[Federal Register Volume 63, Number 231 (Wednesday, December 2, 1998)]
[Notices]
[Pages 66619-66621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32096]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40716; File No. SR-NASD-98-63]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to the Proposed Rule Change by the National Association 
of Securities Dealers, Inc. Relating to Fees for Nasdaq's Workstation 
II Service for Those Subscribers Who Are Not Members of the NASD

November 25, 1998.

I. Introduction

    On August 20, 1998, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly-owned subsidiary, The Nasdaq 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify the fees that the NASD 
charges non-NASD members receiving Nasdaq Workstation II (``NWII'') 
service. Nasdaq amended the filing on September 10, 1998.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Robert Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
September 10, 1998 (``Amendment No. 1'').
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    The Commission published notice of the proposed rule change, in the 
Federal Register on October 14, 1998.\4\ The Commission received no 
comments specifically directed toward this proposal.\5\ Nasdaq filed a 
second amendment on November 17, 1998.\6\ For the reasons discussed 
below, the

[[Page 66620]]

Commission is approving the proposed rule change as amended.
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    \4\ Securities Exchange Act Release No. 40521 (October 5, 1998), 
63 FR 55167 (October 14, 1998).
    \5\ As discussed below, the Commission received comments that 
were directed toward a parallel proposal, File No. SR-NASD-98-62, 
which proposed to modify the fees Nasdaq charges NASD members 
receiving NWII service.
    \6\ See Letter from Robert Aber, Nasdaq, to Richard Strasser, 
Division, Commission, dated November 17, 1998 (``Amendment No. 2''). 
Amendment No. 2 deleted language, appearing in the Federal Register 
notice, stating that if non-NASD member subscribers received EWN II 
technology prior to approval of this proposed rule change, then 
after approval Nasdaq would bill the non-member subscribers in an 
amount equal to the differential under the EWN I and the EWN II fee 
structures.
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II. Description of the Proposal

    The NASD filed this proposed rule change in conjunction with a 
parallel proposal to modify the fees charged NASD members, File No. SR-
NASD-98-62.\7\ The fee schedule set forth in that proposal became 
effective upon filing in accordance with Section 19(b)(3)(A)(ii) of the 
Act \8\ and Rule 19b-4.
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    \7\ Securities Exchange Act Release No. 40434 (September 11, 
1998), 63 FR 49937 (September 18, 1998).
    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    This proposed rule change would increase the monthly fees for NWII 
service as follows: the monthly Service Charge would increase from $100 
per ``server'' to $1500 per ``service delivery platform'' (``SDP''); 
the monthly Display Charge would increase from $500 to $525 per 
presentation device (``PD''); and the monthly ``Additional Circuit/SDP 
Charge'' (formerly the ``Additional Circuit Charge'') would increase 
from $1150 to $2700. This proposed rule change also clarifies that the 
fee schedule applies to subscribers who access NWII service through an 
application programming interface (``API''). Finally, the proposal 
eliminates the Digital Interface Service fee schedule because Nasdaq no 
longer provides that service.
    Nasdaq proposed this fee change in conjunction with the 
construction of EWN II, a new network for delivering NWII service. 
Nasdaq is in the process of converting existing subscribers to the EWN 
II network. During this process, some NWII subscribers will continue to 
utilize the existing EWN I network and pay the fees for that service, 
until they are upgraded to EWN II.
    To access NWII service, each subscriber location has at least one 
SDP, or server, that resides on the network and connects to Nasdaq by a 
dedicated circuit. Under the EWN II network, each dedicated circuit 
(``T1 circuit'') will be capable of supporting up to six SDPs. Each SDP 
can support up to eight PDs, or Nasdaq Workstation IIs, although a firm 
may elect to have fewer than eight PDs on a single SDP. A subscriber 
may also obtain NWII service through an API, which allows a firm to 
obtain NWII Service using the firm's own hardware (e.g., personal 
computer) and software systems.
    Under the new fee structure, a firm with one SDP ($1500) and eight 
PDs (8  x  $525 = $4200) would be charged a monthly fee of $5700 
(compared to $4100 under the existing schedule). A firm with one SDP 
($1500) and two PDs (2  x  $525 = $1050) would be charged a monthly fee 
of $2550 (compared to $1100 under the existing schedule). If a 
subscriber chooses to access NWII through an API, the subscriber would 
be assessed the service charge for each SDP, the display charge for 
each of the subscriber's linkages (e.g., NWII substitute, quote-update 
facility), as well as the additional circuit charge. The Additional 
Circuit/SDP charge will apply if a subscriber obtains additional SDPs 
and/or T1 circuits without first maximizing the capacity on its SDPs 
and T1 circuits.
    Nasdaq justifies the proposed fee structure on the grounds that it 
is derived from the fee structure in the contract that Nasdaq and MCI 
Communications Corporation (``MCI'') entered into in 1997, under which 
MCI would build and maintain the new network. Nasdaq represents that 
the proposed fee structure subsidizes its subscribers, in that the 
proposed Service Charge does not pass on all of the SDP/server costs 
that Nasdaq incurs under the contract. Nasdaq also represents that the 
proposed fee schedule's Display Charge in part helps the NASD recoup 
its subsidy of the SDP/server costs and other expenses associated with 
the development and the maintenance of NWII.
    Although the Commission received no comment letters specifically 
addressing this filing, Nasdaq's proposal to change the fee schedule 
applicable to NASD members generated three comment letters.\9\ The 
three letters criticized the proposed fee schedule applicable to NASD 
members on a number of issues, including: that it disproportionately 
affects smaller subscribers, that it is unfair to market makers, that 
it does not adequately place the EWN II network's costs upon the 
network's beneficiaries, and that Nasdaq has not adequately justified 
various components of the fee structure and related fees. One letter 
requested that the Commission review the bidding process and the costs 
associated with the contract for the new network, to determine a fair 
cost.\10\
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    \9\ See Letter from Douglas Ralston, President, Sherman Ralston, 
Inc., to Jonathan Katz, Secretary, Commission, dated October 8, 
1998; Letter from David Rich, Associate Compliance Director, 
Jefferies & Company, Inc., to Jonathan Katz, dated October 9, 1998; 
Letter from Marge Ferguson, President, Wall Street 
Telecommunications Association, to Jonathan Katz, dated November 4, 
1998 (not specifically identifying a file number, but focusing its 
comments on Nasdaq Level III service, which is available only to 
NASD members) (``WSTA letter'').
    \10\ See WSTA letter.
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III. Discussion

    The Commission finds that the proposed fee schedule for non-NASD 
members is consistent with the requirements of Section 15A(b)(5) of the 
Act.\11\ Section 15A(b)(5) specifies that the rules of a registered 
securities association shall provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that the NASD operates or 
controls.\12\
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    \11\ 15 U.S.C. 78o-3(b)(5).
    \12\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
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    This proposed rule change provides that NASD members and non-NASD 
members who subscribe to NWII service will pay the same rates, 
suggesting that the burden of the new fees was allocated fairly. 
Moreover, by basing the SDP rates on the costs that Nasdaq pays under 
the contract to implement the EWN II network, but reducing the impact 
on smaller users by not passing on all of the SDP costs that Nasdaq 
incurs, the Commission believes that Nasdaq has sought to minimize the 
adverse impact of those increased fees on non-NASD members, suggesting 
that the fees are reasonable under the circumstances.
    The Commission is not persuaded by the commenters' criticism (in 
the parallel rule filing regarding the fees Nasdaq charges NASD 
members) that the costs were not allocated fairly or that the costs are 
not justified. None of the commenters disputes the issue that Nasdaq's 
technical modernization efforts are intended to improve Nasdaq's 
capacity and to enhance services provided to NASD members and non-
members alike. Nor do the commenters dispute Nasdaq's contention that 
the increased Service Charge is intended to offset the costs associated 
with the technology modernization efforts. Finally, the commenters do 
not dispute Nasdaq's representation that Nasdaq has chosen not to pass 
on the entire cost of each SDP slot to members and non-members. 
Therefore, the Commission finds that the proposal is consistent with 
the Act.
    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. Amendment No. 2 merely clarifies that Nasdaq will 
not attempt to impose the monthly fee changes on non-NASD member 
subscribers who receive EWN II technology prior to this Order.

[[Page 66621]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether it is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 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 File No. SR-NASD-98-63 and should be 
submitted by ?????.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-98-63, including Amendment No. 2, 
is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ See 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32096 Filed 12-1-98; 8:45 am]
BILLING CODE 8010-01-M