9810 Federal Register / Vol. 72, No. 42 / Monday, March 5, 2007 / Notices 

23NASD has satisfied the five-day pre-filing 

requirement. 

24 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See NASD Rule 6610(d) (defining ‘‘OTC Equity 

Security’’). 

4Amendment No. 1 replaced and superseded the 

original filing in its entirety and Amendment No. 

2 replaced and superseded Amendment No. 1 in its 

entirety. 

5See Securities Exchange Act Release No. 54705 

(November 3, 2006), 71 FR 65863 (‘‘Notice’’). 

6See Letter from Shane E. Swanson, Director of 

Compliance, Automated Trading Desk, LLC, to 

Nancy M. Morris, Secretary, Commission, dated 

December 29, 2006. Although this letter was not 

submitted in response to SR–NASD–2005–146, the 

letter referred to the instant filing and expressed 

support for NASD’s proposal to require the lesser 

of $0.01 or 1⁄2 the spread of price improvement with 

respect to the implementation of Manning Rule 

protection to orders priced below $1.00. 

7The text of Amendment No. 3 is available at 

NASD, the Commission’s Public Reference Room, 

and http://www.nasd.com. 

8See NASD Rule 2110. 

9See Securities Exchange Act Release No. 52210 

(August 4, 2005), 70 FR 46897 (August 11, 2005) 

(SR–NASD–2004–089) (approving the expansion of 

IM–2110–2, which previously applied only to 

Nasdaq securities, to exchange-listed securities). 

See also NASD Notice to Members 05–64 (October 

2005) (announcing Commission approval of the 

amendments to IM–2110–2, which became effective 

on January 2, 2006). 

of filing or such shorter time as the 

Commission may designate if consistent 

with the protection of investors and the 

public interest; provided that NASD has 

given the Commission notice of its 

intent to file the proposed rule change, 

along with a brief description and text 

of the proposed rule change, at least five 

business days prior to the date of filing 

of the proposed rule change, or such 

shorter time as designated by the 

Commission.23

At any time within 60 days of the 

filing of such proposed rule change the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change 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 rulecomments@sec.gov. Please include File 

Number SR–NASD–2007–014 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2007–014. 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 

Room. Copies of the 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–2007–014 and 

should be submitted on or before March 

26, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.24

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–3744 Filed 3–2–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55351; File No. SR–NASD–

2005–146] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Amendment No. 3 to and Order 

Granting Accelerated Approval of a 

Proposed Rule Change as Modified by 

Amendment Nos. 2 and 3 Thereto To 

Expand the Scope of IM–2110–2 

Relating To Trading Ahead of 

Customer Limit Orders To Apply to All 

OTC Equity Securities 

February 26, 2007. 

I. Introduction 

On December 9, 2005, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) filed with the Securities and 

Exchange Commission (‘‘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 expand the 

scope of NASD Interpretive Material 

(‘‘IM’’) 2110–2, Trading Ahead of 

Customer Limit Order (‘‘IM–2110–2’’, 

which is commonly referred to as the 

‘‘Manning Rule’’), and any interpretive 

guidance thereunder, to include overthe-counter (‘‘OTC’’) equity securities.3

On September 26, 2006, NASD filed 

Amendment No. 1 to the proposed rule 

change, and on October 19, 2006, NASD 

filed Amendment No. 2 to the proposed 

rule change.4 The proposed rule change, 

as amended, was published for 

comment in the Federal Register on 

November 9, 2006.5 The Commission 

received one comment letter on the 

proposal, which supported the 

proposal.6 On February 6, 2007, the 

Exchange filed Amendment No. 3 to the 

proposed rule change.7 This order 

provides notice of Amendment No. 3 to 

the proposed rule change and approves 

the proposed rule change as modified by 

Amendment Nos. 2 and 3 on an 

accelerated basis. 

II. Description of the Proposal 

NASD’s Manning Rule generally 

prohibits an NASD member from 

trading for its own account in an 

exchange-listed security at a price that 

is equal to or better than an unexecuted 

customer limit order in that security, 

unless the member immediately 

thereafter executes the customer limit 

order at the price at which it traded for 

its own account or better. The legal 

underpinnings for the Manning Rule are 

a member’s fiduciary obligations and 

the requirement that a member must, in 

the conduct of its business, ‘‘observe 

high standards of commercial honor and 

just and equitable principles of trade.’’ 8

IM–2110–2 currently applies to 

exchange-listed securities, 9 but does not 

apply to OTC equity securities. 

NASD Rule 6541 extends the general 

principles of the Manning Rule to a 

subset of OTC equity securities—

specifically, those equity securities that 

are quoted on NASD’s OTC Bulletin 

Board (‘‘OTCBB’’). NASD Rule 6541, 

however, differs from IM–2110–2 in 


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Federal Register / Vol. 72, No. 42 / Monday, March 5, 2007 / Notices 9811 

10See Notice, supra note 5 (for a detailed 

discussion of the differences between NASD Rule 

6541 and IM–2110–2). 

11For the purposes of IM–2110–2, 

contemporaneous has been interpreted to require 

execution as soon as possible, but absent reasonable 

and documented justification, within one minute. 

See NASD Notices to Members 95–67 (August 1995) 

and 98–78 (September 1998). In contrast, NASD 

Rule 6541(d) provides that the contemporaneous 

execution should occur as soon as practicable, but 

in no event more than five minutes after the 

member has traded at a price superior to the held 

customer limit order. See NASD Notice to Members 

01–46 (July 2001). 

12Specifically, NASD Rule 6541(c) only requires 

that an order be 10,000 shares or more and greater 

than $20,000 in value, while IM–2110–2 requires 

that an order be 10,000 shares or more and greater 

than $100,000 in value. 

13Specifically, the price-improvement standard 

currently set forth in IM–2110–2 provides that, 

where a member is holding a customer limit order 

priced at or inside the inside market displayed in 

Nasdaq, the member may execute an incoming 

order on a proprietary basis without being obligated 

to execute the customer limit order if the member 

executes the incoming order at least $0.01 better 

than the price of the customer limit order. Further, 

if the customer limit order is priced outside the 

inside market displayed in Nasdaq, then the 

member must execute the incoming order at the 

next superior minimum quotation increment 

permitted by Nasdaq (currently $0.01). In contrast, 

NASD Rule 6541 provides that if the customer limit 

order is priced at or inside the current inside 

market, the price improvement is a minimum of the 

lesser of $0.01 or one-half (1⁄2) of the current inside 

spread. 

14See Securities Exchange Act Release No. 52210 

(August 4, 2005), 70 FR 46897 (August 11, 2005) 

(SR–NASD–2004–089). See also NASD Notice to 

Members 05–64 (October 2005). 

15See Notice, supra note 5, at 71 FR 65865. 

16NASD states that the term ‘‘OTC equity 

securities’’ does not include options. See NASD 

Rule 6610(d) (defining OTC equity security as any 

non-exchange-listed security and certain exchangelisted securities that do not otherwise qualify for 

real-time trade reporting). 

17 17 CFR 242.600(b)(47). 

18 15 U.S.C. 78o–3(b)(6). 

19 In approving this proposed rule change, as 

amended, 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). 

several respects.10 For example, while 

IM–2110–2 and NASD Rule 6541 both 

provide that a member is not deemed to 

have traded ahead of a customer limit 

order if the member provides a 

contemporaneous execution of the 

customer’s order, the two rules differ in 

how they define ‘‘contemporaneous.’’ 11

Other differences include the fact that 

NASD Rule 6541 applies a lower 

threshold requirement on the value of 

large-size limit orders for which a 

member can negotiate specific terms 

and conditions applicable to the 

acceptance of such orders 12 and IM–

2110–2 excludes marketable limit 

orders, whereas NASD Rule 6541 

provides no such exclusion. In addition, 

IM–2110–2 generally is applicable from 

9:30 a.m. to 6:30 p.m. Eastern Time, 

whereas NASD Rule 6541 applies only 

from 9:30 a.m. to 4 p.m. Eastern Time. 

IM–2110–2 and NASD Rule 6541 also 

differ in the minimum level of priceimprovement that a member must 

provide to trade ahead of an unexecuted 

customer limit order;13 and NASD Rule 

6541 does not require, as IM–2110–2 

does, that a member that has traded 

ahead of a customer limit order at a 

price that is more favorable than the 

customer limit order price pass along 

that price improvement to the customer 

limit order.14

In support of its proposal, NASD 

stated its belief that the distinctions in 

application between NASD Rule 6541 

and IM–2110–2 no longer make sense, 

and that customer limit orders in OTC 

equity securities and NMS stocks 

should be subject to the same order 

handling and customer protection 

requirements under the Manning 

Rule.15 Accordingly, NASD proposes to 

expand the scope of IM–2110–2 and any 

interpretive guidance thereunder to 

include all OTC equity securities.16 In 

addition, NASD proposes to adopt new 

standards relating to the minimum 

amount of price improvement necessary 

in order for a member to execute an 

incoming order on a proprietary basis 

when holding an unexecuted limit order 

in that same security and not be 

required to execute the held limit order. 

Specifically, for customer limit orders 

priced greater than or equal to $1.00 that 

are at or inside the best inside market, 

the minimum amount of price 

improvement required would be $0.01, 

and for customer limit orders priced less 

than $1.00 that are at or inside the best 

inside market, the minimum amount of 

price improvement required would be 

the lesser of $0.01 or one-half (1⁄2) of the 

current inside spread. Subsequently, in 

light of the proposed expansion of IM–

2110–2 to cover OTC equity securities, 

NASD proposes to repeal NASD Rule 

6541. 

NASD also proposes to delete the 

obsolete provisions in IM–2110–2 that 

prescribe the minimum level of priceimprovement for securities trading in 

non-decimalized fractions since equity 

securities no longer trade in fractions. In 

addition, NASD proposes to delete 

obsolete references in IM–2110–2, 

which limit portions of the Manning 

Rule’s applicability to Nasdaq-listed 

securities. Finally, given that the 

definition of ‘‘NMS stock’’ in Rule 

600(b)(47) of Regulation NMS 17

substantially covers all stocks listed on 

a national securities exchange, the 

proposal would replace references to the 

term ‘‘exchange-listed security’’ in IM–

2110–2 with the term ‘‘NMS stock.’’

The proposal would be subject to 

delayed effectiveness. In particular, as 

proposed in the Notice, NASD would 

announce the effective date of the 

proposed rule change in a Notice to 

Members to be published no later than 

60 days following Commission approval 

of this proposal. In recognition of the 

technological and systems changes the 

proposed rule change may require, 

NASD has noted that it will set the 

effective date of the amendments 

contained in this proposed rule change 

at 90 days following publication of the 

Notice to Members announcing 

Commission approval of this filing. 

III. Discussion and Commission 

Findings 

The Commission has reviewed 

carefully the proposed rule change and 

the comment letter and finds that the 

proposed rule change is consistent with 

the Act and the rules and regulations 

thereunder applicable to a national 

securities association, including the 

provisions of Section 15A(b)(6) of the 

Act,18 which requires, among other 

things, that NASD rules be designed to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, processing 

transactions in securities, and, in 

general, to protect investors and the 

public interest.19

Currently, IM–2110–2 prohibits an 

NASD member from trading for its own 

account in an exchange-listed security 

at a price that is equal to or better than 

an unexecuted customer limit order in 

that security, unless the member 

immediately thereafter executes the 

customer limit order at the price at 

which it traded for its own account or 

better. NASD Rule 6541 extends the 

general principles of IM–2110–2 to 

those OTC equity securities that are 

quoted on the OTCBB. As discussed 

above, NASD Rule 6541, however, 

differs from IM–2110–2 in several 

respects, including the applicable 

trading hours, time limits for 

‘‘contemporaneous’’ executions, and the 

threshold for individually-negotiable 

large-size orders. NASD’s proposal 

would revise IM–2110–2 to include 

OTC equity securities. The Commission 

believes that NASD’s proposal to apply 

the Manning Rule’s limit order 

protection requirements uniformly to 

NMS stocks and OTC equity securities 

is appropriate and should benefit 

customers who submit limit orders for 

OTC equity securities. 

NASD also proposes to amend the 

provisions relating to the amount of 

price-improvement necessary in order 


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9812 Federal Register / Vol. 72, No. 42 / Monday, March 5, 2007 / Notices 

20NASD also proposes to delete the provisions in 

IM–2110–2 that prescribe the minimum level of 

price-improvement for securities trading in nondecimalized fractions since equity securities no 

longer trade in fractions. In addition, NASD 

proposes to delete references in IM–2110–2, which 

limit portions of the Manning Rule’s applicability 

to Nasdaq-listed securities. 

21The Manning Rule provides that a member is 

not deemed to have traded ahead of a customer 

limit order if the member provides a 

contemporaneous execution of the customer’s 

order. 

22See Securities Exchange Act Release No. 44165 

(April 6, 2001), 66 FR 19268 (April 13, 2001) (SR–

NASD–2001–27). See also Securities Exchange Act 

Release No. 54953 (December 18, 2006), 71 FR 

77429 (December 26, 2006) (SR–NASD–2006–134) 

(extending the pilot until June 30, 2007). 

23See Notice, supra note 5. 

24See supra note 6 (citing to the comment letter). 

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

26 17 CFR 200.30–3(a)(12). 

for a member to execute an incoming 

order on a proprietary basis when 

holding an unexecuted customer limit 

order in that same security. The 

proposal would revise and make 

uniform the minimum priceimprovement standards for all NMS 

stocks and OTC equity securities.20

With respect to the minimum level of 

price-improvement that a member must 

provide in order to trade ahead of an 

unexecuted customer limit order,21

NASD proposes that, for customer limit 

orders priced greater than or equal to 

$1.00 that are at or inside the inside 

market, the minimum amount of price 

improvement required would be $0.01. 

For customer limit orders priced less 

than $1.00 that are at or inside the 

inside market, the minimum amount of 

price improvement required would be 

the lesser of $0.01 or one-half (1⁄2) of the 

current inside spread. For customer 

limit orders priced outside the inside 

market, the member would be required 

to execute the incoming order at a price 

at or inside the inside market for the 

security. Lastly, for customer limit 

orders in securities for which there is no 

published inside market, the minimum 

amount of price improvement required 

is $0.01. The Commission believes that 

the proposed uniform price 

improvement standards are appropriate 

and reasonably designed to protect 

customer limit orders in both NMS 

stocks and OTC equity securities. The 

Commission also believes that the 

proposal is reasonably designed to 

remove obsolete references to price 

improvement standards in nondecimalized fractions, as well as 

references to portions of the Manning 

Rule that were formerly applicable only 

to securities quoted on Nasdaq. 

For the reasons described above, the 

Commission believes that NASD’s 

proposed rule change promotes the 

protection of investors and the public 

interest by expanding the scope of IM–

2110–2 to apply to NMS stocks and OTC 

equity securities. Further, in expanding 

the application of Manning obligations 

under IM–2110–2 to include OTC equity 

securities and establishing uniform 

standards for both NMS stocks and OTC 

equity securities, the Commission 

believes that the proposal will enhance 

the opportunity for investors to receive 

superior-priced limit order executions 

in OTC equity securities. 

NASD has requested that the 

Commission find good cause for 

approving the proposed rule change 

prior to the thirtieth day after the date 

of publication of notice of Amendment 

No. 3 in the Federal Register. In 

Amendment No. 3, NASD requested that 

the Commission grant permanent 

approval of the price-improvement 

standards for decimalized securities 

contained in IM–2110–2 that currently 

apply on a pilot basis.22 The 

Commission notes that the proposal, as 

modified by Amendment No. 2, was 

published for notice and comment,23

and that the Commission received one 

comment letter in support of the 

proposal.24 Amendment No. 3 simply 

seeks to clarify the status of the 

provision of IM–2110–2 concerning 

price improvement standards for 

decimalized securities, which is 

proposed to be amended as part of the 

instant proposed rule change. The 

Commission believes that permanent 

approval of the pilot is appropriate 

because the minimum price 

improvement standards, including the 

revisions contained in the instant 

proposed rule change, are reasonably 

designed to protect customer limit 

orders in both NMS stocks and OTC 

equity securities. In addition, the 

Commission does not believe that 

Amendment No. 3 raises any new or 

novel issues. Based on the above, the 

Commission finds good cause to 

accelerate approval of the proposed rule 

change, as modified by Amendment 

Nos. 2 and 3. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change 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 rulecomments@sec.gov. Please include File 

Number SR–NASD–2005–146 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE, Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2005–146. 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 

Room. Copies of the 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–2005–146 and 

should be submitted on or before March 

26, 2007. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,25 that the 

proposed rule change (SR–NASD–2005–

146), as modified by Amendment Nos. 

2 and 3, be, and hereby is, approved on 

an accelerated basis. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.26

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–3748 Filed 3–2–07; 8:45 am] 

BILLING CODE 8010–01–P 


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