[Federal Register Volume 65, Number 134 (Wednesday, July 12, 2000)]
[Notices]
[Pages 43067-43069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43003; File No. SR-NASD-00-40]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Mandatory Decimal Pricing Testing

June 30, 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 June 27, 2000, the National Association of Securities Dealers, Inc. 
(``NASDA'' or ``Association''), through its wholly owned subsidiary, 
NASD Regulation, Inc. (``NASD Regulation''), filed a proposed rule 
change with the Securities and Exchange Commission (``SEC'' or 
``Commission''). The proposed rule change is described in Items I, II, 
and III below, which Items have been prepared by NASD Regulation. NASD 
Regulation has designated the proposed rule change as one concerned 
solely with the administration of the self-regulatory organization 
under Section 19(b)(3)(A)(iii) of the Act,\3\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
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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 add a new rule, Rule 3420, to the 
Conduct Rules of the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), to require clearing firms and market 
makers that are members to conduct or participate in the testing of 
their computer systems to ascertain decimal pricing conversion 
compatibility of those systems. The text of the proposed rule change is 
available at the NASD and at the Commission.

[[Page 43068]]

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 purpose of the proposed rule change is to require clearing 
firms and market makers that are members of the NASD to conduct or 
participate in the securities industry's decimalization pricing tests 
to ensure that conversion to decimal pricing occurs successfully and 
with minimal disruption of the markets.\4\ The proposed rule change 
will assist the Association in implementing the SEC's recent Order 
Directing the Exchanges and NASD to Submit a Decimalization 
Implementation Plan \5\ (``SEC Order''), which directs certain 
securities industry participants to develop a plan for conversion to 
decimal pricing. The NASD believes that the proposed rule change, which 
mandates testing by and among securities industry participants, will 
play a critical role in ensuring a successful conversion to decimal 
pricing.
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    \4\ The current practice in the U.S. equities markets is to 
quote security prices in fractions. Decimalization is the conversion 
of securities industry systems from fractional to decimal pricing. 
The U.S. securities markets are the only major markets that do not 
price securities in decimals.
    \5\ Securities Exchange Act Release No. 42914, (June 8, 2000), 
65 FR 38010 (June 19, 2000).
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    To ensure that its members successfully transition to 
decimalization, the NASD has been working to prepare the industry for 
conversion to decimal pricing by requiring testing by and among 
industry participants.
    In particular, the testing by and among industry participants 
mandated by the proposed rule change will be critical to: (1) Ensuring 
compliance with the SEC Order; (2) successfully converting the U.S. 
market to decimal pricing; (3) minimizing any disruption to the markets 
as a result of such conversion; and (4) reducing the impact of 
conversion on investors.
    The proposed rule change provides authority to the NASD to require 
participation in organized, industry-sponsored tests, and to require 
``point-to-point'' testing between member firms and the NASD and other 
industry systems. The decimalization testing is expected to be 
implemented in stages.
    Member testing will focus on those firms that the NASD believes 
could cause the most disruption to the securities markets if their 
computer system were not able to accommodate decimal pricing--
specifically clearing firms and market making firms. The NASD proposes 
to require market makers and clearing firms to conduct or participate 
in testing of their computer systems to ascertain the decimal pricing 
conversion compatibility of such systems.
    In connection with the proposed rule change, the NASD intends to 
issue Notices to Members specifying members' reporting and testing 
obligations sufficiently in advance of specific testing events to 
provide members with adequate time to comply. While it is expected that 
each Notice to Members will be issued with sufficient time for members 
to comply with a particular testing requirement, nothing in this rule 
relieves member firms of their ongoing obligation to take all necessary 
steps so that they may function properly upon industry conversion to 
decimal pricing.
    In addition, the proposed rule change requires firms to provide the 
NASD with any reports concerning the results of industry tests. Members 
also would be responsible for maintaining adequate documentation of any 
tests performed and would be required to make such documentation 
available for examination by NASD staff.
    To assist with reporting test results to the NASD, the staff will 
design a standardized format for firms to use. Individual member firm 
testing result reports will not be publicly available, but will be 
provided to the Securities and Exchange Commission upon request. NASD 
staff will collect, review and analyze these reports and compile 
periodic consolidated reports that will be made available to the 
Securities and Exchange Commission and to others generally to evaluate 
the progress of the testing effort and the readiness of certain NASD 
members. In addition, the NASD believes that the individual reports 
from members will enable the NASD to identify those members that have 
not adequately prepared for decimal pricing conversion so that 
appropriate action can be taken to address these members' deficiencies. 
Any member that is subject to testing and fails to participate in the 
tests or fails to file any required reports or surveys will be subject 
to disciplinary action.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that the Association's rules must 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 that 
the proposed rule is necessary to protect investors and the public 
interest. The proposed rule change, which requires certain members to 
conduct or participate in decimal pricing testing, and to file reports 
about the tests, will enable the NASD and the SEC to evaluate the 
readiness of the securities industry for decimal pricing. The scope of 
firms subject to the rule is limited to those firms that perform 
critical functions in the markets and if they were unable to perform 
these functions upon industry conversion to decimal pricing, could 
cause disruptions in the markets and, consequently, harm investors.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change has become effective immediately under 
Section 19(b)(3)(A)(iii) of the Act \6\ and subparagraph (f)(3) \7\ of 
Rule 19b-4 thereunder,\8\ in that it is concerned solely with the 
administration of the self-regulatory organization. At any time

[[Page 43069]]

within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \7\ Inititally, the proposed rule change was filed under 
subparagraph (f)(1) of Rule 19b-4. This error was corrected by 
letter dated June 29, 2000. See letter from Alden S. Adkins, Senior 
Vice President and General Counsel, NASD Regulation, to Katherine 
England, Assistant Director, SEC.
    \8\ 17 CFR 240.19b-4(f)(5).
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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, 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 at the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-00-40 and should 
be submitted by August 2, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-17547 Filed 7-11-00; 8:45 am]
BILLING CODE 8010-01-M