[Federal Register Volume 67, Number 143 (Thursday, July 25, 2002)]
[Notices]
[Pages 48691-48693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46232; File No. SR-NASD-2002-94]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
National Association of Securities Dealers, Inc. to Reinstate a 
Transaction Credit Pilot Program for Exchange-Listed Securities

July 19, 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 July 8, 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'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by Nasdaq. On 
July 17, 2002, Nasdaq amended the proposal.\3\ Nasdaq filed the 
proposal pursuant to 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.\6\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See July 17, 2002 letter from Mary M. Dunbar, Vice President 
and Deputy General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission and 
attachments (``Amendment No. 1''). In Amendment No. 1, Nasdaq 
provided clarification as to the procedural history of its 
transaction credit pilot program, and in particular, with regard to 
SR-NASD-2002-68. For purposes of calculating the 60-day abrogation 
period, the Commission considers the period to have commenced on 
July 17, 2002, the date Nasdaq filed Amendment No. 1.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ Nasdaq asked the Commission to waive the 5-day pre-filing 
notice requirement and the 30-day operative delay. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    As of July 1, 2002, Nasdaq proposes to reinstate its transaction 
credit pilot program for exchange-listed securities for a six-month 
pilot period, through December 31, 2002. The text of the proposed rule 
change is below. Proposed new language is in italics; proposed 
deletions are in brackets.\7\
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    \7\ On July 2, 2002, the Commission abrogated SR-NASD-2002-68. 
See Securities Exchange Act Release No. 46159 (July 2, 2002), 67 FR 
45775 (SR-NASD-2002-61, SR-NASD-2002-68, SR-CSE-2002-06, and SR-PCX-
2002-37) (order of summary abrogation). By abrogating SR-NASD-2002-
68, the Commission eliminated the pilot program, despite the fact 
that the NASD Rules still contained NASD Rule 7010(c)(2). Because 
Nasdaq is reinstating the pilot program at this time, the Commission 
did not require Nasdaq to file a proposed rule change to eliminate 
the language of NASD Rule 7010(c)(2). As a result, the only language 
that appears in italics as new language is the language identifying 
the expiration date of the newly reinstated pilot program.
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7010. System Services
    (a)-(b) No change.
    (c)(1) No change.
    (2) Exchange-Listed Securities Transaction Credit.
    For a pilot period, qualified NASD members that trade securities 
listed on the NYSE and Amex in over-the-counter transactions reported 
by the NASD to the Consolidated Tape Association may receive from the 
NASD transaction credits based on the number of trades so reported. To 
qualify for the credit with respect to Tape A reports, an NASD member 
must account for 500 or more average daily Tape A reports of over-the-
counter transactions as reported to the Consolidated Tape during the 
concurrent calendar quarter. To qualify for the credit with respect to 
Tape B reports, an NASD member must account for 500 or more average 
daily Tape B reports of over-the-counter transactions as reported to 
the Consolidated Tape during the concurrent calendar quarter. If an 
NASD member is so qualified to earn credits based either on its Tape A 
activity, or its Tape B activity, or both, that member may earn credits 
from one or both pools maintained by the NASD, each pool representing 
40% of the revenue paid by the Consolidated Tape Association to the 
NASD for each of Tape A and Tape B transactions. A qualified NASD 
member may earn credits from the pools according to the member's pro 
rata share of the NASD's over-the-counter trade reports in each of Tape 
A and Tape B for each calendar quarter starting with July 1, 2000 for 
Tape A reports (April 1, 2000 for Tape B reports) and ending with the 
calendar quarter starting on [April] October 1, 2002.
    (d)-(r) No change.
* * * * *

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 its proposal and discussed any 
comments it received regarding the proposal. 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 reinstate through December 31, 2002 its pilot 
program to provide a transaction credit to NASD members that exceed 
certain levels of trading activity in exchange-listed securities. 
Nasdaq's InterMarket is a quotation, communication, and execution 
system that allows NASD members to trade stocks listed on the New York 
Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex'').\8\ The InterMarket competes with regional exchanges like 
the Chicago Stock Exchange (``CHX'') and the Cincinnati Stock Exchange 
(``CSE'') for retail order flow in stocks listed on the NYSE and the 
Amex. The NASD collects trade reports from broker-dealers trading these 
securities in the over-the-counter (``OTC'') market and provides the 
trade reports to the Consolidate Tape Association (``CTA'') for 
inclusion in the Consolidated Tape. As a participant in the CTA Plan, 
the NASD is entitled to a portion of the revenue that the CTA generates 
by selling this market data information. NASD's share of the revenues 
is based on trades that it reports on behalf of these broker-dealers in 
NYSE-listed

[[Page 48692]]

securities (``Tape A'') and in Amex-listed securities (``Tape B'').
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    \8\ Nasdaq's InterMarket formerly was referred to as Nasdaq's 
Third Market. See Securities Exchange Act Release No. 42907 (June 7, 
2000); 65 FR 37445 (June 14, 2002) (SR-NASD-00-323).
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    The Transaction Credit Pilot Program (the ``Program'') began in 
1999.\9\ Under the Program, Nasdaq shares a portion of the tape 
revenues that it receives (through the NASD) from the CTA, by providing 
a transaction credit to members who exceed certain levels of OTC 
trading activity in NYSE and Amex securities. The Program helps 
InterMarket market makers and investors lower costs associated with 
trading listed securities. The Program is also an important tool for 
Nasdaq to compete against other exchanges (particularly CSE and CHX) 
that offer similar programs \10\ and thereby maintain market share in 
listed securities.
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    \9\ See Securities Exchange Act Release No. 41174 (March 16, 
1999), 64 FR 14034 (March 23, 1999) (SR-NASD-99-13). The SEC issued 
notice of subsequent extensions of the Program. See Securities 
Exchange Act Release Nos. 42095 (November 3, 1999), 64 FR 61680 
(November 12, 1999) (SR-NASD-99-59); 42672 (April 12, 2000), 65 FR 
21225 (April 20, 2000) (SR-NASD-00-10); 42907 (June 7, 2000), 65 FR 
37445 (June 14, 2000) (SR-NASD-00-32); 43831 (January 10, 2001), 66 
FR 4882 (January 18, 2001) (SR-NASD-00-72); 44098 (March 23, 2000), 
66 FR 17462 (March 30, 2001) (SR-NASD-01-15); 44734 (August 22, 
2001), 66 FR 4537 (August 26, 2001) (SR-NASD-2001-42); and 45273 
(January 14, 2002); 67 FR 2716 (January 18, 2002) (SR-NASD-2001-92).
    \10\ See Securities Exchange Act Release No. 38237 (February 4, 
1997), 62 FR 6592 (Feb. 12, 1997) (SR-CHX-97-01) and Securities 
Exchange Act Release No. 39395 (December 3, 1997), 62 FR 65113 
(December 10, 1997) (SR-CSE-97-12.)
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    Under the Program, Nasdaq calculates two separate pools of revenue 
from which credits can be earned: one representing 40% of the gross 
revenues received from the CTA for providing trade reports in NYSE-
listed securities executed in the InterMarket for dissemination by the 
CTA (Tape A), the other representing 40% of the gross revenue received 
from the CTA for reporting Amex trades (Tape B). Eligibility for 
transaction credits is based on concurrent quarterly trading activity. 
For example, an InterMarket participant that enters the market for Tape 
A or Tape B securities during a particular quarter and prints an 
average of 500 daily trades of Tape A securities during the time it is 
in the market, or that averages 500 Tape B prints during such quarter, 
would be eligible to receive transaction credits based on its trades 
during that quarter. Only those members that continue to average an 
appropriate daily execution level are eligible for transaction credits. 
Eligible members receive a pro-rata portion of the Tape A and/or Tape B 
pool, as applicable.
    The Program was scheduled to expire on June 30, 2002. Nasdaq 
submitted a proposed rule change on June 13, 2002 to extend the Program 
through December 31, 2002, and to modify the Program by providing 
transaction credits to the liquidity provider in a transaction rather 
than the reporting party.\11\ On July 2, 2002, the Commission summarily 
abrogated SR-NASD-2002-68 and certain filings of the CSE and The 
Pacific Exchange, Inc. related to market data revenue sharing.\12\ 
However, revenue sharing programs for Tape A and Tape B offered by the 
CSE and CHX remain in effect. Accordingly, Nasdaq, after consultation 
with Commission staff, is reinstating the Program, as it was in effect 
during the first half of 2002, to prevent competitive disparities from 
arising.
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    \11\ See Securities Exchange Act Release No. 46153 (July 1, 
2002), 67 FR 45164 (July 8, 2002) (SR-NASD-2002-68).
    \12\ See Securities Exchange Act Release No. 46159 (July 2, 
2002), 67 FR 45775 (SR-NASD-2002-61, SR-NASD-2002-68, SR-CSE-2002-
06, and SR-PCX-2002-37) (order of summary abrogation).
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2. Statutory Basis
    Nasdaq believes that the proposal is consistent with the Act, 
including section 15A(b)(5) of the Act,\13\ 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,\14\ which requires rules 
that are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. By reinstating the Program, the 
proposed rule change will allow overall fees for InterMarket to remain 
at the level they were at during the first six months of 2002.
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    \13\ 15 U.S.C. 78o-3(b)(5).
    \14\ 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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) thereunder.\16\ 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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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 5-day pre-filing 
notice requirement and the 30-day operative delay. The Commission 
believes waiving the 5-day pre-filing notice requirement and the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Acceleration of the operative date will allow Nasdaq 
to reinstate the Program effective as of July 1, 2002, thereby 
eliminating competitive disparities between self-regulatory 
organizations that offer tape revenue sharing programs. For these 
reasons, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\17\
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    \17\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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

[[Page 48693]]

available for inspection and copying at the principal office of the 
Association. All submissions should refer to file number SR-NASD-2002-
94 and should be submitted by August 15, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18842 Filed 7-24-02; 8:45 am]
BILLING CODE 8010-01-P