[Federal Register Volume 67, Number 72 (Monday, April 15, 2002)]
[Notices]
[Pages 18279-18282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45702; File No. SR-NASD-2002-35]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Amending NASD Rules 6110 and 6120 Relating to 
UTP Exchange Usage of ACT

April 5, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4under,\2\ notice is hereby given that on 
March 7, 2002, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), 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 the NASD. 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

    The NASD proposes to amend NASD Rules 6110, Definitions, and 6120, 
Participation in ACT, regarding the Automated Confirmation Transaction 
System (``ACT''). The proposed rule change would permit Nasdaq to grant 
access to ACT to national securities exchanges that trade Nasdaq 
securities on an unlisted trading privileges basis (``UTP 
Exchanges'').\3\
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    \3\ The NASD requested that the Commission make various 
technical corrections to the proposed rule language and delete an 
inaccurate reference to the Boston Stock Exchange, Inc. (``BSE'') in 
footnote 8. Telephone discussion between Katherine England, 
Assistant Director, Division of Market Regulation, SEC, and Jeffrey 
S. Davis, Associate General Counsel, Office of General Counsel, 
Nasdaq (April 5, 2002).
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
6110. Definitions
    (a)-(o) No Change.
    (p) The terms ``Participant,'' ``ACT Order Entry Firm,'' 
``correspondent executing broker/dealer,'' ``correspondent executing 
broker,'' ``introducing broker/dealer,'' ``introducing broker,'' 
``clearing broker/dealer,'' and ``clearing broker'' shall also include, 
where appropriate, the Non-Member Clearing Organizations and UTP 
Exchanges listed in Rule 6120(a)(5) and (a)(6) below and their 
qualifying members.
6120. Participation in ACT
    (a) Mandatory Participation for Clearing Agency Members
    (1)-(5) No Change.
    (6) Upon compliance with the conditions specified in subparagraphs 
(A)-(E) below, access to and participation in ACT may be granted to a 
national securities exchange that trades Nasdaq National Market or 
SmallCap securities on an unlisted trading privileges basis (``UTP 
Exchange''). The terms and conditions of such access and participation, 
including available functionality and applicable rules and fees, shall 
be set forth in and governed by a UTP Exchange ACT Participant 
Application Agreement. Such access may be made available on terms that 
differ from the terms applicable to members but that do not 
unreasonably discriminate among national securities exchanges.
    (A) Execution of, and continuing compliance with, a UTP Exchange 
ACT Participant Application Agreement;
    (B) Continuing compliance with UTP Exchange ACT Participant 
Application Agreement and all applicable rules and operating procedures 
of the Association and the Commission;
    (C) Maintenance of the physical security of the equipment located 
on the premises of the UTP Exchange to prevent the unauthorized entry 
of information into ACT;
    (D) Acceptance and settlement of each trade that ACT identifies as 
having been effected by itself or any of its correspondents on the 
regularly scheduled settlement date; and
    (E) A UTP Exchange shall not permit its members to have direct 
access to ACT without the express written consent of the Association.
    [(6)] (7) Each ACT Participant shall be obligated to inform the 
Association of non-compliance with any of the participation 
requirements set forth above.
* * * * *

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

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and the 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. The NASD 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
    The NASD is proposing to offer UTP Exchanges the ability to 
participate in Nasdaq's proprietary trade reporting and comparison 
system, ACT, according to terms established by Nasdaq. Under this 
proposed rule filing, exchanges that choose to use Nasdaq's ACT system 
will sign a contract with Nasdaq setting forth the terms and conditions 
of usage of ACT, including available functionality and applicable rules 
and fees. UTP Exchange access to ACT may be made available on terms 
that differ from the terms applicable to NASD members \4\ but that do 
not unreasonably discriminate among UTP Exchanges.
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    \4\ Until Nasdaq registers as an exchange, all NASD member firms 
are members of The Nasdaq Stock Market, Inc., after which time, 
Nasdaq member firms are expected to be a subset to the NASD 
membership. For this filing, because Nasdaq is not yet an exchange, 
``Nasdaq members'' are NASD members that participate in the Nasdaq 
Stock Market.
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Background

    During three decades of operation, Nasdaq has evolved into one of 
the largest, most liquid markets in the world and a powerful driver of 
the U.S. economy. As a market, Nasdaq builds and operates systems that 
enable its members to execute and report trades in Nasdaq-listed and 
over-the-counter securities, consistent with Section 15A of the Act. 
Among the systems that provide the core functionality of the Nasdaq 
market are its quotation display device, the Nasdaq Workstation II 
(``NWII''),\5\ its execution systems--the Nasdaq National Market 
Execution System (``SuperSOES'') and SelectNet--and its trade reporting 
system, ACT. The NWII, SuperSOES, SelectNet, and ACT are examples of 
Nasdaq proprietary systems.
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    \5\ As a market, Nasdaq offers two proprietary routes of entry 
into its proprietary systems: The Application Programming Interface 
(``API''), and the Computer-to-Computer Interface (``CTCI''). Both 
interfaces exist as part of Nasdaq's proprietary Enterprise Wide 
Network, a network provided through an extensive contract with MCI 
WorldCom. Both interfaces rely on a multiple T1 connection into 
Nasdaq's Unisys system for quote updates and Tandem system for 
SuperSOES, SelectNet, and ACT messages. All participants who depend 
on Nasdaq's API/CTCI interface are subject to SEC-approved pricing 
for those services provided over that interface.
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    Nasdaq is also an exclusive securities information processor 
(``SIP'') under Section 11A of the Act. Pursuant to the Securities Act 
Amendments of 1975, Nasdaq negotiated and executed a national market 
system plan, the ``Nasdaq UTP Plan,'' for quoting and trading of Nasdaq 
National Market stocks by securities markets that chose to participate 
in the Nasdaq UTP Plan. As the SIP for the Nasdaq UTP Plan, Nasdaq 
operates facilities to collect, consolidate, and disseminate quotations 
and last sale reports of all markets quoting and trading Nasdaq-listed 
securities. The Plan-sponsored mechanism for entering quotations and 
last sale reports is a computer-to-computer interface commonly referred 
to as ``the UTP Line.''\6\ The Plan does not grant participants access 
to Nasdaq's proprietary execution facilities, but simply requires that 
UTP Exchange specialists have access to and be accessible by Nasdaq 
members via the

[[Page 18281]]

telephone.\7\ Thus, the SIP facilities are separate and distinct from 
Nasdaq's proprietary systems.
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    \6\ The UTP Interface is a TCP/IP connection into Nasdaq's 
Tandem mainframe. All quote messages are then passed to Nasdaq's 
Unisys mainframe for processing and dissemination. All trade 
messages are processed in the Tandem mainframe and disseminated out 
on the Nasdaq Trade Dissemination Service datafeed. In the coming 
months, the Nasdaq SIP is migrating all UTP quote and trade messages 
to a new Tandem environment.
    \7\ The SEC established this policy in its 1985 report, Unlisted 
Trading Privileges in Over-the-Counter Securities, Exchange Act 
Release No. 22412 (September 16, 1985), 50 FR 38640 (September 24, 
1985), fn. 89 and accompanying text. The SEC rejected calls for a 
``more sophisticated intermarket trading linkage'' similar to ITS/
CAES, but urged the participants to develop suitable access 
mechanisms, such as the UTP Line that was later developed.
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    Nasdaq will continue to maintain a technological, financial, and 
regulatory distinction between its role as a market and its role as a 
SIP. As a SIP, Nasdaq is obligated to provide UTP Exchanges access only 
to the facilities enumerated in the Nasdaq UTP Plan, namely, the UTP 
Interface and the telephone. The UTP Interface allows other market 
centers to send Nasdaq quotes and trade reports for inclusion in the 
consolidated quote and trade dissemination systems that Nasdaq 
operates. As a market, Nasdaq is not obligated to provide UTP Exchanges 
with access to any of Nasdaq's proprietary systems. Therefore, subject 
to SEC approval where necessary, Nasdaq is entitled to condition the 
manner in which it will voluntarily make its proprietary systems, 
including ACT, available to UTP Exchanges that choose to use them.\8\ 
Whether acting as a SIP or a market, Nasdaq will act in a 
nondiscriminatory manner and will make best efforts to reach a 
contractual solution with each UTP Exchange that wishes to use the ACT 
system.
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    \8\ Nasdaq has voluntarily permitted UTP Exchanges to 
participate in SuperSOES and has filed rules defining the manner in 
which those exchanges may use this system. In fact, Nasdaq is filing 
a rule proposal to make SuperSOES the exclusive Nasdaq proprietary 
execution system available for UTP Exchanges to quote and trade 
Nasdaq securities on Nasdaq.
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    This proposed rule would enable Nasdaq to enter into contracts with 
UTP Exchanges that will govern the terms of use and applicable fees for 
the use of ACT by UTP Exchanges. Under the proposal, UTP Exchanges 
could use ACT services, but would pay a markup over the fees applicable 
to members' use of ACT. Although the BSE is, to date, the only UTP 
Exchange that has requested use of ACT to report and clear both Nasdaq 
system and non-Nasdaq system trades, it is foreseeable that other UTP 
Exchanges will seek use of ACT as well.
    Nasdaq believes it is essential that all UTP Exchanges that use 
Nasdaq proprietary systems execute a contract defining the terms and 
conditions of such use, which may be different from the terms and 
conditions imposed on Nasdaq members.\9\ For example, Nasdaq has asked 
the BSE, as a condition of using ACT, to sign an agreement that 
requires the BSE ``to take reasonable disciplinary actions against its 
members for violations of the Nasdaq Requirements, as if such were 
violations of its own rules.'' It is essential for preserving the 
integrity of Nasdaq's proprietary systems that those self-regulatory 
organizations that use those systems agree to ensure that their members 
(over which Nasdaq typically has no authority) use them in a manner 
that is consistent with Nasdaq's systems requirements. Similarly, 
Nasdaq will make ACT available to UTP Exchanges on the basis of 
contractually agreed charges for such use. Such charges may be 
different than the charges that Nasdaq members pay for ACT. Nasdaq 
participants have paid for the maintenance and development of Nasdaq 
services, such as ACT, over the course of more than two decades. 
Charging UTP Exchanges or other non-members a higher rate than members 
for these services reflects the fact that the Nasdaq members have 
already borne the costs to build and enhance the service over time. The 
fact that the charges are set through arms-length contract negotiations 
with UTP Exchanges and other non-members allows for the flexibility to 
address each particular situation and agree on an appropriate response.
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    \9\ Nasdaq does not impose a monthly fee for access to the UTP 
Interface. The UTP Interface is installed and maintained by an 
independent vendor.
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2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \10\ of the Act, which requires, 
among other things, that the NASD's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest; and are not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers. The NASD 
believes that the proposed rule responds to the request of a UTP 
Exchange for access to trade reporting and comparison functionality to 
facilitate submission of transaction reports to the SIP for Nasdaq 
securities, and ultimately, for dissemination to the public. Moreover, 
the NASD believes that the proposed rule would permit Nasdaq to 
distinguish among Nasdaq members and non-members in order to promote 
behavior that benefits both the market structure that Nasdaq offers to 
investors and Nasdaq as a business. Such distinctions would be based 
upon the voluntary agreement of independent self-regulatory 
organizations that have equal standing to negotiate arms-length 
agreements. As the Commission has noted in the context of another self-
regulatory organization's fees, the Act ``prohibits unfair 
discrimination,' not discrimination' simpliciter * * *.'' \11\
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    \10\ 15 U.S.C. 7803(b)(6)
    \11\ Exchange Act Release No. 37250 (May 29, 1996), 61 FR 28629 
(June 6, 1996) (quoting Timpinaro v. SEC, 2 F.3d 453, 456 (D.C. Cir. 
1993).
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    The NASD further believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) \12\ of the Act, 
which requires that the rules of the NASD provide for the equitable 
allocation of reasonable fees, dues, and other charges among members 
and issuers and other persons using any facility or system which the 
NASD operates or controls.
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    \12\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \13\ of the Act and Rule 19b-4(f)(3) thereunder \14\ as 
being concerned solely with the administration of the NASD. At any time 
within 60 days of the filing of such 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.\15\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(3).
    \15\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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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

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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-2002-35 and 
should be submitted by May 6, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-8998 Filed 4-12-02; 8:45 am]
BILLING CODE 8010-01-P