[Federal Register Volume 68, Number 240 (Monday, December 15, 2003)]
[Notices]
[Pages 69734-69736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30841]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48880; File No. SR-NASD-2003-145]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto To Give Authority to a 3-
Member Subcommittee of NASD's Market Regulation Committee to Review 
Alternative Display Facility System Outage and Denial of Excused 
Withdrawal Determinations

December 4, 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 September 25, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASD. On November 24, 
2003, and December 2, 2003, NASD filed Amendment Nos. 1\3\ and 2\4\ to 
the proposed rule change, respectively. 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\ NASD filed a new Form 19b-4, which replaces and supersedes 
the original filing in its entirety.
    \4\ Letter from Philip A. Shaikun, Office of General Counsel, 
Regulatory Policy and Oversight, NASD, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
December 2, 2003 (``Amendment No. 2''). Amendment No. 2 deletes the 
following sentence from Exhibit 1 to the Form 19b-4: ``NASD has 
designated the proposed rule change as concerned solely with 
administration of the self-regulatory organization under Section 
19(b)(3)(A)(iii) of the Act and Rule 19b-4(f)(3) thereunder, which 
renders the proposal effective upon receipt of this filing by the 
Commission.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 4300A and 4619A(g) to give 
jurisdiction to a 3-member subcommittee of NASD's Market Regulation 
Committee (``MRC'') to review system outage determinations under Rule 
4300A(f) and excused withdrawal denials under Rule 4619A, respectively.
    The proposed rule change would apply during the time that the NASD 
Alternative Display Facility operates on a pilot basis. The Commission 
previously approved the ADF as a nine-month pilot to quote and trade 
only Nasdaq-listed securities.\5\ The Commission subsequently approved 
an extension of the pilot until January 26, 2004.\6\ The text of the 
proposed rule is set forth below. Proposed new language is italicized; 
proposed deletions are in brackets.
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    \5\ Securities Exchange Act Release No. 46249 (July 24, 2002), 
67 FR 49822 (July 31, 2002).
    \6\ Securities Exchange Act Release No. 47633 (April 10, 2003), 
68 FR 19043 (April 17, 2003).
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* * * * *
    4300A. Quote and Order Access Requirements.
    (a) through (e) No change.
    (f) Procedures for Reviewing System Outages
    (1) through (4) No change.
    (5) A Market Participant may appeal a determination made under 
paragraph (e)(3) to a three-member subcommittee comprised of current or 
former industry members of NASD's Market Regulation [Alternative 
Display Facility Market Operations Review] Committee in writing, via 
facsimile or otherwise, by the close of business on the day a 
determination is rendered pursuant to paragraph (e)(3). An appeal to 
the subcommittee [Committee] shall operate as a stay of the 
determination made pursuant paragraph (e)(3). Once a written appeal has 
been received, the Market Participant may submit any additional 
supporting written documentation, via facsimile or otherwise, up until 
the time the appeal is considered by the subcommittee [Committee]. The 
subcommittee [Committee] shall render a determination by the close of 
business following the day a notice of appeal is received. The 
subcommittee's [Committee's] determination shall be final and binding.
* * * * *
    4619A. Withdrawal of Quotations and Passive Market Making
    (a) through (f) No Change.
    (g) A three-member subcommittee comprised of current or former 
industry members of NASD's [Alternative Display Facility Operations 
Review] Market Regulation Committee shall have jurisdiction over 
proceedings brought by market makers seeking review of a denial of an 
excused withdrawal

[[Page 69735]]

pursuant to this Rule, or the conditions imposed on their reentry.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD 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. NASD 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
    Background. On July 24, 2002, the Commission approved SR-NASD 2002-
97, which authorizes NASD to operate the ADF on a pilot basis in Nasdaq 
securities for nine months, pending the anticipated approval of SR-
NASD-2001-90, which proposes to operate the ADF on a permanent 
basis.\7\ On April 10, 2003, the Commission approved SR-NASD-2003-53, 
authorizing extension of the ADF pilot period until January 26, 
2004.\8\ As described in detail in SR-NASD-2001-90, the ADF is a 
quotation collection, trade comparison, and trade reporting facility 
developed by NASD in accordance with the Commission's SuperMontage 
Approval Order \9\ and in conjunction with Nasdaq's anticipated 
registration as a national securities exchange.\10\
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    \7\ Securities Exchange Act Release No. 46249 (July 24, 2002), 
67 FR 49822 (July 31, 2002).
    \8\ Securities Exchange Act Release No. 47633 (April 10, 2003), 
68 FR 19043 (April 17, 2003).
    \9\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001).
    \10\ Securities Exchange Act Release No. 44396 (June 7, 2001), 
66 FR 31952 (June 13, 2001).
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    For the duration of the pilot period, ADF will provide ADF market 
participants (market makers and ECNs) the ability to post quotations in 
Nasdaq securities and will provide all members that participate in the 
ADF the ability to view quotations and report transactions in Nasdaq 
securities to the Exclusive Securities Information Processor (``SIP'') 
for Nasdaq-listed issues \11\ for consolidation and dissemination of 
data to vendors and ADF market participants. The facility also will 
provide for trade comparison through the Trade Reporting and Comparison 
Service (``TRACS''). The facility further will provide for real-time 
data delivery to NASD for regulatory purposes, including enforcement of 
firm quote and related rules. It is anticipated that the ADF will 
operate on a pilot basis until the effective date of SR-NASD-2001-90, 
the approval of which would provide for the operation of the ADF on a 
permanent basis and an expansion of ADF-eligible securities to include 
all exchange-listed securities.
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    \11\ Nasdaq initially will be the designated SIP for all 
transactions and quotations in Nasdaq securities. During the pilot 
period, the SIP will distribute individual quotations for both ADF 
and Nasdaq market makers and ECNs.
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    Order Access Rule. The ADF does not provide an order routing 
capability. Instead, NASD pilot Rule 4300A requires market participants 
to provide direct electronic access to other market participants and to 
provide to all other NASD members direct electronic access or allow for 
indirect electronic access to the individual market participant's 
quote. This rule provides the means for ADF market participants and 
other broker/dealers to access ADF quotes and, among other things, to 
meet the firm quote and locked and crossed quotation requirements.
    System Outage Determinations. Pursuant to NASD Rule 4300A(e)(2), 
NASD may suspend a market participant from quoting for 20 business days 
if the market participant experiences three unexcused, confirmed system 
outages during any period of five business days. The Rule defines 
system outages as (1) an inability to quote or (2) an inability to 
respond to orders. The Rule gives officers of NASD authority to review 
an outage and determine whether the outage should be excused. An 
officer may deem a system outage excused based on the specific facts 
and circumstances surrounding the outage. Most significant 
consideration is given to whether the system outage resulted from 
circumstances beyond the market participant's control and whether the 
market participant voluntarily brought the matter to the attention of 
NASD before it otherwise learned of the outage. Other factors that may 
be considered include, but are not limited to, the extent and duration 
of the system problem.
    Rule 4300A provides for a review and appeal process of a 
determination of whether an outage is excused or unexcused. Currently, 
Rule 4300A(f)(5) gives authority for such reviews to NASD's Alternative 
Display Facility Market Operations Review Committee. The proposed rule 
change would amend that provision to give review authority to a three-
member subcommittee comprised of current or former industry members of 
NASD's MRC to take advantage of that committee's expertise. It would be 
NASD's intention to draw first from current MRC members and resort to 
former members only when conflicts or availability problems exist with 
current members.
    Denial of Excused Withdrawals. NASD Rule 4619A generally provides 
that NASD Alternative Display Facility Operations may, under certain 
circumstances, grant excused withdrawal status to an ADF Market Maker 
that withdraws its quotations from a security. Rule 4619A(g) provides 
for review of a denial of an excused withdrawal and gives authority for 
such reviews to NASD's Alternative Display Facility Market Operations 
Review Committee. The proposed rule change would amend that provision 
to give review authority to a three-member subcommittee comprised of 
current or former industry members of the MRC, as would be the case for 
system outage proceedings described above.
2. Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that NASD rules 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. NASD believes that the MRC is the appropriate 
committee to review ADF system outage and excused withdrawal 
determinations.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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

    Written comments were neither solicited nor received.

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

[[Page 69736]]

(ii) as to which NASD 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 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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
NASD-2003-145. This file number should be included on the subject line 
if e-mail is used. To help the Commission process and review your 
comments more efficiently, comments should be sent in hardcopy or by e-
mail but not by both methods.
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD.
    All submissions should refer to File No. NASD-2003-145 and should 
be submitted by January 5, 2004.


    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30841 Filed 12-12-03; 8:45 am]
BILLING CODE 8010-01-P