[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45868-45870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17391]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50084; File No. SR-NASD-2004-103]


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 the 
Methodology for Applying Nasdaq's Pricing Schedule to Affiliated 
Members

July 26, 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 June 29, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 Nasdaq. On July 21, 
2004, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 
Nasdaq has designated this proposal as one establishing or changing a 
due, fee, or other charge imposed by the self-regulatory organization 
under section 19(b)(3)(A)(ii) of the Act \4\ and Rule 19b-4(f)(2) 
thereunder,\5\ 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.
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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''), dated July 
19, 2004, and accompanying Form 19b-4 (``Amendment No. 1''). 
Amendment No. 1 replaced the original filing in its entirety. For 
purposes of calculating the 60-day abrogation period, the Commission 
considers the proposal to have been filed on July 21, 2004, the date 
Nasdaq filed Amendment No. 1. See Rule 19b-4(f)(2), 17 CFR 240.19b-
4(f)(2).
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.19b-4(f)(2).
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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 its fee schedule by allowing the 
aggregation of activity of affiliated members, provided that the 
members have complete identity of common ownership. Nasdaq plans to 
implement the proposed rule change on August 1, 2004.
    The text of the proposed rule change appears below.\6\ Proposed new 
language is in italics; proposed deletions are in brackets.
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    \6\ The proposed rule change is marked to show changes from the 
rule as it appears in the electronic NASD Manual available at 
www.nasd.com.
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* * * * *

7020. [Reserved] Aggregation of Activity of Affiliated Members

    (a) For purposes of applying any provision of Rules 7010(c), (d), 
(f), (g), (i), or (u) that reflects a charge assessed, or credit 
provided, by Nasdaq, a member may request that Nasdaq aggregate its 
activity with the activity of its affiliates. A member requesting 
aggregation of affiliate activity shall be required to certify to 
Nasdaq the affiliate status of entities whose activity it seeks to 
aggregate prior to receiving approval for aggregation, and shall be 
required to inform Nasdaq immediately of any event that causes an 
entity to cease to be an affiliate. In addition, Nasdaq reserves the 
right to request information to verify the affiliate status of an 
entity.
    (b) For purposes of applying any provision of Rules 7010(c), (d), 
(f), (g), (i), or (u) that reflects a charge assessed, or credit 
provided, by Nasdaq, references to an entity (including references to a 
``member,'' a ``participant,'' or a ``Nasdaq Quoting Market 
Participant'') shall be deemed to include the entity and its affiliates 
that have been approved for aggregation.
    (c) For purposes of this Rule 7020, the terms set forth below shall 
have the following meanings:
    (1) An ``affiliate'' of a member shall mean any wholly owned 
subsidiary, parent, or sister of the member that is also a member.
    (2) A ``wholly owned subsidiary'' shall mean a subsidiary of a 
member, 100% of whose voting stock or comparable ownership interest is 
owned by the member, either directly or indirectly

[[Page 45869]]

through other wholly owned subsidiaries.
    (3) A ``parent'' shall mean an entity that directly or indirectly 
owns 100% of the voting stock or comparable ownership interest of a 
member.
    (4) A ``sister'' shall mean an entity, 100% of whose voting stock 
or comparable ownership interest is owned by a parent that also owns 
100% of the voting stock or comparable ownership interest of a member.
* * * * *

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's schedule of fees and credits, as reflected in the Rule 
7000 Series of the NASD Manual, contains several provisions in which a 
member using Nasdaq services pays a fee, or receives a credit, that 
varies based upon its volume of usage. For example, when members use 
the order execution services of the Nasdaq Market Center, the fees that 
they pay to access liquidity, and the credits that they receive for 
providing liquidity, vary based upon the average daily shares of 
liquidity provided during a month: higher levels of liquidity provision 
result in lower fees and higher credits.\7\ Other examples of volume-
based pricing in the current Nasdaq fee schedule include pricing for 
transactions in exchange-listed stocks traded through the Nasdaq Market 
Center,\8\ Nasdaq Workstation II display charges,\9\ and fees for trade 
reporting.\10\ In several prior pricing filings, Nasdaq has stated that 
although it would aggregate activity associated with multiple market 
participant identifiers (``MPIDs'') used by a member, Nasdaq would not 
aggregate one corporate entity's activity with activity associated with 
MPIDs assigned to subsidiaries or other affiliates with a different 
Central Registration Depository (``CRD'') number.\11\ However, a 
particular member may choose to allocate activity across a group of 
wholly owned subsidiaries or other affiliates, rather than across 
multiple MPIDs of the same entity. Nasdaq understands that certain of 
its competitors allow aggregation of affiliate activity when applying 
their fee schedules.\12\ Accordingly, Nasdaq has decided to revise its 
present policy by adopting a rule to allow aggregation of activity of 
affiliated members, provided that the members have a complete identity 
of common ownership. Thus, a member could request that its activity be 
aggregated with, for example, the activity of a direct wholly owned 
subsidiary, or an indirect subsidiary that was wholly owned by a direct 
wholly owned subsidiary.
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    \7\ See NASD Rule 7010(i).
    \8\ See NASD Rule 7010(d).
    \9\ See NASD Rule 7010(f)(1)(A).
    \10\ See NASD Rule 7010(g).
    \11\ See, e.g., Securities Exchange Act Release No. 48972 
(December 22, 2003), 68 FR 75301 (December 30, 2003) (notice of 
filing and immediate effectiveness of File No. SR-NASD-2003-185); 
and Securities Exchange Act Release No. 47661 (April 10, 2003), 68 
FR 19045 (April 17, 2003) (notice of filing and immediate 
effectiveness of File No. SR-NASD-2003-51).
    \12\ See, e.g., http://www.inetats.com/prodserv/bd/fee/fee.asp.
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    Any diminution in the level of ownership below 100% of the voting 
stock or other comparable ownership interest would prevent the member 
from aggregating its activity with related members, even if a control 
relationship between the entities still existed. Thus, for example, if 
one member (``Member A'') owned 90% of the voting stock of a subsidiary 
member (``Member B''), which in turn owned 100% of the voting stock of 
another subsidiary member (``Member C''), Members B and C would be 
eligible for aggregation of their activity with one another, but Member 
A would not be permitted to aggregate its activity with either Member B 
or Member C, even though it exercised a control relationship with 
respect to them. Nasdaq believes that a bright line, set at the 100% 
level, is necessary to ensure that aggregation can occur without the 
need for a subjective analysis of the degree of control exercised by 
one entity over another.
    Aggregation of activity could also be requested by a subsidiary 
with respect to parent corporations and/or sister corporations. Thus, 
for example, if Member A was wholly owned by Member B, which also owned 
100% of Member C, Member A could request that its activity be 
aggregated with activity of both Members B and C. Finally, it should be 
noted that not all corporations in an ownership structure would be 
required to be members for the activity of the members to be 
aggregated, provided a wholly owned relationship existed among the 
members in the structure. Thus, for example, if a non-member holding 
company owned 100% of the stock of two members, the activity of the two 
members could be aggregated.
    A member seeking to aggregate activity with that of other members 
would be required to send an application to Nasdaq informing Nasdaq as 
to the names and relationships of the entities for which aggregation is 
requested. In the application, the member would also certify that each 
entity for which aggregation is requested is, in fact, an affiliate 
within the meaning of Rule 7020. The member would be required to inform 
Nasdaq immediately if any entity ceased to be an affiliate.\13\ 
Finally, Nasdaq reserves the right to require members requesting 
aggregation to provide information to verify the affiliate status of 
entities (although Nasdaq would not generally require such background 
information unless it had reason to question a firm's certification).
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    \13\ Nasdaq states that a false certification, or a failure to 
provide a timely notice that an entity has ceased to be an 
affiliate, would be deemed a violation of Nasdaq's rules and would 
be referred to NASD for investigation.
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    In applying Nasdaq's schedule of credits and fees, references to an 
entity (including references to a ``member,'' a ``participant,'' or a 
``Nasdaq Quoting Market Participant'') shall be deemed to include the 
entity and its affiliates that have been approved for aggregation. 
Thus, for example, under the fee schedule for order executions of 
Nasdaq-listed securities through the Nasdaq Market Center, if two 
members that are affiliates provide an average daily volume of 15 
million and 6 million shares of liquidity, respectively, during a 
month, each member would be entitled to receive a credit of $0.0025 per 
share of liquidity provided, rather than the $0.002 per share that each 
would currently receive. The activity of affiliated members would also 
be aggregated when applying Nasdaq's revenue sharing programs.\14\ 
Finally, under NASD Rule 7010(i)(1), a member would not be charged for 
order executions when its order accesses its own Quote/Order or the 
Quote/Order of an affiliate.
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    \14\ See NASD Rules 7010(c) and (u).
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    Volume-based discounts that apply after certain thresholds are 
passed during the course of a month will be allocated to affiliates 
based on aggregate usage on an ongoing basis. For example, under NASD 
Rule 7010(i), there is a $10,000 per month cap on the $0.001

[[Page 45870]]

per share charge for accessing liquidity from ECNs. Each of two 
affiliates would pay $0.001 per share until the $10,000 cap had been 
reached by the affiliates in the aggregate; thereafter, each affiliate 
would pay no fee for the remainder of the month. Volume-based discounts 
that apply to marginal usage of a service that is provided on a 
monthly, rather than a daily, basis (e.g., the discount on the monthly 
fee for Nasdaq Workstation logons in excess of 150 logons) will be 
allocated to affiliates on a pro rata basis.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\15\ in general, and with 
section 15A(b)(5) of the Act,\16\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees, and other 
charges among members and issuers and other persons using any facility 
or system which the NASD operates or controls. Nasdaq believes the 
proposed rule change will allow members to receive the benefits of 
volume-based discounts in Nasdaq's fee schedule when they choose to 
allocate their activity across a group of wholly owned subsidiaries or 
other affiliates, rather than across multiple MPIDs of the same member. 
Accordingly, Nasdaq believes the change will result in a wider 
availability of the discounts provided by the fee schedule.
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    \15\ 15 U.S.C. 78o-3.
    \16\ 15 U.S.C. 78o-3(b)(5).
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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, 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)(ii) of the Act \17\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\18\ because it establishes or changes a due, fee, or other 
charge imposed by the self-regulatory organization. At any time within 
60 days of the filing of the 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.\19\
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    \17\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
    \19\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposal to have been filed on July 21, 
2004, the date Nasdaq filed Amendment No. 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send e-mail to [email protected]. Please include File 
Number SR-NASD-2004-103 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-103. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-NASD-2004-103 and 
should be submitted on or before August 20, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-17391 Filed 7-29-04; 8:45 am]
BILLING CODE 8010-01-P