[Federal Register Volume 62, Number 141 (Wednesday, July 23, 1997)]
[Notices]
[Pages 39564-39565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19346]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38845; File No. SR-NASD-97-37]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to an Interpretation of NASD Conduct Rule 2110 Regarding Anti-
Intimidation/Coordination Activities of Member Firms and Persons
Associated With Member Firms
July 17, 1997.
On May 7, 1997, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'').\1\
The proposed rule change was published for comment in Securities
Exchange Act Release No. 38715 (June 4, 1997), 62 FR 31854 (June 11,
1997) (``Notice of Proposed Rule Change''). No comments were received
on the proposal. For the reasons discussed below, the Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Background
On August 8, 1996, the Commission used an Order pursuant to Section
19(h)(1) of the Exchange Act (``SEC Order''), making certain findings
about the NASD and conduct on the Nasdaq Market, and imposing remedial
sanctions.\2\ Among other findings, the Commission determined that
certain activities of Nasdaq market makers had directly and indirectly
impeded price competition on the Nasdaq market. In addition, the
Commission 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 Commission'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, trade 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 display 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 concert 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. See also Report Pursuant
to Section 21(a) of the Securities Exchange Act of 1934 Regarding
the NASD, the Nasdaq Market and Nasdaq Market Makers, Securities
Exchange Act Release No. 37542 (August 8, 1996) (``21(a) Report''),
and Appendix thereto.
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To comply with both Undertaking 11 and 12, the NASD proposed a rule
interpretation of NASD Conduct Rule 2110 (formerly Article III, Section
1 of the NASD's Rules of Fair Practice). The NASD noted that 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 makets. The
NASD, therefore, believes that the conduct described in the
interpretation is already prohibited by NASD Rule 2110, which requires
members to observe high standards of commercial honor and just and
equitable principles of trade. The NASD, however, proposed the
interpretation 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.
II. Description
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
conduct excluded, however, must otherwise be in compliance with all
other applicable law. 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. In addition, the interpretation
does not prohibit a market maker from contacting another market maker
in a locked or crossed market situation to attempt to unlock or uncross
the market. Moreover, the overall prohibited behavior outlined in the
interpretation applies to primary market as well as secondary trading
activities.
The second part of the interpretation prohibits ``directing or
requesting'' another member to alter prices or quotations. This would
include, among other things, 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 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).
III. Discussion
The Exchange Act contemplates that the U.S. securities markets
shall be ``free and open'' \3\ with safeguards ``to protect investors
and the public interest.'' \4\ The Commission stated in the 21(a)
Report that vigorous price competition is a hallmark of a free and open
market and
[[Page 39565]]
is critically important to the efficient functioning and regulation of
a dispersed dealer market and any significant hindrance to price
competition impedes the free and open market prescribed by the Exchange
Act.
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\3\ 15 U.S.C. 78f(b)(5).
\4\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the NASD's proposed interpretation
expressly reaffirms that anti-competitive and intimidation and
harassment of other members is prohibited. The Commission noted in the
21(a) Report, and the NASD's interpretation reiterates, that such
conduct is inconsistent with just and equitable principles of trade.
The Interpretation clearly delineates the type of behavior that is
antithetical to a free and open market while preserving the ability of
members to engage in legitimate market activity. Although the behavior
prohibited under the interpretation has continually been violative of
NASD Rule 2110 and the federal securities laws, the Commission believes
that the interpretation will clearly highlight for members that such
conduct is a serious violation of NASD Rules.
The Commission believes that the proposed rule change is consistent
with the Exchange Act and the rules and regulations thereunder
applicable to the NASD, in particular, Sections 15A(b)(6) and 15
A(b)(11).5 The Commission finds that the proposed
interpretation specifically prohibiting anti-competitive conduct of
member broker/dealers and persons associated with member broker/dealers
is in furtherance of the requirements of Section 15A(b)(6) that the
Association's rules be designed to promote just and equitable
principles of trade, prevent fraudulent and manipulative acts and
practices, and to protect investors and the public interest. In
addition, the Commission funds that the proposed rule change is
consistent with Section 15A(b)(11) in that the interpretation is
designed to produce fair and informative quotations, to prevent
fictitious or misleading quotations, and to promote orderly procedures
for collecting, distributing, and publishing quotations.
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\5\ 15 U.S.C. 78o-3.
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IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Exchange Act and the rules and
regulations thereunder applicable to the NASD and, in particular,
Sections 15A(b)(6) and 15A(b)(11).6
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\6\ In approving this rule proposal, the Commission notes that
it has also considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Exchange Act,7 that the proposed rule change (SR-NASD-97-37)
be, and hereby is, approved.
\7\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.8
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-19346 Filed 7-22-97; 8:45 am]
BILLING CODE 8010-01-M