[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52980-52982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25924]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37772; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments and Order Approving 
Request To Extend Temporary Effectiveness of Plan, Including Temporary 
Effectiveness of Revised Amendment 9 Thereto, 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 Boston, Chicago and Philadelphia Stock Exchanges

October 1, 1996.
    The National Association of Securities Dealers, Inc., on behalf of 
itself and the Boston, Chicago, and Philadelphia Stock Exchanges 
(collectively, ``Participants'') \1\ has submitted to the Commission a 
request \2\ to extend through March 30, 1997, operation of a joint 
transaction reporting plan (``Plan'') and certain related exemptive 
relief for trading of Nasdaq/National Market securities traded on an 
exchange on an unlisted or listed basis.\3\ This notice and order 
solicits comment on certain related substantive matters identified 
below and extends the effectiveness of the Plan and the exemptive 
relief discussed below. Temporary approval of the Plan incorporates 
temporary approval of Amendment No. 9, as revised, to the Plan relating 
to revenue sharing, through March 30, 1997.\4\
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    \1\ The signatories to the Plan, i.e., the National Association 
of Securities Dealers, Inc. (``NASD''), and the 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. Originally, the American Stock 
Exchange, Inc. (``Amex''), was a Participant to the Plan, but did 
not trade securities pursuant to the Plan, and withdrew from 
participation in the Plan in August 1994.
    \2\ See letter from Robert E. Aber, Vice President, General 
Counsel and Secretary, Nasdaq, to Mr. Jonathan G. Katz, Secretary, 
Commission, dated September 30, 1996.
    \3\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits unlisted trading privileges 
(``UTP'') under certain circumstances. For example, Section 12(f), 
among other things, permits exchanges to trade certain securities 
that are traded over-the-counter (``OTC/UTP''), but only pursuant to 
a Commission order or rule. The present order fulfills this Section 
12(f) requirement. For a more complete discussion of this Section 
12(f) requirement, see November 1995 Extension Order, infra note 5, 
at n. 2.
    \4\ On March 18, 1996, the Commission, solicited comment on a 
revenue sharing agreement among the participants. See Securities 
Exchange Act Release No. 36985 (March 18, 1996), 61 FR 12122 
(``March 18, 1996 Extension Order''). Thereafter, the Participants 
submitted certain technical revisions to the revenue sharing 
agreement (``revised Amendment 9''). See letter from Robert E. Aber, 
Vice President, General Counsel, and Secretary, Nasdaq, to Jonathan 
G. Katz, Secretary, Commission, dated September 13, 1996. See also 
Securities Exchange Act Release No. 37689, (September 16, 1996), 
(notice and order recognizing receipt of revised Amendment No. 9) 
(``September 16, 1996 Extension Order'').
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I. Background

    The Commission originally approved the Plan on June 26, 1990.\5\ 
The Plan

[[Page 52981]]

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 UTP. Commission 
approval of operation of the Plan was previously scheduled to expire 
September 30, 1996. Recently, the Commission received certain technical 
revisions to Amendment No. 9 to the Plan, which was originally noticed 
for comment on March 18, 1996, concerning the proposed revenue sharing 
agreement. In order to provide the Commission with an opportunity to 
review the revised Amendment No. 9 to the Plan, the Commission extended 
temporary approval of the Plan through September 30, 1996. The 
Commission received no comment letters on Amendment No. 9 to the Plan, 
either as originally proposed or as revised.
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    \5\ See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (``1990 Approval Order''). For a detailed 
discussion of the history of UTP in OTC securities, and the events 
that led to the present plan and pilot program, See also Securities 
Exchange Act Release No. 34371 (July 13, 1994), 59 FR 37103 (``1994 
Extension Order''). See also Securities Exchange Act Release No. 
35221, (January 11, 1995), 60 FR 3886 (``January 1995 Extension 
Order''), Securities Exchange Act Release No. 36102 (August 14, 
1995), 60 FR 43626 (``August 1995 Extension Order''), Securities 
Exchange Act Release No. 36226 (September 13, 1995), 60 FR 49029 
(``September 1995 Extension Order''), Securities Exchange Act 
Release No. 36368 (October 13, 1995), 60 FR 54091 (``October 1995 
Extension Order''), Securities Exchange Act Release No. 36481 
(November 13, 1995), 60 FR 58119 (``November 1995 Extension 
Order''), Securities Exchange Act Release No. 36589 (December 13, 
1995), 60 FR 65696 (``December 13, 1995 Extension Order''), 
Securities Exchange Act Release No. 36650 (December 28, 1995), 60 FR 
358 (``December 28, 1995 Extension Order''), Securities Exchange Act 
Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6 1996 
Extension Order''), March 18, 1996 Extension Order, and September 
16, 1996 Extension Order.
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II. Description of the Proposal

    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 have now concluded 
those negotiations, as evidenced by their submission to the Commission 
of revised Amendment No. 9 to the Plan.
    Under the Revenue Sharing Plan, Exchange Participants will receive 
annual payments in quarterly installments out of total net 
distributable operating revenue \6\ based on their percentage of total 
Nasdaq volume,\7\ subject to certain specified minimum and maximum 
payments for an initial period of four-and-one-half years (``buy-in 
period'').\8\ Thereafter, once the ``buy-in'' period elapses with 
respect to a particular Exchange Participant, that exchange will 
receive annual payments in quarterly installments out of total net 
distributable operating revenue proportional to its percentage of total 
Nasdaq volume, without regard to any minimum or maximum payment 
amounts. Plan Participants would not be eligible to receive revenue 
under the Plan until they have established an automated interface with 
Nasdaq for the transmission of quotations and transaction information. 
Once an Exchange Participant is eligible to receive revenue under the 
Revenue Sharing Plan, that Exchange Participant also will be eligible 
to receive revenue based on its volume for the preceding twelve-month 
period, up to the maximum payment amount discussed below.\9\
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    \6\ Revised Amendment No. 9 clarifies that net distributable 
operating revenue for any particular calendar year shall be 
calculated by adding all revenues from Level 1, Level 2, (non-market 
maker revenue only), Nasdaq/NMS/Last Sale, and NQDS, including 
revenues from the dissemination of information among Eligible 
Securities to foreign marketplaces, and subtracting from such 
revenues all operating and administrative expenses of the Processor 
in connection with the collection from the Participants, and 
consolidation and dissemination to Vendors and Subscribers, of 
Quotation Information and Transaction Reports in Eligible 
Securities.
    \7\ An Exchange Participant's percentage of total Nasdaq volume 
will be based on the average of that Exchange's proportion of total 
Nasdaq trade volume reported to Nasdaq and disseminated to 
securities information vendors, and total Nasdaq share volume 
reported to Nasdaq and disseminated to securities information 
vendors.
    \8\ Revised Amendment No. 9 clarifies that each Participant 
becoming a signatory to the Plan after June 26, 1990, shall as a 
condition to become a Participant, pay to the other Plan 
Participants a proportionate share of the aggregate development 
costs previously paid by Plan Participants to the Processor, which 
aggregate development costs totaled $439,530, with the result that 
each Exchange Participant's share of all development costs is the 
same. In this regard, the Commission notes that the Amex, prior to 
its withdrawal as a Participant to the Plan, presumably paid a share 
of development costs to the Processor. The Commission believes that, 
if the Amex rejoins as a participant to the Plan, the Amex would not 
be expected to repay any development costs that it has already paid. 
The Commission believes, however, that an open issue remains as to 
the proper handling of any payments received by the Participants 
from a new Participant to the Plan given any contribution to 
development costs made by the Amex. Specifically, it is not clear 
whether the Amex, either as a non-Participant to the Plan or after 
possibly rejoining as a Participant, would be due a proportionate 
share of development costs paid by a new Participant to the Plan.
    \9\ Because the Chx is the only Exchange Participant that has 
implemented and maintained an automated interface with Nasdaq for 
the reporting of transaction and quotation information pursuant to 
the Plan, the Chx will receive a lump-sum payment of $444,525 
payable thirty days after the effective date of the Revenue Sharing 
Plan. The Commission notes that this amount is based on the 
following payments for previous periods: (1) For the six-month 
period ending December 1993, $50,000; (2) for the one-year period 
ending December 1994, $100,000; and (3) for the period between 
January 1, 1995 and March 5, 1996, $294,525. For the period March 6 
to December 31, 1996, the NASD is scheduled to pay the Chx a pro 
rate amount of its payment for 1996.
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    Specifically, the maximum payment amount for any Exchange 
Participant will be an amount based on total net distributable 
operating revenue under the Plan for 1995. This maximum payment amount 
figure will be calculated and furnished to all Exchange Participants by 
the NASD by April 30, 1996. Based on revenue calculations performed by 
the NASD in the last quarter of 1995, it is expected that the maximum 
payment amount will be somewhere in the range of $820,000 and $880,000, 
but this figure could be higher or lower depending on the eventual 
revenue for 1995. Over time, this maximum payment amount will be 
adjusted upward or downward depending on fluctuations in net operating 
revenue relative to revenue in 1995. The minimum payment amount for the 
Chx would be $250,000 and likewise would be adjusted upward or downward 
depending on fluctuations in net operating revenue relative to revenue 
in 1995. The minimum payment for other exchanges becoming eligible to 
receive revenue under the Plan would be set relative to the trading 
volume of the Exchange Participant with the highest trading volume 
among Exchange Participants during the year before the Participant 
became eligible to receive revenue under the Plan. The minimum payment 
amount to other Exchange Participants also would be adjusted annually 
in the same manner as that of the Chx. Accordingly, for a period of 
four-and-one-half years, if an Exchange Participant's share of 
distributable revenue is less than its minimum payment amount, it would 
receive the minimum payment amount; if its share is equal to or greater 
than its minimum payment amount but less than its maximum payment 
amount, it would receive that share of revenue; and, if its share is 
greater than the maximum payment amount, it would receive the maximum 
payment amount. The interim plan found in the proposal for the buy-in 
period also contains provisions for the pro rata diminution of the 
minimum payment amount in the event that an Exchange Participant 
becomes eligible or ineligible to receive revenue during a calendar 
year. After this initial buy-in period, an Exchange Participant would 
receive a relative proportion of net distribution operating revenue 
based on its trading volume.\10\ Payment dates are calculated based on 
the effective date of this order or, for amounts due after 1996, as of 
actual dates specified in revised Amendment No. 9.
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    \10\ The Commission notes that the NASD, as discussed in the 
March 18, 1996 Extension order, states its strong belief that 
Participants should address the fact that, absent an additional 
amendment to the Plan, Participants would have the right to receive 
revenue for late trade reports. The NASD ``believes it is improper 
to reward a market center for transmitting stale transactions that, 
at best, have questionable, if any, redeeming economic value to 
market participants and, at worse, are potentially disruptive to the 
marketplace.'' The NASD also notes the numerous benefits that it 
believes would be derived from limiting Participant's revenues to 
those associated with timely-reported transactions. The Commission 
believes this to be an open matter, and expects the Plan 
participants to resolve the NASD's concerns in this regard.
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III. Exemptive Relief

    In conjunction with the Plan, on a temporary basis scheduled to 
expire on September 30, 1996, the Commission

[[Page 52982]]

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.

IV. Comments on the Operation of the Plan

    In the January 1995, August 1995, September 1995, October 1995, 
November 1995, December 13, 1995, December 28, 1995, March 6, 1996, 
March 18, 1996, and September 16, 1996 Extension Orders, the Commission 
solicited, among other things, comment on: (1) whether the BBO 
calculation for the relevant securities should be based on price and 
time only (as currently is the case) or if the calculation should 
include size of the quoted bid or offer; and (2) whether there is a 
need for an intermarket linkage for order routing and execution and an 
accompanying trade-through rule. The Commission continues to solicit 
comment on these matters.

V. Solicitation of Comment

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 at the 
Commission's Public Reference Room. All submissions should refer to 
File No. S7-24-89 and should be submitted by October 30, 1996.

VI. Conclusion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan through March 30, 1997, is appropriate and in 
furtherance of Section 11A of the Act as it will provide the 
Participants with additional time to make reasonable proposals 
concerning: (1) Whether the BBO calculation for the relevant securities 
should be based on price and time only (as currently is the case) or if 
the calculation should include size of the quoted bid or offer; and (2) 
whether there is a need for an intermarket linkage for order routing 
and execution and an accompanying trade-through rule. While the 
Commission continues to solicit comment on these matters, the 
Commission believes that these matters should be addressed directly by 
the Participants during the extension period so that issues presented 
by these matters will be resolved prior to March 30, 1997.
    Concerning incorporation of the revenue sharing agreement within 
the present temporary approval of the operation of the Plan, the 
Commission believes that it is appropriate and in furtherance of the 
Act and the rules thereunder to approve revised Amendment No. 9 to the 
Plan. Accordingly, revised Amendment No. 9 to the Plan will be 
temporarily approved, as are all other elements of the Plan, through 
March 30, 1997. Consequently, any Participants due payments under 
revised Amendment No. 9 to the Plan (currently, the Chx) during the 
extension period are to be paid in accordance with the agreement within 
the time periods described in revised Amendment No. 9 as of this 
effective date.
    The Commission finds further that extension of the exemptive relief 
through March 30, 1997, as described above, also is consistent with the 
Act, the Rules thereunder, and specifically with the objectives set 
forth in Sections 12(f) and 11A of the Act and in Rules 11Aa3-1 and 
11Aa3-2 thereunder.

VII. Conclusion

    It is therefore ordered, pursuant to Sections 12(f) and 11A of the 
Act and (c)(2) of Rule 11Aa3-2 thereunder, that the Participants' 
request to extend the effectiveness of the Joint Transaction Reporting 
Plan for Nasdaq/National Market securities traded on an exchange on an 
unlisted or listed basis, incorporating revised Amendment No. 9 
thereto, and certain exemptive relief, through March 30, 1997, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Jonathan G. Katz,
Secretary.
[FR Doc. 96-25924 Filed 10-8-96; 8:45 am]
BILLING CODE 8010-01-M