37442 Federal Register / Vol. 65, No. 115 / Wednesday, June 14, 2000 / Notices

Fund (‘‘Regional Fund,’’ and together

with Large Cap Fund, the ‘‘Funds’’). The

Adviser, a Minnesota corporation,

serves as investment adviser to the

Funds and is registered as an

investment adviser under the

Investment Advisers Act of 1940. The

Adviser is record holder of more than

5% of the outstanding shares of

Regional Fund.

2. On February 20, 2000, the boards

of directors of each Funds (together, the

‘‘Boards’’), including the directors who

are not ‘‘interested persons,’’ as defined

in section 2(a)(19) of the Act

(‘‘Independent Directors’’), unanimously

approved an agreement and plan of

reorganization (the ‘‘Reorganization

Agreement’’) under which Large Cap

Fund will acquire the assets and

liabilities of Regional Fund in exchange

for Large Cap Fund shares (the

‘‘Reorganization’’). The Large Cap Fund

shares exchanged will have an aggregate

net asset value equal to the aggregate net

asset value of the Regional Fund’s

shares determined at the effective time

of the Reorganization (the ‘‘Effective

Time’’), currently anticipated to occur

on June 30, 2000. The net asset value

per share of each Fund’s shares will be

determined in the manner set forth in

the respective Fund’s current

prospectus and statement of additional

information. At the Effective Time,

Regional Fund will liquidate and

distribute pro rata to its shareholders

the Large Cap Fund shares.

3. Applicants state that the

investment objectives of Large Cap Fund

are identical to those of Regional Fund.

Neither Largo Cap Fund nor Regional

Fund imposes any sales charges or

distribution related fees. No sales

charges will be imposed upon Regional

Fund shareholders in connection with

the Reorganization. The Adviser will

pay the expenses of the Reorganization.

4. The Boards, including all of the

Independent Directors, determined that

the Reorganizations is in the best

interests of each Fund, and that the

interests of the existing shareholders of

each Fund would not be diluted as a

result of the Reorganization. In assessing

the Reorganization, the Boards

considered various factors, including:

(a) The compatibility of each Fund’s

investment objectives and principal

investment strategies; (b) the terms and

conditions of the Reorganization; (c) the

expense ratio of each Fund; and (d) the

tax-free nature of the Reorganization.

5. The Reorganization is subject to a

number of conditions, including that: (a)

The Reorganization Agreement is

approved by the Regional Fund

shareholders; (b) the Funds receive an

opinion of counsel that the

Reorganization will be tax-free; and (c)

applicants receive exemptive relief from

the Commission as requested in the

application. The Reorganization

Agreement may be terminated and the

Reorganization abandoned at any time

prior to the Effective Time if either

Board determines that circumstances

have changed to make the

Reorganization inadvisable. Applicants

agree not to make any material changes

to the Reorganization Agreement

without prior Commission approval.

6. A registration statement on Form

N–14 containing a combined

prospectus/proxy statement was filed

with the Commission on April 10, 2000,

and became effective on May 10, 2000.

Proxy solicitation materials were mailed

to Regional Fund’s shareholders on May

23, 2000. A special meeting of Regional

Fund shareholders is scheduled for June

15, 2000.

Applicants’ Legal Analysis

1. Section 17(a) of the Act generally

prohibits an affiliated person of a

registered investment company, or an

affiliated person of such a person, acting

as principal, from selling any security

to, or purchasing any security from, the

company. Section 2(a)(3) of the Act

defines an ‘‘affiliated person’’ of another

person to include (a) any person directly

or indirectly owning, controlling, or

holding with power to vote 5% or more

of the outstanding voting securities of

the other person; (b) any person 5% or

more of whose securities are directly or

indirectly owned, controlled, or held

with power to vote by the other person;

(c) any person directly or indirectly

controlling, controlled by, or under

common control with the other person;

and (d) if the other person is an

investment company, any investment

adviser of that company.

2. Rule 17a–8 under the Act exempts

from the prohibitions of section 17(a)

mergers, consolidations, or purchases or

sales of substantially all of the assets of

registered investment companies that

are affiliated persons, or affiliated

persons of an affiliated person, solely by

reason of having a common investment

adviser, common directors, and/or

common officers, provided that certain

conditions set forth in the rule are

satisfied.

3. Applicants believe that because the

Funds may be deemed to be affiliated by

reasons other than having a common

investment adviser, common directors,

and/common officers, they may not be

able to rely on rule 17a–8 in connection

with the Reorganization. Applicants

state that the Adviser holds of record

more than 5% of the outstanding

securities of Regional Fund, and holds

or shares voting power and/or

investment discretion with respect to a

portion of these shares.

4. Section 17(b) of the Act provides,

in relevant part, that the Commission

may exempt a transaction from the

provisions of section 17(a) if evidence

establishes that the terms of the

proposed transaction, including the

consideration to be paid or received, are

reasonable and fair and do not involve

overreaching on the part of any person

concerned, and that the proposed

transaction is consistent with the policy

of each registered investment company

concerned and with the general

purposes of the Act.

5. Applicants request an order under

section 17(b) of the Act exempting them

from section 17(a) to the extent

necessary to complete the

Reorganization. Applicants submit that

the Reorganization satisfies the

standards of section 17(b) of the Act.

Applicants state that the terms of the

Reorganization are reasonable and fair

and do not involve overreaching.

Applicants state that the investment

objectives of Regional Fund and Large

Cap Fund are identical. Applicants also

state that the Boards, including all of the

Independent Directors, have determined

that the participation of each Fund in

the Reorganization is in the best

interests of each Fund and that such

participation will not dilute the

interests of shareholders of each Fund.

In addition, Applicants state that the

Reorganization will be based on the

Funds’ relative net asset values.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14929 Filed 6–13–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42824; File No. SR–CBOE–

99–40]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Granting Approval to

Proposed Rule Change Relating to

Operation of Retail Automatic

Execution System; Nine-Month Pilot

Program

May 25, 2000.

I. Introduction

On July 29, 1999, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

Federal Register / Vol. 65, No. 115 / Wednesday, June 14, 2000 / Notices 37443

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

2 17 CFR 240.19b–4.

3See Letter from Timothy Thompson, Director,

Regulatory Affairs, CBOE, to Nancy Sanow,

Assistant Director, Division of Market Regulation,

SEC, dated January 19, 2000.

4See Securities Exchange Act Release No. 42396

(February 7, 2000), 65 FR 7404 (February 14, 2000).

5See CBOE Rule 6.8(e).

6 Generally, a market maker may log on RAES in

a particular equity option class (other than DJX)

only in person and may continue on the system

only so long as he or she is present in that trading

crowd. Accordingly, a member generally may not

remain on the RAES system and must log off the

system when he or she has left the trading crowd,

unless the departure is for a brief interval. See

CBOE Rule 8.16(a)(iii). In option classes designated

by the appropriate Market Performance Committee,

any market maker who has logged on RAES at any

time during an expiration month must log on the

RAES system in that option class whenever he or

she is present in that trading crowd until the next

expiration. See CBOE Rule 8.16(b).

7See CBOE Rule 6.8(a)(ii).

8See CBOE Rule 6.8(d)(i).

9CBOE Rule 6.8, Interpretation .06(b). See

Securities Exchange Act Release No. 41821

(September 1, 1999), 64 FR 50313 (September 16,

1999) (approving implementation of Variable

RAES).

10Telephone conversation between Timothy

Thompson, Director, Regulatory Affairs, CBOE, and

Gordon Fuller, Special Counsel, Division of Market

Regulation, SEC (May 16, 2000).

11Telephone conversation between Timothy

Thompson, Director, Regulatory Affairs, and

Anthony Montesano, Vice President, Trading

Operations Department, CBOE; and Nancy Sanow,

Assistant Director, and Gordon Fuller, Special

Counsel, Division of Market Regulation, SEC, (May

1, 2000).

12All designees of the same DPM unit will have

their percentage aggregated into a single percentage

for the DPM unit. Because of this methodology, the

DPM unit can still receive its entitled percentage

even if any particular designee is not logged on

RAES at the time.

13The minimum entitlement applies to any

market maker in a particular option class who logs

on RAES during a given review period. Thus, new

market makers who have not yet had time to

acquire market share on the trading floor will be

allocated a single spoke if they log on RAES during

the first review period they traded that class on the

Exchange floor. Similarly, an existing market maker

who was on vacation for the whole of the previous

review period, who thus had no trading history

during that review period, would receive a onespoke allocation if he or she logged on RAES during

the first review period immediately following his or

her return. Telephone conversation between

Timothy Thompson, Director, Regulatory Affairs,

and Anthony Montesano, Vice President, Trading

Operations Department, CBOE; and Gordon Fuller,

Special Counsel, and Michael Gaw, Attorney,

Division of Market Regulation, SEC (May 19, 2000).

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposal to permit the

appropriate CBOE Floor Procedure

Committee (‘‘FPC’’) to implement a new

order assignment procedure for the

Exchange’s Retail Automatic Execution

System (‘‘RAES’’). The new RAES order

assignment procedure is called the ‘‘100

Spoke RAES Wheel.’’ On January 21,

2000, the Exchange filed Amendment

No. 1 to the proposed rule change.3 On

February 14, 2000, the Commission

published the proposed rule change and

Amendment No. 1 in the Federal

Register.4 The Commission received no

comments on the proposal. This order

approves the proposed rule change, as

amended, for a pilot period of nine

months through February 28, 2001.

II. Description of the Proposal

RAES is a part of the CBOE’s order

routing system that automatically

executes customer market and

marketable limit orders that fall within

designated order size parameters. The

maximum order size eligible for entry

into RAES is 50 contracts for all classes

of equity options and most classes of

index options.5 All designated primary

market makers (‘‘DPMs’’) of a particular

option class are required to log on RAES

for that class; other market makers who

trade that class on the floor may log on

RAES but are not required to do so.6

When RAES receives an order, the

system automatically attaches to the

order its execution price, generally

determined by the prevailing market

quote at the time of the order’s entry to

the system, and a participating market

maker will be designated as the

counterparty on the trade.7 Participating

market makers are assigned by RAES on

a rotating basis, with the first market

maker selected at random from the list

of logged-on market makers.8

In its filing, the Exchange described

that its PFCs currently have two options

by which to allocate RAES orders: The

‘‘entire order’’ procedure and ‘‘Variable

RAES.’’ Under the entire order

procedure, RAES orders are assigned to

market makers participating on RAES

one order at a time to the market maker

next in line on the ‘‘RAES Wheel.’’

When a particular market reaches his or

her turn on the Wheel, the market maker

is assigned one entire order whether the

order is for one contract or for the

maximum number of contracts eligible

for entry into RAES for that particular

class of options. By contrast, under

Variable RAES, for each options class in

which market makers participates in

RAES, market makers are permitted to

designate the maximum number of

contracts that they are willing to buy or

sell each time it is their turn on the

RAES Wheel, provided that the number

of contracts selected is equal to or

greater than a minimum number

selected by the FPC.9 CBOE represents

that its FPCs now employ Variable

RAES for both equity options and index

options.10

The current proposal provides the

appropriate FPC with a third choice for

apportioning RAES trades among

participating market makers, the ‘‘100

Spoke RAES Wheel.’’ Under the 100

Spoke RAES Wheel, RAES orders will

be assigned to logged-in market makers

according to the percentage of their inperson agency contracts (excluding

RAES contracts) traded in that class

compared to all of the market maker inperson agency contracts (excluding

RAES contracts) traded during the

review period. Agency contracts are

defined as contracts that are represented

by an agent and do not include contracts

traded between market makers in person

in the trading crowd. The CBOE

represents that in-person agency

contracts include trades by a market

maker against a booked order or an

order represented by a broker in the

trading crowd, whether that order is for

the account of another broker-dealer or

for the account of a customer. 11 Agency

contracts do not included contracts

executed through RAES.

Under the 100 Spoke RAES Wheel, on

each revolution of the Wheel, each

participating market maker who is

logged on RAES at the time will be

assigned a number of agency contracts

that replicates the percentage of

contracts on RAES that he or she traded

in-person in that class during the review

period, subject to the exceptions

described below. The appropriate FPC

will determine the review period but in

no event may it set the review period for

a period greater than two weeks. At the

end of each review period, the

appropriate FPC will recalculate the

percentage of RAES orders to be

distributed to each market maker

participating on the 100 Spoke RAES

Wheel. The percentage allotted to a

particular market maker will be the

same as the percentage of in-person

agency contracts traded by that market

maker in the Exchange crowd during the

previous review period.12 Any market

maker that logs on the system during a

particular review period will be

guaranteed to receive an entitlement

during that review period of no less

than 1 percent of RAES contracts, or one

‘‘spoke’’ as explained below.13

The RAES Wheel may be envisioned

as having a number of ‘‘spokes,’’ each

generally representing 1 percent of the

total participation of all market makers

in the class. Thus, a market maker

generally will be assigned one spoke for

each 1 percent of his or her market

maker participation during the review

period. If all market makers who traded

in-person agency contracts in that

option class during the review period

are logged on RAES, no other market

makers are logged on, the RAES Wheel

37444 Federal Register / Vol. 65, No. 115 / Wednesday, June 14, 2000 / Notices

14The CBOE has stated that Variable RAES and

the 100 Spoke RAES Wheel cannot operate

concurrently for trading in a given option class.

Similarly, the ‘‘entire order’’ allocation procedure

and the 100 Spoke RAES Wheel cannot operate

concurrently for trading in a given option class.

Telephone conversation between Timothy

Thompson, Director, Regulatory Affairs, and

Anthony Montesano, Vice President, Trading

Operations Department. CBOE; and Gordon Fuller,

Special Counsel, and Michael Gaw, Attorney,

Division of Market Regulation, SEC (May 19, 2000).

15The one-spoke allocation for each of the two

new market makers would apply only during their

initial review period. See supra note 13. After that

initial review period, each of the two new market

makers would be entitled to the number of spokes

they had earned during the applicable review

period.

16 15 U.S.C. 78f(b)(5) and 78f(b)(8).

17 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiently, competition, and capital formation. See

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

18However, under Variable RAES, the market

maker has some flexibility in limiting the extent of

its exposure during each revolution of the Wheel.

would consist of 100 spokes,

representing 100 percent of all market

maker activity during the review period.

Normally, one spoke on the Wheel

would be equivalent to one contract,

except that the appropriate FPC may

establish a larger spoke size. For

example, setting the spoke size to five

contracts would redefine the RAES

Wheel for a particular option class as a

Wheel of 500 contracts. Changing the

spoke size (and thus, the Wheel size)

would not change the participation

percentages of the individual market

makers.14

For example, if there are twelve

market in a crowd, consisting of ten

veteran market makers each of whom

accounted for 10 percent of total market

maker trading (exclusive of RAES

trades) during the review period, and

two new market makers, and if nine of

the veteran makers and both of the new

market makers are logged on RAES, the

RAES Wheel would consist of 92 spokes

(ten spokes for each of the nine veteran

market makers, and one spoke for each

of the two new market makers),15

accounting for 92 contracts in a

complete revolution of the Wheel. In

this case, each of the veteran market

makers would participate in ten out of

every 92 contracts traded on RAES, and

the two new market makers would each

receive one out of every 92 contracts.

A wedge is the maximum number of

spokes that may be assigned to a market

maker in any one ‘‘hit’’ during a rotation

of the RAES Wheel. The purpose of the

wedge is to break up the distribution of

contracts into smaller groupings to

reduce the exposure of any one market

maker to market risk. If the size of the

wedge is smaller than the number of

spokes to which a particular market

maker may be entitled based on his or

her participation percentage, that

market maker would receive one or

more additional assignments during one

revolution of the RAES Wheel. For

example, in the case where one spoke is

equal to one contract and the market

maker’s participation percentage is 15

percent (entitling it to 15 contracts on

one RAES Wheel revolution, i.e., 15

percent of 100) and the wedge size is

ten, that market maker first would be

assigned ten contracts on the RAES

Wheel and then five contracts at a

different place on the RAES Wheel

during that same revolution. Thus, in

one complete revolution of the RAES

Wheel, the market market would be

assigned two times for a total of 15

contracts (assuming one contract per

spoke), consisting of ten-contract

assignment and one five-contract

assignment. The wedge size would be

variable at the discretion of the

appropriate FPC and may be established

at different levels for different classes,

or at the same level for all classes.

III. Discussion

A. General

After careful review, the Commission

finds that implementation of the

proposed rule change on a pilot basis is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange and, in particular,

with Sections 6(b)(5) and 6(b)(8) of the

Act.16 Section 6(b)(5) requires, among

other things, that the rules of an

exchange be designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to facilitate

transactions in securities, to remove

impediments to and perfect the

mechanisms of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest.17 Section 6(b)(5) also

requires that those rules not be designed

to permit unfair discrimination between

customers, issuers, brokers, or dealers.

Finally, Section 6(b)(8) of the Act

requires that the rules of an exchange

not impose any burden on competition

not necessary or appropriate in

furtherance of the purposes of the Act.

B. An Important Step Forward

Currently, RAES assigns orders

randomly to market makers who are

logged on the system. The Commission

believes that the 100 Spoke RAES

Wheel takes an important step forward

by rewarding those market makers who

consistently execute a greater portion of

agency orders in the trading crowd,

rather than randomly assigning

contracts to all market makers logged on

RAES. Although the 100 Spoke RAES

Wheel does not reward a market maker

for improving the Exchange’s displayed

quotation, it does reward the market

maker for providing liquidity to orders

in the trading crowd by linking the

market maker’s percentage of RAES

contracts to the percentage of agency

contracts it executed in the trading

crowd. The Commission finds that it is

consistent with the Act’s purpose for the

CBOE to take this step.

Under the two existing means of

allocation, the size of the order assigned

to a particular market maker is

determined randomly.18 Under the

entire order procedure, it is theoretically

possible for a market maker who

accounts for a significant percentage of

in-person agency contracts in a given

class of options to be randomly assigned

only a minimal number of contracts

with each turn of the Wheel.

Conversely, a market maker who

accounts for only a small percentage of

the in-person agency contracts traded in

the same option class could be

randomly allocated on RAES the

maximum number of contracts possible.

The 100 Spoke RAES Wheel, however,

will more closely allocate the

percentage of contracts that a particular

market maker can receive on a single

revolution of the Wheel to the

percentage of in-person agency contacts

(excluding RAES contracts) traded on

CBOE by that market maker. With the

100 Spoke RAES Wheel, market makers

will have a greater incentive to compete

effectively for orders in the crowd, and

this, in turn, should benefit investors

and promote the public interest.

The Commission also views the

‘‘wedge’’ system, which limits the

number of ‘‘spokes’’ each market maker

may be assigned consecutively, not to

impose any unnecessary burden on

competition, consistent with Section

6(b)(8) of the Act. The wedge system

will not effect the number of contracts

to which each market maker is entitled

for each revolution of the Wheel, but

only the timing of the assignment of

contracts to each market maker. The

wedge system ensures that each market

maker eligible to participate during a

particular review period will be

assigned at least some contracts before

market makers entitled to a greater

number of spokes are assigned all of

their contracts in a given revolution.

The wedge system also reduces the

exposure of market makers to market

risk by breaking up the distribution of

contracts into smaller groupings.

Federal Register / Vol. 65, No. 115 / Wednesday, June 14, 2000 / Notices 37445

19 15 U.S.C. 78s(b)(2).

20 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii).

4The transaction credit can be applied to any and

all changes imposed by the NASD or its non-selfregulatory organization affiliates. Any remaining

balance may be paid directly to the member.

It is important to stress that

implementation of the 100 Spoke RAES

Wheel will have no effect on the prices

offered to customers. Under CBOE Rule

6.8(a)(ii), RAES automatically provides

to each retail customer order its

execution price, generally determined

by the prevailing market quote at the

time of the order’s entry into the system.

The 100 Spoke RAES Wheel merely

provides for a different contract

allocation system than currently exists

for automatic execution of small retail

orders.

C. Pilot Program

The Commission is approving this

proposal on a nine-month pilot basis,

through February 28, 2001. As indicated

above, the Commission anticipates that

the 100 Spoke RAES Wheel will

encourage market makers to compete

effectively for order flow in the trading

crowds, thus benefiting investors and

serving the public interest. The

Commission, however, intends to

review the Exchange’s experience with

the 100 Spoke RAES Wheel during the

course of the pilot program.

IV. Conclusion

It is therefore ordered, pursuant to

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

proposed rule change (SR–CBOE–99–

40) is approved on a pilot basis, through

February 28, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14931 Filed 6–13–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42907; File No. SR–NASD–

00–32]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to Nasdaq’s

Transaction Credit Pilot Program

June 7, 2000.

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 June 6,

2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’

‘‘Association’’), through its wholly

owned subsidiary The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’), filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by Nasdaq. Nasdaq has

designated this proposal as one

establishing or changing a due, fee, or

other charge imposed by the Association

under Section 19(b)(3)(A)(ii) of the

Act, 3 which renders the proposal

effective upon filing with the

Commission. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq proposes to amend NASD

Rule 7010, System Services, to extend

Nasdaq’s transaction credit pilot

program for an additional six months for

Tape A reports, and reinstate for nine

months the pilot for Tape B reports. The

text of the proposed rule change is

below. Proposed new language is in

italics. Proposed deletions are in

brackets.

* * * * *

7010 System Services

(a)–(b) No Change

(c)

(1) No Change

(2) Exchange-Listed Securities Transaction

Credit. For a pilot period, qualified NASD

members that trade securities listed on the

NYSE and Amex in over-the-counter

transactions reported by the NASD to the

Consolidated Tape Association may receive

from the NASD transactions credits based on

the number of trades so reported. To qualify

for the credit with respect to Tape A reports,

an NASD member must account for 500 or

more average daily Tape A reports of overthe-counter transactions as reported to the

Consolidated Tape during the concurrent

calendar quarter. To qualify for the credit

with respect to Tape B reports, an NASD

member must account for 500 or more

average daily Tape B reports of over-thecounter transactions as reported to the

Consolidated Tape during the concurrent

calendar quarter. If an NASD member is so

qualified to earn credits based either on its

Tape A activity, or its Tape B activity, or

both, that member may earn credits from one

or both pools [the Tape A pool] maintained

by the NASD, each [such] pool representing

40% of the revenue paid by the Consolidated

Tape Association to the NASD for each of

Tape A and Tape B transactions. A qualified

NASD member may earn credits from the

pools [the Tape A pool] according to the

member’s pro rata share of the NASD’s overthe-counter trade reports in each of Tape A

and Tape B for each calendar quarter starting

with [January 1, 2000, and ending with the

calendar quarter starting on April 1, 2000]

July 1, 2000 for Tape A reports (April 1, 2000

for Tape B reports) and ending with the

calendar quarter starting on October 1, 2000.

* * * * *

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

Nasdaq proposes to extend until

December 31, 2000, its pilot program to

provide a transaction credit 4 to NASD

members that exceed certain levels of

trading activity in exchange-listed

securities. Nasdaq proposes to extend by

six months the pilot for over-the-counter

(‘‘OTC’’) trades in securities listed on

the New York Stock Exchange (‘‘NYSE’’)

(i.e., from July 1, 2000 to December 31,

2000) and re-institute and extend by

nine months the pilot for OTC trades in

securities listed on the American Stock

Exchange (‘‘Amex’’) (i.e. from April 1,

2000 to December 31, 2000). The NASD

established its transaction credit pilot to

find ways to lower investor costs

associated with trading listed securities,

and to respond to steps taken by other

exchanges that compete with Nasdaq for

investor order flow in those issues.

Nasdaq’s Third Market is a quotation,

communication, and execution system

that allows NASD members to trade

stocks listed on the NYSE and the

Amex. The Third Market competes with

regional exchanges like the Chicago

Stock Exchange (‘‘CHX’’) and the

Cincinnati Stock Exchange (‘‘CSE’’) for

retail order flow in stocks listed on the

NYSE and Amex. The NASD collects

quotations from broker-dealers that

trade these securities OTC and provides

such quotations to the Consolidated

Quotation System for dissemination.