[Federal Register Volume 67, Number 96 (Friday, May 17, 2002)]
[Notices]
[Pages 35171-35174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12337]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45915; File No. SR-NASD-2001-44]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 Thereto by the National Association of Securities 
Dealers, Inc. To Allow Electronic Communications Networks and 
Alternative Trading Systems To Participate in the Over-the-Counter 
Bulletin Board

May 10, 2002.

I. Introduction

    On July 12, 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''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to allow electronic communications networks 
(``ECNs'') and alternative trading systems (``ATSs'') to participate in 
the Over-the-Counter Bulletin Board (``OTCBB''). On August 28, 2001, 
the Commission published notice of the proposal in the Federal 
Register.\3\ The Commission received seven comments on the proposal. On 
January 18, 2002, the NASD submitted Amendment No. 1 to the 
proposal.\4\ This notice and order approves the proposed rule change, 
solicits comment from interested persons on Amendment No. 1, and 
approves Amendment No. 1 on an accelerated basis.
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\See Securities Exchange Act Release No. 44732 (August 22, 
2001), 66 FR 45348.
    \4\See Letter from Teri Nelson Jacoby, Office of General 
Counsel, Nasdaq, to Katherine A. England, Division of Market 
Regulation (``Division''), Commission, dated January 18, 2002 
(``Amendment No. 1''). In Amendment No. 1, the NASD proposed 
additional rule text to clarify that an ATS or ECN that participates 
on the OTCBB must reflect non-subscriber access or post-transaction 
fees in its posted quote on the OTCBB.
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II. Description of the Proposal

    The OTCBB is an automated quotation service that displays real-time 
quotes, last-sale prices, and volume information in over-the-counter 
(``OTC'') equity securities.\5\ The OTCBB,

[[Page 35172]]

which began operating on a pilot basis in June 1990, is designed to 
facilitate the widespread publication of quotation and last-sale 
information for OTC equity securities. The Commission permanently 
approved the OTCBB in 1997.\6\
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    \5\An OTC equity security generally is an equity security that 
is not listed or traded on Nasdaq or a national securities exchange. 
OTCBB securities include national, regional, and foreign equities, 
warrants, units, American Depositary Receipts, and direct 
participation programs securities.
    \6\See Securities Exchange Act Release No. 38456 (March 31, 
1997), 62 FR 16635 (April 7, 1997) (approving SR-NASD-92-7).
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    The OTCBB operates pursuant to NASD Rule 6500 et seq. These rules 
provide, among other things, that all securities quoted on the OTCBB 
must be sponsored by an NASD member that is a participating market 
maker. An OTC equity security not currently quoted on the OTCBB is 
considered ``ineligible'' until a market maker registers the security 
on NASD's Form 211.\7\ The market maker also must provide certain 
additional information about the issuer of the security, for purposes 
of NASD Rule 6530, on a Form 211 Addendum. Under NASD Rule 6530, the 
issuer must be current in its filings with the Commission or other 
applicable regulatory authority for the security to be eligible for 
quotation on the OTCBB.
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    \7\In certain limited circumstances, a market maker is permitted 
to quote a security on the OTCBB by submitting a Rule 15c2-11 
Exemption Form and/or a Form 211 Addendum, depending on the 
particular situation. For example, a market maker could be able to 
use a Rule 15c2-11 Exemption Form for certain securities that are 
already quoted on another quotation medium (e.g., the Pink Sheets) 
or are being delisted from Nasdaq. Telephone conversation between 
Teri Nelson Jacoby and Jeffrey Davis, Office of General Counsel, 
Nasdaq; Ken Worm, Market Regulation Department, NASD Regulation, 
Inc. (``NASDR''); Lisabeth Heese, Nasdaq Transaction Services; and 
Nancy Sanow and Michael Gaw, Division, Commission, on May 9, 2002 
(``May 9 call'').
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    A market maker would submit the Form 211 and the Addendum to the 
NASDR OTC Compliance Unit. If the NASDR OTC Compliance Unit ``clears'' 
the security for quotation, Nasdaq's Market Data Integrity Unit would 
notify the market maker that it has been registered in the security and 
that it may enter a quote for that security on the OTCBB. Once cleared, 
the security would have ``eligible'' status. During the eligible 
period, Nasdaq administers a frequency-of-quotation test. The test must 
be satisfied before the security is identified as ``active.'' To become 
active, the security must have been quoted on the OTCBB on at least 12 
business days during the preceding 30 calendar days, with no more than 
four consecutive business days without quotations.\8\ If the security 
is active, a market maker need not submit a Form 211 before quoting the 
security. However, a market maker must register with Nasdaq when it 
enters a quotation on the OTCBB for the first time; this registration 
may be completed on-line.
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    \8\See NASD Rule 6540(b); 17 CFR 240.15c2-11(f)(3)(i).
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    Proposed NASD Rule 6540(b) would permit an ATS or ECN to 
participate in the OTCBB in the same way that a market maker currently 
participates. If the security were not ``active,'' the ATS or ECN would 
be required to provide the same information required by the Form 211 
Addendum.\9\ The first time that an ATS or ECN posted a quotation in an 
active security, it would be required to register on-line in the same 
manner as a market maker.
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    \9\Nasdaq anticipates that ATSs and ECNs generally would submit 
quotations for those securities that do not require the filing of a 
Form 211 (i.e., ``active'' securities). See May 9 call.
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    In addition, ATSs and ECNs that wish to participate in the OTCBB 
would be required to comply with all other OTCBB rules applicable to 
market makers. For example, the OTCBB system does not permit a market 
maker to post a firm quote for less than the minimum size required by 
NASD Rule 6750.\10\ Thus, an ATS or ECN would not be able to post in 
the OTCBB montage an order on behalf of a user for less than the 
minimum size required by NASD Rule 6750.\11\
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    \10\Telephone conversation between Teri Nelson Jacoby, Office of 
General Counsel, Nasdaq; Lisabeth Heese, Nasdaq Transaction 
Services; and Michael Gaw, Division, Commission, on April 23, 2002.
    \11\See id.
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III. Comments Received, NASD Response, and Amendment No. 1

    The Commission received seven comments from six commenters in 
response to the proposal.\12\ Three commenters supported the proposal 
without qualification.\13\ The fourth commenter, Knight, was generally 
supportive but raised concerns that the proposal did not set forth with 
sufficient particularity the requirements that would be imposed on ATSs 
and ECNs electing to participate in the OTCBB.\14\ Knight was 
``particularly concerned with Nasdaq's failure to state unequivocally 
that ATSs participating in the OTCBB shall not be permitted to levy 
post transaction fees against non-subscribers.'' Knight further stated 
that ATSs and ECNs should be prohibited from levying fees on non-
subscribers or be required to include non-subscriber fees in their 
quotes on the OTCBB. Furthermore, Knight believed that ATSs and ECNs 
that participate in the OTCBB should be required to comply with all 
rules applicable to other market maker participants, including, but not 
limited, to Rule 15c2-11.
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    \12\See e-mail from Malcolm Steed to [email protected], 
dated September 9, 2001 (``Steed''); letter from K. Richard B. 
Niehoff to Margaret McFarland, Deputy Secretary, Commission, dated 
September 17, 2001 (``Niehoff''); letter from Kenneth Veneziano, 
Executive Vice President and General Counsel, GlobeNet Securities, 
Inc., to Jonathan G. Katz, Secretary, Commission, dated September 
18, 2001; letter from Richard B. Levin, Assistant General Counsel 
and Regulatory Affairs Officer, Knight Securities, L.P., dated 
September 19, 2001 (``Knight''); e-mail from Gary Swancey to [email protected], dated September 25, 2001 (``Swancey''); letter 
from Chris Concannon, Vice President, The Island ECN, Inc., dated 
September 26, 2001 (``Island''); letter from Kenneth Veneziano, 
Executive Vice President and General Counsel, GlobeNet Securities, 
Inc., to Jonathan G. Katz, Secretary, Commission, dated October 9, 
2001 (``GlobeNet II'').
    \13\See Island; Steed; Swancey.
    \14\See Knight.
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    The fifth commenter--GlobeNet, an ATS that currently operates a 
matching system for orders in OTCBB securities and that seeks to 
participate in the OTCBB--also advocated approval of the proposal. In 
GlobeNet's view, consolidating the quotes of market makers and ATSs on 
the OTCBB would facilitate the search by broker-dealers for the best 
price for their customers' orders. GlobeNet also stated that Nasdaq's 
proposal would enhance fair competition by allowing ATSs and market 
makers to compete on equal terms and would encourage dealers in OTCBB 
securities to compete with ATSs on price. GlobeNet cautioned, however, 
that it did not believe that the proposal was the ideal means to allow 
ATS and ECN participation on the OTCBB. GlobeNet noted that the NASD's 
proposal was structured to treat an ATS as a market maker, even though 
an ATS operates in a very different manner than a market maker.
    In its second comment letter that responded to the views and 
concerns raised by other commenters, GlobeNet argued that its business 
model should not be undercut by precluding its ability to charge 
transaction fees. GlobeNet stated, nevertheless, that ``the ability of 
GlobeNet to participate in the OTCBB is of such paramount importance to 
our ability to compete on a level playing field with market makers in 
the OTCBB that we reluctantly would acquiesce for the time being to a 
Nasdaq decision to reflect our transaction fees in the GlobeNet quote 
on the OTCBB.''\15\ GlobeNet added that, when the Commission reaches a 
resolution on access fees in the Nasdaq market, it should apply the 
same approach to the OTCBB market.
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    \15\GlobeNet II.
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    The sixth commenter, Niehoff, was the only commenter who strongly 
opposed the NASD's proposal. Niehoff characterized the proposal as 
``clearly anti-competitive'' and ``a thinly disguised effort by Nasdaq 
to dictate the terms and conditions under which

[[Page 35173]]

trading in OTCBB securities takes place.''\16\ Niehoff recommended that 
the Commission explore several issues--including whether an ATS or ECN 
desiring to participate in the OTCBB should be required to be an NASD 
member, to file Form 211, and to incur participation costs--and 
republish the proposal for additional comment.
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    \16\Niehoff.
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    On November 27, 2001, Nasdaq submitted a response to the comments 
noted above.\17\ With respect to the application of Rule 15c2-11 to 
ATSs and ECNs, Nasdaq stated that it would apply NASD Rule 6740, 
Submission of Rule 15c2-11 Information on Non-Nasdaq Securities, to 
ATSs and ECNs in the same manner as it applies to market makers. Nasdaq 
noted, however, that the Commission has issued an exemption that 
permits broker-dealers to publish or submit quotations in quotation 
mediums--including quotation mediums that are not inter-dealer 
quotation systems--when they satisfy the requirements set forth in the 
exemption letter.\18\ Nasdaq stated that it would adjust its 
administration of Rule 15c2-11 to be consistent with the Commission's 
interpretation of that rule, including with respect to GlobeNet and 
other similarly situated parties.
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    \17\See letter from Mary M. Dunbar, Vice President, Nasdaq, to 
Jonathan G. Katz, Secretary, Commission, dated November 13, 2001.
    \18\See letter from Larry E. Bergmann, Division, Commission, to 
Howard Kramer, Schiff Hardin & Waite, dated October 6, 2000.
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    With respect to the comment submitted by Niehoff, Nasdaq stated 
that Niehoff did not offer specific reasons why he believes the 
proposal to be anti-competitive. Nasdaq believes, to the contrary, that 
the proposal is pro-competitive because it would broaden participation 
on the OTCBB while treating all participants equally. Also, Nasdaq 
believes that all ATSs and ECNs that seek to participate in the OTCBB 
must be NASD members; otherwise, the NASD would not have jurisdiction 
to regulate and oversee all participants. Nasdaq further stated that 
ATSs and ECNs would participate by posting quotes on the OTCBB through 
a Nasdaq Workstation II or an application program interface, as market 
makers currently do. According to Nasdaq, the costs to ATSs and ECNs of 
participation in the OTCBB would be the same as for market makers.
    To address the issue of ATS and ECN fees, the NASD filed Amendment 
No. 1 to the proposal. As stated in Amendment No. 1, Nasdaq believes 
that, because market makers that enter quotes in the OTCBB are not 
permitted to charge access or post-transaction fees over and above 
their posted quotes, a participating ATS or ECN should be similarly 
prohibited from charging such fees, unless such fees were incorporated 
in its posted quote. Nasdaq indicated that the terms ``access fee'' and 
``post-transaction fee'' both refer to fees charged by an ATS or ECN to 
participants with whom the ATS or ECN does not have a subscriber 
agreement. Typically, the fees are assessed on a per-share basis each 
time the non-subscriber accesses the posted quote of the ATS or ECN.
    Nasdaq proposed to add new paragraph (c) to NASD Rule 6540 to 
reflect the foregoing. Paragraph (c) of the original proposal would 
become paragraph (d). Paragraph (b) is unchanged from the original 
proposal. NASD Rule 6540 would therefore read as follows. New text is 
italicized:
6540. Requirements Applicable to Market Makers
    (a) No change.
    (b) An alternative trading system (ATS), as defined in Regulation 
ATS, Rule 300(a), or electronic communications network (ECN) as defined 
in SEC Rule 11Ac1-1(a)(8), shall be eligible to participate in the 
Service, provided however, that such ATS or ECN is an NASD member and 
otherwise meets the requirements for participation set forth in the OTC 
Bulletin Board Rules. Where used in the OTC Bulletin Board Rules, the 
term ``market maker'' shall be construed to include a participating ATS 
or ECN.
    (c) A participating ATS or ECN shall reflect non-subscriber access 
or post-transaction fees in the ATS's or ECN's posted quote in the OTC 
Bulletin Board montage.
    (d) No change.

IV. Discussion

A. The Proposal as Amended

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the regulations 
thereunder applicable to the NASD.\19\ In particular, the Commission 
believes that the proposal is consistent with section 15A(b)(6) of the 
Act.\20\ Section 15A(b)(6) requires, among other things, that the rules 
of a national securities association be designed to prevent fraudulent 
and manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest.
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    \19\In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \20\15 U.S.C. 78o-3(b)(6).
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    The Commission finds that participation by ATSs and ECNs in the 
OTCBB will enhance competition in the marketplace for OTC equity 
securities. In the Commission's view, the proposal will foster 
competition because a greater number of market participants will be 
able to display their quotations on the OTCBB. Moreover, quotations for 
OTCBB securities will now be capable of being displayed in a single 
system, so that broker-dealers that execute orders in such securities 
can more readily ascertain the best prices.
    As proposed in Amendment No. 1, an ATS or ECN that posts a quote 
for a security on the OTCBB may charge a fee to a non-subscriber for 
executing against that quote, provided that the fee is reflected in the 
quote. The Commission finds that Nasdaq's approach to ATS and ECN fees 
with respect to OTCBB participation is consistent with the Act.\21\
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    \21\The Commission notes that, while Nasdaq for the sake of 
convenience uses the definition of ``electronic communication 
network'' set forth in Rule 11Ac1-1(a)(8), 17 CFR 240.11Ac1-1(a)(8), 
an ECN that participates in the OTCBB must independently satisfy the 
Commission's requirements in order to be considered an ECN for 
purposes of the Commission's Order Handling Rules.
    In addition, the Commission expects that the NASD will address 
how transactions on the OTCBB that result from the posted quote of 
an ATS or ECN will be reported, cleared, and confirmed in light of 
the fact that such quote must include non-subscriber access or post-
transaction fees, if any.
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    The Commission also believes that it is reasonable for the NASD to 
require ATSs and ECNs that wish to post quotes on the OTCBB to comply 
with the same obligations as a market maker. A broker-dealer is subject 
to Rule 15c2-11 whenever it places a quotation\22\ in any quotation 
medium--including an ATS or ECN--unless it can rely on one of the 
exceptions set forth in Rule 15c2-11 or an exemption granted by the 
Commission.\23\ The Commission has previously stated that Rule 15c2-11 
would apply to an ATS or ECN if, as a registered broker-dealer, it 
displayed its own orders in the ATS or ECN.\24\ However, if the ATS or 
ECN displayed the order of another broker-dealer, the

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requirements of Rule 15c2-11 would apply only to that broker-dealer and 
not to the ATS or ECN that functions as the quotation medium for such 
order.\25\ Therefore, in a case in which an ``ineligible'' security is 
being quoted for the first time on the OTCBB through an ATS or ECN, the 
broker-dealer submitting the quote to the ATS or ECN would be required 
to submit a Form 211, rather than the ATS or ECN itself.
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    \22\''Quotation,'' as defined in Rule 15c2-11, means any bid or 
offer at a specified price with respect to a security, or any 
indication of interest by a broker or dealer in receiving bids or 
offers from others for a security, or any indication by a broker or 
dealer that he wishes to advertise his general interest in buying or 
selling a particular security. See 17 CFR 240.15c2-11(e)(3).
    \23\See Securities Exchange Act Release No. 41110 (February 25, 
1999), 64 FR 11124, 11135 (March 8, 1999) (reproposing amendments to 
Rule 15c2-11).
    \24\See id.
    \25\See id.
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    The Commission does not believe that the commenters raised any 
issue that would preclude approval of the proposed rule change. In 
particular, the Commission disagrees with one commenter's view that 
``the Commission should republish the proposal with a thorough analysis 
of the issues raised and seek further public comment.''\26\ The 
Commission believes that the issues raised by this commenter have been 
sufficiently addressed by Nasdaq, and that expanding the OTCBB to allow 
ATS and ECN participation has the potential to increase competition.
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    \26\Niehoff.
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B. Accelerated Approval of Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 to 
the proposal prior to the thirtieth day after the date of public of 
notice in the Federal Register, pursuant to section 19(b)(2) of the 
Act.\27\ Amendment No. 1 clarified the obligations that would be 
imposed on ATSs and ECNs by the new provisions of NASD Rule 6540. One 
of these obligations is that an ATS or ECN participating in the OTCBB 
must reflect non-subscriber access or post-transaction fees in a quote 
that it posts in the OTCBB montage. The Commission understands that, 
presently, only one ATS --GlobeNet-- has clearly expressed its intent 
to participate in the OTCBB, and GlobeNet in its second comment letter 
stated that it ``would acquiesce for the time being to a Nasdaq 
decision to reflect [its] transaction fees in the GlobeNet quote on the 
OTCBB.'' GlobeNet also argued that the Commission should approve the 
proposed rule change ``as quickly as possible.''\28\ Therefore, the 
Commission does not believe that an additional comment period for 
Amendment No. 1 is necessary, and that the proposed rule change, as 
amended, should be approved at this time.
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    \27\15 U.S.C. 78s(b)(2).
    \28\GlobeNet II.
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VI. Solicitation of Comments on Amended Proposal

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, 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 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-2001-44 and 
should be submitted by June 7, 2002.

VII. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASD-2001-44) is approved 
and that Amendment No. 1 thereto is approved on an accelerated basis.
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    \29\Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12337 Filed 5-16-02; 8:45 am]
BILLING CODE 8010-01-P