Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Reflect Nasdaq's Complete Separation From NASD Upon the NASDAQ Stock Market LLC's Operation as a National Securities Exchange for Non-Nasdaq Exchange-Listed Securities, 55243-55247 [06-7845]

Download as PDF Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices www.nscc.com/legal/. 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 Numbers SR–FICC– 2006–03 and SR–NSCC–2006–03 and should be submitted on or before October 12, 2006. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,19 that the proposed rule changes (File Nos. SR– FICC–2006–03 and SR–NSCC–2006–03) be and hereby are approved on an accelerated basis. For the Commission by the Division of Market Regulation, pursuant to delegated authority.20 J. Lynn Taylor, Assistant Secretary. [FR Doc. 06–7844 Filed 9–20–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54451; File No. SR–NASD– 2006–104] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Reflect Nasdaq’s Complete Separation From NASD Upon the NASDAQ Stock Market LLC’s Operation as a National Securities Exchange for Non-Nasdaq Exchange-Listed Securities September 15, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 5, 2006, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASD. On September 14, 2006, NASD submitted Amendment No. 1 to the proposed rule change.3 The Commission is publishing 19 15 U.S.C. 78s(b)(2). 20 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 In Amendment No. 1, NASD clarifies that (1) The effective date of the proposed rule change will be the date upon which The NASDAQ Stock Market LLC (‘‘Nasdaq Exchange’’) operates as an exchange for non-Nasdaq exchange listed securities, which the Nasdaq Exchange anticipates will be in November 2006; (2) the NASD’s Market Regulation Committee will perform substantially the same functions as performed by the Nasdaq’s Quality of jlentini on PROD1PC65 with NOTICES 1 15 VerDate Aug<31>2005 16:30 Sep 20, 2006 Jkt 208001 this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to: (1) Delete The Nasdaq Stock Market Inc.’s (‘‘Nasdaq’’) By-Laws and amend the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries (‘‘Delegation Plan’’), NASD By-Laws, NASD Regulation, Inc. By-Laws, NASD Dispute Resolution, Inc. By-Laws, and NASD rules to reflect Nasdaq’s separation from NASD upon the operation of the Nasdaq Exchange as a national securities exchange for nonNasdaq exchange-listed securities; (2) amend NASD rules relating to quoting and trading otherwise than on an exchange in non-Nasdaq exchangelisted securities to reflect changes in the services provided by NASD in this regard; and (3) expand the scope of the NASD/Nasdaq Trade Reporting Facility rules to include trade reporting in nonNasdaq exchange-listed securities. The text of the proposed rule is available on the NASD Web Site (http://www.nasd.com), on the Commission’s Web Site at (http:// www.sec.gov), at the NASD Office of Secretary and at the Commission’s Public Reference Room. All NASD rules that do not have rule text changes specified remain unchanged and effective for all NASD members. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On June 30, 2006, the Commission approved proposed rule change SR– NASD–2005–087, which, among other things, amended NASD’s Delegation Markets Committee; and (3) the proposed rule change reflects NASD’s continued participation in the Intermarket Trading System (‘‘ITS’’) Plan. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 55243 Plan, By-Laws, and NASD rules to reflect the Nasdaq Exchange’s operation as a national securities exchange for purposes of Nasdaq-listed securities.4 Specifically, to facilitate an orderly transition and minimize any potential disruption to the marketplace, for a transitional period that commenced on August 1, 2006, the Nasdaq Exchange has been operating as an exchange for purposes of Nasdaq-listed securities only, while Nasdaq continues to perform its current obligations under the NASD’s Delegation Plan with respect to non-Nasdaq exchange-listed securities.5 Pursuant to SR–NASD– 2005–087 and under the Delegation Plan, Nasdaq, as a subsidiary of NASD, continues to perform during this transitional period only those functions relating to over-the-counter (‘‘OTC’’) quoting, trading, and execution of nonNasdaq exchange-listed securities. As such, Nasdaq no longer performs functions relating to Nasdaq-listed securities pursuant to delegated authority from NASD. The proposed rule change described herein provides amendments to NASD rules to reflect Nasdaq’s complete separation from NASD upon the operation of the Nasdaq Exchange as a national securities exchange for purposes of non-Nasdaq exchange-listed securities in addition to Nasdaq-listed securities. In addition, the proposed rule change amends the current NASD rules for quoting and trading otherwise than on an exchange in non-Nasdaq exchange-listed securities to reflect the manner in which NASD would be satisfying its regulatory obligations under the Act and the rules thereunder on a temporary basis until the Alternative Display Facility (‘‘ADF’’) is able to satisfy those obligations. Further, this proposed rule change reflects NASD’s continued participation in the ITS Plan.6 This is one of the conditions that must be met before Nasdaq can operate as an exchange for non-Nasdaq exchange-listed securities.7 Finally, the proposed rule change expands the scope of the NASD/Nasdaq Trade Reporting 4 See Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR–NASD–2005–087). 5 The Commission approved the Nasdaq Exchange application on January 13, 2006. See Securities Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10–131). See also Securities Exchange Act Release No. 54085 (June 30, 2006), 71 FR 38910 (July 10, 2006), which modified the conditions set forth in the Nasdaq Exchange Approval Order to allow the Nasdaq Exchange to operate as a national securities exchange solely with respect to Nasdaq-listed securities. 6 See Amendment No. 1. 7 See id. E:\FR\FM\21SEN1.SGM 21SEN1 55244 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices Facility rules to include trade reporting in non-Nasdaq exchange-listed securities, as well as other technical and clarifying changes. jlentini on PROD1PC65 with NOTICES Proposed Changes Relating to the Separation of Nasdaq As described in detail in SR–NASD– 2005–087, in 2000, NASD began restructuring its relationship with Nasdaq, which operates as an independent, for-profit company. As the result of a two-phase private placement of Nasdaq shares, a public offering completed in January 2005 and other dispositions of NASD shares, NASD no longer holds a common stock ownership interest in Nasdaq. However, because Nasdaq exercises regulatory authority under the Delegation Plan, NASD retains control of Nasdaq through a single share of Series D Preferred Stock (the ‘‘Series D Preferred’’) that allows NASD to cast a majority of the votes cast in any matter submitted to Nasdaq’s stockholders, including the election of Nasdaq directors. Once the delegation to Nasdaq is no longer necessary, the share of Series D Preferred Stock would automatically lose its voting rights and would be redeemed by Nasdaq for $1.00. Thus, upon the Nasdaq Exchange’s operation as a national securities exchange for non-Nasdaq exchangelisted securities, Nasdaq and NASD would be unaffiliated corporate entities, and thus each will have separate rules applicable to their respective members. Therefore, NASD is proposing to amend its rules to reflect this complete separation of Nasdaq from NASD. These changes include removing references in the Delegation Plan to Nasdaq as a subsidiary and delegation of authority to Nasdaq; revising the NASD By-Laws, NASD Regulation, Inc. By-Laws, and NASD Dispute Resolution, Inc. By-Laws to remove references to Nasdaq as a subsidiary of NASD; deleting the Nasdaq By-Laws and all Nasdaq-specific rules and requirements; replacing references to ‘‘Nasdaq’’ with ‘‘NASD’’ or ‘‘exchange,’’ as applicable; and renaming and renumbering certain rules.8 The NASD Rule 11890 Series (Clearly Erroneous Transactions) has been amended to delete those provisions relating to Nasdaq’s current clearly erroneous authority, including the authority to break trades as a result of a complaint. The proposed rule change reallocates to NASD the authority previously delegated to 8 This proposed rule change also includes corrections of minor grammatical or typographical errors and other miscellaneous non-substantive changes. VerDate Aug<31>2005 16:30 Sep 20, 2006 Jkt 208001 As part of the Nasdaq Exchange approval order, the Commission conditioned the operation of Nasdaq as an exchange for non-Nasdaq exchangelisted securities on NASD’s ability to represent to the Commission that control of Nasdaq through the Series D Preferred share is no longer necessary because NASD can fulfill through other means its obligations with respect to non-Nasdaq exchange-listed securities under Section 15A(b)(11) of the Act, Rules 602 and 603 of Regulation NMS, and the national market system plans in which NASD participates.10 To meet these obligations under the federal securities laws with respect to non-Nasdaq exchange-listed securities, NASD is proposing amendments to provide for the operation of an OTC quoting and trading facility in nonNasdaq exchange-listed securities on a temporary basis, as well as linkage and communications mechanisms necessary under the Intermarket Trading System (ITS) Plan, as described in more detail below. In doing so, NASD is amending (or deleting as appropriate) those rules relating to Nasdaq and Nasdaq’s performance of any functions and operation of any systems relating to OTC trading in non-Nasdaq exchange- listed securities under the current Delegation Plan.11 Specifically, the NASD Rule 4900 (Brut System) and NASD 4950 (INET System) Series have been deleted in their entirety, given that the Brut and INET Systems will no longer be operating pursuant to NASD Rules. With respect to the NASD Rule 4700 Series (ITS/CAES System—Execution Services), the NASD Rule 5200 Series (Intermarket Trading System/Computer Assisted Execution System) and the NASD Rule 6300 Series (Consolidated Quotation Services (CQS)), the general framework under those rule series would remain substantially similar to the rules in place today, including all functionality relating to the outbound and inbound ITS linkage; however the functionality available to users within the ITS/CAES System under those rules, particularly the NASD Rule 4700 Series, would be more limited in nature as described below. The proposed ITS/CAES System would permit registered ITS/CAES Market Makers to (1) Display attributable quotes and orders through the system; (2) access other ITS/CAES Market Makers’ bids and offers using the ‘‘Preferenced Order’’ functionality described below; and (3) interact with other ITS exchanges’ bids and offers via inbound and outbound ITS Commitments. Only ITS/CAES Market Makers can display quotes in the system and send Preferenced Orders and ITS Commitments. Non-ITS/CAES Market Makers would not be permitted to display interest on the system or send orders; however, as described in more detail below, non-ITS/CAES Market Makers would be able to report lockedin trades through the system.12 Members would be required to register with NASD to become ITS/ CAES Market Makers (including ECNs that choose to register as such). Members must meet the minimum requirements to be an ITS/CAES Market Maker, as described in NASD Rules 4705, 5220, 6320, and 6330, and all ITS/ CAES Market Makers must display and maintain continuous two-sided quotes. To comply with its two-sided quotation requirements, an ITS/CAES Market Maker would have the option of entering quotations or summary orders. 9 This is consistent with NASD’s current clearly erroneous authority with respect to Nasdaq and OTC equity securities. 10 Currently, Nasdaq fulfills these obligations for NASD through the operation of, among other things, its SuperIntermarket (‘‘SiM’’) trading platform, pursuant to authority delegated to Nasdaq under the Delegation Plan. NASD fulfills the obligations with respect to Nasdaq-listed securities through the operation of the ADF. 11 With respect to the OTC quoting and trading facility proposed herein, Nasdaq will be acting solely in the capacity of a vendor pursuant to a services agreement. 12 By comparison, under current rules, non-ITS/ CAES Market Makers (defined as ‘‘Order Entry Firms’’) also are not able to display orders or send or receive ITS Commitments; however, they are able to use the system to send ‘‘immediate or cancel’’ orders to ITS/CAES Market Makers. Nasdaq to break trades in non-Nasdaq exchange-listed securities on its own motion.9 Finally, the proposed rule change deletes NASD Rule 4400 (Impact of Non-Designation of Certain Dually Listed Securities), which is no longer applicable once Nasdaq is operating as a separate entity. As part of the proposed amendments to the Delegation Plan, NASD is proposing to delete Section III of the Delegation Plan relating to the Quality of Markets Committee, which was a Committee appointed by the Nasdaq Board. NASD is clarifying that NASD’s Market Regulation Committee will perform substantially the same functions as performed by Quality of Markets Committee. The Supplemental Delegation Regarding the Market Regulation Committee is set forth in Section II.C.1 of the Delegation Plan. Quoting and Trading of Non-Nasdaq Exchange-listed Securities PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\21SEN1.SGM 21SEN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices Specifically, an ITS/CAES Market Maker may enter a bid quotation and an offer quotation, each at a single price level, and/or it may choose to enter ‘‘summary orders’’ at multiple price levels into the system. All orders and quotes must be in round lots. Both quotations and summary orders would be treated the same for purposes of display and ITS execution purposes. Summary orders may be entered with the following Time in Force (TIF): (1) ‘‘DAY’’ order type, which means that after entry into the system, the order would remain available for potential display and/or execution until market close (4 p.m. Eastern Time), after which it shall be returned to the entering party; and (2) Total Day (‘‘X’’) order type, which means that after entry into the system, the order would remain available for potential display between 7:30 a.m. and 6:30 p.m. and for potential execution between market open (9:30 a.m.) and 6:30 p.m., after which it shall be returned to the entering party. Where an ITS/CAES Market Maker’s quote is exhausted due to an execution with a commitment to trade, as described in NASD Rule 4710(b)(1)(C) and consistent with current practice, the bid side of the ITS/CAES Market Maker’s quote would be zeroed out and then automatically refreshed to establish a bid of $0.01 for 100 shares. Similarly, if the offer side of the ITS/CAES Market Maker’s quote is zeroed out, the system would automatically establish an offer of two times the system best bid plus $0.01 for 100 shares. Although quotes would be refreshed automatically in this manner, NASD Rule 5230(c) would require that the ITS/CAES Market Maker enter quotes promptly, but in no event later than 15 seconds from when the quote(s) were exhausted. Quotations displayed through the ITS/CAES System would be accessible by other ITS Exchanges through inbound ITS Commitments, which would have a uniform TIF of 5 seconds. The system would not provide autoexecution functionality; therefore ITS Commitments received by ITS/CAES Market Makers would not be responded to (or executed) unless the ITS/CAES Market Maker provides an affirmative response within 5 seconds. If the ITS Commitment is not responded to within that time period, it would be returned to the sending exchange. Similarly, ITS/CAES Market Makers would be able to send outbound ITS Commitments to access quotes displayed by other ITS exchanges. All outbound ITS Commitments entered by an ITS/CAES Market Maker would be treated as Immediate or Cancel (‘‘IOC’’ VerDate Aug<31>2005 16:30 Sep 20, 2006 Jkt 208001 or ‘‘IOX,’’ if it includes the 4 p.m. to 6:30 p.m. session) and would have a TIF of 5 seconds (or 30 seconds in the limited circumstance where the ITS Commitment is sent to an ITS Exchange that can only accept a TIF of 30 seconds). Once an ITS Commitment is entered, it cannot be cancelled by the ITS/CAES Market Maker. At the end of each trading day, all quotes/orders would be cleared from the system (returned to the sender). Therefore, at the beginning of each trading day, an ITS/CAES Market Maker must enter new quotes and/or summary orders in each security for which it is a registered market maker. ITS/CAES Market Makers would be able to access other ITS/CAES Market Maker quotes and ITS Exchanges through the use of ‘‘Preferenced Orders,’’ which must be entered using the IOC or IOX TIF. Preferenced Orders may only be sent to another ITS/CAES Market Maker when that ITS/CAES Market Maker is at the best bid/best offer in the system and only in an amount equal to or less than the ITS/ CAES Market Maker’s displayed quote. The system would reject a Preferenced Order sent to an ITS/CAES Market Maker that is not at the best bid/best offer in the system, or where the execution of the Preferenced Order would result in the violation of the Trade-Through Rule under NASD Rule 5262. The proposed rule change deletes all rules relating to functionality not available in the new system, including reserve size, the ability to quote or submit orders on a non-attributable basis and certain order types such as ‘‘discretionary,’’ ‘‘non-directed,’’ ‘‘sweep’’ and ‘‘fill or return’’ orders. In addition, because the system is not an ‘‘execution’’ system (i.e., it does not provide auto-execution functionality, only order delivery requiring user response), all references to autoexecution functionality or execution algorithms have been deleted. Similarly, as noted above, members not registered as ITS/CAES Market Makers can use the system only for trade reporting purposes and therefore, rules relating to order functionality previously available to ‘‘order entry firms’’ have been deleted. The proposed rule change also deletes all rules relating to the ITS Pre-Opening Application (e.g., current NASD Rules 5240 and 5250) functionality. The PreOpening Application is a mechanism designed for use by the primary listing markets for ITS Securities to open their markets at prices that are materially different than the previous day’s closing prices. The Pre-Opening Application is initiated by the New York Stock PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 55245 Exchange LLC (‘‘NYSE’’) and the American Stock Exchange LLC (‘‘Amex’’) for their securities and today, NASD, through its delegation to Nasdaq, does not provide a mechanism to participate in that process via SiM. Therefore, NASD would not be offering that functionality as part of the proposed ITS/CAES System. The proposed system, however, would provide the ability for ITS/CAES Market Makers to view the Pre-Opening notifications published by other ITS Exchanges. With respect to locked/crossed markets, the NASD ITS/CAES System would reject all quotes that lock or cross the NASD BBO or the National BBO. Because the system would not permit ITS/CAES Market Makers to initiate a locking or crossing quote, NASD is proposing to delete NASD Rule 5263, which provides procedures relating to locking and crossing markets, and replace it with a general prohibition of such quoting activities. With respect to the minimum price variation (MPV), NASD is retaining the current MPV increment ($0.01 for quotations priced at or above $1.00 per share and $0.0001 for quotations priced below $1.00 per share), but is proposing to amend NASD Rule 6330(d) to prohibit the entry of quotes or orders not in compliance with the MPV. NASD would not adjust or round such quotes or orders, but would reject those not in compliance with the MPV. If a Preferenced Order or ITS Commitment is accepted by an ITS/ CAES Market Maker, the ITS/CAES System would lock-in the transaction and report it to the ‘‘tape’’ for dissemination purposes and also would provide the necessary clearing information regarding the transaction to the National Securities Clearing Corporation (‘‘NSCC’’). With respect to non-ITS/CAES transactions (i.e., OTC trades in nonNasdaq exchange-listed securities that are not effected through the ITS/CAES System), NASD is providing a mechanism by which members (both ITS/CAES Market Makers and non-ITS/ CAES Market Makers) may report those trades through the ITS/CAES System. Non-ITS/CAES Market Makers that wish to use this functionality must register as a ‘‘Trade Reporting Only Participant,’’ pursuant to proposed NASD Rule 4705(a). To report transactions through the ITS/CAES System, members must comply with the requirements of NASD Rule 4720, including that members that are parties to the trade must agree to all trade details prior to submitting the report to the system and have in effect, E:\FR\FM\21SEN1.SGM 21SEN1 55246 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices and on file with NASD, an NASD Service Bureau/Executing Broker Supplement to the NASD Services Agreement (‘‘Attachment C Agreement’’) and an NASD Give-Up Addendum to the NASD Services Agreement (‘‘NASD Give-Up Agreement’’). In the event that the parties do not have such agreements in effect and on file with NASD, NASD would only facilitate the reporting of the transaction pursuant to an effective transaction reporting plan; the parties must use an alternative mechanism for clearing and comparing the transaction, as necessary. NASD also is proposing to amend NASD Rule 4720 to require that all transaction reports submitted to the system via NASD Rule 4720 comply with the requirements contained in the NASD Rule 6400 Series, which are substantially similar to the non-Nasdaq exchange-listed trade reporting requirements in place today. NASD is also proposing to amend Rule 6400 (Reporting Transactions in Listed Securities) to clarify that transactions required or eligible to be reported under the Rule 6400 Series must be reported through the ITS/CAES System pursuant to the provisions of Rule 4720. jlentini on PROD1PC65 with NOTICES Proposed Changes Relating to the NASD/Nasdaq Trade Reporting Facility Rules Pursuant to SR–NASD–2005–087, NASD established the NASD/Nasdaq Trade Reporting Facility, which provides members another mechanism for reporting transactions effected otherwise than on an exchange. The NASD/Nasdaq Trade Reporting Facility is a facility of NASD and subject to NASD’s registration as a national securities association. As such, NASD has regulatory responsibility for the trades reported to the NASD/Nasdaq Trade Reporting Facility, while Nasdaq pays for the cost of regulation and provides the systems to enable brokerdealers to report trades to the NASD/ Nasdaq Trade Reporting Facility. Currently, the NASD/Nasdaq Trade Reporting Facility rules apply only to reporting transactions in Nasdaq-listed securities. The proposed rule change amends the NASD Rule 4100, 4200, 4600, and 6100 Series to combine with those provisions the trade reporting requirements for exchange-listed securities currently found in the NASD Rule 6400 Series.13 As a result, the trade reporting requirements for Nasdaq and 13 NASD also is proposing technical changes to the NASD Rule 4000 and 6000 Series to replace the term ‘‘Trade Reporting Facility’’ with the ‘‘NASD/ Nasdaq Trade Reporting Facility’’ to make it clear that these rules apply to the Trade Reporting Facility operated by the Nasdaq Exchange. VerDate Aug<31>2005 16:30 Sep 20, 2006 Jkt 208001 other exchange-listed securities reported through the NASD/Nasdaq Trade Reporting Facility would be uniform and found in these rule series.14 In this regard, current NASD Rules 6420(e)(6) and (7) provide exclusions to the trade reporting requirements for non-Nasdaq exchange-listed securities; these exclusions were specific to exchange trading and therefore did not apply to trade reporting in Nasdaq securities. They have now been incorporated into proposed subparagraphs (7) and (8) of NASD Rule 4632(e) and would apply to all exchange-listed securities reported to the NASD/Nasdaq Trade Reporting Facility, including Nasdaq securities. The NASD/Nasdaq Trade Reporting Facility permits participants to enter into ‘‘give-up’’ arrangements whereby one member reports to the NASD/ Nasdaq Trade Reporting Facility on behalf of another member. Participants must complete and submit to the NASD/ Nasdaq Trade Reporting Facility the appropriate documentation reflecting the arrangement. Proposed NASD Rule 4632(h) codifies this process and provides that the member with the reporting obligation remains responsible for the transaction submitted on its behalf. Further, both the member with the reporting obligation and the member submitting the trade to the NASD/ Nasdaq Trade Reporting Facility are responsible for ensuring that the information submitted is in compliance with all applicable rules and regulations. Finally, NASD is also proposing an amendment to NASD Rule 4632(d)(3)(B) relating to requirements for reporting ‘‘riskless principal’’ transactions to the NASD/Nasdaq Trade Reporting Facility.15 The proposed rule change would clarify that where the media leg of the riskless principal transaction is reported to the NASD/Nasdaq Trade Reporting Facility, the second, nonmedia leg must also be reported to the NASD/Nasdaq Trade Reporting Facility. However, where the media leg of the riskless principal transaction was 14 NASD will have an integrated audit trail of non-Nasdaq exchange-listed securities transactions from the ITS/CAES system and the NASD/Nasdaq Trade Reporting Facility and will have integrated surveillance capabilities. Based on the structure and functionality of the system and rules proposed herein, NASD expects that comprehensive audit trail and surveillance integration on an automated basis will be completed by the end of fourth quarter 2006. Prior to that time, NASD staff will be able to create an integrated audit trail on a manual basis as needed for regulatory purposes. 15 A riskless principal transaction is a transaction in which a member, after having received a customer order, executes an offsetting transaction, as principal, with another customer or broker-dealer to fill that customer order and both transactions are executed at the same price. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 previously reported by an exchange, the member would be permitted, but not required, to report the second, nonmedia leg to the NASD/Nasdaq Trade Reporting Facility.16 Members that choose to report such transactions to the NASD/Nasdaq Trade Reporting Facility must include all data elements required under the rules. Members should note, however, that transactions reported by an exchange should not be reported to NASD/Nasdaq Trade Reporting Facility for media purposes, as that would result in double reporting of the same transaction.17 Finally, NASD is proposing to amend the definition of ‘‘Reporting ECN’’ in NASD Rule 6110(i) to clarify that the term includes alternative trading systems, as well as electronic communications networks, as those terms are defined in Rule 600 of Regulation NMS, for purposes of reporting transactions to the System.18 Pursuant to NASD Rule 6130(c)(5), a Reporting ECN must ensure that transactions are reported in accordance with one of three methods and must provide written notice to NASD of the method of trade reporting for each of its subscribers. Other Related Changes Certain trading practice requirements relating to exchange-listed securities currently found in NASD Rule 6440 have been moved to NASD Rule 5120 and would apply to all trading otherwise than on an exchange. In addition, NASD is proposing to add a new NASD Rule 5130 (Obligation to Provide Information) to require explicitly that members participating in any NASD system or facility provide information orally, in writing, or electronically (if such information is, or is required to be, maintained in electronic form) to the staff of NASD when NASD staff makes an oral, written or electronically communicated request for information relating to a specific 16 NASD is proposing a similar amendment to NASD Rule 6420(d)(3)(B) to clarify that members can report the second non-media leg of a riskless principal transaction to NASD, but should not report the first media leg, where such leg has been reported by an exchange. 17 See NASD Rule 4632(e)(6), which has been amended to provide that transactions reported on or through the facilities of an exchange shall not be reported to the NASD/Nasdaq Trade Reporting Facility for purposes of publication. See Securities Exchange Act Release Nos. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR–NASD– 2005–087); 53977 (June 12, 2006), 71 FR 34976 (June 16, 2006) (File No. SR–NASD–2006–055); and 54318 (August 15, 2006), 71 FR 48959 (August 22, 2006) (File No. SR–NASD–2006–098). 18 As defined in NASD Rule 6110(m), ‘‘System’’ includes, inter alia, the NASD/Nasdaq Trade Reporting Facility and the trade reporting service of the ITS/CAES System. E:\FR\FM\21SEN1.SGM 21SEN1 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices NASD rule, Commission rule, or provision of a joint industry plan (e.g., UTP, CTA, CQA and ITS). A failure to comply in a timely, truthful and/or complete manner with a request for information made pursuant to proposed NASD Rule 5130 may be deemed conduct inconsistent with just and equitable principles of trade.19 Proposed Implementation The effective date of the proposed rule change will be the date upon which the Nasdaq Exchange operates as an exchange for non-Nasdaq exchangelisted securities, which Nasdaq currently anticipates will be in November 2006. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A of the Act,20 in general, and Section 15A(b)(6) of the Act,21 in particular, in that the proposal is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change will provide an effective mechanism and regulatory framework for quoting and trading activities otherwise than on an exchange in non-Nasdaq exchangelisted securities upon Nasdaq’s complete separation from NASD. B. Self-Regulatory Organization’s Statement on Burden on Competition NASD believes that the proposed rule change will not result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others Written comments on this proposed rule change were neither solicited nor received. jlentini on PROD1PC65 with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) As the Commission may designate up to 19 Proposed NASD Rule 5130 is substantially similar to former NASD Rule 4625 (Obligation to Provide Information), which imposed obligations on members relating to requests from Nasdaq MarketWatch and Nasdaq Market Operations staff. NASD Rule 4625 was inadvertently deleted as part of SR–NASD–2005–087. 20 15 U.S.C. 78o–3. 21 15 U.S.C. 78o–3(b)(6). VerDate Aug<31>2005 16:30 Sep 20, 2006 Jkt 208001 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which NASD consents, the Commission will: (A) By order approve such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2006–104 on the subject line. 55247 should be submitted on or before October 12, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.22 J. Lynn Taylor, Assistant Secretary. [FR Doc. 06–7845 Filed 9–20–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54444; File No. SR–NSCC– 2006–02] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Providing Financial Reports to Participants September 14, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on February 15, 2006, the National Securities Clearing Corporation Paper Comments (‘‘NSCC’’) filed a proposed rule change • Send paper comments in triplicate with the Securities and Exchange to Nancy M. Morris, Secretary, Commission (‘‘Commission’’) and on Securities and Exchange Commission, July 21, 2006, and August 18, 2006, 100 F Street, NE., Washington, DC amended the proposed rule change as 20549–1090. described in Items I, II, and III below, All submissions should refer to File which Items have been prepared Number SR–NASD–2006–104. This file primarily by NSCC. NSCC filed the number should be included on the subject line if e-mail is used. To help the proposed rule change pursuant to Section 19(b)(3)(A)(i) of the Act 2 and Commission process and review your Rule 19b–4(f)(1) 3 thereunder so that the comments more efficiently, please use proposal was effective upon filing with only one method. The Commission will post all comments on the Commission’s the Commission. The Commission is publishing this notice to solicit Internet Web site (http://www.sec.gov/ comments on the proposed rule change rules/sro.shtml). Copies of the from interested persons. submission, all subsequent amendments, all written statements I. Self-Regulatory Organization’s with respect to the proposed rule Statement of the Terms of Substance of change that are filed with the the Proposed Rule Change Commission, and all written The proposed rule change will clarify communications relating to the NSCC’s rules that it will provide proposed rule change between the unaudited quarterly financial statements Commission and any person, other than to its members for the first three those that may be withheld from the quarters of the calendar year only. public in accordance with the II. Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be Statement of the Purpose of, and available for inspection and copying in Statutory Basis for, the Proposed Rule the Commission’s Public Reference Room. Copies of such filing also will be Change available for inspection and copying at In its filing with the Commission, the principal office of NASD. NSCC included statements concerning All comments received will be posted the purpose of and basis for the without change; the Commission does proposed rule change and discussed any not edit personal identifying comments it received on the proposed information from submissions. You should submit only information that 22 17 CFR 200.30–3(a)(12). you wish to make available publicly. All 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78s(b)(3)(A)(i). submissions should refer to the File 3 17 CFR 240.19b–4(f)(1). Number SR–NASD–2006–104 and PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 E:\FR\FM\21SEN1.SGM 21SEN1

Agencies

[Federal Register Volume 71, Number 183 (Thursday, September 21, 2006)]
[Notices]
[Pages 55243-55247]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7845]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54451; File No. SR-NASD-2006-104]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Reflect 
Nasdaq's Complete Separation From NASD Upon the NASDAQ Stock Market 
LLC's Operation as a National Securities Exchange for Non-Nasdaq 
Exchange-Listed Securities

September 15, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 5, 2006, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASD. On September 14, 
2006, NASD submitted Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NASD clarifies that (1) The effective 
date of the proposed rule change will be the date upon which The 
NASDAQ Stock Market LLC (``Nasdaq Exchange'') operates as an 
exchange for non-Nasdaq exchange listed securities, which the Nasdaq 
Exchange anticipates will be in November 2006; (2) the NASD's Market 
Regulation Committee will perform substantially the same functions 
as performed by the Nasdaq's Quality of Markets Committee; and (3) 
the proposed rule change reflects NASD's continued participation in 
the Intermarket Trading System (``ITS'') Plan.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to: (1) Delete The Nasdaq Stock Market Inc.'s 
(``Nasdaq'') By-Laws and amend the Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries (``Delegation Plan''), NASD By-Laws, 
NASD Regulation, Inc. By-Laws, NASD Dispute Resolution, Inc. By-Laws, 
and NASD rules to reflect Nasdaq's separation from NASD upon the 
operation of the Nasdaq Exchange as a national securities exchange for 
non-Nasdaq exchange-listed securities; (2) amend NASD rules relating to 
quoting and trading otherwise than on an exchange in non-Nasdaq 
exchange-listed securities to reflect changes in the services provided 
by NASD in this regard; and (3) expand the scope of the NASD/Nasdaq 
Trade Reporting Facility rules to include trade reporting in non-Nasdaq 
exchange-listed securities.
    The text of the proposed rule is available on the NASD Web Site 
(http://www.nasd.com), on the Commission's Web Site at (http://
www.sec.gov), at the NASD Office of Secretary and at the Commission's 
Public Reference Room. All NASD rules that do not have rule text 
changes specified remain unchanged and effective for all NASD members.

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

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

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

1. Purpose
    On June 30, 2006, the Commission approved proposed rule change SR-
NASD-2005-087, which, among other things, amended NASD's Delegation 
Plan, By-Laws, and NASD rules to reflect the Nasdaq Exchange's 
operation as a national securities exchange for purposes of Nasdaq-
listed securities.\4\ Specifically, to facilitate an orderly transition 
and minimize any potential disruption to the marketplace, for a 
transitional period that commenced on August 1, 2006, the Nasdaq 
Exchange has been operating as an exchange for purposes of Nasdaq-
listed securities only, while Nasdaq continues to perform its current 
obligations under the NASD's Delegation Plan with respect to non-Nasdaq 
exchange-listed securities.\5\ Pursuant to SR-NASD-2005-087 and under 
the Delegation Plan, Nasdaq, as a subsidiary of NASD, continues to 
perform during this transitional period only those functions relating 
to over-the-counter (``OTC'') quoting, trading, and execution of non-
Nasdaq exchange-listed securities. As such, Nasdaq no longer performs 
functions relating to Nasdaq-listed securities pursuant to delegated 
authority from NASD.
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    \4\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (File No. SR-NASD-2005-087).
    \5\ The Commission approved the Nasdaq Exchange application on 
January 13, 2006. See Securities Exchange Act Release No. 53128 
(Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10-131). See 
also Securities Exchange Act Release No. 54085 (June 30, 2006), 71 
FR 38910 (July 10, 2006), which modified the conditions set forth in 
the Nasdaq Exchange Approval Order to allow the Nasdaq Exchange to 
operate as a national securities exchange solely with respect to 
Nasdaq-listed securities.
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    The proposed rule change described herein provides amendments to 
NASD rules to reflect Nasdaq's complete separation from NASD upon the 
operation of the Nasdaq Exchange as a national securities exchange for 
purposes of non-Nasdaq exchange-listed securities in addition to 
Nasdaq-listed securities. In addition, the proposed rule change amends 
the current NASD rules for quoting and trading otherwise than on an 
exchange in non-Nasdaq exchange-listed securities to reflect the manner 
in which NASD would be satisfying its regulatory obligations under the 
Act and the rules thereunder on a temporary basis until the Alternative 
Display Facility (``ADF'') is able to satisfy those obligations. 
Further, this proposed rule change reflects NASD's continued 
participation in the ITS Plan.\6\ This is one of the conditions that 
must be met before Nasdaq can operate as an exchange for non-Nasdaq 
exchange-listed securities.\7\ Finally, the proposed rule change 
expands the scope of the NASD/Nasdaq Trade Reporting

[[Page 55244]]

Facility rules to include trade reporting in non-Nasdaq exchange-listed 
securities, as well as other technical and clarifying changes.
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    \6\ See Amendment No. 1.
    \7\ See id.
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Proposed Changes Relating to the Separation of Nasdaq
    As described in detail in SR-NASD-2005-087, in 2000, NASD began 
restructuring its relationship with Nasdaq, which operates as an 
independent, for-profit company. As the result of a two-phase private 
placement of Nasdaq shares, a public offering completed in January 2005 
and other dispositions of NASD shares, NASD no longer holds a common 
stock ownership interest in Nasdaq. However, because Nasdaq exercises 
regulatory authority under the Delegation Plan, NASD retains control of 
Nasdaq through a single share of Series D Preferred Stock (the ``Series 
D Preferred'') that allows NASD to cast a majority of the votes cast in 
any matter submitted to Nasdaq's stockholders, including the election 
of Nasdaq directors. Once the delegation to Nasdaq is no longer 
necessary, the share of Series D Preferred Stock would automatically 
lose its voting rights and would be redeemed by Nasdaq for $1.00.
    Thus, upon the Nasdaq Exchange's operation as a national securities 
exchange for non-Nasdaq exchange-listed securities, Nasdaq and NASD 
would be unaffiliated corporate entities, and thus each will have 
separate rules applicable to their respective members. Therefore, NASD 
is proposing to amend its rules to reflect this complete separation of 
Nasdaq from NASD. These changes include removing references in the 
Delegation Plan to Nasdaq as a subsidiary and delegation of authority 
to Nasdaq; revising the NASD By-Laws, NASD Regulation, Inc. By-Laws, 
and NASD Dispute Resolution, Inc. By-Laws to remove references to 
Nasdaq as a subsidiary of NASD; deleting the Nasdaq By-Laws and all 
Nasdaq-specific rules and requirements; replacing references to 
``Nasdaq'' with ``NASD'' or ``exchange,'' as applicable; and renaming 
and renumbering certain rules.\8\ The NASD Rule 11890 Series (Clearly 
Erroneous Transactions) has been amended to delete those provisions 
relating to Nasdaq's current clearly erroneous authority, including the 
authority to break trades as a result of a complaint. The proposed rule 
change reallocates to NASD the authority previously delegated to Nasdaq 
to break trades in non-Nasdaq exchange-listed securities on its own 
motion.\9\ Finally, the proposed rule change deletes NASD Rule 4400 
(Impact of Non-Designation of Certain Dually Listed Securities), which 
is no longer applicable once Nasdaq is operating as a separate entity.
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    \8\ This proposed rule change also includes corrections of minor 
grammatical or typographical errors and other miscellaneous non-
substantive changes.
    \9\ This is consistent with NASD's current clearly erroneous 
authority with respect to Nasdaq and OTC equity securities.
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    As part of the proposed amendments to the Delegation Plan, NASD is 
proposing to delete Section III of the Delegation Plan relating to the 
Quality of Markets Committee, which was a Committee appointed by the 
Nasdaq Board. NASD is clarifying that NASD's Market Regulation 
Committee will perform substantially the same functions as performed by 
Quality of Markets Committee. The Supplemental Delegation Regarding the 
Market Regulation Committee is set forth in Section II.C.1 of the 
Delegation Plan.
Quoting and Trading of Non-Nasdaq Exchange-listed Securities
    As part of the Nasdaq Exchange approval order, the Commission 
conditioned the operation of Nasdaq as an exchange for non-Nasdaq 
exchange-listed securities on NASD's ability to represent to the 
Commission that control of Nasdaq through the Series D Preferred share 
is no longer necessary because NASD can fulfill through other means its 
obligations with respect to non-Nasdaq exchange-listed securities under 
Section 15A(b)(11) of the Act, Rules 602 and 603 of Regulation NMS, and 
the national market system plans in which NASD participates.\10\
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    \10\ Currently, Nasdaq fulfills these obligations for NASD 
through the operation of, among other things, its SuperIntermarket 
(``SiM'') trading platform, pursuant to authority delegated to 
Nasdaq under the Delegation Plan. NASD fulfills the obligations with 
respect to Nasdaq-listed securities through the operation of the 
ADF.
---------------------------------------------------------------------------

    To meet these obligations under the federal securities laws with 
respect to non-Nasdaq exchange-listed securities, NASD is proposing 
amendments to provide for the operation of an OTC quoting and trading 
facility in non-Nasdaq exchange-listed securities on a temporary basis, 
as well as linkage and communications mechanisms necessary under the 
Intermarket Trading System (ITS) Plan, as described in more detail 
below. In doing so, NASD is amending (or deleting as appropriate) those 
rules relating to Nasdaq and Nasdaq's performance of any functions and 
operation of any systems relating to OTC trading in non-Nasdaq 
exchange-listed securities under the current Delegation Plan.\11\
---------------------------------------------------------------------------

    \11\ With respect to the OTC quoting and trading facility 
proposed herein, Nasdaq will be acting solely in the capacity of a 
vendor pursuant to a services agreement.
---------------------------------------------------------------------------

    Specifically, the NASD Rule 4900 (Brut System) and NASD 4950 (INET 
System) Series have been deleted in their entirety, given that the Brut 
and INET Systems will no longer be operating pursuant to NASD Rules. 
With respect to the NASD Rule 4700 Series (ITS/CAES System--Execution 
Services), the NASD Rule 5200 Series (Intermarket Trading System/
Computer Assisted Execution System) and the NASD Rule 6300 Series 
(Consolidated Quotation Services (CQS)), the general framework under 
those rule series would remain substantially similar to the rules in 
place today, including all functionality relating to the outbound and 
inbound ITS linkage; however the functionality available to users 
within the ITS/CAES System under those rules, particularly the NASD 
Rule 4700 Series, would be more limited in nature as described below.
    The proposed ITS/CAES System would permit registered ITS/CAES 
Market Makers to (1) Display attributable quotes and orders through the 
system; (2) access other ITS/CAES Market Makers' bids and offers using 
the ``Preferenced Order'' functionality described below; and (3) 
interact with other ITS exchanges' bids and offers via inbound and 
outbound ITS Commitments. Only ITS/CAES Market Makers can display 
quotes in the system and send Preferenced Orders and ITS Commitments. 
Non-ITS/CAES Market Makers would not be permitted to display interest 
on the system or send orders; however, as described in more detail 
below, non-ITS/CAES Market Makers would be able to report locked-in 
trades through the system.\12\
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    \12\ By comparison, under current rules, non-ITS/CAES Market 
Makers (defined as ``Order Entry Firms'') also are not able to 
display orders or send or receive ITS Commitments; however, they are 
able to use the system to send ``immediate or cancel'' orders to 
ITS/CAES Market Makers.
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    Members would be required to register with NASD to become ITS/CAES 
Market Makers (including ECNs that choose to register as such). Members 
must meet the minimum requirements to be an ITS/CAES Market Maker, as 
described in NASD Rules 4705, 5220, 6320, and 6330, and all ITS/CAES 
Market Makers must display and maintain continuous two-sided quotes.
    To comply with its two-sided quotation requirements, an ITS/CAES 
Market Maker would have the option of entering quotations or summary 
orders.

[[Page 55245]]

Specifically, an ITS/CAES Market Maker may enter a bid quotation and an 
offer quotation, each at a single price level, and/or it may choose to 
enter ``summary orders'' at multiple price levels into the system. All 
orders and quotes must be in round lots. Both quotations and summary 
orders would be treated the same for purposes of display and ITS 
execution purposes. Summary orders may be entered with the following 
Time in Force (TIF):
    (1) ``DAY'' order type, which means that after entry into the 
system, the order would remain available for potential display and/or 
execution until market close (4 p.m. Eastern Time), after which it 
shall be returned to the entering party; and
    (2) Total Day (``X'') order type, which means that after entry into 
the system, the order would remain available for potential display 
between 7:30 a.m. and 6:30 p.m. and for potential execution between 
market open (9:30 a.m.) and 6:30 p.m., after which it shall be returned 
to the entering party.
    Where an ITS/CAES Market Maker's quote is exhausted due to an 
execution with a commitment to trade, as described in NASD Rule 
4710(b)(1)(C) and consistent with current practice, the bid side of the 
ITS/CAES Market Maker's quote would be zeroed out and then 
automatically refreshed to establish a bid of $0.01 for 100 shares. 
Similarly, if the offer side of the ITS/CAES Market Maker's quote is 
zeroed out, the system would automatically establish an offer of two 
times the system best bid plus $0.01 for 100 shares. Although quotes 
would be refreshed automatically in this manner, NASD Rule 5230(c) 
would require that the ITS/CAES Market Maker enter quotes promptly, but 
in no event later than 15 seconds from when the quote(s) were 
exhausted.
    Quotations displayed through the ITS/CAES System would be 
accessible by other ITS Exchanges through inbound ITS Commitments, 
which would have a uniform TIF of 5 seconds. The system would not 
provide auto-execution functionality; therefore ITS Commitments 
received by ITS/CAES Market Makers would not be responded to (or 
executed) unless the ITS/CAES Market Maker provides an affirmative 
response within 5 seconds. If the ITS Commitment is not responded to 
within that time period, it would be returned to the sending exchange.
    Similarly, ITS/CAES Market Makers would be able to send outbound 
ITS Commitments to access quotes displayed by other ITS exchanges. All 
outbound ITS Commitments entered by an ITS/CAES Market Maker would be 
treated as Immediate or Cancel (``IOC'' or ``IOX,'' if it includes the 
4 p.m. to 6:30 p.m. session) and would have a TIF of 5 seconds (or 30 
seconds in the limited circumstance where the ITS Commitment is sent to 
an ITS Exchange that can only accept a TIF of 30 seconds). Once an ITS 
Commitment is entered, it cannot be cancelled by the ITS/CAES Market 
Maker.
    At the end of each trading day, all quotes/orders would be cleared 
from the system (returned to the sender). Therefore, at the beginning 
of each trading day, an ITS/CAES Market Maker must enter new quotes 
and/or summary orders in each security for which it is a registered 
market maker.
    ITS/CAES Market Makers would be able to access other ITS/CAES 
Market Maker quotes and ITS Exchanges through the use of ``Preferenced 
Orders,'' which must be entered using the IOC or IOX TIF. Preferenced 
Orders may only be sent to another ITS/CAES Market Maker when that ITS/
CAES Market Maker is at the best bid/best offer in the system and only 
in an amount equal to or less than the ITS/CAES Market Maker's 
displayed quote. The system would reject a Preferenced Order sent to an 
ITS/CAES Market Maker that is not at the best bid/best offer in the 
system, or where the execution of the Preferenced Order would result in 
the violation of the Trade-Through Rule under NASD Rule 5262.
    The proposed rule change deletes all rules relating to 
functionality not available in the new system, including reserve size, 
the ability to quote or submit orders on a non-attributable basis and 
certain order types such as ``discretionary,'' ``non-directed,'' 
``sweep'' and ``fill or return'' orders. In addition, because the 
system is not an ``execution'' system (i.e., it does not provide auto-
execution functionality, only order delivery requiring user response), 
all references to auto-execution functionality or execution algorithms 
have been deleted. Similarly, as noted above, members not registered as 
ITS/CAES Market Makers can use the system only for trade reporting 
purposes and therefore, rules relating to order functionality 
previously available to ``order entry firms'' have been deleted.
    The proposed rule change also deletes all rules relating to the ITS 
Pre-Opening Application (e.g., current NASD Rules 5240 and 5250) 
functionality. The Pre-Opening Application is a mechanism designed for 
use by the primary listing markets for ITS Securities to open their 
markets at prices that are materially different than the previous day's 
closing prices. The Pre-Opening Application is initiated by the New 
York Stock Exchange LLC (``NYSE'') and the American Stock Exchange LLC 
(``Amex'') for their securities and today, NASD, through its delegation 
to Nasdaq, does not provide a mechanism to participate in that process 
via SiM. Therefore, NASD would not be offering that functionality as 
part of the proposed ITS/CAES System. The proposed system, however, 
would provide the ability for ITS/CAES Market Makers to view the Pre-
Opening notifications published by other ITS Exchanges.
    With respect to locked/crossed markets, the NASD ITS/CAES System 
would reject all quotes that lock or cross the NASD BBO or the National 
BBO. Because the system would not permit ITS/CAES Market Makers to 
initiate a locking or crossing quote, NASD is proposing to delete NASD 
Rule 5263, which provides procedures relating to locking and crossing 
markets, and replace it with a general prohibition of such quoting 
activities.
    With respect to the minimum price variation (MPV), NASD is 
retaining the current MPV increment ($0.01 for quotations priced at or 
above $1.00 per share and $0.0001 for quotations priced below $1.00 per 
share), but is proposing to amend NASD Rule 6330(d) to prohibit the 
entry of quotes or orders not in compliance with the MPV. NASD would 
not adjust or round such quotes or orders, but would reject those not 
in compliance with the MPV.
    If a Preferenced Order or ITS Commitment is accepted by an ITS/CAES 
Market Maker, the ITS/CAES System would lock-in the transaction and 
report it to the ``tape'' for dissemination purposes and also would 
provide the necessary clearing information regarding the transaction to 
the National Securities Clearing Corporation (``NSCC'').
    With respect to non-ITS/CAES transactions (i.e., OTC trades in non-
Nasdaq exchange-listed securities that are not effected through the 
ITS/CAES System), NASD is providing a mechanism by which members (both 
ITS/CAES Market Makers and non-ITS/CAES Market Makers) may report those 
trades through the ITS/CAES System. Non-ITS/CAES Market Makers that 
wish to use this functionality must register as a ``Trade Reporting 
Only Participant,'' pursuant to proposed NASD Rule 4705(a).
    To report transactions through the ITS/CAES System, members must 
comply with the requirements of NASD Rule 4720, including that members 
that are parties to the trade must agree to all trade details prior to 
submitting the report to the system and have in effect,

[[Page 55246]]

and on file with NASD, an NASD Service Bureau/Executing Broker 
Supplement to the NASD Services Agreement (``Attachment C Agreement'') 
and an NASD Give-Up Addendum to the NASD Services Agreement (``NASD 
Give-Up Agreement''). In the event that the parties do not have such 
agreements in effect and on file with NASD, NASD would only facilitate 
the reporting of the transaction pursuant to an effective transaction 
reporting plan; the parties must use an alternative mechanism for 
clearing and comparing the transaction, as necessary.
    NASD also is proposing to amend NASD Rule 4720 to require that all 
transaction reports submitted to the system via NASD Rule 4720 comply 
with the requirements contained in the NASD Rule 6400 Series, which are 
substantially similar to the non-Nasdaq exchange-listed trade reporting 
requirements in place today. NASD is also proposing to amend Rule 6400 
(Reporting Transactions in Listed Securities) to clarify that 
transactions required or eligible to be reported under the Rule 6400 
Series must be reported through the ITS/CAES System pursuant to the 
provisions of Rule 4720.
Proposed Changes Relating to the NASD/Nasdaq Trade Reporting Facility 
Rules
    Pursuant to SR-NASD-2005-087, NASD established the NASD/Nasdaq 
Trade Reporting Facility, which provides members another mechanism for 
reporting transactions effected otherwise than on an exchange. The 
NASD/Nasdaq Trade Reporting Facility is a facility of NASD and subject 
to NASD's registration as a national securities association. As such, 
NASD has regulatory responsibility for the trades reported to the NASD/
Nasdaq Trade Reporting Facility, while Nasdaq pays for the cost of 
regulation and provides the systems to enable broker-dealers to report 
trades to the NASD/Nasdaq Trade Reporting Facility.
    Currently, the NASD/Nasdaq Trade Reporting Facility rules apply 
only to reporting transactions in Nasdaq-listed securities. The 
proposed rule change amends the NASD Rule 4100, 4200, 4600, and 6100 
Series to combine with those provisions the trade reporting 
requirements for exchange-listed securities currently found in the NASD 
Rule 6400 Series.\13\ As a result, the trade reporting requirements for 
Nasdaq and other exchange-listed securities reported through the NASD/
Nasdaq Trade Reporting Facility would be uniform and found in these 
rule series.\14\ In this regard, current NASD Rules 6420(e)(6) and (7) 
provide exclusions to the trade reporting requirements for non-Nasdaq 
exchange-listed securities; these exclusions were specific to exchange 
trading and therefore did not apply to trade reporting in Nasdaq 
securities. They have now been incorporated into proposed subparagraphs 
(7) and (8) of NASD Rule 4632(e) and would apply to all exchange-listed 
securities reported to the NASD/Nasdaq Trade Reporting Facility, 
including Nasdaq securities.
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    \13\ NASD also is proposing technical changes to the NASD Rule 
4000 and 6000 Series to replace the term ``Trade Reporting 
Facility'' with the ``NASD/Nasdaq Trade Reporting Facility'' to make 
it clear that these rules apply to the Trade Reporting Facility 
operated by the Nasdaq Exchange.
    \14\ NASD will have an integrated audit trail of non-Nasdaq 
exchange-listed securities transactions from the ITS/CAES system and 
the NASD/Nasdaq Trade Reporting Facility and will have integrated 
surveillance capabilities. Based on the structure and functionality 
of the system and rules proposed herein, NASD expects that 
comprehensive audit trail and surveillance integration on an 
automated basis will be completed by the end of fourth quarter 2006. 
Prior to that time, NASD staff will be able to create an integrated 
audit trail on a manual basis as needed for regulatory purposes.
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    The NASD/Nasdaq Trade Reporting Facility permits participants to 
enter into ``give-up'' arrangements whereby one member reports to the 
NASD/Nasdaq Trade Reporting Facility on behalf of another member. 
Participants must complete and submit to the NASD/Nasdaq Trade 
Reporting Facility the appropriate documentation reflecting the 
arrangement. Proposed NASD Rule 4632(h) codifies this process and 
provides that the member with the reporting obligation remains 
responsible for the transaction submitted on its behalf. Further, both 
the member with the reporting obligation and the member submitting the 
trade to the NASD/Nasdaq Trade Reporting Facility are responsible for 
ensuring that the information submitted is in compliance with all 
applicable rules and regulations.
    Finally, NASD is also proposing an amendment to NASD Rule 
4632(d)(3)(B) relating to requirements for reporting ``riskless 
principal'' transactions to the NASD/Nasdaq Trade Reporting 
Facility.\15\ The proposed rule change would clarify that where the 
media leg of the riskless principal transaction is reported to the 
NASD/Nasdaq Trade Reporting Facility, the second, non-media leg must 
also be reported to the NASD/Nasdaq Trade Reporting Facility. However, 
where the media leg of the riskless principal transaction was 
previously reported by an exchange, the member would be permitted, but 
not required, to report the second, non-media leg to the NASD/Nasdaq 
Trade Reporting Facility.\16\ Members that choose to report such 
transactions to the NASD/Nasdaq Trade Reporting Facility must include 
all data elements required under the rules. Members should note, 
however, that transactions reported by an exchange should not be 
reported to NASD/Nasdaq Trade Reporting Facility for media purposes, as 
that would result in double reporting of the same transaction.\17\
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    \15\ A riskless principal transaction is a transaction in which 
a member, after having received a customer order, executes an 
offsetting transaction, as principal, with another customer or 
broker-dealer to fill that customer order and both transactions are 
executed at the same price.
    \16\ NASD is proposing a similar amendment to NASD Rule 
6420(d)(3)(B) to clarify that members can report the second non-
media leg of a riskless principal transaction to NASD, but should 
not report the first media leg, where such leg has been reported by 
an exchange.
    \17\ See NASD Rule 4632(e)(6), which has been amended to provide 
that transactions reported on or through the facilities of an 
exchange shall not be reported to the NASD/Nasdaq Trade Reporting 
Facility for purposes of publication. See Securities Exchange Act 
Release Nos. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) 
(File No. SR-NASD-2005-087); 53977 (June 12, 2006), 71 FR 34976 
(June 16, 2006) (File No. SR-NASD-2006-055); and 54318 (August 15, 
2006), 71 FR 48959 (August 22, 2006) (File No. SR-NASD-2006-098).
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    Finally, NASD is proposing to amend the definition of ``Reporting 
ECN'' in NASD Rule 6110(i) to clarify that the term includes 
alternative trading systems, as well as electronic communications 
networks, as those terms are defined in Rule 600 of Regulation NMS, for 
purposes of reporting transactions to the System.\18\ Pursuant to NASD 
Rule 6130(c)(5), a Reporting ECN must ensure that transactions are 
reported in accordance with one of three methods and must provide 
written notice to NASD of the method of trade reporting for each of its 
subscribers.
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    \18\ As defined in NASD Rule 6110(m), ``System'' includes, inter 
alia, the NASD/Nasdaq Trade Reporting Facility and the trade 
reporting service of the ITS/CAES System.
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Other Related Changes
    Certain trading practice requirements relating to exchange-listed 
securities currently found in NASD Rule 6440 have been moved to NASD 
Rule 5120 and would apply to all trading otherwise than on an exchange.
    In addition, NASD is proposing to add a new NASD Rule 5130 
(Obligation to Provide Information) to require explicitly that members 
participating in any NASD system or facility provide information 
orally, in writing, or electronically (if such information is, or is 
required to be, maintained in electronic form) to the staff of NASD 
when NASD staff makes an oral, written or electronically communicated 
request for information relating to a specific

[[Page 55247]]

NASD rule, Commission rule, or provision of a joint industry plan 
(e.g., UTP, CTA, CQA and ITS). A failure to comply in a timely, 
truthful and/or complete manner with a request for information made 
pursuant to proposed NASD Rule 5130 may be deemed conduct inconsistent 
with just and equitable principles of trade.\19\
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    \19\ Proposed NASD Rule 5130 is substantially similar to former 
NASD Rule 4625 (Obligation to Provide Information), which imposed 
obligations on members relating to requests from Nasdaq MarketWatch 
and Nasdaq Market Operations staff. NASD Rule 4625 was inadvertently 
deleted as part of SR-NASD-2005-087.
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Proposed Implementation
    The effective date of the proposed rule change will be the date 
upon which the Nasdaq Exchange operates as an exchange for non-Nasdaq 
exchange-listed securities, which Nasdaq currently anticipates will be 
in November 2006.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\20\ in general, and Section 
15A(b)(6) of the Act,\21\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD believes that the 
proposed rule change will provide an effective mechanism and regulatory 
framework for quoting and trading activities otherwise than on an 
exchange in non-Nasdaq exchange-listed securities upon Nasdaq's 
complete separation from NASD.
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    \20\ 15 U.S.C. 78o-3.
    \21\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on this proposed rule change were neither 
solicited nor received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2006-104 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-104. 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 (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NASD-2006-
104 and should be submitted on or before October 12, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-7845 Filed 9-20-06; 8:45 am]
BILLING CODE 8010-01-P