Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36193

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42461

(February 25, 2000), 64 FR 11359.

4Specifically, if during at least 4 of the preceding

6 calendar months an ATS accounts for five percent

or more of the aggregate average share volume in

a Nasdaq National Market (‘‘NNM’’) or SmallCap

security, the ATS must display the best prices of

orders entered by all subscribers (e.g., market

makers, nonmarket makers, and institutions). For

example, if as calculated on July 1, 1999 an ATS

account for 7% of the trading volume in an NNM

security during January, February, April, and May

1999, the ATS would be required to reflect in

Nasdaq its best priced order even if the order is

from an institution or other entity that is not a

Nasdaq market maker. The Nasdaq securities

subject to this requirement are being phased-in

according to a schedule set by the Commission. See

Securities Exchange Act Release No. 41297 (April

16, 1999), 64 FR 19450 (April 21, 1999).

5The Commission has considered the proposed

rule’s impact on efficiency, competition, and capital

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

6 15 U.S.C. 78k–1.

7 15 U.S.C. 78o–3(b)(6).

8 15 U.S.C. 78k–1(a)(1)(C).

9 15 U.S.C. 78o–3(b)(6).

10 17 CFR 242.300 et seq. (‘‘Regulation ATS’’).

11See Securities Exchange Act Release No. 40760

(December 8, 1998), 63 FR 70844 (December 22,

1998).

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42851; File No. SR–NASD–

99–49]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change Relating to

Regulation ATS

May 30, 2000.

I. Introduction

On September 21, 1999, the National

Association of Securities Dealers, Inc.

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

wholly owned subsidiary, the Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), 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 19(b)–4 thereunder,2

a proposed rule change to amend NASD

Rules 4623 and 4613(e) to incorporate

the requirements of Regulation ATS into

the NASD’s rules.

The proposed rule change was

published for comment in the Federal

Register on March 2, 2000.3 The

Commission did not receive any

comments on the proposed rule change.

This order approves the proposed rule

change.

II. Description of Proposed Rule Change

The proposal would amend the NASD

Rules to incorporate the requirements of

Regulation ATS. Specifically, the

proposal would amend NASD Rule

4623, which currently governs

electronic communications networks

(‘‘ECNs’’) that display orders in Nasdaq

(‘‘ECN Rule’’), and NASD Rule 4613(e),

which governs locked and crossed

markets (‘‘Locked and Crossed Market

Rule’’). The amendments would: (1)

Incorporate into the ECN Rule the new

obligations that are imposed on ECNs

under Regulation ATS, (2) extend the

current ECN Rule so that it captures

other types of alternative trading

systems (‘‘ATSs’’), and (3) extend the

current Locked and Crossed Market

Rule to capture other types of ATSs.

ECN Rule

Regulation ATS requires ATSs

(including ECNs) that account for a

significant percentage of the volume in

a security listed on Nasdaq to display in

the public quotation stream the orders

of all subscribers of the ATS, which

includes orders from institutions and

broker-dealers that are not market

makers.4 Currently, the ECN Rule only

requires ECNs to display orders entered

by market makers. Accordingly, the

proposal would amend the ECN Rule to

require ECNs to display in Nasdaq any

subscriber orders required under

Regulation ATS.

Regulation ATS also governs

alternative trading systems that are

organized other than as ECNs.

Consequently, these other types of ATSs

may be required to display orders in

Nasdaq. The proposal would expand the

current ECN Rule to encompass these

other types of ATSs. These systems will

have to fulfill a series of obligations

identical to those imposed on ECNs that

display orders in Nasdaq.

Locked and Crossed Markets

The Locked and Crossed Markets

Rule, NASD Rule 4613(e), is designed to

limit locked and crossed markets by

imposing on market makers an

obligation to take reasonable measures

before locking or crossing a market.

Currently included within the definition

of market maker for purposes of this

rule is: (1) Any NASD member that

enters orders into an ECN, or (2) any

NASD member that operates as an ECN

(when the priced order being displayed

by the ECN has been entered by an

entity that is not an NASD member).

Reasonable measures include

attempting to execute against the contra

side of the market prior to entering an

order into Nasdaq’s systems that would

lock or cross the market in a security.

The proposal would amend the Locked

and Crossed Markets Rule to capture

NASD members that place orders in an

ATS or operate as an ATS (when the

priced order being displayed by the ATS

has been entered by an entity that is not

an NASD member).

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act 5 and the

rules and regulations thereunder

applicable to a national securities

association. In particular, the

Commission finds the proposal is

consistent with the requirements of

Sections 11A 6 and 15A(b)(6) 7 of the

Act. Section 11A(a)(1)(C) 8 provides that

it is in the public interest and

appropriate for the protection of

investors and the maintenance of fair

and orderly markets to assure: (1)

Economically efficient execution of

securities transactions; (2) fair

competition among brokers and dealers;

(3) the availability to brokers, dealers

and investors of information with

respect to quotations and transactions in

securities; (4) the practicability of

brokers executing investors orders in the

best market; and (5) an opportunity for

investors’ orders to be executed without

the participation of a dealer. Section

15A(b)(6) 9 requires that the rules of a

registered national securities association

be 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 in 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; and are not designed to

permit unfair discrimination between

customers, issuers, brokers, or dealers.

Recently, the Commission adopted a

set of rules under the Act 10 that govern

alternative trading systems, including

ECNs.11 Regulation ATS governs

alternative trading systems that choose

to register as broker-dealers (ATSs). The

most familiar type of ATS is an ECN;

however, the definition of ATS

encompasses other types of trading

systems that register as broker dealers.

For example, an electronic trading

system that only accepts orders from

institutions and non-market-maker

broker-dealers would be an ATS. Such

a system would not be an ECN,

however, because, by definition, an ECN

is a system that accepts orders from

36194 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

12SEC Rule 11Ac1–1(a)(8), 17 CFR 240.11Ac1–

1(a)(8).

13 15 U.S.C. 78k–1 and 78o–3(b)(6).

14 15 U.S.C. 78s(b)(2).

15 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Division of Market Regulation (‘‘Division’’),

Commission, dated June 1, 1999 (‘‘Amendment No.

1’’); Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Division, Commission, dated July 7, 1999

(‘‘Amendment No. 2’’); Letter from Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation, to Richard C. Strasser, Assistant

Director, Division, Commission, dated July 15, 1999

(‘‘Amendment No. 3’’); Letter from Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation, to Richard C. Strasser, Assistant

Director, Division, Commission, dated October 7,

1999 (‘‘Amendment No. 4’’); and Letter from Alden

S. Adkins, Senior Vice President and General

Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Division, Commission,

dated April 11, 2000 (‘‘Amendment No. 5’’).

Amendment No. 1 conforms several provisions of

NASD rule 2520 to New York Stock Exchange

(‘‘NYSE’’) Rule 431. Among other things,

Amendment No. 1 indicates that, for purposes of

the JBO provisions of NASD Rule 2520, the NASD

will interpret the terms ‘‘carrying and clearing

member’’ and ‘‘carrying member’’ in the same

manner as the NYSE. Amendment No. 1 also

provides additional information regarding the

proposed changes to the provisions of NASD Rule

2520 governing control and restricted securities.

Amendment Nos. 2 and 3 make technical changes

to the text of NASD Rule 2520. Amendment No. 4

states that the NASD will allow a six-month phasein period for implementation of the proposed rule’s

requirements relating to JBO arrangements.

Amendment No. 5 incorporates certain proposed

maintenance margin requirements for non-equity

securities and options-related requirements that are

the subject of related rule filings by NASD

Regulation and to ensure consistency with similar

proposed changes to NYSE Rule 431.

4See Securities Exchange Act Release No. 41704

(August 4, 1999), 64 FR 43797 (August 11, 1999).

5 12 CFR 220 et seq. The Board of Governors of

the Federal Reserve System (‘‘Federal Reserve

Board’’) promulgated Regulation T pursuant to

Section 7(a) of the Exchange Act, which authorizes

it to prescribe regulations relating to credit

extensions on securities. See 15 U.S.C. 78g(a). 6See Board of Governors of the Federal Reserve

System Docket Nos. R–0905, R–0923, and R–0944,

63 FR 2806 (January 16, 1998).

7See Amendment No. 1, supra note 3.

8 12 CFR 220.2.

market makers.12 The NASD’s current

rules capture only those ATSs that meet

the definition of ECN. Therefore, the

Commission believes that it is necessary

to amend these rules to capture those

ATSs that do not meet the definition of

ECN.

Accordingly, the Commission finds

that the proposal is consistent with

sections 11A(a)(1)(C) and section

15A(b)(6) 13 because it will permit

Nasdaq to incorporate ATS orders into

the Nasdaq quote montage and provide

NASD members with the ability to

access these orders. In addition, to limit

market disruptions caused by locked or

crossed markets, the proposal will

require members that submit orders to

ATSs and ATSs, in certain

circumstances, to take reasonable

measures before locking or crossing a

market. Finally, the amendments will

incorporate into the NASD’s rules the

new obligations imposed on ECNs by

Regulation ATS.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–NASD–99–

49) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14251 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 42858; File No. SR–NASD–99–

05]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment Nos. 4 and 5

to the Proposed Rule Change Relating

to Margin for Exempted Borrowers,

Good Faith Accounts, Joint Back

Office Arrangements and Options

Transactions

May 30, 2000.

On January 19, 1999, the National

Association of Securities Dealers, Inc.

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

wholly-owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’),

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 amending the

margin requirements for exempted

borrowers, good faith accounts, joint

back office (‘‘JBO’’) arrangements,

control and restricted securities, and

options transactions. The NASD

amended its proposal on June 1, 1999,

July 7, 1999, July 15, 1999, October 7,

1999 and April 11, 2000.3 The proposed

rule change and Amendment Nos. 1, 2,

and 3 were published for comment in

the Federal Register on August 11,

1999.4 The Commission received no

comment letters on the proposal. This

order approves the proposed rule

change, as amended. In addition, the

Commission is publishing notice to

solicit comments and is simultaneously

approving, on an accelerated basis,

Amendment Nos. 4 and 5.

I. Description of the Proposal

NASD Regulation proposes to amend

NASD rule 2520, ‘‘Margin

Requirements,’’ to revise the margin

requirements for exempted borrowers,

good faith accounts, JBO arrangements,

control and restricted securities, and

options transactions. NASD Regulation

believes that the proposal will conform

NASD Rule 2520 to recent changes to

NYSE Rule 431 and recently adopted

changes to Regulation T.5 NASD

Regulation is also proposing other

minor changes to eliminate obsolete

provisions and correct errors in the text

of NASD Rule 2520.

A. Margin Requirements for Exempted

Borrowers and Good Faith Accounts

Under the recent changes to

Regulation T,6 the Federal Reserve

Board has created a new category of

account called the ‘‘good faith account’’

to replace the ‘‘non-purpose,’’

‘‘arbitrage,’’ and ‘‘government

securities’’ accounts. In the good faith

account, a customer may purchase

certain securities (exempted and nonequity securities, and money market and

exempted securities mutual funds) on

‘‘good faith’’ margin (the amount of

margin specified by the creditor in the

exercise of sound credit judgment) or

the margin specified by the regulatory

authority, whichever is greater.

Regulation T no longer specifies initial

margin, payment and liquidation time

frames for transactions in these

securities in a good faith account.

NASD Regulation believes that

transactions in good faith accounts raise

the same safety and soundness

questions as transactions in cash and

margin accounts. Accordingly, the

proposal amends NASD Rule 2520(c) to

require all accounts, including good

faith accounts, to maintain margin as

required by NASD Rule 2520.7 Cash

accounts will continue to be subject

only to certain specific requirements,

not to the overall requirements of the

rule.

In addition, NASD Regulation states

that the Federal Reserve Board

established a classification of exempted

borrowers which are exempt from

Regulation T. An ‘‘exempted borrower,’’

as defined in Regulation T, is a brokerdealer ‘‘a substantial portion of whose

business consists of transactions with

persons other than brokers or dealers.’’ 8

The proposal codifies this exemption