[Federal Register Volume 70, Number 23 (Friday, February 4, 2005)]
[Notices]
[Pages 6061-6063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-431]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51092; File No. SR-NASD-2004-159]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Allow NASD 
To Review on a Pilot Basis Denial of Access Complaints Related to the 
Alternative Display Facility

January 28, 2005.
    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 22, 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 NASD. On 
January 11, 2005, NASD filed 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\ In Amendment No. 1, the Exchange clarified the scope of 
authority granted to the NASD and the Market Regulation Committee to 
review denials of access. Amendment No. 1 replaced the original 
filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to establish on a pilot basis new NASD Rule 
4400A, which would give NASD the authority to receive and review 
complaints against an NASD Market Participant \4\ alleging denial of 
direct or indirect access of the NASD Market Participant's quotations 
in the Alternative Display Facility (``ADF'') that the NASD Market 
Participant is required to provide pursuant to NASD Rule 4300A. In 
addition, proposed NASD Rule 4400A would set forth the procedures and 
review process for such complaints. Finally, the proposal would 
delegate authority to NASD's Market Regulation Committee to review 
denial of access determinations rendered in accordance with Rule 4400A. 
The text of the proposed rule change is available on NASD's Web site 
(http://www.nasd.com), at the principal offices of NASD, and at the 
Commission's Public Reference Room.
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    \4\ See NASD Rule 4300A(d)(4) defining ``NASD Market 
Participant'' as: (a) A NASD Registered Reporting ADF Market Maker 
(defined in NASD Rule 4200A(10); (b) an alternative trading system 
or ``ATS''; or (c) an NASD ADF Registered electronic communication 
network or ``ECN.''
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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. 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.\5\ 
NASD subsequently filed for immediate effectiveness proposed rule 
changes to extend the pilot, the most recent until July 26, 2005.\6\ 
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\
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    \5\ See Securities Exchange Act Release No. 46249 (July 24, 
2002), 67 FR 49822 (July 31, 2002).
    \6\ See Securities Exchange Act Release Nos. 47663 (April 10, 
2003), 68 FR 19043 (April 17, 2003) (SR-NASD-2003-67); 49131 
(January 27, 2004), 69 FR 5229 (February 3, 2004) (SR-NASD-2004-12); 
50601 (October 28, 2004), 69 FR 64611 (November 5, 2004) (SR-NASD-
2004-160).
    \7\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (SR-NASD-99-53).
    \8\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66 
FR 31952 (June 13, 2001) (File No. 10-131).
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    Under the pilot, the ADF provides NASD Market Participants 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 exclusive Securities

[[Page 6062]]

Information Processor (``SIP'') for Nasdaq-listed issues \9\ for 
consolidation and dissemination of data to vendors and ADF market 
participants. The facility also provides for trade comparison through 
the Trade Reporting and Comparison Service or ``TRACS.'' The facility 
further provides for real-time data delivery to NASD for regulatory 
purposes, including enforcement of firm quote and related rules.
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    \9\ Nasdaq initially will be the designated SIP for all 
transactions and quotations in Nasdaq securities. During the pilot 
period, the SIP will distribute individual quotations for both ADF 
and Nasdaq market makers and ECNs.
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Order Access Rule
    The ADF does not provide an order routing capability. Instead, 
pilot NASD Rule 4300A requires an NASD Market Participant to provide 
direct electronic access to other NASD Market Participants and to 
provide to all other NASD members direct electronic access or allow for 
indirect electronic access to its quotations in the ADF. This rule 
provides the means for NASD Market Participants and other broker-
dealers to access ADF quotes and, among other things, to meet the firm 
quote and locked-and-crossed quotation requirements.
Authority and Review Procedures
    The proposed rule change would give NASD the authority to receive 
and review complaints against an NASD Market Participant alleging 
denial of direct or indirect access required by NASD Rule 4300A. 
According to NASD, the proposed rule change is not intended to include 
complaints that allege: (1) A denial of direct or indirect access 
because of non-payment of fees for access to an NASD Market 
Participant's quotations that are imposed by the NASD Market 
Participant in accordance with SEC rules and regulations or otherwise; 
or (2) a specific instance or group of instances over discrete time 
periods where an NASD Market Participant is alleged not to have not 
honored its quotation in accordance with applicable SEC and NASD rules 
with respect to orders received electronically pursuant to NASD Rule 
4300A.\10\ Under the proposed rule change, the process for proper 
denial of access complaints would be as follows:
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    \10\ NASD's Market Regulation Department has established a real-
time process to receive, evaluate, and act upon firm quote 
complaints.
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    The complainant would be required to file a written complaint with 
ADF Operations via facsimile, personal delivery, courier, or overnight 
mail that specifically alleges denial of access to an NASD Market 
Participant's quotation. The complainant would be required to serve a 
copy of the complaint by the same means on the opposite party in 
accordance with NASD Rule 9134(b).
    The denial of access complaint would be reviewed by an officer 
designated by a President of NASD or one its divisions to make a 
determination on the merits of the complaint. The officer could, at his 
or her discretion, conduct further investigation before rendering a 
decision as to whether there had been a denial of access in 
contravention of NASD Rule 4300A. In the event that the officer 
determined that there had been a denial of access in contravention of 
NASD Rule 4300A, he or she would direct the offending party to provide 
access to ADF quotes and could limit participation in the ADF by such 
party if it did not comply promptly with the directive to provide 
access. The directive and any action to limit participation in the ADF 
would become effective and remain in place during the pendency of any 
further review or appeal.
    The proposed rule change also would provide for a review of this 
initial determination by a three-member subcommittee consisting of 
current or former members of NASD's Market Regulation Committee 
(``MRC'').\11\ A party seeking such review would be required to submit 
a written appeal to NASD by the close of business on the next business 
day after receipt of the initial determination and simultaneously to 
serve a copy of the written appeal to the opposite party. The party 
seeking review would be accorded 24 hours, or a longer period 
determined by NASD staff, after submission of the appeal to provide 
NASD and the opposing party any supporting written information 
concerning the appeal. The opposing party would then have 24 hours, or 
a longer period determined by NASD staff, to submit written 
documentation in support of its position. A three-member subcommittee 
of current or former MRC members would then render a final 
determination to affirm or reverse the determination of the NASD 
officer based on the record and any hearing it shall, in its 
discretion, determine to hold.
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    \11\ The Market Regulation Committee is an NASD committee that 
considers the federal securities laws and the rules and regulations 
adopted thereunder and various NASD Rules and policies relating to: 
(1) The quotations of securities, (2) the executions of 
transactions, (3) the reporting of transactions; and (4) trading 
practices and rules. See NASD Rule 9120(s).
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    The proposal would require the MRC subcommittee to provide written 
notification of its decision by the close of business the day following 
its determination. The decision, including affirmation of any directive 
to provide access or action to limit participation in the ADF rendered 
by the NASD officer, would be effective upon issuance of the written 
decision and remain in effect during the pendency of further appeals or 
other legal proceedings. The MRC subcommittee could not impose any 
additional sanctions, including monetary fines; its authority would be 
limited to affirming or reversing the determination of the NASD 
officer.
    The MRC decision would constitute final NASD action, which could be 
appealed to the Commission. The decision would not prejudice the rights 
of the parties to subsequently submit the matter to arbitration or 
another adjudicatory forum as appropriate. Furthermore, the decision 
would not operate as an estoppel or otherwise bind NASD in any 
subsequent disciplinary action or other legal proceeding. Amendment No. 
1 to the proposed rule change clarifies the scope of the authority 
granted to NASD and its MRC to review alleged denial of access 
complaints pursuant to NASD Rule 4300A and limits the remedies that may 
be imposed as part of the review.
Plan of Allocation and Delegation to Subsidiaries
    Pursuant to Article XIII, Section 1 of the NASD By-Laws, the Board 
of Governors is vested with the authority to limit the activities, 
functions, and operations of members for failure to comply with NASD 
rules. Section 2 of Article XIII permits the Board of Governors to 
delegate that authority. In accordance with those provisions, the 
proposed rule change also would amend the Plan of Allocation and 
Delegation to Subsidiaries to expressly delegate to the MRC the 
authority to review denial of access determinations in accordance with 
the NASD Rule 4000A Series.
    If the Commission approves the proposal, NASD would announce the 
effective date of the new rule in a Notice to Members to be published 
no later than 60 days following Commission approval. The effective date 
would be 30 days following publication of the Notice to Members 
announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of

[[Page 6063]]

the Act,\12\ which requires, among other things, that NASD's 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 
procedures to hear denial of access complaints would maintain the 
integrity of the ADF and provide a fair process for review.
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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, as amended, 
would 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. 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-2004-159 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-2004-159. 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 such 
filing will also be available for inspection and copying at the 
principal office of 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-2004-159 and should be submitted on or before February 25, 
2005.

    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. E5-431 Filed 2-3-05; 8:45 am]
BILLING CODE 8010-01-P