[Federal Register Volume 69, Number 56 (Tuesday, March 23, 2004)]
[Notices]
[Pages 13606-13608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6407]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49427; File No. SR-NASD-2004-032]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. To Modify NASD 
Rule 4619 With Respect to Certain Excused Withdrawal Requests

March 16, 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 February 24, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), through its subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), submitted to the Securities and Exchange 
Commission (``Commission'' and ``SEC'') the proposed rule change as 
described in items I, II and III below, which items have been prepared 
by Nasdaq. On March 15, 2004, the NASD filed Amendment No. 1 to the 
proposed rule change.\3\ Nasdaq filed this proposal pursuant to section 
19(b)(3)(A)(iii) of the Act \4\ and Rule 19b-4(f)(3) \5\ thereunder, as 
one concerned solely with the administration of the self-regulatory 
organization, which renders the proposal effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
March 12, 2004 (``Amendment No. 1''). Amendment No. 1 replaces the 
original filing in its entirety.
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rule 4619, which will shift the 
administration of a limited subset of existing excused withdrawal 
requests from one department to another department.
    Below is the text of the proposed rule change. Proposed new 
language is italics; proposed deletions are in [brackets].
* * * * *

4619. Withdrawal of Quotations and Passive Market Making

    (a) [A]Except as provided in paragraph (b) of this Rule, a market 
maker that wishes to withdraw quotations in a security or have its 
quotations identified as the quotations of a passive market maker shall 
contact Nasdaq MarketWatch to obtain excused withdrawal status prior to 
withdrawing its quotations or identification as a passive market maker. 
Withdrawals of quotations or identifications of quotations as those of 
a passive market maker shall be granted by Nasdaq MarketWatch only upon 
satisfying one of the conditions specified in this Rule.
    (b) A market maker that wishes to obtain excused withdrawal status 
based on a market maker's systemic equipment problems, such as defects 
in a market maker's software or hardware systems or connectivity 
problems associated with the circuits connecting Nasdaq's systems with 
the market maker's systems, shall contact Nasdaq Market Operations. 
Nasdaq Market Operations may grant excused withdrawal status based on 
systemic equipment problems for up to five (5) business days, unless 
extended by Nasdaq Market Operations.
    (c) Excused withdrawal status based on circumstances beyond the 
market maker's control, other than systemic equipment problems, may be 
granted for up to five (5) business days, unless extended by Nasdaq 
MarketWatch. Excused withdrawal status based on demonstrated legal or 
regulatory requirements, supported by appropriate documentation and 
accompanied by a representation that the condition necessitating the 
withdrawal of quotations is not permanent in nature, may, upon 
notification, be granted for not more than sixty (60) days (unless such 
request is required to be made pursuant to paragraph (d) below). 
Excused withdrawal status based on religious holidays may be granted 
only if written notice is received by the Association one business day 
in advance and is approved by the Association. Excused withdrawal 
status based on vacation may be granted only if:
    (1) The written request for withdrawal is received by the 
Association one business day in advance, and is approved by the 
Association
    (2) The request includes a list of the securities for which 
withdrawal is requested; and
    (3) The request is made by a market maker with three (3) or fewer 
Nasdaq level 3 terminals. Excused withdrawal status may be granted to a 
market maker that has withdrawn from an issue prior to the public 
announcement of a merger or acquisition and wishes to re-register in 
the issue pursuant to the same-day registration procedures contained in 
Rule 4611 above, provided the market maker has remained registered in 
one of the affected issues. The withdrawal of quotations because of 
pending news, a sudden influx of orders or price changes, or to effect 
transactions with competitors shall not constitute acceptable reasons 
for granting excused withdrawal status.
    [(c)](d) Excused withdrawal status may be granted to a market maker 
that fails to maintain a clearing arrangement with a registered 
clearing agency or with a member of such an agency and is withdrawn 
from participation in the Automated Confirmation Transaction service, 
thereby terminating its registration as a market maker in Nasdaq 
issues. Provided however, that if the Association finds that the market 
maker's failure to maintain a clearing arrangement is voluntary, the 
withdrawal of quotations will be considered voluntary and unexcused 
pursuant to Rule 4620 and the Rule 4700 Series governing the Nasdaq 
National Market Execution System. Market makers that fail to maintain a 
clearing relationship will have their NNMS system status set to 
``suspend'' and be thereby prevented from entering, or executing 
against, any quotes/orders in the system.
    [(d)](e) Excused withdrawal status or passive market maker status 
may be granted to a market maker that is a distribution participant 
(or, in the case of excused withdrawal status, an affiliated purchaser) 
in order to comply with SEC Rule 101, 103, or 104 under the Act on the 
following conditions:
    (1) A member acting as a manager (or in a similar capacity) of a 
distribution of a Nasdaq security that is a subject security or 
reference security under SEC Rule 101 and any member that is a 
distribution participant or an affiliated purchaser in such a 
distribution that does not have a manager shall provide written notice 
to Nasdaq MarketWatch and the Market Regulation D[d]epartment of NASD 
Regulation, Inc. no later than the business day prior to the first 
entire trading session of the one-day or five-day restricted period 
under SEC [r]Rule 101, unless later notification is necessary under the 
specific circumstances.
    (A) [t]The notice required by subparagraph [(d)](e)(1) of this Rule 
shall be provided by submitting a completed Underwriting Activity 
Report that includes a request on behalf of each market maker that is a 
distribution

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participant or an affiliated purchaser to withdraw the market maker's 
quotations, or that includes a request on behalf of each market maker 
that is a distribution participant (or an affiliated purchaser of a 
distribution participant) that its quotations be identified as those of 
a passive market maker and includes the contemplated date and time of 
the commencement of the restricted period.
    (B) The managing underwriter shall advise each market maker that it 
has been identified as a distribution participant or an affiliated 
purchaser to Nasdaq MarketWatch and that its quotations will be 
automatically withdrawn or identified as passive market maker 
quotations, unless a market maker that is a distribution participant 
(or an affiliated purchaser of a distribution participant) notifies 
Nasdaq MarketWatch as required by subparagraph [(d)](e)(2), below.
    (2) A market maker that has been identified to Nasdaq MarketWatch 
as a distribution participant (or an affiliated purchaser of a 
distribution participant) shall promptly notify Nasdaq MarketWatch and 
the manager of its intention not to participate in the prospective 
distribution or not to act as a passive market maker in order to avoid 
having its quotations withdrawn or identified as the quotations of a 
passive market maker.
    (3) If a market maker that is a distribution participant withdraws 
its quotations in a Nasdaq security in order to comply with the net 
purchases limitation of SEC Rule 103 or with any other provision of SEC 
Rules 101, 103, or 104 and promptly notifies Nasdaq MarketWatch of its 
action, the withdrawal shall be deemed an excused withdrawal. Nothing 
in this subparagraph shall prohibit the Association from taking such 
action as is necessary under the circumstances against a member and its 
associated persons for failure to contact Nasdaq MarketWatch to obtain 
an excused withdrawal as required by subparagraphs (a) and [(d)](e) of 
this Rule.
    (4) The quotations of a passive market maker shall be identified on 
Nasdaq as those of a passive market maker.
    (5) A member acting as a manager (or in a similar capacity of a 
distribution subject to subparagraph [(d)](e)(1) of this R[r]ule shall 
submit a request [a] to Nasdaq MarketWatch and the M[m]arket Regulation 
Department of NASD Regulation, Inc. to rescind the excused withdrawal 
status or passive market making status of distribution participants and 
affiliated purchasers, which request shall include the date and time of 
the pricing of the offering, the offering price, and the time the 
offering terminated, and, if not in writing, shall be confirmed in 
writing no later than the close of business the day the offering 
terminates. The request by this subparagraph may be submitted on the 
Underwriting Activity Report.
    [(e)](f) The Market Operations Review Committee shall have 
jurisdiction over proceedings brought by [M]market [M]makers seeking 
review of the denial of an excused withdrawal pursuant to this Rule 
4619, 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, 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
    The proposed rule change seeks to reflect the administrative shift 
of certain responsibilities under NASD Rule 4619 from Nasdaq 
MarketWatch to Nasdaq Market Operations. NASD Rule 4619 identifies 
Nasdaq MarketWatch as the Nasdaq department responsible for 
administration of this rule. Nasdaq has determined that, in order to 
ensure continued and effective administration of NASD Rule 4619, it 
would be appropriate and desirable to transfer responsibility of 
handling excused withdrawal requests based on systemic equipment 
problems that prevent a market maker from meeting its obligations from 
Nasdaq MarketWatch to Nasdaq Market Operations. Systemic equipment 
problems include, but are not limited to, defects in the software or 
hardware of a market maker's systems or connectivity problems 
associated with the circuits connecting Nasdaq's systems with a market 
maker's systems. Nasdaq believes that excused withdrawal requests based 
on systemic equipment problems are more appropriately handled by Nasdaq 
Market Operations because of that department's particular expertise in 
technology and connectivity related issues. The proposed rule change 
does not create a new basis for excused withdrawals. Excused 
withdrawals based on systemic equipment problems are currently granted 
under existing NASD Rule 4619. The proposed rule change is only 
intended to separate out a limited subset of current excused withdrawal 
requests for administration by Nasdaq Market Operations.
    The transfer of the administration of excused withdrawal requests 
based on systemic equipment problems from Nasdaq MarketWatch to Nasdaq 
Market Operations will not adversely impact Nasdaq's record keeping and 
surveillance efforts with respect to excused withdrawals. Both Nasdaq 
MarketWatch and Nasdaq Market Operations maintain detailed databases of 
all excused withdrawals. The databases for excused withdrawals tracks 
detailed information of each excused withdrawal, including the reason 
for the excused withdrawal, the date an excused withdrawal is 
requested, the name of the requester, the firm name, the security or 
securities involved, the date for the excused withdrawal, and the date 
reinstated. Nasdaq MarketWatch and Nasdaq Market Operations review the 
excused withdrawal databases on a periodic basis and have begun to 
develop procedures for inter-departmental communications and reviews of 
these databases, which are expected to be implemented by the end of 
April. All excused withdrawals granted by Nasdaq Market Operations are 
communicated to Nasdaq MarketWatch through same-day announcements made 
over Nasdaq's internal intercom system. Finally, additional 
surveillance is provided by the NASD, which receives a copy of the 
excused withdrawal databases from Nasdaq MarketWatch and Nasdaq Market 
Operations on a quarterly basis.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
section 15A of the Act,\6\ in general, and with section 15A(b)(6) of 
the Act,\7\ in particular, in that the proposal is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest. Because 
Nasdaq Market Operations has particular expertise in technology and 
connectivity issues, Nasdaq believes

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that this department, rather than Nasdaq MarketWatch, is the most 
appropriate department to handle excused withdrawal requests based on a 
market maker's systemic equipment problems. As such, the organizational 
realignment and the corresponding proposed rule change are consistent 
with the requirements of the Act.
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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing proposal has become effective pursuant to section 
19(b)(3)(A)(iii) of the Act \8\ and Rule 19b-4(f)(3) \9\ thereunder as 
one concerned solely with the administration of the self-regulatory 
organization. At any time within 60 days of the filing of such proposed 
rule change, 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.\10\
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    \8\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \9\ 17 CFR 240.19b-4(f)(3).
    \10\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the abrogation period to have begun on 
March 15, 2004, the date Nasdaq submitted Amendment No. 1. See 15 
U.S.C. 78s(b)(3)(C).
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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, 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-2004-032. The 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 Exchange. All submissions should refer to the 
File No. SR-NASD-2004-032 and should be submitted by April 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6407 Filed 3-22-04; 8:45 am]
BILLING CODE 8010-01-P