[Federal Register Volume 70, Number 65 (Wednesday, April 6, 2005)]
[Notices]
[Pages 17492-17494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1555]



[[Page 17492]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51449; File No. SR-NASD-2005-034]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. To Provide Limited 
Compensation for Losses Due to Malfunctions of the Order-Execution 
Systems of the Nasdaq Market Center or Nasdaq's Brut Facility

March 30, 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 March 23, 2005, 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 and 
II below, which items have been prepared by Nasdaq. On March 24, 2005, 
Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ Nasdaq 
has filed the proposal pursuant to section 19(b)(3)(A) of the Act \4\ 
and Rule 19b-4(f)(6) 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)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 made technical corrections to the propose 
rule text of the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A)
    \5\ 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

    Nasdaq proposes to provide limited compensation for losses due to 
malfunctions of the order-execution systems of the Nasdaq Market Center 
or Nasdaq's Brut facility. Nasdaq has designated this proposal as non-
controversial and has requested that the Commission waive the 30-day 
pre-operative waiting period contained in Rule 19b-4(f)(6)(iii) under 
the Act.\6\
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    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change, as amended, is below. 
Proposed new language is italicized; proposed deletions are in 
[brackets].
* * * * *
4705. Nasdaq Market Center Participant Registration
    (a) through (h) No Change.
    (i) Except as provided for in paragraph (j) below, [T]the 
Association and its subsidiaries shall not be liable for any losses, 
damages, or other claims arising out of the Nasdaq Market Center or its 
use. Any losses, damages, or other claims, related to a failure of the 
Nasdaq Market Center to deliver, display, transmit, execute, compare, 
submit for clearance and settlement, adjust, retain priority for, or 
otherwise correctly process an order, Quote/Order, message, or other 
data entered into, or created by, the Nasdaq Market Center shall be 
absorbed by the member, or the member sponsoring the customer, that 
entered the order, Quote/Order, message, or other data into the Nasdaq 
Market Center.
    (j) Nasdaq, subject to the express limits set forth below, may 
compensate users of the Nasdaq Market Center or Nasdaq's Brut order 
execution system for losses directly resulting from the systems' actual 
failure to correctly process an order, Quote/Order, message, or other 
data, provided the Nasdaq Market Center, or Brut system, as applicable, 
has acknowledged receipt of the order, Quote/Order, message, or data.
    (1) For one or more claims made by a single market participant 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, Nasdaq's liability shall not exceed the larger of 
$100,000, or the amount of any recovery obtained by Nasdaq under any 
applicable insurance policy.
    (2) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, Nasdaq's liability shall not exceed the larger of 
$250,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy.
    (3) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system during a 
single calendar month, Nasdaq's liability shall not exceed the larger 
of $500,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy.
    (4) In the event all of the claims arising out of the use of the 
Nasdaq Market Center or Brut system cannot be fully satisfied because 
in the aggregate they exceed the maximum amount of liability provided 
for in this Rule, then the maximum amount will be proportionally 
allocated among all such claims arising on a single trading day, or 
during a single calendar month, as applicable.
    (5) All claims for compensation pursuant to this Rule shall be in 
writing and must be submitted no later than the opening of trading on 
the next business day following the day on which the use of the Nasdaq 
Market Center or the Brut system gave rise to the such claims. Nothing 
in this rule shall obligate Nasdaq or Brut to seek recovery under any 
applicable insurance policy.
* * * * *
4913. Limitation of Liability
    Except as provided for in Rule 4705(j), [T]the Association and its 
subsidiaries, as well as Nasdaq and Brut and their subsidiaries, shall 
not be liable for any losses, damages, or other claims arising out of 
the System or its use. Any losses, damages, or other claims, related to 
a failure of the System to deliver, display, transmit, execute, 
compare, submit for clearance and settlement, adjust, retain priority 
for, or otherwise correctly process an order, Quote/Order, message, or 
other data entered into, or created by, the System shall be absorbed by 
the member, or the member sponsoring the customer, that entered the 
order, Quote/Order, message, or other data into the System.
* * * * *

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, as 
amended. 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 is proposing to provide a limited exception to its general 
limitation of liability rules to allow for payments of claims to users 
for order processing failures in the Nasdaq Market Center and Nasdaq's 
Brut system. Current limitation of liability rules provide that Nasdaq 
and Brut are not liable for any losses, damages, or claims arising out 
of the Nasdaq Market Center or the Brut system or their use

[[Page 17493]]

and that any such losses, damages, or claims related to a failure of 
the Nasdaq Market Center or the Brut system must be absorbed by the 
member that entered the order into the Nasdaq Market Center or Brut 
system or that sponsored that customer entering that order.\7\
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    \7\ See NASD Rules 4705(i) and 4913.
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    Under the proposal, Nasdaq would compensate users of either the 
Nasdaq Market Center or Brut for failures of the order-execution 
portion of either system to correctly process an order, Quote/Order, 
message, or other data (Order) transmitted by a market participant into 
it, provided receipt of the entry has been acknowledged by that system. 
Payments under the proposal shall be subject to the following limits:
    (1) For one or more claims made by a single market participant 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, compensation would be limited to the larger of 
$100,000, or the amount of any recovery obtained by Nasdaq under any 
applicable insurance policy; \8\
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    \8\ The decision to seek recovery under any applicable insurance 
policy for any claim shall be within Nasdaq's sole discretion. See 
NASD Rule 4705(j)(5).
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    (2) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, compensation will be limited to the larger of 
$250,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy; and
    (3) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system during a 
single calendar month, compensation will be limited to the larger of 
$500,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy.
    If all of the claims arising out of the use of the Nasdaq Market 
Center or Brut system cannot be fully satisfied because together they 
exceed the maximum amount of compensation dollars available, then 
available monies will be allocated on a proportional basis among all 
such claims arising on a single trading day or during a single calendar 
month, as applicable. All claims for compensation must be made in 
writing and submitted to Nasdaq no later than the opening of trading on 
the next business day after the day on which the use of Nasdaq's 
facilities gave rise to the compensation claim.
    Nasdaq states that it will apply the proposed rule in a non-
discriminatory manner, and believes that the proposed rule change 
provides a uniform non-discriminatory method to compensate Nasdaq 
Market Center and Brut system users for losses arising from system 
malfunctions in the order execution process. Nasdaq believes that the 
potential availability of such compensation engenders confidence in 
Nasdaq market systems, and may encourage greater use of those systems 
thereby increasing beneficial liquidity for all system users. Finally, 
Nasdaq notes that another market center has a similar rule in place to 
likewise provide limited compensation for system malfunctions.\9\
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    \9\ See PCXE Rule 13.2.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act,\10\ in 
general, and with section 15A(b)(6) of the Act,\11\ in particular, 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 a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 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, as amended, 
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 foregoing proposed rule change, as amended, is subject to 
section 19(b)(3)(A)(iii) of the Act \12\ and Rule 19b-4(f)(6) 
thereunder \13\ because the proposal: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative prior to 30 days after the date of filing or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest; provided that Nasdaq has given 
the Commission notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq satisfied the five-day pre-filing requirement. In addition, 
Nasdaq has requested that the Commission waive the 30-day operative 
delay. Nasdaq believes that additional benefits and protections offered 
to users of Nasdaq and Brut, including public customers, impacted by 
system malfunctions should not be delayed. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest because such waiver will permit users 
of the Nasdaq Market Center and Brut system to avail themselves of the 
benefits of these provisions immediately. In addition, the Commission 
notes that the proposed rule is substantially similar to a rule 
currently in place at another market center.\14\ For these reasons, the 
Commission designates the proposal to be effective and operative upon 
filing with the Commission.\15\
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    \14\ See PCXE Rule 13.2.
    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    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.\16\
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    \16\ See Section 19(b)(3)(C) of the Act, 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. 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-2005-034 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission,

[[Page 17494]]

450 Fifth Street, NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2005-034. 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-2005-034 and should be submitted on or before April 
27, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Margaret H. McFarland,
Deputy Secretary.
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    \17\ CFR 200.30-3(a)(12).
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[FR Doc. E5-1555 Filed 4-5-05; 8:45 am]
BILLING CODE 8010-01-P