[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Rules and Regulations]
[Pages 40732-40733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20053]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-38870; 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 final 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 accommodate the 
new schedule. In addition, the Commission is providing temporary 
exemptive relief from compliance with the 1% requirement of the Quote 
Rule with respect to non-19c-3 securities.

DATES: Effective Date: July 24, 1997. Compliance Dates: The phase-in 
schedule with respect to the remaining approximately 5,766 Nasdaq 
securities will be as follows: 250 Nasdaq securities on August 4, 1997; 
250 Nasdaq securities on August 11, 1997; 850 Nasdaq securities on 
September 8, 1997; 850 Nasdaq securities on September 15, 1997; 850 
Nasdaq securities on September 22, 1997; 850 Nasdaq securities on 
September 29, 1997; 850 Nasdaq securities on October 6, 1997; and the 
remaining approximately 930 Nasdaq securities on October 13, 1997. 
Concurrently, the Commission is exempting responsible broker 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 
October 13, 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 
September 30, 1997.

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

SUPPLEMENTARY INFORMATION:

Background

    On August 28, 1996, The 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 
specialist 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 
postponed the effective date of the 1% Rule, with respect to the 
amended definition of ``subject security,'' from January 10, 1997, 
to April 10, 1997. See also Securities Exchange Act Release No. 
38490 (April 9, 1997), 62 FR 18514 (April 16, 1997) which further 
postponed the effective date of the definition of ``subject 
security'' until July 28, 1997.

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[[Page 40733]]

Discussion

    On January 20, 1997, the Order Execution Rules became effective.\6\ 
The Commission recognized in adopting the Order Execution Rules that 
they would result in a significant change in the order handling 
practices of OTC market makers. The Commission thereafter chose to 
require compliance with the rules over a phased-in period. 
Subsequently, the Commission required compliance with the Order 
Execution Rules for the Nasdaq securities on a phased-in basis through 
July 7, 1997.\7\ The Commission, therefore, provided exemptive relief, 
until July 28, 1997, from compliance with the Order Execution Rules 
with respect to the Nasdaq securities not phased in under the Order 
Execution Rules. To date, compliance is mandatory for all exchange-
traded securities and 700 of the 1,000 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), and 
38139 (January 8, 1997).
    \7\ See Securities Exchange Act Release Nos. 38246 (February 5, 
1997) and 38490 (April 9, 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.
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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, the Commission has provided Nasdaq the time necessary to 
upgrade its systems to improve its ability to handle the additional 
quotation traffic resulting from the Order Execution Rules.\8\ The 
Commission believes it has succeeded in striking a reasonable balance 
between the desire to provide the benefits of the Order Execution Rules 
to investors and the need to ensure that implementation of the Rules do 
not compromise the integrity or capacity of automated systems operated 
by Nasdaq, broker-dealers, ECNs, or vendors. Accordingly, the 
Commission believes it is appropriate to continue phasing in both the 
Limit Order Display Rule and the ECN Amendment for the remaining Nasdaq 
securities.\9\
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    \8\ The Nasdaq Stock Market made system enhancements in mid-July 
which were designed to improve its capacity levels.
    \9\ The Commission notes, however, that while ECNs qualifying 
for the ECN Display Alternative must publicly display quotes in 
Nasdaq securities once those securities are phased in pursuant to 
the phase-in schedule, these ECNs may voluntarily begin publicly 
displaying quotes in any Nasdaq security beginning August 4, 1997.
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    The 700 Nasdaq securities currently in compliance with the Order 
Execution Rules account for over 62% of the total share volume on 
Nasdaq and over 85% of the total dollar volume. The Commission, 
therefore, believes that the remaining Nasdaq securities can be phased 
in on a more accelerated schedule.
    The new compliance schedule for the remaining, approximately 5,766 
Nasdaq securities is as follows: 250 Nasdaq securities on August 4, 
1997, of which 150 securities will be selected from the 1,000 most 
actively traded Nasdaq securities and 100 securities will be selected 
from the remaining Nasdaq securities; \10\ 250 Nasdaq securities on 
August 11, 1997, of which 150 securities will be the last of the 1,000 
most actively traded Nasdaq securities not already phased-in and 100 
securities will be selected from the remaining Nasdaq securities; 850 
Nasdaq securities on September 8, 1997; \11\ 850 Nasdaq securities on 
September 15, 1997; 850 Nasdaq securities on September 22, 1997; 850 
Nasdaq securities on September 29, 1997; 850 Nasdaq securities on 
October 6, 1997; and the remaining approximately 930 Nasdaq securities 
on October 13, 1997. To accommodate this phase-in schedule and pursuant 
to Rule 11Ac1-1(d) \12\ of the Exchange Act, the Commission is 
exempting responsible brokers and dealers, electronic communications 
networks, exchanges, and associations, until October 13, 1997, from the 
requirements of Rule 11Ac1-1(c)(5)(i), the ECN Amendment, with respect 
to all Nasdaq securities not phased in as of October 13, 1997. The 
Commission is also exempting, pursuant to Rule 11Ac1-4(d) \13\ of the 
Exchange Act, responsible brokers and dealers, electronic 
communications networks, exchanges, and associations, until October 13, 
1997 from the requirements of Rule 11Ac1-4, the Limit Order Display 
Rule, with respect to all Nasdaq securities not phased in as of October 
13, 1997.
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    \10\ The Nasdaq Stock Market will continue to identify which 
Nasdaq securities are to be phased in, and will notify market 
participants of the specific securities at least a week prior to the 
securities being phased-in.
    \11\ These 850 securities, as well as the subsequent securities 
phased-in under this schedule, will be selected from the remaining 
approximately 5,180 Nasdaq securities.
    \12\ 17 CFR 240.11Ac1-1(d).
    \13\ 17 CFR 240.11Ac1-4(d).
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    The Commission has granted this exemptive relief to permit the 
continued phase-in and orderly operation of the Order Execution Rules. 
Moreover, the Commission believes that a three-week pause after 200 of 
the less active Nasdaq securities are phased in will provide an 
opportunity to enable broker-dealers to make any necessary operational 
adjustments to handle the remaining approximately 5,180 securities. 
Accordingly, 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.
    In addition, the Commission, pursuant to Rule 11Ac1-1(d), is 
extending the exemptive relief granted to responsible broker dealers 
\14\ from the requirements of Rule 11Ac1-1(c)(1), with respect to non-
Rule 19c-3 securities \15\ until the current calendar quarter ends 
September 30, 1997.\16\ OTC market makers and specialists, therefore, 
responsible for more than 1% of the aggregate trading volume during the 
calendar quarter ending September 30, 1997, must, within 10 business 
days, commence quoting regular and continuous two-sided markets.

    \14\ The term ``responsible broker or dealer'' is defined in 
Rule 11Ac1-1(a)(21).
    \15\ 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.
    \16\ OTC market makers and specialists are currently required to 
publish two-sided quotes in Rule 19c-3 securities if their aggregate 
trading volume exceeds 1% during the most recent calendar quarter. 
This obligation with respect to Rule 19c-3 securities remains 
unchanged by this action.
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30(a)(28) and (61).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-20053 Filed 7-29-97; 8:45 am]
BILLING CODE 8010-01-M