[Federal Register Volume 68, Number 179 (Tuesday, September 16, 2003)]
[Notices]
[Pages 54256-54258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48468; File No. SR-NASD-2003-113]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
National Association of Securities Dealers, Inc. To Codify Nasdaq's 
Existing Authority To Implement a ``Quote-Only Period'' Before the 
Start of Trading in Initial Public Offerings on Nasdaq

September 10, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 21, 2003, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange

[[Page 54257]]

Commission (``Commission'') the proposed rule change as described in 
Items I and II, which Items have been prepared by Nasdaq. On September 
2, 2003, Nasdaq amended the proposed rule change.\3\ Nasdaq filed the 
proposal pursuant to section 19(b)(3)(A) of the Act,\4\ and Rule 19b-
4(f)(6) thereunder,\5\ which renders the proposal effective upon filing 
with the Commission. The Commission is publishing this notice, as 
amended, 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\ See August 29, 2003 letter from Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, and 
attachments (``Amendment No. 1''). Amendment No. 1 completely 
replaces and supersedes the original proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6). The Commission considers the 
original filing to have satisfied Nasdaq's obligation to provide the 
Commission with notice of its intention to file the proposed rule 
change pursuant to Rule 19b-4(f)(6). Nasdaq asked the Commission to 
waive the 30-day operative delay.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq seeks to codify under NASD Rule 4120 Nasdaq's existing 
authority to implement a ``Quote-Only Period'' (``Period'') before the 
start of trading in initial public offerings (``IPOs'') on Nasdaq. The 
text of the proposed rule change is below. Proposed new language is in 
italics.
4120. Trading Halts
(a) Authority To Initiate Trading Halts
    In circumstances in which Nasdaq deems it necessary to protect 
investors and the public interest, Nasdaq may, pursuant to the 
procedures set forth in paragraph (b):
    (1)-(6) No Change.
    (7) Halt trading in a security that is the subject of an Initial 
Public Offering on Nasdaq.
(b) Procedure for Initiating a Trading Halt
    (1)-(6) No Change.
    (7) A trading halt initiated under Rule 4120(a)(7) shall be 
terminated when Nasdaq releases the security for trading. Prior to 
terminating the halt, there will be a 15-minute period during which 
market participants may enter quotes in that security in Nasdaq 
systems. If the inside market is not locked or crossed at the 
conclusion of that 15-minute period, Nasdaq will release the security 
for trading and terminate the halt. If the inside market is locked or 
crossed at the conclusion of the initial 15-minute period, Nasdaq will 
extend the halt for an additional 15 minutes during which quotations 
may be entered in Nasdaq systems. At the conclusion of the second 15-
minute period, the halt shall be terminated and the security released 
for trading.
* * * * *

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
    Nasdaq is proposing to amend NASD Rule 4120 to codify that NASD 
members or persons associated with NASD members are prohibited from 
executing trades, directly or indirectly, in a Nasdaq IPO prior to the 
conclusion of a quote-only period and the dissemination over the 
consolidated tape of a trade in that security on the Nasdaq Stock 
Market.
    Section 12 of the Act \6\ and Rule 12f-2 thereunder \7\ prohibit 
off-exchange trading of IPOs of exchange-listed securities prior to the 
first trade on the listing exchange. This prohibition ensures the 
smooth functioning of the market during the initial trading of these 
IPOs that might otherwise experience volatility that may be observed in 
the opening of IPOs for secondary market trading. The prohibition also 
helps to ensure that markets are not open for trading when unusual 
circumstances may prevent such markets from remaining fair and orderly. 
Market participants are better able to digest and respond to market 
price indications before an IPO is released for trading, and thus to 
provide better information upon which to make trading decisions.
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    \6\ 15 U.S.C. 78l.
    \7\ 17 CFR 240.12f-2.
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    The Act does not extend this protection to over-the-counter 
listings such as those on Nasdaq. Therefore, in 1994, Nasdaq 
established a quotation-only time period for quoting participants to 
enter and adjust their first quotations for IPO securities.\8\ Prior to 
the Period, NASD members may not disseminate quotes or trades in the 
IPO security. During the Period, NASD members are prohibited from 
effecting trades, either directly or indirectly, in the Nasdaq IPO 
security. Market participants may freely quote and trade once the 
Period has ended and Nasdaq has released the security for trading.
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    \8\ See Securities Exchange Act Release 34254 (June 24, 1994), 
59 FR 33808 (June 30, 1994)(SR-NASD-94-37).
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    In 1998, Nasdaq modified and expanded the Period.\9\ As amended and 
as is current practice, the initial Period lasts for 15 minutes. If the 
market is locked/crossed at the end of the first 15 minutes of the 
Period, Nasdaq extends the Period for an additional 15 minutes, after 
which trading in the security is released. Although Nasdaq monitors 
quotations for the entire 15 minutes, the determination whether to 
extend the Period is based solely on whether the market is locked or 
crossed at the end of that Period.
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    \9\ See Securities Exchange Act Release 40968 (January 22, 
1999), 64 FR 4729 (January 29, 1999)(SR-NASD-98-98).
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    When the Commission approved Nasdaq's 1998 proposal to extend the 
Period, Nasdaq noted that its practice of imposing a Period is related 
to its authority to halt trading pursuant to NASD Rule 4120.\10\ NASD 
Rule 4120 provides Nasdaq with authority to halt trading in securities 
in a number of circumstances in which Nasdaq deems a trading halt 
necessary to protect investors and the public interest. Prior to the 
adoption of the pilot amendment, the specific bases for initiating a 
trade halt focused primarily on ensuring that all investors have access 
to material news about an issuer. Nasdaq believes that the IPO Period 
shares the characteristics that are common to trade halts, including 
the presence of unusual market conditions and the possible lack of 
complete information upon which to base investment decisions.
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    \10\ Id. at footnote 4. Specifically, Nasdaq stated that the 
Quote Only Period ``like the objectives in [NASD] Rule 4120, is 
designed to ensure that the market is not open for trading when 
unusual circumstances may prevent such markets from remaining fair 
and orderly.''
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    Although Nasdaq's 1998 proposal referenced NASD Rule 4120, Nasdaq 
did not amend Rule 4120 at that time. Nasdaq believes that it is 
necessary and appropriate to codify Nasdaq's existing authority as 
established by Commission approval in 1998. Some market participants 
have expressed to Nasdaq their confusion or uncertainty about the 
Period. Therefore, Nasdaq submits this proposal to ensure that its 
authority is

[[Page 54258]]

clearly articulated in an approved rule, and that the implications of 
that rule be clearly understood by all market participants and 
investors. The proposal is designed to codify Nasdaq's existing 
authority and not to modify or expand it any manner.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\11\ including section 
15A(b)(6) of the Act,\12\ 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. 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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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(b)(6).
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    In addition, section 15A(b)(11) of the Act \13\ requires that the 
rules of a registered national securities association be designed to 
produce fair and informative quotations, prevent fictitious or 
misleading quotations and to promote orderly procedures for collecting, 
distributing, and publishing quotations. Nasdaq believes the proposal 
is designed to protect investors and to produce fair and informative 
quotations, prevent fictitious or misleading quotations and to promote 
orderly procedures for collecting, distributing, and publishing 
quotations.
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    \13\ 15 U.S.C. 78o-3(b)(11).
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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

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

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) of the Act \14\ and 
Rule 19b-4(f)(6) thereunder.\15\ At any time within 60 days of the 
filing of the proposed rule change,\16\ 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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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ The Commission considers the 60-day abrogation period to 
have commenced on September 2, 2003, the date Nasdaq filed Amendment 
No. 1.
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    Nasdaq has asked the Commission to waive the 30-day operative 
delay. The Commission believes waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Such waiver will allow Nasdaq to immediately codify its existing 
authority to implement a Period before the start of trading in IPOs. 
For these reasons, the Commission designates the proposal to be 
effective and operative upon filing with the Commission.\17\
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    \17\ 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 proposal 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 number SR-NASD-2003-113 and should be 
submitted by October 7, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23551 Filed 9-15-03; 8:45 am]
BILLING CODE 8010-01-P