[Federal Register Volume 67, Number 147 (Wednesday, July 31, 2002)]
[Notices]
[Pages 49727-49729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19316]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46248; File No. SR-NASD-2002-95]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. to Extend the Manning Pilot on the OTCBB

July 24, 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 16, 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 
(''Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. Nasdaq has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. On July 19, 2002, the NASD submitted 
Amendment No. 1 to the proposal.\4\ The Commission is publishing this 
amended 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\ 17 CFR 240.19b-4(f)(6).
    \4\ See letter from Jeffrey S. Davis, Nasdaq, to Nancy Sanow, 
Division of Market Regulation, Commission, dated July 19, 2002 
(``Amendment No. 1''). In Amendment No. 1, the NASD made certain 
technical corrections to the narrative description of the proposed 
rule change.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    This is a proposal to extend through December 15, 2002, two pilot 
programs contained in NASD Rule 6541, which prohibits member firms from 
trading ahead of customer limit orders in designated OTC Bulletin Board 
(''OTCBB'') securities. NASD Rule 6541 was established on a pilot basis 
through February 8, 2002. Portions of NASD Rule 6541 were separately 
amended for a pilot period that originally ran for a three-month period 
from August 1, 2001, to November 1, 2001. This pilot period was 
extended through January 14, 2002, and again until July 15, 2002. 
Nasdaq is proposing no changes to the language of NASD Rule 6541.
    Pursuant to Rule 19b-4(f) under the Act, Nasdaq has designated this 
proposal as non-controversial and has provided the Commission with the 
5-day notice required by Rule 19b-4(f)(6)(iii). Nasdaq has requested 
that the Commission waive the 30-day pre-operative requirement 
contained in Rule 19b-4(f)(6)(iii). If such waiver is granted by the 
Commission, the two pilots programs would continue in effect until 
December 15, 2002.

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
    On February 8, 2001, the Commission approved new NASD Rule 6541 
which, on a pilot basis, extended the basic customer limit order 
protection principles--that presently apply to Nasdaq securities--to 
designated securities traded on the OTCBB.\5\ NASD Rule 6541(a), in 
general, prohibits member firms that accept customer limit orders in 
these securities from ``trading

[[Page 49728]]

ahead'' of their customers for their own account at prices equal or 
superior to the limit orders, without executing them at the limit 
price. NASD Rule 6541(b) requires member firms to provide a minimum 
level of price improvement to incoming orders in OTCBB securities if 
the firm chooses to trade as principal with those incoming orders while 
holding customer limit orders. If a member firm fails to provide the 
minimum level of price improvement to the incoming order, the firm must 
execute its held customer limit orders.
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    \5\ See Securities Exchange Act Release No. 43944 (February 8, 
2001), 66 FR 10541 (February 15, 2001) (approving SR-NASD-00-22).
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    The limit order protection embodied in NASD Rule 6541 is an 
investor protection tool based on NASD IM-2110-2 (commonly known as the 
``Manning Rule''). In the Manning case, the NASD found and the 
Commission affirmed that a member firm that accepts a customer limit 
order has a fiduciary duty not to trade for its own account at prices 
more favorable than the customer order.\6\ NASD Rule 6541 expands to 
the trading of OTCBB the protections that NASD IM-2110-2 provides to 
the trading of Nasdaq National Market and SmallCap securities.
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    \6\ See In re E.F. Hutton & Co., Securities Exchange Act Release 
No. 25887 (July 6, 1988) (``Manning'').
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    On March 2, 2001, and April 6, 2001, the Commission approved 
modifications to NASD IM-2110-2.\7\ In general, these modifications 
narrowed the amount of price improvement required to avoid the 
obligation to fill a customer limit order, in recognition of the 
introduction of decimal pricing of Nasdaq securities. On July 26, 2001, 
Nasdaq filed and implemented an amendment to NASD Rule 6541(b) (SR-
NASD-2001-39) that likewise narrowed the amount of required price 
improvement for trading of OTCBB securities.\8\ As originally drafted, 
NASD Rule 6541(b) required price improvement of at least the lesser of 
$0.05 or one-half of the current inside spread. Under SR-NASD-2001-39, 
the price improvement requirement was narrowed to $0.01 or one-half the 
inside spread (whichever is less) for a market maker wishing to trade 
in front of a held customer limit order that is priced at or inside the 
current inside spread for an OTCBB security. For a customer limit order 
priced less than $0.01 outside the inside spread, however, SR-NASD-
2001-39 required a market maker seeking to trade in front of such limit 
order to execute its trades at a price at least equal to the inside bid 
(with respect to a held customer limit order to buy) or inside offer 
(for a held order to sell). Moreover, SR-NASD-2001-39 provided that 
limit order protection would not apply to a customer limit order that 
was priced more than $0.01 outside the current inside spread. The 
amendment to NASD Rule 6541(b) adopted by SR-NASD-2001-39 was effective 
for a three-month pilot period that ended on November 1, 2001.
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    \7\ See Securities Exchange Act Release No. 44030 (March 2, 
2001), 66 FR 14235 (March 9, 2001) (approving SR-NASD-2001-09); 
Securities Exchange Act Release No. 44165 (April 6, 2001), 66 FR 
19268 (April 13, 2001) (approving SR-NASD-2001-27). See also 
Securities Exchange Act Release No. 44529 (July 9, 2001), 66 FR 
37082 (July 16, 2001) (SR-NASD-2001-43).
    \8\ See Securities Exchange Act Release No. 44593 (July 26, 
2001), 66 FR 40304 (August 2, 2001).
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    At the expiration of that period, Nasdaq amended Rule 6541(b) to 
eliminate the minimum price improvement requirement for limit orders 
outside the inside spread.\9\ Accordingly, any degree of price 
improvement would relieve a market maker from the obligation to fill a 
limit order that is outside of the inside spread. At the same time, 
Nasdaq eliminated the provision of the pilot that provided no limit 
order protection to customer limit orders that are priced more than 
$0.01 outside the current inside spread. Thus, the basic prohibition on 
trading ahead of a customer limit order at a price equal or superior to 
the limit order, without filling the limit order, applies to all limit 
orders in OTCBB securities covered by NASD Rule 6541. The amount of 
required price improvement for limit orders priced inside the current 
inside spread remained the lesser of $0.01 or one-half of the current 
inside spread.
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    \9\ See Securities Exchange Act Release No. 45011 (November 1, 
2001), 66 FR 56587 (November 8, 2001) (SR-NASD-2001-78).
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    Nasdaq believes that a six-month extension of both existing pilot 
programs is necessary to allow Nasdaq to complete its analysis of the 
impact of NASD Rule 6541 on trading in this market. Currently, it is 
Nasdaq's intent to implement limit order protection on a permanent 
basis at or before the end of this pilot extension.\10\
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    \10\ The Commission notes that permanent approval of limit order 
protection for OTCBB securities would require the NASD to submit a 
proposed rule change to this effect under Section 19(b) of the Act, 
15, U.S.C. 78s(b).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act \11\ in general, and Section 
15A(b)(6) of the Act \12\ in particular, in that it is designed to: (1) 
Promote just and equitable principles of trade; (2) foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities; (3) perfect the mechanism of a free and 
open market and a national market system; and (4) maintain the current 
rule language without a lapse, in keeping with the public interest and 
the protection of investors.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 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 would 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 been filed by Nasdaq as a non-
controversial rule change pursuant to Rule 19b-4(f)(6) under the Act. 
Nasdaq represents that 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 from the date on which it 
was filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest; 
therefore, it has become immediately effective pursuant to Section 
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder. 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.\14\
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    \13\ 15 U.S.C 78s(b)(3)(A).
    \14\ Because the NASD amended the proposed rule change, the 60-
day abrogation period runs from the date of filing of the amendment 
(July 19, 2002) rather than the date of filing of the original 
submission (July 16, 2002).
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    Nasdaq has requested that the Commission waive the 30-day pre-
operative period required by Rule 19b-4(f)(6), which would allow the 
proposal to become operative immediately. The Commission believes that 
continuing the two pilot programs will further the aim of protecting 
investors and the

[[Page 49729]]

public interest.\15\ Accordingly, the Commission hereby grants Nasdaq's 
request.
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    \15\ 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. See 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 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 
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-2002-95 and should be submitted by August 21, 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. 02-19316 Filed 7-30-02; 8:45 am]
BILLING CODE 8010-01-P