[Federal Register Volume 70, Number 48 (Monday, March 14, 2005)]
[Notices]
[Pages 12521-12522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1052]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51326; File No. SR-NASD-2004-173]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving a Proposed Rule Change and Amendment No. 
1 Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 2 Thereto To Establish Rules Governing the Operation 
of Nasdaq's Brut Facility

March 7, 2005.

I. Introduction

    On November 3, 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''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish rules governing the 
operation of its Brut trading facility. On January 24, 2005, Nasdaq 
submitted Amendment No. 1 to the proposed rule change.\3\ The proposed 
rule change was published for comment in the Federal Register on 
January 31, 2005.\4\ The Commission received no comments on the 
proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the originally filed 
proposed rule change.
    \4\ See Securities Exchange Act Release No. 51078 (January 25, 
2005), 70 FR 4902 (January 31, 2005) (SR-NASD-2004-173) (``Release 
No. 51078'').
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    On March 2, 2005, Nasdaq submitted Amendment No. 2 to the proposed 
rule change.\5\ This order approves the proposed rule change, as 
amended by Amendment Nos. 1 and 2. Simultaneously, the Commission is 
providing notice of filing of Amendment No. 2 and granting accelerated 
approval of Amendment No. 2.
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    \5\ The text of Amendment No. 2 is available on the NASD's Web 
site (http://www.nasd.com), at the NASD's Office of the Secretary, 
and at the Commission's Public Reference Room.
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II. Description

    On September 7, 2004, Nasdaq acquired Brut LLC, a registered 
broker-dealer and member of the NASD, and operator of the Brut ECN 
(``Brut'' or ``Brut System''), through an ownership interest in Toll 
Associates LLC (``Toll'').\6\ Once purchased by Nasdaq, Brut became a 
facility of a national securities association. Nasdaq currently 
operates Brut pursuant to a Temporary Conditional Exemption under 
Section 36 of the Act (``Exemption''), which the Commission granted for 
a period of six months following Nasdaq's acquisition of Brut.\7\
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    \6\ Toll is a wholly-owned subsidiary of Nasdaq. Toll owns 
99.78% of Brut LLC and 100% of Brut Inc., which owns the remaining 
0.22% of Brut LLC. Both Toll and Brut Inc. conduct no business other 
than serving as holding entities for their respective ownership 
interests in Brut LLC. See Release No. 51078 at 4906.
    \7\ See Exchange Act Release No. 50311 (September 3, 2004), 69 
FR 54818 (September 10, 2004).
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    A condition to the exemption required Nasdaq to submit rule filings 
under Section 19(b) of the Act fully articulating its operation of Brut 
and Brut's integration with Nasdaq within 60 days of the 
acquisition.\8\ Accordingly, Nasdaq proposes to establish rules 
governing the operation of its Brut trading facility. These rules, 
proposed as NASD Rule 4900 Series, address, among other things, the 
Brut System's order display and system matching, access standards, 
order types, time-in-force designations, out-bound order routing, order 
execution algorithm, clearly erroneous trade procedures, and other 
system features and standards.\9\ Under the proposal, Nasdaq would 
operate Brut on a platform separate from the Nasdaq Market Center. 
Ultimately, Nasdaq intends to unify Brut and the Nasdaq Market Center 
into a single platform that would use the Brut broker-dealer for out-
bound access to other markets.\10\
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    \8\ See Exemption supra note 7.
    \9\ See Release No. 51078, note 4 supra.
    \10\ Id.
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    In Amendment No. 2, Nasdaq amended the proposed rule change to 
clarify that Brut would continue temporarily to provide access to its 
system for approximately twelve non-NASD member entities.\11\ Under 
section 15A of the Act, as a facility of a self-regulatory 
organization, access to Nasdaq facilities like Brut would be limited to 
NASD broker-dealers, or those sponsored by such broker-dealers. 
Accordingly, Nasdaq proposes to allow non-NASD members to continue to 
participate in the Brut system through the Brut broker-dealer. Pursuant 
to proposed NASD Rule 4914, Nasdaq would implement procedures and 
internal controls to restrict the flow of confidential information 
between the Brut System and the separate introducing broker functions 
Brut performs for non-NASD member firms. These procedures and controls 
are intended to ensure that all Brut participants have access to the 
same information on the same terms.
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    \11\ Nasdaq proposes to continue to provide non-member access 
for a limited interim period to expire on July 31, 2005.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a self-regulatory 
organization \12\ and, in particular, the requirements of section 15A 
of the Act \13\ and the rules and regulations thereunder. The 
Commission finds that the proposed rule change is consistent with 
section 15A(b)(6) of the Act,\14\ in that it 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.
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    \12\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that the Brut System became a facility of a 
national securities association subject to the standards set forth in 
sections 15A and 19(b)(1) of the Act when Nasdaq completed its purchase 
of the Brut System. As such, NASD and, pursuant to NASD's plan of 
allocation and delegation of function to its subsidiaries, Nasdaq are 
obligated to file

[[Page 12522]]

rules governing the operation of the Brut System with the Commission. 
The Commission also notes that as a broker-dealer, Brut remains subject 
to the applicable NASD rules. The Commission believes that, as a result 
of this proposed rule change, the rules that the NASD and Nasdaq will 
be required to enforce, and that Brut and Brut System participants will 
be required to follow should be readily discernable.
    The Commission notes that the proposed rule change articulates 
Nasdaq's operation of Brut and Brut's integration with the Nasdaq 
Market Center. The Commission finds that this proposed rule change, as 
amended, should enable market participants in general and Brut System 
participants in particular to understand the operation of, and the 
rules applicable to, the Brut System as a Nasdaq facility. The rules 
that are the subject of this filing encompass a wide range of areas, 
including the Brut System's order display and system matching, access 
standards, order types, time-in-force designations, out-bound order 
routing, order execution algorithm, clearly erroneous trade procedures, 
and other system features and standards. The Commission believes that 
the proposed rules are designed to enhance order interaction and price 
competition. The Commission also notes that Nasdaq has stated that Brut 
will continue to participate in market surveillance and audit trail 
programs conducted by Nasdaq and the NASD.\15\ Finally, the Commission 
notes that this proposal represents an interim step toward Nasdaq's 
ultimate plan to have Brut and the Nasdaq Market Center unified into a 
single technology platform and to use the Brut broker-dealer as an out-
bound order router to other markets.\16\
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    \15\ See Release No. 51078 at 4906.
    \16\ See Release No. 51078 at 4910.
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    In Amendment No. 2, Nasdaq amended the proposed rule change to 
clarify that Brut would provide sponsored access to its system for 
approximately twelve non-NASD member entities for a temporary 
period.\17\ Further, Nasdaq proposed to implement procedures and 
internal controls to ensure all Brut participants have access to the 
same information on the same terms.
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    \17\ The Commission has expressed concern about the potential 
conflict of interest that arises for a self-regulatory organization 
(``SRO'') when a member firm is affiliated with the SRO and recently 
proposed rules to prohibit such affiliations. See Securities 
Exchange Act Release No. 50699 (November 18, 2004) 69 FR 71126 
(December 4, 2004) (``SRO Proposal''). Pending Commission 
consideration of comments on this proposal, Nasdaq applied for 
membership to the New York Stock Exchange (``NYSE'') on behalf of 
Brut. Further, Nasdaq committed to seek the Commission's approval 
pursuant to Rule 17d-1 under the Act to have the NYSE appointed as 
Brut's Designated Examining Authority for financial responsibility 
rules upon approval of Brut's membership in the NYSE. See Exemption, 
supra note 7. Approval of this proposed rule change in no way 
prejudges Commission action on the SRO Proposal. Depending on the 
outcome of the SRO Proposal, further structural changes may be 
required of Nasdaq and Brut.
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    The Commission notes that the changes to the proposal in Amendment 
No. 2 should permit non-NASD members to continue to participate in the 
Brut System without interruption on a temporary basis. Accordingly, the 
Commission finds that there is good cause, consistent with section 
15A(b)(6) \18\ and section 19(b)(2) of the Act,\19\ to approve 
Amendment No. 2 on an accelerated basis prior to the 30th day of the 
date of publication of notice of filing thereof in the Federal 
Register.
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    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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-2004-173 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-2004-173. 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 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-2004-173 and should be submitted on or before April 
4, 2005.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (File No. SR-NASD-2004-173), as 
amended by Amendment No. 1, be, and hereby is, approved, and that 
Amendment No. 2 to the proposed rule change be, and hereby is, approved 
on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1052 Filed 3-11-05; 8:45 am]
BILLING CODE 8010-01-P