[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Notices]
[Pages 5846-5848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2733]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40992; File No. SR-NASD-98-94]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Adjudication of Clearly Erroneous Transactions

January 28, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(`'Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 18, 1998, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly-owned regulatory subsidiary, NASD 
Regulation, Inc. (``NASD Regulation''), filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
by NASD Regulation. 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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Rule 11890 (``Rule'') to 
conform the time frame for requesting a clearly erroneous adjudication 
for pre-opening transactions to the 30-minute time frame that applies 
to trades that occur after 10:00 a.m. Below is the text of the proposed 
rule change. Proposed new language is in italics; proposed deletions 
are in brackets.

11890. Clearly Erroneous Transactions

    (a) No Change
    (b) Procedures for Reviewing Transactions
    (1) Any member or person associated with a member that seeks to 
have a transaction reviewed pursuant to paragraph (a) hereof, shall 
submit a written complaint, via facsimile or otherwise, to Nasdaq 
Market Operations in accordance with the following time parameters:
    (A) For transactions occurring at or after 9:30 a.m., Eastern Time, 
but prior to 10:00 a.m., Eastern Time, complaints must be submitted by 
10:30 a.m., Eastern Time; and
    (B) For transactions occurring [on] prior to 9:30 a.m., Eastern 
Time and those occurring at or after 10:00 a.m., Eastern Time, 
complaints must be submitted within thirty minutes.
 * * * * *

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

    In its filing with the Commission, NASD Regulation 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. NASD Regulation 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
    The Rule sets forth the process through which The Nasdaq Stock 
Market, Inc. (``Nasdaq'') may review certain transactions and declare 
them null and void or otherwise modify their terms. In early 1998, the 
Commission approved changes to the rule to make this process more 
efficient and fair (``Amendments'').\3\ Among other things, the rule 
was amended to shorten the

[[Page 5847]]

time period to submit erroneous transaction complaints--from any time 
during the trading day to within 30 minutes of the erroneous 
transaction. This was done to reduce the potential for firms to wait 
until the end of the day to decide whether an erroneous trade became 
unprofitable, and to ensure that firms give the counterparty adequate 
notice in close proximity to the time of execution.
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    \3\ Securities Exchange Act Release No. 39550 (January 14, 
1998), 63 FR 4333 (January 28, 1998) (approving SR-NASD-96-51).
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    Because of the high volume of trading commencing at the 9:30 a.m. 
opening, however, the NASD intended to provide additional time to 
submit adjudication requests for trades occurring between 9:30 a.m. and 
10:00 a.m. Specifically, the NASD intended that members have until 
10:30 a.m. to request an adjudication for trades occurring between the 
9:30 a.m. open and 10:00 a.m. The rule, however, currently only 
references trades that occur between 10:00 a.m., and is silent as to 
trades that occur before the 9:30 a.m. opening. Consequently, a literal 
reading of the Rule accords additional time to pre-9:30 a.m. 
transactions as well as those that occur between 9:30 and 10:00.
    The NASD staff identified this issue at the time the Commission 
approved the Amendments, but agreed, in consultation with Commission 
staff, to wait and observe the operation of the amended Rule. After 
administering the Rule for eight months under the new time parameters, 
the NASD has confirmed its original belief that this additional time is 
not necessary with respect to pre-opening transactions, and reiterates 
its view that it is in fact inconsistent with the original intent of 
the Amendments.
    In particular, the NASD notes that of 27 requests for adjudication 
pre-opening trades received to date since the Amendments, more than 
half were submitted by members within 30 minutes (in several instances 
within ten minutes) even though they had as long as 90 minutes to do so 
in some cases. More importantly, virtually all of these requests (23 of 
27) were made after the market opened and thus after the requesting 
party had an opportunity to observe the direction of the market. While 
the NASD still believes that it is appropriate to provide additional 
time to request an adjudication for erroneous trades that occur 
following the opening, the NASD does not believe members should be 
provided with this additional time for pre-opening transactions. Such 
additional time is inconsistent with the intent of the Amendment, and 
leaves the potential for the same abuses and risks that the Amendments 
sought to address.
    Accordingly, this proposed rule change merely conforms the pre-
opening time frame to the same 30-minute standard that applies to 
trades occurring on or after 10:00 a.m.
2. Statutory Basis
    NASD Regulation believes the proposed rule change, by helping to 
ensure that clearly erroneous transactions are quickly corrected or 
nullified and properly reported to the public, is consistent with the 
Act and in particular with Sections 15A(b)(6) \4\ and 11A(a)(1)(C) \5\ 
of the Act. Among other things, Section 15A(b)(6) requires that the 
rules of a national securities association be designed to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and in general to protect investors and the 
public interest. Section 15A(b)(6) also provides that the rules of the 
association not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Section 11A(a)(1)(C) provides 
that, among other things, it is in the public interest to assure the 
availability of information with respect to quotations for and 
transactions in securities to brokers, dealers, and investors.
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    \4\ 15 U.S.C. 78o-3(b)(6).
    \5\ 15 U.S.C. 78k-1(a)(1)(C).
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    In the proposed rule change, NASD Regulation provides greater 
specificity in the procedures for resolving pre-opening clearly 
erroneous transactions. NASD Regulation believes that the proposed 
amendments to the NASD's procedures to review these transactions should 
benefit market participants by promoting fair and efficient resolution 
of disputes involving clearly erroneous transactions. In addition, the 
proposed rule change addresses concerns raised by the Commission in its 
August 8, 1996, Report Pursuant to Section 21(a) of the Securities 
Exchange Act of 1934 Regarding the NASD and The Nasdaq Stock Market 
regarding the fairness of the clearly erroneous review process. NASD 
Regulation believes that the proposed rule change will make the process 
for resolving clearly erroneous transaction complaints more fair and 
more efficient. In this regard, the proposal is consistent with Section 
15A(b)(6) of the Act because it helps to ensure that the Rule does not 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
    Further, it is important for the proper functioning of the 
securities markets that investors be able to rely on reported 
transactions as accurately reflecting the current state of the market 
and actual executions. When clearly erroneous transactions are publicly 
reported, it is important that, whenever possible, Nasdaq correct these 
errors and the inaccurate information that was disseminated in the 
market about these transactions as quickly as possible.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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.

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

    NASD Regulation did not solicit or receive written comments on the 
proposal.

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, the Commission will:
    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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Secretaries 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 in Washington, DC. Copies of such 
filing will also be available for

[[Page 5848]]

inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-98-94 and should be 
submitted by February 26, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2733 Filed 2-4-99; 8:45 am]
BILLING CODE 8010-01-M