[Federal Register Volume 65, Number 123 (Monday, June 26, 2000)]
[Notices]
[Pages 39457-39459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16063]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42958; File No. SR-NASD-00-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to Rule 2320(g) and Rule 3110(b)

June 20, 2000.
    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 April 13, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned 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 Rules 2320(g) and 
3110(b): (1) To require that members executing a customer order in a 
non-Nasdaq security contact and obtain quotations from three dealers 
(or all dealers if three or less) to determine the best inter-dealer 
market for security, unless two or more priced quotations are displayed 
in an inter-dealer quotation system that permits quotation updates on a 
real-time basis (such as the OTC Bulletin Board (``OTCBB'') or the 
electronic pink sheets); (2) to require that members that display 
priced quotations for the same non-Nasdaq security in two or more 
quotation mediums that permit quotation updates on a real-time basis 
display the same priced quotations for the security in each quotation 
medium; (3) to eliminate the requirement that a member indicate on the 
order ticket for each transaction in a non-Nasdaq security the name of 
each broker-dealer contacted and the quotations received, if two or 
more priced quotations are displayed and NASD Regulation has access, on 
a historical basis, to the quotation data; and (4) to define the terms 
inter-dealer quotation system and quotation medium for the purposes of 
the proposed rule change.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.

2320. Best Execution and Interpositioning

    (a) through (f) No Change.
    (g)(1) Unless two or more priced quotations for a non-Nasdaq 
security (as defined in the Rule 6700 Series) are displayed in an 
inter-dealer quotation system that permits quotation updates on a real-
time basis, [I]in any transaction for or with a customer pertaining to 
the execution of an order in a non-Nasdaq security [(as defined in the 
Rule 6700 Series)], a member or person associated with a member, shall 
contact and obtain quotations from three dealers (or all dealers if 
three or less) to determine the best inter-dealer market for the 
subject security.
    (2) Members that display priced quotations on a real-time basis for 
a non-Nasdaq security in two or more quotation mediums that permit 
quotation updates on a real-time basis must display the same priced 
quotations for the security in each medium.
    (3) For purposes of this paragraph, the term ``inter-dealer 
quotation system'' means any system of general circulation to brokers 
or dealers that regularly disseminates quotations of identified brokers 
or dealers.
    (4) For purposes of this paragraph, the term ``quotation medium'' 
means any inter-dealer quotation system or any publication or 
electronic communications network or other device that is used by 
brokers or dealers to make known to others their interest in 
transactions in any security, including offers to buy or sell at a 
stated price or otherwise, or invitations of offers to buy or sell.
    (5) Pursuant to the Rule 9600 Series, the staff, for good cause 
shown, after taking into consideration all relevant factors, may exempt 
any transaction or classes of transactions, either unconditionally or 
on specified terms, from any or all of the provisions of this paragraph 
if it determines that such exemption is consistent with the purpose of 
this Rule, the protection of investors, and the public interest.
* * * * *

3110. Books and Records

    (a) No Change
    (b)(1) No Change
    (b)(2) A person associated with a member shall indicate on the 
memorandum for each transaction in a non-Nasdaq security, as that term 
is defined in the Rule 6700 Series, the name of each dealer contacted 
and the quotations received to determine the best inter-dealer market; 
however, the requirements of this subparagraph shall not apply if two 
or more priced quotations for the security are displayed in an inter-
dealer quotation system, as defined in Rule 2320(g), that permits 
quotation updates on a real-time basis for which NASD Regulation has 
access to historical quotation information.
* * * * *

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 purposes 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.

[[Page 39458]]

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

1. Purpose
    Rule 2320(g) (``Three Quote Rule'' was originally adopted on May 2, 
1988 \3\ as an amendment to the NASD's best execution interpretation. 
Specifically, the Three Quote Rule requires members that execute 
transactions in non-Nasdaq securities on behalf of customers to contact 
a minimum of three dealers (or all dealers if three or fewer) and 
obtain quotations in determining the best inter-dealer market.\4\ The 
intent of the Three Quote Rule is to create a standard to help ensure 
that members fulfill their best execution responsibilities to customers 
in non-Nasdaq securities, particularly in transactions involving 
relatively illiquid securities with non-transparent prices. The Three 
Quote Rule is a minimum standard, and compliance with the rule, in and 
of itself, does not mean a member has met its best execution 
obligations. Best execution requires each member to use reasonable 
diligence to ascertain the best inter-dealer market for a security, and 
to buy or sell in that market so that the resultant price to the 
customer is as favorable as possible under prevailing market 
conditions. \5\
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    \3\ See Exchange Act Release No. 25637 (May 2, 1988), 53 FR 
16488 (May 9, 1988).
    \4\ Currently, if three firm quotations are displayed, a broker-
dealer is not required to call the three market makers to verify the 
firm quotations that are displayed on the screen. A broker-dealer 
need note on the order ticket only the identity of the broker-
dealers and the firm quotations displayed.
    \5\ See NASD Rule 2320(a).
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    Since the adoption of the Three Quote Rule, the market for non-
Nasdaq securities has changed dramatically. For example, from 1996 to 
1999, the OTCBB experienced growth of 72 percent in market maker 
positions, 421 percent in average daily share volume, and 65 percent in 
average daily dollar volume.
    Given the rapid growth in the market for non-Nasdaq securities, 
NASD Regulation believes that the current Three Quote Rule often 
hinders, rather than furthers, investor protection by causing 
significant delays in obtaining executions of customer orders. The 
costs associated with delayed executions resulting from compliance with 
the Three Quote Rule are not outweighed by the benefits of obtaining 
three telephone quotes. Indeed, NASD Regulation believes that the 
informational value of three telephone quotes is significantly less 
than the informational value of two transparent, firm quotes in terms 
of obtaining best execution for customers.
    Therefore, NASD Regulation is proposing that Rule 2320(g) be 
amended to require members to obtain quotations from three dealers (or 
all dealers if three or less) only when there are fewer than two priced 
quotations displayed in an inter-dealer quotation system that permits 
quotation updates on a real-time basis (such as the OTCBB or the 
electronic pink sheets). The proposed rule change defines the term 
inter-dealer quotation system as any system of general circulation to 
brokers or dealers that regularly disseminates quotations of identified 
brokers or dealers.
    NASD Regulation believes the proposed rule change would enhance 
investor protection by reducing execution delays, while improving the 
quality of information relied upon by firms in seeking to obtain best 
execution. As with the current rule, the proposed rule change would not 
limit or change a member's general best execution obligations.
    The proposed rule change also would require members that display 
priced quotations for the same security in two or more quotation 
mediums that permit quotation updates on a real-time basis to display 
the same priced quotations in each system. The proposed rule change 
defines the term quotation medium as any inter-dealer quotation system 
or any publication or electronic communications network or other device 
that is used by brokers or dealers to make known to others their 
interest in transactions in any security, including offers to buy or 
sell at a stated price or otherwise, or invitations of offers to buy or 
sell.
    NASD Regulation believes that members' displaying different priced 
quotations in different quotation mediums for the same security can be 
confusing and misleading to other market participants and, more 
importantly, to public investors. Moreover, requiring that members 
display consistent priced quotations in multiple quotation mediums 
would enhance the ability of other market participants to ascertain the 
best inter-dealer market for a security.
    In addition, Rule 3110(b)(2) currently requires that members 
indicate on the order ticket for each transaction in a non-Nasdaq 
security the name of each dealer contacted and the quotations received 
to determine the best inter-dealer market. Under the proposed rule 
change, members would not be required to note such information on the 
order ticket if two or more priced quotations are displayed and NASD 
Regulations has access to the quotation data. As a result, the proposed 
rule change would alleviate certain recordkeeping burdens for members 
where NASD Regulation can validate and confirm compliance with 
applicable requirements directly through its internal historical data. 
Currently, NASD Regulation has such data with respect to the OTCBB 
securities, although it does not have access to historical quotation 
data for the electronic pink sheets.\6\
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    \6\ NASD Regulation currently is soliciting comment on a rule 
proposal that would require members to record and report their 
quotation data in the electronic pink sheets or similar quotation 
systems to NASD Regulations. See NASD Notice to Members 00-17 (Mar. 
2000).
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act \7\ 
which requires, among other things, that the Association's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The NASD believes that the 
proposed rule change would reduce the time and effort necessary in 
contacting three market makers when there are at least two priced 
quotations displayed, while potentially enabling members to provide 
customers better executions in non-Nasdaq securities than is provided 
under existing requirements.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change 
would 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

    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 NASD 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.

[[Page 39459]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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 20549-0609. 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 No. SR-NASD-00-20 and should be 
submitted by July 17, 2000.

    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. 00-16063 Filed 6-23-00; 8:45 am]
BILLING CODE 8010-01-M