Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices 1351

2Securities Exchange Act Release No. 36025 (July

26, 1995), 60 FR 39200 (Aug. 1, 1995).

3 15 U.S.C. § 78o-3.

4 15 U.S.C. 78o–3.

5 15 U.S.C. 78o–3(b)(5).

6 15 U.S.C. 78s(b)(3)(A).

7 17 CFR 240.19b–4.

8 17 CFR 200.30–3(a)(12).

1The NASD amended the proposed rule change

four times subsequent to its initial filing.

Amendment No. 4 filed October 16, 1996, changed

the narrative in the proposed rule change.

Amendment No. 3, filed October 2, 1996, replaced

Amendment No. 2, which was filed September 23,

1996. Amendment No. 2, in turn, replaced

Amendment No. 1, which was filed August 5, 1996.

The proposed rule change, as originally

submitted, would have provided market makers

with a 15-second grace period following their

receipt of a Small Order Execution System

(‘‘SOES’’) execution report during locked and

crossed markets in which to update their quotation

in that security before being required to execute

another SOES order in that security. The filing as

amended would establish a 5 second grace period

between SOES executions in locked and crossed

markets. See letter from Robert E. Aber, Vice

President and General Counsel, The Nasdaq Stock

Market to Katherine England, Assistant Director,

Division of Market Regulation, Commission

(October 2, 1996).

2 15 U.S.C. § 78s(b)(1).

3 17 CFR 240.19b–4.

4NASD Manual, Marketplace Rules (CCH), Rule

4730.

5Letter from Edward J. Johnsen, Vice President &

Counsel, Morgan Stanley & Co. Inc. (‘‘Morgan

Stanley’’), to Jonathan G. Katz, Secretary,

Commission, dated November 14, 1996.

important systems project.2 The

temporary fees were implemented on

August 1, 1995, and applied to all

filings received on or after that date. The

fee increase was to be reduced for most

types of filings made in calendar year

1997 and was to return to the pre-1995

levels in calendar year 1998.

NASD Regulation has added

functionality to the new CRD system

and improved the system’s

compatibility with various computer

operating systems, such as Windows 95

and Windows NT. This has resulted in

delays and cost increases in

implementing the redesigned CRD.

Accordingly, NASD Regulation is

proposing to amend Schedule A,

Section 2 to eliminate the scheduled fee

rollbacks and to retain the current fee

level indefinitely. This fee level will

provide $4 million in extra revenue

each year over the revenue produced by

the pre-1995 fee levels.

The NASD believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(5) of the

Act 3 which requires that the rules of the

Association provide for the equitable

allocation of reasonable dues, fees, and

other charges in that the proposed rule

provides a consistent basis for

assessments among member firms and

fairly assesses a charge to cover the

costs incurred by the Association in the

implementation of the redesigned CRD

System.

2. Statutory Basis

The proposed rule change is

consistent with Section 15A of the Act 4

in general and furthers the objectives of

Section 15A(b) (5) 5 in particular in that

it provides for the equitable allocation

of reasonable dues, fees, and other

charges among the NASD’s members

and other persons using its facilities.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The proposed rule change does not

impose any burden on competition that

is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The NASD has neither solicited nor

received written comments on the

proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change constitutes

or changes a due, fee, or other charge

imposed by the NASD and, therefore,

has become effective pursuant to

Section 19(b)(3)(A) of the Act 6 and

subparagraph (e) of Rule 19b–4

thereunder.7

At any time within 60 days of the

filing of the 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.

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 at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the National

Association of Securities Dealers. All

submissions should refer to File No.

SR–NASD–96–53 and should be

submitted by January 30, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Jonathan G. Katz,

Secretary.

[FR Doc. 97–439 Filed 1–8–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38115; File No. SR–NASD–

95–54]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

National Association of Securities

Dealers, Inc., Relating to a Modification

of the Operation of the Small Order

Execution System During Locked and

Crossed Markets

January 3, 1997.

On November 15, 1995,1 the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 2 and Rule

19b–4 thereunder.3 The rule change

amends NASD Rule 4730(b)(4) 4 to

provide that during locked or crossed

markets, SOES will execute orders in

five-second intervals against a locked or

crossed market maker at the best price,

regardless of whether the market maker

entered the quotation locking or

crossing the market.

Notice of the proposed rule change,

together with the substance of the

proposal, was provided by issuance of a

Commission release (Securities

Exchange Act Release No. 37845,

October 21, 1996) and by publication in

the Federal Register (61 FR 55342,

October 25, 1996). One comment letter

was received.5 This order approves the

proposed rule change.

I. Description of Rule Change

The rule change approved today

modifies SOES to provide that during
1352 Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices

6Quotations are ‘‘locked’’ when the bid price

quoted by one market maker in a security equals the

ask price quoted by another market maker in the

same security. Quotations are ‘‘crossed’’ when the

bid price quoted by one market maker in a security

is greater than the ask price quoted by another

market maker in the same security.

7The minimum exposure limit for SOES is

currently twice the maximum SOES order size for

a given security. Thus, the minimum exposure limit

for a Nasdaq/National Market security in the 1,000-

share tier size is 2,000 shares. The NASD has filed

a proposed rule change that would, among other

things, eliminate minimum exposure limits in

SOES. See Securities Exchange Act Release No.

38008 (December 2, 1996), 61 FR 64550 (December

5, 1996) (publishing notice of filing of SR–NASD–

96–43).

8See Rule 4730(b)(4). The Commission notes that

Rule 4730(b)(4) currently provides that ‘‘a Market

Maker with a quotation for that security in the

Nasdaq System that is causing the locked or crossed

market may have orders representing shares equal

to the minimum exposure limit or the firm’s

exposure limit, whichever is greater, executed by

SOES for that Market Maker’s account at its quoted

price if that price is the best price.’’ Rule 4730(b)(4)

by its terms does not apply to market makers whose

quotations have been locked or crossed. The

proposed rule would change this distinction and

both types of firms to the Rule.

9See Securities Exchange Act Release No. 25791

(June 9, 1988), 53 FR 22594 (order approving SR–

NASD–88–1). The NASD stated in its filing that

prior to the approval of SR–NASD–88–1, SOES

would not execute orders in locked and crossed

markets.

10The NASD indicated that many locked and

crossed markets occur after trading halts are lifted

or when market makers are adjusting their

quotations in response to material news disclosed

concerning the issuer of the security.

11Section 15A(b)(9) provides that the rules of the

NASD must not impose any burden on competition

not necessary or appropriate in furtherance of the

purposes of the Act. Section 15A(b)(11) directs the

NASD to adopt rules designed to produce fair and

informative quotations, prevent fictitious and

misleading quotations, and promote orderly

procedures for collecting and distributing

quotations. Section 11A(a)(1)(C) of the Act states

that it is in the public interest and appropriate for

the protection of investors and the maintenance of

fair and orderly markets to assure, among other

things, (i) economically efficient execution of

securities transactions; (ii) fair competition among

brokers and dealers; and (iii) the practicality of

brokers executing investor orders in the best

market.

locked or crossed markets, SOES will

execute orders in five-second intervals

against a market maker whose quotation

is locked or crossed at the best price,

regardless of whether the market maker

entered the quotation locking or

crossing the market. Currently, when

markets are not locked or crossed, SOES

provides market makers with a 15-

second period of time following their

receipt of a SOES execution report to

update their quotation before being

required to execute another order in that

security through SOES. The NASD

represented in its filing that when the

market for a Nasdaq National Market

security is locked or crossed,6 however,

SOES is currently designed so that the

market maker whose quotation is locked

or crossed and the market maker who

has entered a locking or crossing

quotation will have SOES orders

representing shares equal to the SOES

minimum exposure limit 7 or the firm’s

exposure limit, whichever is greater,

executed by SOES against the market

maker’s account without any delay

between SOES executions (‘‘locked and

crossed market rule’’).8 Thus, in such

instances, unlike the operation of SOES

during non-locked or crossed markets,

the market maker’s account will receive

SOES executions without any delay

between executions until its exposure

limit is exhausted. In addition, during

locked or crossed markets, SOES orders

are executed against market makers

whose quotations are locked or crossed

irrespective of any preference indicated

by the SOES order entry firm.

The locked and crossed market rule

was intended to increase the accuracy of

displayed quotations in NNM securities

by providing an incentive for market

makers to reduce the frequency and

duration of locked and crossed

markets.9

The NASD stated in its filing that the

magnitude of SOES orders received and

executed during locked and crossed

markets is such that market makers

execute significant volume through

SOES before they are able to rectify

locked and crossed markets. The NASD

further stated the rule change was

intended to continue to provide market

makers an incentive to update their

quotations in locked and crossed

markets while enhancing market

makers’ ability to react to SOES

transactions in locked and crossed

markets.10

II. Comments

Morgan Stanley opposes the proposed

rule change. It states that the interval

proposed is too short for it to react to

a locked or crossed market. It

recommends a 15 second interval at a

minimum, but argues that a SOES

market maker whose quotation has been

locked or crossed should not be subject

to SOES executions for: (i) 90 seconds

after its quotation has been locked or

crossed; or (ii) whatever period of time

is needed for the locking or crossing

market maker to notify the NASD, and

for the NASD, in turn, to notify the

market maker that its quotation has been

locked or crossed. It also recommends

that NASD provide a market maker

whose quotation has been locked or

crossed with a warning window on its

screen.

III. Discussion

The Commission finds that the rule

change is consistent with the provisions

of Sections 15A(b)(6), 15A(b)(9),

15A(b)(11) and 11A(a)(1)(C) of the Act

and Rule 11Ac1–1 (‘‘Quote Rule’’)

thereunder.11 Among other things,

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, to foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system and in

general to protect investors and the

public interest. The Commission

believes that the rule change will

remove impediments to and perfect the

mechanism of a free and open market

and a national market system by

providing Nasdaq market makers with a

brief period to update their quotations

during locked and crossed markets

before being subject to a SOES

execution. The Commission recognizes

that a locked or crossed market can

occur during unusual market

conditions. Consequently, it is not

unreasonable to provide market makers

with a very brief period to update their

quotes. At the same time, market makers

should have an incentive to fix a locked

or crossed market as quickly as possible

in order to correct the quotation

anomaly. Thus, the quote update period

for locked and crossed markets should

be as short as possible. The Commission

believes that the rule strikes this balance

by encouraging market makers to

remedy quickly locked and crossed

markets that occur, given that market

makers will continue to face executions

at intervals that are less than one-third

of the length of intervals between

unpreferenced SOES executions during

times when markets are not locked or

crossed.

The Commission does not believe that

the alternatives recommended by

Morgan Stanley provide market makers

with a sufficient incentive to remedy

locked and crossed markets that occur.

Therefore, it disagrees with Morgan

Stanley’s argument. The Commission

also notes that the rules change will

continue to permit retail investors to

have immediate access to the best prices

displayed by Nasdaq market makers on

Nasdaq because SOES will continue to

execute trades during locked and

crossed markets. By contrast, Morgan

Stanley’s suggestion that the NASD not

permit executions against a market

maker’s quotation that has been locked
Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices 1353

12See Securities Exchange Act Release No. 29801

(October 10, 1991), 56 FR 52098 (approving 15-

second interval following a market maker’s receipt

of a SOES execution report to update its quotation

before being required to execute another order in

that security through SOES).

13Morgan Stanley argues that market makers

whose quotes have been locked or crossed may not

always have adequate notice that their quotation

has been locked or crossed. It recommends that the

NASD provide a market maker whose quotation has

been locked or crossed with a warning window on

its screen. While the suggestion has merit, the

Commission does not believe that it is a necessary

prerequisite for approving a rule change providing

market makers with five additional seconds to

update their quotations.

14 17 CFR 200.30–3(a)(12) (1989).

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

2On December 5, 1996, the NYSE filed

Amendment No. 1 with the Commission. The

proposed rule change was submitted on September

25, 1996. However, amendments to the rule

language were improperly identified in

contravention of Section 19(b); therefore, the filing

is deemed to be filed on the later date. See letter

from James E. Buck, Senior Vice President and

Secretary, NYSE, to Katherine A. England, Assistant

Director, Division of Market Regulation, SEC, dated

December 5, 1996.

1 If the phone number of the clearing organization

appears on the back of the statement it must be in

‘‘bold’’ or ‘‘highlighted’’ letters.

or crossed until the locking or crossing

market maker has notified the NASD,

and the NASD, in turn, has notified the

market maker that its quotation has been

locked or crossed, would be highly

inefficient and would be inconsistent

with the NASD’s statutory mandate that

its rules remove impediments to and

perfect the mechanism of a free and

open market. The Commission also

notes that each of the alternatives

suggested by Morgan Stanley would

inhibit the ability of investors to obtain

executions at a market maker’s

displayed quotations if it were

implemented. Thus, the Morgan Stanley

alternatives do not give due recognition

to the interests of investors or to the

interest of the NASD in discouraging

locked and crossed markets.

The 5-second interval between SOES

executions during locked and crossed

markets will apply to all SOES users

and participants. Although the proposal

will limit to a small extent the ability to

investors to obtain executions in locked

and crossed markets by providing a 5-

second interval between executions, the

Commission believes that the rule

change appropriately balances the

interests of investors and the need for

market makers to have a very brief

period to update their quotations

expeditiously in locked or crossed

markets. The rule change also is

intended to enhance the production of

fair and orderly quotations in NNM

securities. This, in turn, should

encourage market makers to enter more

competitive quotations.

The Quote Rule requires that brokers

and dealers execute orders to buy and

sell securities at their published quotes

unless communicating a revised bid or

offer or unless updating their quotations

in response to an execution. The 5-

second interval is intended to provide

market makers with an opportunity to

update their quotations in response to

an execution. Market makers who do

not so will be required to execute

further transactions at their published

bid or offer. 12 The Commission notes

that if the NASD adopted either

alternative suggested by Morgan

Stanley, Nasdaq market makers would

not be required to execute orders to buy

and sell securities at their published

quotes even when they are not

communicating a revised bid or offer or

updating their quotations in response to

an execution. 13

IV. Conclusion

It is therefore ordered, pursuant to

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

proposed rule change SR–NASD–95–54

be, and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 14

[FR Doc. 97–445 Filed 1–8–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 38106; File No. SR–NYSE–96–

27]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

New York Stock Exchange, Inc.,

Relating to an Interpretation of Rule

409 (‘‘Statements of Accounts to

Customers’’)

December 31, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

December 5, 1996,2 the New York Stock

Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II and III below, which Items

have been prepared by the selfregulatory organization. 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

The Exchange has filed with the

Commission a proposed rule change

which consists of an interpretation with

respect to the meaning and

administration of existing Exchange

Rule 409 (‘‘Statements of Accounts of

Customers’’). Below is the text of the

proposed rule change. Proposed new

language is in italics; proposed

deletions are in brackets.

RULE 409: STATEMENTS OF

ACCOUNTS TO CUSTOMERS

(a)

/01 Applicability

Compliance with Rule 409(a) and the

accuracy of statements of accounts

thereunder is the responsibility of the

member organization carrying the

customer account for which the

statement is required, unless such

responsibility has been allocated to a

non-member carrying organization

pursuant to an Exchange approved

agreement under Rule 382.

/02 Information To Be Disclosed

Statements of accounts to customers

must clearly and prominently disclose

on the front of the statement:

1. the identity of the introducing and

carrying organization and their

respective phone numbers for service;1

2. where the customers’ assets

included on the statement are carried;

3. that the carrying organization is a

member of SIPC and whether any of the

customers’ assets included on the

statement are not covered by SIPC;

4. the opening and closing balances

for the account.

/03 Use of Third Party Agents

Prior to utilizing a ‘‘third party agent’’

to prepare and/or transmit statements of

accounts to customers, a member

organization shall represent/undertake

in writing to the Exchange that:

1. the third party is acting as agent for

the member organization;

2. the member organization retains

responsibility for compliance with Rule

409(a);

3. the member organization has

developed procedures/controls for

reviewing and testing the accuracy of

statements of accounts prepared and/or

transmitted by the third party agent;

4. the member organization will retain

copies of statements of accounts

prepared and/or transmitted by the

third party agent in accordance with

applicable books and records

requirements.

Allocation of responsibilities for

preparation and/or transmission of

statements to any person other than a

carrying organization pursuant to an

agreement approved by the Exchange in

accordance with Rule 382 (Carrying