Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56217

36See supra note 11.

37 15 U.S.C. 78s(b)(2).

38 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Leonard Mayer, President, Mayer

& Schweitzer, Inc., to Jonathan G. Katz, Secretary,

Commission, dated September 12, 1997 (‘‘Mayer

letter’’), and letter from Paul Chalmers, Senior Vice

President, International Trading, Canaccord Capital,

to Jonathan G. Katz, Secretary, Commission, dated

September 17, 1997 (‘‘Canaccord letter’’).

4See Securities Exchange Act Release No. 25637

(May 2, 1988), 53 FR 16488 (May 9, 1988).

5 ‘‘Interpretation of the Board of Governors—

Execution of Retail Transactions in the Over-theCounter Market.’’

6The best execution interpretation in Article III,

Section 1 of the NASD’s Rules of Fair Practice was

converted into NASD Rule 2320 in connection with

the NASD’s Manual revision project. See Securities

Exchange Act Release No 36698 (January 11, 1996),

61 FR 1419 (January 19, 1996.)

7See NASD Rule 2320(a).

8Schedule H of the By-laws required NASD

members executing principal transactions in nonNasdaq securities to report price and volume data

for the days on which their sales or purchases

exceeded 50,000 shares or $10,000. In 1993,

member obligations under Schedule H were

modified or eliminated as a result of the NASD

adopting real-time reporting of transactions for nonNasdaq securities. See Securities Exchange Act

Release No. 32647 (July 16, 1993), 58 FR 39262

(July 22, 1993).

9On March 31, 1997, the SEC granted permanent

approval of the OTC Bulletin Board. See Securities

Exchange Act Release No. 38456 (March 31, 1997),

62 FR 16635 (April 7, 1997).

10See Securities Exchange Act Release No. 27975

(May 1, 1990), 55 FR 19123 (May 8, 1990).

11These changes include: requiring that all priced

quotations entered by market makers in domestic

securities be firm for at least one trading unit (see

Securities Exchange Act Release No. 29261 (May

31, 1991), 56 FR 29297 (June 26, 1991)); calculating

inside quotes for individual securities and

disseminating this information through vendors;

Continued

Finally, the Commission notes that

CSE has submitted surveillance

procedures for the trading of PDRs,

specifically SPDRs and MidCap SPDRs,

and believes that those procedures,

which incorporate and rely upon

existing CSE surveillance procedures

governing equities, are adequate under

the Act.

The Commission finds that CSE’s

proposal contains adequate rules and

procedures to govern the trading of PDR

securities, including trading SPDRs and

MidCap SPDRs pursuant to UTP.

Specifically, PDRs are equity securities

that will be subject to the full panoply

of CSE rules governing the trading of

equity securities on CSE, including,

among others, rules governing the

priority, parity and precedence of orders

and the responsibilities of specialists. In

addition, CSE has developed specific

listing and delisting criteria for PDRs

that will help to ensure that the markets

for PDRs will be deep and liquid. As

noted above, CSE’s proposal provides

for trading halt procedures governing

PDRs. Finally, the Commission notes

that CSE has stated that Rule 3.7,

Recommendations to Customers, will

apply to the trading of PDRs in general,

and SPDRs and MidCap SPDRs, in

particular.

The Commission finds good cause for

approving the proposed rule change

prior the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. The Commission

believes that accelerated approval of the

proposal is appropriate because it is

very similar to CHX’s previously

approved proposal covering the listing

and trading of PDRs in general, and

SPDRs and MidCap SPDRs, in

particular.36 As such, the Commission

believes that the proposed rule change

does not raise any new regulatory

concerns or issues.

It is therefore ordered, pursuant to

Section 19(b)(2) 37 that the proposed

rule change is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.38

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–28572 Filed 10–28–97; 8:45 am]

BILLING CODE 8010–-01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39266; File No. SR–NASD–

97–42)]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change to Amend

NASD Rule 2320(g) to Provide

Authority to the Staff of NASD

Regulation to Grant Exemptions From

Such Provision

October 22, 1997.

I. Introduction

On June 17, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) submitted

to the Securities and Exchange

commission (‘‘Commission’’), pursuant

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

Exchange Act of 1934 (‘‘Exchange

Act’’) 1 and Rule 19b–4 thereunder,2 a

proposed rule change to amend NASD

Rule 2320(g) to provide the staff of

NASD Regulation authority to grant

exemptions from such provision.

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

38936 (August 14, 1997), 62 FR 44503

(August 21, 1997). Two comment letters

were received on the proposal.3

II. Description

NASD Rule 2320(g) (‘‘The Three

Quote Rule’’ or ‘‘Rule’’) was adopted on

May 2, 1998 4 as an amendment to the

NASD’s best execution interpretation 5

under Article III, Section 1 of the

NASD’s Rules of Fair Practice.6 The

Three Quote Rule was adopted in

connection with the NASD’s efforts to

develop a nationwide automated market

surveillance program for non-Nasdaq,

over-the-counter (‘‘OTC’’) securities,

commonly referred to as ‘‘pink sheet’’

stocks, and was designed to create a

standard to help assure that members

would fulfill their best execution

responsibilities to customers in nonNasdaq securities, especially

transactions involving relatively illiquid

securities with non-transparent prices.

The Rule expanded a member’s best

execution obligation to customers by

setting forth additional requirements for

customer transactions in non-Nasdaq

securities. In particular, the Rule

requires members that execute

transactions in non-Nasdaq securities on

behalf of customers to contact a

minimum of three dealers (or all dealers

if there are three or less) to obtain

quotations to enable them to determine

the best inter-dealer market. Each

member is generally required to use

reasonable diligence to ascertain this

best inter-dealer market for a security,

and to buy or sell in that market so that

the resultant price to the customer is as

favorable as possible under prevailing

market conditions.7

Concurrent with these activities, the

Commission also approved Schedule H

to the NASD’s By-Laws, which

established an electronic system of

mandatory price and volume reporting

for the OTC non-Nasdaq securities.8 On

May 1, 1990, the Commission issued an

order approving the operation of the

NASD’s OTC Bulletin Board Display

Service (‘‘OTC Bulletin Board’’) for a

pilot term of one year.9 The NASD

introduced the OTC Bulletin Board to

allow NASD eligible members to enter,

update and retrieve quotation

information on a real-time basis in nonNasdaq securities.10

Since the establishment of the OTC

Bulletin Board, significant market,

regulatory and technology related

improvements have occurred in the

non-Nasdaq marketplace.11 In
56218 Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices

and establishing larger minimum-size requirements

for market makers’ quotes in domestic securities.

12See Securities Exchange Act Release No. 32647

(July 16, 1993), 58 FR 39262 (July 22, 1993).

13On October 15, 1990, the Securities

Enforcement Remedies and Penny Stock Reform

Act of 1990 (‘‘Reform Act’’) was signed into law.

Among other things, the Reform Act amended the

Exchange Act by adding Section 17B, which

requires the Commission to facilitate the

development of one or more automated quotation

systems for the collection and dissemination of

information for penny stocks.

14See Rules 15g–1 through 15g–9 under the

Exchange Act, 17 CFR 240.15g–1 through 240.15g–

9.

15 ‘‘Penny Stock’’ is defined under Rule 3a51–1 of

the Exchange Act, 17 CFR 240.3a51–1. 16See Mayer letter, supra note 3.

17See Canaccord letter, supra note 3.

18 15 U.S.C. 78o–3(b)(6).

19 15 U.S.C. 78O–3(b)(9).

20 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

21 In its proposal, the NASD stated that some

member broker-dealers who are active in the nonNasdaq market claim that adherence to the three

quote requirement may, in certain situations, have

a negative impact on a member’s ability to satisfy

its best execution obligations, due to time delays

involved in contacting and collecting quotations

from three separate dealers. In addition, the NASD

noted that some members question whether the

Three Quote Rule should continue to apply to all

customer transactions in non-Nasdaq securities in

light of the technological and regulatory

improvements to the non-Nasdaq marketplace and

to the OTC Bulletin Board, over the past seven

years. However, there are many non-Nasdaq

securities that only trade in the Pink Sheets.

22The Three Quote Rule applies to transactions

in all non-Nasdaq securities. A non-Nasdaq security

is defined in NASD Rule 6710 as ‘‘any equity

particular, the NASD has implemented

enhancements to the OTC Bulletin

Board to increase the reliability of

information contained therein. Most

recently, in July 1993, the Commission

approved an NASD rule change to

implement real-time trade reporting for

members’ OTC transactions in certain

non-Nasdaq equity securities,12 and in

April 1994, the NASD commenced

realtime dissemination of transaction

reports through the Nasdaq network and

the networks of commercial vendors,

providing member firms and their

customers access to last-sale price and

volume information for these securities

throughout the business day.

The OTC Bulletin Board meets the

requirements of an ‘‘automated

quotation system’’ as the characteristics

of such system Ware described in

Section 17B of the Exchange Act.13 As

such, the OTC Bulletin Board has

assisted NASD broker-dealers in

complying with certain disclosure

regulations under Section 15(g) of the

Exchange Act (‘‘the Penny Stock

Rules’’).14 The OTC Bulletin Board was

also designed to help deter fraudulent

and manipulative trading practices in

penny stocks, 15 in part through realtime transaction reporting.

Technological improvements to the OTC

Bulletin Board have enhanced the

NASD’s surveillance capabilities to,

among other things, permit

computerized analyses of market

markers’ quotation entries and reported

transactions.

The proposed change to Rule 2320(g)

will provide for general exemptive

authority under the Rule. The NASD

Regulation staff, upon written request

and taking into consideration all

relevant factors, will be able to exempt

from Rule 2320 any transaction or class

of transactions, either unconditionally

or on specified terms, if the exemption

is consistent with the purposes of the

Rule, protection of investors and the

public interest. The decision may be

appealed to the National Business

Conduct Committee (‘‘NBCC’’). NASD

Regulation has not yet determined

whether any particular class of

transactions should be exempted.

The NASD noted in its filing that the

staff could consider, in determining

whether to grant an exemptive request:

(1) The number of firms publishing firm

quotations and the period of time during

which such quotations were published;

(2) the size of the customer order in

relation to the minimum size of the

market makers’ quotations; (3) the

transaction volume of the security in

question; and (4) the number of dealers

publishing quotations through an

electronic quotation medium in

comparison to dealers in the security

that do not publish such quotes. The

NASD also stated that it expects the

range of circumstances in which

exemptions may be granted would be

limited to those circumstances in which

it can be shown that the Three Quote

Rule would, in fact, hinder a member’s

best execution obligation.

The Office of the General Counsel of

NASD Regulation (‘‘the Office’’) will be

responsible for strict compliance with

discharging this exemptive authority.

Member broker-dealers will be

instructed to submit all requests for

exemptions to the Office and will be

required to limit the requests to actual

contemplated transactions or situations.

The NASD Regulation staff will not

provide exemptions in response to

hypothetical situations or transactions.

The request should be detailed and

include all relevant information

necessary for the staff to reach a

determination on the request. If a

particular exemption involves a

particular class of transactions or class

of customers that may be relevant to

other member broker-dealers, the NASD

Regulation staff will also publish such

results to the membership through a

Notice to Members or similar

publication or broadcast. NASD

Regulation staff determinations will be

subject to review by the NBCC.

III. Summary of Comments

The Commission received two

comment letters on the proposal, both of

which supported the proposal. One

commenter supported the ability of the

NASD Regulation staff to have

discretionary authority to grant, where

appropriate, exemptions from the Three

Quote Rule both for a particular fact

situation or as to a class of securities or

transactions.16 Both commenters agreed

that in certain situations the Three

Quote Rule may hinder, rather than

help, a firm in meeting its best

execution obligations. One commenter

stated that, in particular, the exemption

should be available for foreign securities

and agreed with the reasoning in the

proposing release.17

IV. Discussion

The Commission believes that the

proposed rule change is consistent with

Sections 15A(b)(6) 18 and 15A(b)(9) 19 of

the Exchange Act. Section 15A(b)(6)

requires that the rules of a national

securities association be designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, and 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. Section 15A(b)(9)

requires that rules of an association not

impose any burden on competition not

necessary or appropriate in furtherance

of the purposes of the Exchange Act.20

The Commission believes that the

proposed rule change is consistent with

the Exchange Act because it will give

NASD Regulation the authority to grant

exemptions from the Three Quote Rule

in situations where complying with the

rule would hinder, rather than assist,

best execution. The Commission

believes that providing general

exemptive authority under the Rule is

appropriate in order to provide

flexibility to respond to changing

market conditions and to particular fact

situations,21 as well as instances when

certain classes of transactions or certain

securities on OTC Bulletin Board may

warrant an exemption from the Three

Quote Rule.

The Commission notes that one

situation where exemptive relief might

be applied would be trading in certain

foreign securities.22 In some
Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56219

security that is neither included in the Nasdaq

Stock Market nor traded on any national securities

exchange * * *. Therefore, the rule by its terms

applies to transactions effected on any foreign

exchange. The term ‘‘national securities exchange’’

is not defined in NASD rules, but the requirements

to qualify are set forth in Sections 6(a) and 19(a) of

the Exchange Act.

23After the NASD gains experience with this

exemptive authority, the Commission expects the

NASD to codify, to the extent possible, exceptions

to the Rule. In particular, the NASD should amend

the rule to incorporate exemptions provided to

broad classes or types of transactions.

24 15 U.S.C. 78s(b)(2).

25 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

1File No. SR–NYSE–91–01.

2 15 U.S.C. 78f(b)(4).

circumstances the foreign exchange

market may constitute the best market

for the securities that are listed on that

market, and the time delay involved in

contacting three dealers in advance of a

customer transaction could hinder

obtaining the best execution for the

customer.

The Commission believes that the

exemptive process provided by the rule

change is reasonable under the

Exchange Act. The Commission stresses

that the NASD Regulation staff would

not be able to grant an exemption (either

for a particular market maker in a

particular security, or for all market

makers in a particular security or a class

of securities) unless a market maker can

demonstrate that adherence to the Rule

could serve as an impediment to

satisfying its best execution obligations

with regard to a particular situation. The

NASD Regulation Staff will not provide

exemptions in response to hypothetical

situations. The Commission also notes

that if a particular exemption involves

a particular class of transactions or class

of customers that may be relevant to

other member broker-dealers. The

NASD Regulation staff will also publish

such results to the membership through

a Notice to Members or similar

publication or broadcast. Further, the

Commission notes that the grant of an

exemption to the Three Quote Rule

should not in any way limit a member’s

best execution obligation. Finally, the

NASD Regulation staff determinations

are subject to review by the NBCC.23

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,24

that the proposed rule change (SR–

NASD–97–42) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

[FR Doc. 97–28627 Filed 10–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39264; File No. SR–NYSE–

97–26]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the New York Stock

Exchange, Inc. Relating to Listing Fees

for Short-Term Instruments

October 22, 1997.

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

September 18, 1997, the New York

Stock Exchange, Inc. (‘‘NYSE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I and II

below, which Items have been prepared

by the self-regulatory organization. The

Commission is published this notice to

solicit comments on the proposed rule

change from interested persons. The

Commission is also granting accelerated

approval to this proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange is proposing to amend

its rule regarding listing fees for shortterm instruments contained in

Paragraph 902.03 of the Listed Company

Manual. Currently, the Exchange

charges reduced listing fees for short

term instruments with terms of less than

five years. Pursuant to the proposed rule

change, the Exchange will charge such

reduced listing fees for instruments with

a term of up to seven years.

The Exchange requests the

Commission to find good cause,

pursuant to Section 19(b)(2) of the Act,

for approving the proposed rule change

prior to the thirtieth day after

publication in the Federal Register

because this rule change will benefit

issuers and investors by reducing listing

fees on certain short-term instruments

and that accelerated approval will

provide such benefits in an expedited

fashion.

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

self-regulatory organization 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 III below.

The self-regulatory organization 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

The Exchange has listing standards

for a variety of short-term special

purpose securities (e.g., index warrants,

foreign current warrants, contingent

value rights). By their terms, these are

instruments that will be listed on the

Exchange for only a short period of

time. Accordingly, in 1990 the Exchange

adopted reduced listing fees for such

short-term securities and defined such

securities as having a term of less than

five years.1 Issuers now are seeking to

list special purpose securities with a life

of up to seven years. Thus, the purpose

of this filing is to amend the definition

of short-term securities to cover

securities with a life of seven years or

less. This effectively will reduce the

listing fees for instruments with a term

of five to seven years.

2. Statutory Basis

The Exchange believes that the basis

under the Act for this proposed rule

change is the requirement under Section

6(b)(4) 2 that an exchange have rules that

provide for the equitable allocation of

reasonable dues, fees and other charges

among its members and other persons

using its facilities.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

No written comments were either

solicited or received.

III. 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.,