[Federal Register Volume 62, Number 6 (Thursday, January 9, 1997)]
[Rules and Regulations]
[Pages 1279-1281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-440]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-38110; File No. S7-30-95]
RIN 3235-AG66


Order Execution Obligations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; revised effective date; revised compliance dates.

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SUMMARY: The Securities and Exchange Commission is revising: (1) The 
effective date of Rule 11Ac1-4 (``Limit Order Display Rule'') and 
amendments

[[Page 1280]]

to Rule 11Ac1-1 (``ECN Amendment'' to the ``Quote Rule'') from January 
10 to January 13, 1997; (2) the effective date of the amendment to 
subsection (a)(25)(ii) of the Quote Rule (``Subject Security 
Definition'') to April 10, 1997; and (3) the compliance dates of the 
ECN Amendment with respect to most over-the-counter (``OTC'') 
securities.

DATES: Effective January 9, 1997, the effective date for the Limit 
Order Display Rule, and the amendments to the Quote Rule, adopted 
August 28, 1996, by the Securities and Exchange Commission, and 
published on September 12, 1996 (61 FR 48290) (collectively, ``Order 
Execution Rules''), is being changed to January 13, 1997, except that 
the effective date for the amendment to Sec. 240.11Ac1-1(a)(25)(ii) the 
Subject Security Definition in the Quote Rule is April 10, 1997. The 
compliance date with respect to the ECN Amendment (except for the 
Subject Security Definition) for exchange-traded securities and 50 of 
the 1000 most actively traded OTC securities is January 13, 1997. The 
compliance date of the ECN Amendment for an additional 100 of these 
1,000 securities is January 31, 1997, and the compliance date for the 
remaining 850 most actively traded securities is February 21, 1997. The 
final compliance date for the remainder of the securities is March 28, 
1997.

FOR FURTHER INFORMATION CONTACT:
Betsy Prout Lefler, Special Counsel, Gail Marshall-Smith, Special 
Counsel, or David Oestreicher, Special Counsel, (202) 942-0158, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, N.W., Mail Stop 5-1, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: 

I. Background

    On August 28, 1996, the Securities and Exchange Commission 
(``Commission'') adopted Rule 11Ac1-4,\1\ the ``Limit Order Display 
Rule,'' and amendments to Rule 11Ac1-1, the ``ECN Amendment,'' to 
require OTC market makers and exchange specialists to display certain 
customer limit orders, and to publicly disseminate the best prices that 
the OTC market maker or exchange specialist has placed in certain 
electronic communications networks (``ECNs''), or to comply indirectly 
with the ECN Amendment by using an ECN that furnishes the best market 
maker and specialist prices therein to the public quotation system. The 
Commission also expanded the definition of ``subject security'' under 
the Quote Rule, which brought all exchange-traded securities, rather 
than just the subset of such securities known as ``Rule 19c-3 
securities,'' under the scope of the mandatory quotation requirements 
of the Quote Rule. In the Adopting Release, the Commission deemed the 
effective date of all these initiatives January 10, 1997. Thereafter, 
the Commission modified the compliance dates with respect to the Limit 
Order Display Rule so that the display of customer limit orders in OTC 
securities now will be phased-in over several months.\2\
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    \1\ 17 CFR 240.11Ac1-4.
    \2\ See Securities Exchange Act Release No. 37972 (November 22, 
1996), 61 FR 63709.
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    More recently, the Commission received a letter from the National 
Association of Securities Dealers (``NASD'') requesting additional 
relief from the Limit Order Display Rule and the ECN Amendment.\3\ 
First, the NASD letter requests that the implementation date of both 
the Limit Order Display Rule and the ECN Amendment be delayed by one 
business day to ensure an orderly and safe introduction of the software 
necessary to operate in accordance with the new rules. Second, the NASD 
letter requests that the ECN Amendment be phased-in according to the 
same schedule as the Limit Order Display Rule.
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    \3\ See Letter from Alfred R. Berkeley, III, President Nasdaq, 
to Richard R. Lindsey, Director, Division of Market Regulation 
(``Division''), Commission, dated December 18, 1996 (``NASD 
letter'').
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    The Commission is hereby modifying the effective dates and 
compliance dates in response to the NASD letter. In addition, in order 
to address concerns about the impact on marketwide quotation systems 
and third market makers upon implementation of the mandatory quotation 
requirement of the Order Execution Rules, the Commission is moving from 
January 10, to April 10, 1997, the effective date of the new definition 
of ``subject security'' under the Quote Rule (Rule 11Ac1-1(a)(25)(ii)), 
as discussed below.

II. Discussion

A. Implementation Date of the ECN Amendment

    With regard to the implementation date of the Limit Order Display 
Rule and the ECN Amendment (collectively, ``rules''), the NASD letter 
expresses concern that introducing software that has been significantly 
revised during the evening of January 9 poses a serious risk of 
potential system malfunction or an untimely start-up of the market. 
Instead, the NASD believes that introduction of the new software over 
the weekend preceding Monday, January 13, 1997, would provide the NASD 
with an opportunity to take the appropriate time to carefully load the 
software and build the necessary databases to ensure a smooth 
transition. According to the NASD letter, the NASD's technology staff, 
several ECNs, and many industry members including members of the 
Quality of Markets Committee (made up of institutions, retail investors 
and broker-dealers) agree that it would be imprudent to commence 
implementation, and the attendant software changes, on Friday, January 
10th. Moreover, the NASD letter notes that several broker-dealers that 
are revising their own internal systems would not introduce their 
software changes on January 10 because of the risks in migrating to the 
new code within a limited period of time during a trading week.

B. ECN Amendment Phase-in

    The NASD letter also requests that the phase-in schedule for 
securities under the Limit Order Display Rule be extended to the ECN 
Amendment. This request is intended to ensure that investors and other 
market participants have an opportunity to obtain experience with the 
ECN Amendment scaled over a manageable set of securities. The NASD 
believes this phase-in will enable all interested parties to more 
accurately determine the impact that full implementation of the ECN 
Amendment will have on issues such as system capacity and trading 
patterns.

C. Implementation of the Subject Security Definition

    The Order Execution Rules' amendment to the definition of the term 
``subject security'' under the Quote Rule brought all exchange-traded 
securities, rather than just the subset of such securities known as 
``Rule 19c-3 securities,'' under the scope of the mandatory quotation 
requirements of the Quote Rule. Under this amendment, an OTC market 
maker must publish firm two-sided quotations for any exchange-traded 
security in which its executed volume, during the most recent calendar 
quarter, comprised more than one percent of the aggregate trading 
volume of the security. Thus, firms that previously did not quote in 
certain exchange-traded securities may be required to publish 
quotations in such securities when the amendment becomes effective. In 
the Adopting Release, the Commission asked the NASD and the Intermarket 
Trading System (``ITS'') Participants to review their existing 
limitations on the automated generation of quotations.

[[Page 1281]]

This review has not been completed. The Commission believes that 
additional time should be provided for this review, prior to 
implementation of the expanded definition of ``subject security,'' 
because of the additional quotation obligations that may result from 
the rules. The Commission also believes that extending the effective 
date will give additional time to evaluate the effect on existing 
systems of the potential increase in quotation traffic that may be 
caused by the mandatory quotation requirement for exchange-traded 
securities.

III. Conclusion

    For the reasons described above, the Commission is modifying the 
effective date of the Limit Order Display Rule and the amendments to 
the Quote Rule (except as discussed below concerning subsection 
(a)(25)(ii) of the Quote Rule) until the start of business on Monday, 
January 13, 1997, rather than on January 10, 1997.
    In addition the Commission is modifying the compliance dates of the 
ECN Amendment in order to phase-in the implementation of the ECN 
Amendment. Accordingly, beginning on January 13, 1997, compliance with 
the ECN Amendment will be required with respect to all exchange-traded 
securities and 50 of the 1000 Nasdaq securities, as identified by 
Nasdaq for the first phase of compliance with the Limit Order Display 
Rule. On January 31, 1997, compliance with the ECN Amendment will be 
required with respect to the additional 100 of these 1,000 securities 
selected by Nasdaq. The ECN Amendment will apply to the remaining 850 
of the 1,000 securities on February 21, 1997, as identified by Nasdaq. 
The next phase-in date will be on March 28, 1997, and, unlike the Limit 
Order Display Rule, will cover all remaining Nasdaq securities. The 
Commission will review the operation of the markets during this phase-
in period.
    Finally, the Commission is modifying the effective date of the 
amendment to Rule 11Ac1-1(a)(25)(ii) from January 10, 1997, to April 
10, 1997. In the interim, the Commission expects the NASD and the ITS 
Participants to continue to review the NASD's and ITS Plan's 
limitations on automated quotations.

    Dated: January 2, 1997.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-440 Filed 1-8-97; 8:45 am]
BILLING CODE 8010-01-M