[Federal Register Volume 67, Number 14 (Tuesday, January 22, 2002)]
[Notices]
[Pages 2936-2937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1425]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45276; File No. SR-NASD-202-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. to Extend the Manning Pilot on the OTCBB

January 14, 2002.
    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 January 14, 2002, 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. Nasdaq has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    This is a proposal to extend through July 15, 2002, two pilot 
programs contained in NASD Rule 6541, which prohibits member firms from 
trading ahead of customer limit orders in designated OTC Bulletin Board 
(``OTCBB'') securities. NASD Rule 6541 was established on a pilot basis 
through February 8, 2002. Portions of NASD Rule 6541 were separately 
amended for a pilot period that originally ran for a three-month period 
from August 1, 2001, to November 1, 2001, and was later extended 
through January 14, 2002. Nasdaq is proposing no changes to the 
language of NASD Rule 6541.
    Pursuant to Rule 19b-4(f) under the Act, Nasdaq has designated this 
proposal as non-controversial and has provided the Commission with the 
5-day notice required by Rule 19b-4(f)(6)(iii). Nasdaq requests that 
the Commission waive the 30-day pre-operative requirement contained in 
Rule 19b-4(f)(6)(iii). If such waiver is granted by the Commission, the 
two pilots programs would continue to operate without interruption, 
remaining in effect until July 15, 2002.

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 concerning the 
purpose of an 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 Section, 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
    On February 8, 2001, the Commission approved new NASD Rule 6541 
which, on a pilot basis, extended the basis customer limit order 
protection principles--that presently apply to Nasdaq securities--to 
designated securities traded on the OTCBB.\4\ NASD Rule 6541(a), in 
general, prohibits member firms that accept customer limit orders in 
these securities from ``trading ahead'' of their customers for their 
own account at prices equal or superior to the limit orders, without 
executing them at the limit price. NASD Rule 6541(b) requires member 
firms to provide a minimum level of price improvement to incoming 
orders in OTCBB securities if the firm chooses to trade as principal 
with those incoming orders while holding customer limit orders. If a 
firm fails to provide the minimum level of price improvement to the 
incoming order, the firm must execute its held customer limit orders.
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    \4\ See Securities Exchange Act Release No. 43944 (February 8, 
2001), 66 FR 10541 (February 15, 2001) (approving SR-NASD-00-22).
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    The limit order protection embodied in NASD Rule 6541 is an 
investor protection tool based on NASD IM-2110-2 (commonly known as the 
``Manning Rule''). In Manning, the NASD found and the Commission 
affirmed that a member firm that accepts a customer limit order has 
fiduciary duty not to trade for its own account at prices more 
favorable than the customer order.\5\ NASD Rule 6541 expands to the 
trading of OTCBB the protections that NASD IM-2110-2 provides to the 
trading of Nasdaq National Market and SmallCap securities.
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    \5\ See In re E.F. Hutton & Co., Securities Exchange Act Release 
No. 25887 (July 6, 1988 (``Manning'').
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    On March 2, 2001, and April 6, 2001, the Commission approved 
modifications to NASD IM-2110-2.\6\ In general, these modifications 
narrowed the amount of price improvement required to avoid the 
obligation to file a customer limit order, in recognition of the 
introduction of decimal pricing of Nasdaq securities. On July 26, 2001, 
Nasdaq filed and implemented an amendment to NASD Rule 6541(b) (SR-
NASD-2001-39) that likewise narrowed the amount of required price 
improvement for trading of OTCBB securities.\7\ As originally drafted, 
NASD Rule 6541(b) required price improvement of at least the lesser of 
$0.05 or one-half of the current insider spread. Under SR-NASD-2001-39, 
the price improvement requirement was narrowed to $0.01 or one-half the 
inside spread (whichever is less) for a market maker wishing to trade 
in front of a held customer limit order that is priced at or inside the 
current inside spread for an OTCBB security. For a customer limit order 
priced less than $0.01 outside the inside spread, however, SR-NASD-
2001-39 required a market seeking to trade in front of such limit order 
to execute its trades at a price at least equal to the inside bid (with 
respect to a held customer limit order to buy) or inside offer (for a 
held order to sell). Moreover, SR-NASD-2001-39 provided that limit 
order protection would not apply to a customer limit order that was 
priced more than $0.01 outside the current inside spread. The amendment 
to NASD Rule 6541 (b) adopted by SR-NASD-2001-39 was effective for a 
three-month pilot period that ended on November 1, 2001.
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    \6\ See Securities Exchange Act Release No. 44030 (March 2, 
2001), 66 FR 14235 (March 9, 2001) (approving SR-NASD-2001-09); 
Securities Exchange Act Release No. 44165 (April 6, 2001), 66 FR 
19268 (April 13, 2001) (approving SR-NASD-2001-27). See also 
Securities Exchange Act Release No. 44529 (July 9, 2001), 66 FR 
37082 (July 16, 2001) (SR-NASD-2001-43).
    \7\ See also Securities Exchange Act Release No. 44593 (July 26, 
2001), 66 FR 40304 (August 2, 2001).
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    At the expiration of that period, Nasdaq amended Rule 6541(b) to 
eliminate the minimum price improvement requirement for limit orders 
outside the inside spread.\8\ Accordingly, any degree of price 
improvement would relieve a market maker from the obligation to fill a 
limit order that is outside of the inside spread. At the same time, 
Nasdaq eliminated the provision of the pilot

[[Page 2937]]

that provided no limit order protection to customer limit orders that 
are priced more than $0.01 outside the current inside spread. Thus, the 
basic prohibition on trading ahead of a customer limit order at a price 
equal or superior to the limit order, without filling the limit order, 
applies to all limit orders in OTCBB securities covered by NASD Rule 
6541. The amount of required price improvement for limit orders priced 
inside the current inside spread remained the lesser of $0.01 or one-
half of the current inside spread.
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    \8\ See Securities Exchange Act Release No. 45011 (November 1, 
2001), 66 FR 56587 (November 8, 2001) (SR-NASD-2001-78).
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    Nasdaq has represented that it is actively studying the impact of 
NASD Rule 6541 on quoting and trading of OTCBB securities. Nasdaq 
believes that a six-month extension of both pilots is necessary to 
allow Nasdaq to collect and analyze sufficient data upon which to base 
its analysis. Nasdaq further believes, preliminarily, that NASD Rule 
6541 has had a positive effect on investors. Accordingly, it is 
Nasdaq's intent to implement limit order protection on a permanent 
basis at or before the end of this pilot extension.\9\
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    \9\ The Commission notes that permanent approval of limit order 
protection for OTCBB securities would require the NASD to submit a 
proposed rule change to this effect under Section 19(b) of the Act, 
15 U.S.C. 78s(b).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \10\ in that it is 
designed to: (1) Promote just and equitable principles of trade; (2) 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; (3) perfect the mechanism of a 
free and open market and a national market system; and (4) maintain the 
current rule language without a lapse, in keeping with the public 
interest and the protection of investors.
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    \10\ 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

    The proposed rule change has been filed by Nasdaq as a non-
controversial rule change pursuant to Rule 19b-4(f)(6) under the Act. 
Nasdaq represents that the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest; 
therefore, it has become immediately effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) thereunder. At any 
time 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
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    Nasdaq has requested that the Commission waive the 30-day pre-
operative period required by Rule 19b-4(f)(6), which would allow the 
proposal to become operative immediately. The Commission finds that 
granting this request is consistent with the protection of investors 
and the public interest, as the price improvement standards under NASD 
Rule 6541 will remain in effect on an uninterrupted basis, thereby 
furthering the aim of protecting investors and the public interest.\12\
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    \12\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
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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 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-2002-06 and 
should be submitted by February 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1425 Filed 1-18-02; 8:45 am]
BILLING CODE 8010-01-M