[Federal Register Volume 71, Number 131 (Monday, July 10, 2006)]
[Notices]
[Pages 38948-38950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10713]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54089; File No. SR-NASD-2006-077]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Eliminate Its Current General Revenue Sharing Program 
Under NASD Rule 7010(u) and To Adopt a Revenue Sharing Program Limited 
to Transactions in Nasdaq-Listed Securities Reported to the Trade 
Reporting Service of the Nasdaq Market Center

June 30, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 22, 2006, 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. Nasdaq has filed 
the proposal as a ``non-controversial'' proposed rule change pursuant 
to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission.\5\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ Nasdaq gave the Commission written notice of its intent to 
file the proposed rule change on May 31, 2006 and has asked the 
Commission to waive the 30-day operative delay. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).

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[[Page 38949]]

 I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to eliminate its current general revenue sharing 
plan under NASD Rule 7010(u) and to adopt a revenue sharing program 
limited to transactions in Nasdaq-listed securities reported to the 
Trade Reporting Service of the Nasdaq Market Center. Nasdaq will 
implement the proposed rule change on July 1, 2006.
    The text of the proposed rule change is below. Proposed new 
language \6\ is in italics; proposed deletions are in [brackets].
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    \6\ With Nasdaq's permission, the Commission modified the 
proposed rule text to add italics to item (g)(1). See e-mail from 
John Yetter, Senior Associate General Counsel, Nasdaq, to Joseph 
Morra, Special Counsel, Division of Market Regulation, Commission, 
dated June 28, 2006.
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7010. System Services

    (a)-(f) No change.
    (g) Nasdaq Market Center Trade Reporting
    (1) No change to text.
    (2) Nasdaq Market Center Trade Reporting Revenue Sharing Program
    After Nasdaq earns total operating revenue sufficient to offset 
actual expenses and working capital needs, a percentage of Reporting 
Participant Operating Revenue (``RPOR'') associated with transactions 
in Nasdaq-listed securities reported to the Trade Reporting Service of 
the Nasdaq Market Center shall be eligible for sharing with Nasdaq 
Market Makers and Nasdaq ECNs (as defined in the Rule 4700 Series). 
RPOR is defined as operating revenue that is generated by Nasdaq Market 
Makers and Nasdaq ECNs and consists of transaction fees and market data 
revenue that is attributable to Nasdaq Market Makers' and Nasdaq ECNs' 
transactions in Nasdaq-listed securities reported to the Trade 
Reporting Service of the Nasdaq Market Center. RPOR shall not include 
any investment income or regulatory monies. The sharing of RPOR shall 
be based on each Nasdaq Market Maker's and Nasdaq ECN's pro rata 
contribution to RPOR. In no event shall the amount of revenue shared 
with Nasdaq Market Makers and Nasdaq ECNs under Rule 7010(g)(2) exceed 
RPOR. To the extent market data revenue is subject to year-end 
adjustment, RPOR revenue may be adjusted accordingly. Credits will be 
provided on a quarterly basis.
    (h)-(t) No change.
    (u) [Nasdaq Revenue Sharing Program] Reserved
    [After Nasdaq earns total operating revenue sufficient to offset 
actual expenses and working capital needs, a percentage of all Market 
Participant Operating Revenue (``MPOR'') shall be eligible for sharing 
with Nasdaq Quoting Market Participants (as defined in Rule 4701). MPOR 
is defined as operating revenue that is generated by Nasdaq Quoting 
Market Participants. MPOR consists of transaction fees, technology 
fees, and market data revenue that is attributable to Nasdaq Quoting 
Market Participant activity in Nasdaq National Market and Capital 
Market securities. MPOR shall not include any investment income or 
regulatory monies. The sharing of MPOR shall be based on each Nasdaq 
Quoting Market Participant's pro rata contribution to MPOR. In no event 
shall the amount of revenue shared with Nasdaq Quoting Market 
Participants exceed MPOR. To the extent market data revenue is subject 
to year-end adjustment, MPOR revenue may be adjusted accordingly.]
    (v)-(w) No change.
* * * * *

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 is proposing to modify the scope of its current programs for 
revenue sharing by replacing its current general revenue sharing 
program under NASD Rule 7010(u) with a program limited to transactions 
in Nasdaq-listed securities reported to the Trade Reporting Service of 
the Nasdaq Market Center. The program will be similar in structure to 
Nasdaq's current program, in that it will share a percentage of 
operating revenue with members based on their pro rata contribution to 
such revenues. Like the revenue sharing program recently instituted by 
NYSE Arca, Inc. (``NYSE Arca''),\7\ however, it will be narrower in its 
application because it will be limited to transactions in Nasdaq-listed 
securities reported to the Trade Reporting Service of the Nasdaq Market 
Center. In SR-PCX-2005-121, the Pacific Exchange (now NYSE Arca) 
instituted a general revenue sharing program for Cross Orders in 
Nasdaq-listed securities. As provided in NYSE Arca Rule 7.31(s), a 
Cross Order allows an NYSE Arca member to internalize orders and report 
them through NYSE Arca after the matched order is processed through a 
limited algorithm designed to pursue price improvement opportunities on 
NYSE Arca and markets to which it routes.
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    \7\ Securities Exchange Act Release No. 52672 (October 25, 
2005), 70 FR 66885 (November 3, 2005) (SR-PCX-2005-121).
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    Under Nasdaq's proposal, Nasdaq Market Makers and Nasdaq ECNs 
(i.e., market makers and ECNs that post quotes in one or more Nasdaq-
listed stocks in the Nasdaq Market Center) would be eligible to share 
in Reporting Participant Operating Revenue (``RPOR'') associated with 
transactions in Nasdaq-listed securities reported to the Trade 
Reporting Service of the Nasdaq Market Center. RPOR is defined as 
operating revenue that is generated by Nasdaq Market Makers and ECNs 
from transaction fees and market data revenue attributable to trade 
reports. RPOR will not include any investment income or regulatory 
monies.
    The proposed new rule provides that the amount of revenue shared 
with Nasdaq Market Makers and Nasdaq ECNs under NASD Rule 7010(g)(2) 
may not exceed RPOR. As with the current rule, Nasdaq's Board of 
Directors (either acting through its Finance Committee or as a whole) 
will have the authority to determine on an ongoing basis the 
appropriate amount of RPOR to be shared with Nasdaq Market Makers and 
Nasdaq ECNs, on a pro rata basis. In making this determination, the 
Board will balance the objective of sharing a meaningful percentage of 
RPOR with the objective of maintaining Nasdaq's financial integrity. In 
particular, Nasdaq will not compromise its regulatory responsibilities 
by sharing revenue that would more appropriately be used to fund 
regulatory responsibilities. Nasdaq will be mindful of its regulatory 
responsibilities when determining its working capital needs. This 
determination will be made, and the credits will be provided, on a 
quarterly basis.
    These changes are designed to provide a competitive response to 
efforts by NYSE Arca and potentially other venues to attract order flow 
that is matched by a broker-dealer and then submitted to a self-
regulatory organization for clearing and reporting to the tape. Nasdaq 
evaluated the economics of modifying its current

[[Page 38950]]

approach to revenue sharing and determined that the approach reflected 
in the proposed rule was feasible and appropriate, given the costs 
involved and competitive concerns.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\8\ in general, and with 
Sections 15A(b)(5) \9\ and (b)(6) of the Act,\10\ 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; and in that it 
is designed to facilitate transactions in securities, to promote just 
and equitable principles of trade, to enhance competition, and to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(5)
    \10\ 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 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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\11\ and Rule 10b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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.
    Nasdaq has requested that the Commission waive the 30-day operative 
delay contained in Rule 19b-4(f)(6)(iii) under the Act \13\ based upon 
a representation that the proposal will allow Nasdaq to implement more 
competitive pricing for transactions reported to the trade reporting 
service of the Nasdaq Market Center, and in that it is intended as a 
response to a similar program instituted by a competitor on an 
immediately effective basis. In light of the foregoing, the Commission 
believes such waiver is consistent with the protection of investors and 
the public interest. Accordingly, the Commission designates the 
proposal to be effective and operative upon filing with the 
Commission.\14\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the 30-day operative delay 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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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2006-077 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-077. 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 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-2006-077 and should be submitted on or before July 
31, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-10713 Filed 7-7-06; 8:45 am]
BILLING CODE 8010-01-P