4368 Federal Register / Vol. 62, No. 19 / Wednesday, January 29, 1997 / Notices

5 17 CFR 200.30–3(a)(12).

1See letter from Robert E. Aber, Vice President

and General Counsel, Nasdaq, to Katherine A.

England, Assistant Director, SEC, dated January 17,

1997. Amendment No. 1 corrects typographical

errors in the text of the proposed rule change.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–2100 Filed 1–28–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38196; File No. SR–NASD–

96–51]

Self-Regulatory Organizations; Notice

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Amending Rule 11890

Regarding Clearly Erroneous

Transactions

January 22, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on December 17, 1996,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD and

The Nasdaq Stock Market, Inc.

(‘‘Nasdaq’’). On January 17, 1997, the

NASD and Nasdaq submitted to the

Commission Amendment No. 1 to the

proposed rule change.1 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

Pursuant to Section 19(b)(1) under the

Act and Rule 19b–4 thereunder, the

NASD and Nasdaq are submitting this

rule filing to amend Rule 11890, the rule

related to clearly erroneous transactions.

The proposed amended language for

Rule 11890 is set forth below. [new text

is italicized; deleted text is bracketed].

11890. Clearly Erroneous [Trades]

Transactions

(a) Authority to [Declare] Review

Transactions [Void]

(1) [In circumstances in which the

Association deems it necessary to

maintain a fair and orderly market and

to protect investors and the public

interest, the Association may, pursuant

to the procedures set forth in paragraph

(b) below, declare any transaction

arising out of the use or operation of any

automated quotation, execution, or

communication system owned or

operated by the Association or any

subsidiary thereof and approved by the

Commission, null and void on the

grounds that one or more of the terms

of the transaction are clearly erroneous.

(2)] For the purposes of this Rule, the

terms of a transaction are clearly

erroneous when there is an obvious

error in any term, such as price, number

of shares or other unit of trading, or

identification of the security.

(2) Officers of The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) designated by

the President of Nasdaq shall, pursuant

to the procedures set forth in paragraph

(b) below, have the authority to review

any transaction arising out of the use or

operation of any automated quotation,

execution, or communication system

owned or operated by Nasdaq and

approved by the Commission. A Nasdaq

officer shall review transactions with a

view toward maintaining a fair and

orderly market and the protection of

investors and the public interest. Based

upon this review, the Officer shall

decline to act upon a disrupted

transaction if the officer believes that

the transaction under dispute is not

clearly erroneous, or, if the officer

determines the transaction in dispute is

clearly erroneous, he or she shall

declare that the transaction is null and

void or modify one or more terms of the

transaction. When adjusting the terms of

a transaction, the Nasdaq officer shall

seek to adjust the price and/or size of

the transaction to achieve an equitable

rectification of the error that would

place the parties to a transaction in the

same position, or as close as possible to

the same position, that they would have

been in had the error not occurred.

Nasdaq shall promptly provide oral

notification of a determination to the

parties involved in a disputed

transaction and thereafter issue a

written confirmation of the

determination.

(b) Procedures for Reviewing [Declaring

a] Transactions [Void]

(1) Any member or person associated

with a member that seeks to have a

transaction reviewed [declared null and

void] pursuant to paragraph (a) hereof,

shall submit a written complaint, via

facsimile or otherwise, to Nasdaq

Market Operations in accordance with

the following time parameters:

(A) for transactions occurring prior to

10:00 a.m., Eastern Time, complaints

must be submitted 10:30 a.m., Eastern

Time; and

(B) for transactions occurring on or

after 10:00 a.m., Eastern Time,

complaints must be submitted within

thirty minutes.

[notify an officer of the Association

designated by the President of the

transaction during Nasdaq operating

hours on the same business day the

transaction occurs, and shall provide

such official all facts and information

necessary for a determination under

paragraph (a). Information

communicated orally shall be confirmed

promptly in writing.]

(2) Once a complaint has been

received in accord with subparagraph

(b)(1) above:

(A) the complainant shall have up to

thirty (30) minutes, or such longer

period as specified by Nasdaq staff, to

submit any supporting written

information concerning the complaint

necessary for a determination under

paragraph (a)(2), via facsimile or

otherwise;

(B) the counterparty to the trade shall

be verbally notified of the complaint by

Nasdaq staff and shall have up to thirty

(30) minutes, or such longer period as

specified by Nasdaq staff, to submit any

supporting written information

concerning the complaint necessary for

a determination under paragraph (a)(2),

via facsimile or otherwise; and

(C) either party to a disputed trade

may request the written information

provided by the other party pursuant to

this subparagraph.

(3) Notwithstanding paragraph (b)(2)

above, once a party to a disputed trade

communicates that it does not intend to

submit any further information

concerning a complaint, the party may

not thereafter provide additional

information unless requested to do so by

Nasdaq staff. If both parties to a

disputed trade indicate that they have

no further information to provide

concerning the complaint before their

respective thirty-minute information

submission period has elapsed, then the

matter may be immediately presented to

a Nasdaq officer for a determination

pursuant to paragraph (a)(2) above.

(4) Each member and/or person

associated with a member involved in

the transaction shall provide the

Association with any information

requested by the Association in order to

resolve the matter on a timely basis

notwithstanding the time parameters set

forth in paragraph (b)(2) above.

(5) Once a party has applied to

Nasdaq for review, the transaction shall

be reviewed and a determination

rendered, unless both parties to the

transaction agree to withdraw the

application for review prior to the time

a decision is rendered pursuant to

paragraph (a)(2).
Federal Register / Vol. 62, No. 19 / Wednesday, January 29, 1997 / Notices 4369

2See, e.g., New York Stock Exchange Rule 75.

[(2) An officer of the Association

designated by the President shall review

the information submitted and

determine whether the transaction in

dispute is clearly erroneous and

detrimental to the maintenance of a fair

and orderly market and the protection of

investors and the public interest and

may declare that the transaction be null

and void. The official may decline to act

upon a disputed transaction if he or she

believes that action is unnecessary or

inappropriate. The Association shall

immediately issue a written

determination of the matter, setting

forth the actions taken and the reasons

therefor.]

(c) Procedures for Reviewing

Transactions Executed During System

Disruptions or Malfunctions

In the event of a disruption or

malfunction in the use or operation of

any automated quotation, execution, or

communications system owned or

operated by Nasdaq and approved by

the Commission, Nasdaq, acting

through an officer designated by the

President of Nasdaq pursuant to

paragraph (a)(2), may, on its own

motion pursuant to the standards set

forth in paragraph (a), declare

transactions arising out of the use or

operation of such systems during the

period of such disruption or

malfunction null and void or modify the

terms of these transactions; provided

that, in the absence of extraordinary

circumstances, a Nasdaq officer must

take action pursuant to this paragraph

within thirty (30) minutes of detection of

the erroneous transaction(s), but in no

event later than 6:00 p.m., Eastern

Time, on the next trading day following

the date of the trade at issue. When

Nasdaq takes action pursuant to this

subparagraph, the member firms

involved in the transaction shall be

notified as soon as is practicable and

shall have a right to appeal such action

in accordance with paragraph (d)(1)

below.

(d) [(3)] Review by the Market

Operations Review Committee

(‘‘MORC’’)

(1) A member or person associated

with a member may appeal a

determination made under paragraphs

(a)(2) or (c) [the determination under

subparagraph (2)] to the MORC [Market

Operations Review Committee]

provided such appeal is made in

writing, via facsimile or otherwise,

within [four market hours of] thirty (30)

minutes after the member or person

associated with a member receives

verbal notification of such

determination. [For the purposes of this

Rule, ‘‘market’’ hours shall mean those

hours the Nasdaq market is open in the

United States, Eastern Time.] Once a

written appeal has been received, the

counterparty to the trade will be notified

of the appeal and both parties shall be

able to submit any additional

supporting written information, via

facsimile or otherwise, up until the time

the appeal is considered by the

Committee. Either party to a disputed

trade may request the written

information provided by the other party

during the appeal process. An appeal to

the Committee shall not operate as a

stay of the determination made

pursuant to paragraph (a)(2) above.

Once a party has appealed a

determination to the Committee, the

determination shall be reviewed and a

decision rendered, unless both parties to

the transaction agree to withdraw the

appeal prior to the time a decision is

rendered by the Committee. Upon

consideration of the record, and after

such hearings as it may in its discretion

order, the Committee, pursuant to the

standards set forth in paragraph (a),

shall affirm, modify, reverse, [dismiss,]

or remand the determination made

under [sub]paragraph (a)(2) or (c) above.

(2) [(4)] The decision of the

Committee shall be final and binding

upon any member or person associated

with a member and shall constitute final

Association action on the matter in

issue. Any adverse determination by a

Nasdaq officer pursuant to paragraph

(a)(2) or (c) or any adverse decision by

the Committee pursuant to paragraph

(d)(1) shall be rendered without

prejudice as to the rights of the parties

to the transaction to submit their

dispute to arbitration.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NASD and 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. The

NASD and Nasdaq have 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

The NASD and Nasdaq have

determined to amend Rule 11890, the

NASD’s rule governing the review and

resolution of erroneous transaction

complaints. In general, the proposed

amendments provide greater specificity

regarding declarations of erroneous

transactions. As explained in more

detail below, the proposed amendments

would:

• Provide Nasdaq officials the

authority to efficiently and

expeditiously adjust the price and size

of erroneous transactions (currently

Nasdaq officials may only nullify,

affirm, or decline to act with respect to

an allegedly erroneous transaction);

• Shorten the time period to submit

erroneous transactions complaints from

same day submission to submission

within 30 minutes of the transaction;

• Clarify the procedures by which the

parties to an allegedly erroneous

transaction may submit written

information concerning the transaction;

• Provide Nasdaq officials the

requisite authority to cancel or adjust

erroneous transactions on their own

motion;

• Discourage regulatory arbitrage by

prohibiting a member from withdrawing

an erroneous transaction complaint

unless the other party to the trade agrees

to withdraw the matter;

• Shorten the time period to appeal

an erroneous transaction determination

from four ‘‘market’’ hours to thirty

minutes; and

• Clarify that an appeal of an

erroneous transaction determination

does not operate as a stay of the

determination.

A. Background

In April 1990, the SEC approved an

NASD proposal to add Section 70 to the

Uniform Practice Code (now NASD rule

11890) to permit the NASD to declare

clearly erroneous transactions null and

void if they arise out of the use or

operation of any automated quotation,

execution, or communication system

owned or operated by the NASD.

Previously, the NASD had no authority

to cancel a transaction, even if one or

more terms of the transaction clearly

was in error. For example, one of the

catalysts for adopting Rule 11890 was

that a member had complained that a

trade executed over Nasdaq’s SelectNet

service was ten points away from the

inside quotation, clearly an error, but

the contra party refused to cancel the

trade. With the adoption of rule 11890,

the NASD now has the ability to resolve

disputes involving obvious errors in an

expeditious manner, akin to an

exchange floor governor ruling.2
4370 Federal Register / Vol. 62, No. 19 / Wednesday, January 29, 1997 / Notices

3 In essence, the rule grants a free call option

when a potential complainant sold stock and a free

put option when the potential complainant bought

stock.

4A list of the Nasdaq officials that have the

authority to cancel or modify the terms of a

transaction shall be maintained by the Nasdaq

Corporate Secretary.

Briefly, the current procedures for

canceling a clearly erroneous trade

require one party to contact the NASD

on trade day and in writing state the

basis for the requested action.

Thereafter, an officer of Nasdaq: (1)

advises the contra party to the trade that

the transaction is in dispute; (2) obtains

additional information concerning the

transaction, if necessary; (3) reviews the

trade information; and (4) makes a

determination as to whether the trade

should stand or be broken. If either

party wishes to appeal the staff

determination, it may seek review by

the MORC.

While the current Erroneous

Transaction procedures have served as a

vehicle to correct or cancel erroneous

transactions, experience with the

operation of Rule 11890 has shown that

the Rule can be improved to enhance

the fairness and expediency with which

erroneous transaction complaints are

resolved. Experience with the Rule also

has revealed shortcomings in the scope

of Nasdaq’s authority to take action with

respect to clearly erroneous

transactions. In particular, there have

been instances in the past where it

would have been appropriate for Nasdaq

to declare a series of transactions

erroneous even though the parties to the

transactions were immediately unaware

of any error. The proposed changes to

the rule are intended to eliminate the

shortcomings and to provide additional

capabilities to resolve clearly erroneous

transactions.

B. Proposed Changes to Rule 11890

(i) Authority of Nasdaq Officers to

Adjust the Terms of Erroneous

Transactions: While Nasdaq officers and

the MORC both have the authority to

nullify, affirm, or decline to act with

respect to an allegedly erroneous

transaction, only the MORC can

presently adjust the terms of an

erroneous transaction. In order to

enhance the efficiency with which

erroneous transaction disputes are

resolved, it is appropriate to grant

Nasdaq officers the requisite authority

with respect to allegedly erroneous

transactions that the MORC possesses.

Accordingly, the NASD and Nasdaq

propose that Rule 11890 be amended to

afford Nasdaq officers the authority to

adjust the terms of a clearly erroneous

transaction. In particular, the NASD and

Nasdaq believe Nasdaq officers should

be able to adjust the price and/or size of

a transaction to achieve an equitable

correction of an error that would place

the parties to the transaction in the same

position, or as close as possible to the

same position, that they would have

been in had the error not occurred.

(ii) Time Parameters For the

Submission of Erroneous Transaction

Complaints: Rule 11890 presently

provides that a member can submit an

erroneous transaction complaint

‘‘during Nasdaq operating hours on the

same business day the transaction

occurs. . . .’’ Because members can file

erroneous transaction complaints any

time during the trading day, however,

the rule has been used by some firms to

seek to cancel trades that were not

erroneous at the time of execution, but

which became unprofitable due to

subsequent market movement. For

example, when a trade occurs on

SelectNet at 10:00 a.m. and a party does

not complain of an error until 5:00 p.m.,

the complainant has had the

opportunity to watch for positive or

negative market movements, prior to

requesting NASD action. If the market

moves in a direction that is unfavorable

to the trade, the member will contact the

NASD to cancel the trade after the close

of the market, leaving the other side of

the transaction at risk, without giving

adequate notice of the disputed trade in

close proximity to the time of

execution.3

Accordingly, the NASD and Nasdaq

believe that Rule 11890 should be

amended to require the timely

submission of notifications of allegedly

erroneous transactions. The NASD and

Nasdaq are proposing two different time

periods depending upon the time of day

when the allegedly erroneous

transaction occurred to take into

account the peak trading period that

occurs at the market’s opening. Because

of the pace and volume of trades that

occur in the first half hour of trading

each morning, the proposal establishes

a separate timeframe for reporting

clearly erroneous transactions that occur

between 9:30 and 10:00. Thus,

notifications would be required

according to the following time table:

(a) for transactions occurring prior to

10:00 a.m., Eastern Time, complaints

must be submitted by 10:30 a.m.,

Eastern Time; and

(b) for transactions occurring at or

after 10:00 a.m., Eastern Time,

complaints must be submitted within

thirty minutes.

In addition, the NASD proposes to

amend Rule 11890 to clarify several

procedural aspects concerning the

submission of erroneous transaction

complaints. Specifically, the

amendments would clarify that:

(a) a complaint will not be deemed to

have been submitted until Market

Operations receives a written complaint,

via facsimile or otherwise;

(b) once a timely complaint is

received, a complainant will have up to

thirty minutes to submit any supporting

written information concerning the

complaint, via facsimile or otherwise;

(c) once a timely complaint is

received, the counter-party will be

notified by Market Operations of the

complaint and afforded a thirty-minute

period to submit any supporting written

information concerning the disputed

trade, via facsimile or otherwise;

(d) either party to a disputed trade

may request the written information

submitted by the other party;

(e) notwithstanding the thirty-minute

period to submit information, once a

party to a disputed trade communicates

that it has no further information to

provide, it may not thereafter provide

additional information unless requested

to do so by the staff; and

(f) if both parties to a disputed trade

indicate that they have no further

information to provide concerning the

complaint before their respective thirtyminute information submission period

has elapsed, then the matter may be

immediately presented to a Nasdaq

officer for a determination.

(iii) Authority of Nasdaq to Cancel or

Adjust Clearly Erroneous Trades on its

Own Motion: Presently, only members

can seek to have an allegedly erroneous

transaction nullified. There have been

occasions, however, where Nasdaq

system malfunctions have caused

erroneous trades. Accordingly, in order

to promote fair and orderly markets, the

NASD and Nasdaq believe it would be

appropriate to provide designated

Nasdaq officials the authority to cancel

or modify the terms of transactions in

the event of a disruption or malfunction

in the use or operation of any automated

quotation, execution, or communication

system owned or operated by Nasdaq.4

Under this provision, the NASD and

Nasdaq also believe such senior officials

should be authorized to cancel or adjust

an erroneous transaction on their own

motion within thirty minutes of

detection of the erroneous transaction,

absent extraordinary circumstances, but

in no event later than 6:00 p.m. on the

next trading day after the date of the

trade(s) in dispute. As with any other

erroneous transaction determination,

members would have the right to appeal

such actions to the MORC.

(iv) Withdrawal of Erroneous

Transaction Complaints: Rule 11890
Federal Register / Vol. 62, No. 19 / Wednesday, January 29, 1997 / Notices 4371

currently permits a member to withdraw

an erroneous transaction complaint at

any time. Because there are no

restrictions on when a complaint can be

withdrawn, market participants have in

the past withdrawn their complaints

when the market moved in their favor

subsequent to filing the complaint.

Accordingly, in order to facilitate the

maintenance of fair and orderly markets

and the equitable resolution of

erroneous transaction disputes, the

NASD and Nasdaq believe that Rule

11890 should be amended to prohibit

the withdrawal of a complaint or an

appeal of an erroneous transaction

determination unless both parties to the

trade agree to withdraw the matter.

(v) Time Parameter to Appeal

Erroneous Transaction Determinations:

Presently, members have four ‘‘market’’

hours to appeal an erroneous

transaction determination. This period

of time is too long in that it unduly

extends the period of time that both

parties to the trade are subject to market

risk. Accordingly, the NASD has

proposed that, once a member has

received verbal notification of an

erroneous transaction determination

from the staff, it shall have thirty

minutes to appeal the determination.

The NASD and Nasdaq also propose

that Rule 11890 should be amended to

clarify that once a written appeal has

been received, the counter-party to the

trade will be notified of the appeal and

both parties will be able to submit any

additional supporting written

information up until the time the appeal

is considered by the Committee. In

addition, the NASD and Nasdaq believe

that the Rule should be amended to

provide that either party to a disputed

trade may request the written

information provided by the other party

during the appeal process.

(vi) Clarification of the Appeal

Process for Erroneous Transaction

Determinations: In order to clarify the

current operation of the appeal process

for erroneous transaction

determinations, Rule 11890(b)(3) should

be amended to provide that:

(a) an appeal of an erroneous

transaction determination does not

operate as a stay of the initial ruling;

and

(b) any decisions by the MORC or the

staff are rendered without prejudice as

to the rights of the parties to seek

arbitration of the disputed transactions.

In proposing these rule changes, the

NASD and Nasdaq believe that the

process for resolving erroneous

transaction complaints will become

fairer, more efficient, and more timely,

thereby promoting the maintenance of

fair and orderly markets and exposing

the parties to an allegedly erroneous

transaction to less market risk. In

addition, allowing Nasdaq officials to

cancel or adjust erroneous transactions

on their own motion in the event a

disturbance or malfunction with a

Nasdaq system will serve to protect the

interests of investors. Accordingly, the

NASD and Nasdaq believe that the

proposed rule change is consistent with

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

that it promotes the protection of

investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD and Nasdaq do not believe

that the proposed rule change will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. By order approve such proposed

rule change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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 such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–96–51 and should be

submitted by February 19, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–2099 Filed 1–28–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

Office of the Secretary

[Public Notice 2506]

Extension of the Restriction on the Use

of United States Passports for Travel

to, in or Through Lebanon

On January 26, 1987, pursuant to the

authority of 22 U.S.C. 211a and

Executive Order 11295 (31 FR 10603),

and in accordance with 22 CFR

51.73(a)(3), all United States passports,

with the exception of passports of

immediate family members of hostages

in Lebanon, were declared invalid for

travel to, in or through Lebanon unless

specifically validated for such travel.

This action was taken because the

situation in Lebanon was such that

American citizens there could not be

considered safe from terrorist acts, and

has since been periodically renewed.

Although security conditions in

Lebanon continue to improve, the

situation there has led me to conclude

that Lebanon remains an area

‘‘. . . where there is imminent danger

to the public health or the physical

safety of United States travelers’’ within

the meaning of 22 U.S.C. 211a and 22

CFR 51.73(a)(3).

Accordingly, all United States

passports shall remain invalid for travel

to, in, or through Lebanon unless

specifically validated for such travel

under the authority of the Secretary of

State.

This Public Notice shall be effective

upon publication in the Federal

Register and shall expire at midnight

July 31, 1997, unless extended or sooner

revoked by Public Notice. Upon

publication, this Public Notice shall

supersede Public Notice 2429,

published August 22, 1996 (61 FR

43395).