[Federal Register Volume 67, Number 80 (Thursday, April 25, 2002)]
[Notices]
[Pages 20566-20568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10158]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45777; File No. SR-NASD-2002-26]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
National Association of Securities Dealers, Inc. Relating to the 
Adjustment of Open Orders in Nasdaq's SuperMontage System

April 18, 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 March 25, 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 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by 
Nasdaq.\3\ The NASD filed this proposal under section 19(b)(3)(A) of 
the Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the 
proposal effective upon filing with the Commission. 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\ On March 25, 2002, the Commission received an amendment from 
Nasdaq revising its process for adjusting open orders in Nasdaq's 
future Order Display and Collection Facility (``NNMS'' or 
``SuperMontage''). See letter from Edward S. Knight, Executive Vice 
President and General Counsel, Nasdaq, to Katherine England, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated March 22, 2002 (``Amendment No. 1''). Amendment 
No. 1 supersedes and replaces in its entirety the original proposed 
rule change that Nasdaq filed with the SEC on February 21, 2002. The 
proposed rule change is treated as filed on the date Amendment No. 1 
was received.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6). Nasdaq requested that the Commission 
waive the 5-day pre-filing notice requirement.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD is proposing to allow the adjustment of open orders residing 
in SuperMontage in response to issuer corporate actions. Nasdaq will 
implement this rule change no later than 30 days after successful user 
acceptance testing of the SuperMontage system. Below is the text of the 
proposed rule changes. Proposed new language is underlined.
* * * * *
    4715. Adjustment of Open Quotes and/or Orders--NNMS will 
automatically adjust the price and/or size of open quotes and/or orders 
resident in the system in response to issuer corporate actions related 
to a dividend, payment or distribution, on the ex-date of such actions, 
except where a cash dividend or distribution is less than one cent 
($0.01), as follows:
    (a) Quotes--All bid and offer side quotes shall be purged from the 
system.
    (b) Sell Orders--Sell side orders shall not be adjusted by the 
system and must be modified, if desired, by the entering party, except 
for reverse splits where such sell side orders shall be purged from the 
system.
    (c) Buy Orders--Buy side orders shall be adjusted by the system 
based on the particular corporate action impacting the security (i.e. 
cash dividend, stock dividend, both, stock split, reverse split) as set 
forth below:
    (1) Cash Dividends: Buy side order prices shall be first reduced by 
the dividend amount and the resulting price will then be rounded down 
to the nearest penny unless marked ``Do Not Reduce''.
    (2) Stock Dividends and Stock Splits: Buy side order prices shall 
be determined by first rounding up the dollar value of the stock 
dividend or split to the nearest penny. The resulting amount shall then 
be subtracted from the price of the buy order. Unless marked ``Do Not 
Increase'', the size of the order shall be increased by first, (A) 
multiplying the size of the original order by the numerator of the 
ratio of the dividend or split, then (B) dividing that result by the 
denominator of the ratio of the dividend or split, then (C) rounding 
that result to the next lowest round-lot.
    (3) Dividends Payable in Either Cash or Securities at the Option of 
the Stockholder: Buy side order prices shall be reduced by the dollar 
value of either the cash or securities, whichever is greater. The 
dollar value of the cash shall be determined using the formula in 
paragraph (1) above, while the dollar value of the securities shall be 
determined using the formula in paragraph (2) above. If the stockholder 
opts to receive securities, the size of the order shall be increased 
pursuant to the formula in subparagraph (2) above.
    (4) Combined Cash and Stock Dividends/Split: In the case of a 
combined cash dividend and stock split/dividend, the cash dividend 
portion shall be calculated first as per section (1) above, and stock 
portion thereafter pursuant to sections (2) and/or (3) above.
    (5) Reverse Splits: All orders (buy and sell) shall be cancelled 
and returned to the entering firm.
    (d) Open buy and sell orders that are adjusted by the system 
pursuant to the above rules, and that thereafter continuously remain in 
the system, shall retain the time priority of their original entry.
* * * * *
4705. NNMS Participant Registration
    (a) through (f) No Change.
    (g) The Association and its subsidiaries shall not be liable for 
any losses, damages, or other claims arising out of the NNMS or its 
use. Any losses, damages, or other claims, related to a failure of the 
NNMS to deliver, display, transmit, execute, compare, submit for 
clearance and settlement, adjust, retain priority for, or otherwise 
correctly process an order, Quote/Order, message, or other data entered 
into, or created by, the NNMS shall be absorbed by the member, or the 
member sponsoring the customer, that entered the order, Quote/Order, 
message, or other data into the NNMS.
* * * * *

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
    As part of its ongoing preparation for the launch of SuperMontage, 
Nasdaq is engaging in a continuing review of the system's functionality 
and rules with a view to constant improvement. As a result of this 
review, and in consultation with industry professionals, Nasdaq has 
determined to adopt rules to govern the adjustment of open orders 
residing in the SuperMontage system in response to issuer corporate 
actions (e.g. stock splits, stock dividends).
    The current design of SuperMontage contemplates that the open 
orders of

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securities residing in the system that thereafter become subject of a 
corporate action(s) by the issuer impacting their price and/or size are 
to be cancelled and purged from SuperMontage and returned to the 
entering party for adjustment and, if desired, re-entry. Once purged, 
these orders lose their original time-priority in the system and are 
treated as new orders upon re-entry.
    In order to assist Nasdaq market participants that elect to submit 
orders to SuperMontage in appropriately managing and adjusting such 
open orders, and the quotes representing such orders, in response to 
actions taken by an issuer, Nasdaq has determined to adopt an automated 
process within the system that will govern how open SuperMontage quotes 
and/or orders will, and will not be adjusted as the result of issuer 
corporate actions.
    First, quotes on both the bid and offer side of the market will be 
purged by the system if they are for stocks that become subject of a 
corporate action that impacts their price or size. Once purged, they 
will have to be re-entered, if desired, by a quoting market 
participant. Orders to sell will not be purged by the system and will 
not be automatically adjusted by the system.\6\ Buy orders shall have 
their price and/or size automatically adjusted by the system based on 
the type of corporate action taken by the issuer as outlined in the 
rule language. Nasdaq notes that automatic adjustments of open orders 
proposed here are substantially similar to those already in place for 
NASD members pursuant to NASD Rule 3220.\7\ Finally, orders that are 
automatically adjusted by the system and that thereafter continuously 
remain in SuperMontage shall retain the time-priority of their original 
entry.
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    \6\ The only exception to this standard is sell orders involving 
a security subject to a reverse stock split. Such sell orders shall 
be purged by the system and must be re-entered, if desired, by the 
entering party.
    \7\ Unlike NASD Rule 3220, the proposal does not specifically 
address the adjustment of open stop orders to buy or sell because 
SuperMontage will not accept stop orders. Telephone call between 
Thomas P. Moran, Counsel, Nasdaq, and Jennifer Lewis, Attorney, 
Division, Commission, on April 5, 2002 (``April 5 Telephone Call'').
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    Nasdaq believes that adoption of these automated adjustments to 
open orders will enhance the ability of market participants to manage 
customer limit orders. By automating the open order adjustment process 
in the context of corporate actions, firms can ensure that open orders 
of customers residing in the SuperMontage system will be consistently 
and appropriately adjusted whenever a corporate action impacts them. 
Moreover, since adjustments made by the system result in the order 
retaining its original time priority, the process decreases firm and 
customer burdens that can accompany the wholesale purging and re-entry 
of customer limit orders when an issuer corporate action takes place 
while retaining, to the extent possible, the time-priority previously 
established by customers.
    Nasdaq proposes to revise its Rule 4705 to provide for the proposed 
adjustments to be made to SuperMontage orders in connection with the 
corporate actions described above and the proposed priority 
retention.\8\ In addition, Nasdaq proposes to clarify in its Rule 4705 
that Nasdaq shall bear no liability for SuperMontage errors by adding 
the word ``correctly'' to such rule.\9\
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    \8\ April 5 Telephone Call, supra note 7.
    \9\ Id. Nasdaq believes that the rule language already provided 
for this waiver of liability, but that the rule language could be 
improved.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
section 15A(b) of the Act,\10\ in general, and furthers the objectives 
of section 15A(b)(6) of the Act,\11\ in particular, because it promotes 
just and equitable principles of trade, fosters cooperation and 
coordination with persons engaged in processing information with 
respect to, and facilitating transactions in securities, as well as 
removes impediments to and perfects the mechanism of a free and open 
market, and, in general, protects investors and the public interest.
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    \10\ 15 U.S.C. 78o-3(b).
    \11\ 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 will 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

    Nasdaq has neither solicited nor received written comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because 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 after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that 
Nasdaq has given the Commission written notice of its intent to file 
the proposed rule change, along with a brief description and text of 
the proposed rule change, at least five business days prior to the date 
of filing of the proposed rule change, or such shorter time as 
designated by the Commission, the proposed rule change has become 
effective pursuant to section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) \13\ thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally 
requires that a self-regulatory organization give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change. However, Rule 19b-4(6)(iii) \15\ permits the Commission to 
designate a shorter time. Nasdaq seeks to have the five-business-day 
pre-filing requirement waived with respect to the proposed rule change. 
The Commission has determined to waive the five-business-day pre-filing 
requirement.
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    \14\ Id.
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
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    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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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

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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-2002-26 and should be submitted by May 16, 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. 02-10158 Filed 4-24-02; 8:45 am]
BILLING CODE 8010-01-P