[Federal Register Volume 66, Number 161 (Monday, August 20, 2001)]
[Notices]
[Pages 43598-43600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20856]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44694; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments and Order Approving 
Request to Extend Temporary Effectiveness of Reporting Plan for Nasdaq/
National Market Securities Traded on an Exchange on an Unlisted or 
Listed Basis, Submitted by the National Association of Securities 
Dealers, Inc., the Pacific Exchange, Inc., and the Boston, Chicago, 
Philadelphia, and Cincinnati Stock Exchanges

August 14, 2001.

I. Introduction

    On August 14, 2001, the Cincinnati Stock Exchange, Inc. (``CSE'') 
on behalf of itself and the National Association of Securities Dealers, 
Inc. (``NASD''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Stock Exchange, Inc. (``CHX''), Pacific Exchange, Inc. (``PCX''), and 
the Philadelphia Stock Exchange, Inc. (``Phlx'') (hereinafter referred 
to as the ``Participants'') \1\ submitted to the Securities and 
Exchange Commission (``Commission'' or ``SEC'') a proposal to extend 
the

[[Page 43599]]

operation of the Plan \2\ for Nasdaq/National Market (``Nasdaq/NM'') 
securities traded on an exchange on an unlisted or listed basis.\3\ The 
August 2001 Extension Request would extend the effectiveness of the 
Plan through September 19, 2001 and also would extend certain exemptive 
relief as described below. The August 2001 Extension Request does not 
seek permanent approval of the Plan because the Participants currently 
are negotiating certain amendments to the Plan for which they will seek 
approval in the future.\4\
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    \1\ The CSE was elected as chair of the Operating Committee for 
the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Exchange-Listed Nasdaq/National Market 
System Securities and for Nasdaq/National Market System Securities 
Traded on Exchanges on an Unlisted Trading Privileges Basis 
(``Plan'') by the Participants.
    \2\ See letter from Jeffrey T. Brown, Vice President Regulation 
and General Counsel, CSE, to Jonathan G. Katz, Secretary, 
Commission, dated August 9, 2001 (``August 2001 Extension 
Request''). The signatories to the Plan are the Participants for 
purposes of this release; however, the BSE joined the plan as a 
``limited participant'' and reports quotation information and 
transaction reports only in Nasdaq/National Market securities listed 
on the BSE. Originally, the American Stock Exchange Inc. (``Amex``) 
was a Participant but withdrew its participation from the Plan in 
August 1994.
    \3\ Section 12 of the Securities Exchange Act of 1934 (``Act'') 
generally requires an exchange to trade only those securities that 
the exchange lists, except that Section 12(f) of the Act permits 
unlisted trading privileges (``UTP'') under certain circumstances. 
For example, Section 12(f) of the Act, among other things, permits 
exchanges to trade certain securities that are traded over-the-
counter (``OTC/UTP''), but only pursuant to a Commission order or 
rule. The present order fulfills this Section 12(f) requirement. For 
a more complete discussion of the Section 12(f) requirement, see 
November 1995 Extension Order, infra note 7.
    \4\ In accordance with the Commission's statements in its order 
approving the establishment of the Nasdaq Order Display Facility and 
Order Collector Facility (``SuperMontage''), the Participants 
represent that they are revising the Plan. See Securities Exchange 
Act Release No. 43863 (January 19, 2001) 66 FR 8020 (January 26, 
2001). The Participants submitted the 12th amendment to the Plan 
(``Interim Plan'') on August 3, 2001.
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II. Background

    The Plan governs the collection, consolidation, and dissemination 
of quotation and transaction information for Nasdaq/NM securities 
listed on an exchange or traded on an exchange pursuant to a grant of 
UTP.\5\ The Commission originally approved the Plan on a pilot basis on 
June 26, 1990.\6\ The parties did not begin trading until July 12, 
1993, accordingly, the pilot period commenced on July 12, 1993. The 
Plan has since been in operation on an extended pilot basis.\7\
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    \5\ See Section 12(f)(2) of the Act, 15 U.S.C. 78l(f)(2).
    \6\ See Securities Exchange Act Release No. 28146, 55 FR 27917 
(July 6, 1990) (``1990 Plan Approval Order'').
    \7\ See Securities Exchange Act Release Nos. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); 35221 (January 11, 1195), 60 FR 
3886 (January 19, 1995); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995); 36226 (September 13, 1995), 60 FR 49029 
(September 21, 1995); 36368 (October 13, 1995), 60 FR 54091 (October 
19, 1995); 36481 (November 13, 1995), 60 FR 58119 (November 24, 
1995) (``November 1995 Extension Order''); 36589 (December 13, 
1995), 60 FR 65696 (December 20, 1995); 36650 (December 28, 1995), 
61 FR 358 (January 4, 1996); 36934 (March 6, 1996), 61 FR 10408 
(March 13, 1996); 36985 (March 18, 1996), 61 FR 12122 (March 25, 
1996); 37689 (September 16, 1996), 61 FR 50058 (September 24, 1996); 
37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); 38457 (March 
31, 1997), 62 FR 16880 (April 8, 1997); 38794 (June 30, 1997) 62 FR 
36586 (July 8, 1997); 39505 (December 31, 1997) 63 FR 1515 (January 
9, 1998); 40151 (July 1, 1998) 63 FR 36979 (July 8, 1998; 40896 
(December 31, 1998), 64 FR 1834 (January 12, 1999); 41392 (May 12, 
1999), 64 FR 27839 (May 21, 1999) (``May 1999 Approval Order''); 
42268 (December 23, 1999), 65 FR 1202 (January 6, 2000); 43005 (June 
30, 2000), 65 FR 42411 (July 10, 2000); 44099 (March 23, 2001), 66 
FR 17457 (March 30, 2001); and 44348 (May 24, 2001), 66 FR 29610 
(May 31, 2001); 44552 (July 13, 2001), 66 FR 37712 (July 19, 2001).
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III. Description of the Plan

    The Plan provides for the collection from Plan Participants, and 
the consolidation and dissemination to vendors, subscribers and others, 
of quotation and transaction information in ``eligible securities.'' 
\8\ The Plan contains various provisions concerning its operation, 
including: Implementation of the Plan; Manner of Collecting, 
Processing, Sequencing, Making Available, and Disseminating Last Sale 
Information; Reporting Requirements (including hours of operation); 
Standards and Methods of Ensuring Promptness, Accuracy and Completeness 
of Transaction Reports; Terms and Conditions of Access; Description of 
Operation of Facility Contemplated by the Plan; Method and Frequency of 
Processor Evaluation; Written Understandings of Agreements Relating to 
Interpretation of, or Participation in, the Plan; Calculation of the 
Best Bid and Offer (``BBO''); Dispute Resolution; and Method of 
Determination and Imposition, and Amount of Fees and Charges.\9\
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    \8\ The Plan defines ``eligible security'' as any Nasdaq/NM 
security as to which unlisted trading privileges have been granted 
to a national securities exchange pursuant to Section 12(f) of the 
Act or that is listed on a national securities exchange. On May 12, 
1999, in response to a request from the CHX, the Commission expanded 
the number of eligible Nasdaq/NM securities that may be traded by 
the CHX pursuant to the Plan from 500 to 1000. See May 1999 Approval 
Order, supra note 7. On November 9, 2000, the Commission noticed and 
requested comment on a proposal by the PCX to expand the maximum 
number of securities eligible to trade to include all Nasdaq/NM 
securities. See Securities Exchange Act Release No. 43454, 65 FR 
69581 (November 17, 2000).
    \9\ The full text of the Plan, as well as a ``Concept Paper'' 
describing the requirements of the Plan, are contained in the 
original filing, which is available for inspection and copying in 
the Commission's public reference room.
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IV. Exemptive Relief

    In conjunction with the Plan, on a temporary basis, the Commission 
granted an exemption to vendors from Rule 11Ac1-2 \10\ under the Act 
regarding the calculation of the BBO \11\ and granted the BSE an 
exemption from the provision of Rule 11Aa3-1 \12\ under the Act that 
requires transaction reporting plans to include market identifiers for 
transaction reports and last sale data. In the August 2001 Extension 
Request, the Participants ask that the Commission grant an extension of 
the exemptive relief described above to vendors until the BBO 
calculation issue is fully resolved. In addition, in the August 2001 
Extension Request, the Participants request that the Commission grant 
an extension of the exemptive relief described above to the BSE until 
September 19, 2001.
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    \10\ 17 CFR 240.11Ac1-2.
    \11\ Rule 11Ac1-2 under the Act requires that the best bid or 
best offer be computed on a price/size/time algorithm in certain 
circumstances. Specifically, Rule 11Ac1-2 under the Act provides 
that ``in the event two or more reporting market centers make 
available identical bids or offers for a reported security, the best 
bid or offers * * * shall be computed by ranking all such identical 
bids or offers * * * first by size * * * first by size * * * then by 
time.'' The exemption permits vendors to display the BBO for Nasdaq 
securities subject to the Plan on a price/time/size basis.
    \12\ 17 CFR 240.11Aa3-1.
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V. Solicitation of Comment

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it is consistent 
with the Act. The Commission continues to solicit comment regarding the 
BBO calculation, the trade-through rule and any issues presented by 
changes occurring in the market place. 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 proposal that are filed with the 
Commission, and all written communications relating to the proposal 
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. All submissions should refer to File No. S7-24-
89 and should be submitted by September 10, 2001.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through September 19, 2001, is 
appropriate and in furtherance of

[[Page 43600]]

Section 11A\13\ of the Act.\14\ The Commission had previously stated 
that a revised Plan must be filed with the Commission by July 19, 2001, 
or the Commission will amend the Plan directly.\15\ The Participants 
submitted an Interim Plan to the Commission on August 3, 2001, which, 
among other things, includes a process for selecting an alternative 
securities information processor. Therefore, to enable the Commission 
to consider and to solicit comment on the Interim Plan, the Commission 
believes that it is appropriate to extend the current Plan.
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    \13\ 15 U.S.C. 78k-1.
    \14\ In approving this extension, the Commission has considered 
the extension's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \15\ See supra note 4. The Commission notes that the 
SuperMontage order stated the Participants were directed to produce 
a revised plan by July 19, 2001. The Commission, however, provided 
for a 3-month extension of the July 19, 2001 deadline if requested 
by the Participants for good cause. The Commission recognizes that 
the Participants have been meeting to discuss the alternatives for a 
new plan.
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    The Commission notes that the revised final Plan must provide for 
either (1) a fully viable alternative exclusive securities information 
processor (``SIP'') for all Nasdaq securities, or (2) a fully viable 
alternative non-exclusive SIP in the event that the Plan does not 
provide for an exclusive SIP. If the revised Plan provides for an 
exclusive consolidating SIP, a function currently performed by Nasdaq, 
the Commission believes that, to avoid conflicts of interest, there 
should be a presumption that a Plan Participant, and in particular 
Nasdaq, should not operate such exclusive consolidating SIP. The 
presumption may be overcome if: (1) The Plan processor is chosen on the 
basis of bona fide competitive bidding and the Participant submits the 
successful bid; and (2) any decision to award a contract to a Plan 
Participant, and any ensuing review or renewal of such contract, is 
made without that Plan Participant's direct or indirect voting 
participation. If a Plan Participant is chosen to operate such 
exclusive SIP, the Commission believes there should be a further 
presumption that the Participant-operated exclusive SIP shall operate 
completely separate from any order matching facility operated by that 
Participant and that any order matching facility operated by that 
Participant must interact with the plan-operated SIP on the same terms 
and conditions as any other market center trading Nasdaq-listed 
securities. Further, the Commission will expect the NASD to provide 
direct or indirect access to the alternative SIP, whether exclusive or 
non-exclusive, by any of its members that qualify, and to disseminate 
transaction information and individually identified quotation 
information for these members through the SIP.
    Furthermore, the revised final Plan should be open to all SROs, and 
the Plan should share governance of all matters subject to the Plan 
equitably among the SRO Participants. The Plan also should provide for 
sharing of market data revenues among SRO Participants. Finally, the 
Plan should provide for sharing of market data revenues among SRO 
Participants. Finally, the Plan should provide a role for participation 
in decision making to non-SROs that have direct or indirect access to 
the alternative SIP provided by the NASD. The Commission expects the 
parties to continue to negotiate in good faith on the above matters 
\16\ as well as any other issues that arise during Plan negotiations.
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    \16\ See also discussion in the SuperMontage order, supra note 
4.
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    The Commission also finds that it is appropriate to extend the 
exemptive relief from Rule 11Ac1-2\17\ under the Act until the earlier 
of September 19, 2001, or until such time as the calculation 
methodology of the BBO is based on a mutual agreement among the 
Participants approved by the Commission. The Commission further finds 
that it is appropriate to extend the exemptive relief from Rule 11Aa3-
1\18\ under the Act to BSE through September 19, 2001. The Commission 
believes that the temporary extensions of the exemptive relief provided 
to vendors and the BSE, respectively, are consistent with the Act, the 
Rules thereunder, and specifically with the objectives set forth in 
Sections 12(f)\19\ and 11A\20\ of the Act and in Rules 11Aa3-1\21\ and 
11Aa3-2\22\ thereunder.
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    \17\ 17 CFR 240.11Ac1-2.
    \18\ 17 CFR 240.11Aa3-1.
    \19\ 15 U.S.C. 78l(f).
    \20\ 15 U.S.C. 78k-1.
    \21\ 17 CFR 240.11Aa3-1.
    \22\ 17 CFR 240.11Aa3-2.
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VII. Conclusion

    It is therefore ordered, pursuant to Sections 12(f)\23\ and 11A\24\ 
of the Act and paragraph (c)(2) of Rule 11Aa3-2\25\ thereunder, that 
Participants' request to extend the effectiveness of the Plan, as 
amended, for Nasdaq/NM securities traded on as exchange on an unlisted 
or listed basis through September 19, 2001, and certain exemptive 
relief through September 19, 2001, is approved.
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    \23\ 15 U.S.C. 78l(f).
    \24\ 15 U.S.C. 78k-1.
    \25\ 17 CFR 240.11Aa3-2(c)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(29).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-20856 Filed 8-17-01; 8:45 am]
BILLING CODE 8010-01-M