Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices 34515

25 Id.

26 Id.

27See Amendment No. 1, supra note 5.

28 15 U.S.C. 78f(b)(2).

29Under ISE’s rules, only the PMM has access to

all orders on the ISE book; not just the top of the

book.

30 15 U.S.C. 78f(b)(5).

31 15 U.S.C. 78f(b)(2).

32 Id.

33 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42473

(February 29, 2000), 65 FR 11818.

4See letters to Jonathan G. Katz, Secretary, SEC,

from Holly H. Smith, Sutherland, Asbill & Brennan

LLP, dated March 24, 2000 (‘‘SA&B Letter’’); Peter

J. Chepucavage, Fulbright & Jaworski L.L.P., dated

March 28, 2000 (‘‘Phlx Letter’’); and Charles J.

Henry, President and Chief Operating Officer,

Chicago Board Options Exchange, dated March 31,

2000 (‘‘CBOE Letter’’).

The Commission also agrees with the

ISE that public customer bids (offers) on

the Exchange at the time a facilitation

order is executed that are priced higher

(lower) than the facilitation price should

be executed at the facilitation price. The

Commission believes that this proposal

will both protect public customer limit

orders on the ISE’s book and provide

public customers with the benefit of

price improvement through the

facilitation mechanism. The

Commission also believes that allowing

the execution of higher bids and lower

offers from non-customer orders and

quotes by executing them at their stated

price is reasonable. Accordingly, the

Commission finds that the proposed

amendment to ISE Rule 716(d)(4)(i) is

consistent with Section 6(b)(5) of the

Act 25 in that it promotes just and

equitable principles of trade and

facilitates transactions in securities by

allowing the partial execution of a

facilitation order at an improved price

for the number of non-customer

contracts available, while protecting

public customer orders on the book by

giving them the benefit of a better

execution price.

The Commission also finds that the

proposed amendments to ISE Rule

716(d)(4)(ii) are consistent with Section

6(b)(5) of the Act.26 Under current ISE

rules, a PMM is guaranteed certain

participation rights in a facilitation

order after public customer orders are

executed and the facilitating EAM

receives an allocation of 40 percent of

the order. Amendment No. 1 eliminates

the PMM’s participation guarantee.

Thus, any indication or quote by a PMM

will be treated the same as other Crowd

Participants’ interest. The Commission

believes that this proposed amendment

is consistent with the public interest,

and that it promotes just and equitable

principles of trade by ensuring that

market makers will be able to compete

in a fair and equitable manner, based on

the competitiveness of their quotes, for

that portion of an order remaining after

public customer interest and the EAM’s

facilitation guarantee.

The Commission finds good cause for

approving this proposed amendment

prior to the thirtieth day after date of

publication of the notice of filing in the

Federal Register. The proposed change

to paragraph (d)(4)(ii) of ISE Rule 716

makes available to Crowd Participants a

greater percentage of facilitation

orders. 27 Specifically, this change

ensures that, if a PMM is among the

Crowd Participants with interest at the

facilitation price, the PMM will be

treated equally with all other Crowd

Participants, rather than being

‘‘guaranteed’’ special participation

rights. Because this amendment reduces

the guarantees to PMMs, the

Commission believes it will increase the

opportunity for other participants in ISE

to complete for order flow and finds that

granting accelerated approval to the

proposed amendments to ISE Rule

716(d)(4)(ii) in Amendment No. 1

consistent with Section 18(b)(2) Act. 28

Finally, the Commission believes that

ISE’s proposed amendment to ISE Rules

716(d)(2) and (3) to clarity that members

may enter indications into the

facilitation mechanism at prices that

improve the facilitation price, if such

improved price is inferior to the ISE best

bid or offer, is consistent with the Act.

ISE’s rules currently state that

indications from Crowd Participants

must be priced at the price of the order

to be facilitated and must not exceed the

size of the order to be facilitated. To

facilitate the order at a price superior to

the facilitation price, ISE’s current rules

require Crowd Participants to enter

orders change their quotes, as

applicable. The proposed amendment

allows a Crowd Participant to enter an

indication to facilitate an order at a

price better than the facilitation price,

but inferior to the ISE best bid or offer.

Without this change, it would have been

possible for a Crowd Participant to

improve the facilitation price, but not be

at the ISE best bid or offer. In this

situation, only the PMM 29 would know

about the improved price, creating the

potential for PMM to benefit at the

expense of the customer order being

facilitated. For these reasons, the

Commission finds that ISE’s proposed

amendment is consistent with Section

6(b)(5) of the Act 30

The Commission also finds good

cause for approving the proposed

amendments of ISE Rules 716(d)(2) and

(3) prior to the thirtieth day after the

date of publication of notice of filing in

the Federal Register. These proposed

changes eliminate a potential avenue for

abuse and ensure that a public customer

order would receive the benefit of any

price offered that is better than the

facilitation price. Accordingly, the

Commission believes that these

proposed amendments do not

significantly alter the original proposal,

which was subject to a full notice and

comment period and addresses the

issued raised by commenters. Therefore,

the Commission finds that granting

accelerated approval to the proposed

changes to ISE Rules 716(d)(2) and (3)

in Amendment No. 1 is consistent with

Section 19(a)(2) of Act. 31

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, 32 that the

proposed rule change (SR–ISE–00–03),

including Amendment No. 1, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.33

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13413 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42808; File No. SR–ISE–

00–01]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 by the International Securities

Exchange LLC Relating to Market

Maker Allocations

May 22, 2000.

I. Introduction

On February 25, 2000, the

International Securities Exchange LLC

(‘‘ISE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), 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 relating to its proposed market

maker allocation algorithm.

The proposed rule change was

published for comment in the Federal

Register on March 6, 2000.3 The

Commission received three comment

letters regarding the proposal.4 On May

19, 2000, the ISE filed Amendment No.

34516 Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices

5See letter from Katherine Simmons, Vice

President and Associate General Counsel, ISE, to

Deborah Flynn, Senior Special Counsel, Division of

Market Regulation, SEC, dated May 19, 2000

(‘‘Amendment No. 1’’). In Amendment No. 1, the

ISE requests that the Commission approve its

proposal with respect to its proposed five contract

preference as a one-year pilot program. Consistent

with this request, the ISE proposes to revise

paragraph .01(c) of Supplementary Material to ISE

Rule 713 to require that the ISE provide the

following information to the Commission on a

quarterly basis, with respect to OCC cleared

transactions: (1) The percentage of volume executed

on the Exchange (excluding facilitation orders) that

results from the execution of orders of five contracts

or fewer (‘‘Five Contract Volume’’); (2) the

percentage of Five Contract Volume executed by

Primary Market Makers (‘‘PMMs’’); (3) the ratio of

PMM trades to the total of PMM and Competitive

Market Maker (‘‘CMM’’) trades; and (4) the ratio of

PMM contract volume to the total of PMM and

CMM contract volume.

6See Amendment No. 1, supra note 5.

7 Id.

8 Id.

9See note 4, supra. 10See CBOE Letter. 11See SA&B Letter, Phlx Letter; CBOE Letter. 12 Id. 13See CBOE Letter. 14 Id. 15See letter to Jonathan G. Katz, Secretary, SEC,

from Katherine Simmons, Vice President and

Associate General Counsel, ISE, dated May 19, 2000

(‘‘ISE Response Letter’’).

1 to proposed rule change.5 This order

approves the proposed rule change. In

addition, the Commission is publishing

this notice to solicit comments on

Amendment No. 1 and is

simultaneously approving Amendment

No. 1 on an accelerated basis.

II. Description of the Proposal

ISE Rule 713(d) provides that public

customer orders at a given price have

priority. ISE Rule 713(e) provides that,

if there are two or more non-customer

orders or market maker quotations at the

Exchange’s inside market, after filling

all customer orders at that price,

executions will be allocated between the

non-customer orders and market maker

quotations ‘‘pursuant to an allocation

procedure to be determined by the

Exchange from time to time. * * *’’ ISE

Rule 713(e) also states that if the PMM

is quoting at the Exchange’s inside

market, it will have precedence over

non-customer orders and CMM quotes

for execution of orders that are up to a

specified number of contracts. The ISE

is proposing to establish its allocation

procedure for non-customer orders and

market maker quotations, and to define

the size of orders for which the PMM

has priority.

According to the ISE, the allocation

procedure is a trading algorithm

programmed in the ISE’s electronic

auction market system (‘‘System’’) that

determines how to split the execution of

incoming orders among professional

trading interests at the same price. All

public customer orders at a given price

are executed fully before the trading

algorithm is applied. Moreover, because

the algorithm is applied automatically

by the System upon the receipt of an

executable order, only those noncustomer orders and market maker

quotes that are in the System participate

in the algorithm. The ISE represents

that, subject to the PMM’s participation

rights discussed below, the allocation of

executions to non-customer orders and

market maker quotes is based on the

size associated with the order or quote

relative to the total size available at the

execution price.

The ISE is also proposing certain

participation rights for PMMs. If the

PMM is one of the participants with a

quote at the best price, it has

participation rights equal to the greater

of (1) the proportion of the total size at

the best price represented by the size of

its quote, or (2) 60 percent of the

contracts to be allocated if there is only

one other non-customer order or market

maker quotation at the best price, 40

percent if there are two other noncustomer orders and/or market maker

quotes at the best price, and 30 percent

if there are more than two other noncustomer orders and/or market maker

quotes at the best price. In addition, the

PMM has precedence to execute orders

of five contracts of fewer if it is quoting

at the best price. The proposal provides

that the PMM cannot receive any

portion of an allocation unless it is

quoting at the best price at the time the

System receives the executable order.

Moreover, the size associated with the

PMM’s quote must be sufficient to fill

the portion of the order that would be

allocated to it according to the

participation rights.

The Exchange proposes to implement

the PMM five contract preference as a

one-year pilot program.6 During that

time, ISE proposes to evaluate what

percentage of the volume executed on

the Exchange, excluding volume

resulting from the execution of orders in

the facilitation mechanism, is

comprised of orders for five contracts or

fewer executed by PMMs, and will

reduce the size of the orders included in

this provision if such percentage is over

40 percent.7 In addition, during this

pilot period, ISE proposes to provide

certain data to the Commission on a

quarterly basis, with respect to OCC

cleared transaction: (1) The percentage

of volume executed on the Exchange

(excluding facilitation orders) that

results from the execution of orders of

five contracts or fewer (‘‘Five Contract

Volume’’); (2) the percentage of Five

Contract Volume executed by PMMs; (3)

the ratio of PMM and CMM trades; and

(4) the ratio of the PMM contract

volume divided by the total of PMM and

CMM contract volume.8

III. Summary of Comments

The Commission received three

comment letters on the proposal.9 These

commenters opposed ISE’s proposed

rule change, as originally proposed. The

commenters argued that the ISE’s

proposed allocation algorithm would

discourage competition among market

participants by requiring that other

market makers and non-customers be

quoting at the best bid or offer on ISE

to participate in the execution of an

incoming order. Thus, ISE Rule 713

would allow a PMM to trade with 100

percent of an incoming order when it

was along at the ISE’s best bid or offer.10

In addition, commenters asserted that

the algorithm would permit a PMM to

internalize order flow by giving PMMs

at the best bid or offer an absolute right

to trade against all orders of five

contracts or fewer.11 Commenters

characterize this proposed guarantee as

essentially a small order referencing

rule giving PMMs a distinct economic

advantage over all other non-customer

trading interest entered into the ISE. In

connection with the proposed allocation

procedure, the commenters argued that

these rules build an infrastructure for

percentage and crossing, and guarantee

that the orders routed to ISE will not be

exposed to the level of price

competition necessary to protect the

public interest.12

Commenters also disagreed with ISE’s

characterization of five contracts as an

‘‘odd lot,’’ noting that five contracts

represent 500 shares of underlying stock

and that orders of five contracts or fewer

constitute a significant portion of all

portion of all options order flow.13

According to commenters, the proposed

five contract precedence for PMMs will

result in referencing arrangements,

internalization, and payment for order

flow to attract these low-risk orders, and

is anticompetitive because it reduces

incentives for other market makers to

quote aggressively due to their inability

to attract these smaller orders.14

In response to commenters’

objections, the ISE notes that the

percentage of an order that a PMM

executes is uncertain from the outset,

and far from a ‘‘guarantee.’’ 15 Instead,

the allocation is dependent on the

number of public customer orders, the

price and size of the PMM’s quote, and

Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices 34517

16See ISE Response Letter.

17 Id.

18 Id.

19 Id.

20 In approving this rule, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

21 15 U.S.C. 78f(b)(5).

22 Id.

23 Id.

24See Amendment No. 1, supra note 5.

the number of non-customers competing

with the PMM at the same price. The

ISE argues that, contrary to the

commenters’ characterization of an

absolute ‘‘guarantee,’’ the algorithm

provides only that if an order is not

completely executed after public

customer orders are executed, the PMM

has preference as to the balance, but

only if quoting at the best price and only

if it has displayed sufficient size. Thus,

according to the ISE, a PMM must be

competitive on price in order to receive

any allocation, and must be competitive

on size—otherwise its allocation is

limited by the size associated with its

quote.16

Similarly, the ISE argues that the

commenters’ assertions that the PMM

preference as to orders of five contracts

or fewer will lead to decreased

competition for small orders,

preferencing, internalization, and

payment for order flow is erroneous

because it is based on the flawed

premise that this preference is an

‘‘exclusive right’’ and absolute

‘‘guarantee.’’ 17 The ISE further claims

that preferencing and payment for order

flow arrangements are unlikely because

orders for five contracts or fewer are

expected to constitute only a small

percentage of order flow.18 Moreover,

the ISE maintains that because its

market is based on intramarket price

and size competition and incoming

orders are executed automatically,

market participants, including the

PMM, would not have the opportunity

to know the size of an incoming order,

nor would market participants know

whether the PMM would be quoting at

the best with sufficient size.19

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether the proposed

amendment is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW,

Washington, DC 20549–0609. 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the ISE. All

submissions should refer to File No.

SR–ISE–00–01 and should be submitted

by June 20, 2000.

V. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange.20 In particular, the

Commission finds that the proposal is

consistent with Section 6(b)(5) of the

Act.21

Under Section 6(b)(5) of the Act, a

registered national securities exchange

must have rules that are designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

is securities, 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.

The Commission finds that ISE’s

proposed amendments to

Supplementary Material .01 to ISE Rule

713 are consistent with Sections 6(b)(5)

of the Act.22 The Commission believes

that ISE’s proposed amendment to the

commentary to ISE Rule 713

establishing its algorithm governing the

allocation of orders to market

participants, including PMMs, is

reasonable. Moreover, because PMMs,

like specialists on floor-based options

exchanges, perform important functions

and undertake responsibilities greater

than those of other market makers, the

Commission believes it is reasonable for

the ISE to choose to offer its PMMs an

elevated level of participation rights like

other options exchanges currently

provide to their specialists.

Although the Commission recognizes

that intramarket competition, as well as

protection of public customers, could be

compromised if such a participation

right constituted an absolute guarantee

or if it consumed too great a percentage

of order flow, the Commission believes

that the ISE’s proposal sets forth

reasonable safeguards against such

potential harms. The ISE’s proposal

prioritizes public customer limit orders

on the book. Indeed, if sufficient

existing customer interest exists, a PMM

might not receive any allocation of a

given incoming order. Moreover, a

PMM’s participation is directly

dependent on the competitiveness of the

PMM’s quote as well as the number of

non-customers who have entered

competitive quotes at the same price at

the time an order is received by the

market. In addition, the size of a PMM’s

quote is important, because a PMM’s

execution is limited by the size of its

quote, regardless of any participation

right that ISE’s allocation algorithm

would otherwise prescribe. The

Commission believes that these limits

on a PMM’s participation right should

assure reasonable protection for public

customers and prevent impediments to

a free and open market that might

otherwise result from an absolute

specialist guarantee.

The Commission further finds that the

ISE’s proposal to provide on a one-year

pilot basis PMMs with a preference for

orders of five contracts or fewer is

consistent with Section 6(b)(5) of the

Act.23 The Commission acknowledges

the potential competitive issues noted

by commenters, and intends to use the

one-year pilot period to monitor the

rule’s impact on competition. To assist

the Commission in evaluating the pilot

program, the ISE will provide four types

of specific data to the Commission, on

a quarterly basis and should allow the

ISE to achieve its stated goal of limiting

execution for five contracts or fewer by

PMMs to 40 percent or less of total

exchange volume (excluding facilitation

orders).24

The Commission finds good cause for

approving proposed Amendment No. 1

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. The

Commission notes that Amendment No.

1 clarifies the proposed rule change and

is responsive to the issues raised by

commenters. By approving this proposal

as a one-year pilot program and

requesting certain statistics from the ISE

on a quarterly basis regarding the

volume of orders for five contracts or

fewer executed by PMMs, the

Commission should be able to

adequately assess the operation of this

proposal and determine whether the

competitive issues raised by

commenters pose a concern. Because

Amendment No. 1 does not significantly

34518 Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices

25 15 U.S.C. 78f(b)(2).

26 Id.

27 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42345

(January 18, 2000), 65 FR 4002.

4 17 CFR 240.10b–17. For a description of the

rule, see text accompanying notes 12 and 13 infra.

5Under Section 12(k) of the Act, the Commission

may impose trading suspensions in the U.S.

securities markets. See 15 U.S.C. 781(k).

Additionally, NASD Rule 3340 prohibits members

from trading any security as to which a trading

suspension is in effect. When the Commission

suspends trading in an OTCBB security, Nasdaq

announces the trading ban via the NEWS frame on

the Nasdaq Workstation II and prohibits trading and

quotations on the OTCBB.

6NASD Rules 6530 and 6540 impose certain

regulatory filing requirements for securities to be

included in the OTCBB.

7See NASD Rule 4120(a)(4).

8The NASD and Nasdaq do not proposed to halt

for material news because Nasdaq does not have a

formal listing agreement with OTCBB issuers, and

thus cannot compel the full disclosure and

dissemination of material news. The NASD and

Nasdaq do not propose to halt trading if an issuer

fails to meet filing or disclosure requirements

imposed by a foreign regulatory authority or market,

because Nasdaq would, in essence, be importing

filing obligations of a foreign regulatory authority

on OTCBB issuers when such requirements may not

currently exist in the United States for such issuers.

Lastly, the NASD and Nasdaq are not proposing to

halt trading based on a foreign exchange’s

operational halt, such as an order imbalance,

because Nasdaq generally does not halt for

operational reasons.

9Of course, if an issuer failed to meet the

eligibility requirements contained in NASD Rules

alter the original proposal, which was

subject to a full notice and comment

period, and addresses the issues raised

by commenters, the Commission finds

that granting accelerated approval to

Amendment No. 1 is consistent with

Section 19(b)(2) of the Act.25

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,26 that the

proposed rule change (SR–ISE–00–01),

including Amendment No. 1, is

approved, and that PMM five contract

preference proposal contained in

Amendment No. 1 is approved as a oneyear pilot to expire on May 22, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13414 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42806; File No. SR–NASD–

99–33]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change and

Amendment Nos. 1 and 2 Relating to

the Establishment of Trade and Quote

Halt Authority for the National

Association of Securities Dealers,

Inc.’s Over-the-Counter Bulletin Board

Service

May 22, 2000.

I. Introduction

On July 14, 1999, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, the Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’) submitted

to the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

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 establish trade

and quote halt authority for the NASD’s

over-the-counter Bulletin Board Service

(‘‘OTCBB’’).

The proposed rule change, including

Amendment Nos. 1 and 2, was

published for comment in the Federal

Register on January 25, 2000.3 No

comments were received on the

proposal. This order approves the

proposal.

II. Description of the Proposal

The OTCBB is an NASD system

which, pursuant to delegated authority,

Nasdaq is responsible for operating. In

the proposed rule change, the NASD

and Nasdaq propose to expand Nasdaq’s

authority so that Nasdaq may impose

quotation and trading halts in OTCBB

securities when: (1) The OTCBB

security or the securities underlying the

OTCBB American Depository Receipt

(‘‘ADR’’) is dually listed or registered

and a foreign regulatory authority or

market halts trading in the security; (2)

the OTCBB security is a derivative or

component of a security listed on

Nasdaq, a domestic exchange, or foreign

exchange/market (e.g., a convertible

security or warrant) and Nasdaq, the

exchange, or foreign exchange/market

halts trading in the underlying security;

or (3) the OTCBB issues does not timely

provide the NASD with information

required by Rule 10b–17 under the Act.4

Currently, NASD Rule 4120

authorizes Nasdaq to impose trading

halts in Nasdaq-listed securities and

securities listed on a national securities

exchange and traded in the third

market. There are, however, no rules

that grant Nasdaq authority to impose

trading or quotation halts in OTCBB

securities, Additionally, unlike the

Nasdaq market, there is no listing

agreement between Nasdaq and OTCBB

issuers, and thus Nasdaq does not have

the ability to compel such issuers to

disclose information to Nasdaq.

Accordingly, it is difficult for Nasdaq to

unilaterally impose trade and quote

halts in an OTCBB security because, in

most cases, information from the issuer

is necessary before the NASD can assess

the situation and determine if a halt

and/or resumption of trading is

appropriate.5 In light of the foregoing,

the NASD and Nasdaq are proposing to

vest Nasdaq with trade and quote halt

authority as described below.

Foreign Regulatory Authority Halts.

First, the NASD and Nasdaq are

proposing to impose trading and

quotation halts in OTCBB eligible

securities 6 when a foreign market or

regulatory authority has imposed a trade

halt in the security in its open market

for regulatory reasons. This authority

would permit Nasdaq to impose a trade

and quotation halt on an OTCBB

security or OTCBB ADRs when a foreign

market on which the OTCBB security is

also traded, or a regulatory authority

that has oversight authority for the

OTCBB security, halts trading in the

security or the security underlying the

ADR for ‘‘regulatory’’ reasons. (Nasdaq

currently has similar trading-halt

authority for Nasdaq-listed securities.) 7

Under the proposal, upon receipt of

information from a foreign securities

market on which the OTCBB security or

the security underlying the OTCBB ADR

is listed or registered or from a

regulatory authority overseeing such

issuer, exchange, or market, Nasdaq’s

Stockwatch section will evaluate the

information (generally, a trade-halt

order issued by the foreign market or

regulatory authority) and determine

whether a trade and quotation halt in

the OTCBB security is appropriate.

Nasdaq will impose such a halt only

when the foreign market or regulatory

authority has imposed its halt because

of potential fraudulent conduct or other

public interest concerns. Nasdaq will

not impose a halt if the foreign entity’s

halt is based on the dissemination of

material news, an issuer’s failure to

meet regulatory filing requirements

imposed by a foreign market or

regulatory authority, or for operational

reasons (e.g., order imbalance in the

foreign market). 8

For this and the proposed halts

described below, an OTCBB halt would

be lifted if Nasdaq determines that the

basis of the halt no longer exists or upon

the passage of five trading days, which

ever occurs first. 9 If quoting and trading