[Federal Register Volume 67, Number 196 (Wednesday, October 9, 2002)]
[Notices]
[Pages 63003-63004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25675]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46559; File No. SR-NASD-2002-125]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. To Extend a 
Pilot Amendment to NASD Rule 4120 Regarding Nasdaq's Authority To 
Initiate and Continue Trading Halts

September 26, 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 September 20, 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 filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission.\5\ 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)(6).
    \5\ 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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to extend a pilot amendment to NASD Rule 4120, 
which clarified Nasdaq's authority to initiate and continue trading 
halts in circumstances where Nasdaq believes that extraordinary market 
activity in a security listed on Nasdaq may be caused by the misuse or 
malfunction of an electronic quotation, communication, reporting, or 
execution system operated by, or linked to, Nasdaq. The purpose of this 
filing is to extend the pilot until November 15, 2002.\6\ Accordingly, 
there is no new proposed rule language. Nasdaq will implement the 
proposed rule change immediately.
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    \6\ Nasdaq confirmed that this proposed rule change only extends 
the operation of the pilot, and does not change the pilot 
substantively. Telephone converation between John Yetter, Assistant 
General Counsel, Office of the General Counsel, Nasdaq, and Joseph 
Morra, Special Counsel, and Marc McKayle, Special Counsel, Division 
of Market Regulation (``Division''), Commission on September 25, 
2002.
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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 May 11, 2001, Nasdaq filed with the Commission a proposed rule 
change to clarify Nasdaq's authority to initiate and continue trading 
halts in circumstances where Nasdaq believes that extraordinary market 
activity in a security listed on Nasdaq may be caused by the misuse or 
malfunction of an electronic quotation, communication, reporting, or 
execution system operated by, or linked to, Nasdaq.\7\ On July 27, 
2001, Nasdaq filed Amendment No. 1 to the proposed rule change, which 
requested that the Commission approve the proposed rule change on a 
three-month pilot basis expiring on October 27, 2001.\8\ Also on July 
27, 2001, the Commission approved the proposed rule change and 
Amendment No. 1 on a pilot basis \9\ after finding that the proposed 
rule change was consistent with the requirements of the Act, including 
Section 15A of the Act.\10\ Since that time, the pilot period for the 
rule has been extended on several occasions.\11\
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    \7\ See Securities Exchange Act Release No. 44307 (May 15, 
2001), 66 FR 28209 (May 22, 2001) (Notice for SR-NASD-2001-37).
    \8\ See Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Alton Harvey, Office Head of MarketWatch, Division, 
Commission dated July 27, 2001. (Amendment No. 1 to SR-NASD-2001-
37).
    \9\ See Securities Exchange Act Release No. 44609 (July 27, 
2001), 66 FR 40761 (Aug. 3, 2001) (Order granting approval of SR-
NASD-2001-37 on a pilot basis).
    \10\ 15 U.S.C. 78o-3.
    \11\ See Securities Exchange Act Release No. 44870 (Sept. 28, 
2001), 66 FR 50701 (Oct. 4, 2001); Securities Exchange Act Release 
No. 45344 (Jan. 28, 2002), 67 FR 5022 (Feb. 3, 2002); Securities 
Exchange Act Release No. 45851 (Apr. 30, 2002), 67 FR 31858 (May 10, 
2002).
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    According to Nasdaq, as a result of the decentralized and 
electronic nature of

[[Page 63004]]

the market operated by Nasdaq, the price and volume of transactions in 
a Nasdaq-listed security may be affected by the misuse or malfunction 
of electronic systems, including systems that are linked to, but not 
operated by, Nasdaq. In circumstances where misuse or malfunction 
results in extraordinary market activity, Nasdaq believes that it may 
be appropriate to halt trading in an affected security until the system 
problem can be rectified. In the period during which the rule change 
has been in effect, Nasdaq has not had occasion to initiate a trading 
halt under the rule. Nevertheless, Nasdaq believes that the rule is an 
important component of its authority to maintain the fairness and 
orderly structure of the Nasdaq market. Accordingly, Nasdaq believes 
that the rule should remain in effect on an uninterrupted basis.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\12\ including Section 
15A(b)(6) of the Act,\13\ which requires, among other things, that a 
registered national securities association's rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. Nasdaq believes that the proposed 
rule change provides Nasdaq with clearer authority to respond to and 
alleviate market disruptions and thereby protect investors and the 
public interest.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 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

    In a letter dated July 27, 2001, Instinet Corporation 
(``Instinet'') commented on the proposed rule change as originally 
proposed and currently in effect.\14\ Nasdaq has filed a proposed rule 
change--SR-NASD-2001-75--to modify the rule in certain respects and to 
make the rule permanent, and has received no comments on that 
proposal.\15\ Nasdaq believes that the amendments to the rule proposed 
in SR-NASD-2001-75 respond to the concerns expressed by Instinet 
without impairing the flexibility that the rule must retain in order 
for the rule to assist Nasdaq in meeting its overarching responsibility 
to maintain the fairness and orderly structure of the Nasdaq market. 
Pending Commission action on SR-NASD-2001-75, Nasdaq believes that the 
pilot period of the current rule should be extended to allow the rule 
to remain in effect on an uninterrupted basis.
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    \14\ See Letter from Jon Kroeper, First Vice President--
Regulatory Policy/Strategy, Instinet to Jonathan G. Katz, Secretary, 
Commission dated July 27, 2001.
    \15\ See Securities Exchange Act Release No. 45355 (Jan. 29, 
2002), 67 FR 5351 (Feb. 5, 2002) (File No. SR-NASD-2001-75).
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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) \16\ of the Act and 
Rule 19b-4(f)(6) thereunder.\17\ 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 the 
pilot to operate continuously through November 15, 2002, while the 
Commission considers Nasdaq's request for permanent approval. For these 
reasons, the Commission waives both the 5-day pre-filing requirement 
and the 30-day operative waiting period.\18\
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    \18\ 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 proposed rule 
change 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-2002-125 should 
be submitted by October 30, 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. 02-25675 Filed 10-8-02; 8:45 am]
BILLING CODE 8010-01-P