[Federal Register Volume 69, Number 15 (Friday, January 23, 2004)]
[Notices]
[Pages 3414-3415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1465]


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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-49075, File No. SR-NASD-2003-181)


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Amend NASD Rule 4613A(c) To 
Clarify That NASD May Suspend Quotations in NASD's Alternative Display 
Facility Displayed by an Electronic Communication Network That Are No 
Longer Reasonably Related to the Prevailing Market

January 14, 2004.
    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 December 4, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') 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 NASD. 
NASD has designated this proposed rule change as concerned solely with 
the administration of the self-regulatory organization under section 
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(3) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice 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\ 15 U.S.C. 78(s)(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend NASD Rule 4613A(c) to clarify that NASD may 
suspend quotations in NASD's Alternative Display Facility (``ADF'') 
displayed by any market participant, including an Electronic 
Communication Network (``ECN''), that are no longer reasonably related 
to the prevailing market. The proposed rule change would apply during 
the time that the NASD ADF operates on a pilot basis. The Commission 
previously approved the ADF as a nine-month pilot to quote and trade 
Nasdaq-listed securities only.\5\ The Commission subsequently approved 
an extension of the pilot until January 26, 2004.\6\
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    \5\ See Securities Exchange Act Release No. 46249 (July 24, 
2002), 67 FR 49822 (July 31, 2002)(SR-NASD-2002-97).
    \6\ See Securities Exchange Act Release No. 47663 (April 10, 
2003), 68 FR 19043 (April 17, 2003)(SR-NASD-2003-67).
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    The text of the proposed rule appears below. Proposed new text is 
in italics. Deleted text is in brackets.
* * * * *

4613A. Character of Quotations

    (a) through (b), No change.
    (c) Quotations Reasonably Related to the Market
    An NASD Market Participant [Registered Reporting ADF Market Maker] 
shall enter and maintain quotations that are reasonably related to the 
prevailing market. In the event it appears that an NASD market 
Participant's [Registered Reporting ADF Market Maker's] quotations are 
no longer reasonably related to the prevailing market, NASD may require 
the [m]NASD Market [maker] Participant to re-enter its quotations. If 
an NASD Market Participant[Registered Reporting ADF Market Maker] whose 
quotations are no longer reasonably related to the prevailing market 
fails to re-enter its quotations, NASD may suspend the NASD Market 
Participant's[market maker's] quotations in one or all securities. For 
the purposes of this paragraph (c), ``NASD Market Participant'' shall 
have the meaning as set forth in Rule 4300A(d)(4).
    (1) In the event that an NASD Market Participant's [Registered 
Reporting ADF Market Maker's] ability to enter or update quotations is 
impaired, the NASD Market Participant [Registered Reporting ADF Market 
Maker] shall immediately contact NASD Alternative Display Facility 
operations to request the withdrawal of its quotations.
    (2) In the event that an NASD Market Participant's [Registered 
Reporting ADF Market Maker's] ability to enter or update quotations is 
impaired and the NASD Market Participant [Registered Reporting ADF 
Market Maker] elects to continue to participate through NASD's 
Alternative Display Facility, the NASD Market Participant [Registered 
Reporting ADF Market Maker] shall execute an offer to buy or sell 
received from another NASD member at its quotations as disseminated 
through NASD's Alternative Display Facility.
    (d) through (c) No change.
* * * * *

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 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-

[[Page 3415]]

NASD-2001-90, the ADF is quotation collection, trade comparison, and 
trade reporting facility developed by NASD in accordance with the 
Commission's approval of Nasdaq's SuperMontage \9\ and in conjunction 
with Nasdaq's application to register as a national securities 
exchange.\10\
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    \7\ See Securities Exchange Act Release No. 46249 (July 24, 
2002), 67 FR 49822 (July 31, 2002).
    \8\ See supra note 6.
    \9\ See Securities Exchange Act Release NO. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (SR-NASD-99-53).
    \10\ See Securities Exchange Act Release No. 44396 (June 7, 
2001), 66 FR 31952 (June 13, 2001) (File No. 10-131).
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    For the duration of the pilot period, the ADF will provide NASD 
market participants \11\ (e.g., 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 securities for 
consolidation and dissemination of data to vendors and ADF market 
participants. The ADF also will provide for trade comparison through 
the Trade Reporting and Comparison Service (``TRACS''). The ADF further 
will provide for real-time data delivery to NASD for regulatory 
purposes, including enforcement of the firm quote rule and other 
related rules. NASD anticipates that the ADF will operate on a pilot 
basis until the date the Commission should approve SR-NASD-2001-90, 
providing for the operation of the ADF on a permanent basis and an 
expansion of ADF-eligible securities to include all exchange-listed 
securities.

    \11\ See NASD Rule 4300(A)(d)(4).
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Quotations Reasonably Related to the Market

    NASD Rule 4613A(c) permits NASD to suspend an ADF market maker's 
quotations in one or all securities when those quotations are no longer 
reasonably related to the prevailing market and where that market maker 
fails to remedy the disparity by re-entering its quotations. The rule 
also requires that ADF market makers contact ADF Market Operations and 
request the withdrawal of their quotes if their ability to enter or 
update quotes is impaired. In the event that an ADF market maker elects 
to continue to participate in the ADF under such circumstances, the 
market maker must execute any orders received against the displayed 
quote. In accordance with ADF market participant subscriber agreements, 
as well as NASD's plenary obligations to operate a fir and efficient 
over-the-counter market, NASD states that it also has maintained 
similar authority with respect to ECN market participants. NASD 
represents that the proposed rule change only makes express its 
existing interpretation of NASD Rule 4613A(c), that it believes is 
consistent with the terms and conditions of ADF market participant 
subscriber agreements, that ECN quotations are also subject to these 
requirements in such circumstances.
2. Statutory 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 proposed rule change will 
foster greater confidence in the markets by making clear that NASD can 
take appropriate remedial action with regard to quotations by any ADF 
market participant that may compromise the integrity of the ADF.
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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 impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) \13\ of the Act and subparagraph (f)(1) of Rule 19b-4 \14\ 
thereunder, in that the proposed rule change constitutes a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule. At any time within 
60 days of this filing, the Commission may summarily abrogate much 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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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(1).
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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 proposed rule 
change 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 comments letters should refer to 
File No. SR-NASD-2003-181. 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 amendment, 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 at 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. SR-NASD-2003-181 and should be 
submitted by February 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1465 Filed 1-22-04; 8:45 am]
BILLING CODE 8010-01-M