[Federal Register Volume 68, Number 109 (Friday, June 6, 2003)]
[Notices]
[Pages 34025-34026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14295]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47949; File No. SR-NASD-2001-75]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 by the National Association of 
Securities Dealers, Inc., and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 2 To Make Permanent a Pilot 
Amendment to NASD Rule 4120 Relating to Nasdaq's Authority To Initiate 
and Continue Trading Halts

May 30, 2003.

I. Introduction

    On October 18, 2001, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its subsidiary, 
The Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC''), 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 make permanent 
a pilot amendment to NASD Rule 4120 relating to Nasdaq's authority to 
initiate and continue trading halts in circumstances where Nasdaq 
believes that extraordinary market activity in a security listed on 
Nasdaq is caused by the misuse or malfunction of an electronic 
quotation, communication, reporting, or execution system. On January 
28, 2002, Nasdaq amended the proposal.\3\ The proposed rule change, as 
modified by Amendment No. 1, was published for notice and comment in 
the Federal Register on February 5, 2002.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See January 25, 2002 letter from Mary M. Dunbar, Vice 
President, Nasdaq, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), SEC, and attachments 
(``Amendment No. 1''). Amendment No. 1 completely replaced and 
superseded the original proposal.
    \4\ See Securities Exchange Act Release No. 45355 (January 29, 
2002), 67 FR 5351.
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    The Commission received one comment letter on the proposed rule 
change.\5\ On April 14, 2003, Nasdaq again amended the proposed rule 
change.\6\ This order approves the proposed rule change as modified by 
Amendment No. 1, and, simultaneously, the Commission provides notice of 
filing of Amendment No. 2 and grants accelerated approval of Amendment 
No 2.
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    \5\ See October 2, 2002 letter from Richard T. Chase, Executive 
Vice President, Member Firm Regulation, The American Stock Exchange 
LLC (``Amex''), to Jonathan G. Katz, Secretary, SEC (``Amex 
Letter''). In its comment letter, the Amex expressed its support of 
Nasdaq's efforts to protect investors and the public interest 
through the use of trading halts. The Amex further stated that 
Nasdaq should clarify that Nasdaq's ``authority to determine what is 
and what is not extraordinary market activity is limited to 
transactions within its jurisdiction and does not extend to 
transactions within the jurisdiction of other self-regulatory 
organizations.'' Amex Letter at 2. The Amex expressed no objection 
to Nasdaq's proposal if it is applied to situations that involve a 
Nasdaq system or the system of a broker-dealer or electronic 
communications network that is a Nasdaq member firm and over which 
Nasdaq has regulatory authority. Id. Nasdaq opposed the proposed 
rule change to the extent that Nasdaq wants to regulate the systems 
of UTP exchanges over which Nasdaq has no regulatory authority. Id. 
The Amex further stated that any authority for additional regulation 
of activity in Nasdaq securities having an inter-market impact 
should be exercised pursuant to the Reporting Plan for Nasdaq-Listed 
Securities Traded on Exchanges on an Unlisted Trading Privilege 
Basis. Id.
    The Commission notes that Instinet Corporation (``Instinet'') 
filed a comment letter in response to SR-NASD-2001-37, the proposed 
rule change that established the pilot amendment to NASD Rule 4120. 
See July 27, 2001 letter from Jon Kroeper, First Vice President--
Regulatory Policy/Strategy, Instinet, to Jonathan G. Katz, 
Secretary, Commission. Instinet stated that the proposed rule change 
(1) failed to properly define ``extraordinary market activity;'' (2) 
lacked objective standards for Nasdaq to make a determination to 
initiate and terminate trading halts; and (3) should be amended to 
allow NASD Regulation, Inc. to initiate and terminate trading halts 
based on extraordinary market activity instead of Nasdaq. Because 
Instinet's comment letter essentially addresses the same issues in 
the instant filing, the Commission has considered Instinet's letter 
in approving the instant proposed rule change.
    \6\ See April 11, 2003 letter from John M. Yetter, Assistant 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, SEC, and attachments (``Amendment No. 2''). In 
Amendment No. 2, Nasdaq proposes changes to clarify the effect of a 
trading halt under the rule on exchanges trading Nasdaq securities 
on an unlisted trading privileges basis, as well as the NASD's 
Alternative Display Facility. Nasdaq filed Amendment No. 2 in 
response to concerns the Amex raised, and discussed the proposed 
rule change with members of the UTP Operating Committee on October 
23, 2002. See Amendment No. 2 at 4. At that time, Nasdaq asked that 
members of the UTP Operating Committee inform Nasdaq of objections 
either to the permanent adoption of the proposed rule as amended, or 
to the conclusion that a trading halt initiated pursuant to the 
proposed rule would constitute a regulatory halt under the UTP Plan. 
At the time Nasdaq filed Amendment No. 2, Nasdaq had received no 
objections.
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II. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change and 
the comment letters, and finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association 
\7\ and, in particular, the requirements of Section 15A of the Act,\8\ 
which requires, among other things, that a registered national 
securities association's rules be designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and, in general, protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3.
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    The Commission believes that, in circumstances where the misuse or 
malfunction of electronic systems that trade Nasdaq-listed securities 
may impact the price and volume of transactions in such securities, 
Nasdaq should have the authority to halt trading in an affected 
security until the problem can be addressed. Such a decision to halt 
trading requires Nasdaq to make a determination that the action is 
necessary for the protection of investors and the public interest 
pursuant to NASD Rule 4120. Nasdaq has stated ``the rule would not be 
invoked merely because a system malfunction rendered a particular venue 
for transactions in a security temporarily unavailable, nor would it be 
applied in other circumstances where the system problems of an 
individual firm or market center did not give rise to extraordinary 
market activity.'' \9\ Instead, Nasdaq states the rule is intended to 
address circumstances where there is ``a market-wide regulatory concern 
that system misuse or malfunction is likely to harm investors by 
leading them to enter into transactions whose terms are materially 
influenced by the misuse or malfunction.'' \10\ Nasdaq also states that 
it will terminate trading halts initiated under the rule ``as soon as 
Nasdaq can conclude that the system misuse or malfunction will no 
longer have a material effect on the market for the security that is 
the subject of the halt or that system misuse or malfunction is not the 
cause of an instance of extraordinary market activity.'' \11\ The 
Commission believes that the proposed rule change is consistent with 
the Act, and believes that the proposed rule may assist Nasdaq in 
exercising its responsibility to maintain fair and orderly markets.
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    \9\ Amendment No. 2 at 2-3.
    \10\ Id. at 3.
    \11\ Id.
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    The Commission notes that Nasdaq, in Amendment No. 2, indicates 
that it believes that trading halts instituted by Nasdaq under the 
proposed rule would constitute ``regulatory'' trading halts under the 
Reporting Plan for Nasdaq-Listed Securities Traded on Exchanges on an 
Unlisted Trading Privilege Basis (``Reporting Plan''). Under the 
Reporting

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Plan, regulatory trading halts instituted by Nasdaq would be honored by 
exchanges trading Nasdaq securities on an unlisted trading privileges 
basis (``UTP Exchanges'') and the NASD's Alternative Display Facility 
(``ADF'') participating in the Reporting Plan (collectively, ``Plan 
Participants''). The Commission understands that Nasdaq and the other 
Plan Participants are still discussing this issue. The Commission 
believes that an agreement would need to be reached among the Plan 
Participants on this subject before trading halts instituted by Nasdaq 
under the proposed rule would be considered ``regulatory'' trading 
halts under the Reporting Plan. Thus, approval of the proposed rule 
change, as amended, does not resolve the issue of whether a trading 
halt instituted by Nasdaq under the proposed rule constitutes a 
``regulatory'' trading halt under the Reporting Plan.
    The Commission finds good cause for approving proposed Amendment 
No. 2 before the 30th day after the date of publication of notice of 
filing thereof in the Federal Register. Nasdaq filed Amendment No. 2 to 
further clarify the manner in which Nasdaq envisions implementing the 
proposed rule change. The Commission believes the substance of 
Amendment No. 2 does not warrant republication of the proposed rule 
change as amended. Therefore, the Commission finds good cause for 
accelerating approval of the proposed rule change, as amended by 
Amendment No. 2.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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 Amendment No. 2 that are filed with the Commission, and all 
written communications relating to Amendment No. 2 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-2001-75 and should be 
submitted by June 27, 2003.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\12\, that the proposed rule change (SR-NASD-2001-75), as amended by 
Amendment No. 1, be, and it hereby is, approved, and that Amendment No. 
2 to the proposed rule change be, and hereby is, approved on an 
accelerated basis.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14295 Filed 6-5-03; 8:45 am]
BILLING CODE 8010-01-P