[Federal Register Volume 69, Number 214 (Friday, November 5, 2004)]
[Notices]
[Pages 64611-64613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3017]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50601; File No. SR-NASD-2004-160]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Extend the Operation of NASD's Alternative 
Display Facility on a Pilot Basis

October 28, 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 October 21, 2004, 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 the NASD. 
NASD has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to extend for nine months, to July 26, 2005, the 
operation of NASD's Alternative Display Facility (``ADF'') on a pilot 
basis. The ADF pilot program, as approved by the SEC on July 24, 2002, 
and extended on April 17, 2003 and January 26, 2004, will expire on 
October 26, 2004. The pilot permits members to quote and trade only 
Nasdaq-listed securities on or through the ADF.
    Below is the text of the proposed rule change. Proposed new 
language is underlined; proposed deletions are in brackets.
* * * * *

4000A. NASD ALTERNATIVE DISPLAY FACILITY

4100A. General

    NASD Alternative Display Facility (``ADF'') is the facility to be 
operated by NASD on a nine-month pilot basis for members that choose to 
quote or effect trades in Nasdaq securities (``ADF-

[[Page 64612]]

eligible securities'') otherwise than on Nasdaq or on an exchange. The 
ADF will collect and disseminate quotations, compare trades, and 
collect and disseminate trade reports. Those NASD members that utilize 
ADF systems for quotation or trading activities must comply with the 
Rule 4000A, Rule 5400 and Rule 6000A Series, as well as all other 
applicable NASD Rules. The ADF pilot will expire on [October 26, 2004] 
July 26, 2005.
* * * * *

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
    On July 24, 2002, the Commission approved SR-NASD-2002-97,\4\ which 
authorizes NASD to operate the ADF on a pilot basis for nine months, 
pending the consideration of SR-NASD-2001-90, in which NASD proposes to 
operate the ADF on a permanent basis. NASD subsequently filed for 
immediate effectiveness proposed rule changes SR-NASD-2003-67 to extend 
the pilot until January 26, 2004,\5\ and SR-NASD-2004-012 to extend the 
pilot until October 26, 2004.\6\ 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 \7\ and in conjunction with 
Nasdaq's proposal to register as a national securities exchange.\8\ In 
addition, since the Commission gave its initial approval to the ADF 
pilot, NASD has filed several other ADF-related rule change proposals, 
some of which are effective and have been incorporated into the 
operation and administration of the pilot.\9\
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    \4\ Securities Exchange Act Release No. 46249 (July 24, 2002), 
67 FR 49822 (July 31, 2002).
    \5\ Securities Exchange Act Release No. 47633 (April 10, 2003), 
68 FR 19043 (April 17, 2003).
    \6\ Securities Exchange Act Release No. 49131 (January 27, 
2004), 69 FR 5229 (February 3, 2004).
    \7\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001).
    \8\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66 
FR 31952 (June 13, 2001).
    \9\ On January 30, 2003, NASD filed proposed rule change SR-
NASD-2003-009 to revise the transaction and quotation-related fees 
applicable to ADF activity during the pilot program. The rule change 
proposal became effective upon filing, with an implementation date 
of February 17, 2003. On January 6, 2004, the Commission granted 
accelerated approval to SR-NASD-2003-145, a proposal to amend the 
NASD ADF pilot rules to give jurisdiction to a three-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. The rule change proposal became 
effective contemporaneously with the Commission's approval. On 
December 4, 2003, NASD filed for immediate effectiveness a proposed 
rule change to amend Rule 4613A(c) to clarify that NASD may suspend 
quotations in the ADF displayed by any market participant, including 
an ECN, that are no longer reasonably related to the prevailing 
market.
    Additionally, NASD filed with the Commission two other rule 
change proposals. On March 12, 2004, the Commission approved SR-
NASD-2003-175, a rule change proposal to repeal Rule 4613A(e)(1), 
which requires members that display priced quotations for a Nasdaq 
security in two or more market centers to display the same priced 
quotations for that security in each market center. On August 18, 
2004, the Commission approved SR-NASD-2004-002, a proposed rule 
change to amend NASD Rule 4300A to require an ADF Market Participant 
to provide advance written notice to NASD's 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 Market Participant's 
quotations.
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    As proposed in SR-NASD-2001-90, the ADF would provide market 
participants the ability to quote and trade Nasdaq and exchange-listed 
securities. The current ADF pilot program, however, permits operation 
of the ADF with respect to Nasdaq securities only. This is because 
several regulatory issues relating to the trading of exchange-listed 
securities on the ADF have not been resolved.
    The ADF has been operating successfully during the pilot period. 
The SEC acknowledged this fact when it approved the launch of 
SuperMontage, stating that the ADF met the conditions set forth in its 
SuperMontage Approval Order to provide an alternative quotation 
collection, trade comparison, and trade reporting facility. NASD 
believes that the ADF has since continued to honor those conditions. 
Meanwhile, the issues related to trading exchange-listed securities--
and by extension, approval of the operation of the ADF on a permanent 
basis--remain unresolved. Accordingly, NASD believes it is appropriate 
to extend the pilot period for ADF trading in Nasdaq securities for 
nine months or until approval of SR-NASD-2001-90.
    The proposed rule change will become effective upon filing, will be 
implemented at the close of business on October 26, 2004, and will 
expire on July 26, 2005.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ which requires that 
NASD rules must be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination among persons engaged in 
regulating, clearing, settling, processing information and facilitating 
transactions in securities, 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. In addition, 
this rule proposal is consistent with Section 15A(b)(6) of the Act 
because it does not permit unfair discrimination between customers, 
issuers, brokers, or dealers, fix minimum profits, impose any schedule 
or fix rates of commissions, allowances, discounts, or other fees to be 
charged by members, or regulate matters not related to the purposes of 
the Act or the administration of NASD.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The 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 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 proposed rule change has been filed by NASD as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act,\11\ 
in that the proposed rule change does not significantly affect the 
protection of investors or the public interest and does not impose any 
significant burden on competition. NASD has requested that the 
Commission waive the requirement that the rule change not become 
operative for 30 days after the date of the filing, as set forth in 
Rule 19b-4(f)(6)(iii), to

[[Page 64613]]

prevent the current ADF pilot program from lapsing. The Commission 
finds good cause for the proposed rule change to become operative prior 
to the 30th day after the date of publication of notice of filing 
thereof because the proposed rule change is to prevent the benefits 
provided by the current ADF pilot program from lapsing.\12\
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    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ Rule 19b-4(f)(6) also requires self-regulatory 
organizations to give written notice of proposed rule changes filed 
pursuant to this subsection at least five business days prior to 
filing. NASD complied with this requirement.
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal 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.

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. 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 an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-160 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-2004-160. 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 Room. Copies of the 
filing also will be available for inspection and copying at the 
principal offices 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 NASD-2004-160 and should be submitted on or before November 
26, 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. E4-3017 Filed 11-4-04; 8:45 am]
BILLING CODE 8010-01-P