[Federal Register: August 24, 2004 (Volume 69, Number 163)]
[Notices]
[Page 52055-52057]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au04-105]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50218; File No. SR-NASD-2004-002]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 2 Thereto To Require an NASD
Market Participant To Provide Written Notice Before Denying Any NASD
Member Direct Electronic Access to Its Quote in the ADF
August 18, 2004.
I. Introduction
On January 8, 2004, the National Association of Securities Dealers,
Inc. (``NASD'') submitted to 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 4300A to
require an NASD Market Participant to provide written notice before
denying any NASD member direct electronic access to its quote on NASD's
Alternative Display Facility (``ADF''). NASD filed Amendment No. 1 to
the proposed rule change on February 5, 2004.\3\ The proposed rule
change and Amendment No. 1 were published for comment in the Federal
Register on February 24, 2004.\4\ The Commission received no comment
letters on the proposed rule change and Amendment No. 1. NASD filed
Amendment No. 2 to the proposed rule change on July 14, 2004.\5\ This
order approves the proposed rule change and Amendment No. 1 and issues
notice of filing of, and approves on an accelerated basis, Amendment
No. 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated February 4, 2004 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 49252 (February 13,
2004), 69 FR 8505.
\5\ See letter from Patricia M. Albrecht, Assistant General
Counsel, NASD, to Katherine A. England, Assistant Director,
Division, Commission, dated July 13, 2004 (``Amendment No. 2'').
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II. Description of the Proposal
The ADF is a pilot system that NASD operates for its members that
choose to quote or effect trades in Nasdaq securities otherwise than on
the Nasdaq Stock Market or an exchange.\6\ The Commission conditioned
its approval of the SuperMontage facility on NASD's establishment of
the ADF.\7\ In the SuperMontage proposal, several commenters expressed
concern that SuperMontage would become the only execution system
through which substantially all displayed trading interest in the over-
the-counter markets could be reached. In response to these concerns,
NASD agreed to provide an alternative quotation and transaction
reporting facility (now known as the ADF) that would, in effect, make
participation in SuperMontage voluntary.\8\ The ADF permits NASD
members to comply with their obligations under Commission and NASD
rules (including Rule 11Ac1-1(c)(5) under the Exchange Act \9\ and
Regulation ATS \10\) without participating in SuperMontage. NASD's
authority to operate the ADF pilot system extends until October 26,
2004.\11\
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\6\ See Securities Exchange Act Release No. 46249 (July 24,
2002), 67 FR 49821 (July 31, 2002) (approving the ADF pilot).
\7\ See Securities Exchange Act Release No. 43863 (January 19,
2001), 66 FR 8020 (January 26, 2001) (approving SuperMontage).
\8\ See 66 FR at 8024.
\9\ 17 CFR 240.11Ac1-1(c)(5).
\10\ 17 CFR 242.300 et seq.
\11\ See Securities Exchange Act Release No. 49131 (January 27,
2004), 69 FR 5229 (February 3, 2004) (extending the ADF pilot).
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The ADF does not have an order-routing capability. Instead, an NASD
Market Participant must provide other NASD Market Participants with
direct electronic access to its quote in the ADF.\12\ In addition, an
NASD Market Participant must provide NASD member broker-dealers that
are not NASD Market Participants direct electronic access, if
requested, and allow for indirect electronic access to its ADF
quote.\13\ An NASD Market Participant is prohibited from in any way
directly or indirectly influencing or prescribing the prices that its
customer broker-dealer may choose to impose for providing indirect
access and precluding or discouraging indirect electronic access,
including through the imposition of discriminatory pricing or quality
of service with regard to a broker-dealer that is providing indirect
electronic access.\14\ However, an NASD Market Participant that is an
electronic communication network (``ECN'') may lawfully deny access to
its ADF quote in the limited circumstances where a broker-dealer fails
to pay contractually obligated costs to the ECN.
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\12\ See NASD Rule 4300A(a)(1). ``Direct electronic access'' is
defined as the ability to deliver an order for execution directly
against an individual NASD Market Participant's best bid and offer
subject to quote and order access obligations without the need for
voice communication, with the equivalent speed, reliability,
availability, and cost (as permissible under the federal securities
laws, the rules and regulations thereunder, and NASD Rules), as are
made available to NASD Market Participant's own customer broker-
dealers or other active customers or subscribers. See NASD Rule
4300A(d)(2).
\13\ See NASD Rule 4300(a)(2). ``Indirect electronic access'' is
defined as the ability to route an order through customer broker-
dealers of an NASD Market Participant that are not affiliates of the
NASD Market Participant, for execution against NASD Market
Participant's best bid and offer subject to quote and order access
obligations, without the need for voice communication, with
equivalent speed, reliability, availability, and cost, as are made
available to the Market Participant's customer broker-dealer
providing the indirect access or other active customers or
subscribers. See NASD Rule 4300A(d)(3).
\14\ See NASD Rule 4300(a)(2).
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NASD proposes to amend NASD Rule 4300A to require an NASD Market
Participant to provide written notice before denying any NASD member
direct electronic access to its ADF quotes. The NASD Market Participant
would be required to provide this notice to ADF Market Operations via
facsimile, personal delivery, courier, or overnight mail at least 14
calendar days in advance of denying access. The 14-day period would
begin on the first business day that ADF Market Operations has receipt
of the notice. In Amendment No. 1, NASD stated that, to ensure proper
documentation of compliance with this rule, NASD members should
maintain evidence of receipt of the notice (e.g., dated facsimile
confirmation, receipt from a courier, etc.). ADF Market Operations
would then post this notice on the ADF webpage to ensure that members
have adequate time to make other routing or access arrangements, as
necessary.
In Amendment No. 2, NASD added a provision that a notice provided
under the proposed rule must be based on the good faith belief of an
NASD Market Participant that its denial of access is appropriate and
does not violate any NASD rules or the federal securities laws. NASD
also added that the proposed notification and publication of an NASD
Market Participant's intent to deny access would have no bearing on the
merits of any claim between the NASD Market Participant and any
affected broker-dealers, nor would it insulate the NASD Market
Participant from liability for violations of NASD rules or the federal
securities laws, such as Rule 11Ac1-1 under the Act,\15\ should it be
determined that the denial of access was inappropriate. In Amendment
No. 2, NASD stated that, if NASD believes that an NASD Market
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Participant has improperly denied a broker-dealer access to its quotes,
the NASD Market Participant would not have met the terms of Rule 4300A
and therefore would be in violation of that provision and would not be
permitted to continue quoting on the ADF. Amendment No. 2 also
clarified that ECNs are the only NASD Market Participants that may
lawfully deny access to their quotes, and that an ECN may do so only in
the limited circumstances where a broker-dealer fails to pay
contractually obligated costs.
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\15\ 17 CFR 240.11Ac1-1.
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Finally, in Amendment No. 2, NASD revised the proposal to remove
the requirement that an NASD Market Participant provide notice with
respect to a denial of indirect access. An NASD Market Participant is
not permitted to look through its order flow to identify or
discriminate against a source of the order flow via indirect access;
therefore, the revised proposal no longer contemplates provision of
notice for denials of indirect access.
The text of the proposed rule change, as amended by Amendment Nos.
1 and 2, appears below. Proposed new language is in italics. Proposed
deletions are in brackets.
4300A. Quote and Order Access Requirements
(a) To ensure that NASD Market Participants comply with their quote
and order access obligations as defined below, for each security in
which they elect to display a bid and offer (for Registered Reporting
ADF Market Makers), or a bid and/or offer (for Registered Reporting ADF
ECNs), in the Alternative Display Facility, NASD Market Participants
must:
(1) through (2) No change.
(3) Provide at least 14 calendar days advance written notice, via
facsimile, personal delivery, courier or overnight mail, to NASD
Alternative Display Facility Operations before denying any NASD member
direct electronic access as defined below. An ECN is the only Market
Participant that may lawfully deny access to its quotes, and an ECN may
only do so in the limited circumstance where a broker-dealer fails to
pay contractually obligated costs for access to the ECN's quotes. The
notice provided hereunder must be based on the good faith belief of a
Market Participant that such denial of access is appropriate and does
not violate any of the Market Participant's obligations under NASD
rules or the federal securities laws. Further, any notification or
publication of a Market Participant's intent to deny access will have
no bearing on the merits of any claim between the Market Participant
and any affected broker-dealer, nor will it insulate the Market
Participant from liability for violations of NASD rules or the federal
securities laws, such as SEC Rule 11Ac1-1. The 14-day period begins on
the first business day that NASD Alternative Display Facility
Operations has receipt of the notice.
(4) [3] Share equally the costs of providing to each other the
direct electronic access required pursuant to paragraph (a)(1), unless
those Market Participants agree upon another cost-sharing arrangement.
(b) through (f) No change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether it 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-2004-002 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-2004-002. 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 Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of 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-2004-002
and should be submitted on or before September 14, 2004.
IV. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities
association,\16\ particularly section 15A(b)(6) of the Act.\17\ Section
15A(b)(6) requires, among other things, that a national securities
association's rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
and, in general, to protect investors and the public interest.
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\16\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\17\ 15 U.S.C. 78o-3(b)(6).
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The proposed rule change should allow NASD to provide its members
advance notice of when an NASD Market Participant intends to deny an
NASD member access to its quotes so as to minimize any potential
disruptions in the ADF market. NASD has indicated that an NASD Market
Participant recently denied an NASD member access to the NASD Market
Participant's quotes for allegedly failing to pay contractually
obligated costs. NASD stated that this denial of access disrupted
trading not only for the NASD member that was denied access, but also
for other NASD members that indirectly accessed the NASD Market
Participant's quote through the NASD member that was denied direct
access. NASD believes that, although there were other means in place by
which NASD members could have accessed the NASD Market Participant's
quotes, the absence of any advance notice of the denial of access
caused confusion in the marketplace as members considered how best to
access the NASD Market Participant's quotes by other means. The
Commission believes that the proposed rule change should help avert
such disruption by providing NASD members advance notice of potential
denials of direct access, thereby affording them an opportunity to make
other routing or access arrangements.
The Commission further believes that it is reasonable and
consistent with the Act for the new provisions of NASD Rule 4300A(a)(3)
to state that any
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notification or publication of an NASD Market Participant's intent to
deny access will have no bearing on the merits of any claim between the
NASD Market Participant and any affected broker-dealer, nor will it
insulate the NASD Market Participant from potential liability for
violations of NASD rules or the federal securities laws. The Commission
believes that the mere act of providing notice of a denial of access
pursuant to this rule change should not insulate an NASD Market
Participant from liability if that denial of access were illegal.
The Commission finds good cause for accelerating approval of
Amendment No. 2 prior to the thirtieth day after publication in the
Federal Register. The Commission notes that the proposed rule change
and Amendment No. 1 thereto were noticed for the full comment period
and that no comments were received. Amendment No. 2 clarifies the
proposal and provides that compliance with the proposed rule would not
bear on the merits of any claim between an NASD Market Participant and
any affected broker-dealer, nor would it shield an NASD Market
Participant from liability for a violation of NASD rules or federal
securities laws. Furthermore, accelerated approval should permit NASD
to promptly begin to receive notices for any potential denials of
access, thereby enabling NASD to investigate any denial of access while
providing notice of such denials to NASD members to minimize any
potential disruptions in the ADF market that could result. For these
reasons, the Commission finds good cause exists, consistent with
sections 15A(b) \18\ and 19(b)(2) of the Act,\19\ to approve Amendment
No. 2 on an accelerated basis.
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\18\ 15 U.S.C. 78o-3(b).
\19\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-NASD-2004-002) and Amendment
No. 1 is hereby approved, and that Amendment No. 2 is hereby approved
on an accelerated basis.
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\20\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E4-1888 Filed 8-23-04; 8:45 am]
BILLING CODE 8010-01-P