[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17663]


[[Page Unknown]]

[Federal Register: July 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34371; File No. S7-24-89]

 

Joint Industry Plan; Order Approving Amendment No. 1 to Reporting 
Plan for Nasdaq/National Market Securities Traded on an Exchange on an 
Unlisted or Listed Basis, Submitted by the National Association of 
Securities Dealers, Inc., and the American, Boston, Chicago and 
Philadelphia Stock Exchanges

July 13, 1994.
    On July 12, 1994, the National Association of Securities Dealers, 
Inc., and the American, Boston, Chicago, and Philadelphia Stock 
Exchanges (collectively, ``Participants'')\1\ submitted to the 
Commission Amendment No. 1 to a joint transaction reporting plan 
(``Plan'') for Nasdaq/National Market securities traded on an exchange 
on an unlisted or listed basis.\2\ The Commission is approving the 
proposed amendment to the Plan and trading pursuant to the Plan on a 
temporary basis to expire on January 12, 1995.
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    \1\The signatories to the Plan, i.e., the National Association 
of Securities Dealers, Inc. (``NASD''), and the American Stock 
Exchange, Inc. (``Amex''), Chicago Stock Exchange, Inc. (``Chx'') 
(previously, the Midwest Stock Exchange, Inc.), Philadelphia Stock 
Exchange, Inc. (``Phlx''), and the Boston Stock Exchange, Inc. 
(``BSE''), are the ``Participants.'' The BSE, however, joined the 
Plan as a ``Limited Participant,'' and reports quotation information 
and transaction reports only in Nasdaq/National Market (previously 
referred to as ``Nasdaq/NMS'') securities listed on the BSE.
    \2\See letter from T. Grant Callery, Vice President, NASD, to 
Jonathan G. Katz, Secretary, Commission, dated July 11, 1994 (``1994 
Extension Request''). The 1994 Extension Request also requests the 
Commission to continue to provide exemptive relief, previously 
granted in connection with the Plan on a temporary basis, from Rules 
11Ac1-2 and 11Aa3-1 under the Securities Exchange Act of 1934 
(``Act'').
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I. Introduction

    The Commission originally approved the Plan on June 26, 1990.\3\ 
The Plan governs the collection, consolidation and dissemination of 
quotation and transaction information for Nasdaq/National Market 
securities listed on an exchange or traded on an exchange pursuant to a 
grant of unlisted trading privileges (``UTP'').\4\ The Commission 
approved trading pursuant to the Plan on a one-year pilot basis, with 
the pilot period to commence when transaction reporting pursuant to the 
Plan commenced. Accordingly, the pilot period commenced on July 12, 
1993, and was scheduled to expire on July 12, 1994.\5\
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    \3\See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (``1990 Plan Approval Order'').
    \4\Section 12(f)(2) of the Act permits the Commission to grant 
UTP to securities traded over-the-counter (``OTC/UTP''), but 
requires the Commission, prior to such grant, to consider:
    The public trading activity in such security, the character of 
such trading, the impact of such extension on the existing markets 
for such securities, and the desirability of removing impediments to 
and the progress that has been made toward the development of a 
national market system and [the Commission] shall not grant any such 
application if any rule of the national securities exchange making 
application under this subsection would unreasonably impair the 
ability of any dealer to solicit or effect transactions in such 
security for his own account, or would unreasonably restrict 
competition among dealers in such security or between such dealers 
acting in the capacity of market makers who are specialists and such 
dealers who are not specialists.
    For further background on the statutory history of OTC/UTP, see 
Securities Exchange Act Release No. 21498 (November 16, 1984), 49 FR 
46156.
    \5\See letter from David T. Rusoff, Foley & Lardner, to Betsy 
Prout, Commission, dated May 9, 1994.
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    As originally approved by the Commission, the Plan required the 
Participants to complete their negotiations regarding revenue sharing 
during the one-year pilot period. The Participants, however, have not 
yet come to an agreement concerning revenue sharing for transactions 
effected pursuant to the Plan. Proposed Amendment No. 1 to the Plan 
extends this negotiation period for an additional six months. In 
conjunction with the Plan, on a temporary basis also scheduled to 
expire on July 12, 1994, the Commission granted an exemption from Rule 
11Ac1-2 under the Act regarding the calculated best bid and offer 
(``BBO''), and granted the BSE an exemption from the provision of Rule 
11Aa3-1 under the Act that requires transaction reporting plans to 
include market identifiers for transaction reports and last sale data. 
At the request of the Participants, this order extends these exemptions 
through July 12, 1995, provided that the Plan continues in effect 
through that date pursuant to a Commission order.

II. Background

    The Securities Acts Amendments of 1975 (``1975 Amendments'') 
directed the Commission to facilitate the development of a national 
market system for securities, consistent with certain objectives, 
including ``fair competition * * * between exchange markets and markets 
other than exchange markets.'' The legislative history of the 1975 
Amendments makes clear that many active OTC stocks were expected to be 
part of the national market system. The 1975 Amendments also authorized 
the Commission to grant OTC/UTP to exchanges if certain conditions were 
met. The Commission generally deferred granting exchanges OTC/UTP 
pending progress on the development of the national market system.
    In 1985, however, the Commission noted that since the enactment of 
the 1975 Amendments, important developments had occurred in the OTC 
market; these developments led the Commission to reconsider its 
position on OTC/UTP.\6\ The Commission announced in its 1985 OTC/UTP 
Release its willingness to grant UTP to national securities exchanges 
in NMS Securities,\7\ conditioned in part on the approval of a plan 
submitted by interested exchanges and the NASD to consolidate and 
disseminate exchange and OTC quotation data and transaction data in OTC 
securities upon which UTP is granted.\8\ The exchanges and the NASD 
have been negotiating the terms of a plan, under the oversight of the 
Commission staff, since that time.
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    \6\See Securities Exchange Act Release No. 22412 (September 16, 
1985), 50 FR 38640 (``1985 OTC/UTP Release'').
    \7\Congress envisioned that National Market System Securities 
(``NMS Securities'') would include those equity securities whose 
characteristics of size, earnings history, breadth of ownership, and 
investor interest made them suitable for auction-market trading. See 
Senate Comm. on Banking, Housing & Urb. Affs., Report to Accompany 
S. 249: Securities Acts Amendments of 1975, S. Rep. No. 75, 94th 
Cong., 1st Sess. 16 (1975). NMS Securities are designated pursuant 
to Rule 11Aa2-1, 17 CFR 240.11Ac1-2, adopted in Securities Exchange 
Act Release No. 16590 (February 19, 1980), 45 FR 12391.
    \8\See 1985 OTC/UTP Release, supra note 6.
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    In its 1985 OTC/UTP Release, the Commission also determined that 
although it was premature to require any specific type of market 
linkage prior to the initiation of trading, the exchanges must provide 
OTC market makers direct telephone access to the exchange specialist in 
UTP securities to facilitate intermarket trading in those securities. 
The Commission determined to grant OTC/UTP to an exchange only if the 
exchange provided Nasdaq market makers access to the exchange market in 
the subject securities to the same extent that Nasdaq market makers 
provide specialists access to the Nasdaq market maker trading 
facilities.
    In 1985, the Commission also stated that it expected Nasdaq market 
makers to provide exchange members with fair and efficient access to 
the OTC market, and that if the Commission became aware of any 
limitation on such access, it would take prompt remedial action. The 
Commission further noted that it did not believe that a more 
sophisticated intermarket linkage need be in place during the initial 
stages of trading OTC/UTP securities, but encouraged the NASD and the 
exchanges to forge their own initiatives in facilitating computerized 
intermarket trading linkages and adopting trade-through rules for these 
securities. The 1985 OTC/UTP Release also conditioned the grant of OTC/
UTP on the exchanges not applying their off-board trading restrictions 
to those securities.
    Finally, the Commission stated that it would evaluate trading under 
the one-year pilot and at the end of the pilot period would determine 
what further action to take. Because of the potentially significant 
market structure implications of this new policy, the Commission 
decided to proceed cautiously by establishing a one-year pilot program 
under which each exchange requesting UTP would be permitted to trade, 
on an unlisted basis, up to 25 OTC securities designated as NMS 
Securities pursuant to Rule 11Aa2-1 under the Act. The Commission 
stated that it considered this one-year pilot a first step in granting 
UTP on NMS Securities and that granting UTP on additional NMS 
Securities might be appropriate if no adverse consequences resulted 
from the trading of securities under the pilot program.
    In 1986, because of protracted negotiations to develop a joint 
industry plan, the Chx entered into an interim transaction reporting 
plan (``Interim Plan'') with the NASD that was significantly more 
limited than the Joint Industry Plan. On April 29, 1987, the Commission 
approved the Chx's application for UTP in 25 NMS securities quoted on 
the Nasdaq system (generally, ``Nasdaq/National Market securities'')\9\ 
and simultaneously approved the Interim Plan submitted by the Chx and 
the NASD.
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    \9\See Securities Exchange Act Release No. 24407 (April 29, 
1987), 52 FR 17349.
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    As discussed more fully below, in 1990, the Commission approved the 
Plan and the ability for Participants to effect transactions pursuant 
to the Plan on a one-year pilot basis, to begin when certain 
enhancements were made to the Nasdaq system and transaction reporting 
pursuant to the Plan commenced. The Commission also expanded the 
maximum number of Nasdaq/National Market securities to which a 
Participant could extend UTP from 25 to 100.
    In 1992, the Phlx, prior to the initiation of the Plan pilot, filed 
with the Commission a proposed rule change to initiate a pilot program 
to provide for transactions on the Phlx floor in OTC securities 
pursuant to UTP. The Commission initially approved this pilot program 
and the accompanying rules for a temporary period ending on December 
31, 1993.\10\ Thereafter, the Commission extended the Phlx pilot 
program and the effectiveness of the accompanying Phlx rules through 
December 31, 1994.\11\
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    \10\See Securities Exchange Act Release No. 31672 (December 30, 
1992), 58 FR 3054 (``1992 Phlx Pilot Order'').
    \11\See Securities Exchange Act Release No. 33408 (December 30, 
1992), 59 FR 1045 (``1993 Phlx Pilot Extension Order'').
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    The Chx Interim Plan continued in effect, subject to the 100 
security limitation, through July 12, 1993, when trading pursuant to 
the Plan commenced, thereby superseding the Interim Plan. The Phlx and 
the Chx, as Participants to the Plan, continue to be limited to 
extending UTP to a maximum of 100 Nasdaq/National Market securities. 
The Phlx currently effects transactions in Nasdaq/National Market 
securities pursuant to the Plan and the Phlx pilot program (i.e., while 
using the Plan Processor and pursuant to Phlx rules established under 
the Phlx pilot program).
    The Plan provides for the collection from Plan Participants and the 
consolidation and dissemination to vendors, subscribers and others of 
quotation and transaction information in ``eligible securities,'' i.e., 
NMS Securities traded on an exchange on a listed or UTP basis. The Plan 
contains various provisions concerning the operation of the Plan, which 
include: Implementation of the Plan; Manner of Collecting, Processing, 
Sequencing, Making Available, and Disseminating Last Sale Information; 
Reporting Requirements (including hours of operation); Standards and 
Methods of Ensuring Promptness, Accuracy, and Completeness of 
Transaction Reports; Terms and Conditions of Acess (including the 1985 
OTC/UTP Order requirement to ensure direct telephone access between 
dealers and specialists); Description of Operation of Facility 
Contemplated by the Plan; the Method and Frequency of Processor 
Evaluation (providing that the Processor's performance is subject to 
review by an Operating Committee during the fifth year of the 
Processor's operation); Written Understandings of Agreements Relating 
to Interpretation of, or Participation in, the Plan; Calculation of the 
BBO; Dispute Resolution; Method of Determination and Imposition, and 
Amount of, Fees and Charges.
    The provisions affected by the present submission to the 
Commission, including proposed Amendment No. 1 to the Plan, and the 
Participants' request for extensions of exemptive relief granted by the 
Commission in our 1990 Plan Approval Order, are discussed in more 
detail below.

III. Discussion

    The Participants have submitted to the Commission proposed 
Amendment No. 1 to the Plan, and have requested continued exemptive 
relief under certain provisions under the Act.\12\ The Commission's 
approval of Amendment No. 1 and the requests for continued exemptive 
relief are discussed below. In the 1990 Plan Approval Order, the 
Commission stated that it would review several issues related to the 
Plan after it had been in operation for one year. These issues are also 
discussed below. Furthermore, in 1985, 1992, and 1993, the Commission 
discussed the possible need for an intermarket linkage and a trade-
through rule for transactions effected pursuant to extensions of OTC/
UTP.\13\ As discussed below, the Commission continues to believe that 
such a linkage and/or rule in this context may be appropriate.
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    \12\See 1994 Extension Request, supra note 2.
    \13\See 1985 OTC/UTP Order, supra note 6; 1992 Phlx Pilot Order, 
supra note 10; and 1993 Phlx Pilot Extension Order, supra note 11.
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A. Proposed Amendment No. 1 of the Plan

    Section XIV of the Plan provides that the NASD shall recover from 
exchange Participants a sum of money to be negotiated. Specifically, 
Section XIV of the Plan states:

    [I]t is expressly agreed and understood among the Participants 
that specific provisions governing the issues of cost allocation and 
revenue-sharing among the Participants will not be included in the 
Plan at the time of execution thereof, but will be resolved within 
one year from the commencement of the Plan's operation. The 
provisions agreed upon by the Participants will be applied on a 
retroactive basis by means of an amendment to the Plan. There shall 
be no retroactive application if the Participants are unable to 
agree upon a cost allocation and revenue-sharing provision or the 
amount of recapture. * * *

    Even through the Plan has been in operation for one year, the 
Participants have not yet come to an agreement concerning revenue 
sharing. Proposed Amendment No. 1 to the Plan, which the Commission is 
approving today, extends the negotiation period for an additional six 
months. Thus, the Plan will now require the Participants to come to an 
agreement on these financial matters before January 12, 1995.
    To assist the Participants in ensuring compliance with this Plan 
amendment, the Commission is requesting each Participant (including the 
BSE) to submit a written report to the Commission on or before 
September 30, 1994, that describes the status of the negotiations, and 
the Participant's position with respect to those negotiations.\14\
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    \14\The Commission notes that, throughout the Plan negotiations 
prior to the 1990 Plan Approval Order, the Participants agreed that 
distributions would be made from net operating revenues, rather than 
net income, as the basis for determining revenues pursuant to the 
Plan. In 1990, the Commission expressly approved the language ``net 
operating revenues'' in this regard. See 1990 Plan Approval Order, 
supra note 3. The Commission reiterates this determination in 
approving the extension of the Plan.
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B. BBO Calculation and Extension of Rule 11Ac2-1 Exemptive Relief

    On a temporary basis also scheduled to expire July 12, 1994, the 
Commission provided an exemption from Rule 11Ac2-1 under the Act 
regarding the calculated BBO for securities quoted pursuant to the 
Plan. At the Participants' request, the Commission is extending this 
exemptive relief through July 12, 1995, provided that the Plan 
continues in effect through that date pursuant to a Commission order.
    The Plan provides that, in calculating the BBO disseminated to 
vendors, if quotations of more than one Participant are identical in 
price, then the earliest in time is the best. While the Commission 
chose not to modify this Plan provision in 1990, the Commission stated 
in approving both the Chx Interim Plan, and the Plan, that it would 
continue to reevaluate this BBO calculation. Indeed, the Commission 
stated that its temporary approval of this BBO calculation would not 
foreclose a future Commission decision to require size priority 
pursuant to the Vendor Display Rule,\15\ should such a decision be 
appropriate. The Commission also notes that, in the 1990 Plan Approval 
Order, the Commission stated that the NASD had represented to the 
Commission that the Plan Processor would include a ``switch'' for easy 
conversion if the Commission determines that the BBO should be 
calculated using price/size/time priority.\16\
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    \15\17 CFR 240.11Ac1-2.
    \16\See 1990 Plan Approval Order, supra note 3.
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    In order to evaluate the effects of this term of the Plan, the 
Commission is requesting that the Participants each submit to the 
Commission a written evaluation of any relevant effects of the BBO 
calculation based on time on or before September 30, 1994.

C. The Boston Stock Exchange's Request for Exemption

    The Plan does not provide for market identifiers for Limited 
Participant transaction reports or Limited Participant consolidated 
best bid and offer quotations. Subsection (b)(2)(viii) of Rule 11Aa3-1 
under the Act, however, requires any transaction reporting plan 
submitted to the Commission to provide market identifiers for 
transaction reports or last sale data made available to vendors. The 
BSE, as the only Limited Participant under the Plan, requested in 1990 
that the Commission exempt it from this requirement.
    Prior to 1990, the BSE stated that it had signed the Plan only 
because it seeks to continue providing trading facilities for dually 
listed (i.e., listed on the BSE and traded in Nasdaq) stocks that it 
listed prior to the date the Plan was filed with the Commission and 
does not wish to apply for OTC/UTP.\17\ To accommodate the BSE, the 
Plan Participants created the category of ``Limited Participants,'' 
which do not pay any of the development costs of modifying NASDAQ to 
accommodate OTC/UTP and have limited voting rights under the Plan. 
Limited Participants are not permitted to expand the number of dually 
listed issues or to apply for OTC/UTP. The Plan provides that the BSE's 
quotations and trade reports will not have a BSE market identifier, but 
will instead be identified by Nasdaq's market symbol.
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    \17\Id.
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    The Participants have requested that the Commission extend, for an 
additional year, this exemptive relief to the BSE from Rule 11Aa3-
1(b)(2)(viii) under the Act. The Commission is unaware of any negative 
impact that this exemption has had on the marketplace, and believes 
that the extension of exemptive relief through July 12, 1995, is 
appropriate under these limited circumstances.

D. Written Understandings of Agreements Relating to Interpretation of, 
or Participation in, the Plan

    The pilot program, as originally approved and memorialized in an 
Undertaking dated April 1, 1989, provides that, for the one-year period 
following the date on which the UTP Processor commences operations, 
each initial entry or update of quotation information in Eligible 
Securities shall be effected by an individual at a computer terminal 
and shall not be programmed or automated.\18\ No Participant has 
submitted a request to the Commission that this Undertaking be 
extended. This agreement, therefore, expired July 12, 1994.
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    \18\In the 1990 Plan Approval Order, the Commission stated that 
after the pilot program had been operating for one year, the 
Commission would review the issues presented by this Undertaking. A 
copy of the Undertaking is attached to the original filing, S7-24-
89, that was approved by the Commission in the 1990 Plan Approval 
Order. Among other matters, this Undertaking operated to forbid 
exchange Participants from effecting automated quote updates or 
tracking of inside quotations (e.g. by the use of ``autoquote'' 
systems) in the Nasdaq system. The Participants, however, have not 
requested that the Undertaking be extended and have not supplied the 
Commission with any data or commentary concerning this issue with 
respect to the Plan. Thus, the Commission has no new information to 
review in this area, and finds no cause to extend an undertaking for 
which no request to extend has been submitted to the Commission.
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E. Intermarket Trading Linkage and Trade-Through Rule

    The Commission has stated in several instances that it believes the 
Participants should work toward developing an intermarket trading 
linkage and an accompanying trade-through rule with respect to OTC/
UTP.\19\ The Commission is unaware of any recent efforts made by the 
Participants in this regard.
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    \19\The Commission's most recent statement in this regard was 
made in 1993:
    The Commission stated in our 1992 Phlx Pilot Order that the 
Participants should develop an intermarket trading linkage and an 
accompanying trade-through rule. The Commission believes that the 
Participants should continue working toward these goals.
    1993 Phlx Pilot Extension Order, at n.14, supra note 11.
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    While the Commission understands that the Participant meetings 
concerning the Plan primarily have dealt with financial matters, the 
Commission believes that efficient executions of securities 
transactions and customer protection concerns must be considered with 
respect to the operation of the Plan. Accordingly, the Commission 
requests each Participant to submit to the Commission, no later than 
September 30, 1994, a statement concerning the effects that an 
intermarket trading linkage and/or a trade-through rule would have on 
market efficiency and/or customer protection.\20\ The Commission will 
be particularly interested in comments concerning the Participants' 
experience under the pilot program under the Plan and/or the Chx 
Interim Plan. The Commission also requests each Participant to include 
in its submission a statement concerning the appropriate course of 
action to ensure that the Participants routinely evaluate market 
quality and customer protection matters as transactions continue to be 
effected pursuant to the Commission's temporary or permanent approval 
of the Plan.
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    \20\Specifically, the Commission requests that the Participants 
evaluate the existing pilot and the probable effects that an 
intermarket linkage and/or trade-through rule would have on the 
markets with respect to furthering certain Congressional directives, 
among others, found in Section 11A of the Act: economically 
efficient execution of securities transactions; fair competition 
among brokers and dealers, among exchange markets, and between 
exchange markets and markets other than exchange markets; and, the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.
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F. Commission's Previous Directive for Quantitative Assessment of 
Plan's Effects

    In the 1990 Plan Approval Order, the Commission stated:

    Plan Participants are hereby directed, in connection with any 
request for extension of the pilot or for permanent approval of the 
Plan, to provide the Commission with a quantitative assessment of 
the effects, if any, of unlisted trading privileges and the Plan on 
the width of quotation spreads and on price continuity in trading in 
OTC/UTP securities.

The Commission has not received any Participant's assessment of these 
effects. While the Commission believes that a 6-month extension of the 
pilot program is warranted and appropriate under the Act, the 
Commission believes that receipt of the above referenced quantitative 
assessments is essential to the Commission's evaluation of the pilot 
program. Thus, the Commission directs the Participants to submit to the 
Commission, on or before September 30, 1994, the quantitative 
assessments described above. The Commission expects these assessments 
to be based on statistical studies.\21\
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    \21\In the 1990 Plan Approval Order, the Commission also stated 
that, at the end of the one year pilot period, the Commission would 
review the bases on which firms decide to which markets to send 
customer orders for execution. The Commission directs each 
Participant to submit to the Commission, on or before September 30, 
1994, statements describing the bases on which firms decide to which 
markets to send customer orders for execution.
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VI. Conclusion

    The Commission finds that proposed Amendment No. 1 to the Plan to 
extend the financial negotiation period for an additional six months is 
appropriate and in furtherance of Section 11A of the Act. The 
Commission also finds that one-year extensions of the exemptive relief 
requested, and described above, also is consistent with the Act and the 
Rules thereunder. Specifically, the Commission believes that these 
extensions should serve to provide the Participants with more time to 
conclude their financial negotiations and to evaluate the effects of 
the pilot program and report their findings to the Commission. This, in 
turn, should further the objects of the Act in general, and 
specifically those set forth in Section 11A of the Act and in Rules 
11Aa3-1 and 11Aa3-2 thereunder.
    It is therefore ordered, pursuant to Section 11A of the Act and 
(c)(2) of Rule 11Aa3-2 thereunder, that Amendment No. 1 to the Joint 
Transaction Reporting Plan for Nasdaq/National Market securities traded 
on an exchange on an unlisted or listed basis is hereby approved, and 
trading pursuant to the Plan is hereby approved on a temporary basis 
through January 12, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17663 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M