[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)]
[Notices]
[Pages 23874-23879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-8252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55669; File No. SR-NASDAQ-2006-065]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendments Nos. 1, 2, and 
3 Thereto To Reestablish a Quotation and Trading System for Securities 
That Are Designated by The PORTAL[supreg] Market as PORTAL Securities

April 25, 2007.
    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 December 22, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), 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 substantially prepared by Nasdaq. On March 6, 
2007, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ On 
April 3, 2007, Nasdaq filed Amendment No. 3 to the proposed rule 
change.\4\ 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    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ Amendment No. 2 was filed and withdrawn on April 3, 2007.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to reestablish a quotation and trading system for 
securities that are designated by The PORTAL[supreg] Market (``PORTAL'' 
or the ``PORTAL[supreg] Market'') as PORTAL securities.
    The text of the proposed rule change is available on Nasdaq's Web 
site at http://www.nasdaq.com, at Nasdaq's principal office, and at the 
Commission's Public Reference Room.

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
Background
    Nasdaq currently operates the PORTAL Market for securities that 
were sold in private placements and are eligible for resale under SEC 
Rule 144A \5\ adopted under the Securities Act of 1933 (``Securities 
Act''). The National Association of Securities Dealers, Inc. (``NASD'') 
created the PORTAL Market in 1990,\6\ simultaneously with the SEC's 
adoption of Rule 144A,\7\ for the purposes of quotation, trading, and 
trade reporting in securities deemed eligible by the NASD for resale 
under Rule 144A. Rule 144A provides an exemption from registration 
under Section 5 of the Securities Act \8\ for resales of privately 
placed securities to investors that meet the eligibility requirements 
of being a qualified institutional buyer (``QIB'') under Rule 
144A(a)(1),\9\ i.e., institutional investors that in the aggregate own 
or invest on a discretionary basis at least $100 million in securities 
and broker/dealers that in the aggregate own or invest on a 
discretionary basis at least $10 million

[[Page 23875]]

in securities. The Depository Trust Company (``DTC'') can make Rule 
144A securities eligible for deposit, book-entry delivery, and other 
depository services provided that such Rule 144A securities, except in 
the case of investment grade rated debt,\10\ are designated for 
inclusion in a system of a self-regulatory organization (``SRO'') for 
the reporting, quoting and trading of Rule 144A securities. An issuer 
of an investment grade rated debt issue can apply directly to DTC for 
book-entry services under DTC rules (``Rule 144A investment grade rated 
debt issues'') and need not also qualify the security as a PORTAL-
designated security.\11\
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    \5\ 17 CFR 230.144A.
    \6\ See Securities Exchange Act Release No. 27956 (April 27, 
1990), 55 FR 18781 (May 4, 1990) (SR-NASD-88-23). The PORTAL Rules 
were subsequently amended. See Securities Exchange Act Release Nos. 
28678 (December 6, 1990), 55 FR 51194 (December 12, 1990) (SR-NASD-
90-50); 33326 (December 13, 1993), 58 FR 66388 (December 20, 1993) 
(SR-NASD-91-5); 34562 (August 19, 1994), 59 FR 44210 (August 26, 
1994) (SR-NASD-94-39); 35083 (December 12, 1994), 59 FR 65104 
(December 16, 1994) (SR-NASD-94-65); 40424 (September 10, 1998), 63 
FR 49623 (September 16, 1998) (SR-NASD-98-68); 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (SR-NASD-99-65); 44042 (March 
6, 2001), 66 FR 14969 (March 14, 2001) (SR-NASD-99-66); NASD Notice 
to Members 01-19 (March 2001) (the ``2001 PORTAL rule filing'').
    \7\ See Securities Exchange Act Release No. 27928 (April 23, 
1990), 55 FR 17933 (April 30, 1990).
    \8\ 15 U.S.C. 77e.
    \9\ 17 CFR 230.144A(a)(1).
    \10\ Investment grade rated debt includes nonconvertible debt 
securities and nonconvertible preferred stock that are rated in one 
of the top four generic rating categories by a nationally recognized 
statistical rating organization.
    \11\ See Securities Exchange Act Release No. 33327 (December 13, 
1993), 58 FR 67878 (December 22, 1993) (SR-DTC-90-06).
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    The sole current function of Nasdaq related to the PORTAL Market is 
to review whether an issue of privately placed securities meets the 
eligibility requirements of Rule 144A,\12\ thereby qualifying the 
securities for DTC book-entry services. The PORTAL Market, as 
originally approved by the SEC in 1990, was intended to function as a 
system that would allow NASD members and QIBs to trade PORTAL-
designated securities in a closed system in compliance with SEC Rule 
144A. Thus, the PORTAL rules included requirements to qualify NASD 
members and QIBs as ``PORTAL Participants'' for qualified NASD members 
to enter quotations in PORTAL securities and to submit trade reports 
for PORTAL trades to the PORTAL system for comparison, clearance, and 
settlement.
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    \12\ Nasdaq staff historically had responsibility for review of 
PORTAL Market applications to determine the eligibility of 
securities and, originally, PORTAL Participants (including broker/
dealers and investors). Upon the separation of Nasdaq from the NASD 
and the approval of Nasdaq as a registered national securities 
exchange under Section 6 of the Act, the review functions for PORTAL 
Market eligibility were retained by Nasdaq, and the PORTAL Market 
rules in the NASD Rule 5300 Series became the Nasdaq Rule 6500 
Series. See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006).
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    These market-related functions in PORTAL securities as originally 
approved by the SEC in 1990 did not, however, develop as anticipated. 
In particular, Nasdaq believes that the NASD's adoption of PORTAL rules 
that imposed trade reporting for all transactions in PORTAL securities, 
which occurred at a time when no trade reporting requirements applied 
to privately-placed securities in general, ultimately were not 
implemented because of: (1) A cumbersome technology for access to the 
PORTAL Market computer system for reporting purposes, which was a 
stand-alone computer system; and (2) resistance to the imposition of 
trade reporting in Rule 144A equity and in both Rule 144A and SEC-
registered debt.
    In a continuing effort to encourage trade-reporting in PORTAL-
designated securities, the NASD obtained SEC approval in 1998 of an 
interpretation of the definition of the term ``ACT Eligible Security'' 
in NASD Rule 6110(a) for the Automated Confirmation Transaction Service 
(``ACT'') \13\ to include all securities designated as PORTAL 
securities pursuant to the PORTAL rules to the extent transactions in 
such PORTAL-designated securities were voluntarily submitted to ACT 
solely for reconciliation and comparison.\14\ In addition, the NASD 
submitted a letter to the Divisions of Market Regulation and 
Corporation Finance of the SEC, dated November 16, 1998, advising that 
the NASD would eliminate the Stratus computer system that supported the 
PORTAL Market. On January 23, 2001, the SEC approved the establishment 
of a corporate bond trade reporting and transaction dissemination 
facility, known as the Trade Reporting and Compliance Engine or 
``TRACE,'' \15\ which required trade reporting in most PORTAL 
designated securities and investment grade debt Rule 144A securities 
that are DTC eligible.\16\
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    \13\ ACT is a system owned and operated by Nasdaq that 
accommodates reporting and dissemination of last sale reports for 
secondary market transactions in equity securities and can provide 
automated comparison and confirmation services and can forward 
confirmed trades to DTC for settlement. The OTC Trade Reporting 
Facility provides the same functions for reporting trades in PORTAL 
equity securities as previously performed by ACT.
    \14\ See Securities Exchange Act Release No. 40424 (September 
10, 1998), 63 FR 49623 (September 16, 1998) (SR-NASD-98-68).
    \15\ TRACE is a system operated by the NASD that facilitates the 
mandatory reporting of over-the-counter secondary market 
transactions in eligible fixed income securities. See NASD Rule 6200 
Series.
    \16\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (and related NASD Notice to 
Members 01-18 (March 2001)). Other changes were subsequently made to 
the TRACE rules. See Securities Exchange Act Release Nos. 48056 
(June 18, 2003), 68 FR 37886 (June 25, 2003) (SR-NASD-2003-78) (and 
related NASD Notice to Members 03-36 (June 2003)); 48305 (August 8, 
2003), 68 FR 48656 (August 14, 2003) (SR-NASD-2003-99) (and related 
NASD Notice to Members 03-45 (August 2003)); 49854 (June 14, 2004), 
69 FR 35088 (June 23, 2004) (SR-NASD-2004-57) (and related NASD 
Notice to Members 04-51 (July 2004)); 50317 (September 3, 2004), 69 
FR 55202 (September 13, 2004) (SR-NASD-2004-94) (and related NASD 
Notice to Members 04-65 (September 2004)); 50977 (January 6, 2005), 
70 FR 2202 (January 12, 2005) (SR-NASD-2004-189) (and related NASD 
Notice to Members 05-05 (January 2005)); 51611 (April 26, 2005), 70 
FR 22735 (May 2, 2005) (SR-NASD-2005-026) (and related NASD Notice 
to Members 05-37 (May 2005)); 52183 (August 1, 2005), 70 FR 46239 
(August 9, 2005) (SR-NASD-2005-63) (and related NASD Notice to 
Members 05-52 (August 2005)); 53031 (December 28, 2005), 71 FR 634 
(January 5, 2006) (SR-NASD-2005-120) (and related NASD Notice to 
Members 06-01 (January 2006)).
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    On March 6, 2001,\17\ the SEC approved amendments to the PORTAL 
rules to require that NASD members submit trade reports of secondary 
market transactions in PORTAL-designated equity securities through ACT 
and of most PORTAL-designated debt securities through TRACE.\18\ Only 
trade reporting obligations were imposed with respect to secondary 
market transactions in PORTAL equity and debt securities.
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    \17\ See supra, note 6, the 2001 PORTAL rule filing.
    \18\ A limited number of PORTAL debt securities are not subject 
to trade reporting to TRACE, e.g., mortgage or asset backed 
securities, collateralized mortgage obligations, money market 
instruments, and municipal and municipal-derivative securities.
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    The use of TRACE and ACT for mandatory trade reporting of secondary 
market transactions in PORTAL securities was intended to address the 
technological and cost problems that were associated with the reporting 
of such trades through the stand-alone PORTAL computer system. The SEC 
also, as part of the same rule change, approved the elimination of a 
large number of obsolete provisions in the PORTAL rules, including the 
registration requirements for NASD members and QIBs to trade in a 
closed system, rules regulating the quotation and trading of PORTAL 
securities, and the unsuccessful PORTAL trade reporting 
requirements.\19\
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    \19\ In another rule change, the NASD amended the Uniform 
Practice Code to apply to re-sales of restricted securities as 
defined in Rule 144(a)(3) under the Securities Act. See Securities 
Exchange Act Release No. 38491 (April 9, 1997), 62 FR 18665 (April 
16, 1997) (SR-NASD-97-06); see also Section 11100(a) of the NASD 
Uniform Practice Code.
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The Current Trading Environment for PORTAL Securities
    The market, trading, and technological environments for PORTAL 
securities have evolved. As stated previously, mandatory trade 
reporting applies to almost all PORTAL securities. Today, pursuant to 
NASD Rule 6700 Series, trade reports in all PORTAL-designated equity 
securities are submitted to the NASD's OTC Reporting Facility (``OTC 
Reporting Facility'') \20\ and trade reports in most PORTAL-designated 
debt securities continue to be submitted to TRACE. There is no public 
dissemination in any

[[Page 23876]]

form of information in trade reports submitted with respect to PORTAL 
securities and depository-eligible Rule 144A investment grade rated 
debt issues. NASD provides ongoing surveillance of the trade reports in 
PORTAL securities that are submitted through the OTC Reporting Facility 
and TRACE, including trade reports with respect to PORTAL securities 
and depository-eligible Rule 144A investment grade rated debt issues.
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    \20\ See NASD Rule 6600 Series.
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    The existence of mandatory trade reporting for most PORTAL 
securities has led to an increased interest on the part of the 
securities industry for greater market transparency in PORTAL 
securities in the form of centralized quotations and last sale trade 
information. In addition, technological advances now allow a quotation, 
trade negotiation, and reporting system to be more easily integrated 
into the existing PORTAL Market structure.
Nasdaq's PORTAL Proposal
    Nasdaq is proposing to establish an updated version of the PORTAL 
Market that was originally envisioned when PORTAL was first approved in 
1990. The proposed amendments to the PORTAL rules will: (i) Establish 
qualification requirements for brokers and dealers that are Nasdaq 
members and QIBs that wish to access PORTAL; and (ii) implement 
quotation, trade negotiation and trade reporting functions in the 
PORTAL Market with respect to PORTAL-designated securities. Most of the 
proposed amendments were previously approved by the Commission with 
respect to the earlier attempt by the NASD to establish PORTAL as a 
closed trading system for Rule 144A securities. Nasdaq's proposed 
PORTAL system is summarized below.
    Security Designation: Nasdaq will continue to qualify ``restricted 
securities,'' as that term is defined in SEC Rule 144(a)(3) \21\ and 
securities that are restricted pursuant to contract or through the 
terms of the security for designation as PORTAL securities based on, 
among other things, the security and information requirements for the 
resale of a security under Rule 144A(d)(3) and (d)(4).\22\ Thus, PORTAL 
securities must not be, or have been when issued, of the same class as 
securities listed on a national securities exchange or quoted in a U.S. 
automated inter-dealer quotation system, nor be securities of an open-
end investment company, unit investment trust or face-amount 
certificate company that is or is required to be registered under 
Section 8 of the Investment Company Act of 1940. With respect to the 
information requirements under Rule 144A(d)(4), an issuer of a PORTAL-
designated security must be subject to reporting under Section 13 of 
the Act \23\ or Section 15(d) of the Act,\24\ a foreign private issuer 
that is exempt from reporting pursuant to Rule12g3-2(b) under the 
Act,\25\ a foreign government eligible to register securities under 
Schedule B of the Securities Act, or include disclosure in the private 
placement memorandum that the issuer agrees to provide to a holder of a 
Rule 144A security and a prospective purchaser designated by the holder 
reasonably current information about the issuer's business and 
financial statements.
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    \21\ 17 CFR 230.144(a)(3).
    \22\ 17 CFR 230.144A(d)(3) and (d)(4).
    \23\ 15 U.S.C. 78m.
    \24\ 15 U.S.C. 78o(d).
    \25\ 17 CFR 240.12g3-2(b).
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    As a matter of practice, PORTAL designation is limited to those 
Rule 144A securities that are initially sold to QIBs by a broker/dealer 
acting as initial placement agent or initial purchaser.\26\ Moreover, 
Nasdaq will continue to have authority under PORTAL rules to suspend or 
terminate the designation of a PORTAL security if Nasdaq determines 
that the security is not in compliance with PORTAL rules, a holder or 
prospective purchaser that requested information pursuant to Rule 
144A(d)(4) did not receive the information, any application or other 
document relative to such securities submitted to Nasdaq contained an 
untrue statement of material fact or omitted to state a material fact 
necessary to make the statements therein not misleading, or failure to 
withdraw designation of such securities would for any reason be 
detrimental to the interests and welfare of Nasdaq, Nasdaq members, or 
investors.
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    \26\ Current Rule 6522(a)(4) requires that a PORTAL security be 
assigned a CUSIP number that is different than the identification 
number assigned to any unrestricted securities of the same class. As 
a matter of practice by PORTAL and Standard & Poor's (``S&P''), the 
CUSIP number assigned to those securities that are initially sold to 
QIBs pursuant to Rule 144A is different than the CUSIP numbers 
assigned to those securities that are part of the same offering that 
are sold to accredited investors pursuant to SEC Regulation D and to 
non-U.S. investors under SEC Regulation S. Thus, PORTAL-designation 
is limited to those securities that have initially been sold to 
QIBs. Nasdaq is proposing to amend this rule, which will be 
renumbered Rule 6502(b)(1)(D), to reflect this policy.
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    Broker/Dealer Access: Similar to NASD's original PORTAL system 
approved by the SEC, Nasdaq members that meet the PORTAL qualification 
requirements will be designated as ``PORTAL Dealers'' and ``PORTAL 
Brokers.'' The purpose of distinguishing between Nasdaq members 
thatualify as ``PORTAL Dealers'' and ``PORTAL Brokers'' is to identify 
in PORTAL those Nasdaq members that qualify as a QIB under Rule 144A to 
purchase Rule 144A securities on a principal basis. To qualify as a 
PORTAL Broker, a Nasdaq member will be required by PORTAL rules to 
execute a subscriber agreement with PORTAL, be a member of Nasdaq, be 
qualified to do business as a general securities firm, and agree to 
comply with the PORTAL rules. Pursuant to Rule 144A(a)(1)(iii), a 
dealer registered under Section 15 of the Act \27\ is authorized to act 
as an agent for a QIB on a non-discretionary basis pursuant to Rule 
144A or to act in a riskless principal capacity on behalf of a QIB. To 
qualify as a PORTAL Dealer, a Nasdaq member will be required by PORTAL 
rules to meet these same requirements and also to demonstrate to the 
satisfaction of Nasdaq that it is eligible to purchase securities under 
the financial criteria of SEC Rule 144A. Under Rule 144A(a)(1)(ii), a 
dealer so registered will qualify as a QIB if the dealer in the 
aggregate owns and invests on a discretionary basis at least $10 
million of securities of issuers that are not affiliated with the 
dealer and may act for its own account or the accounts of other QIBs. 
Nasdaq proposes to qualify a Nasdaq member as a PORTAL Dealer based on 
the member's Audited Financial Statements filed with the SEC pursuant 
to Rule 17a-5(d) under the Act.\28\ Nasdaq would annually update its 
qualification of PORTAL Dealers.
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    \27\ 15 U.S.C. 78o.
    \28\ 17 CFR 240.17a-5(d).
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    PORTAL Dealers and PORTAL Brokers would be permitted to post 
anonymous one- or two-sided indicative quotations in PORTAL securities 
that may be accessed by other PORTAL Dealers and Brokers and QIBs 
qualified as ``PORTAL Qualified Investors.'' \29\ In addition, PORTAL 
Dealers and Brokers will be permitted to negotiate anonymously, execute 
trades in PORTAL securities, and submit trade reports in PORTAL-
negotiated trades that will be forwarded to TRACE and the OTC Reporting 
Facility for comparison and confirmation.
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    \29\ The SEC noted that pursuant to Rule 144A, broker/dealers 
are permitted to enter quotations in an inter-dealer quotation 
system so long as the offer is made to QIBs or persons whom dealers 
reasonably believe to be QIBs. See supra, note 6, the 2001 PORTAL 
rule filing.
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    Investor Access: Like the original PORTAL system approved by the 
SEC, an institution that executes a subscriber agreement, agrees to 
comply with the PORTAL rules and meets the $100 million standard of 
being a QIB under

[[Page 23877]]

Rule 144A would be qualified by Nasdaq as a ``PORTAL Qualified 
Investor'' to access the PORTAL Market through a password protected 
linkage and view quotations by PORTAL Dealers and PORTAL Brokers, and 
confirm transactions where the investor uses a PORTAL Dealer or Broker 
to execute a trade in PORTAL. In addition, in order to comply with the 
requirement of Rule 144A(d)(2) that the seller of Rule 144A securities 
take reasonable steps to ensure that the purchaser is aware that the 
seller may rely on Rule 144A, the subscriber agreement will include an 
undertaking that the PORTAL Qualified Investor is aware that it may 
purchase a PORTAL security from another qualified investor who may rely 
on an exemption from the provisions of Section 5 of the Securities 
Act.\30\
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    \30\ 15 U.S.C. 77(e).
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    Trade Negotiation/Execution: Unlike the original PORTAL system, the 
reestablished PORTAL system would use electronic negotiation features 
in order to allow PORTAL Dealers and PORTAL Brokers to negotiate both 
openly and anonymously and execute trades in PORTAL securities. All 
quotes in the PORTAL system will be indicative, not firm. Once an 
anonymous trade is negotiated in the PORTAL system, the identity of the 
counter-parties will be revealed to each other for purposes of 
comparison, confirmation, and settlement.
    Trade Reporting: Trade reports in reportable PORTAL debt and equity 
securities will continue to be submitted to the TRACE and the OTC 
Reporting Facility, respectively. In addition, PORTAL-negotiated trades 
will be submitted through the PORTAL System to TRACE and the OTC 
Reporting Facility. Nasdaq also intends to provide the ability to 
forward PORTAL trades to an appropriate subsidiary of Depositary Trust 
and Clearing Corporation for settlement.
    Dissemination of PORTAL Trade Report Information: All trade report 
information for trades that are negotiated via the PORTAL system will 
be disseminated in PORTAL to PORTAL Brokers, Dealers and Qualified 
Investors (``PORTAL Participants''), but would not include the identity 
of the parties and, in the case of PORTAL debt, would not aggregate or 
otherwise follow the dissemination protocols applicable to debt trades 
reported to TRACE.\31\ PORTAL Participants would be prohibited from 
disclosing any PORTAL Market information, including quotations, 
transactions and other information displayed in the PORTAL Market 
(``PORTAL Market Information''), to any party other than another PORTAL 
Participant. Nasdaq will not disseminate PORTAL Market Information to 
the public.
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    \31\ Trade report information on Rule 144A investment grade debt 
that is not a PORTAL security would not be disseminated in PORTAL. 
To the extent that Nasdaq members desire to quote, execute, and view 
trade report information on any Rule 144A investment grade debt 
security in PORTAL, the security must be qualified as a PORTAL 
security.
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    Regulatory Surveillance: NASD currently provides and would continue 
to provide surveillance of the trade reports in PORTAL securities that 
are submitted through TRACE and the OTC Reporting Facility. Real-Time 
Surveillance of quoting and trading activity in the PORTAL system will 
be conducted by Nasdaq's MarketWatch Department.
SEC Exemptions
    As part of its original review and approval of a PORTAL trading 
system, the Commission and its staff granted several exemptions and no-
action requests to the NASD as the then-operator of the PORTAL Market 
and made other related determinations. Nasdaq, through letter requests 
to be separately submitted to the Commission, will seek the issuance of 
similar and new exemptions so as to allow the operation of the PORTAL 
trading system as described in this filing. In summary, Nasdaq is 
seeking Commission exemptions in the following areas:
    SEC Rule 15c2-11: Through a separate letter request, Nasdaq is 
seeking an exemption from Rule 15c2-11 under the Act \32\ with respect 
to the gathering and furnishing of the prescribed information by PORTAL 
Dealers and PORTAL Brokers that intend to publish, or submit for 
publication, quotations for PORTAL-designated securities through the 
PORTAL system.
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    \32\ 17 CFR 240.15c2-11.
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    Registration Under Section 12(g) of the Act: Through a separate 
letter request, Nasdaq is seeking an exemption from the provisions of 
Section 12(g) of the Act \33\ to permit Nasdaq members and brokers and 
dealers to trade PORTAL-designated equity securities that are not 
registered under Section 12(g) of the Act.\34\
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    \33\ 15 U.S.C. 78l(g).
    \34\ Id.
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    Registration Under Section 12(b) of the Act: Through a separate 
letter request, Nasdaq is seeking an exemption from the provisions of 
Section 12(a) of the Act \35\ to permit Nasdaq members and brokers and 
dealers to trade PORTAL securities that are not registered under 
Section 12(b) of the Act.\36\
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    \35\ 15 U.S.C. 78l(a).
    \36\ 15 U.S.C. 78l(b).
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R2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\37\ in general and with Section 
6(b)(5) of the Act,\38\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, remove impediments to a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest. In particular, the proposal can be 
expected to enhance the efficiency and transparency of trading Rule 
144A securities.
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    \37\ 15 U.S.C. 78f.
    \38\ 15 U.S.C. 78f(b)(5).
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    In addition, Nasdaq believes that the proposed rule change is 
consistent with Section 11A(a)(1) of the Act. \39\ Section 11A(a)(1) 
articulates the Congressional findings and policy goals and objectives 
respecting the development of a national market system. Essentially, 
Congress found that new data processing and communication techniques 
should be applied to improve the efficiency of market operations, 
broaden the distribution of market information, enhance opportunities 
to achieve best execution and promote competition among market 
participants. That provision stresses the importance of implementing 
communication enhancements that will advance the efficiency and 
effectiveness of a securities market in servicing the needs of 
investors. Currently, the secondary placement market in unregistered 
securities is a traditional over-the-counter market, in which 
negotiations are conducted over the phone without the benefit of a 
quotation or last sale trade information dissemination system. Nasdaq 
believes that the proposed amendments to the PORTAL Market will provide 
these benefits and, thus, will enhance the efficiency of the market's 
operation in Rule 144A-eligible securities.
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    \39\ 15 U.S.C. 78k-1(a)(1).
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    Rule 144A Under the Securities Act: Because Nasdaq has designed the 
amendments to the PORTAL Market to facilitate compliance with Rule 
144A, Section 6(b)(1) of the Act \40\ also requires a determination as 
to whether it is reasonably designed to accomplish this purpose.\41\ 
Nasdaq believes that the

[[Page 23878]]

PORTAL system is designed to provide that participants who comply with 
its requirements will also be in compliance with the requirements of 
Rule 144A, except where information is not provided upon request in 
compliance with Rule 144A(d)(4).
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    \40\ 15 U.S.C. 78f(b)(1).
    \41\ Section 6(b)(1) of the Act requires that Nasdaq, as a 
national securities exchange, be so organized and have the capacity 
to enforce compliance with, among other things, the federal 
securities laws. See 15 U.S.C. 78f(b)(1).
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    Rule 144A is available only to institutional investors meeting the 
definition of ``qualified institutional buyer'' under Rule 144A(a)(1). 
A seller is required to form a reasonable belief that a purchaser is a 
``qualified institutional buyer'' as the term is defined in Rule 
144A(a)(1). With the exception of broker-dealers, a qualified 
institutional buyer is required to in the aggregate own and invest on a 
discretionary basis at least $100 million in securities of non-
affiliated issuers. The proposed amendments to the PORTAL rules require 
that any investor applying to qualify as a PORTAL Qualified Investor 
meet the Rule 144A standards for qualified institutional buyers.
    Rule 144A(d)(2) requires that the seller of 144A securities take 
reasonable steps to ensure that the purchaser is aware that the seller 
may rely on Rule 144A. To meet this requirement of Rule 144A, the 
proposed amendments to the PORTAL rules also provide in the designation 
requirements for PORTAL Qualified Investors that applicants sign an 
undertaking in a subscriber agreement that states that they are aware 
that they may purchase a PORTAL security from another qualified 
investor who may rely on an exemption from the provisions of Section 5 
of the Securities Act \42\ pursuant to Rule 144A.
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    \42\ 15 U.S.C. 77(e).
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    The PORTAL rules also have current eligibility requirements for 
admitting securities into the PORTAL system that parallel the Rule 144A 
eligibility requirements for securities. The PORTAL rules require, 
therefore, that the security be eligible to be sold pursuant to Rule 
144A under the Securities Act. The application for designation of a 
PORTAL security requires the submission of specific information 
necessary to support the applicant's claim that the security meets the 
requirements of Rule 144A. In addition, the current PORTAL Rules 
provide Nasdaq with the authority to request any additional information 
that Nasdaq believes is necessary to make a determination of whether a 
security is eligible under Rule 144A.\43\
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    \43\ See Nasdaq Rules 6521(a) and 6522(a)(5).
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    Furthermore, Rule 144A conditions the eligibility of certain 
securities under Rule 144A on certain information being available to 
holders and prospective purchasers. Rule 144A(d)(4) provides that, with 
respect to securities of an issuer that is neither subject to Section 
13 of the Act \44\ nor Section 15(d) of the Act,\45\ nor exempt from 
reporting pursuant to Rule 12g3-2(b) under the Act,\46\ nor a foreign 
government eligible to register securities under Schedule B of the 
Securities Act, the holder and a prospective purchaser designated by 
the holder must have the right to obtain from the issuer, upon request 
of the holder, and the purchaser must have received at or prior to the 
time of sale, upon such purchaser's request to the holder, certain 
information about the issuer. Because the PORTAL rules currently 
require that a security meet the Rule 144A security eligibility 
requirements and that the issuer undertake to provide the information 
required by Rule 144A(d)(4), where applicable, Nasdaq must, as part of 
the PORTAL security designation process, assess whether the issuer is 
required to provide such information to holders and prospective 
purchasers.
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    \44\ 15 U.S.C. 78m.
    \45\ 15 U.S.C. 78o(d).
    \46\ 17 CFR 240.12g3-2(b).
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    In addition to structuring the PORTAL rules to provide that 
participants who comply with its requirements also are in compliance 
with the requirements of Rule 144A, the proposed rule change would 
structure PORTAL to limit the possibility that unregistered securities 
enter the U.S. retail market by requiring that PORTAL-designated 
securities be assigned a CUSIP or CINS security identification number 
that is different than the identification number assigned to any 
securities of the same class that do not satisfy the eligibility 
requirements for PORTAL securities. Since the original approval of the 
PORTAL Market, the security explanation protocol employed by S&P 
related to the CUSIP number assigned to PORTAL securities specifically 
distinguishes those securities from all other publicly-traded and 
restricted securities by using the words ``Rule 144A'' and ``PORTAL.'' 
For these reasons, Nasdaq believes that the PORTAL system, as proposed, 
is reasonably designed to facilitate compliance with Rule 144A, so long 
as there is compliance with the PORTAL rules and procedures, except 
where information is not provided on request pursuant to Rule 
144A(d)(4).

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.

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 Nasdaq 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 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-NASDAQ-2006-065 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-NASDAQ-2006-065. 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

[[Page 23879]]

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 
Nasdaq. 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-
NASDAQ-2006-065 and should be submitted on or before May 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8252 Filed 4-30-07; 8:45 am]
BILLING CODE 8010-01-P