[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8505-8506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3884]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49252; File No. SR-NASD-2004-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by National Association of 
Securities Dealers, Inc. Relating To Amend NASD Rule 4300A To Require 
an NASD Alternative Display Facility Market Participant To Provide 
Advance Written Notice Prior To Denying Electronic Access to Its Quote 
to Any NASD Member

February 13, 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 January 8, 2004 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 February 5, 
2004, the Commission received Amendment No. 1 to the proposed rule 
change.\3\ 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\ On February 5, 2004, NASD filed a Form 19b-4, which replaced 
the original filing in its entirety (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    NASD proposes to amend NASD Rule 4300A to require an Alternative 
Display Facility (``ADF'') Market Participant to provide advance 
written notice to NASD's ADF Market Operations (``ADF Market 
Operations'') before denying electronic access to its ADF quote to any 
NASD member in the limited circumstances where a broker-dealer fails to 
pay contractually obligated costs for access to the ADF Market 
Participant's quotations.
    The text of the proposed rule change appears below. Proposed new 
language is in italics. Proposed deletions are in [brackets].
* * * * *
4300A. Quote and Order Access Requirements
    (a) To ensure that NASD Market Participants comply with their quote 
and order access obligations as defined below, for each security in 
which they elect to display a bid and offer (for Registered Reporting 
ADF Market Makers), or a bid and/or offer (for Registered Reporting ADF 
ECNs), in the Alternative Display Facility, NASD Market Participants 
must:
    (1) through (2) No change.
    (3) Provide at least 14 calendar days advance written notice, via 
facsimile, personal delivery, courier or overnight mail, to NASD 
Alternative Display Facility Operations before denying any NASD member 
direct or indirect electronic access, as defined below. The 14-day 
period begins on the first business day that NASD Alternative Display 
Facility Operations has receipt of the notice.
    (4) [(3)] [Market Participants shall s]Share equally the costs of 
providing to each other the direct electronic access required pursuant 
to paragraph (a)(1), unless those Market Participants agree upon 
another cost-sharing arrangement.
    (b) through (f) 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
    ADF is a quotation collection, trade comparison, and trade 
reporting facility developed by NASD in accordance with the 
Commission's SuperMontage Approval Order \4\ and in conjunction with 
Nasdaq's anticipated registration as a national securities exchange.\5\ 
ADF currently is operating as a pilot until October 26, 2004,\6\ and it 
is anticipated that ADF will continue to operate on a pilot basis until 
the Commission approves the operation of the ADF on a permanent basis.
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    \4\ See Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001).
    \5\ See Securities Exchange Act Release No. 44396 (June 7, 
2001), 66 FR 31952 (June 13, 2001).
    \6\ See Securities Exchange Act Release No. 49131 (January 27, 
2004), 69 FR 5229 (February 3, 2004).
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    ADF provides Market Participants (e.g., ADF-registered market 
makers or electronic communications networks) the ability to post 
quotations in Nasdaq securities and provides all members that 
participate in the ADF the ability to view quotations and report 
transactions in Nasdaq securities to the Securities Information 
Processor (``SIP'') for Nasdaq-listed issues for consolidation and 
dissemination of data to vendors and ADF market participants. ADF also 
provides for trade comparison through the Trade Reporting and 
Comparison Service (``TRACS''). ADF further provides for real-time data 
delivery to NASD for regulatory purposes, including enforcement of firm 
quote and related rules.
    ADF does not provide an order-routing capability. Instead, NASD 
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, meet the firm quote and 
locked and crossed quotation requirements.
    NASD Rule 4300A prohibits Market Participants from in any way 
discouraging or discriminating against members that wish to reach their 
quotes. A Market Participant may deny access only in the limited 
circumstances where a broker-dealer fails to pay contractually 
obligated costs for access to a market participant's quotes; otherwise, 
market participants must provide access to their quotes displayed in 
the ADF to all broker-dealers seeking such access.\7\
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    \7\ See Securities Exchange Act Release No. 46249 (July 24, 
2002), 67 FR 49822 (July 31, 2002).
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    Recently, NASD became aware that an ADF Market Participant denied 
access to a second ADF Market Participant for allegedly failing to pay 
contractually obligated costs. This action caused disruption not only 
for the ADF Market Participant denied access, but also other NASD 
members that typically accessed the first ADF Market Participant's 
quote through the second ADF Market Participant's routing system. 
Although there were other means in place by which an NASD member could 
access the first ADF Market Participant's quotes, absence of any 
advance notice of the denial of access caused confusion in the 
marketplace as members considered how best to access the first ADF 
Market Participant's quotes by other means.
    Accordingly, to maintain market efficiency and prevent such 
confusion in the future, NASD proposes to amend NASD Rule 4300A to 
require ADF

[[Page 8506]]

Market Participants to provide written notice, via facsimile, personal 
delivery, courier or overnight mail, at least 14 calendar days in 
advance to ADF Operations before denying direct or indirect electronic 
access to an NASD member. The 14-day period begins on the first 
business day that ADF Operations has receipt of the notice. To ensure 
proper documentation of compliance with this rule, members should 
maintain evidence of receipt of the notice (i.e., dated facsimile 
confirmation, receipt from a courier, etc.). ADF Operations will then 
post this notice on the ADF Web page to ensure that members have 
adequate time to make other routing or access arrangements, as 
necessary.
    NASD believes that it is important to note, however, that the 
proposed notification and publication of an ADF Market Participant's 
intent to deny access will have no bearing on the merits of any claim 
between the ADF Market Participant and any affected broker-dealers, nor 
will it insulate the ADF Market Participant from liability for 
violations of NASD rules or the federal securities laws should it be 
determined that the denial of access was inappropriate.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD'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 would amend NASD Rule 4300A 
to require an ADF Market Participant to provide advance written notice 
to ADF Operations before denying electronic access to its ADF quote, 
thereby, NASD believes, facilitating market efficiency and reducing 
potential confusion for market participants.
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    \8\ 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, as amended, 
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.

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 (ii) as to 
which the self-regulatory organization 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 proposed rule 
change, as amended, 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-2004-02. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review 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, as amended, that are filed with 
the Commission, and all written communications relating to the proposed 
rule change, as amended, 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-2004-02 and 
should be submitted by March 16, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3884 Filed 2-23-04; 8:45 am]
BILLING CODE 8010-01-P