[Federal Register: July 9, 2007 (Volume 72, Number 130)]
[Notices]
[Page 37285-37287]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy07-125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56004; File No. SR-NASD-2004-130]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Amendment No. 3 and Order Granting
Accelerated Approval of a Proposed Rule Change as Modified by Amendment
Nos. 2 and 3 Relating to Amendments to Rule 2320(g) (Three Quote Rule)
and Corresponding Recordkeeping Requirements under Rule 3110(b)
July 2, 2007.
I. Introduction
On August 27, 2004, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 amend NASD Rule 2320(g)
(``Three Quote Rule'') to exempt from the Three Quote Rule certain
transactions in foreign securities of a foreign issuer that are part of
an index calculated by the FTSE Group. On May 8, 2006, NASD filed
Amendment No. 1 to the proposed rule change.\3\ On October 19, 2006,
NASD filed Amendment No. 2 to the proposed rule change.\4\ The proposed
rule change, as modified by Amendment No. 2, was published for comment
in the Federal Register on October 31, 2006.\5\ The Commission received
ten comment letters on the proposal.\6\ On April 3, 2007, NASD filed
Amendment No. 3 to the proposed rule change \7\ and a response to the
comment letters.\8\ This order provides notice of Amendment No. 3 and
approves the proposed rule change as modified by Amendment Nos. 2 and 3
on an accelerated basis.
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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\3\ Amendment No. 1 replaced and superseded in its entirety the
text of the original filing.
\4\ Amendment No. 2 replaced and superseded in its entirety the
text of the original filing, as amended.
\5\ See Securities Exchange Act Release No. 54650 (October 25,
2006), 71 FR 63812 (``Notice'').
\6\ See letters from James Duncan, Senior Vice President &
Director, International Trading, and Andrew Jappy, Chief Information
Officer & EVP, Canaccord Capital Corporation, dated November 21,
2006 (``Canaccord Letter''); Achilles M. Perry, Associate General
Counsel, CIBC World Markets Corp., dated November 21, 2006 (``CIBC
Letter''); Grant Vingoe, Esq., Partner, Arnold Porter LLP, dated
November 21, 2006 (``Arnold Porter Letter''); Bill Yancey, Chairman
of the Board, and John C. Giesea, President and CEO, Security
Traders Association, dated November 21, 2006 (``STA Letter''); Rik
Parkhill, Executive Vice President, TSX Group, Inc., President, TSX
Markets, dated November 29, 2006 (``TSX Letter''); George W. Lennon,
President, Canadian Security Traders Association, Inc., dated
December 1, 2006 (``CSTA Letter''); Christopher Climo, Managing
Director, Compliance and Chief Compliance Officer, TD Securities,
Inc., dated December 7, 2006 (``TD Securities Letter''); James E.
Twiss, Chief Policy Counsel, Market Regulation Services Inc., dated
December 8, 2006 (``RS Letter''); Debra V. Moore, Manager--NASDAQ/
OTC Equity Trading, and Glenn A. Hoback, Implementation Consultant--
Internal Controls, Wachovia Securities, LLC, dated December 14, 2006
(``Wachovia Letter''); and Bryce Engel, Chief Brokerage Operations
Officer, TD AMERITRADE, Inc., dated December 21, 2006 (``TD
Ameritrade Letter'').
\7\ In Amendment No. 3, NASD proposes, among other things, to
codify the existing exemptions relating to transactions in a non-
exchange-listed security (as defined below) that are securities
listed on a Canadian exchange.
\8\ See letter from Andrea D. Orr, Assistant General Counsel,
NASD, to Nancy M. Morris, Secretary, Commission, dated April 3, 2007
(``NASD Response Letter'').
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II. Description of the Proposal
Currently, the Three Quote Rule requires NASD members who execute a
transaction in a non-exchange-listed security \9\ for or with a
customer to contact and obtain the quotations from three dealers (or
all dealers if less than three) to determine the best inter-dealer
market for that security. The Three Quote Rule, however, does not apply
if two or more priced quotations for a non-exchange-listed security are
displayed in an inter-dealer quotation system that permits quotation
updates on a real-time basis. NASD proposes to expand the categories of
transactions that would be exempted from the Three Quote Rule. First,
NASD proposes to exempt a transaction for or with a customer in a non-
exchange-listed security of a foreign issuer that is part of the FTSE
All-World Index, if such transaction is executed during the regular
business hours of the foreign market for the foreign security and no
trading halt or other similar trading or quoting restriction is in
effect in any foreign market on which such security is listed. Second,
in response to comments following publication of its proposal, NASD
proposes to codify certain exemptions previously issued by NASD staff
under the Three Quote Rule's exemptive process.\10\ Specifically, NASD
proposes to exempt a transaction for or with a customer pertaining to
the execution of an order in a non-exchange-listed security that is
listed on a Canadian exchange as long as the customer order is executed
by the NASD member or a person associated with the member on a Canadian
exchange in an agency or riskless principal capacity and the member or
a person associated with the member conducts regular and rigorous
reviews of the equality of the execution of such orders in such
securities, pursuant to the member's duty of best execution. NASD has
also proposed to amend its recordkeeping requirement to provide a
corresponding exclusion with respect to these proposed exemptions.
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\9\ NASD Rule 6610(c) defines the term ``non-exchange-listed
security'' as ``any equity security that is not traded on any
national securities exchange'' and ``shall not include `restricted
securities,' as defined by SEC Rule 144(a)(3) under the Securities
Act of 1933, nor any securities designated in the PORTAL Market, the
Rule 6700 Series.''
\10\ See, e.g., Letter to Kenneth W. Perlman, General Counsel,
Mayer & Schweitzer, Inc., from Alden S. Adkins, Senior Vice
President and General Counsel, NASD Regulation, Inc., on May 29,
1998.
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Under the proposed rule change, NASD members would continue to be
required to comply with their best execution obligations under NASD
Rule 2320 and, to the extent applicable, the suitability obligations
under NASD Rule 2310.
III. Summary of Comments and NASD's Response
The Commission received ten comment letters on the proposal.\11\
NASD submitted the NASD Response Letter,\12\ and corresponding
Amendment No. 3 to address the issue regarding application of the
proposed rule change to Canadian-listed securities that was raised by
the commenters. While some commenters expressed general support for
NASD's proposal to exempt from the Three Quote Rule
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foreign securities that are part of the FTSE All-World Index,\13\ all
of the commenters objected to NASD's proposed withdrawal of the
exemptions from the Three Quote Rule for Canadian issuers' securities.
Specifically, NASD proposed to withdraw all existing exemptions granted
under the Three Quote Rule with respect to Canadian securities executed
on a Canadian exchange in an agency or riskless principal basis.\14\
Were these exemptions withdrawn, NASD members would be required to
comply with the Three Quote Rule in connection with transactions in
Canadian securities that are not part of the FTSE All-World Index. The
commenters argued that this result would be contrary to the duty of
best execution,\15\ would cause significant delays in execution,\16\
and would increase the cost of transactions in Canadian securities that
are not part of the FTSE All-World Index.\17\
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\11\ See supra note 6.
\12\ See supra note 8.
\13\ See, e.g., Canaccord Letter, CIBC Letter, STA Letter, TSX
Letter, CSTA Letter, and TD Ameritrade Letter.
\14\ See Notice, supra note 5, 71 FR at 63813 n.13.
\15\ See, e.g., Canaccord Letter, STA Letter, TXS Letter, CSTA
Letter, RS Letter, and Wachovia Letter.
\16\ See, e.g., Canaccord Letter, CIBC Letter, Arnold Porter
Letter, STA Letter, TD Securities Letter, Wachovia Letter, and TD
Ameritrade Letter.
\17\ See, e.g., STA Letter and TD Securities Letter.
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In light of the comments, NASD revised its previous position and
clarified that the proposal would not supersede any exemptions
previously granted. Contemporaneously with the NASD Response Letter,
NASD filed Amendment No. 3 to codify the relief previously granted in
the existing exemptions.
IV. Discussion
After careful review, the Commission believes that the proposed
rule change is consistent with the requirements of the Act and the
regulations thereunder applicable to NASD.\18\ In particular, the
Commission believes that the proposal is consistent with section
15A(b)(6) of the Act \19\ and section 15A(b)(9) of the Act.\20\ Section
15A(b)(6) of the Act requires that the rules of a national securities
association be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and 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. Section 15A(b)(9) of the Act
requires that rules of an association not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.
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\18\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78o-3(b)(6).
\20\ 15 U.S.C. 78o-3(b)(9).
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The Commission approved NASD's proposal to institute the Three
Quote Rule in 1988.\21\ The Three Quote Rule was an amendment to NASD's
interpretation relating to best execution of retail transactions in
non-Nasdaq securities. The Three Quote Rule's purpose is to assure that
NASD members fulfill their duty to provide customers with best
execution for transactions in non-exchange-listed securities,
especially illiquid securities with non-transparent prices. The
Commission subsequently approved NASD's proposal providing NASD staff
authority to grant exemptions from the Three Quote Rule in 1997.\22\
Subsequently, NASD granted exemptions from the Three Quote Rule for
customer transactions in Canadian securities executed on a Canadian
exchange.\23\ In 2000, the Commission approved NASD's proposal to limit
the Three Quote Rule's applicability to those situations when fewer
than two priced quotes for a non-Nasdaq security are posted in an
inter-dealer quotation medium.\24\
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\21\ See Securities Exchange Act Release No. 25637 (May 2,
1988), 53 FR 16488 (May 9, 1988).
\22\ See Securities Exchange Act Release No. 39266 (October 22,
1997), 62 FR 56217 (October 29, 1997).
\23\ See supra note 10.
\24\ See Securities Exchange Act Release No. 43319 (September
21, 2000), 65 FR 58589 (September 29, 2000). Pursuant to this
exception, if two or more priced quotations for a non-exchange-
listed security are displayed in an inter-dealer quotation system
that permits quotation updates on a real-time basis, then NASD
members are not required to obtain quotes from three dealers.
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The Commission finds that NASD's proposal to add the two new
exceptions to the Three Quote Rule is consistent with the Act. In its
order granting NASD staff exemptive authority with respect to the Three
Quote Rule, the Commission noted that ``one situation where exemptive
relief might be applied would be trading in certain foreign securities.
In some circumstances the foreign exchange market may constitute the
best market for the securities that are listed on that market, and the
time delay involved in contacting three dealers in advance of a
customer transaction could hinder obtaining the best execution for the
customer.''\25\
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\25\ Securities Exchange Act Release No. 39266 (October 22,
1997), 62 FR 56217 (October 29, 1997).
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Thus, the Commission believes that it is reasonable for NASD to
exempt from the Three Quote Rule transactions in a foreign security
that are included in the FTSE All-World Index and transactions in a
security listed on a Canadian exchange, subject to the conditions
specified in the amended Three Quote Rule. The Commission notes that,
whether or not a transaction in a non-exchange-listed security is
subject to the Three Quote Rule, the NASD member executing the
transaction must satisfy its duty of best execution.
V. Accelerated Approval
The Commission finds good cause to approve NASD's proposal, as
amended, prior to the thirtieth day after the amendment is published
for comment in the Federal Register pursuant to section 19(b)(2) of the
Act. NASD submitted Amendment No. 3 in response to comments received on
its proposal. The amendment codifies exemptions NASD staff previously
issued under the Three Quote Rule's exemptive process,\26\ and as
described above, proposes a corresponding exclusion to the
recordkeeping requirements if a member establishes and documents the
exemption. Accordingly, Amendment No. 3 does not raise any new issues.
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\26\ See supra note 22.
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The Commission therefore finds good cause to approval NASD's
proposal on an accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3, including whether Amendment No. 3
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 rule-comments@sec.gov. Please include
File Number SR-NASD-2004-130 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2004-130. 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
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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, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. 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-2004-130 and should be submitted on or before July
30, 2007.
VII. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-NASD-2004-130), as modified
by Amendment Nos. 2 and 3, be, and hereby is, approved on an
accelerated basis.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13200 Filed 7-6-07;8:45 am]
BILLING CODE 8010-01-P