[Federal Register Volume 66, Number 112 (Monday, June 11, 2001)]
[Notices]
[Pages 31262-31264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44390; File No. SR-NASD-00-33]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
NASD Rule 3340 To Prohibit Publication of Quotations or Indications of 
Interest in a Security During a Trading Halt

June 5, 2001.

I. Introduction

    On June 7, 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'' or ``SEC'') a 
proposed rule change pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ On 
August 2, 2000, NASD Regulation amended the proposal.\3\ Notice of the 
proposed rule change, as amended, was published for comment in the 
Federal Register on October 3, 2000.\4\ The Commission received one 
comment letter regarding the proposal.\5\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See August 2, 2000 letter from Kathleen A. O'Mara, Assistant 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), SEC 
(``Amendment No. 1''). In Amendment No. 1, NASD Regulation broadened 
the scope of the proposed rule change.
    \4\ See Securities Exchange Act Release No. 43346 (September 26, 
2000), 65 FR 59036.
    \5\ See October 30, 2000 letter from Cameron Smith, General 
Counsel, Island ECN, Inc. to Jonathan Katz, Secretary, SEC (``Island 
Letter'').
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II. Description of the Proposal

    NASD Regulation proposes to amend NASD Rule 3340 to expressly 
prohibit members from publishing quotations in a security during a 
trading halt.
    According to NASD Regulation, the purpose of the rule change is to 
expressly prohibit members from publishing quotations or indications of 
interest in a security during a trading halt. Currently, NASD Rule 3340 
prohibits members from effecting a transaction in a security during a 
trading halt, but does not expressly state that members are prohibited 
from publishing quotations or indications of interest.\6\ However, NASD 
Rules 3310 \7\

[[Page 31263]]

and 3320,\8\ respectively, state that members are required to enter 
only bona fide quotations and honor such quotations if presented with 
an order. Thus, if during a trading halt, a member that is publishing a 
quotation for a security is presented with a liability order for such 
security, the member would be faced with the choice of either honoring 
its quote and violating the rule prohibiting transactions in a security 
during a trading halt, or complying with the trading halt rule but 
violating the Firm Quote Rule.
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    \6\ The Commission may impose trading suspensions in the United 
States securities markets under Section 12(k) of the Act. See 15 
U.S.C. 781(k).
    NASD Rule 4120 provides that Nasdaq may halt trading: (1) In the 
over-the-counter market of a security listed on Nasdaq to permit the 
dissemination of material news; or (2) in the over-the-counter 
market of a security listed on a national securities exchange during 
a trading halt imposed by such exchange to permit the dissemination 
of material news; or (3) by (i) Consolidated Quotation System 
(``CQS'') market makers in a CQS security because of an order 
imbalance or influx (``operational trade halt''); or (ii) Nasdaq 
market makers in a security listed on Nasdaq, when the security is a 
derivative or component of a CQS security and a national securities 
exchange imposes an operational trading halt in that CQS security; 
or (4) in an American Depositary Receipt (``ADR'') or other security 
listed on Nasdaq, when the Nasdaq-listed security or the security 
underlying the ADR is listed on or registered with a national or 
foreign securities exchange or market, and the national or foreign 
securities exchange or market, or regulatory authority overseeing 
such exchange or market, halts trading in such security for 
regulatory reasons; or (5) in a security listed on Nasdaq when 
Nasdaq requests from the issuer information relating to: (i) 
Material news; (ii) the issuer's ability to meet Nasdaq listing 
qualification requirements, as set forth in NASD Rule 4300 and 4400 
Series; or (iii) any other information which is necessary to protect 
investors and the public interest. See also Securities Exchange Act 
Release No. 42806 (May 22, 2000), 65 FR 34518 (May 30, 2000) (SR-
NASD-99-33), which establishes Nasdaq's trade and quote halt 
authority in certain specific circumstances in securities included 
in the OTC Bulletin Board Service (``OTCBB''), and Notice to Members 
99-69 soliciting comments on whether NASD Regulation should have 
authority to halt trading in non-Nasdaq, non-OTCBB, over-the-counter 
securities under certain circumstances.
    \7\ NASD Rule 3310 states that: [n]o member shall publish or 
circulate, or cause to be published or circulated, any notice, 
circular, advertisement, newspaper article, investment service, or 
communication of any kind which purports * * * to quote the bid 
price or asked price for any security, unless such member believes 
that such quotation represents a bona fide bid for, or offer of, 
such security * * *.
    NASD Rule IM-3310 states, among other things, that: [i]t would 
be inconsistent with the above provisions for a member, for itself 
or for any other person, to publish or circulate or to cause to be 
published or circulated, by any means whatsoever, any quotation for 
any security without having reasonable cause to believe that such 
quotation is a bona fide quotation, is not fictitious and is not 
published or circulated or caused to be published or circulated for 
any fraudulent, deceptive or manipulative purpose. IM-3310 also 
provides: [f]or the purposes of this interpretation, the term 
``quotation'' shall include any bid or offer or any formula, such as 
``bid wanted'' or ``offer wanted,'' designed to induce any person to 
make or submit any bid or offer.
    \8\ NASD Rule 3320 (``Firm Quote Rule'') states that: [n]o 
member shall make an offer to buy from or sell to any person any 
security at a stated price unless such member is prepared to 
purchase or sell, as the case may be, at such price and under such 
conditions as are stated at the time of such offer to buy or sell.
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    In addition, the entry of quotations or indications of interest 
while there is a trading halt in a security could be potentially 
misleading. To prevent this from happening, NASD Regulation is 
proposing that NASD Rule 3340 be amended to expressly state that 
members are prohibited from publishing quotations or indications of 
interest during a trading halt.

III. Summary of Comments

    The Commission received one comment letter regarding the 
proposal.\9\ The commenter expressed concern that the proposal would 
cause the market to abruptly open once a trading halt is lifted without 
allowing a time period for market participants to enter new quotes.\10\ 
The commenter also stated that the proposal did not provide instruction 
on what would happen to quotes that were in the system before a trading 
halt was imposed, and whether market participants would have a chance 
to refresh their quotes when a trading halt is lifted.\11\
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    \9\ See footnote 5, supra.
    \10\ Island Letter, page 2.
    \11\ Id.
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    The commenter suggested an alternative method of resuming trading 
after a trading halt, whereby participants would be allowed a five-
minute period to open their quotes. If a quote were refreshed during 
that period, the quote would then be considered open, and subject to 
the Firm Quote Rule. Any remaining quotes would remain closed. If, 
after the five-minute period, any market participants failed to update 
their quotes, the quotes would be refreshed at the price established 
before the trading halt was imposed. If the pre-halt price would lock 
or cross the market, the quote would be subject to an excused 
withdrawal.\12\
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    \12\ Id.
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    The commenter also suggested that Nasdaq should be required to make 
system changes to prevent the entry of orders in SelectNet during a 
trading halt, rather than requiring each of the Nasdaq market 
participants to make the changes in their own systems.\13\
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    \13\ Id.
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    Finally, the commenter suggested that Nasdaq develop official and 
automated methodology to alert members about the imposition of trading 
halts, citing examples of two occasions where incorrect or delayed 
messages regarding the status of trading halts were posted on the 
Nasdaq News Frame.\14\
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    \14\ Id.
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    In response to the comment letter,\15\ NASD Regulation stated that 
the proposed rule change would not alter the method by which trading is 
resumed when a trading halt is lifted.\16\ NASD Regulation stated that 
Nasdaq MarketWatch provides notice of trading halts to members through 
the Nasdaq workstation. Simultaneously, all quotes for the security at 
issue are eliminated from the Nasdaq workstation interactive area. 
Nasdaq MarketWatch updates the status of a trading halt, and notifies 
members of the exact time the trading halt will be lifted. MarketWatch 
also notifies members that they may begin entering quotations in 
anticipation of the end of a trading halt (the ``grace period''). 
Quotations during the grace period are designated as closed by 
displaying a ``g'' symbol next to each quotation. The quotations remain 
closed until the trading halt is lifted, at which time the ``g'' symbol 
is removed, and quotations become firm.\17\
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    \15\ See May 10, 2001 letter from Jeffrey S. Holik, Vice 
President and Acting General Counsel, NASD Regulation, to Katherine 
A. England, Assistant Director, Division, SEC (``NASD Regulation 
Letter'').
    \16\ Id. at page 2.
    \17\ Id.
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    Regarding the commenter's suggestion that Nasdaq modify SelectNet 
to prevent the entry of orders in SelectNet during a trading halt, NASD 
Regulation stated it is a member's responsibility to ensure compliance 
with NASD rules.\18\ While modifying SelectNet may be appropriate as a 
supplemental measure, NASD Regulation believes there must be 
fundamental prohibition of the conduct addressed by the proposed rule 
change.\19\ NASD Regulation indicated it has forwarded the commenter's 
suggestion to Nasdaq, along with the commenter's request that Nasdaq 
develop official and automated methodology to alert members to the 
imposition of a trading halt.\20\
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    \18\ Id.
    \19\ Id.
    \20\ Id.
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IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, the 
comment letter, NASD Regulation's response to the comment letter, and 
the entire record herein, and finds that the proposed rule change, as 
amended, is consistent with the Act and the rules and regulations 
applicable to the Association. In particular, the Commission finds that 
the proposal is consistent with the requirements of Sections 
15A(b)(6),\21\ 15A(b)(11),\22\ and 11A(a)(1)(C) \23\ of the Act.
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    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ 15 U.S.C. 78o-3(b)(11).
    \23\ 15 U.S.C. 78k-1(a)(1)(C).
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    Section 15A(b)(6) \24\ requires that the rules of a registered 
national securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Commission finds the 
proposal is consistent with these requirements.
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    \24\ 15 U.S.C. 78o-3(b)(6).
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    The Commission further finds the proposed rule is consistent with 
Section 15A(b)(11),\25\ which requires that the rules of a registered 
national securities association be designed to produce fair and 
informative quotations, prevent fictitious or misleading quotations, 
and to promote orderly procedures for collecting, distributing, and 
publishing quotations.
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    \25\ 15 U.S.C. 78o-3(b)(11).
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    The Commission also finds the proposed rule is consistent with the 
goals expressed in Section

[[Page 31264]]

11A(a)(1)(C),\26\ which grants the Commission the authority to require 
rules designed to ensure appropriate protection of investors and the 
maintenance of fair and orderly markets to assure: (1) Economically 
efficient execution of securities transactions; (2) fair competition 
among brokers and dealers; (3) the availability to brokers, dealers and 
investors of information with respect to quotations and transactions in 
securities; (4) the practicability of brokers executing investors' 
orders in the best market; and (5) an opportunity for investors' orders 
to be executed without the participation of a dealer.
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    \26\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission has reviewed carefully the commenter's letter, and 
is not persuaded by the commenter's assertions. NASD Regulation has 
stated that the proposed rule change will not affect the process by 
which trading resumes after a trading halt is lifted for Nasdaq 
National Market Securities and Nasdaq SmallCap securities, and has 
explained in detail those procedures.\27\ Additionally, NASD Regulation 
has stated it would not consider the entry of closed quotations into 
Nasdaq for these types of securities a violation of NASD Rule 3340, 
provided the quotations were entered in conformity with Nasdaq's 
resumption process.\28\ The Commission also agrees that the 
responsibility to ensure compliance with NASD rules rests with the 
NASD's members, and that the proposal is important because it 
delineates the prohibition of specific conduct during trading 
halts.\29\
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    \27\ See NASD Regulation Letter, page 2.
    \28\ Id.
    \29\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiently, competition and capital 
formation. 15 U.S.C. 78c(f). Additionally, the Commission notes that 
the Association's definition of ``quotation'' under the proposal 
differs from the definition of ``quotation'' under Exchange Act Rule 
15c2-11. 17 CFR 240.15c2-11. The Association's definition of 
``quotation'' will have no impact whatsoever on the definition of 
``quotation'' under Exchange Act Rule 15c2-11.
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V. Conclusion

    For the reasons stated above, the Commission finds that the 
proposed rule change, as amended, is consistent with the Act, in 
general, and in particular with Sections 15A(b)(6),\30\ 15A(b)(11),\31\ 
and 11A(a)(1)(c)\32\ of the Act.
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    \30\ 15 U.S.C. 78o-3(b)(6).
    \31\ 15 U.S.C. 78o-3(b)(11).
    \32\ 15 U.S.C. 78k-1(a)(1)(C).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-NASD-00-33), as amended, be 
and hereby is approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14587 Filed 6-8-01; 8:45 am]
BILLING CODE 8010-01-M