[Federal Register Volume 65, Number 190 (Friday, September 29, 2000)]
[Notices]
[Pages 58589-58590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25025]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43319; File No. SR-NASD-00-20]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
the Three Quote Rule for Transactions in Non-Nasdaq Securities

September 21, 2000.

I. Introduction

    On April 13, 2000, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, NASD Regulation, Inc. (``NASD 
Regulation''), 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 \2\ thereunder, a 
proposed rule change that amends the Three Quote Rule for transactions 
in non-Nasdaq securities and its corresponding recordkeeping provision. 
The proposal was published for comment in the Federal Register on June 
25, 2000.\3\ The Commission received no comments on the proposal. This 
order approves NASD Regulations' proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42958 (June 20, 2000), 
65 FR 39457.
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II. Description of the Proposal

    NASD Regulation has proposed three amendments to the NASD's rules.
    First NASD Regulation has proposed to amend NASD Rule 2320(g)--
commonly known as the ``Three Quote Rule''--to relieve members of the 
current obligation to obtain three quotes for a transaction in a non-
Nasdaq security \4\ when there are two or more priced quotations for 
that security displayed in an inter-dealer quotation system (such as 
the OTC Bulletin Board (``OTCBB'') or the Electronic Quotation Service 
operated by Pink Sheets LLC (``Pink Sheets'')) that permits quotation 
updates on a real-time basis.
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    \4\ A non-Nasdaq security is any equity security that is neither 
included in the Nasdaq Stock Market nor traded on a national 
securities exchange. See NASD Rule 6710(c).
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    Currently, the rule requires members that execute a transaction in 
a non-Nasdaq security on behalf of a customer to contact and obtain 
quotations from three dealers (or all dealers if three or less) to 
determine the best inter-dealer market for that security.\5\ The intent 
of the Three Quote Rule is to help ensure that members fulfill their 
responsibilities to customers to provide best execution for 
transactions in non-Nasdaq security, particularly illiquid securities 
with non-transparent prices.
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    \5\ Currently, if three firm quotations are displayed, a broker-
dealer is not required to call the three market makers to verify the 
firm quotations that are displayed on the screen. A broker-dealer 
need note on the order ticket only the identity of the broker-
dealers and the firm quotations displayed.
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    NASD Regulation now believes that the existing Three Quote Rule 
often hinders, rather than furthers, investor protection by causing 
significant delays in obtaining executions of customer orders. 
Therefore, NASD Regulation is proposing that Rule 2320(g) be amended to 
require that members obtain quotations from three dealers (or all 
dealers if three or less) only when there are fewer than two priced 
quotations displayed in an inter-dealer quotation system that permits 
quotation updates on a real-time basis (such as the OTCBB or the Pink 
Sheets).\6\
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    \6\ The proposed rule change defines the term inter-dealer 
quotation system as any system of general circulation to brokers or 
dealers that regularly disseminates quotations of identified brokers 
or dealers.
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    Second, NASD Regulation has proposed to amend one of its 
recordkeeping requirements for members to correspond with the proposed 
amendment to the Three Quote Rule. Currently, NASD Rule

[[Page 58590]]

3110(b)(2) requires that members, for each transaction in a non-Nasdaq 
security, indicate on the order ticket the name of each dealer 
contacted and each quotation received with respect to that security, in 
order to determine the best inter-dealer market. NASD Regulation has 
proposed to eliminate this obligation when two or more priced 
quotations for that security are displayed in an inter-dealer quotation 
system if: (1) the system permits quotation updates on a real-time 
basis, and (ii) NASD Regulation has access to the quotation data.\7\
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    \7\ At present, NASD Regulation has such data with respect to 
the OTCBB but does not have access to historical quotation data with 
respect to the Pink Sheets. NASD Regulation recently submitted to 
the Commission a proposed rule change (SR-NASD-00-42) that would 
require NASD members that publish quotations in the Pink Sheets (or 
any similar automated quotation system) to record and maintain 
priced quotations and unpriced indications of interest data and to 
report such quotation data to NASD Regulation upon request.
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    Third, NASD Regulation has proposed to add a new provision to Rule 
2320(g) that will require members that display quotations for a given 
non-Nasdaq security in two or more quotation mediums that permit 
quotation updates on a real-time basis to provide the same priced 
quotation in each medium.\8\
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    \8\ The proposed rule change defines the term quotation medium 
as any inter-dealer quotation system or any publication or 
electronic communications network or other device that is used by 
brokers or dealers to make known to others their interest in 
transactions in any security, including offers to buy or sell at a 
stated price or otherwise, or invitations of offers to buy or sell.
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III. Discussion

A. General

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the 
regulations thereunder applicable to the NASD.\9\ In particular, the 
Commission believes that the proposal is consistent with Sections 
15A(b)(6) and 15A(b)(9) of the Act.\10\ Section 15A(b)(6) requires, 
among other things, 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 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 the rules of the 
association not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \9\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6) and (b)(9).
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B. Amendment to Three Quote Rule and Corresponding Recordkeeping 
Provision

    The Commission approved the NASD proposal that instituted the Three 
Quote Rule in 1988.\11\ The Three Quote Rule was an amendment to the 
NASD's interpretation relating to best execution of retail transactions 
in non-Nasdaq securities. The Rule's purpose is to assure that NASD 
members fulfill their duty to provide customers with best execution for 
transactions in non-Nasdaq securities, especially illiquid securities 
with non-transparent prices.
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    \11\ See Securities Exchange Act Release No. 25637 (May 2, 
1988), 53 FR 16488 (May 9, 1988).
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    Currently, the Three Quote Rule requires members to obtain quotes 
from three dealers before executing a transaction in a non-Nasdaq 
security on behalf of a customer. Under NASD Rule 3110(b)(2), the 
companion recordkeeping rule, members are required to indicate on the 
order ticket for each transaction in a non-Nasdaq security the names of 
the dealers contacted and the prices of the quotations. NASD 
Regulation's current proposal would exempt from the Three Quote Rule 
transactions involving a non-Nasdaq security when there are two or more 
priced quotations for that security displayed in an inter-dealer 
quotation system that permits quotation updates on a real-time basis. A 
corresponding amendment to NASD Rule 3110(b)(2) would eliminate the 
requirement to indicate on the order ticket for a transaction in a non-
Nasdaq security the dealers contacted and quotations received, provided 
there are two or more priced quotations for that security displayed in 
an inter-dealer quotation system and NASD Regulation has access to the 
historical quotation information.\12\
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    \12\ See supra note 7.
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    In light of the significant technological advances that have 
occurred in the markets for non-Nasdaq securities since adoption of the 
Three Quote Rule, the Commission believes it is reasonable and 
consistent with the Act to limit the Rule's applicability to those 
situations when fewer than two priced quotes for a non-Nasdaq security 
are posted in an inter-dealer quotation medium. The Commission also 
finds that, in light of the proposed amendment to the Three Quote Rule, 
the corresponding amendment to the recordkeeping provisions of NASD 
Rule 3110(b)(2) is reasonable and consistent with the purposes of the 
Act. The Commission notes that, whether or not a transaction in a non-
Nasdaq security is subject to the Three Quote Rule, the member 
executing the transaction must satisfy its duty of best execution.

C. Requirement to Post Same Quotation in Different Mediums

    Currently, an NASD member may display different priced quotations 
for the same non-Nasdaq security in different quotation mediums. The 
Commission believes that this practice can be confusing to market 
participants and, in particular, to public investors. Requiring that 
members display consistent priced quotations in multiple quotation 
mediums will enhance the ability of market participants to ascertain 
the best inter-dealer market for a non-Nasdaq security. The Commission 
finds that the proposed amendment implementing this requirement is 
consistent with the purposes of the Act.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASD-00-20) is approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary
[FR Doc. 00-25025 Filed 9-28-00; 8:45 am]
BILLING CODE 8010-01-M