Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendment Nos. 2 and 3 Relating to Amendments to Rule 2320(g) (Three Quote Rule) and Corresponding Recordkeeping Requirements under Rule 3110(b), 37285-37287 [E7-13200]

Download as PDF Federal Register / Vol. 72, No. 130 / Monday, July 9, 2007 / Notices 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of ISE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ISE–2007–37 and should be submitted on or before July 30, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.8 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–13158 Filed 7–6–07; 8:45 am] October 19, 2006, NASD filed Amendment No. 2 to the proposed rule change.4 The proposed rule change, as modified by Amendment No. 2, was published for comment in the Federal Register on October 31, 2006.5 The Commission received ten comment letters on the proposal.6 On April 3, 2007, NASD filed Amendment No. 3 to the proposed rule change 7 and a response to the comment letters.8 This order provides notice of Amendment No. 3 and approves the proposed rule change as modified by Amendment Nos. 2 and 3 on an accelerated basis. II. Description of the Proposal Currently, the Three Quote Rule requires NASD members who execute a transaction in a non-exchange-listed security 9 for or with a customer to contact and obtain the quotations from three dealers (or all dealers if less than three) to determine the best inter-dealer market for that security. The Three Quote Rule, however, does not apply if BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56004; File No. SR–NASD– 2004–130] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendment Nos. 2 and 3 Relating to Amendments to Rule 2320(g) (Three Quote Rule) and Corresponding Recordkeeping Requirements under Rule 3110(b) rwilkins on PROD1PC63 with NOTICES July 2, 2007. I. Introduction On August 27, 2004, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder, 2 a proposed rule change to amend NASD Rule 2320(g) (‘‘Three Quote Rule’’) to exempt from the Three Quote Rule certain transactions in foreign securities of a foreign issuer that are part of an index calculated by the FTSE Group. On May 8, 2006, NASD filed Amendment No. 1 to the proposed rule change.3 On 8 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 replaced and superseded in its entirety the text of the original filing. VerDate Aug<31>2005 16:59 Jul 06, 2007 Jkt 211001 4 Amendment No. 2 replaced and superseded in its entirety the text of the original filing, as amended. 5 See Securities Exchange Act Release No. 54650 (October 25, 2006), 71 FR 63812 (‘‘Notice’’). 6 See letters from James Duncan, Senior Vice President & Director, International Trading, and Andrew Jappy, Chief Information Officer & EVP, Canaccord Capital Corporation, dated November 21, 2006 (‘‘Canaccord Letter’’); Achilles M. Perry, Associate General Counsel, CIBC World Markets Corp., dated November 21, 2006 (‘‘CIBC Letter’’); Grant Vingoe, Esq., Partner, Arnold Porter LLP, dated November 21, 2006 (‘‘Arnold Porter Letter’’); Bill Yancey, Chairman of the Board, and John C. Giesea, President and CEO, Security Traders Association, dated November 21, 2006 (‘‘STA Letter’’); Rik Parkhill, Executive Vice President, TSX Group, Inc., President, TSX Markets, dated November 29, 2006 (‘‘TSX Letter’’); George W. Lennon, President, Canadian Security Traders Association, Inc., dated December 1, 2006 (‘‘CSTA Letter’’); Christopher Climo, Managing Director, Compliance and Chief Compliance Officer, TD Securities, Inc., dated December 7, 2006 (‘‘TD Securities Letter’’); James E. Twiss, Chief Policy Counsel, Market Regulation Services Inc., dated December 8, 2006 (‘‘RS Letter’’); Debra V. Moore, Manager—NASDAQ/OTC Equity Trading, and Glenn A. Hoback, Implementation Consultant— Internal Controls, Wachovia Securities, LLC, dated December 14, 2006 (‘‘Wachovia Letter’’); and Bryce Engel, Chief Brokerage Operations Officer, TD AMERITRADE, Inc., dated December 21, 2006 (‘‘TD Ameritrade Letter’’). 7 In Amendment No. 3, NASD proposes, among other things, to codify the existing exemptions relating to transactions in a non-exchange-listed security (as defined below) that are securities listed on a Canadian exchange. 8 See letter from Andrea D. Orr, Assistant General Counsel, NASD, to Nancy M. Morris, Secretary, Commission, dated April 3, 2007 (‘‘NASD Response Letter’’). 9 NASD Rule 6610(c) defines the term ‘‘nonexchange-listed security’’ as ‘‘any equity security that is not traded on any national securities exchange’’ and ‘‘shall not include ‘restricted securities,’ as defined by SEC Rule 144(a)(3) under the Securities Act of 1933, nor any securities designated in the PORTAL Market, the Rule 6700 Series.’’ PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 37285 two or more priced quotations for a nonexchange-listed security are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis. NASD proposes to expand the categories of transactions that would be exempted from the Three Quote Rule. First, NASD proposes to exempt a transaction for or with a customer in a non-exchange-listed security of a foreign issuer that is part of the FTSE All-World Index, if such transaction is executed during the regular business hours of the foreign market for the foreign security and no trading halt or other similar trading or quoting restriction is in effect in any foreign market on which such security is listed. Second, in response to comments following publication of its proposal, NASD proposes to codify certain exemptions previously issued by NASD staff under the Three Quote Rule’s exemptive process.10 Specifically, NASD proposes to exempt a transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security that is listed on a Canadian exchange as long as the customer order is executed by the NASD member or a person associated with the member on a Canadian exchange in an agency or riskless principal capacity and the member or a person associated with the member conducts regular and rigorous reviews of the equality of the execution of such orders in such securities, pursuant to the member’s duty of best execution. NASD has also proposed to amend its recordkeeping requirement to provide a corresponding exclusion with respect to these proposed exemptions. Under the proposed rule change, NASD members would continue to be required to comply with their best execution obligations under NASD Rule 2320 and, to the extent applicable, the suitability obligations under NASD Rule 2310. III. Summary of Comments and NASD’s Response The Commission received ten comment letters on the proposal.11 NASD submitted the NASD Response Letter,12 and corresponding Amendment No. 3 to address the issue regarding application of the proposed rule change to Canadian-listed securities that was raised by the commenters. While some commenters expressed general support for NASD’s proposal to exempt from the Three Quote Rule 10 See, e.g., Letter to Kenneth W. Perlman, General Counsel, Mayer & Schweitzer, Inc., from Alden S. Adkins, Senior Vice President and General Counsel, NASD Regulation, Inc., on May 29, 1998. 11 See supra note 6. 12 See supra note 8. E:\FR\FM\09JYN1.SGM 09JYN1 37286 Federal Register / Vol. 72, No. 130 / Monday, July 9, 2007 / Notices foreign securities that are part of the FTSE All-World Index,13 all of the commenters objected to NASD’s proposed withdrawal of the exemptions from the Three Quote Rule for Canadian issuers’ securities. Specifically, NASD proposed to withdraw all existing exemptions granted under the Three Quote Rule with respect to Canadian securities executed on a Canadian exchange in an agency or riskless principal basis.14 Were these exemptions withdrawn, NASD members would be required to comply with the Three Quote Rule in connection with transactions in Canadian securities that are not part of the FTSE All-World Index. The commenters argued that this result would be contrary to the duty of best execution,15 would cause significant delays in execution,16 and would increase the cost of transactions in Canadian securities that are not part of the FTSE All-World Index.17 In light of the comments, NASD revised its previous position and clarified that the proposal would not supersede any exemptions previously granted. Contemporaneously with the NASD Response Letter, NASD filed Amendment No. 3 to codify the relief previously granted in the existing exemptions. rwilkins on PROD1PC63 with NOTICES IV. Discussion After careful review, the Commission believes that the proposed rule change is consistent with the requirements of the Act and the regulations thereunder applicable to NASD.18 In particular, the Commission believes that the proposal is consistent with section 15A(b)(6) of the Act 19 and section 15A(b)(9) of the Act.20 Section 15A(b)(6) of the Act requires that the rules of a national securities association be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Section 15A(b)(9) of the 13 See, e.g., Canaccord Letter, CIBC Letter, STA Letter, TSX Letter, CSTA Letter, and TD Ameritrade Letter. 14 See Notice, supra note 5, 71 FR at 63813 n.13. 15 See, e.g., Canaccord Letter, STA Letter, TXS Letter, CSTA Letter, RS Letter, and Wachovia Letter. 16 See, e.g., Canaccord Letter, CIBC Letter, Arnold Porter Letter, STA Letter, TD Securities Letter, Wachovia Letter, and TD Ameritrade Letter. 17 See, e.g., STA Letter and TD Securities Letter. 18 In approving the proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 19 15 U.S.C. 78o–3(b)(6). 20 15 U.S.C. 78o–3(b)(9). VerDate Aug<31>2005 16:59 Jul 06, 2007 Jkt 211001 Act requires that rules of an association not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Commission approved NASD’s proposal to institute the Three Quote Rule in 1988.21 The Three Quote Rule was an amendment to NASD’s interpretation relating to best execution of retail transactions in non-Nasdaq securities. The Three Quote Rule’s purpose is to assure that NASD members fulfill their duty to provide customers with best execution for transactions in non-exchange-listed securities, especially illiquid securities with non-transparent prices. The Commission subsequently approved NASD’s proposal providing NASD staff authority to grant exemptions from the Three Quote Rule in 1997.22 Subsequently, NASD granted exemptions from the Three Quote Rule for customer transactions in Canadian securities executed on a Canadian exchange.23 In 2000, the Commission approved NASD’s proposal to limit the Three Quote Rule’s applicability to those situations when fewer than two priced quotes for a non-Nasdaq security are posted in an inter-dealer quotation medium.24 The Commission finds that NASD’s proposal to add the two new exceptions to the Three Quote Rule is consistent with the Act. In its order granting NASD staff exemptive authority with respect to the Three Quote Rule, the Commission noted that ‘‘one situation where exemptive relief might be applied would be trading in certain foreign securities. In some circumstances the foreign exchange market may constitute the best market for the securities that are listed on that market, and the time delay involved in contacting three dealers in advance of a customer transaction could hinder obtaining the best execution for the customer.’’25 Thus, the Commission believes that it is reasonable for NASD to exempt from the Three Quote Rule transactions in a foreign security that are included in the FTSE All-World Index and transactions in a security listed on a Canadian 21 See Securities Exchange Act Release No. 25637 (May 2, 1988), 53 FR 16488 (May 9, 1988). 22 See Securities Exchange Act Release No. 39266 (October 22, 1997), 62 FR 56217 (October 29, 1997). 23 See supra note 10. 24 See Securities Exchange Act Release No. 43319 (September 21, 2000), 65 FR 58589 (September 29, 2000). Pursuant to this exception, if two or more priced quotations for a non-exchange-listed security are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis, then NASD members are not required to obtain quotes from three dealers. 25 Securities Exchange Act Release No. 39266 (October 22, 1997), 62 FR 56217 (October 29, 1997). PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 exchange, subject to the conditions specified in the amended Three Quote Rule. The Commission notes that, whether or not a transaction in a nonexchange-listed security is subject to the Three Quote Rule, the NASD member executing the transaction must satisfy its duty of best execution. V. Accelerated Approval The Commission finds good cause to approve NASD’s proposal, as amended, prior to the thirtieth day after the amendment is published for comment in the Federal Register pursuant to section 19(b)(2) of the Act. NASD submitted Amendment No. 3 in response to comments received on its proposal. The amendment codifies exemptions NASD staff previously issued under the Three Quote Rule’s exemptive process,26 and as described above, proposes a corresponding exclusion to the recordkeeping requirements if a member establishes and documents the exemption. Accordingly, Amendment No. 3 does not raise any new issues. The Commission therefore finds good cause to approval NASD’s proposal on an accelerated basis. VI. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning Amendment No. 3, including whether Amendment No. 3 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–2004–130 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–2004–130. 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 26 See E:\FR\FM\09JYN1.SGM supra note 22. 09JYN1 Federal Register / Vol. 72, No. 130 / Monday, July 9, 2007 / Notices 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASD–2004–130 and should be submitted on or before July 30, 2007. VII. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,27 that the proposed rule change (SR–NASD–2004– 130), as modified by Amendment Nos. 2 and 3, be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.28 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–13200 Filed 7–6–07;8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56003; File No. SR–NASD– 2007–028] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Order Audit Trail System rwilkins on PROD1PC63 with NOTICES July 2, 2007. On April 17, 2007, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 27 15 28 17 U.S.C. 78s(b)(2). CFR 200.30(a)(12). VerDate Aug<31>2005 16:59 Jul 06, 2007 Jkt 211001 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Rules 6951 and 6954 to require members that transmit an intermarket sweep order (‘‘ISO’’) to another member, electronic communications network, nonmember, or exchange to record and report the fact that the order was an ISO. On May 18, 2007, NASD filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on May 31, 2007.3 The Commission received no comment letters on the proposal. This order approves the proposed rule change, as modified by Amendment No. 1. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to NASD,4 and, in particular, section 15A(b)(6) of the Act 5 which requires, among other things, that NASD rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. On June 9, 2005, the Commission adopted Regulation NMS,6 which among other things, adopted an Order Protection Rule 7 that requires trading centers to establish, maintain, and enforce policies and procedures designed to prevent the execution of trades at prices inferior to protected quotations displayed by automated trading centers, subject to applicable exceptions. One of the exceptions from the Order Protection Rule is when the transaction that constitutes a tradethrough 8 is ‘‘effected by a trading center that simultaneously routed an intermarket sweep order to execute against the full displayed size of any U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 55806 (May 23, 2007), 72 FR 30406 (the ‘‘Notice’’). 4 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 5 15 U.S.C. 78o–3(b)(6). 6 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 7 17 CFR 242.611. 8 A ‘‘trade-through’’ is ‘‘the purchase or sale of an NMS stock during regular trading hours, either as principal or agent, at a price that is lower than a protected bid or higher than a protected offer.’’ See 17 CFR 242.600(b)(77). PO 00000 1 15 2 17 Frm 00106 Fmt 4703 Sfmt 4703 37287 protected quotation in the NMS stock that was traded through.’’ 9 The purpose of the proposed rule change is to require member firms to record the fact that an order in an OATS-eligible security is an ISO when the member routes an ISO to another member or non-member. The member would be required to include this information in the Route Report it submits to NASD pursuant to the OATS Rules.10 This requirement should ensure that NASD knows that the order was an ISO and can utilize that information when reviewing audit trails.11 The Commission believes that the proposed rule change is consistent with the Act and should enhance OATS data and help ensure that the NASD is able to more effectively monitor compliance with Regulation NMS. It is therefore ordered, pursuant to section 19(b)(2) of the Act,12 that the proposed rule change (File No. SR– NASD–2007–028), as amended, be, and hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–13201 Filed 7–6–07; 8:45 am] BILLING CODE 8010–01–P 9 See 17 CFR 242.611(b)(6). The phrase ‘‘intermarket sweep order’’ is defined as ‘‘a limit order for an NMS stock that meets the following requirements: (i) When routed to a trading center, the limit order is identified as an intermarket sweep order; and (ii) Simultaneously with the routing of the limit order identified as an intermarket sweep order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the NMS stock with a price that is superior to the limit price of the limit order identified as an intermarket sweep order. These additional routed orders must also be marked as intermarket sweep orders.’’ The proposed rule change adopts this same definition of intermarket sweep order for purposes of the OATS Rules. See 17 CFR 242.600(b)(30). 10 When a member transmits an order in an OATS-eligible security to another member, electronic communications network, non-member, or exchange for handling or execution, the routing member is required to submit a Route Report to NASD. The categories of information that a member must include in a Route Report are set forth in NASD Rule 6954(c) and in the OATS Reporting Technical Specifications published by NASD. 11 As discussed in the Notice, firms will not be required to begin using the ISO routing method code on Route Reports until February 4, 2008, but the code will be available for use by firms immediately on approval. Firms are encouraged to use the ISO code as soon as possible to facilitate NASD’s ability to determine whether the trade was made in reliance on an ISO exception from the Order Protection Rule. 12 15 U.S.C. 78s(b)(2). 13 17 E:\FR\FM\09JYN1.SGM CFR 200.30–3(a)(12). 09JYN1

Agencies

[Federal Register Volume 72, Number 130 (Monday, July 9, 2007)]
[Notices]
[Pages 37285-37287]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-13200]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56004; File No. SR-NASD-2004-130]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Amendment No. 3 and Order Granting 
Accelerated Approval of a Proposed Rule Change as Modified by Amendment 
Nos. 2 and 3 Relating to Amendments to Rule 2320(g) (Three Quote Rule) 
and Corresponding Recordkeeping Requirements under Rule 3110(b)

July 2, 2007.

I. Introduction

    On August 27, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder, \2\ a proposed rule change to amend NASD Rule 2320(g) 
(``Three Quote Rule'') to exempt from the Three Quote Rule certain 
transactions in foreign securities of a foreign issuer that are part of 
an index calculated by the FTSE Group. On May 8, 2006, NASD filed 
Amendment No. 1 to the proposed rule change.\3\ On October 19, 2006, 
NASD filed Amendment No. 2 to the proposed rule change.\4\ The proposed 
rule change, as modified by Amendment No. 2, was published for comment 
in the Federal Register on October 31, 2006.\5\ The Commission received 
ten comment letters on the proposal.\6\ On April 3, 2007, NASD filed 
Amendment No. 3 to the proposed rule change \7\ and a response to the 
comment letters.\8\ This order provides notice of Amendment No. 3 and 
approves the proposed rule change as modified by Amendment Nos. 2 and 3 
on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded in its entirety the 
text of the original filing.
    \4\ Amendment No. 2 replaced and superseded in its entirety the 
text of the original filing, as amended.
    \5\ See Securities Exchange Act Release No. 54650 (October 25, 
2006), 71 FR 63812 (``Notice'').
    \6\ See letters from James Duncan, Senior Vice President & 
Director, International Trading, and Andrew Jappy, Chief Information 
Officer & EVP, Canaccord Capital Corporation, dated November 21, 
2006 (``Canaccord Letter''); Achilles M. Perry, Associate General 
Counsel, CIBC World Markets Corp., dated November 21, 2006 (``CIBC 
Letter''); Grant Vingoe, Esq., Partner, Arnold Porter LLP, dated 
November 21, 2006 (``Arnold Porter Letter''); Bill Yancey, Chairman 
of the Board, and John C. Giesea, President and CEO, Security 
Traders Association, dated November 21, 2006 (``STA Letter''); Rik 
Parkhill, Executive Vice President, TSX Group, Inc., President, TSX 
Markets, dated November 29, 2006 (``TSX Letter''); George W. Lennon, 
President, Canadian Security Traders Association, Inc., dated 
December 1, 2006 (``CSTA Letter''); Christopher Climo, Managing 
Director, Compliance and Chief Compliance Officer, TD Securities, 
Inc., dated December 7, 2006 (``TD Securities Letter''); James E. 
Twiss, Chief Policy Counsel, Market Regulation Services Inc., dated 
December 8, 2006 (``RS Letter''); Debra V. Moore, Manager--NASDAQ/
OTC Equity Trading, and Glenn A. Hoback, Implementation Consultant--
Internal Controls, Wachovia Securities, LLC, dated December 14, 2006 
(``Wachovia Letter''); and Bryce Engel, Chief Brokerage Operations 
Officer, TD AMERITRADE, Inc., dated December 21, 2006 (``TD 
Ameritrade Letter'').
    \7\ In Amendment No. 3, NASD proposes, among other things, to 
codify the existing exemptions relating to transactions in a non-
exchange-listed security (as defined below) that are securities 
listed on a Canadian exchange.
    \8\ See letter from Andrea D. Orr, Assistant General Counsel, 
NASD, to Nancy M. Morris, Secretary, Commission, dated April 3, 2007 
(``NASD Response Letter'').
---------------------------------------------------------------------------

II. Description of the Proposal

    Currently, the Three Quote Rule requires NASD members who execute a 
transaction in a non-exchange-listed security \9\ for or with a 
customer to contact and obtain the quotations from three dealers (or 
all dealers if less than three) to determine the best inter-dealer 
market for that security. The Three Quote Rule, however, does not apply 
if two or more priced quotations for a non-exchange-listed security are 
displayed in an inter-dealer quotation system that permits quotation 
updates on a real-time basis. NASD proposes to expand the categories of 
transactions that would be exempted from the Three Quote Rule. First, 
NASD proposes to exempt a transaction for or with a customer in a non-
exchange-listed security of a foreign issuer that is part of the FTSE 
All-World Index, if such transaction is executed during the regular 
business hours of the foreign market for the foreign security and no 
trading halt or other similar trading or quoting restriction is in 
effect in any foreign market on which such security is listed. Second, 
in response to comments following publication of its proposal, NASD 
proposes to codify certain exemptions previously issued by NASD staff 
under the Three Quote Rule's exemptive process.\10\ Specifically, NASD 
proposes to exempt a transaction for or with a customer pertaining to 
the execution of an order in a non-exchange-listed security that is 
listed on a Canadian exchange as long as the customer order is executed 
by the NASD member or a person associated with the member on a Canadian 
exchange in an agency or riskless principal capacity and the member or 
a person associated with the member conducts regular and rigorous 
reviews of the equality of the execution of such orders in such 
securities, pursuant to the member's duty of best execution. NASD has 
also proposed to amend its recordkeeping requirement to provide a 
corresponding exclusion with respect to these proposed exemptions.
---------------------------------------------------------------------------

    \9\ NASD Rule 6610(c) defines the term ``non-exchange-listed 
security'' as ``any equity security that is not traded on any 
national securities exchange'' and ``shall not include `restricted 
securities,' as defined by SEC Rule 144(a)(3) under the Securities 
Act of 1933, nor any securities designated in the PORTAL Market, the 
Rule 6700 Series.''
    \10\ See, e.g., Letter to Kenneth W. Perlman, General Counsel, 
Mayer & Schweitzer, Inc., from Alden S. Adkins, Senior Vice 
President and General Counsel, NASD Regulation, Inc., on May 29, 
1998.
---------------------------------------------------------------------------

    Under the proposed rule change, NASD members would continue to be 
required to comply with their best execution obligations under NASD 
Rule 2320 and, to the extent applicable, the suitability obligations 
under NASD Rule 2310.

III. Summary of Comments and NASD's Response

    The Commission received ten comment letters on the proposal.\11\ 
NASD submitted the NASD Response Letter,\12\ and corresponding 
Amendment No. 3 to address the issue regarding application of the 
proposed rule change to Canadian-listed securities that was raised by 
the commenters. While some commenters expressed general support for 
NASD's proposal to exempt from the Three Quote Rule

[[Page 37286]]

foreign securities that are part of the FTSE All-World Index,\13\ all 
of the commenters objected to NASD's proposed withdrawal of the 
exemptions from the Three Quote Rule for Canadian issuers' securities. 
Specifically, NASD proposed to withdraw all existing exemptions granted 
under the Three Quote Rule with respect to Canadian securities executed 
on a Canadian exchange in an agency or riskless principal basis.\14\ 
Were these exemptions withdrawn, NASD members would be required to 
comply with the Three Quote Rule in connection with transactions in 
Canadian securities that are not part of the FTSE All-World Index. The 
commenters argued that this result would be contrary to the duty of 
best execution,\15\ would cause significant delays in execution,\16\ 
and would increase the cost of transactions in Canadian securities that 
are not part of the FTSE All-World Index.\17\
---------------------------------------------------------------------------

    \11\ See supra note 6.
    \12\ See supra note 8.
    \13\ See, e.g., Canaccord Letter, CIBC Letter, STA Letter, TSX 
Letter, CSTA Letter, and TD Ameritrade Letter.
    \14\ See Notice, supra note 5, 71 FR at 63813 n.13.
    \15\ See, e.g., Canaccord Letter, STA Letter, TXS Letter, CSTA 
Letter, RS Letter, and Wachovia Letter.
    \16\ See, e.g., Canaccord Letter, CIBC Letter, Arnold Porter 
Letter, STA Letter, TD Securities Letter, Wachovia Letter, and TD 
Ameritrade Letter.
    \17\ See, e.g., STA Letter and TD Securities Letter.
---------------------------------------------------------------------------

    In light of the comments, NASD revised its previous position and 
clarified that the proposal would not supersede any exemptions 
previously granted. Contemporaneously with the NASD Response Letter, 
NASD filed Amendment No. 3 to codify the relief previously granted in 
the existing exemptions.

IV. Discussion

    After careful review, the Commission believes that the proposed 
rule change is consistent with the requirements of the Act and the 
regulations thereunder applicable to NASD.\18\ In particular, the 
Commission believes that the proposal is consistent with section 
15A(b)(6) of the Act \19\ and section 15A(b)(9) of the Act.\20\ Section 
15A(b)(6) of the Act requires that the rules of a national securities 
association be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. Section 15A(b)(9) of the Act 
requires that rules of an association not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
---------------------------------------------------------------------------

    \18\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission approved NASD's proposal to institute the Three 
Quote Rule in 1988.\21\ The Three Quote Rule was an amendment to NASD's 
interpretation relating to best execution of retail transactions in 
non-Nasdaq securities. The Three Quote Rule's purpose is to assure that 
NASD members fulfill their duty to provide customers with best 
execution for transactions in non-exchange-listed securities, 
especially illiquid securities with non-transparent prices. The 
Commission subsequently approved NASD's proposal providing NASD staff 
authority to grant exemptions from the Three Quote Rule in 1997.\22\ 
Subsequently, NASD granted exemptions from the Three Quote Rule for 
customer transactions in Canadian securities executed on a Canadian 
exchange.\23\ In 2000, the Commission approved NASD's proposal to limit 
the Three Quote Rule's applicability to those situations when fewer 
than two priced quotes for a non-Nasdaq security are posted in an 
inter-dealer quotation medium.\24\
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 25637 (May 2, 
1988), 53 FR 16488 (May 9, 1988).
    \22\ See Securities Exchange Act Release No. 39266 (October 22, 
1997), 62 FR 56217 (October 29, 1997).
    \23\ See supra note 10.
    \24\ See Securities Exchange Act Release No. 43319 (September 
21, 2000), 65 FR 58589 (September 29, 2000). Pursuant to this 
exception, if two or more priced quotations for a non-exchange-
listed security are displayed in an inter-dealer quotation system 
that permits quotation updates on a real-time basis, then NASD 
members are not required to obtain quotes from three dealers.
---------------------------------------------------------------------------

    The Commission finds that NASD's proposal to add the two new 
exceptions to the Three Quote Rule is consistent with the Act. In its 
order granting NASD staff exemptive authority with respect to the Three 
Quote Rule, the Commission noted that ``one situation where exemptive 
relief might be applied would be trading in certain foreign securities. 
In some circumstances the foreign exchange market may constitute the 
best market for the securities that are listed on that market, and the 
time delay involved in contacting three dealers in advance of a 
customer transaction could hinder obtaining the best execution for the 
customer.''\25\
---------------------------------------------------------------------------

    \25\ Securities Exchange Act Release No. 39266 (October 22, 
1997), 62 FR 56217 (October 29, 1997).
---------------------------------------------------------------------------

    Thus, the Commission believes that it is reasonable for NASD to 
exempt from the Three Quote Rule transactions in a foreign security 
that are included in the FTSE All-World Index and transactions in a 
security listed on a Canadian exchange, subject to the conditions 
specified in the amended Three Quote Rule. The Commission notes that, 
whether or not a transaction in a non-exchange-listed security is 
subject to the Three Quote Rule, the NASD member executing the 
transaction must satisfy its duty of best execution.

V. Accelerated Approval

    The Commission finds good cause to approve NASD's proposal, as 
amended, prior to the thirtieth day after the amendment is published 
for comment in the Federal Register pursuant to section 19(b)(2) of the 
Act. NASD submitted Amendment No. 3 in response to comments received on 
its proposal. The amendment codifies exemptions NASD staff previously 
issued under the Three Quote Rule's exemptive process,\26\ and as 
described above, proposes a corresponding exclusion to the 
recordkeeping requirements if a member establishes and documents the 
exemption. Accordingly, Amendment No. 3 does not raise any new issues.
---------------------------------------------------------------------------

    \26\ See supra note 22.
---------------------------------------------------------------------------

    The Commission therefore finds good cause to approval NASD's 
proposal on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2004-130 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-2004-130. 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

[[Page 37287]]

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, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2004-130 and should be submitted on or before July 
30, 2007.

VII. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-NASD-2004-130), as modified 
by Amendment Nos. 2 and 3, be, and hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13200 Filed 7-6-07;8:45 am]
BILLING CODE 8010-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.