s payment of
obligations relating to the costs
associated with the NASD’s
performance of regulatory services for
the Trade Reporting Facility.133 As the
NASD states in its response to the
commenters, Nasdaq bears the economic
risks associated with the operation of
the Trade Reporting Facility, including
any losses if revenues fail to cover
regulatory and other costs associated
with operating the Trade Reporting
Facility.134 In light of the costs, and
potential losses, that Nasdaq must bear
in connection with the operation of the
Trade Reporting Facility, the
Commission does not believe that
allocating revenues generated by the
Trade Reporting Facility to Nasdaq, net
of costs, would provide the Nasdaq
Exchange with an unfair economic
advantage over other national securities
exchanges or impose a burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
Moreover, the Commission does not
believe that an agreement by the NASD
under which it pays Nasdaq market data
revenue in exchange for Nasdaq
providing the technology and bearing
other costs of operating the facility is
inconsistent with Regulation NMS or
131 See
NASD Response Letter II, supra note 14.
NASD Response Letter II, supra note 13.
133 See LLC Agreement, Section 12.
134 See NASD Response Letter I, supra note 14.
See also LLC Agreement, Section 15 (allocating the
profits and losses of the Trade Reporting Facility to
Nasdaq).
132 See
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17:10 Jul 07, 2006
Jkt 208001
the Exchange Act and the rules and
regulations thereunder.
Finally, the Commission disagrees
with the characterization of Nasdaq’s
ACT system as an industry utility. ACT
is an automated system owned and
operated by Nasdaq that, among other
things, provides for the reporting of
transactions in securities. The Exchange
Act, however, does not prevent any
other party, including an exchange,
from developing similar technology for
use as an NASD facility. Further, the
Commission does not believe that the
inability of competitors to use ACT for
purposes of receiving compensation for
trades reported by their members
constitutes a denial of access under
Section 19(d) of the Exchange Act.
Under the proposal, all market
participants that are members of the
NASD will continue to have the ability
to report internalized trades through
ACT. Thus, the proposal does not
prohibit or limit any person with
respect to access to services offered by
the NASD in violation of Section 19(d)
of the Exchange Act. The Commission
does not believe that Section 19(d) or
any other provision of the Exchange Act
requires Nasdaq to make its proprietary
trade reporting system available to a
competing exchange.
d. Impact on the NASD’s Ability to
Effectively Regulate
One commenter also questions
whether the payment of market data
revenue to Nasdaq would adversely
impact the NASD’s ability to regulate
the Trade Reporting Facility or provide
NASD members with reduced
membership fees, or would impair the
NASD’s regulatory independence.135 In
particular, the commenter claims that it
would compromise the NASD’s
regulatory integrity and neutrality as the
SRO for the OTC market and would
perpetuate the conflicts that the
separation of the Nasdaq Exchange from
the NASD was designed to ameliorate.
Nasdaq asserts that it would receive the
revenues associated with the TRF LLC
‘‘because it would provide the
connectivity and reporting technology
and bear all costs associated with the
facility.’’ 136 In addition, the LLC
Agreement requires Nasdaq to ensure
that the TRF LLC has funds sufficient to
satisfy its regulatory obligations and to
guarantee the TRF LLC’s payment
obligations relating to costs associated
with the NASD’s performance of its SRO
responsibilities related to the activities
of the TRF LLC.137 This obligation is
PO 00000
135 See
NYSE Letter I, supra note 13.
Nasdaq Letter II, supra note 13.
137 137 See LLC Agreement Section 12.
136 See
Frm 00106
Fmt 4703
Sfmt 4703
38947
independent of the revenue associated
with the TRF LLC. Therefore, the
Commission does not believe that the
LLC Agreement or the TRF LLC would
impair the NASD’s ability to carry out
its obligations under Section 15A of the
Exchange Act.138
e. Compliance With CTA Plan and the
Nasdaq UTP Plan
One commenter contends that the
payment of market data revenue to the
Nasdaq Exchange by the NASD would
violate both the CTA and Nasdaq UTP
Plans.139 This commenter refers to its
earlier comment letters regarding
Nasdaq’s application for exchange
registration, in which the commenter
opposed Nasdaq’s proposed transaction
reporting rules.140 The proposed rules
would have allowed the Nasdaq
Exchange to report—and receive
revenue for—internalized and other offexchange trades. This commenter
argued that the proposed transaction
reporting rules would not comply with
Section VIII(a) of the CTA Plan, which
requires each participant exchange to
report all trades occurring on its floor
and requires the NASD to report all
trades that do not take place on the floor
of an exchange.141 Similarly, the
commenter maintained that the
proposed rules would violate Section
VIII(B) of the Nasdaq UTP Plan.142 By
not complying with the terms of these
plans, the commenter concludes that
both Nasdaq and the NASD would
138 15
U.S.C. 78o–3.
NYSE Letter I and attached letters, supra
139 See
note 13.
140 See letters from Darla C. Stuckey, Corporate
Secretary, NYSE, to Jonathan G. Katz, Secretary,
Commission, dated February 15, 2002 (‘‘NYSE
February 2002 Letter’’); and James E. Buck, Senior
Vice President and Secretary, NYSE, to Jonathan G.
Katz, Secretary, Commission, dated August 27,
2001.
141 Specifically, Section VIII(a) of the CTA Plan
states that the exchange participants will each
collect and report to the Processor all last sale price
information to be reported by it relating to
transactions in Eligible Securities taking place on
its floor. Section VIII(a) states, further, that the
NASD shall collect from its members all last sale
price information to be included in the
consolidated tape relating to transactions in Eligible
Securities not taking place on the floor of an
exchange and shall report all such last sale price
information to the Processor in accordance with the
provisions of Section VIII(b) of the CTA Plan.
142 See NYSE February 2002 Letter, supra note
140. Section VIII(B) of the Nasdaq UTP Plan states
that each Participant shall be responsible to
promptly collect and transmit to the Processor
Transaction Reports in Eligible Securities executed
in its Market. Section III(E) of the Nasdaq UTP Plan
defines ‘‘Market,’’ when used in connection with
Transaction Reports, to mean the Plan Participant
through whose facilities the transaction took place
or was reported, or the Plan Participant to whose
facilities the order was sent for execution.
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violate Rule 608 of Regulation NMS,143
which requires each SRO to comply
with the terms of an effective national
market system plan in which it
participates and to enforce compliance
with such plan by its members and
persons associated with its members.144
As noted in the Nasdaq Exchange
Order, Nasdaq amended its exchange
application so that only trades executed
through the systems of the Nasdaq
Exchange will be reported to the Nasdaq
Exchange. 145 Through its Trade
Reporting Facility and related rules, the
NASD, rather than Nasdaq, will report
all off-exchange trades and collect
transaction reports for trades reported
through the Trade Reporting Facility, as
required by the Nasdaq UTP Plan.
Accordingly, the Commission believes
that the LLC Agreement and the
proposed rules of the Trade Reporting
Facility are consistent with the terms of
the Nasdaq UTP Plan.146
f. Consistency With Market Data
Revenue Allocation Formula
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One commenter states that the TRF
LLC proposal is inconsistent with the
objectives of the market data revenue
allocation rules adopted by the
Commission in conjunction with
Regulation NMS. 147 According to this
commenter, the new market data
revenue allocation rules were intended
to decrease incentives to engage in sham
trades, wash sales, and tape shredding.
In addition to modifying Exchange
Act rules governing the display and
distribution of market data, the
Commission amended the CTA Plan, the
CQ Plan, and the Nasdaq UTP Plan
(each a ‘‘Plan’’ and, collectively, the
‘‘Plans’’) to incorporate a new net
income allocation formula into each
Plan.148 The amendments to each of the
Plans incorporated a broad-based
measure of the contribution of an SRO’s
quotes and trades to the consolidated
data stream.
The Commission does not believe that
the TRF LLC is inconsistent with the
objectives of the new Plan formulas,
which included reducing the incentives
143 Rule 608 of Regulation NMS was formerly
Exchange Act Rule 11Aa3–1.
144 See Rule 608(c) of Regulation NMS, 17 CFR
242.608(c).
145 See Nasdaq Exchange Order, supra note 5.
146 The Commission notes that the Trade
Reporting Facility will not accept trade reports for
CTA Plan Securities and, thus, the NASD will not
report such trades to the CTA Plan through the
Trade Reporting Facility. Accordingly, the Trade
Reporting Facility and the TRF LLC will not receive
CTA Plan revenue.
147 See NYSE Letter II, supra note 13.
148 See Securities Exchange Act Release No.
51808 (June 9, 2005), 70 FR 37496 (June 29,
2005)(adopting Regulation NMS).
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17:10 Jul 07, 2006
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for distortive behavior, such as sham
trades, wash sales, and tape shredding.
The TRF LLC does not alter the new
Plan formulas. Further, the NASD’s
proposed Trade Reporting Facility rules
do not appear to create any incentives
for distortive behavior.
V. Conclusion
IV. Solicitation of Comments
By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–6083 Filed 7–7–06; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
1, including whether Amendment No. 1
is consistent with the Exchange 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
No. SR–NASD–2005–087 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File No.
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 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 publicly available. All
submissions should refer to File No.
SR–NASD–2005–087 and should be
submitted on or before July 31, 2006.
PO 00000
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It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,149
that the proposed rule change (SR–
NASD–2005–087), as amended, is
approved.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54089; File No. SR–NASD–
2006–077]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Eliminate Its Current
General Revenue Sharing Program
Under NASD Rule 7010(u) and To
Adopt a Revenue Sharing Program
Limited to Transactions in NasdaqListed Securities Reported to the Trade
Reporting Service of the Nasdaq
Market Center
June 30, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 22,
2006, 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 and II below, which Items have
been prepared by Nasdaq. Nasdaq has
filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act,3 and Rule 19b–4(f)(6) thereunder,4
which renders the proposal effective
upon filing with the Commission.5 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
149 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 Nasdaq gave the Commission written notice of
its intent to file the proposed rule change on May
31, 2006 and has asked the Commission to waive
the 30-day operative delay. See Rule 19b–4(f)(6)(iii).
17 CFR 240.19b–4(f)(6)(iii).
1 15
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]]>Agencies
[Federal Register Volume 71, Number 131 (Monday, July 10, 2006)]
[Notices]
[Pages 38935-38948]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6083]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54084; File No. SR-NASD-2005-087]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to Amendment No. 1
Relating to Amendments to the NASD's Rules Following the Nasdaq
Exchange's Operation as a National Securities Exchange for Nasdaq UTP
Plan Securities
June 30, 2006
I. Introduction
On July 11, 2005, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend various NASD rules to
reflect the Nasdaq Stock Market, Inc.'s (``Nasdaq'') separation from
the NASD following the commencement of operations of the Nasdaq Stock
Market LLC (``Nasdaq Exchange'') as a national securities exchange.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19B-4.
---------------------------------------------------------------------------
Prior to 2000, Nasdaq was wholly-owned by the NASD. The NASD
currently retains voting control of Nasdaq through an outstanding share
of Nasdaq Series D preferred stock.\3\ The NASD and Nasdaq began
restructuring their relationship in 2000 with the goal of completely
separating Nasdaq from the NASD. As part of this restructuring, Nasdaq
filed with the Commission an application to register one of its
subsidiaries, the Nasdaq Exchange, as a national securities
exchange.\4\
---------------------------------------------------------------------------
\3\ The share of Series D preferred stock gives the NASD the
right to cast one more than one-half of all votes entitled to be
cast at an election by all holders of capital stock of Nasdaq. When
Nasdaq ceases to operate pursuant to the NASD's Plan of Allocation
and Delegation of Functions by NASD to Subsidiaries (the
``Delegation Plan''), the Series D preferred share will expire
automatically. See Securities Exchange Act Release No. 53022
(December 23, 2005), 70 FR 77433 (December 30, 2005). To reflect
this change, the NASD will file a proposed rule change to revise the
Delegation Plan to remove references to Nasdaq as a subsidiary of
the NASD. Because this change to the Delegation Plan would terminate
the NASD's control under the Series D preferred share, the NASD
cannot file this proposed rule change until it can represent to the
Commission that its control of Nasdaq is no longer necessary because
the NASD can fulfill through other means its obligations with
respect to securities reported to the Consolidated Transaction
Association Plan (``CTA Plan Securities'') See Order Modifying
Nasdaq Exchange Conditions, infra note 6.
\4\ In connection with the Nasdaq Exchange registration, Nasdaq
became a holding company with the Nasdaq Exchange as its wholly-
owned subsidiary.
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The Commission approved the Nasdaq's Exchange's registration as a
national securities exchange on January 13, 2006.\5\ In the Nasdaq
Exchange Order, the Commission conditioned the Nasdaq Exchange's
operation as a national securities exchange on the satisfaction of
certain enumerated requirements. The Nasdaq Exchange Order and the
conditions therein reflected the Nasdaq Exchange's intentions to begin
operations as a national securities exchange for CTA Plan Securities as
well as securities listed on Nasdaq and reported to the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation
and Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading Privileges
Basis (``Nasdaq UTP Plan Securities'').
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\5\ See Securities Exchange Act Release No. 53128, 71 FR 3350
(January 23, 2006) (``Nasdaq Exchange Order'').
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The Commission modified the conditions set forth in the Nasdaq
Exchange Order on June 30, 2006, to allow the Nasdaq Exchange to
operate as a national securities exchange solely with respect to Nasdaq
UTP Plan Securities.\6\ During this period, the NASD will continue to
control Nasdaq through the Series D preferred share and Nasdaq will
continue to perform obligations under the Delegation Plan with respect
to CTA Plan Securities. Accordingly, the NASD filed Amendment No. 1 to
modify the proposed rule change to reflect the Nasdaq Exchange's
operational plan.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 54085 (June 30,
2006) (``Order Modifying Nasdaq Exchange Conditions'').
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II. NASD Proposal
In the proposed rule change, the NASD proposed to: (1) Delete
certain NASD rules that pertain to the operation of the Nasdaq Exchange
and thus reflect Nasdaq's separation from the NASD; \7\ (2) modify
certain NASD rules to clarify the NASD's continued regulation of the
over-the-counter (``OTC'') market upon the Nasdaq Exchange's operation
as an exchange; \8\ (3) amend the NASD's Order Audit Trail System
(``OATS'') to reflect the use of OATS by Nasdaq Exchange members; \9\
(4) make technical and clarifying changes to the rules governing the
NASD's Alternative Display Facility
[[Page 38936]]
(``ADF''); \10\ and (5) establish rules governing the NASD's proposed
new trade reporting facility (``Trade Reporting Facility'').\11\
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\7\ See infra note 44 and accompanying section.
\8\ See infra notes 46-53 and accompanying text.
\9\ See infra note 55 and accompanying text.
\10\ See infra notes 77-84 and accompanying section.
\11\ See infra notes 85-101 and accompanying text.
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The proposed rule change was published for comment in the Federal
Register on July 22, 2005.\12\ The Commission received 14 comment
letters from 12 commenters regarding the proposal.\13\ On November 23,
2005, and May 3, 2006, the NASD submitted responses to the comment
letters.\14\
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\12\ See Securities Exchange Act Release No. 52049 (July 15,
2005), 70 FR 42398 (July 22, 2005).
\13\ See letters to Jonathan G. Katz, Secretary, Commission,
from Mary Yeager, Assistant Secretary, New York Stock Exchange, Inc.
(``NYSE''), dated August 12, 2005 (``NYSE Letter I'') and November
10, 2005 (``NYSE Letter II''); Edward S. Knight, Executive Vice
President and General Counsel, Nasdaq, dated October 13, 2005
(``Nasdaq Letter''); John Boese, Vice President and Chief Regulatory
Officer, Boston Stock Exchange, Inc. (``BSE''), dated November 4,
2005 (``BSE Letter''); and Kevin J.P. O'Hara, Chief Administrative
Officer and General Counsel, Archipelago Holdings, Inc.
(``Archipelago''), dated November 10, 2005 (``Archipelago Letter'');
letters to The Honorable Christopher Cox, Chairman, Commission, from
Bart J. Ward, Chief Executive Officer, Ward & Company, dated
February 10, 2006 (``Ward Letter''); John A. Thain, Chief Executive
Officer, NYSE Group, Inc., dated April 27, 2006 (``NYSE Letter
III''). See also letters to The Honorable Christopher Cox, Chairman,
Commission, from The Honorable Geoff Davis, U.S. House of
Representatives, dated February 9, 2006 (``Davis Letter''); The
Honorable Melissa L. Bean, U.S. House of Representatives, dated
January 16, 2006 (``Bean Letter''); The Honorable Edolphus Towns,
U.S. House of Representatives, dated January 12, 2006 (``Towns
Letter''); The Honorable Michael E. Capuano, U.S. House of
Representatives, dated January 3, 2006 (``Capuano Letter''); The
Honorable Patrick T. McHenry, U.S. House of Representatives, dated
December 22, 2005 (``McHenry Letter''); The Honorable Jim Gerlach,
U.S. House of Representatives, dated December 14, 2005 (``Gerlach
Letter''); and The Honorable Richard H. Baker, Chairman,
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises, U.S. House of Representatives, dated December 13, 2005
(``Baker Letter''). The comment letters are available in the
Commission's Public Reference Room and on the Commission's Internet
Web site (https://www.sec.gov). The Commission notes that the
Archipelago Letter and NYSE Letter II also were submitted as comment
letters in response to the Nasdaq Exchange's application to register
as a national securities exchange.
\14\ See letter to Jonathan G. Katz, Secretary, Commission, from
Barbara Z. McSweeney, Senior Vice President and Corporate Secretary,
NASD, dated November 23, 2005 (``NASD Response Letter I''); letter
to the Honorable Christopher Cox, Chairman, Commission from Robert
R. Glauber, Chairman and Chief Executive Officer, NASD, dated May 2,
2006 (``NASD Response Letter II'').
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The NASD filed Amendment No. 1 to the proposal on June 15, 2006. In
addition to making several technical corrections and conforming
changes,\15\ the NASD proposes in Amendment No. 1 to revise its
proposal to: (1) Amend the Delegation Plan to retain the delegation to
Nasdaq of obligations with respect to CTA Plan Securities, while
eliminating Nasdaq's regulatory authority with respect to Nasdaq UTP
Plan Securities; \16\ (2) amend the Nasdaq Bylaws to reflect changes
that were approved in the Nasdaq Exchange Order; \17\ (3) retain
amended versions of the rules governing Nasdaq's BRUT and INET trading
systems; \18\ (4) provide that members may continue to quote and trade
CTA Plan Securities and participate in the Intermarket Trading System
(``ITS'') through an NASD facility by retaining in the NASD's rules
revised versions of relevant rules; \19\ (5) revise an existing NASD
rule to make clear that certain securities that will be listed on the
Nasdaq Exchange will continue to be treated as CTA Plan Securities;
\20\ and (6) delete from NASD Rule 6120 a provision allowing a national
securities exchange that trades Nasdaq securities on an unlisted
trading privileges basis (``UTP Exchange'') to participate in the Trade
Reporting Facility. In addition, the NASD has requested that this
proposal become effective only when the Nasdaq Exchange begins
operations as a national securities exchange for Nasdaq UTP Plan
Securities.
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\15\ For example, the NASD proposes to: (1) Revise NASD Rule
5100, ``Short Sale Rule,'' to indicate that the NASD's Short Sale
Rule will continue to operate as a pilot program; (2) retain the
NASD Rule 9700 Series, ``Procedures on Grievances Concerning the
Automated Systems'' for appeals of OTC Bulletin Board eligibility
determinations and retain NASD Rule 11890, ``Clearly Erroneous
Transactions,'' and IM-11890-1 and IM-11890-2; (3) make additional
technical changes to the ADF Rules; (4) incorporate NASD rules that
have been approved since the NASD filed the proposal; (5) clarify
the termination provision in the Trade Reporting Facility LLC
agreement to correctly reflect that Nasdaq is not registered as a
self-regulatory organization (``SRO''); and (6) retain references to
Nasdaq in NASD's Delegation Plan, bylaws and rules to reflect that
Nasdaq remains a controlled subsidiary.
\16\ See infra notes 40-41 and accompanying text.
\17\ See infra note 42 and accompanying text.
\18\ See infra notes 72-74 and accompanying text.
\19\ See infra notes 58-70 and accompanying text.
\20\ See infra note 57 and accompanying text.
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Finally, in Amendment No. 1, the NASD also proposed to renumber
NASD Rule 6440(i) as NASD Rule 5110, ``Transactions Related to Initial
Public Offerings'' and to extend its application to transactions in
Nasdaq UTP Plan Securities.
After careful consideration and for the reasons discussed below,
the Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder applicable to the NASD, and, in particular, with
the requirements of Sections 15A(b)(2), (6), and (11) of the Exchange
Act.\21\ Section 15A(b)(2) of the Exchange Act requires a registered
national securities association to be so organized and have the
capacity to be able to carry out the purposes of the Exchange Act.
Section 15A(b)(6) of the Exchange Act requires that the rules of a
registered national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to and facilitating transactions in
securities, to remove impediments to and protect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Section 15A(b)(11) of the
Exchange Act requires that the rules of a registered national
securities association be designed to produce fair and informative
quotations, to prevent fictitious or misleading quotations, and to
promote orderly procedures for collecting, distributing, and publishing
quotations.
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\21\ 15 U.S.C. 78o-3(b)(2), (6), and (11). In approving the
proposed rule change, the Commission has considered the proposal's
impact on efficiency, competition, and capital formation.
---------------------------------------------------------------------------
In addition, the Commission is publishing notice to solicit
comments on, and is simultaneously approving, on an accelerated basis,
Amendment No. 1. Many of the changes proposed in Amendment No. 1
reflect the new implementation strategy for the Nasdaq Exchange and are
necessary for the NASD to fulfill its obligations under the Exchange
Act with regard to CTA Plan Securities.
Specifically, the NASD proposes to retain its rules that govern its
members' quoting, trading, and transaction reporting of CTA Plan
Securities and its ITS rules related to the NASD's and its members'
compliance with the requirements of the ITS Plan. In this regard, in
Amendment No. 1, the NASD proposes to retain the portions of the NASD's
Rule 4700 Series relating to the NASD's participation in the ITS Plan.
The NASD also proposes to amend the Rule 4700 Series to delete rules
that relate to the operation of the Nasdaq Market Center trading
system, while retaining the current rules that relate to the operation
of the SuperIntermarket functionality, which facilitates NASD members'
compliance with the ITS Plan. In addition, the NASD proposes to retain
its Rule 6300 Series and Rule 5200 Series, which, among other things,
allow NASD members to enter
[[Page 38937]]
quotations in CTA Plan Securities by registering as Consolidated Quote
System (``CQS'') market makers and as ITS/Computer Assisted Execution
System (``ITS/CAES'') market makers. Finally, the NASD proposes to
retain its 6400 Series, which governs the reporting of transactions in
CTA Plan Securities that do not occur in the SuperIntermarket. The
retention of these rules, with changes that reflect the Nasdaq
Exchange's operation as an exchange for Nasdaq UTP Plan Securities,
maintains the current framework for OTC trading of CTA Plan Securities.
Accordingly, the Commission finds good cause to accelerate approval of
these changes.
To reflect the new implementation strategy of the Nasdaq Exchange,
in Amendment No. 1, the NASD proposes to retain in the NASD's rules the
Nasdaq By-Laws and, rather than remove all references to Nasdaq in the
Delegation Plan, to only eliminate Nasdaq's responsibility under the
Delegation Plan with respect to Nasdaq UTP Plan Securities. By
retaining references to Nasdaq in the Delegation Plan, the NASD retains
control over Nasdaq pursuant to the Series D preferred share.\22\ The
Commission finds good cause to accelerate approval of these changes to
the Delegation Plan because they allow Nasdaq to continue to perform
the same functions it does today regarding CTA Plan Securities and
appropriately limit Nasdaq's delegated authority once it begins
operations as a national securities exchange so that it will not be
delegated responsibility regarding OTC activities in Nasdaq UTP Plan
Securities. Further, these changes ensure that the NASD retains control
over Nasdaq so that the NASD will have the means by which to fulfill
its obligations through the use of Nasdaq systems with regard to CTA
Plan Securities.
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\22\ See supra note 3.
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In addition, the NASD proposes, in Amendment No. 1, to retain the
rules that govern executions of CTA Plan Securities on BRUT and INET.
The Commission finds good cause to accelerate approval of these changes
because these systems must continue to operate pursuant to NASD rules
until the Nasdaq Exchange begins trading CTA Plan Securities.
Finally, the NASD proposes to amend NASD Rule 4400 relating to
securities that are dually listed on the NYSE and the Nasdaq Exchange.
The revised rule, which reflects language currently found in NASD IM-
4400, makes clear that these dually listed securities will continue to
be treated as CTA Plan Securities under the NASD's rules and applicable
national market system plans. The Commission finds good cause to
accelerate approval of this change because it will ensure that these
securities are handled in the same manner as they are today.
In Amendment No. 1, the NASD proposes to renumber NASD Rule 6440(i)
as NASD Rule 5110 and to extend its application to Nasdaq UTP Plan
Securities. This rule prohibits members from executing transactions in
securities that are subject to an initial public offering until such
security has opened for trading on the listing exchange, which is
indicated by the dissemination of an opening transaction by the listing
exchange via the Consolidated Tape.\23\ The Commission finds good cause
to accelerate approval of extending this rule to Nasdaq UTP Plan
Securities because it will result in uniform regulation of securities
that are subject to an initial public offering.
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\23\ The Commission notes that the NASD committed to file a
proposed rule change to amend this rule to reflect that transactions
in Nasdaq UTP Plan Securities are reported to the Nasdaq UTP Plan.
Telephone call between Kelly Riley, Assistant Director, Division of
Market Regulation (``Division''), Commission and Lisa Horrigan,
Assistant General Counsel, NASD on June 28, 2006.
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In Amendment No. 1, the NASD also proposes to retain the NASD Rule
9700 Series, relating to grievances concerning automated systems, and
NASD Rule 11890, relating to clearly erroneous transactions. Because
the NASD will continue to operate the OTC Bulletin Board (``OTCBB''),
it must retain the NASD Rule 9700 Series, which governs the review of
requests for OTCBB eligibility determinations. Accordingly, the
Commission finds good cause to accelerate approval of NASD's proposal
to retain this rule. The Commission notes that the NASD only proposed
to eliminate reference to a Nasdaq committee that is currently required
in the NASD Rule 9700 Series. The NASD replaced the Nasdaq committee
with an NASD committee designated by the Board that must be comprised
of at least 50% non-industry committee members. The current Nasdaq
committee requires at least five non-industry members on its committee
that may consist of between 8 and 18 members. The Commission finds good
cause to accelerate approval of this change because it reflects the
NASD's responsibility over the OTCBB.
The NASD also proposes to retain amended paragraph (a) of Rule
11890 so that its application will be limited to transactions in CTA
Plan Securities. The NASD originally proposed to delete this rule,
which provides Nasdaq with authority to review any transaction arising
from the use of any execution or communication system owned or operated
by Nasdaq. After the Nasdaq Exchange commences operations as an
exchange for Nasdaq UTP Plan Securities, the only communication systems
of the NASD that will be covered by Rule 11890(a) will be the
SuperIntermarket, BRUT, and INET. Accordingly, the Commission finds
good cause to accelerate approval of this change that limits Nasdaq's
authority under this rule to CTA Plan Securities.
With regard to the Trade Reporting Facility, the NASD proposes in
Amendment No. 1 to delete the provision in NASD Rule 6120 that would
have allowed a UTP Exchange to participate in the Trade Reporting
Facility. This provision is unnecessary because a UTP Exchange would
not require a means for reporting internalized trades. Accordingly, the
Commission finds good cause to accelerate the deletion of this
provision. The NASD also proposes to amend the termination provision of
the Trade Reporting Facility LLC agreement to reflect that Nasdaq is
not a registered SRO. The Commission finds good cause to accelerate
approval of this change because the agreement, as amended, accurately
reflects Nasdaq's status.
In Amendment No. 1, the NASD also proposes several technical
changes. For example, the NASD proposes to indicate that its Short Sale
Rule is a pilot. In addition, the NASD proposes to incorporate rule
changes that have been approved or have otherwise become effective
since it filed its proposed rule change. The Commission finds good
cause to accelerate approval of these changes so that the proposal
accurately reflects the NASD's current rules.
Finally, the NASD proposes that its proposed rule change become
effective upon the operation of the Nasdaq Exchange as an exchange for
Nasdaq UTP Plan Securities. The Commission finds good cause to
accelerate approval of this proposal because the NASD must retain its
current rules until such time as the Nadsaq Exchange begins operation
for Nasdaq UTP Plan Securities in order to continue to fulfill its
obligations under the Exchange Act.
For the reasons discussed above, the Commission finds good cause
for approving Amendment No. 1 to the proposal prior to the 30th day
after the date of publication of notice of filing thereof in the
Federal Register. Accordingly, the Commission finds that it is
consistent with Sections 15A(b)(6)
[[Page 38938]]
and 19(b)(2) of the Exchange Act \24\ to approve Amendment No. 1 on an
accelerated basis.
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\24\ 15 U.S.C. 78o-3(b)(6) and 15 U.S.C. 78s(b)(2).
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III. Discussion
A. The NASD's Obligations Under the Exchange Act and Commission Rules
The NASD is a registered national securities association and SRO.
One of its statutory obligations as a registered national securities
association is to supervise the activities of its members that occur
otherwise than on an exchange. In particular, Section 15A(b)(11) of the
Exchange Act requires the NASD to have rules that govern the ``form and
content of quotations relating to securities sold otherwise than on a
national securities exchange. * * *'' \25\ These rules also must be
designed to produce fair and informative quotations and to promote
orderly procedures for collecting, distributing, and publishing
quotations.\26\ Rule 602 of Regulation NMS also requires the NASD to
collect bids, offers, quotation sizes, and aggregate quotation sizes
from those members who are responsible broker or dealers.\27\ The NASD
must then make available to vendors, at all times when last sale
information is reported, information about the best bids, best offers,
and quotation sizes communicated otherwise than on an exchange by its
members that act as OTC market makers, and their identity.
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\25\ 15 U.S.C. 78o-3(b)(11).
\26\ Id.
\27\ 17 CFR 242.602.
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Rule 601 of Regulation NMS \28\ requires the NASD to file a
transaction reporting plan regarding transactions in listed equity and
Nasdaq securities that are executed by its members otherwise than on a
national securities exchange.\29\ Under Rule 603 of Regulation NMS,\30\
national securities exchanges and national securities associations act
jointly pursuant to an effective national market system plan to
disseminate consolidated information, including a national best bid and
offer, and quotations for and transactions in NMS stocks.
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\28\ 17 CFR 242.601.
\29\ Under Rule 601(b) of Regulation NMS, broker-dealers are
prohibited from executing a transaction otherwise than on a national
securities exchange unless there is an effective transaction
reporting plan. New NASD Rule 5000 requires NASD members to report
transactions in exchange-listed securities effected otherwise than
on an exchange to the NASD.
\30\ 17 CFR 242.603.
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The means by which the NASD complies with these requirements today
is through operation of its Nasdaq facility \31\ and the ADF,\32\ and
by participating in the Consolidated Quotation System Plan (``CQ
Plan'') and CTA Plan for CTA Plan Securities, and the Nasdaq UTP Plan
for Nasdaq UTP Plan Securities.
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\31\ Nasdaq systems collect quotations and transaction reports
from NASD members, including registered market makers and electronic
communication networks (``ECNs''), for both Nasdaq UTP Plan
Securities and CTA Plan Securities. The quotations and transaction
reports in Nasdaq UTP Plan Securities are reported by Nasdaq systems
to the Nasdaq UTP Plan, pursuant to the NASD's participation in the
plan for dissemination to vendors. The quotations and transaction
reports in CTA Plan Securities are reported by Nasdaq systems to the
CQ and CTA Plans, pursuant to the NASD's participation in these
plans for dissemination to vendors.
\32\ See Securities Exchange Act Release No. 46249 (July 24,
2002), 67 FR 49822 (July 31, 2002) (File No. SR-NASD-2002-97) (order
approving the ADF on a pilot basis). See also Securities Exchange
Act Release No. 53699 (April 21, 2006), 71 FR 25271 (April 28, 2006)
(notice of filing and immediate effectiveness of File No. SR-NASD-
2006-050) (extending the ADF pilot program through January 26,
2007). The ADF was developed to provide NASD members with an
alternative to the Nasdaq systems for the reporting of quotations
and transaction reports in Nasdaq UTP Plan Securities. These
quotations and trade reports are provided to the Nasdaq UTP Plan for
dissemination to vendors.
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The NASD proposes to continue to operate the ADF for the collection
of quotes and transaction reports in Nasdaq UTP Plan Securities.\33\ In
addition, the NASD's rules will continue to provide for the collection
of quotes and transaction reports in CTA Plan Securities.\34\ Nasdaq
systems, however, are currently the exclusive means by which NASD
members enter quotations and report trades in CTA Plan Securities.
Under the proposal, as amended, the NASD will continue, via its
delegation to Nasdaq, to use Nasdaq systems for collecting quotations
and transaction reports in CTA Plan Securities.
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\33\ See NASD Rule 4000A Series and Rule 5000 Series. As
discussed more fully below, transaction reports for Nasdaq UTP Plan
Securities also may be submitted to the new Trade Reporting
Facility.
\34\ See NASD Rules 4000 Series, 4700 Series, 5000 Series, 5200
Series, 6300 Series, and 6400 Series.
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Finally, Rule 608 of Regulation NMS requires the NASD to comply
with and enforce compliance with the terms of each national market
system plan of which it is a sponsor or participant.\35\ In addition to
the CQ Plan, CTA Plan and Nasdaq UTP Plan, the NASD is a member of the
ITS Plan. The ITS Plan contains the rules pursuant to which ITS
Participants interact and contains a trade-through rule.\36\
Accordingly, most OTC transactions in CTA Plan Securities regulated by
the NASD are subject to the requirements of the ITS Plan. The NASD
expects to remain a member of the ITS Plan for the purpose of providing
access to OTC quotations communicated by its members through NASD
facilities and to provide its members with access to exchanges'
quotations.
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\35\ 17 CFR 242.608(c).
\36\ In June 2005, the Commission adopted Regulation NMS, which
included the new Rule 611. 17 CFR 242.611. This rule requires a
trading center to establish, maintain and enforce written policies
and procedures that are reasonably designed to prevent trade-
throughs of protected quotations in NMS stocks. Rule 611 became
effective on August 29, 2005; compliance with this rule has been
extended to a series of five dates beginning on October 16, 2006.
See Securities Exchange Act Release No. 53829 (May 18, 2006), 71 FR
100 (May 24, 2006).
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Current NASD rules reflect the NASD's participation in the ITS
Plan.\37\ In Amendment No. 1, the NASD also proposes to retain the
rules that allow its members to enter quotations in CTA Plan Securities
by registering as CQS market makers \38\ and ITS/CAES market
makers.\39\ Accordingly, as discussed further below, the Commission
finds that these rules, as amended, are consistent with Section
15A(b)(11) of the Exchange Act and the Commission also believes that
these changes should enable the NASD to satisfy its obligation under
Rule 602 of Regulation NMS.
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\37\ See NASD Rule 5200 Series and 4700 Series.
\38\ See NASD Rule 6320.
\39\ See NASD Rule 5220.
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B. Changes to the NASD's Governing Documents
The proposal, as amended, revises the Delegation Plan to eliminate
Nasdaq's responsibility for operating the OTC market for Nasdaq UTP
Plan Securities, while continuing to delegate to Nasdaq the
responsibility for operating the OTC market for CTA Plan
Securities.\40\ This change to the Delegation Plan will accurately
reflect the scope of the delegation to Nasdaq after the Nasdaq Exchange
begins to operate as a national securities exchange for Nasdaq UTP Plan
Securities and will ensure that the NASD continues to have the ability
to fulfill its obligations with respect to CTA Plan Securities, as
described above. Further, eliminating Nasdaq's
[[Page 38939]]
delegation of regulatory authority with regard to Nasdaq UTP Plan
Securities satisfies one of the conditions for the Nasdaq Exchange to
begin trading Nasdaq UTP Plan Securities.\41\
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\40\ Among other things, the Delegation Plan, as amended,
delegates to Nasdaq the responsibility for: (1) Operating the OTC
market for CTA Plan Securities and the automated systems supporting
it; (2) providing and maintaining a telecommunications network
infrastructure linking market participants for the efficient
processing and handling of quotations, orders, transaction reports,
and comparisons of transactions in the OTC market for CTA Plan
Securities; (3) developing and adopting rules applicable to the
collection, processing, and dissemination of quotation and
transaction information for securities traded in the OTC market for
CTA Plan Securities; (4) developing and adopting other rules and
policies for the OTC market for CTA Plan Securities; and (5)
establishing standards for participation in the OTC market for CTA
Plan Securities. See Delegation Plan, Section III, A.1.
\41\ See Order Modifying Nasdaq Exchange Conditions, supra, note
6.
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Because Nasdaq will continue to be controlled by the NASD when the
Nasdaq Exchange begins to operate as a national securities exchange for
Nasdaq UTP Plan Securities, the proposal retains Nasdaq's By-Laws in
the NASD's rules.\42\ The Nasdaq By-Laws that the NASD proposes to
retain in its rules reflect changes made to the Nasdaq By-Laws as part
of the Nasdaq Exchange application and that were approved by the
Commission in the Nasdaq Exchange Order.\43\ The Commission finds that
these changes are consistent with the Exchange Act because they ensure
that Nasdaq's By-Laws are accurately reflected in the NASD's rules,
while also ensuring that Nasdaq's governing documents reflect its
status as a parent company of an SRO.\44\
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\42\ See Amendment No. 1.
\43\ See supra, note 5.
\44\ In Amendment No. 1, the NASD also proposes to retain the
references to Nasdaq in the By-Laws of NASD Dispute Resolution, NASD
Regulation, and the NASD to reflect that Nasdaq will continue to be
controlled by the NASD when the Nasdaq Exchange begins to operate as
an exchange for Nasdaq UTP Plan Securities.
---------------------------------------------------------------------------
C. Deleted Rules
The NASD also proposes to delete several rules in their entirety
because the NASD will no longer require them after the Nasdaq Exchange
commences operation as a national securities exchange for Nasdaq UTP
Plan Securities. In this regard, the NASD proposes to delete in their
entirety NASD Rules 2870 through 2885, relating to the listing and
trading of Nasdaq index options. Similarly, the NASD proposes to delete
NASD Rules 2852 and 2854 relating, respectively, to reporting
requirements and trading halts or suspensions for index warrants listed
on Nasdaq and reported to the Nasdaq UTP Plan.
In addition, the NASD proposes to delete from NASD Rules 2841,
2850, and 2851 provisions relating to index warrants listed on Nasdaq,
while retaining provisions in those rules relating to index warrant
trading in the OTC market. Similarly, the NASD proposes to delete
provisions in NASD Rule 2860 relating to standardized options displayed
on Nasdaq, and to retain provisions relating to options trading in the
OTC market.
Because the NASD will not list or trade index options or list
warrants after the Nasdaq Exchange commences operations as a national
securities exchange, the NASD will no longer require these rules.
Accordingly, the Commission finds that it is consistent with Section
15A(b)(6) of the Exchange Act for the NASD to delete from its rules
provisions governing the listing and trading of index options and
warrants listed on Nasdaq.
The NASD also proposes to delete the NASD Rule 6800 Series relating
to the Mutual Fund Quotation Service because the Nasdaq Exchange will
operate this service. Finally, the NASD proposes to delete the NASD
Rule 5100 Series, ``Nasdaq International Service Rules,'' to reflect
the expiration of the Nasdaq International Service pilot program.\45\
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\45\ The Nasdaq International Service pilot program was most
recently extended through October 9, 2003. See Securities Exchange
Act Release No. 46589 (October 2, 2002), 67 FR 63001 (October 9,
2002) (notice of filing and order granting accelerated approval of
File No. SR-NASD-2002-130).
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Because the Nasdaq Exchange, rather than the NASD, will operate the
Mutual Fund Quotation Service, the Commission finds that the deletion
of the Mutual Fund Quotation Service rules from the NASD's rules is
consistent with Section 15A(b)(6) of the Exchange Act. Similarly, the
Commission finds that the NASD's deletion of the Nasdaq International
Service pilot program rules, which reflects the expiration of the pilot
program, is consistent with Section 15A(b)(6) of the Exchange Act.
D. OTC Reporting Facility
The NASD proposes to establish the OTC Reporting Facility. NASD
members will use this facility to report trades in PORTAL
Securities,\46\ OTC Equity Securities,\47\ and Direct Participation
Program (``DPP'') Securities.\48\ Currently, the NASD uses Nasdaq
systems to accept these trade reports. According to the NASD, it plans
to enter into a contract with Nasdaq so that the NASD may continue to
use Nasdaq's Automated Confirmation Transaction Service (``ACT'') \49\
as its facility to collect these transaction reports.\50\
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\46\ See NASD Rule 6732.
\47\ See NASD Rule 6600 Series.
\48\ See NASD Rule 6900 Series.
\49\ In 2004, Nasdaq generally discontinued its use of the term
``ACT'' and replaced it with the term ``Nasdaq Market Center'' or
``service.'' See Securities Exchange Act Release No. 50074 (July 23,
2004), 69 FR 45866 (July 30, 2004) (notice of filing and immediate
effectiveness of File No. SR-NASD-2004-076). To be consistent with
the commenters to this proposal, this order also will use the term
``ACT.''
\50\ See Amendment No. 1.
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1. 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. The NASD proposes to delete
from the NASD Rule 5300 Series rules relating to the qualification
requirements for, or designation of, PORTAL Securities, a function that
the Nasdaq Exchange will perform.\51\ The new NASD Rule 6700 Series
will govern transaction reporting in PORTAL Securities and other
requirements applicable to the trading of PORTAL Securities.\52\
Because these changes will more accurately reflect the NASD's proposed
activities with regard to PORTAL Securities after the Nasdaq Exchange
begins to operate as an exchange for Nasdaq UTP Plan Securities, the
Commission finds them consistent with Section 15A(b)(5) of the Exchange
Act.
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\51\ See Nasdaq Exchange Rule 6500 Series.
\52\ Specifically, the new NASD Rule 6700 Series incorporates
existing NASD Rules 5330, ``Requirements Applicable to Members of
the Association,'' 5331, ``Limitations on Transactions in PORTAL
Securities,'' 5332, ``Reporting Debt and Equity Transactions in
PORTAL Securities,'' 5340, ``Arbitration,'' and 5350, ``Rules of the
Association.''
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2. OTC Equity Securities
The NASD proposes to combine its current NASD Rule 6600 and 6700
Series into a single NASD Rule 6600 Series, which will govern reporting
requirements for certain quotations and transactions in OTC Equity
Securities. \53\ The NASD's rules define OTC Equity Securities as any
equity security not traded on an exchange and certain exchange-listed
securities that do not qualify for real-time trade reporting. Because
these changes will maintain the regulatory requirements for trading and
reporting transactions in OTC Equity Securities, the Commission
believes that they are consistent with Section 15A(b)(6) of the
Exchange Act.
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\53\ The NASD also proposes to make minor changes designed to
reflect Nasdaq's separation from the NASD and to identify the NASD
as the operator of the OTCBB.
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3. DPP Securities
The NASD Rule 6900 Series governs the trade reporting of off-
exchange secondary market transactions in DPP Securities. The NASD
proposes to amend these rules to reflect that such transactions will be
reported to the NASD's OTC Reporting Facility rather than the Nasdaq
Market Center. The Commission finds these changes consistent with the
Exchange Act because the substantive requirements of the NASD Rule 6900
Series will remain unchanged.
[[Page 38940]]
E. NASD Rule 9700 Series and 11890 Series
In the original proposal, the NASD proposed to delete in its
entirety the NASD Rule 9700 Series, ``Procedures on Grievances
Concerning the Automated Systems.'' Because the NASD Rule 9700 Series
governs the review of requests for OTCBB eligibility determinations
under NASD Rule 6530, ``OTCBB-Eligible Securities,'' the NASD proposes
in Amendment No. 1 to retain a revised version of the NASD Rule 9700
Series. The NASD Rule 9700 Series, as amended, replaces references to
Nasdaq, the Nasdaq Listing and Review Hearing Council, and systems
owned by Nasdaq with references to, respectively, the NASD, a committee
designated by the NASD's Board of Governors, and NASD systems. Because
these changes to the NASD Rule 9700 Series provide for the continued
availability of existing procedures for reviewing OTCBB eligibility
determinations, the Commission finds that they are consistent with
Section 15A(b)(6) of the Exchange Act.
In addition, Amendment No. 1 revises NASD Rule 9740,
``Consideration of Applications,'' to permit applicants seeking redress
pursuant to the NASD Rule 9700 Series to be heard telephonically by a
hearing panel, as well as in person. The Commission believes that this
change is consistent with Section 15A(b)(6) of the Exchange Act because
it will provide additional flexibility for applicants seeking redress
under the NASD Rule 9700 Series.
In its original proposal, the NASD proposed to delete NASD Rule
11890, ``Clearly Erroneous Transactions,'' in its entirety. In
Amendment No. 1, the NASD proposes to retain a modified version of NASD
Rule 11890. NASD Rule 11890(a), ``Authority to review Transactions
Pursuant to Complaint of Market Participant,'' currently provides
Nasdaq with the authority to review any transaction arising from the
use of any execution or communication system owned or operated by
Nasdaq. Because Nasdaq will no longer operate an execution or
communication system for the NASD for Nasdaq UTP Plan Securities
pursuant to the Delegation Plan after the Nasdaq Exchange begins to
operate as an exchange for Nasdaq UTP Plan Securities, the NASD is
amending NASD Rule 11890(a) to eliminate Nasdaq's authority under the
rule to review complaints regarding transactions in Nasdaq UTP Plan
Securities. NASD Rule 11890(a) will continue to provide Nasdaq with
authority to review complaints regarding transactions in CTA Plan
Securities arising from the use of an execution or communication system
owned or operated by Nasdaq.\54\ For the same reason, NASD Rule
11890(b)(1), as amended, will continue to allow Nasdaq to review, on
its own motion, any transaction in a CTA Plan Security in the event of
extraordinary market conditions or a disruption or malfunction in the
use or operation of any quotation, execution, communication, or trade
reporting system owned or operated by Nasdaq, while eliminating this
authority with respect to Nasdaq UTP Plan Securities. The Commission
finds that these changes are consistent with Section 15A of the
Exchange Act because Nasdaq will no longer operate, or be delegated
authority with respect to, an NASD execution facility for Nasdaq UTP
Plan Securities after the Nasdaq Exchange begins to operate as an
exchange for Nasdaq UTP Plan Securities.
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\54\ As noted above, Nasdaq will continue to operate the
SuperIntermarket pursuant to a delegation from the NASD after the
Nasdaq Exchange begins to operate as an exchange for Nasdaq UTP Plan
securities.
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In addition, the NASD proposes to amend NASD Rule 11890(b)(2) to
allow it to review, on its own motion, any transaction in a Nasdaq UTP
Plan Security or an OTC Equity Security in the event of extraordinary
market conditions or a disruption or malfunction in the use or
operation of any quotation, communication, or trade reporting system
owned or operated by the NASD. Thus, NASD Rule 11890(b)(2), as amended,
will allow the NASD to declare clearly erroneous transactions in Nasdaq
UTP Plan Securities reported to the ADF or to the Trade Reporting
Facility. The NASD believes that this authority may be appropriate in
very limited circumstances, for example, when an extraordinary event
occurs and multiple SROs are canceling or modifying trades.
The Commission finds that NASD Rule 11890(b)(2), as amended, is
consistent with Section 15A of the Exchange Act because the expansion
of the NASD's authority under NASD Rule 11890(b)(2) replaces authority
previously delegated to Nasdaq and should facilitate the fair and
efficient resolution of disputes involving clearly erroneous
transactions in Nasdaq UTP Plan Securities and OTC Equity Securities.
F. OATS
The NASD proposes to revise its OATS rules regarding orders routed
to non-members, including the Nasdaq Exchange, to ensure that the audit
trail for transactions executed on the Nasdaq Exchange continues in the
same manner as it does today, when transactions are executed on Nasdaq
systems that are NASD facilities. Specifically, the NASD proposes that
orders routed to non-members, which includes national securities
exchanges, be identified with a routed order identifier or other unique
identifier required by the non-member receiving the order, and to
indicate the national securities exchange or registered securities
association to which the order is transmitted.\55\ In addition, the
NASD proposes to clarify existing requirements by providing that
members are permitted to use a routed order identifier that is
different from the order identifier used for origination purposes and
that a member transmitting an order to another member must provide the
routed order identifier to the member receiving the order. The
Commission finds that the proposed changes are consistent with Section
15A(b)(2) of the Exchange Act \56\ in that they are designed to ensure
that the NASD and the Nasdaq Exchange can conduct surveillance and
investigations of their members for potential violations of NASD rules,
Nasdaq Exchange rules, and the federal securities laws.
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\55\ See NASD Rule 6954(c)(6).
\56\ 15 U.S.C. 78o-3(b)(2).
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G. OTC Trading of CTA Plan Securities
1. Dually Listed Securities
The NASD proposes to eliminate current NASD Rule 4400 and to modify
NASD IMZ-Rule 4400, which will become its new Rule 4400. New NASD Rule
4400 describes the treatment of securities that are dually listed on
the Nasdaq Exchange and the NYSE. Specifically, the rule indicates that
such dually listed securities will continue to be subject to the CQ and
CTA Plans and will continue to be treated as CTA Plan Securities under
the NASD's rules.\57\The Commission finds that new NASD Rule 4400 is
consistent with Section 15A of the Act because it clarifies that the
NASD will treat these securities in the same manner as it does today.
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\57\ Among other things, new NASD Rule 4400 indicates the NASD
will continue to send all quotes and transaction reports in dually
listed securities to the processor for the CTA Plan while such
securities continue to trade through the facilities of the NASD. In
addition, the rule notes that market makers in dually listed
securities will retain all of the obligations imposed by the NASD
Rule 5200, 6300, and 6400 Series regarding quoting, trading, and
transaction reporting of CQS securities, and that the NASD will
continue to honor the trade halt authority of the primary market
under the CQ and CTA Plans.
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2. SuperIntermarket Facility
Through its delegation to Nasdaq under the Delegation Plan, the
NASD
[[Page 38941]]
will continue to use technology owned by Nasdaq, i.e., the
SuperIntermarket, as its facility to collect OTC quotes and transaction
reports in CTA Plan Securities. In addition, the SuperIntermarket will
continue to permit NASD members quoting in the facility to participate
in ITS and satisfy the NASD's obligations under the ITS Plan.\58\
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\58\ See supra notes 25-39 and accompanying text.
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a. Quotations
In Amendment No. 1, the NASD proposes to retain its rules that
allow its members to register as CQS market makers \59\ and ITS/CAES
market makers.\60\ These rules are essential to the NASD's ability to
fulfill its statutory \61\ and regulatory obligations,\62\and to NASD
members' ability to fulfill their regulatory obligation to submit their
OTC quotations to the NASD.\63\ The NASD must collect quotations in
subject securities that OTC market makers communicate otherwise than on
an exchange.\64\ NASD rules currently provide that members that
communicate quotations off an exchange in CTA Plan Securities must
register as CQS market makers and ITS/CAES market makers.\65\ The NASD
has only proposed minor changes to the rules for CQS market makers and
ITS/CAES market makers, including replacing references to the Nasdaq
Market Center with references to Nasdaq. The NASD also proposes to
adopt NASD Rule 6431, ``Trading Halts,'' to provide a trading halt rule
for CTA Plan Securities.\66\
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\59\ See NASD Rule 6300 Series. NASD members that submit quotes
in CQS securities must be registered as CQS market makers. See NASD
Rule 6320(a). CQS market makers must also register as ITS/CAES
market makers. See NASD Rule 6320(e). See also NASD Rule 5210(e).
\60\ See NASD Rule 5200 Series. NASD members that participate in
ITS must register as ITS/CAES market makers. See NASD Rule 5220.
ITS/CAES market makers must also register as CQS market makers. See
NASD Rule 5220(a). See also NASD Rule 6320(e).
\61\ 15 U.S.C. 78o-3(b)(11). See supra notes 25-39 and
accompanying text.
\62\ See Rule 602(a) under the Exchange Act, 17 CFR 242.602(a).
\63\ See Rule 602(b) of Regulation NMS under the Exchange Act,
17 CFR 242.602(b).
\64\ See Rule 602(b) of Regulation NMS under the Exchange Act,
17 CFR 242.602(b).
\65\ See NASD Rules 6320(a) and 5210(e). An NASD member that
does not communicate quotations off an exchange, but that executes a
transaction in a CTA Plan Security off an exchange, may report its
transaction to the NASD through ACT, which Nasdaq will operate for
the NASD under the Delegation Plan.
\66\ NASD Rule 4120 currently contains Nasdaq's authority to
halt OTC trading of Nasdaq UTP Plan Securities and CTA Plan
Securities. The proposal revises NASD Rule 4120 and renumbers it as
NASD Rule 4633, ``Trading Halts,'' which now relates solely to the
Trade Reporting Facility. New NASD Rule 6431, which includes the
same provisions as NASD Rule 4633, applies to CTA Plan Securities.
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The Commission finds that the NASD's proposal to retain, with minor
clarifying changes, its rules governing CQS and ITS/CAES market makers
is consistent with Section 15A of the Exchange Act because it will
allow the NASD to continue to fulfill its statutory and regulatory
obligations,\67\ and allow NASD members to continue to fulfill their
regulatory obligation to submit their OTC quotations to the NASD.\68\
In addition, the Commission finds that the proposal to adopt NASD Rule
6431 is consistent with Section 15A of the Exchange Act because it
could help the NASD to maintain a fair and orderly market.
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\67\ See supra notes 61 and 62.
\68\ See note 63, supra, and accompanying text.
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b. Executions
As noted above, the NASD will remain a member of the ITS Plan. As
such, the NASD is required to comply with, and enforce compliance by
its members with, the provisions of the ITS Plan.\69\ Currently, the
NASD uses its Nasdaq SuperIntermarket facility to provide its members
with access to ITS participant exchanges and to provide ITS participant
exchanges with access to ITS/CAES market makers' quotations. The NASD
proposes to continue to use the SuperIntermarket system as its facility
for these purposes through its delegation to Nasdaq.
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\69\ See Rule 608(c) of Regualtions NMS under the Exchange Act,
17 CFR 242.608(c).
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In Amendment No. 1, the NASD proposes to retain certain parts of
its Rule 4700 Series that relate to the SuperIntermarket, and to
eliminate from the 4700 Series those rules that pertain to the trading
of Nasdaq UTP Plan Securities on the Nasdaq Market Center. The
Commission finds that these changes are consistent with the
requirements of the Exchange Act because they will permit the NASD and
its members to continue to participate in ITS as they do today.\70\ The
Commission also finds that the elimination of rules that pertain to the
trading of Nasdaq UTP Plan Securities is consistent with the Exchange
Act because the NASD will no longer be operating an execution facility
for Nasdaq UTP Plan Securities.
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\70\ See Securities Exchange Act Release No. 49349 (March 2,
2004), 69 FR 10775 (March 8, 2004) (order approving the use of
SuperMontage for trading ITS securities). The Commission notes that
required participation in the ITS Plan is of limited duration. See
supra note 36.
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c. Transaction Reporting
Members effecting trades in CTA Plan Securities off an exchange,
yet outside of the SuperIntermarket facility, will continue, as they do
today, to submit trade reports to ACT. Nasdaq will have delegated
responsibility under the Delegation Plan to operate ACT for the NASD
for this purpose. Accordingly, the NASD proposes to retain its 6400
Series, ``Reporting Transactions in Listed Securities,'' with minor
changes, including replacing references to the Nasdaq Market Center
with references to Nasdaq.\71\
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\71\ As described more fully above, the NASD also proposes to
adopt NASD Rule 6431, relating to trading halts for CTA Plan
Securities.
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The Commission finds that these changes are consistent with the
Exchange Act. With respect to CTA Plan Securities, the only means
currently available to the NASD to fulfill its statutory and regulatory
obligations is through NASD facilities owned by Nasdaq. The Commission
believes that the NASD Rule 6400 Series, as amended, will enable the
NASD to continue to satisfy its obligations under Rules 601 and 603 of
Regulation NMS and the CTA Plan to collect its members' transaction
reports for OTC trades of CTA Plan Securities.
3. BRUT and INET Rules
Because the Nasdaq Exchange will not commence trading in CTA Plan
Securities at this time, any trading of these securities that occurs in
BRUT and INET would occur over-the-counter. Accordingly, the NASD has
proposed in Amendment No. 1 to retain its current rules that govern the
operation of the BRUT \72\ and INET \73\ systems with regard to CTA
Plan Securities. These trading platforms will continue to be facilities
of the NASD for CTA Plan Securities that are operated by Nasdaq
pursuant to the Delegation Plan. The NASD has proposed to make some
changes to these rules to reflect that NASD members may not use these
systems to execute OTC trades in Nasdaq UTP Plan Securities.\74\ The
Commission finds that these changes are consistent with the Exchange
Act because they clarify and appropriately limit the use of these
systems by NASD members after the Nasdaq Exchange begins to operate an
exchange for Nasdaq UTP Plan Securities.
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\72\ See NASD Rule 4900 Series.
\73\ See NASD Rule 4950 Series.
\74\ Once the Nasdaq Exchange begins operations as a national
securities exchange in Nasdaq UTP Plan Securities, transactions in
Nasdaq UTP Plan Securities that occur in Brut and INET will be
Nasdaq Exchange trades subject to the Nasdaq Exchange's rules and
regulatory jurisdiction.
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[[Page 38942]]
H. OTC Trading of Nasdaq UTP Plan Securities
1. NASD Rule 5110
The NASD proposes to renumber NASD Rule 6440(i) as NASD Rule 5110,
``Transactions Related to Initial Public Offerings,'' which prohibits a
member from executing, directly or indirectly, a transaction otherwise
than on an exchange in a security subject to an initial public offering
until the security has first opened for trading on the national
securities exchange listing the security, as indicated by the
dissemination, via the Consolidated Tape, of an opening transaction in
the security by the listing exchange. In addition, the NASD proposes to
extend its application to transactions in Nasdaq UTP Plan Securities.
New NASD Rule 5110 is substantially the same as current NASD Rule
6440(i).\75\ The Commission finds that new NASD Rule 5110 is consistent
with the Exchange Act because it is substantially the same as current
NASD Rule 6440(i). In addition, the Commission believes that the
application of NASD Rule 5110 to Nasdaq UTP Plan Securities, as well as
CTA Plan Securities, after the Nasdaq Exchange begins to operate as a
national securities exchange is consistent with the Exchange Act
because it will provide consistent treatment for all exchange-traded
securities.\76\
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\75\ NASD Rule 6440(i) prohibits members from executing,
directly or indirectly, an OTC transaction in a security subject to
an initial public offering until the security has first opened for
trading on the national securities exchange listing the security, as
indicated by the dissemination, via the Consolidated Tape, of an
opening transaction in the security by the listing exchange.
\76\ See supra note 23.
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2. Changes to the ADF Rules
The ADF is an NASD facility for members to quote and report off-
exchange trades in Nasdaq UTP Plan Securities. NASD members that use
the ADF must comply with the NASD Rule 4000A Series, ``NASD Alternative
Display Facility,'' and the NASD Rule 6000A Series, ``NASD ADF Systems
and Programs.''
The NASD proposes to make the following changes to its ADF rules.
First, the NASD proposes to clarify that the following ADF rules apply
to Registered Reporting ECNs as well as Registered Reporting ADF Market
Makers: NASD Rules 4613A(b), relating to firm quote requirements, and
4613A(c), requiring quotations to be reasonably related to the
prevailing market; NASD Rule 4617A, relating to normal business hours;
NASD Rule 4618A, relating to clearance and settlement requirements; and
NASD Rules 4621A and 4622A, relating to the NASD's ability to suspend
or terminate quotations or ADF services. The Commission finds that
these changes are consistent with Section 15A(b)(6) of the Exchange Act
\77\ because they will apply ADF rules consistently to Registered
Reporting ADF Market Makers and Registered Reporting ECNs.
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\77\ 15 U.S.C. 78o-3(b)(6).
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Second, the NASD proposes to revise NASD Rule 4632A, ``Transactions
Reported by Members,'' to incorporate the trade reporting requirements
currently set forth in NASD Rule 5430, ``Transaction Reporting,'' which
is being deleted. The NASD proposes to delete the NASD Rule 5400
Series, ``Nasdaq Stock Market and Alternative Display Facility Trade
Reporting.'' NASD Rule 5410 states that the NASD will operate two
facilities for collecting trade reports, the Nasdaq Stock Market and
the ADF, and notes that the NASD Rule 5400 Series establishes rules
governing which member must report a trade and whether the trade must
be reported to the Nasdaq Market Center or to the ADF. The provisions
in the NASD Rule 5400 Series relating to the reporting of transactions
to the Nasdaq Market Center will be no longer relevant after the Nasdaq
Exchange commences operations as a national securities exchange for
Nasdaq UTP Plan Securities and, accordingly, the NASD proposes to
delete these provisions. Therefore, the Commission finds that
elimination of these rules is consistent with the Exchange Act.
The NASD proposes to relocate the provisions in the NASD Rule 5400
Series relating to the ADF to NASD Rules 4630A, ``Reporting
Transactions in ADF-Eligible Securities,'' and 4632A, ``Transactions
Reported by Members,'' which will govern the reporting of transactions
in ADF-eligible securities through the NASD's Trade Reporting and
Comparison System (``TRACS''). The Commission believes that the
proposal to move the NASD Rule 5400 Series to the ADF rule series
should clarify the applicability of the NASD's rules and, therefore the
Commission finds that these changes are consistent with Section
15A(b)(6) of the Exchange Act.\78\ The Commission believes that this
change will help to consolidate the ADF's trade reporting requirements
while substantially preserving the current requirements of NASD Rule
5430.
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\78\ Id.
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Third, the NASD proposes to make the ADF's trade reporting
requirements more consistent with the trade reporting rules that apply
to Nasdaq systems. For example, the NASD proposes to require that the
execution time in hours, minutes, and seconds based on Eastern Time in
military format be included in all ADF trade reports,\79\ to add
certain trade report modifiers,\80\ and to establish provisions
relating to the reporting of cancelled trades.\81\ The NASD also
proposes to clarify that all applicable trade modifiers must be
included in ``as/of'' trades.\82\ In addition, the NASD proposes to add
to NASD Rule 4632A a provision stating that a pattern or practice of
late reporting without exceptional circumstances may be considered
conduct inconsistent with high standards of commercial honor and just
and equitable principles of trade.\83\ The Commission finds
