[Federal Register Volume 62, Number 112 (Wednesday, June 11, 1997)]
[Notices]
[Pages 31854-31856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38715; File No. SR-NASD-97-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. in Providing 
an Interpretation to NASD Conduct Rule 2110 Regarding Anti-
Intimidation/Coordination Activities of Member Firms and Persons 
Associated With Member Firms

June 4, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 7, 1997, the National 
Association of Securities Dealers, Inc. (``NASD`` or ``Association;;) 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASD Regulation, Inc. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1)(1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing IM-2110-5 to prohibit certain anti-
competitive and coordination conduct of member broker/dealers and 
persons associated with member broker/dealers. Below is the text of the 
proposed rule change. Proposed new language is in italics.

IM-2110-5. Anti-Intimidation/Coordination

    The Board of Governors is issuing this interpretation to codify a 
longstanding policy. It is conduct inconsistent with just and equitable 
principles of trade for any member or person associated with a member 
to coordinate the prices (including quotations), trades, or trade 
reports of such member with any other member or person associated with 
a member; to direct or request another member to alter a price 
(including a quotation); or to engage, directly or indirectly, in any 
conduct that threatens, harasses, coerces, intimidates, or otherwise 
attempts improperly to influence another member or person associated 
with a member. This includes, but is not limited to, any attempt to 
influence another member or person associated with a member to adjust 
or maintain a price or quotation, whether displayed on any automated 
system operated by The Nasdaq Stock

[[Page 31855]]

Market, Inc. (Nasdaq), or otherwise, or refusals to trade or other 
conduct that retaliates against or discourages the competitive 
activities of another market maker or market participant. Nothing in 
this interpretation respecting coordination of quotes, trades, or trade 
reports shall be deemed to limit, constrain, or otherwise inhibit the 
freedom of a member or person associated with a member to:
    (1) Set unilaterally its own bid and ask in any Nasdaq security, 
the prices at which it is willing to buy or sell any Nasdaq security, 
and the quantity of shares of any Nasdaq security that it is willing to 
buy or sell;
    (2) Set unilaterally its own dealer spread, quote increment, or 
quantity of shares for its quotations (or set any relationship between 
or among its dealer spread, inside spread, or the size of any quote 
increment) in any Nasdaq security;
    (3) Communicate its own bid or ask, or the prices at or the 
quantity of shares in which it is willing to buy or sell any Nasdaq 
security to any person, for the purpose of exploring the possibility of 
a purchase or sale of that security, and to negotiate for or agree to 
such purchase or sale;
    (4) Communicate its own bid or ask, or the price at or the quantity 
of shares in which it is willing to buy or sell any Nasdaq security, to 
any person for the purpose of retaining such person as an agent or 
subagent for the member or for a customer of the member (or for the 
purpose of seeking to be retained as an agent or subagent), and to 
negotiate for or agree to such purchase or sale;
    (5) Engage in any underwriting (or any syndicate for the 
underwriting) of securities to the extent permitted by the federal 
securities laws;
    (6) Take any unilateral action or make any unilateral decision 
regarding the market makers with which it will trade and the terms on 
which it will trade unless such action is prohibited by the second and 
third sentences of this Interpretation; and
    (7) Deliver an order to another member for handling, provided, 
however, that the conducted described in (1) through (7) is otherwise 
in compliance with all applicable law.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 8, 1996, the SEC issued an Order pursuant to Section 
19(h)(1) of the Act (``SEC Order''), making certain findings about the 
NASD and conduct on the Nasdaq Market, and imposing remedial 
sanctions.\2\ Among other findings, the SEC determined that certain 
activities of Nasdaq market makers had directly and indirectly impeded 
price competition in the Nasdaq market. In addition, the SEC determined 
that a number of Nasdaq market makers had coordinated quotations, 
trades and trade reports with other Nasdaq market makers for the 
purpose of advancing or protecting the market maker's proprietary 
trading interests. Based on the SEC's specific findings of certain 
anti-competitive behavior of Nasdaq market makers in the Nasdaq Stock 
Market, the NASD agreed to certain undertakings. In particular, 
Undertaking 11 requires the NASD ``[t]o propose a rule or rule 
interpretation for Commission approval which expressly makes unlawful 
the coordination by or among market makers of their quotes, trades and 
trade reports, and which prohibits retribution or retaliatory conduct 
for competitive actions of another market maker or other market 
participant.'' Undertaking 12 requires the NASD ``[t]o enforce Article 
III, Section 1 of the NASD Rules of Fair Practice (currently NASD 
Conduct Rule 2110), with a view to enhancing market maker 
competitiveness by: (a) Acting to eliminate anti-competitive or 
unlawful enforced or maintained industry pricing conventions, and to 
discipline market makers who harass other market makers for narrowing 
the displayed quotations in the Nasdaq market, trading not more than 
the quantities of securities they are required to trade under the 
NASD's rules, or otherwise engaging in competitive conduct; (b) acting 
to eliminate coordination between or among market makers or quotes, 
trades and trade reports; and (c) acting to eliminate concerted 
discrimination and concerted refusals to deal by market makers.''
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    \2\ See Securities Exchange Act Release No. 37538 (August 8, 
1996), SEC's Order Instituting Public Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Remedial Sanctions.
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    To comply with NASD Undertaking 11, the NASD has prepared the 
following rule interpretation of NASD Conduct Rule 2110 (formerly 
Article III, Section 1 of the NASD's Rules of Fair Practice). The NASD 
believes that the conduct described in Undertaking 11 already is 
proscribed by existing NASD Rule 2110, which requires members to 
observe high standards of commercial honor and just and equitable 
principles of trade. The conduct described in the interpretation is 
fundamentally inconsistent with the obligations of member firms to 
their customers and is inimical to the public interest in fair and 
efficient securities markets. Although such conduct already is 
prohibited, this interpretation is designed to address specifically 
certain of the findings contained in the SEC Order and to emphasize the 
importance placed by the NASD on the enforcement of the prohibition.
    This rule interpretation defines as conduct inconsistent with just 
and equitable principles of trade certain conduct by and among members 
firms, and sets forth specific exclusions (numbered 1 through 7) which 
identify bona fide commercial activities by and among member firms. The 
interpretation identifies three general areas of conduct that are 
prohibited. The first part of the interpretation prohibits coordinating 
activities by member firms involving quotations, prices, trades and 
trade reporting. Conduct covered by this prohibition would include, but 
not be limited to agreements to report trades late or inaccurately, or 
to agree to maintain certain minimum spreads or quote sizes above the 
legal minimums.
    The second part of the interpretation prohibits ``directing or 
requesting'' another member to alter prices or quotations. This would 
include situations in which a market maker requests another market 
maker to move or adjust its displayed quotations to accommodate the 
requesting market maker. This prohibition does not extend to activity, 
identified in exclusion number 7, that permits a member to route 
customer orders to market makers for handling or a correspondent firm 
of the member to ask a market maker to represent an order in the market 
maker's quote.
    The third part of the interpretation relates to conduct that 
threatens, harasses, coerces, intimidates or otherwise attempts 
improperly to influence another member in a manner that interferes with 
or impedes the forces of competition among member firms in the Nasdaq 
Stock Market. This

[[Page 31856]]

part of the prohibition is intended to reach conduct that goes beyond 
legitimate bargaining among member firms. This conduct may include, 
among other things, refusals to trade, improper systems messages, 
trading in odd lots, and other conduct intended to influence a member 
to engage in improper market activity or refrain from legitimate market 
activity. However, as identified in exclusion number 6, this language 
would not prohibit a member from taking unilateral action in selecting 
with whom to trade and under what terms, based on legitimate market and 
commercial criteria (e.g., credit exposure).
    In addition, this interpretation does not prohibit a market maker 
from contracting another market maker in a locked or crossed market 
situation to attempt to unlock or uncross the market. Moreover, the 
overall prohibition applies to primary market as well as secondary 
trading activities.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \3\ in that regulating 
the conduct of member broker/dealers and persons associated with member 
broker/dealers by prohibiting anti-competitive conduct is in 
furtherance of the requirements that the Association's rules to promote 
just and equitable principles of trade, prevent fraudulent and 
manipulative acts and practices, and to protect investors and the 
public interest.
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    \3\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents,\4\ the Commission 
will:
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    \4\ The NASD has requested that the Commission find good cause 
pursuant to Section 19(b)(2) for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register. 
The NASD believes that the conduct described in the proposed rule 
change is already proscribed by existing NASD Rule 2110.
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    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by July 2, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15170 Filed 6-10-97; 8:45 am]
BILLING CODE 8010-01-M