[Federal Register Volume 62, Number 73 (Wednesday, April 16, 1997)]
[Rules and Regulations]
[Pages 18514-18515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9713]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240
[Release No. 34-38490; File No. S7-30-95]
RIN 3235-AG66


Order Execution Obligations

AGENCY: Securities and Exchange Commission.

ACTION: Revised compliance dates; exemptive order.

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SUMMARY: The Securities and Exchange Commission (``Commission''') is 
announcing the revised phase-in schedule for compliance with Rules 
11Ac1-1(c)(5) (``ECN Amendment'' of the ``Quote Rule'') and 11Ac1-4 
(``Limit Order Display Rule'') under the Securities Exchange Act of 
1934 (``Exchange Act'') and is providing exemptive relief to accomodate 
the new schedule. In addition, the Commission is providing exemptive 
relief from compliance with the 1% requirement of the Quote Rule with 
respect to non-19c-3 securities.

DATES: Effective: April 9, 1997. Compliance Dates: The phase-in 
schedule with respect to 550 additional Nasdaq securities will be as 
follows: 50 Nasdaq securities on April 21, 1997; 50 Nasdaq securities 
on April 28, 1997; 50 Nasdaq securities on May 5, 1997; 50 Nasdaq 
securities on May 12, 1997; 50 Nasdaq securities on May 19, 1997; 50 
Nasdaq securities on May 27, 1997; 50 Nasdaq securities on June 2, 
1997; 50 Nasdaq securities on June 9, 1997; 50 Nasdaq securities on 
June 23, 1997; 50 Nasdaq securities on June 30, 1997; and 50 Nasdaq 
securities on July 7, 1997. Concurrently, the Commission is exempting 
responsible brokers and dealers, electronic communications networks, 
exchanges and associations from compliance with the Order Execution 
Rules, with respect to the Nasdaq securities that are not phased-in 
under such schedule, until July 28, 1997. In addition, the Commission 
is exempting substantial market makers and specialists from compliance 
with the 1% requirement of the Quote Rule with respect to non-Rule 19c-
3 securities until July 28, 1997.

FOR FURTHER INFORMATION CONTACT: David Oestreicher, Special Counsel, or 
Gail Marshall-Smith, 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: 

Background

    On August 28, 1996, the Securities and Exchange Commission adopted 
Rule 11Ac1-4, the Limit Order Display Rule, and amendments to Rule 
11Ac1-1, the Quote Rule under the Exchange Act.\1\ The Limit Order 
Display Rule requires over-the-counter (``OTC'') market makers and 
exchange specialists to publicly display certain customer limit orders. 
The ECN Amendment of the Quote Rule requires OTC market makers and 
specialists to publicly disseminate the best prices that they enter 
into an electronic communications network (``ECN''),\2\ 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 ``ECN Display Alternative'') \3\ In addition, the Quote 
Rule term ``subject security'' \4\ was amended, thereby requiring OTC 
market makers and specialists to publish quotes in any exchange-listed 
security if their volume in that security exceeds 1% of the aggregate 
volume during the most recent calendar quarter.\5\
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    \1\ See Securities Exchange Act Release No. 37619A (September 6, 
1996), 61 FR 48290 (September 12, 1996) (``Adopting Release'').
    \2\ 17 CFR 240.11Ac1-1(c)(5)(i).
    \3\ 17 CFR 240.11Ac1-1(c)(5)(ii).
    \4\ 17 CFR 240.11Ac1-1(a)(25).
    \5\ 17 CFR 11Ac1-1(c)(1). See Securities Exchange Act Release 
No. 38110 (January 2, 1997), 62 FR 1279 (January 9, 1997) which 
changed the effective date of the 1% Rule, with respect to the 
amended definition of ``subject security'', from January 10, 1997, 
to April 10, 1997.

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[[Page 18515]]

Discussion

    The obligations under the Order Execution Rules represent a 
significant change in the order handling practices of OTC market makers 
and specialists. The Commission, therefore, has chosen to require 
compliance with the rules over a phased-in period. On January 20, 1997, 
the Order Execution Rules became effective and compliance with the 
rules became mandatory for all exchange-traded securities and 50 Nasdaq 
securities.\6\ Subsequently, the Commission provided exemptive relief 
from compliance with the Order Execution Rules for the Nasdaq 
securities not phased-in as of February 14, 1997, until April 14, 
1997.\7\ To date, compliance is mandatory for all exchange-traded 
securities and 150 of the most actively traded Nasdaq securities.
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    \6\ See Securities Exchange Act Release Nos. 37619A (September 
6, 1996), 37972 (November 22, 1996), 38110 (January 2, 1997), 38139 
(January 8, 1997), and 38246 (February 5, 1997) outlining previous 
phase-in schedules for the Order Execution Rules. The Commission 
notes that a broker-dealer's duty of best execution discussed in the 
Adopting Release is applicable to all securities and is not based on 
whether or not the security has been phased-in under the Limit Order 
Display Rule or the ECN Amendment.
    \7\ See Securities Exchange Act Release No. 38246 (February 5, 
1997). Absent the granted exemptive relief, the Limit Order Display 
Rule would currently apply to 1000 Nasdaq securities with an 
additional 1500 Nasdaq securities being required on March 28, 1997. 
Moreover, the ECN Amendment would currently apply to 1000 Nasdaq 
securities with the remaining Nasdaq securities being required on 
March 28, 1997.
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    The Commission has been closely monitoring the implementation of 
the rules and has found that the implementation appears to be occurring 
successfully. The success to date is due, in-part, to affording market 
participants time to adapt to the new regulatory requirements. 
Moreover, Nasdaq will continue to have capacity limitations that reduce 
its ability to handle substantial additional quotation traffic until 
mid-July. The NASD has, therefore, requested that the rules be phased-
in on an extended schedule that strikes a reasonable balance between 
the desire to enhance the benefits of the Rules for investors and the 
need to ensure that implementation of the Rules does not compromise the 
integrity or capacity of automated systems operated by Nasdaq, broker-
dealers, ECNs, and vendors.\8\ Accordingly, the Commission believes it 
is appropriate to continue the gradual phase-in of both the Limit Order 
Display Rule and the ECN Amendment for the next 550 most actively 
traded Nasdaq securities. However, once the most actively traded Nasdaq 
securities are phased-in, the Commission expects to phase-in the 
remaining securities on a more accelerated basis.
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    \8\ See letter from J. Patrick Campbell, Executive Vice 
President, Trading & Market Services, The Nasdaq Stock Market, Inc., 
to Richard R. Lindsey, Director, Division of Market Regulation, 
dated April 8, 1997.
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    The new schedule for the next 550 Nasdaq securities is as follows: 
50 Nasdaq securities on April 21, 1997; 50 Nasdaq securities on April 
28, 1997; 50 Nasdaq securities on May 5, 1997; 50 Nasdaq securities on 
May 12, 1997; 50 Nasdaq securities on May 19, 1997; 50 Nasdaq 
securities on May 27, 1997; 50 Nasdaq securities on June 2, 1997; 50 
Nasdaq securities on June 9, 1997; 50 Nasdaq securities on June 23, 
1997; 50 Nasdaq securities on June 30, 1997; and 50 Nasdaq securities 
on July 7, 1997.\9\ The Commission will not phase-in securities the 
week of June 16, 1997 to afford Nasdaq an opportunity to effect system 
upgrades designed to enhance Nasdaq's quote update response time and 
the capacity of Nasdaq's last sale broadcast. To accommodate this 
schedule and pursuant to Rule 11Ac1-1(d) \10\ of the Exchange Act, the 
Commission is exempting responsible brokers and dealers, electronic 
communications networks, exchanges, and associations, until July 28, 
1997 form the requirements of: (1) Rule 11Ac1-1(c)(5)(i), the ECN 
Amendment, with respect to all Nasdaq securities not phased-in as of 
July 7, 1997; and (2) from the requirements of Rule 11Ac1-1(c)(1), with 
respect to non-Rule 19c-3 securities.\11\ In addition, pursuant to Rule 
11Ac1-4(d) \12\ of the Exchange Act, the Commission is exemption 
responsible brokers and dealers, electronic communications networks, 
exchanges, and associations, until July 28, 1997 from the requirements 
of Rule 11Ac1-4, the Limit Order Display Rule, with respect to all 
Nasdaq securities not phased-in as of July 7, 1997.
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    \9\ Nasdaq will continue to identify the specific securities to 
be phased-in prior to each phase-in date.
    \10\ 17 CFR 240.11Ac1-1(d).
    \11\ See 17 CFR 240.19c-3. Exchange Act Rule 19c-3 prohibits the 
application of off-board trading restrictions to securities that (1) 
were not traded on an exchange before April 26, 1979; or (2) were 
traded on an exchange on April 26, 1979, but ceased to be traded on 
an exchange for any period of time thereafter. Accordingly, 
exchange-traded securities not subject to off-board trading 
restrictions are referred to as Rule 19c-3 securities, and exchange-
traded securities subject to off-board trading restrictions are 
referred to as non-rule 19c-3 securities.
    \12\ 17 CFR 240.11Ac1-4(d).
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    The Commission has granted this exemptive relief to continue 
monitoring the operation of the Order Execution Rules, and will 
announce a phase-in schedule for the Nasdaq securities not phased-in as 
of July 7, 1997 at the appropriate time. The Commission finds that the 
exemptive relief provided herein to responsible brokers and dealers, 
electronic communications networks, exchanges, and associations is 
consistent with the public interest, the protection of investors and 
the removal of impediments to and perfection of the mechanism of a 
national market system. Moreover, granting exemptive relief from the 
requirements of Rule 11Ac1-1(a)(25) until July 28, 1997, will provide 
the NASD and the Intermarket Trading System Participants further time 
to resolve their existing limitations on the automated generation of 
quotations.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30(a)(28) and (61).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9713 Filed 4-15-97; 8:45 am]
BILLING CODE 8010-01-M