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]
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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
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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
(https://www.nasd.com), on the
Commission’s Web Site at (https://
www.sec.gov), at the NASD Office of
Secretary and at the Commission’s
Public Reference Room. 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.
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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.
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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.
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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
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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’’
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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
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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,
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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.
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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 (https://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 (https://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
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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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
(https://www.nasd.com), on the Commission's Web Site at (https://
www.sec.gov), at the NASD Office of Secretary and at the Commission's
Public Reference Room. 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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\6\ See Amendment No. 1.
\7\ See id.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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,
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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 (https://
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 (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of NASD.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to the File Number SR-NASD-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
