[Federal Register Volume 66, Number 167 (Tuesday, August 28, 2001)]
[Notices]
[Pages 45348-45350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21668]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44732; File No. SR-NASD-2001-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. to Allow 
ECN and ATS Participation on the OTC Bulletin Board

August 22, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on July 12, 2001, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 Nasdaq. 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

    Nasdaq is proposing to add new NASD Rule 6540(b) to the NASD Rule 
6500 Series, which governs the operation of the OTC Bulletin Board 
(``OTCBB''). The purpose of the proposed rule change is to permit 
alternative trading systems (``ATSs'') and electronic communication 
systems (``ECNs'') to participate in the OTCBB. The text of the 
proposed rule change is below. Proposed new language is italicized.
* * * * *

6540. Requirements Applicable to Market Makers

    (a) No change.
    (b) An alternative trading system (ATS), as defined in Regulation 
ATS, Rule 300(a), or electronic communications network (ECN) as defined 
in SEC Rule 11Ac1-1(a)(8), shall be eligible to participate in the 
Service, provided however, that such ATS or ECN is an NASD member and 
otherwise meets the requirements for participation set forth in the OTC 
Bulletin Board Rules. Where used in the OTC Bulletin Board Rules, the 
term ``market maker'' shall be construed to include a participating ATS 
or ECN.
    (c) No change.
* * * * *

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

    In its filing with the Commission, Nasdaq 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. Nasdaq 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
    Nasdaq proposed to permit ATSs and ECNs to post quotes and 
otherwise participate in the OTCBB. The OTCBB is a quotation service 
that displays quotes, last-sale prices, and volume

[[Page 45349]]

information in over-the-counter (``OTC'') securities. OTC securities 
are equity securities not listed or traded on Nasdaq or a national 
securities exchange. OTCBB securities include national, regional, and 
foreign equity issues, warrants, units, American Depositary Receipts, 
and Direct Participation Programs. Currently, only NASD member firms 
registered with the NASD as market makers can post quotes for OTC 
securities on the OTCBB. Nasdaq proposes to broaden participation in 
the OTCBB by allowing ATSs and ECNs to participate in the OTCBB.
    The OTCBB began in 1990 as a pilot program to provide transparency 
in the OTC equities market.\3\ In 1997, the program became 
permanent.\4\ The OTCBB operates pursuant to the NASD Rule 6500 Series. 
These rules provide, among other things, that all securities quoted on 
the OTCBB must be sponsored by a participating market maker that 
registers the security by completing a Form 211, unless an exemption 
applies. The market maker submits the Form 211 to the NASD OTC 
Compliance Unit prior to publication of a quote in that security on the 
OTCBB. Once cleared, Nasdaq Market Data Integrity notifies the market 
maker that it has been registered in the security and may enter a 
quote. If the market maker is exempt from Rule 15c2-11 under the 
Act,\5\ the market maker submits a Rule 15c2-11 Exemption Form, which 
is processed in the same way.
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    \3\ See Securities Exchange Act Release No. 27975 (May 1, 1990), 
55 FR 19123 (May 8, 1990) (approving SR-NASD-88-19); Securities 
Exchange Act Release No. 27975A (May 30, 1990), 55 FR 23161 (June 6, 
1990) (correcting initial approval order).
    \4\ See Securities Exchange Act Release No. 38456 (March 31, 
1997), 62 FR 16635 (April 7, 1997) (approving SR-NASD-92-7).
    \5\ 17 CFR 240.15c2-11.
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    Under proposed Rule 6540(b), an ATS or ECN would be permitted to 
participate in the OTCBB in the same way that a market maker currently 
participates. That is, an ATS or ECN that wishes to post a quote in a 
security on the OTCBB would register the security by completing a Form 
211, unless an exemption applies. The ATS or ECN would submit the Form 
211 to the NASD OTC Compliance Unit prior to publication of a quote in 
that security on the OTCBB. Once cleared, Nasdaq Market Data Integrity 
would notify the ATS or ECN that it has been registered in the security 
and may enter a quote. If the ATS or ECN is exempt from Rule 15c2-11, 
the ATS or ECN would submit an alternative form indicating that it is 
an ATS or ECN and that it is exempt from Rule 15c2-11.
    Every OTC security not currently quoted on the OTC Bulletin Board 
is considered ``ineligible'' until a Form 211 or Rule 15c2-11 Exemption 
Form is submitted. Under the current rules and proposed NASD Rule 
6540(b), once clearance to quote the security is given, the security is 
granted ``eligible'' status. Thereafter, any other market maker that 
wishes to quote an ``eligible'' security must also submit a Form 211 or 
Exemption Form. An alternative method for obtaining approval to quote 
an ``eligible'' security and is exempt from Rule 15c2-11. During the 
``eligible'' period, a frequency-of-quotation test is administered. The 
test must be satisfied before the security is identified as ``active.'' 
Once the security is ``active,'' a market maker, ATS, or ECN need not 
submit a Form 211 or Exemption Form before quoting in the security. To 
satisfy the test, the security must have been quoted on the OTCBB on at 
least 12 business days during the preceding 30 calendar days, with not 
more than four consecutive business days without quotations. Market 
makers, ATSs, or ECNs would be permitted to register on-line to quote 
in a security that has satisfied the test. As long as the security 
remains ``active,'' any market maker, ATS, or ECN would be permitted to 
quote the security without a Form 211 or Exemption Form submission.
    Nasdaq has stated that one ATS has expressed interest in 
participating in the OTCBB, and Nasdaq believes that there may be 
additional ATSs or ECNs interested in participating in the Service. 
Proposed NASD Rule 6540(b) would permit such participation.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act.\6\ Section 15A(b)(6) 
requires that the rules of a national securities association, among 
other things, foster cooperation and coordination with persons engaged 
in facilitating transactions in securities and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. Nasdaq believes that the proposed rule, by enabling ATS and 
ECN participation in the OTCBB, would broaden participation and 
increase the transparency and liquidity of the OTCBB.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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 Nasdaq 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, 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 File No. SR-NASD-2001-44 and 
should be submitted by September 18, 2001.


[[Page 45350]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Margaret H. McFarland,
Deputy Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-21668 Filed 8-27-01; 8:45 am]
BILLING CODE 8010-01-M