[Federal Register Volume 67, Number 24 (Tuesday, February 5, 2002)]
[Notices]
[Pages 5351-5353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2654]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45355; File No. SR-NASD-2001-75]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the National Association of Securities 
Dealers, Inc. To Make Permanent a Pilot Amendment to NASD Rule 4120 
Relating to Nasdaq's Authority To Initiate and Continue Trading Halts

January 29, 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 October 18, 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'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq. 
On January 28, 2002, Nasdaq amended the proposal.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See January 25, 2002 letter from Mary M. Dunbar, Vice 
President, Nasdaq, to Katherine A. England, Assistant Director, 
Division of Market Regulation, SEC, and attachments (``Amendment No. 
1''). Amendment No. 1 completely replaces and supersedes the 
original proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to make permanent an amendment to NASD Rule 4120 
that the Commission approved on a pilot basis. The amendment clarified 
Nasdaq's authority to initiate and continue trading halts in 
circumstances where Nasdaq believes that extraordinary market activity 
in a security listed on Nasdaq may be caused by the misuse or 
malfunction of an electronic quotation, communication, reporting, or 
execution system operated by, or linked to, Nasdaq. In addition, Nasdaq 
proposes to make the following amendments to the language of the pilot 
rule that is currently in effect. Proposed new language is in italics; 
proposed deletions are in brackets.

4120. Trading Halts

(a) No change.
    (1)-(5) No change.
    (6) Halt trading in a security listed on Nasdaq when
    (i) Extraordinary market activity in the security is occurring, 
such as the execution of a series of transactions for a significant 
dollar value at prices substantially unrelated to the current market 
for the security, as measured by the national best bid and offer, [and]
    (ii) Nasdaq determines that such extraordinary market activity is 
likely to have a material effect on the market for the security, and 
    ([ii]iii) Nasdaq believes that such extraordinary market activity 
may be caused by the misuse or malfunction of an electronic quotation, 
communication, reporting, or execution system operated by, or linked 
to, Nasdaq.

[[Page 5352]]

    (b) (1)-(5) No change.
    (6) (i) In the case of a trading halt under Rule 4120(a)(6) based 
on the possible misuse or malfunction of an electronic quotation, 
communication, reporting, or execution system that is linked to (but 
not operated by) Nasdaq, Nasdaq will promptly contact the operator of 
the system in question to ascertain information that will assist Nasdaq 
in determining whether a misuse or malfunction has occurred, what 
effect the misuse or malfunction is having on trading in a security, 
and what steps are being taken by the operator of the system to address 
the misuse or malfunction. If the operator of the system is unavailable 
when contacted by Nasdaq, Nasdaq will continue efforts to contact the 
operator of the system to ascertain information that will assist Nasdaq 
in determining whether the trading halt should be terminated.
    (ii) A trading halt initiated under Rule 4120(a)(6) shall be 
terminated as soon as Nasdaq determines either that the system misuse 
or malfunction that caused the extraordinary market activity [has been 
corrected] will no longer have a material effect on the market for the 
security or that system misuse or malfunction is not the cause of the 
extraordinary market activity.
* * * * *

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
    On May 11, 2001, Nasdaq filed with the Commission a proposed rule 
change to clarify Nasdaq's authority to initiate and continue trading 
halts in circumstances where Nasdaq believes that extraordinary market 
activity in a security listed on Nasdaq may be caused by the misuse or 
malfunction of an electronic quotation, communication, reporting, or 
execution system operated by, or linked to, Nasdaq.\4\ On July 27, 
2001, Nasdaq filed Amendment No. 1 to the proposed rule change, 
requesting that the Commission approve the proposed rule change on a 
three-month pilot basis, expiring on October 27, 2001.\5\ Also on July 
27, 2001, the Commission approved the proposed rule change.\6\ On 
September 27, 2001, Nasdaq filed a proposed rule change extending the 
pilot until January 27, 2002.\7\ Nasdaq again extended the pilot until 
April 30, 2002.\8\
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    \4\ Securities Exchange Act Release No. 44307 (May 15, 2001), 66 
FR 28209 (May 22, 2001)(SR-NASD-2001-37).
    \5\ Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Alton Harvey, Division of Market Regulation, SEC (July 
27, 2001).
    \6\ Securities Exchange Act Release No. 44609 (July 27, 2001), 
66 FR 40761 (August 3, 2001)(SR-NASD-2001-37).
    \7\ Securities Exchange Act Release No. 44870 (September 28, 
2001), 66 FR 50701 (October 4, 2001)(SR-NASD-2001-60).
    \8\ SR-NASD-2002-14.
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    NASD Rule 4120 provides Nasdaq with authority to halt trading in 
securities in a number of circumstances in which Nasdaq deems a trading 
halt necessary to protect investors and the public interest. Before 
adopting the pilot amendment, the specific bases for initiating a 
trading halt focused primarily on ensuring that all investors have 
access to material news about an issuer. The pilot amendment added a 
new basis for the imposition of a trading halt, focused on aberrational 
trading in a particular security.
    As a result of the decentralized and electronic nature of the 
market operated by Nasdaq, the price and volume of transactions in a 
Nasdaq-listed security may be affected by the misuse or malfunction of 
electronic systems, including systems that are linked to, but not 
operated by, Nasdaq. In circumstances where misuse or malfunction 
results in extraordinary market activity, Nasdaq believes that it may 
be appropriate to halt trading in an affected security until the system 
problem can be rectified. In the period during which the rule has been 
in effect, Nasdaq has not had occasion to initiate a trading halt under 
the pilot rule, and it continues to be Nasdaq's expectation that the 
rule would be invoked only in rare circumstances. Nevertheless, Nasdaq 
believes that the rule is an important component of its authority and 
responsibility to maintain the fairness and orderly structure of the 
Nasdaq market and should be approved on a permanent basis.
    The rule was drafted to be flexible and to permit rapid action, in 
order to serve the rule's purpose of guarding against disruptive 
trading conditions. Thus, the rule allows Nasdaq to halt trading based 
on a belief that system misuse or malfunction may be the cause of 
extraordinary market activity.\9\ In recognition of the fact that the 
rule allows Nasdaq to take action in response to problems with systems 
that Nasdaq does not operate, however, Nasdaq is proposing to amend the 
rule to specify procedures that Nasdaq will follow in connection with a 
trade halt based on the misuse or malfunction of a system that is 
linked to, but not operated by, Nasdaq.
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    \9\ The phrase ``extraordinary market activity'' is not defined 
in the rule. Similar phrases, such as ``unusual market conditions,'' 
have been used in SEC and self-regulatory organization rules without 
being specifically defined. See e.g., SEC Rule 11Ac1-1(b)(3); New 
York Stock Exchange Rule 104, Supplementary Material .10(6)(i)(B); 
New York Stock Exchange Rule 717. A rule that is designed to respond 
to aberrational market conditions must be somewhat flexible in its 
application because of the difficulty of defining ex ante all 
situations in which application of the rule might be necessary.
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    Specifically, Nasdaq will promptly contact the operator of the 
system in question to ascertain information that will assist Nasdaq in 
determining whether a misuse or malfunction has occurred, what effect 
the misuse or malfunction is having on trading in a security, and what 
steps are being taken by the operator of the system to address the 
misuse or malfunction. If the operator of the system is unavailable 
when contacted by Nasdaq, Nasdaq will continue efforts to contact the 
operator of the system to ascertain information that will assist Nasdaq 
in determining whether the trading halt should be terminated. In 
addition, Nasdaq is proposing to amend the rule to require a finding 
that an observed instance of extraordinary market activity is likely to 
have a material effect on the market for the security that is the 
subject of a trading halt.
    As is true for all trading halts initiated under NASD Rule 4120, a 
decision to halt trading requires a determination that the action is 
necessary to protect investors and the public interest. Moreover, a 
trading halt initiated under the rule will be terminated as soon as 
Nasdaq can conclude that the system misuse or malfunction will no 
longer have a material effect on the market for the security that is 
the subject of the halt or that system misuse or malfunction is not the 
cause of an instance of extraordinary market activity.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\10\ which requires, among 
other things, that

[[Page 5353]]

a registered national securities association's rules be designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and, in general, protect investors 
and the public interest. Nasdaq believes the proposed amendments to the 
rule are consistent with the Act because they establish procedures that 
Nasdaq will follow in connection with a trading halt that is based on 
the misuse or malfunction of a system that is not operated by Nasdaq, 
and will therefore help to ensure that the rule is applied in an 
appropriate manner.
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    \10\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will impose no 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

    Instinet Corporation (``Instinet'') commented on the proposed rule 
change as originally proposed, expressing concerns about trading halts 
that might be premised on the misuse or malfunction of systems that are 
not operated by Nasdaq.\11\ Nasdaq believes that the amendments to the 
rule proposed in this filing respond to the concerns expressed by 
Instinet without impairing the flexibility that the rule must retain in 
order for the rule to assist Nasdaq in meeting its overarching 
responsibility to maintain the fairness and orderly structure of the 
Nasdaq market. Written comments on the proposed rule change were 
neither solicited nor received.
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    \11\ See July 27, 2001 letter from Jon Kroeper, First Vice 
President-Regulatory Policy/Strategy, Instinet, to Jonathan G. Katz, 
Secretary, SEC.
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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 NASD 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 Nasdaq. 
All submissions 2 should refer to file number SR-NASD-2001-75 and 
should be submitted by February 26, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2654 Filed 2-4-02; 8:45 am]
BILLING CODE 8010-01-P