[Federal Register Volume 67, Number 236 (Monday, December 9, 2002)]
[Notices]
[Pages 72994-72998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31019]



[[Page 72994]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46939; File No. SR-NASD-2002-127]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. to Amend 
Rule 11890 Concerning Clearly Erroneous Transactions

December 3, 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 24, 2002, the National Association of Securities Dealers, 
Inc., through its subsidiary, the Nasdaq Stock Market, Inc. 
(``Nasdaq'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by Nasdaq. On 
November 1, 2002, Nasdaq filed Amendment No. 1 to its proposal with the 
Commission.\3\ 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 letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated November 
1, 2002 (``Amendment No. 1''), which replaced the original form 19b-
4 in its entirety. In Amendment No. 1, Nasdaq, in part, reinstated 
the requirement that a Nasdaq officer must notify a market 
participant within 30 minutes of a disruption or malfunction in the 
Nasdaq market when Nasdaq acts on its own motion to modify or 
nullify a trade. Nasdaq also provided an example, in Amendment No. 
1, of a situation where the number of transactions affected by a 
decision to break or modify trades on Nasdaq's own motion would be 
such that the decision would have to be accorded immediate finality 
in order to maintain a fair and orderly market, or to protect 
investors and the public interest. In addition, Amendment No. 1 
clarified that market participants should submit materials to Nasdaq 
via facsimile for the purpose of seeking Nasdaq's review of a 
particular transaction, unless the market participant receives 
Nasdaq's permission to submit the materials via electronic mail.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 11890 (Clearly Erroneous 
Transactions) to implement a number of clarifications and modifications 
to the text of the existing rule. Nasdaq will make the proposed rule 
change effective immediately upon Commission approval.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

11890. Clearly Erroneous Transactions

    (a) Authority to Review Transactions Pursuant to Complaint of 
Market Participant
    (1) Scope of Authority. [For the purposes of this Rule, the terms 
of a transaction are clearly erroneous when there is an obvious error 
in any term, such as price, number of shares or other unit of trading, 
or identification of the security.]
    [(2)] Officers of [The] Nasdaq [Stock Market, Inc. (``Nasdaq'')] 
designated by [the] its President [of Nasdaq] shall, pursuant to the 
procedures set forth in paragraph [(b)] (a)(2) below, have the 
authority to review any transaction arising out of the use or operation 
of any [automated quotation,] execution[,] or communication system 
owned or operated by Nasdaq and approved by the Commission, including 
transactions entered into by a member of a national securities exchange 
with unlisted trading privileges in Nasdaq-listed securities (a ``UTP 
Exchange'') through such a system; provided, however, that the parties 
to the transaction must be readily identifiable by Nasdaq through its 
systems [excluding transactions arising from use of the Nasdaq 
Application of OptiMark]. A Nasdaq officer shall review transactions 
with a view toward maintaining a fair and orderly market and the 
protection of investors and the public interest. Based upon this 
review, the officer shall decline to act upon a disputed transaction if 
the officer believes that the transaction under dispute is not clearly 
erroneous[, or,]. [i]If the officer determines the transaction in 
dispute is clearly erroneous, however, he or she shall declare that the 
transaction is null and void or modify one or more terms of the 
transaction. When adjusting the terms of a transaction, the Nasdaq 
officer shall seek to adjust the price and/or size of the transaction 
to achieve an equitable rectification of the error that would place the 
parties to a transaction in the same position, or as close as possible 
to the same position, as [that] they would have been in had the error 
not occurred. [Nasdaq shall promptly provide oral notification of a 
determination to the parties involved in a disputed transaction and 
thereafter issue a written confirmation of the determination.] For the 
purposes of this Rule, the terms of a transaction are clearly erroneous 
when there is an obvious error in any term, such as price, number of 
shares or other unit of trading, or identification of the security.
    [(b) Procedures for Reviewing Transactions]
    [(1)] (2) Procedures for Reviewing Transactions
    (A) Any member, member of a UTP Exchange, or person associated with 
[a] any such member that seeks to have a transaction reviewed pursuant 
to paragraph (a)(1) hereof[,] shall submit a written complaint[, via 
facsimile or otherwise,] to Nasdaq Market Operations in accordance with 
the following time parameters:
    [(A)] (i) for transactions occurring at or after 9:30 a.m., Eastern 
Time, but prior to 10 a.m., Eastern Time, complaints must be 
[submitted] received by Nasdaq by 10:30 a.m., Eastern Time; and
    [(B)] (ii) for transactions occurring prior to 9:30 a.m., Eastern 
Time and at or after 10:00 a.m., Eastern Time, complaints must be 
[submitted] received by Nasdaq within thirty minutes.
    [(2)] (B) Once a complaint has been received in accord with 
subparagraph [(b)(1)] (a)(2)(A) above:
    [(A)] (i) the complainant shall have up to thirty (30) minutes, or 
such longer period as specified by Nasdaq staff, to submit any 
supporting written information concerning the complaint necessary for a 
determination under paragraph [(a)(2)] (a)(1)[, via facsimile or 
otherwise];
    [(B)] (ii) the counterparty to the trade shall be [verbally] 
notified of the complaint via telephone by Nasdaq staff and shall have 
up to thirty (30) minutes, or such longer period as specified by Nasdaq 
staff, to submit any supporting written information concerning the 
complaint necessary for a determination under paragraph [(a)(2)] 
(a)(1)[, via facsimile or otherwise]; and
    [(C)] (iii) either party to a disputed trade may request the 
written information provided by the other party pursuant to this 
subparagraph.
    [(3)] (C) Notwithstanding subparagraph [(b)(2)] (a)(2)(B) above, 
once a party to a disputed trade communicates that it does not intend 
to submit any further information concerning a complaint, the party may 
not thereafter provide additional information unless requested to do so 
by Nasdaq staff. If both parties to a disputed trade indicate that they 
have no further information to provide concerning the complaint before 
their respective thirty-minute information submission period has 
elapsed, then the matter may be immediately presented to a Nasdaq 
officer for a determination pursuant to paragraph [(a)(2)] (a)(1) 
above.
    [(4)] (D) Each member, member of a UTP Exchange, or person 
associated

[[Page 72995]]

with any such member [and/or person associated with a member] involved 
in the transaction shall provide Nasdaq with any information that it 
requests in order to resolve the matter on a timely basis 
notwithstanding the time parameters set forth in subparagraph [(b)(2)] 
(a)(2)(B) above.
    [(5)] (E) Once a party has applied to Nasdaq for review, the 
transaction shall be reviewed and a determination rendered, unless both 
parties to the transaction agree to withdraw the application for review 
prior to the time a decision is rendered pursuant to paragraph [(a)(2)] 
(a)(1).
    [(c)] (b) Procedures for Reviewing Transactions [Executed During 
System Disruptions or Malfunctions] on Nasdaq's Own Motion
    In the event of (i) a disruption or malfunction in the use or 
operation of any [automated] quotation, execution, [or] communication, 
or trade reporting system owned or operated by Nasdaq and approved by 
the Commission, or (ii) extraordinary market conditions or other 
circumstances in which the nullification or modification of 
transactions may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest, the 
President of Nasdaq or any Executive Vice President designated by the 
President[, acting through an officer designated by the President of 
Nasdaq pursuant to paragraph (a)(2)], may, on [its] his or her own 
motion, [pursuant to the standards set forth in paragraph (a), declare] 
review any transaction[s] arising out of or reported through [the use 
or operation of such systems during the period of such disruption or 
malfunction] any such quotation, execution, communication, or trade 
reporting system, including transactions entered into by a member of a 
UTP Exchange through the use or operation of such a system, but 
excluding transactions that are entered into through, or reported to, a 
UTP Exchange. A Nasdaq officer acting pursuant to this subsection may 
declare any such transaction null and void or modify the terms of 
[these] any such transaction[s] if the officer determines that (i) the 
transaction is clearly erroneous, or (ii) such actions are necessary 
for the maintenance of a fair and orderly market or the protection of 
investors and the public interest; provided, however, that, in the 
absence of extraordinary circumstances, [a] the [Nasdaq] officer must 
take action pursuant to this [paragraph] subsection within thirty (30) 
minutes of detection of the [erroneous] transaction[(s)], but in no 
event later than [6]3:00 p.m., Eastern Time, on the next trading day 
following the date of the trade at issue. [When Nasdaq takes action 
pursuant to this subparagraph, the member firms involved in the 
transaction shall be notified as soon as is practicable and shall have 
a right to appeal such action in accordance with paragraph (d)(1) 
below.]
    [(d)] (c) Review by the Market Operations Review Committee 
(``MORC'')
    (1) A member, member of a UTP Exchange, or person associated with 
[a] any such member may appeal a determination made under [paragraphs] 
subsection (a)[(2) or (c)] to the MORC. A member, member of a UTP 
Exchange, or person associated with any such member may appeal a 
determination made under subsection (b) to the MORC unless the officer 
making the determination also determines that the number of the 
affected transactions is such that immediate finality is necessary to 
maintain a fair and orderly market and to protect investors and the 
public interest. [provided such] An appeal must be [is] made in 
writing[, via facsimile or otherwise], and must be received by Nasdaq 
within thirty (30) minutes after the [member or person associated with 
a member receives verbal] person making the appeal is given 
notification of [such] the determination being appealed, except that if 
Nasdaq notifies the parties of action taken pursuant to paragraph [(c)] 
(b) after 4:00 p.m., [either party has until] the appeal must be 
received by Nasdaq by 9:30 a.m. the next trading day [to appeal]. Once 
a written appeal has been received, the counterparty to the trade will 
be notified of the appeal and both parties shall be able to submit any 
additional supporting written information[, via facsimile or 
otherwise,] up until the time the appeal is considered by the 
Committee. Either party to a disputed trade may request the written 
information provided by the other party during the appeal process. An 
appeal to the Committee shall not operate as a stay of the 
determination [made pursuant to paragraph (a)(2) or (c) above] being 
appealed. Once a party has appealed a determination to the Committee, 
the determination shall be reviewed and a decision rendered, unless 
both parties to the transaction agree to withdraw the appeal prior to 
the time a decision is rendered by the Committee. Upon consideration of 
the record, and after such hearings as it may in its discretion order, 
the Committee, pursuant to the standards set forth in [paragraph (a)] 
this section, shall affirm, modify, reverse, or remand the 
determination [made under paragraph (a)(2) or (c) above].
    (2) The decision of the Committee pursuant to an appeal, or a 
determination by a Nasdaq officer that is not appealed, shall be final 
and binding upon all [any member or person associated with a member] 
parties and shall constitute final Association action on the matter in 
issue. Any [adverse] determination by a Nasdaq officer pursuant to 
paragraph (a)[(2)] or [(c)] (b) or any [adverse] decision by the 
Committee pursuant to paragraph [(d)] (c)(1) shall be rendered without 
prejudice as to the rights of the parties to the transaction to submit 
their dispute to arbitration.
    (d) Communications
    (1) All materials submitted to Nasdaq or the MORC pursuant to this 
Rule shall be submitted via facsimile machine and within the time 
parameters specified herein; provided, however, that if requested, 
Nasdaq staff may authorize submission of material via electronic mail 
on a case-by-case basis. Materials shall be deemed received at the time 
indicated by the equipment (i.e., facsimile machine or computer) 
receiving the materials. Nasdaq, in its sole and absolute discretion, 
reserves the right to reject or accept any material that is not 
received within the time parameters specified herein.
    (2) Nasdaq shall provide affected parties with prompt notice of 
determinations under this Rule via facsimile machine, electronic mail, 
or telephone (including voicemail); provided, however, that if an 
officer nullifies or modifies a large number of transactions pursuant 
to subsection (b), Nasdaq may instead provide notice to parties via the 
Nasdaq Workstation II Service, a press release, or any other method 
reasonably expected to provide rapid notice to many market 
participants.

IM-11890. Refusal to Abide by Rulings of a Nasdaq Officer or the MORC

    It shall be considered conduct inconsistent with just and equitable 
principles of trade for any member to refuse to take any action that is 
necessary to effectuate a final decision of a Nasdaq officer or the 
MORC under Rule 11890.
* * * * *

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

[[Page 72996]]

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 amend NASD Rule 11890, which provides Nasdaq 
with authority to nullify or modify transactions. The proposed rule 
change is designed to achieve three primary goals: first, to clarify 
the conditions under which Nasdaq will consider petitions by market 
participants to review transactions; second, to clarify Nasdaq's 
authority to nullify or modify transactions on its own motion; and 
third, to clarify procedural aspects of the process of reviewing 
transactions. Unless otherwise noted below, the proposed rule change is 
not designed to modify the current scope of the rule, but is rather 
intended to rewrite the rule using more precise language that more 
clearly describes the current application of the rule.
    a. Review of Transactions Pursuant to Complaint of Market 
Participant
    Since 1990, Nasdaq has had the authority to receive petitions from 
market participants requesting that designated officers of Nasdaq 
review the terms of a transaction and nullify or modify it if the 
transaction is found to be clearly erroneous. Under subsections (a) and 
(b) of current NASD Rule 11890, a market participant may seek review by 
submitting a written complaint to Nasdaq Market Operations within 
specified time parameters--by 10:30 a.m. for transactions occurring 
within the first half hour of the regular trading day, and within 
thirty minutes of the time of the transaction for all other 
transactions. Following timely receipt of a complaint, the complainant 
and the counterparty to the disputed trade are given an opportunity to 
submit supporting information in writing and the matter is then 
adjudicated by a Nasdaq officer.
    Currently, subsection (a) of NASD Rule 11890 states that it applies 
to ``any transaction arising out of the use or operation of any 
automated quotation, execution, or communication system owned or 
operated by Nasdaq and approved by the Commission.'' Nasdaq believes 
that this language could be construed to cover not only transactions 
executed through Nasdaq systems, such as SuperMontage, SuperSOES, and 
SelectNet, but also transactions whose only nexus with Nasdaq systems 
is the posting of quotations on Nasdaq's quotation montage. For 
example, a transaction executed entirely through an electronic 
communications network (an ``ECN'') or an exchange trading Nasdaq 
securities pursuant to unlisted trading privileges (a ``UTP 
exchange''), or a trade that is crossed internally by a market maker, 
may arise out of a quotation posted on the Nasdaq quotation montage.
    Nasdaq, however, has not generally adjudicated trades unless they 
have actually been executed through a Nasdaq system. Nasdaq asserts 
several reasons for delineating the scope of its authority in this 
fashion. First, broker-dealers and exchanges through which trades are 
executed are likely to have their own procedures for reviewing and 
breaking trades. Second, because Nasdaq may not be able to identify the 
counterparty to a transaction executed through a non-Nasdaq system 
without obtaining this information from the entity through which the 
transaction was executed, it may not be possible to provide a prompt 
adjudication. As a result of these considerations, Nasdaq has received 
few ``clearly erroneous'' petitions concerning transactions that are 
not executed through Nasdaq systems and has generally declined to 
adjudicate the petitions that it has received, on the grounds that the 
transaction can more appropriately be reviewed by the market center 
through which it was executed. Accordingly, Nasdaq believes that NASD 
Rule 11890(a) should be amended to explicitly limit its purview to 
transactions arising out of the use or operation of Nasdaq execution or 
communication systems \4\ and to explicitly require that the parties to 
a reviewable transaction be readily identifiable by Nasdaq through its 
systems.
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    \4\ At present, the systems covered by the rule would be 
SuperSOES, SOES, SelectNet, SuperMontage, Primex, Liquidity Tracker, 
and CAES. The Over-the-Counter Bulletin Board would not be covered, 
because it is only a quotation system, but the proposed Bulletin 
Board Exchange (``BBX'') would be covered, because it will allow 
executions. It should also be noted that Nasdaq is not proposing to 
delete the phrase ``approved by the Commission'' from Rule 11890, 
but that Nasdaq construes the rule language to include systems and 
aspects of systems that are exempted from formal approval under 
section 19(b)(2) of the Act by section 19(b)(3)(A) of the Act or SEC 
Rules 19b-4(f) or 19b-5.
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    Other proposed changes to NASD Rule 11890(a) governing review of 
complaints by market participants include the following:
    [sbull] Consolidating subsections (a) and (b) of the rule into a 
new subsection (a).
    [sbull] Clarifying that the rule covers transactions entered into 
by a member of a UTP exchange through a Nasdaq execution system. Thus, 
the rule would cover transactions executed between a Nasdaq member and 
a member of UTP exchange that had agreed to accept automatic executions 
through SuperSOES or SuperMontage, but would not cover transactions 
where the UTP exchange merely posted a quote and was accessible only 
via telephone.
    [sbull] Clarifying that information submitted by parties to Nasdaq 
must be received by Nasdaq within the time frames specified by the 
rule.
    [sbull] Eliminating redundant references to communications via 
facsimile and making other miscellaneous changes designed to improve 
the wording of the rule.
    b. Review of Transactions on Nasdaq's Own Motion
    Since 1998, Nasdaq has had the authority to nullify or modify 
transactions on its own motion. Nasdaq represents that it has used its 
authority in circumstances where Nasdaq believed that market integrity 
was threatened by aberrant market activity and a large number of trades 
had to be broken to protect investors. Nasdaq believes, however, that 
the language of NASD Rule 11890 should be amended to provide greater 
clarity as to its scope.
    Specifically, Nasdaq proposes to amend subsection (b) of NASD Rule 
11890 to state that Nasdaq's authority may be exercised in the event of 
extraordinary market conditions or other circumstances in which the 
nullification or modification of transactions may be necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest. Because NASD Rule 11890 is designed to allow 
Nasdaq to respond to aberrational market conditions, Nasdaq believes 
that its scope must be broad and flexible in light of the difficulty of 
defining ex ante all situations in which application of the rule might 
be necessary. However, Nasdaq expects that the amended rule, like the 
current rule, would be used primarily in circumstances where the 
disruption or malfunction of a system resulted in the execution of 
trades with obvious errors, such as a price substantially unrelated to 
the inside market.\5\
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    \5\ Nasdaq notes that, in the event of an emergency or 
extraordinary market conditions, Article VII, section 3 of the NASD 
By-Laws grants the NASD Board of Governors or persons designated by 
the NASD Board the authority to take any action regarding, among 
other things, trading in the over-the-counter securities market, the 
operation of Nasdaq systems and the trading of securities therein, 
and the operation of member firms' offices and systems. Thus, even 
in the absence of NASD Rule 11890, Nasdaq believes that there would 
be authority to break trades when the existence of extraordinary 
market conditions makes such actions necessary or appropriate for 
the protection of investors or the public interest or for the 
orderly operation of the marketplace. Nasdaq believes, however, that 
NASD Rule 11890's specific focus on the nullification or 
modification of trades, as well as the defined procedural mechanisms 
contained in the rule, provide a more tailored approach for 
addressing most situations in which aberrant transactions might 
occur.

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[[Page 72997]]

    Proposed subsection (b) of NASD Rule 11890 also clarifies that this 
portion of the rule may be applied to any transaction arising out of or 
reported through a Nasdaq quotation, execution, communication, or trade 
reporting system, including transactions entered into by a member of a 
UTP exchange through a Nasdaq execution system (but excluding 
transactions entered into through, or reported to, a UTP exchange). In 
contrast to proposed subsection (a) of the rule, which focuses on 
errors made by the parties to a specific trade, the focus of proposed 
subsection (b) is on errors that may affect numerous trades. Nasdaq 
believes that the scope of the rule must be broad to ensure that, to 
the greatest extent possible, similarly situated trades may be given 
similar treatment. Thus, in a situation where the malfunction of a 
Nasdaq system or a member's system results in numerous market 
participants entering into trades on the basis of erroneous price 
information, the proposed rule change would expressly authorize Nasdaq 
to break or modify not only trades executed through its systems, but 
also trades executed through the systems of members that are reported 
to Nasdaq. In recognition of the authority of other self-regulatory 
organizations, Nasdaq does not assert authority to break or modify 
trades entered into through, or reported to, a UTP exchange. As it does 
under the current rule, however, Nasdaq would endeavor to coordinate 
its actions with other market centers in an attempt to achieve 
consistent treatment of trades outside of Nasdaq's jurisdiction.
    Other proposed changes to NASD Rule 11890(b) governing Nasdaq's 
authority to review transactions on its own motion include the 
following:
    [sbull] Providing that the authority conferred by the rule may be 
exercised only by Nasdaq's President or an Executive Vice President 
designated by the President. Currently, Nasdaq's authority to review 
trades on its own motion may be exercised by any officer designated by 
Nasdaq's President. Because this authority may affect a broad range of 
market participants, Nasdaq believes that it should be exercised only 
by senior management.
    [sbull] Providing that Nasdaq may act to nullify or modify a trade 
if it is clearly erroneous or if action is necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest. This change will serve to clarify the scope of 
Nasdaq's authority in situations where quotations for a security have 
been affected by a system malfunction or erroneous market information. 
In such circumstances, the prices of trades might not be deemed 
``clearly erroneous'' when measured against the national best bid and 
offer, but it might nevertheless be necessary, for the protection of 
investors, to nullify or modify transactions executed during the time 
frame when questionable quotations were posted.
    [sbull] Amending the time frame for action under the current rule 
to require that the Nasdaq officer, on Nasdaq's own motion, act, except 
in extraordinary circumstances, no later than 3:00 p.m. on the next 
trading day.
    Finally, Nasdaq is adding interpretative material after the rule to 
provide that it shall be considered conduct inconsistent with just and 
equitable principles of trade for a member to refuse to take action 
that is necessary to effectuate a final decision of a Nasdaq officer or 
the Market Operations Review Committee (``MORC''). When Nasdaq acts to 
nullify or modify a trade that has been executed through Nasdaq's 
systems, Nasdaq can effectuate the decision through those systems. 
However, in circumstances where Nasdaq takes action with respect to a 
trade executed through a non-Nasdaq system, the members that are 
parties to the transaction and/or that operate the execution system 
must effectuate Nasdaq's decision. Accordingly, Nasdaq believes that it 
is important that members be required to abide by decisions made under 
the rule.
    c. Review by the Market Operations Review Committee
    Current NASD Rule 11890(d) (which Nasdaq is redesignating as NASD 
Rule 11890(c)) governs review by the MORC, a standing committee 
composed of representatives of member firms as well as ``non-industry'' 
representatives. Persons seeking to appeal a determination by Nasdaq 
must submit their appeal within the time parameters specified by the 
rule. Both parties are then given the opportunity to submit supporting 
arguments in writing, and the matter is submitted to the MORC for a 
determination. Nasdaq believes that most of the changes to proposed 
subsection (c) are non-substantive clarifications of rule language. 
However, Nasdaq is also proposing that an officer empowered to review 
transactions on Nasdaq's own motion (i.e., the President or an 
Executive Vice President) may determine that the number of transactions 
affected by a decision to break or modify trades on Nasdaq's own motion 
is such that the decision must be accorded immediate finality in order 
to maintain a fair and orderly market and to protect investors and the 
public interest. Although Nasdaq expects that it would use this 
authority only on rare occasions, Nasdaq believes that there will be 
circumstances in which review by the MORC of a large number of trades 
would be impractical and could expose market participants to 
unacceptable levels of risk.\6\ In such cases, Nasdaq believes that the 
market will be best served by finality. Other changes to the provision 
include clarifying that determinations of Nasdaq officers that are not 
appealed are final and binding and constitute final action by the NASD 
on the matter.
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    \6\ For example, Nasdaq believes that if an erroneously priced 
order or quote causes a large number of transactions to occur at 
prices far in excess of a security's true value and if a decision is 
made to break all of the affected trades, some sellers may appeal 
the decision to break the trades. If a market participant is a party 
to trades on both sides of the market, and some remain broken while 
others are appealed and reinstated, it will suffer losses that arise 
solely from the inconsistent treatment of its trades.
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    d. Communications between Nasdaq and Market Participants
    Nasdaq is proposing to add a new subsection (d) to NASD Rule 11890 
to describe in greater detail the parameters for communications between 
Nasdaq and market participants. Specifically, proposed subsection (d) 
provides that:
    [sbull] Materials submitted to Nasdaq or the MORC must be submitted 
via facsimile machine and must be received within the time parameters 
specified by the rule. However, if requested, Nasdaq staff may 
authorize submission of materials via electronic mail on a case-by-case 
basis.\7\ Materials shall be deemed received at the time indicated by a 
facsimile machine or computer that receives the materials. Nasdaq 
reserves the right to reject or accept material that is not received 
within the time parameters specified by the rule.
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    \7\ For example, if a party wishes to submit, pursuant to 
subparagraph (a)(2)(A) of the amended rule, a large document 
containing supporting information, it may be preferable to submit 
the document via electronic mail. Electronic mail may be used only 
when specifically authorized by Nasdaq staff, however, because it is 
impossible to control the delivery time of electronic mail.
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    Nasdaq will provide notice of determinations under the rule via 
facsimile machine, electronic mail, or

[[Page 72998]]

telephone (including voicemail). However, in cases where an officer 
nullifies or modifies a large number of transactions pursuant to 
Nasdaq's authority to act on its own motion, individual notice may not 
be practicable. In that case, Nasdaq may provide notice to market 
participants via the Nasdaq Workstation II Service, a press release, or 
any other method reasonably expected to provide rapid notice to many 
market participants.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\8\ in general and with 
section 15A(b)(6) of the Act,\9\ in particular, in that it promotes 
just and equitable principles of trade and protects investors and the 
public interest. Nasdaq believes that the proposed rule change will 
promote the fair and efficient resolution of disputes involving clearly 
erroneous transactions and will clarify Nasdaq's authority to review 
transactions on its own motion. Accordingly, Nasdaq believes that the 
proposed rule change will lessen the impact of erroneous transactions 
on the public by allowing Nasdaq to correct erroneous transactions 
quickly and by defining more clearly the scope of Nasdaq's authority.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Nasdaq consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 
filings will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to File No. 
SR-NASD-2002-127 and should be submitted by December 30, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31019 Filed 12-6-02; 8:45 am]
BILLING CODE 8010-01-P