[Federal Register Volume 65, Number 24 (Friday, February 4, 2000)]
[Notices]
[Pages 5715-5717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2486]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42363; File No. SR-NASD-00-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to a Notice to Members on Extended 
Hours Trading

January 28, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given 
that on January 11, 2000, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), 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 NASD Regulation. NASD Regulation has 
designated this proposal as one constituting a stated policy and 
interpretation with respect to the meaning of an existing rule under 
Section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) \4\ 
thereunder, which renders the rule effective upon the Commission's 
receipt of this filing. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is issuing a Notice of Members reminding members of 
their obligation under just and equitable principles of trade and the 
advertising rules to disclose to customers the material risks of 
extended hours trading. The text of the Notice to Members is provided 
below.
* * * * *

NASD Notice to Members

Disclosure To Customers Engaging In Extended Hours Trading
Suggested Routing
Legal & Compliance; Senior Management
Executive Summary

    NASD Regulation, Inc. (NASD Regulation) reminds members of their 
obligation under just and equitable principles of trade and the 
advertising rule to disclose to customers the material risks of 
extended hours trading.
    A model disclosure statement is included with this Notice in 
Attachment A.
    Questions concerning this Notice may be directed to Gary L. 
Goldsholle, Assistant General Counsel, Office of General Counsel, NASD 
Regulation, at (202) 728-8104.
Background and Discussion
    A number of member firms recently have started offering their 
retail customers various opportunities to trade stocks after regular 
market hours in what is known as ``extended hours trading.'' An even 
greater number of member firms have announced plans to offer extended 
hours trading in coming months.
    The growth of extended hours trading provides retail customers with 
greater opportunities to trade securities and manage their portfolios, 
and in so doing, provides access to markets that were previously 
limited to institutional customers. Participation in extended hours 
trading may offer certain benefits to retail customers, but entails 
several material risks. Depending on the particular extended hours 
trading environment, these risks may include:

<bullet> lower liquidity
<bullet> high volatility
<bullet> changing prices
<bullet> unlinked markets
<bullet> an exaggerated effect from news announcements; and
<bullet> wider spreads.

    In light of these risks, members have an obligation to their retail 
customers to

[[Page 5716]]

disclose the material risks of extended hours trading to customers 
before permitting them to engage in extended hours trading. NASD 
Regulation commends the many members that have already provided 
detailed disclosures about the risks of extended hours trading. This 
Notice is a reminder that these disclosures are not only a laudable 
business practice, but are a regulatory requirement under just and 
equitable principles of trade.
    To assist members with their disclosure obligation, NASD Regulation 
has developed a series of model disclosures dealing with the risks of 
extended hours trading. Members are free to develop their own 
disclosures or modify these model disclosures to meet their particular 
disclosure needs. In some cases, members may need to develop additional 
disclosures to address such issues as options trading, options 
exercises, the effect of stock splits, dividend payments, as well as 
any additional risks that may arise in the future.
    In addition, members are reminded that Rule 2210 requires that all 
communications with the public shall be based on principles of fair 
dealing and good faith, and that exaggerated, unwarranted, or 
misleading statements are prohibited. Members should use caution in 
communications with the public about their extended hours trading 
systems to ensure that these requirements are satisfied. Members 
describing the benefits of extended hours trading must also describe 
the material risks.
    Finally, members are also reminded that in Notice of Members 99-11, 
NASD Regulation described the types of general disclosure that firms 
may use to inform their customers about the risks associated with stock 
volatility. In preparing disclosures regarding extended hours trading, 
members may wish to review the types of disclosure suggested in that 
Notice.

Attachment A

Model Extended Hours Trading Risk Disclosure
    <bullet> Risk of Lower Liquidity. Liquidity refers to the ability 
of market participants to buy and sell securities. Generally, the more 
orders that are available in a market, the greater the liquidity. 
Liquidity is important because with greater liquidity it is easier for 
investors to buy or sell securities, and as a result, investors are 
more likely to pay or receive a competitive price for securities 
purchased or sold. There may be lower liquidity in extended hours 
trading as compared to regular market hours. As a result, your order 
may only be partially executed, or not at all.
    <bullet> Risk of Higher Volatility. Volatility refers to the 
changes in price that securities undergo when trading. Generally, the 
higher the volatility of a security, the greater its price swings. 
There may be greater volatility in extended hours trading than in 
regular market hours. As a result, your order may only be partially 
executed, or not at all, or you may receive an inferior price in 
extended hours trading than you would during regular market hours.
    <bullet> Risk of Changing Prices. The prices of securities traded 
in extended hours trading may not reflect the prices either at the end 
of regular market hours, or upon the opening the next morning. As a 
result, you may receive an inferior price in extended hours trading 
than you would during regular market hours.
    <bullet> Risk of Unlinked Markets. Depending on the extended hours 
trading system or the time of day, the prices displayed on a particular 
extended hours trading system may not reflect the prices in other 
concurrently operating extended hours trading systems dealing in the 
same securities. Accordingly, you may receive an inferior price in one 
extended hours trading system than you would in another extended hours 
trading system.
    <bullet> Risk of News Announcements. Normally, issuers make news 
announcements that may affect the price of their securities after 
regular market hours. Similarly, important financial information is 
frequently announced outside of regular market hours. In extended hours 
trading, these announcements may occur during trading, and if combined 
with lower liquidity and higher volatility, may cause an exaggerated 
and unsustainable effect on the price of a security.
    <bullet> Risk of Wider Spreads. The spread refers to the difference 
in price between what you can buy a security for and what you can sell 
it for. Lower liquidity and higher volatility in extended hours trading 
may result in wider than normal spreads for a particular security.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. NASD Regulation 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
    A number of member firms have recently started offering their 
retail customers opportunities to trade stocks after traditional market 
hours in what is known as ``extended hours trading.'' An even greater 
number of member firms have announced plans to offer extended hours 
trading in the next several months.
    The growth of extended hours trading provides retail customers with 
greater opportunities to trade securities and manage their portfolios, 
and in so doing, provides access to markets that were previously 
limited to institutional customers. Participation in extended hours 
trading may offer certain benefits to retail customers, but entails 
several material risks. Depending on the particular extended hours 
trading environment, these risks may include: (1) lower liquidity; (2) 
higher volatility; (3) changing prices; (4) unlinked markets; (5) an 
exaggerated effect from news announcements; and (6) wider spreads. In 
light of these risks, NASD Regulation believes that members have an 
obligation to their retail customers to disclose the material risks of 
extended hours trading before permitting them to engage in extended 
hours trading.
    The Notice to Members states that just and equitable principles of 
trade (NASD Rule 2110) require members to disclose to customers the 
material risks of extended hours trading. The Notice to Members also 
states that the advertising rule (NASD Rule 2210) requires that all 
communications with the public shall be based upon principles of fair 
dealing and good faith, and that members describing the benefits of 
extended hours trading must also describe the material risks.
    The Notice to Members does not require any standardized disclosure. 
However, to assist members with their disclosure obligations, NASD 
Regulation staff has developed model extended hours trading risk 
disclosures that address each of the six factors identified above. The 
model disclosures are provided as guidance only. Members will be free 
to modify the model disclosures or draft their own disclosures, so long 
as all of the material risk factors are addressed.

[[Page 5717]]

2. Statutory Basis
    NASD Regulation believes that the Notice to Members is consistent 
with the provisions of Section 15A(b)(6) of the Act,\5\ which requires, 
among other things, that the Association's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. NASD Regulation believes that member firms 
that permit customers to engage in extended hours trading have an 
obligation under just and equitable principles of trade to disclose to 
such customers the material risks of extended hours trading. Similarly, 
members that advertise the opportunities and benefits of extended hours 
trading must also disclose the materials risks. NASD Regulation 
believes that this Notice to Members is an important element to protect 
investors and the public interest with respect to extended hours 
trading.\6\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o-3(b)(6).
    \6\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act \7\ and Rule 19b-4(f)(1) \8\ in that it 
constitutes a stated policy and interpretation with respect to the 
meaning of an existing rule.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.196-4(f)(1).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the 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 purposed rule 
change is consistent with the Act. 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-
0609. 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 number SR-NASD-00-01 and 
should be submitted by February 25, 2000.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2486 Filed 2-3-00; 8:45 am]
BILLING CODE 8010-01-M