[Federal Register Volume 67, Number 96 (Friday, May 17, 2002)]
[Notices]
[Pages 35167-35171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12336]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45916; File No. SR-NASD-2002-61]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Establish a Regulatory Fee and To Increase 
Market Data Revenue Sharing

May 10, 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 May 3, 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 Nasdaq. Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of 
the Act,\3\ and Rule 19b-4(f)(2) thereunder\4\ as one establishing or 
changing a due, fee or other charge imposed by the self-regulatory 
organization, which renders the proposal effective upon filing with 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\15 U.S.C. 78s(b)(3)(A).
    \4\17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to: (1) Institute a fee for the regulatory services 
provided in connection with the operation of The Nasdaq Stock Market; 
(2) expand the market data revenue available for sharing with members 
under NASD Rule 7010(a)(2) by eliminating the deduction for the cost of 
regulatory services provided by NASD Regulation, Inc. (``NASDR'') and 
increasing the percentage of eligible revenue that is shared; and (3) 
extend the pilot period with respect to which market data revenue 
sharing is available through December 31, 2002.\5\
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    \5\When Nasdaq filed the proposed rule change, the proposed rule 
language stated the pilot period would last ``until'' December 31, 
2002, while the description of the proposal stated the pilot period 
would last ``through'' December 31, 2002. To avoid confusion, Nasdaq 
consented to change the proposed rule language to state that the 
pilot period would last through December 31, 2002. The Commission 
did not require Nasdaq to file a formal amendment to accomplish this 
change, since it was Nasdaq's intention to have the pilot period 
last through December 31, 2002. See telephone conversation between 
John M. Yetter, Assistant General Counsel, Nasdaq, and Joseph Morra, 
Special Counsel, Division of Market Regulation, SEC, May 10, 2002.
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    The proposed rule change is effective on filing, but Nasdaq will 
implement the proposed rule change beginning on June 1, 2002, for a 
pilot period running through December 31, 2002. Accordingly, the first 
regulatory fee will be based upon market activity during the month of 
June, and the last fee under the pilot will be based upon market 
activity during the month of December. The increase in market data 
revenue sharing will apply to trade reporting activity from June 
through December.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
7010. System Services
    (a) (1) No change.
(2) Market Data Revenue Sharing
    (A) For a pilot period lasting [until] through [October] December 
31, 2002, NASD members shall receive a market data revenue sharing 
credit. The total credit shall be calculated in accordance with the 
following formula:

Credit = [(0.80)](0.90) x (Eligible Revenue) x (Member's Volume 
Percentage)

    (B) Definitions. The following definitions shall apply to this 
Rule:
    (i) ``Eligible Revenue'' shall mean[:]
    [a.] The portion of the net distributable revenues that Nasdaq, 
through the NASD, is eligible to receive under the Nasdaq UTP Plan, 
that is attributed to the Nasdaq Level 1 Service for Eligible 
Securities.[, minus]
    [b. The portion of the fee charged to Nasdaq by NASD Regulation, 
Inc. for regulatory services allocated to the Nasdaq Level 1 Service 
for Eligible Securities.]
    (ii) ``Eligible Securities'' shall mean all Nasdaq National Market 
securities and any other security that meets the definition of 
``Eligible Security'' in the Nasdaq UTP Plan.
    (iii) ``Member's Volume Percentage'' shall mean the average of:
    a. The percentage derived from dividing the total number of trades 
in Eligible Securities that the member reports in accordance with NASD 
trade reporting rules to the Automated Confirmation Transaction Service 
(``ACT'') by the total number of trades in Eligible Securities reported 
to ACT by NASD members, and
    b. The percentage derived from dividing the total number of shares 
represented by trades in Eligible Securities that the member reports in 
accordance with NASD trade reporting rules to ACT by the total number 
of shares represented by all trades in Eligible Securities reported to 
ACT by NASD members.
    (iv) ``Nasdaq UTP Plan'' shall mean the Joint Self-Regulatory Plan 
Governing the Collection, Consolidation and Dissemination of Quotation 
and Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privilege Basis.
    (b)-(p) No change.
* * * * *
7110. Regulatory Services
    (a) Fee. NASD members will be assessed a monthly fee for the 
regulatory services provided in connection with the operation of The 
Nasdaq Stock Market during a pilot period lasting through December 31, 
2002. The fee shall be calculated at the beginning of each month using 
data

[[Page 35168]]

concerning market activity during the prior month, in accordance with 
the following formula:

Regulatory Fee = ((Monthly Regulatory Charge) x (Member's Quote Share) 
x 0.4) + ((Monthly Regulatory Charge) x (Member's Position Share) x 
0.2) + ((Monthly Regulatory Charge) x (Member's ACT Record Share) x 
0.4)

    (b) Transitional Fee Reduction. The fee for regulatory services 
payable by a member in a given month shall be reduced by an amount 
calculated in accordance with the following formula (if such amount is 
positive):

Fee Reduction = (Aggregate Fee Reduction) x (Member's Share of Fee 
Reduction)

    (c) Definitions. The following definitions shall apply to this 
Rule:
    (1) ``Aggregate Fee Reduction'' shall mean the lesser of (i) the 
Aggregate Impact during a month or (ii) $416,667.
    (2) ``Aggregate Impact'' shall mean the sum of each Member's Impact 
that is positive.
    (3) ``Implicit Monthly Fee'' shall mean the product of (i) the 
Monthly Regulatory Charge with respect to a particular month and (ii) 
the Member's Volume Percentage (as defined in Rule 7010(a)(2)) during 
such month.
    (4) ``Market ACT Record Total'' shall mean the sum of each Member's 
ACT Record Total.
    (5) ``Member's ACT Record Share'' shall mean a percentage 
calculated by dividing the Member's ACT Record Total by the Market ACT 
Record Total.
    (6) ``Member's ACT Record Total'' shall mean the greater of (i) the 
number of all types of ACT records in which the member is the reporting 
party during the month, minus the number of ACT records reported for 
dissemination to the public in which the member is either the reporting 
party or the contra-party during the month, or (ii) the number of ACT 
records reported for dissemination to the public in which the member is 
the reporting party during the month.
    (7) ``Member's Impact'' shall mean the difference between the 
regulatory fee payable by the member under subsection (a) with respect 
to a particular month and the highest Implicit Monthly Fee for such 
member in any month between January 2002 and such month.
    (8) ``Member's Position Share'' shall mean a percentage calculated 
by dividing (i) the sum of the number of days during the month that the 
member posted a bid or offer under its name with respect to each 
Nasdaq-listed security by (ii) the sum of the number of days during the 
month that each member posted a bid or offer under its name with 
respect to each Nasdaq-listed security.
    (9) ``Member's Quote Share'' shall mean a percentage calculated by 
dividing the member's quotation activity in Nasdaq-listed securities 
during the month by the quotation activity of all members in Nasdaq-
listed securities during the month. Prior to the introduction of the 
version of the Nasdaq National Market Execution System (the ``NNMS'') 
commonly referred to as SuperMontage, quotation activity shall be 
measured by quotation updates. In the version of the NNMS commonly 
referred to as SuperMontage, quotation activity shall be measured by 
any entry, modification, cancellation, or cancel/replace of a member's 
best priced Quote/Order on the bid or the offer side of the market.
    (10) ``Member's Share of Fee Reduction'' shall mean a percentage 
calculated by dividing the Member's Impact by the Aggregate Impact.
    (11) ``Monthly Regulatory Charge'' shall mean sum of (i) the fee 
that Nasdaq pays to NASD Regulation, Inc. for regulatory services with 
respect to Nasdaq-listed securities for the month, and (ii) costs 
incurred by Nasdaq's MarketWatch Department for regulatory services 
with respect to Nasdaq-listed securities during the month.
    (12) ``Nasdaq-listed securities'' shall mean Nasdaq National Market 
securities and Nasdaq SmallCap Market securities.
* * * * *

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
    Nasdaq proposes to change the manner in which it shares tape 
revenue with NASD members that report trades in Nasdaq-listed 
securities to Nasdaq's Automated Confirmation Transaction Service 
(``ACT''), and is instituting a direct fee for the regulatory services 
provided in connection with the operation of The Nasdaq Stock Market. 
Nasdaq is making these changes to ensure that Nasdaq can effectively 
compete with exchanges that trade Nasdaq securities on an unlisted 
trading privileges basis (``UTP Exchanges'') without impairing the 
effectiveness of Nasdaq's regulatory program.
    In the past, Nasdaq has funded the costs associated with regulatory 
services through the market data revenue that it receives through the 
NASD, under the Joint Self-Regulatory Plan Governing the Collection, 
Consolidation and Dissemination of Quotation and Transaction 
Information for Nasdaq-Listed Securities Traded on Exchanges on an 
Unlisted Trading Privilege Basis (the ``Nasdaq UTP Plan'' or the 
``Plan''). The portion of this revenue used to fund regulation may be 
characterized as an implicit fee for regulatory services, based on the 
magnitude of trade reporting activity. Recently, however, UTP Exchanges 
have expanded their programs for trading Nasdaq securities and have 
begun sharing the market data revenue that they receive under the Plan 
with market participants that execute and/or report trades through 
their facilities. Nasdaq has also instituted a program for sharing 
market data revenue with members, but shares only a portion of the 
revenues remaining after funding its regulatory costs.\6\
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    \6\Securities Exchange Act Release Nos. 45342 (Jan. 28, 2002), 
67 FR 5109 (Feb. 1, 2002) (SR-NASD-2001-96); and 45444 (Feb. 14, 
2002), 67 FR 8051 (Feb. 21, 2002) (SR-NASD-2002-17).
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    Nasdaq has concluded that financing regulatory services out of 
market data revenue divorces the costs of regulation from the 
marketplace activities that necessitate it and thereby reduces the 
transparency of these costs to market participants. Nasdaq is also 
concerned that using market data revenue for this purpose may 
ultimately prove untenable in an environment where the sharing of 
market data revenues has become a basis for competition. Accordingly, 
Nasdaq is implementing a direct, explicitly formulated fee on members 
for regulatory services and is eliminating the deduction for regulatory 
costs from its market data revenue sharing program. At the same time, 
Nasdaq will increase the amount of tape revenue shared with NASD 
members that trade report Nasdaq securities to Nasdaq.
    The Act imposes obligations on self-regulatory organizations to 
oversee the activities of their members. Currently, the NASD divides 
its regulatory responsibilities with respect to The

[[Page 35169]]

Nasdaq Stock Market between Nasdaq and NASDR, with Nasdaq's MarketWatch 
Department performing real-time surveillance and NASDR's Market 
Regulation Department performing extensive post-trade surveillance and 
investigation of the quoting and trading activity of NASD member firms. 
MarketWatch monitors quote and trade information, as well as third-
party news sources, to detect unusual market activity that may be 
indicative of rule violations or disorderly market conditions. It helps 
to detect and correct inaccurate trade reports and monitors the market 
to resolve locked and crossed markets and trade-or-move rule 
violations. NASDR's Market Regulation Department conducts surveillance 
on a vast range of regulatory matters, including compliance with rules 
relating to order handling, trade reporting, best execution, and limit 
order protection, and the detection of wash sales, front running, 
manipulation, insider trading, and other forms of fraud. The Market 
Regulation Department also conducts on-site examinations of market 
makers, prosecutes violations of Nasdaq marketplace rules, and refers 
violations of SEC rules to the Commission.
    Nasdaq bears the cost of all of these regulatory services, however: 
Directly, in the case of the MarketWatch Department, and through 
payments to NASDR in the case of its Market Regulation Department. If 
the Commission grants Nasdaq's application to register as a national 
securities exchange, Nasdaq will be directly responsible for regulation 
of its members, but will discharge many of its responsibilities through 
a Regulatory Services Agreement with NASDR, under which Nasdaq will 
continue to pay NASDR for services provided. Thus, the financial burden 
associated with regulation will remain largely unchanged following 
exchange registration.\7\
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    \7\The costs of regulation incurred by Nasdaq to operate The 
Nasdaq Stock Market should not be confused with costs incurred by 
the NASD in performing non-Nasdaq regulatory activities--such as 
member examinations and regulating the sales and trading of fixed 
income securities, investment company securities, and other non-
Nasdaq securities--which are financed through assessments under the 
NASD By-Laws.
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    Nasdaq's traditional practice of funding regulatory costs out of 
market data revenue\8\ is not sustainable in an environment where 
market participants have increasing opportunities to execute and/or 
report trades through UTP Exchanges and where Nasdaq UTP Plan 
participants compete by sharing market data revenue with market 
participants. Market data revenue sharing, although a feature of the 
current competitive environment, has the potential to wipe out the 
resources traditionally used to fund regulation. Moreover, if a market 
participant chooses to post quotes on Nasdaq but to report some portion 
of its trades to a UTP Exchange, the decrease in market data revenue 
received by Nasdaq will not be offset by a decrease in its regulatory 
costs. As long as the market participant remains active in Nasdaq, 
NASD/Nasdaq retains a responsibility for maintaining a program aimed at 
detecting regulatory infractions by the market participant and its 
customers.
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    \8\Prior to the introduction of its market data revenue sharing 
program, Nasdaq financed all of its regulatory costs from market 
data revenue. Under the market data revenue sharing program that 
Nasdaq put into effect in February 2002, Nasdaq shares 80% of 
``eligible revenue'' with members, with each member's share of 
eligible revenue based on the percentage of trades reported through 
ACT that are attributable to the member (measured with reference to 
the number of trades and share volume). Securities Exchange Act 
Release Nos. 45342 (Jan. 28, 2002), 67 FR 5109 (Feb. 1, 2002) (SR-
NASD-2001-96); and 45444 (Feb. 14, 2002), 67 FR 8051 (Feb. 21, 2002) 
(SR-NASD-2002-17). However, ``eligible revenue'' consists solely of 
the market data revenue associated with Nasdaq's basic data service, 
the Nasdaq Level 1 Service, minus the portion of the fee charged to 
Nasdaq by NASDR for regulatory services that is allocated to Nasdaq 
Level 1 Service. (The allocation of the fee to Level 1 is made in 
proportion to the revenue derived from Level 1 in comparison to 
other market data revenue.) Thus, under the current program, the 
entire NASDR fee is recovered before any revenue is shared. Under 
this approach, an NASD member is implicitly charged the market 
regulation fee on the basis of the number of trades and the share 
volume that the NASD member trade reports to Nasdaq.
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    Fragmentation of trade reporting data will make Nasdaq's regulatory 
program less effective and more costly, however, because NASDR will not 
have ready access to information about trades reported to UTP 
Exchanges. This will make it more difficult for NASDR to detect a range 
of abuses, including insider trading, wash sales, short sale rule 
violations, and violations of best execution obligations and limit 
order protection obligations. For example, a party wishing to trade on 
the basis of material non-public information might distribute its 
trading between market venues, making it less likely that the trades 
observed by any one regulator would give rise to suspicion. If an 
investigation of fraudulent conduct were commenced, moreover, NASDR 
would have to obtain information about suspicious trades from UTP 
Exchanges and/or their members. In time-sensitive investigations, the 
resulting delays may prevent regulators from taking prompt action to 
stop the fraudulent conduct. Moreover, the ultimate outcome of such an 
investigation may be adversely affected if the trade reporting rules of 
the UTP Exchange do not require the same range of information as NASD/
Nasdaq trade reporting rules.
    Nasdaq believes that the Commission must develop a policy response 
to the regulatory challenges posed by fragmentation of trade reporting 
activity. To enhance its ability to fulfill its own regulatory 
obligations, however, Nasdaq also believes that a restructuring of its 
traditional mechanisms for funding regulatory services is necessary. 
Rather than using a shrinking pool of market data revenue to underwrite 
regulation, Nasdaq believes that it must institute a direct charge on 
members. Such a charge will ensure that each member pays its fair share 
of the regulatory costs necessitated by its participation in the Nasdaq 
market. It will also provide Nasdaq with flexibility to share market 
data revenue in a manner consistent with UTP exchanges, rather than 
using these revenues to cross-subsidize regulation.
    For the remainder of 2002, Nasdaq proposes to fund the costs 
associated with regulation of The Nasdaq Stock Market by imposing a fee 
based upon the number of markets that a member makes in Nasdaq 
securities (i.e., the number of stocks in which the member posts a 
quote, whether it is a market maker or an electronic communications 
network), the number of quotation changes generated by that firm, and 
the number of ACT records reported by the firm. The number of markets 
that a member makes and its quoting activity correlate to the resources 
that NASDR (and therefore Nasdaq) must expend to surveil the firm for 
compliance with rules relating to the handling of customer orders, such 
as the SEC's Order Handling Rules and the NASD's ``Manning'' Rule, as 
well as the resources expended by Nasdaq's MarketWatch Department. A 
firm's ACT records correlate with resources expended to surveil for 
compliance with trading and reporting rules, such as rules relating to 
short sales, trade reporting, best execution, wash sales, front 
running, insider trading, and fraud.
    To a large extent, the regulatory costs incurred by Nasdaq are 
technological: The costs associated with developing, operating, and 
maintaining systems that are capable of storing and analyzing vast 
quantities of market data. These systems include Nasdaq MarketWatch's 
Surveillance Delivery Real-Time (``SDR'') system, which conducts real-
time analysis of quote and trade information, as well as third-party 
news sources, for unusual market activity or conduct that may violate 
marketplace

[[Page 35170]]

rules, and NASDR's detection systems, such as the Advanced Detection 
System (``ADS'') and the Securities Observation News Analysis and 
Research (``SONAR'') system, which conduct more extensive post-trade 
analysis, both through automated detection algorithms and through the 
powerful analytical tools that they provide to NASDR personnel. 
Accordingly, Nasdaq believes that it is reasonable to assess a 
regulatory charge based upon the quoting and trading data that feed 
into these systems.
    To be sure, there may be other aspects of a member's activity that 
create regulatory costs. Accordingly, during the remaining months of 
2002, Nasdaq will conduct an extensive analysis of the costs incurred 
to regulate particular market activities (e.g., quoting, trade 
execution, trade reporting, listing, order entry, etc.) with the goal 
of more precisely calibrating fees for regulation with the activities 
that necessitate it. In the meantime, however, Nasdaq believes that it 
is essential to begin the process of passing regulatory costs through 
to members directly, to ensure that regulatory arbitrage does not 
emerge as a serious threat to market integrity.
    Nasdaq's total regulatory costs for the period from June 1, 2002 to 
December 31, 2002 are expected to be approximately $38,967,000: 
$3,967,000 for the operation of the MarketWatch Department and 
$35,000,000 to be paid to NASDR for the services that it provides.\9\ 
During each month of this period, Nasdaq will allocate 40% of the cost 
to members based upon their quotation activity, 40% based on their ACT 
records, and 20% based upon the markets that they make.\10\ 
Specifically, quotation activity will be measured by dividing the 
quotation activity attributable to the member by all quotation activity 
during the month.\11\ Market making will be measured by dividing (i) 
the sum of the number of days during the month that the member posted a 
bid or offer under its name with respect to each Nasdaq-listed security 
by (ii) the sum of the number of days during the month that each member 
posted a bid or offer under its name with respect to each Nasdaq-listed 
security.\12\
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    \9\These amounts exclude regulatory costs associated with the 
operation of Nasdaq's OTC Bulletin Board Service and Intermarket 
Trading System/Computer Assisted Execution System, which are used 
for trading securities other than Nasdaq-listed securities. The 
regulatory costs associated with these systems are not being charged 
directly to members under this proposed rule change.
    \10\A greater weight is assigned to the quotation and ACT record 
components because of the predominance of costs associated with the 
storage and analysis of quotation and trading data.
    \11\In Nasdaq's current quoting environment, a member may 
display only one two-sided quote per stock. In Nasdaq's future 
SuperMontage environment, a member may maintain Quotes/Orders at 
multiple price levels. Accordingly, the best priced Quote/Order on 
the bid and the offer side of the market will be used to measure 
quotation activity.
    \12\For example, if a member posted quotes in 30 stocks during 
every day of a month with 22 trading days, the numerator used to 
calculate its ``position share'' would be 660.
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    Because all ACT records (clearing and non-clearing, tape and non-
tape) have regulatory costs associated with them, it could be argued 
that a portion of the regulatory fee should be tied directly to the 
number of records in which a member is a reporting party. Some market 
participants, however, routinely interpose themselves as a counter 
party to their customers' trades, and therefore use multiple ACT 
records to report a single transaction fee: A fee tied directly to the 
number of records would impose a heavy burden upon such market 
participants, in effect penalizing them for their business model and 
the patterns of ACT usage that it dictates. To avoid this result, the 
number of ACT records used to calculate each member's share is the 
greater of (i) the number of all types of ACT records (i.e., clearing 
and non-clearing, tape and non-tape) in which the member is the 
reporting party, minus the number of ACT records reported for 
dissemination to the public (i.e., tape records) in which the member is 
either the reporting party or the contra-party, or (ii) the number of 
ACT records reported for dissemination to the public (i.e., tape 
records) in which the member is the reporting party. For a firm that 
frequently uses multiple records to report a single transaction, the 
first part would result in the greater number, but the subtraction of 
tape records would offset the double counting that would occur if all 
ACT records were considered. For a firm that does not frequently use 
multiple records, the first part would drastically undercount its 
usage, so the second part (ACT tape records that it reports) provides a 
better measure of its activity. The number of reports attributed to 
each member under this formula would then be totaled to determine the 
percentage of the total attributable to each member.
    The regulatory charge assigned to some members may be higher than 
the implicit fee that they would have ``paid'' under the old system for 
funding regulation. Although Nasdaq believes that the ultimate goal of 
an explicit regulatory fee must be to charge each member the regulatory 
costs to which its activities give rise, the pilot fee that Nasdaq is 
introducing itself represents a transitional step between the implicit 
fee and the more precisely calibrated fee that Nasdaq will develop this 
year. Accordingly, to ease the transition, the proposed rule change 
incorporates a fee reduction, calculated with reference to the 
difference between a member's regulatory fee and the implicit fee that 
the member paid, or would have paid, during that month or any preceding 
month of 2002. Specifically, all members whose regulatory fee in a 
particular month exceeds the highest implicit fee\13\ in that month or 
any preceding month of 2002 will be eligible to receive a fee reduction 
in proportion to the member's share of the total impact on adversely 
affected members. The aggregate amount of the fee reduction per month 
will be the lesser of (i) the total impact on adversely affected 
members or (ii) $416,667, an amount that represents Nasdaq's projection 
of the average monthly difference between the regulatory fee chargeable 
to members (before the fee reduction) and the increased amount of 
market data revenue that will be shared with members in the period from 
June through December 2002 as a result of the proposed rule changes to 
NASD Rule 7010(a)(2) made by this filing. The fee reduction for a 
specific member will be determined by multiplying the aggregate amount 
of fee reduction by a percentage calculated by dividing the impact on 
the member\14\ by the total impact on all adversely affected members.
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    \13\Calculated by multiplying regulatory costs for the month by 
the member's share of trade activity for the month, measured using 
the same methodology as under the market data revenue sharing 
program.
    \14\That is, the difference between the member's regulatory fee 
and the implicit fee that the member paid, or would have paid, 
during that month or any preceding month of 2002.
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    In addition, Nasdaq will be eliminating the deduction of regulatory 
charges from the pool of revenue eligible for sharing under its market 
data revenue sharing program, and increasing the percentage of eligible 
revenue shared from 80% to 90%. As a result, from Nasdaq's revenue 
perspective, it is expected that the net effect of all the changes made 
by this filing will be revenue neutral or revenue diminishing. 
Particular members, however, may pay more or less, on a net basis, than 
they would have without these changes.
    In particular, members that choose to report a significant number 
of trades through non-Nasdaq facilities will pay more than under an 
implicit fee model, but Nasdaq presumes that they choose

[[Page 35171]]

to report trades elsewhere in large part because of the market data 
revenue sharing offered by exchanges where they print trades. The new 
regulation fee, however, will ensure that such members bear a portion 
of the cost of the regulatory services that continue to benefit them, 
their customers, and the market as a whole.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with the 
Act, including section 15A(b)(5) of the Act,\15\ 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, and section 15A(b)(6) of the Act,\16\ which requires rules 
that are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. The regulatory fee is 
objectively allocated among members based on their quotation activity, 
ACT reporting activity, and market-making activity during a recent 
prior period. The level of the fee is reasonable, in that it is 
designed to pass through the costs that Nasdaq will incur during the 
last eight months of 2002 to regulate the market. Moreover, Nasdaq 
expects that the increase in the level of market data revenue sharing 
available to members will be at least equal to the total regulatory 
charges. Accordingly, the proposed rule change is expected to be 
revenue-neutral or revenue diminishing from Nasdaq's perspective.
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    \15\15 U.S.C. 78o-3(b)(5).
    \16\15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will not 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 become effective pursuant to section 
19(b)(3)(A)(ii) of the Act\17\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\18\ because it establishes or changes a due, fee, or other 
charge imposed by the Association. 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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    \17\15 U.S.C. 78s(b)(3)(A)(ii).
    \18\17 CFR 240.19b-4(f)(2).
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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 proposal 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 Association. All 
submissions should refer to file number SR-NASD-2002-61 and should be 
submitted by June 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12336 Filed 5-16-02; 8:45 am]
BILLING CODE 8010-01-P