[Federal Register Volume 68, Number 64 (Thursday, April 3, 2003)]
[Notices]
[Pages 16328-16332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47587; File No. SR-NASD-2000-42]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Requirements for Recording and Reporting of Certain Quotation Data; 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
Nos. 1, 2, and 3 to the Proposed Rule Change

March 27, 2003.

I. Introduction

    On July 3, 2000, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiary, NASD Regulation, 
Inc. (``NASD Regulation''), filed with the Securities and Exchange 
Commission (``SEC'' or ``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 establish requirements for the 
recording and reporting of certain quotation data. On October 5, 2000, 
the proposed rule change was published for comment in the Federal 
Register.\3\ The Commission received one comment letter in response to 
the proposed rule change.\4\ The NASD responded to the comment letter 
and amended the proposed rule change on January 4, 2001.\5\ On June 14, 
2001, the NASD submitted a letter clarifying a limitation on its 
proposed use of quotation data submitted in response to the proposed 
rule.\6\ On September 21, 2001, the NASD further amended its proposed 
rule change by filing Amendment No. 2.\7\ On February 27, 2003, the 
NASD filed Amendment No. 3 to its proposed rule change.\8\ This notice 
and order solicits comment on Amendment Nos. 1, 2 and 3 and approves 
the proposed rule change, as amended, 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. 43367 (September 27, 
2000), 68 FR 59482.
    \4\ See letter from R. Cromwell Coulson, Chairman and CEO, Pink 
Sheets LLC (``Pink Sheets'') to Jonathan G. Katz, Secretary, 
Commission, dated October 26, 2000 (``Pink Sheets Letter'').
    \5\ See letter from Jeffrey S. Holik, Vice President and Acting 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated January 4, 2001 (``NASD Response to Comments and Amendment No. 
1''). NASD Response to Comments and Amendment No. 1: (1) Addressed 
comments submitted by Pink Sheets; and (2) amended the proposed 
rule's text to clarify the conditions under which a member would be 
required to withdraw its quotations for non-compliance with the 
proposed rule's requirements.
    \6\ See letter from Jeffrey S. Holik, Vice President and Acting 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division, Commission, dated June 14, 2001 (``NASD 
Letter''). The NASD Letter clarified that quotation data provided to 
the NASD pursuant to the proposed rule would not be provided to The 
Nasdaq Stock Market, Inc.
    \7\ See letter from Jeffrey S. Holik, Vice President and Acting 
General Counsel, NASD Regulation, to Nancy J. Sanow, Assistant 
Director, Division, Commission, dated September 21, 2001. 
(``Amendment No. 2''). In Amendment No. 2, the NASD revised the 
proposed rule's text to state expressly that the rule would not 
apply to quotations on inter-dealer quotation systems operated by a 
registered securities association or national securities exchange.
    \8\ See letter from Stephanie M. Dumont, Associate General 
Counsel, NASD, to Katherine A. England, Assistant Director, 
Division, Commission, dated February 26, 2003. (``Amendment No. 
3''). The amendment clarified that the NASD will not use an inside 
bid and/or offer that is calculated and submitted by the Reporting 
Agent for any commercial purposes.
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II. Description of Proposed Rule Change

    According to the NASD, in September 1999, the Electronic Pink 
Sheets (``EPS'') began displaying real-time, on-line stock quotations 
for approximately 5,000 securities, including over-the-counter 
(``OTC'') equity securities. Prior to the availability of EPS, 
quotations were published weekly in hardcopy lists known as the ``pink 
sheets.'' These lists were updated via daily facsimile transmission to 
subscribers. To obtain more current quotations for securities published 
in the pink sheets, market participants would communicate directly with 
broker-dealers publishing quotations in that medium, including unpriced 
indications of interest for the particular security.
    NASD Regulation represents that because quotations for OTC equity 
securities now are displayed on a real-time basis in inter-dealer 
quotation systems, such as the pink sheets, NASD Regulation staff 
requires access to data pertaining to those quotations in order to 
surveil adequately for member compliance with applicable rules and 
regulations and, when necessary, to reconstruct market activity.
    Therefore, the NASD proposed NASD Rule 6630 to require its members 
to: (1) Record specified information pertaining to quotations for OTC 
equity securities displayed in an inter-dealer quotation system \9\ 
that permits real-time quotation updates, unless such system is 
operated by a registered securities association, a national securities 
exchange or an NASD member; (2) preserve the quotation information for 
the period of time and accessibility set forth in Rule 17a-4(a) under 
the Act;\10\ and (3) report the quotation information to the NASD upon 
request.
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    \9\ Rule 15c2-11(e) of the Act defines inter-dealer quotation 
system as ``any system of general circulation to brokers or dealers 
that regularly disseminates quotations of identified brokers or 
dealers.'' 17 CFR 240.15c2-11(e).
    \10\ 17 CFR 240.17a-4(a). Pursuant to Rule 17a-4(a) under the 
Act, members would be required to preserve records of such data for 
at least six years. During the first two of the six years, members 
would be required to maintain the records ``in an easily accessible 
place.''
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    Under the proposed rule, NASD members that publish quotations in 
inter-dealer quotation systems covered by the rule (``covered quotation 
systems'') would be required to record, among other things, the time of 
the quotation's display, the bid price and quotation size, the offer 
price and quotation size, and the prevailing inside bid and offer in 
the quotation system at the time of the quotation.\11\ The proposed 
rule would apply to priced quotes and unpriced indications of interest. 
The NASD proposal would permit members to enter into an agreement with 
a third party that would act as the agent for fulfilling the member's 
obligations under the rule.
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    \11\ See Amendment No. 3, supra note 8, which clarifies that a 
member should not consolidate quotation information from other 
systems or markets that are quoting the security.
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    NASD Regulation represents that it would use quotation data 
obtained pursuant to the proposed rule to surveil,

[[Page 16329]]

for example, for compliance with NASD Rule 3320, Offers at Stated 
Prices, which requires that a member's quotation be ``firm,'' \12\ and 
NASD Rule 6750, Minimum Quotation Size Requirements for OTC Equity 
Securities, which requires that every member firm that functions as a 
market maker in OTC equity securities on an inter-dealer quotation 
system that permits quotations to be updated on a real-time basis must 
honor those quotations for the minimum size applicable to the member 
firm's firm bid or ask price. NASD Regulation represents that although 
it has access to trade execution data through existing trade reporting 
requirements and systems, it does not otherwise have access to 
historical quotation activity at the time of trades.
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    \12\ NASD Rule 3320 states: ``No member shall make an offer to 
buy from or sell to any person any security at a stated price unless 
such member is prepared to purchase or sell, as the case may be, at 
such price and under such conditions as are stated at the time of 
such offer to buy or sell.'' A member is expected to buy or sell at 
least a normal unit of trading in the quoted stock at its then 
prevailing quotations, unless the quotation is designated clearly as 
not firm or as firm for less than a normal unit of trading. NASD 
Firmness of Quotations Rule, IM-3320.
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    As originally proposed, the rule change would not apply to 
quotations displayed on an inter-dealer quotation system that is 
qualified pursuant to section 17B of the Act.\13\ In Amendment No. 2, 
the NASD proposed revising the rule text to state expressly that the 
exclusion applies to quotations on an inter-dealer quotation system 
that is operated by a registered securities association or national 
securities exchange. NASD Regulation observed that the registered 
securities association or national securities exchange operating such 
an inter-dealer quotation system would have access to quotation 
information displayed on that system. Therefore, the NASD would not 
require members to record and report information pertaining to 
quotations entered into inter-dealer quotation systems operated by a 
registered securities association or national securities exchange. NASD 
Regulation noted that, under this exclusion, members would not need to 
record and report quotation information for quotations on the OTC 
Bulletin Board, which is sponsored and regulated by the NASD.
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    \13\ 15 U.S.C. 78q-2. Section 17B states that ``[t]he Commission 
shall facilitate the widespread dissemination of reliable and 
accurate last sale and quotation information with respect to penny 
stocks* * *with a view toward establishing, at the earliest feasible 
time, one or more automated quotation systems that will collect and 
disseminate information regarding all penny stocks.''
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    The proposed rule change also would not apply to an inter-dealer 
quotation system operated by a member of the NASD. The NASD indicated 
that if an NASD member were to operate an inter-dealer quotation 
system, the NASD would be able to receive the pertinent quotation data 
(or, in some cases, the display of limit orders) directly from the NASD 
member operating the system.
    The proposed rule change would permit a member to use an agent to 
provide the quotation data to the NASD (``Reporting Agent'').\14\ The 
NASD believes that most or all members that would be required to 
provide quotation data under the proposed rule would use the services 
of a Reporting Agent, which likely would be the operator of the inter-
dealer quotation system.
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    \14\ NASD Rule 6630(e) would define ``Reporting Agent'' as ``a 
third party that enters into any agreement with a member pursuant to 
which such third party agrees to fulfill such member's obligations 
under this Rule.''
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    NASD Regulation anticipates that if a system operator agrees to be 
a member's Reporting Agent, the system operator would provide all 
relevant quotation data directly to NASD Regulation on a daily or 
ongoing basis. Notwithstanding a member's use of a Reporting Agent to 
furnish quotation information, the member would remain responsible for 
compliance with all requirements of the proposed rule. If a member knew 
or had reason to believe that it or its Reporting Agent was not in 
compliance with the proposed rule, the member would be required to 
withdraw its quotations or unpriced indications of interest from the 
inter-dealer quotation system until the member was satisfied that 
quotation data is being properly recorded and reported.\15\ In this 
regard, NASD Regulation stated that it would expect members that use a 
Reporting Agent to periodically review or monitor its activities in 
order to ensure continued compliance with the proposed rule.
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    \15\ See NASD Response to Comments and Amendment No. 1, supra 
note 5.
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    Under the NASD's original proposed rule change, if a member knew or 
had reason to believe that its Reporting Agent was not in compliance 
with the proposed rule, the member would be required to immediately 
withdraw its priced quotations and unpriced indications of interest. In 
response to concerns that problems with data systems could interfere 
with the ability of a member or its Reporting Agent to comply with the 
proposed rule, the NASD proposed removing the word ``immediately'' from 
the proposed rule's text.\16\
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    \16\ NASD Response to Comments and Amendment No. 1. A literal 
reading of the original proposed rule text would have required a 
member to withdraw its quotations only if the member knew or had a 
reasonable belief that its Reporting Agent was not complying with 
the proposed rule. The NASD proposed a revision to the rule text 
clarifying that the member also must withdraw its quotes if the 
member itself is not complying with the proposed rule. Id.
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    To ensure that its members have adequate time to implement the 
proposed rule, the NASD represented that, if approved, it will announce 
the operative date of the proposed rule change in a Notice to Members 
to be published no later than 60 days following the date of Commission 
approval. The operative date will be 30 days following publication of 
the Notice to Members.

III. Summary of Comments and NASD Response

    The Commission received one comment letter in response to the 
proposed rule change. The letter, from Pink Sheets: (1) Expressed 
concern regarding the NASD's proposal to obtain quotation information 
based on regulation of NASD members rather than through the negotiation 
of a private contract between NASD Regulation and Pink Sheets; (2) 
stated that NASD Regulation must acknowledge Pink Sheets' private 
property rights in the data and provide assurances that this data will 
be protected, and not redistributed in competition with Pink Sheets; 
(3) stated that NASD members should not bear the entire responsibility 
for ensuring that the NASD receives the proper information; (4) stated 
that NASD members should not be required to withdraw quotations without 
time to address data systems problems when such problems are the cause 
of non-compliance; (5) asserted that the proposed rule should set forth 
the form in which required data must be provided; and (6) questioned 
the basis of the proposed rule's exclusion for systems operated by a 
registered securities association or national securities exchange.\17\ 
Pink Sheets also noted its view that the proposed rule change is overly 
restrictive and should apply to bond quotation services and order 
routing and negotiation services in addition to electronic quotation 
services. These comments are discussed below, along with NASD 
Regulation's responses contained in NASD Response to Comments and 
Amendment No. 1.
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    \17\ Pink Sheets Letter, supra note 4.
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A. Approach to Obtaining Quotation Data

    Pink Sheets asserted that it has an intellectual property interest 
in the data that NASD members would be required to ensure was recorded, 
preserved, and provided to the NASD upon request. Pink Sheets posited 
that the negotiation

[[Page 16330]]

of a private contract between the NASD and the owner of an automated 
inter-dealer quotation system would more adequately address the needs 
of both the NASD and the system. In addition, Pink Sheets sought 
assurances that quotation data provided to the NASD pursuant the 
proposed rule would not be redistributed in competition with Pink 
Sheets.
    NASD Regulation has noted that it cannot rely on a contractual 
arrangement with the Pink Sheets. Because the NASD's jurisdiction 
extends only to its members and not to Pink Sheets and other inter-
dealer quotation services, NASD Regulation believed that it could not 
impose a requirement on Pink Sheets to provide quotation data, and, 
therefore, Pink Sheets at any time could refuse to provide the 
quotation data. NASD Regulation stated that, although it could pursue 
legal action against the system operator for breach of such contract, 
it would be at risk of not having quotation data in the interim and 
thus would be unable to surveil effectively and monitor for compliance 
with applicable rules and regulations. Finally, NASD Regulation noted 
that it requires access to the quotation data for regulatory purposes 
and intends to use that data only for this purpose.\18\ Further, in its 
letter dated June 14, 2001, NASD Regulation specifically represented 
that quotation data submitted to the NASD or NASD Regulation under the 
proposed rule will not be provided to The Nasdaq Stock Market by the 
NASD or NASD Regulation.\19\ Also, in Amendment No. 3, the NASD 
represented that to the extent the member's Reporting Agent calculates 
an inside bid and/or offer and submits that inside bid and/or offer to 
the NASD, the NASD will not use this inside bid and/or offer for any 
commercial purposes.\20\
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    \18\ NASD Response to Comments and Amendment No. 1, supra note 
5.
    \19\ NASD Letter, supra note 6.
    \20\ Amendment No. 3, supra note 8.
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B. Responsibility for Compliance

    In the proposed rule change, the NASD stated that an NASD member 
would be fully responsible for compliance with the proposed rule 
whether or not the member used a Reporting Agent to provide quotation 
information. Pink Sheets argued that requiring NASD members to bear the 
responsibility for ascertaining whether the NASD is receiving quotation 
data would impose an undue burden on NASD members. Pink Sheets 
therefore suggested that the proposed rule be amended to require the 
NASD to notify its members or their Reporting Agents if the NASD knows 
or has reason to believe that the NASD is not receiving quotation data.
    NASD Regulation responded that it believes member firms must be 
responsible for compliance with the proposed rule and must put 
procedures in place to ensure proper reporting of quotation 
information. NASD Regulation stated, however, that it would be willing, 
upon request, to confirm whether it is receiving quotation information 
submitted pursuant to the proposed rule.

C. Withdrawal of Quotations

    As originally proposed, non-compliance with the proposed rule would 
require a member to immediately withdraw its priced quotations and 
unpriced indications of interest. Pink Sheets expressed concern that 
this might require NASD members to immediately withdraw their 
quotations where non-compliance is the result of data systems problems.
    NASD Regulation responded that it recognizes members or their 
Reporting Agents may experience systems problems that temporarily 
restrict their ability to record and report quotation information. 
Therefore, NASD Regulation stated that if a member or its Reporting 
Agent were unable to record or report quotation information due to a 
systems problem, the member would not be required to withdraw its 
quotations or unpriced indications of interest, as long as the problem 
did not extend beyond one trading day. NASD Regulation further noted 
that if the systems problem extended beyond one trading day, the 
proposed rule would require that the member withdraw its quotations or 
unpriced indications of interest, if the member is unable to use an 
alternative means to comply with the proposed rule. Reflecting this 
approach, the NASD amended the proposed rule so that it no longer 
requires quotations to be withdrawn immediately.\21\
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    \21\ If a systems problem extends beyond one trading day, 
causing quotation data to not be recorded or reported for a 
particular member, that member would then be required to withdraw 
from the quotation system. See NASD Response to Comments and 
Amendment No. 1, supra note 5.
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    Pink Sheets also expressed concern that market makers required to 
withdraw their quotations and unpriced indications of interest might 
lose their ``piggyback'' status under Rule 15c2-11 of the Act.\22\ Pink 
Sheets asserted that in order to avoid this possible result, the 
proposed rule should be amended so that, in the case of non-compliance, 
members would only be required to withdraw their quotations, not their 
unpriced indications of interest. NASD Regulation responded that if 
quotation information, including unpriced indications of interest, is 
not properly recorded and reported, the NASD could not ensure that its 
members are in compliance with applicable rules.
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    \22\ Rule 15c2-11 requires a broker-dealer to review current 
information about an issuer before it publishes a quotation for the 
issuer's security in the non-Nasdaq OTC markets. Because of the 
rule's ``piggyback'' provision, generally only the first broker-
dealer is required to review this information. Once the security is 
quoted regularly for 30 days, other broker-dealers can ``piggyback'' 
off of those quotations, i.e., submit quotations without reviewing 
information about the issuer. 17 CFR 24.15c2-11(f)(3).
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D. Data Standards

    The proposed rule would require members to record and report 
quotation data ``in such form as is prescribed by the Association from 
time to time.'' The proposed rule, however, specifies the items of 
information the quotation activity must contain. Pink Sheets argued 
that no quotation system should be held to ``such a subjective 
standard.'' NASD Regulation responded that, under the proposed rule, 
the NASD would, in a Notice to Members, prescribe the form in which it 
would require data to be transmitted to the Association. NASD 
Regulation stated that its staff has met with a representative of Pink 
Sheets to discuss data transmission alternatives. Further, NASD 
Regulation stated that if it were to now stipulate the use of a 
specific transmission method, the NASD would not have the ability, 
should it be necessary, ``to address varying systems transmissions 
capabilities.''

E. Inter-Dealer Quotation Systems Covered by the Rule

    As amended, proposed NASD Rule 6630 would not require the recording 
and reporting of quotations that are displayed on an inter-dealer 
quotation system that is either: (1) Operated by a registered 
securities association or national securities exchange; or (2) operated 
by an NASD member. In addition, since the rule applies only to OTC 
equity securities, it would not apply to electronic bond quotation 
services. Pink Sheets objected to the proposed rule's original 
exclusion of systems qualified pursuant to section 17B of the Act, 
which, by definition, are operated by either a national securities 
association or a national securities exchange.\23\ Pink Sheets 
expressed concern that there is no rule that requires members to remove 
their

[[Page 16331]]

quotations from any of the exempt systems if the member believes or has 
reason to believe that the data is not being properly maintained by the 
exempt system. Pink Sheets expressed concern that the NASD could force 
market makers on the OTCBB that also quote in the EQS to abandon their 
use of the EQS. In addition, Pink Sheets inquired why the proposed rule 
would not apply to electronic bond quotation services.
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    \23\ Amendment No. 2, supra note 7, revised the text of this 
exclusion to expressly exclude quotations displayed on an inter-
dealer quotation system operated by a registered securities 
association or national securities exchange.
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    With regard to the original proposal to exclude systems qualified 
under section 17B of the Act, NASD Regulation stated that, because 
those systems are sponsored and regulated by either a national 
securities association or national securities exchange, the association 
or exchange would be able to obtain quotation data directly from those 
systems. Regarding electronic bond quotation services, NASD Regulation 
stated that it does not currently require historical quotation 
information for regulation of the OTC component of the bond market. 
NASD Regulation represented, however, that it will continue to monitor 
bond market activity to determine whether it is necessary to impose, in 
that area, requirements similar to those described in the proposed rule 
change.

IV. Discussion

    The Commission has carefully considered the proposed rule change 
and amendments thereto, along with the comment letter from Pink Sheets, 
as well as the response letter from NASD Regulation and the NASD 
Letter. The Commission finds that the NASD proposed rule change, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
association. In particular, the Commission finds that the proposed rule 
change is consistent with section 15A(b)(6) of the Act,\24\ which 
requires the rules of a national securities association to 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. In addition, the Commission finds 
that the proposed rule change is consistent with section 15A(b)(2) of 
the Act,\25\ which requires that a national securities association be 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply, and enforce compliance by its members and 
persons associated with its members, with the Act and rules and 
regulations thereunder and the rules of the association.
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    \24\ 15 U.S.C. 78o-3(b)(6).
    \25\ 15 U.S.C. 78o-3(b)(2).
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    The Commission finds that the proposed rule change is designed to 
ensure that the NASD receives quotation information that is necessary 
to adequately surveil member activity in OTC equity securities quoted 
on inter-dealer quotation systems that permit quotation updates on a 
real-time basis and that are not operated by a registered national 
securities association, a registered national securities exchange, or 
an NASD member. The required quotation information must be recorded and 
reported by the member itself or, on the member's behalf, though a 
Reporting Agent. The Commission believes that this quotation 
information is necessary for the NASD, through NASD Regulation, to 
adequately surveil member compliance with applicable rules and 
regulations in a trading environment where quotations for OTC equity 
securities are displayed on a real-time basis in those inter-dealer 
quotation systems for which the NASD does not otherwise have access to 
quotation data. Because these OTC equity securities often are microcap 
securities that can be the subject of fraud and manipulation, the 
Commission believes that it is vital for the NASD to have access to 
quotation information for these securities so that the NASD can 
properly carry out its regulatory responsibilities with respect to this 
market sector.
    In considering this proposed rule change, the Commission observes 
that the NASD has amended the proposed rule change to address, and has 
clarified a number of points in response to, issues raised in the Pink 
Sheets Letter. Specifically, in response to comments made in the Pink 
Sheets Letter, the NASD revised the proposal with respect to the 
circumstances under which a member would be required to withdraw its 
quotes from the inter-dealer quotation system in the event of non-
compliance with the rule's provisions. The Commission believes that the 
NASD's revisions address the Pink Sheets' concerns that an NASD member 
would be required to immediately withdraw its quotes where non-
compliance is the result of a temporary data systems problem. The NASD 
also responded to the Pink Sheets' concern about the specificity of the 
standards in which the NASD would require data to be submitted by 
indicating that it would publish information regarding the prescribed 
form for recording and reporting the quotation information in a Notice 
to Members. Finally, the NASD responded to the Pink Sheets' objection 
that the proposed rule did not cover electronic bond quote services by 
indicating that it would monitor activities to determine whether NASD 
Rule 6630 should in the future cover a broader range of securities. The 
Commission does not believe that the NASD's obligations as a self-
regulatory organization (``SRO'') to enforce compliance by its members 
with the Act requires it to apply the same rules to all the varied 
activities of its members. Instead, the Commission believes that, in 
many cases, it is appropriate for an SRO to tailor its rules to aid it 
in fulfilling its responsibilities with respect to a particular market 
segment. The Commission believes that this proposal is appropriately 
tailored to surveil a market segment that historically has experienced 
repeated instances of fraud and manipulation.
    There are two issues raised by Pink Sheets that the Commission 
wishes to address further. First, Pink Sheets claimed that NASD Rule 
6630 is anti-competitive because it excludes systems that are sponsored 
and regulated by a registered securities association or national 
securities exchange, and is unfairly targeted at EQS and its users. The 
Commission finds that the proposed rule's exclusion of quotations 
displayed in inter-dealer quotation systems operated by a registered 
national securities association or national securities exchange is 
consistent with the Act. To qualify for the exclusion, the system must 
be operated by an SRO registered with, and regulated by, the 
Commission. These SROs have responsibilities under the Act to surveil 
systems they operate. Accordingly, it is unnecessary, and would be 
needless and redundant, for the NASD to require its members to record 
and report information regarding quotations on such systems. On the 
other hand, the Commission believes that it is necessary for the NASD, 
as the principal regulator of the OTC equity market, to have the 
requisite information regarding quotations displayed by members in 
covered quotation systems to enable it to carry out its functions as an 
SRO. The Commission also believes that the NASD appropriately places 
the burden to provide the quotation information on its members, because 
it is these members over which the NASD is obligated to enforce 
compliance with the Act's provisions.\26\ To reduce the costs and 
burdens on its members, however, the NASD will permit members to enter 
into an agreement

[[Page 16332]]

with a Reporting Agent to provide the information on the member's 
behalf.
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    \26\ 15 U.S.C. 78o-3(b)(2).
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    Second, Pink Sheets expressed concern that quotation information 
provided to the NASD pursuant to the proposed rule could be used to 
compete against Pink Sheets. Pink Sheets also suggested that the NASD 
might use the quotation information in some way to advantage its OTC 
Bulletin Board, to the detriment of EQS. The Commission notes that NASD 
Regulation specifically represented that it requires access to this 
quotation data for regulatory purposes and intends to use the data only 
for this purpose \27\ and that quotation data submitted to the NASD or 
NASD Regulation under the proposed rule change will not be provided to 
The Nasdaq Stock Market by the NASD or NASD Regulation.\28\ Also, in 
Amendment No. 3, the NASD represented that to the extent the member's 
Reporting Agent calculates an inside bid and/or offer and submits that 
inside bid and/or offer to the NASD, the NASD will not use this inside 
bid and/or offer for any commercial purposes.\29\
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    \27\ See NASD Response to Comments and Amendment No. 1, supra 
note 3.
    \28\ See NASD Letter, supra note 6.
    \29\ See Amendment No. 3, supra note 8.
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V. Accelerated Approval of Amendment Nos. 1, 2, and 3

    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. Under 
Amendment No. 1, the NASD clarified when a member must withdraw its 
quotes from an inter-dealer quotation system under the rule.
    The Commission also finds good cause for approving Amendment No. 2 
to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. By 
expressly excluding from application of the proposed rule quotations 
entered into inter-dealer quotation systems that are operated by a 
registered national securities association or national securities 
exchange, Amendment No. 2 clarifies the proposed rule's scope. In 
addition, the Commission finds good cause for approving Amendment No. 3 
to the proposed rule change prior to the thirtieth day after the date 
of publication of filing thereof in the Federal Register. By clarifying 
that the terms ``prevailing inside bid'' and ``prevailing inside 
offer'' refer to the prevailing inside bid and offer of the system 
under which the participant has a responsibility to provide quotation 
activity under the proposed rule, Amendment No. 3 makes it clear that 
it is not necessary for a member to consolidate quotation information 
from other systems or markets that are quoting the same security. 
Amendment No. 3 also clarifies that the NASD will not use the inside 
bid/offer quotations collected and submitted by the Reporting Agent for 
any commercial purposes.
    For these reasons, the Commission finds good cause, consistent with 
sections 15A(b)(2), 15A(b)(6) and 19(b)(2) of the Act, to accelerate 
approval of Amendment Nos. 1, 2, and 3 to the proposed rule change.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 1, 2, and 3, including whether 
Amendment Nos. 1, 2, and 3 are 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 
number SR-NASD-2000-42 and should be submitted by April 24, 2003.

VII. Conclusion

    It is therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-NASD-00-42) be and hereby 
is, approved, and Amendment Nos. 1, 2, and 3 are approved on an 
accelerated basis.\31\
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    \30\ 15 U.S.C. 78s(b)(2).
    \31\ In approving the proposed rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8037 Filed 4-2-03; 8:45 am]
BILLING CODE 8010-01-P