[Federal Register Volume 66, Number 203 (Friday, October 19, 2001)]
[Notices]
[Pages 53271-53273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26399]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44937; 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 American, Boston, 
Chicago, Philadelphia, and Cincinnati Stock Exchanges

October 15, 2001.

I. Introduction

    On October 12, 2001, the Cincinnati Stock Exchange, Inc. (``CSE'') 
on behalf of itself and the National Association of Securities Dealers, 
Inc. (``NASD''), the American Stock Exchange LLC, 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 operation of the Plan \2\ for Nasdaq/

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National Market (``Nasdaq/NM'') securities traded on an exchange on an 
unlisted or listed basis.\3\ The October 2001 Extension Request would 
extend the effectiveness of the Plan through November 19, 2001 and also 
would extend certain exemptive relief as described below. The October 
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, SEC, dated 
October 10, 2001 (``October 2001 Extension Request''). The 
signatories to the Plan are the Participants for purposes of this 
release. On October 12, 2001, CSE also submitted an amendment to the 
October 2001 Extension Request to include Amex as a Participant. See 
letter from Jeff T. Brown, Vice President Regulation and General 
Counsel, CSE, to Jonathan G. Katz, Secretary, SEC, dated October 12, 
2001.
    \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). As the first step, the Participants submitted the 12th 
amendment to the Plan (``12th Amendment'') on August 30, 2001, which 
was published for comment in the Federal Register on October 2, 
2001. See Securities Exchange Act Release No. 44882 (September 20, 
2001), 66 FR 50226. The revised revenue sharing section of the Plan 
was approved by the Commission on a temporary basis.
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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. 781(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, 1995), 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); 44348 (May 24, 2001), 66 FR 29610 (May 
31, 2001); 44552 (July 13, 2001), 66 FR 37712 (July 19, 2001); 44694 
(August 14, 2001), 66 FR 43598 (August 20, 2001); and 44804 
(September 17, 2001), 66 FR 48299 (September 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 of Frequency of 
Proposed 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\ Currently, the Plan defines ``eligible security'' as any 
Nasdaq/NM security as to which UTP 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. 43545, 65 FR 
69581 (November 17, 2000). The Participants have proposed to amend 
the definition of ``eligible security'' to include Nasdaq SmallCap 
securities. See 12th Amendment, supra note 4.
    \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. In addition, the Commission 
published the Plan in its entirety as proposed to be amended by 12th 
Amendment. See 12th Amendment, supra note. 4.
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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\ In the October 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.
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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 specified security, the 
best bid or offer * * * shall be computed by ranking all such 
identical bids or offers * * * 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.
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V. Solicitation of Comments

    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 comments 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 November 9, 2001.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through November 19, 2001, is 
appropriate and in furtherance of Section 11A \12\ of the Act.\13\ The 
Commission had previously stated that a revised Plan must be filed with 
the Commission by July 19, 2001, or the

[[Page 53273]]

Commission will amend the Plan directly.\14\ The Participants submitted 
the 12th Amendment to the Plan to the Commission on August 30, 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 12th Amendment, 
the Commission believes that it is appropriate to extend the current 
Plan.
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    \12\ 15 U.S.C. 78k-1.
    \13\ 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).
    \14\ 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 and has submitted the 12th Amendment to the 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 ensuring 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 the 
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 quality, 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 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 \15\ as well as any other 
issues that arise during Plan negotiations.
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    \15\ 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 11Ac1-16 \16\ under the Act until the 
earlier of November 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 believes that 
the temporary extension of the exemptive relief provided to vendors is 
consistent with the Act, the Rules thereunder, and specifically with 
the objectives set forth in Sections 12(f) \17\ and 11A \18\ of the Act 
and in Rules 11Aa3-1 \19\ and 11Aa3-2 \20\ thereunder.
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    \16\ 17 CFR 240.11Ac1-2.
    \17\ 15 U.S.C. 781(f).
    \18\ 15 U.S.C. 78k-1.
    \19\ 17 CFR 240.11Aa3-1.
    \20\ 17 CFR 240.11Aa3-2.
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VII. Conclusion

    It Is Therefore Ordered, pursuant to Sections 12(f) \21\ and 11A 
\22\ of the Act and paragraph (c)(2) of Rule 11Aa3-2 \23\ thereunder, 
that the Participants' request to extend the effectiveness of the Plan, 
as amended, for Nasdaq/NM securities traded on an exchange on an 
unlisted or listed basis through November 19, 2001, and certain 
exemptive relief through November 19, 2001, is approved.
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    \21\ 15 U.S.C. 78l(f).
    \22\ 15 U.S.C. 78k-1.
    \23\ 17 CFR 240.11Aa3-2(c)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26399 Filed 10-18-01; 8:45 am]
BILLING CODE 8010-01-M