Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Notices 39919

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

2Securities Exchange Act Release No. 39955 (May

4, 1998), 63 FR 26237.

3For a complete description of the services

provided by the ID system, refer to Securities

Exchange Act Release Nos. 33466 (January 12,

1994), 59 FR 3139 [File No. SR–DTC–93–07] (order

approving proposed rule change relating to the

enhanced ID system); 34166 (June 6, 1994), 59 FR

31660 [File No. SR–DTC–94–01] (order approving

proposed rule change to add a standing instruction

database to the ID system institutional delivery

system); 34199 (June 10, 1994) 59 FR 31660 [File

No. SR–DTC–94–04] (order granting accelerated

approval of a proposed rule change to implement

the interactive capabilities and the electric mail

features of the enhanced institutional delivery

system); 36050 (August 2, 1995), 60 FR 41139 [File

No. SR–DTC–95–10] (order approving proposed

rule change implementing advice of confirm

correction/cancellation feature and modifying the

authorization/exception processing feature of the

institutional delivery system); 39829 (April 6,

1998), 63 FR 17943 [File No. S7–10–98]

(interpretation that a ‘‘matching’’ service that

compares securities trade information from a

broker-dealer’s customer is a clearing agency

function).

4 ISITC (Industry Standardization for Institutional

Trade Communication) is a global working

committee of brokers, investment managers,

custodians, and vendors which was established in

1991 and has developed standard message formats

and operating protocols for transmitting

information concerning security-related

transactions.

5The notice of the proposed rule change, supra

note 2, incorrectly stated that DTC developed the

HUB Mailbox in cooperation with ISITC. It should

have stated that DTC developed the HUB Mailbox

service in cooperation with some ISITC members.

6 15 U.S.C. 78q–1(b)(3)(F).

7 17 CFR 200.30–3(a)(12).

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

2See letter from Robert E. Aber, Senior Vice

President and General Counsel, The Nasdaq Stock

Market, Inc. to Katherine A. England, Assistant

Director, Division of Market Regulation

(‘‘Division’’), SEC, dated June 5, 1998.

3See letter from Robert E. Aber, Senior Vice

President and General Counsel, The Nasdaq Stock

Market, Inc. to Katherine A. England, Assistant

Director, Division, SEC, dated June 29, 1998.

4See letter from Robert E. Aber, Senior Vice

President and General Counsel, The Nasdaq Stock

Market, Inc. to Richard Strasser, Assistant Director,

Division, SEC, dated July 15, 1998.

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 Notice

of the proposal was published in the

Federal Register On May 12, 1998.2 No

comment letters were received. For the

reasons discussed below, the

Commission is approving the proposed

rule change.

I. Description

The rule change implements the HUB

Mailbox service. The HUB Mailbox

service will use the Institutional

Delivery (‘‘ID’’) 3 system’s alreadyexisting telecommunications facilities to

allow investment managers and their

custodians to exchange messages

regarding: (1) securities purchases; (2)

securities sales; (3) reconciliation data

relating to securities positions and cash

movements; and (4) other securityrelated transactions as agreed to by two

or more HUB users. Occasionally, HUB

users may also transmit trade data to

recordkeeping vendors in situations

where the custodial and accounting

functions are performed by two different

parties. All information will be entered

in an ISITC4 approved format initially,

but other formats may be used later if

agreed upon by two or more HUB

users.5

To use the HUB Mailbox, investment

managers and custodians will place

formatted records into bundles for each

addressee with appropriately coded

headers and trailers, and DTC will route

the bundles to addressees’ mailboxes for

retrieval. Addressees will acknowledge

receipt of bundles through their

mailboxes. All mail messages, both

delivered and undelivered, will be

transferred at the end of each business

day between 2:00 AM and 3:00 AM (ET)

to a separate file which can be accessed

directly on the next day. DTC will store

mail messages for up to five days. The

HUB Mailbox service will not do any

processing other than to direct mail to

appropriate mailboxes.

II. Discussion

Section 17A(b)(3)(F) of the Act 6

requires that the rules of a clearing

agency be designed to promote the

prompt and accurate clearance and

settlement of securities transactions. As

discussed below, the Commission

believes that DTC’s proposed rule

change is consistent with this

obligation.

The Commission believes that the

electronic mail features of the HUB

Mailbox service will enable users to

reduce their reliance on facsimile

transmissions when communicating

information such as the details

concerning securities purchases, sales,

reconciliation, and other security

related information. The Commission

believes that transmitting this

information electronically is more

efficient and accurate than the methods

currently used and therefore should

help promote the prompt and accurate

clearance and settlement of securities

transactions.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and in

particular with Section 17A of the Act

and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–

DTC–98–02) be and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Jonathan G. Katz,

Secretary.

[FR Doc. 98–19808 Filed 7–23–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40227; File No. SR–NASD–

98–01]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendments Nos. 1, 2, and 3 by the

National Association of Securities

Dealers, Inc. Relating to the NASD’s

Rules Regarding Electronic

Communications Networks, Locked

and Crossed Markets, and a Member’s

Obligation to Provide Nasdaq With

Certain Information

July 17, 1998.

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

Securities Exchange Act of 1934

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

January 27, 1998, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’), through its wholly owned

subsidiary, The Nasdaq Stock Market,

Inc. (‘‘Nasdaq’’), filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change. The NASD filed

Amendment No. 1 to the proposal on

June 8, 1998,2 Amendment No. 2 on

June 30, 1998,3 and Amendment No. 3

on July 16, 1998.4 The proposed rule

change, as amended, is described in

Items I, II, and III below, which Items

have been prepared by Nasdaq. 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

Nasdaq is submitting proposed rule

changes to amend NASD Rule 4623,

which will specify the manner in which

orders having a reserved size that are

entered into an electronic

communications network (‘‘ECN’’) must

interact with SelectNet orders.

Additionally, Nasdaq is proposing to

amend NASD Rule 4613(e) by adding a

provision regarding locked and crossed

markets that occur at the open. Nasdaq

also is proposing the adoption of NASD

Rule 4625, which will set out the

obligation of members participating in
39920 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Notices

The Nasdaq Stock market to provide

specified information to Nasdaq

departments and staff when so

requested. Proposed new language is

italicized; proposed deletions are in

brackets.

* * * * *

Rule 4623. Electronic Communications

Networks

(a) The Association may provide a

means to permit electronic

communications networks (‘‘ECN’’), as

such term is defined in SEC Rule

11Ac1–1(a)(8), to meet the terms of the

[electronic communications network]

ECN display alternative provided for in

SEC Rule 11Ac1–1(c)(5)(ii) (A) and (B)

(‘‘ECN display alternative’’). In

providing any such means, the

Association shall establish a mechanism

that permits the [electronic

communications network] ECN to

display the best prices and sizes of

orders entered by Nasdaq market makers

(and other entities, if the [electronic

communications network] ECN so

chooses) into the [electronic

communications network] ECN, and

allows any NASD member the electronic

ability to effect a transaction with such

priced orders that is equivalent to the

ability to effect a transaction with a

Nasdaq market maker quotation in

Nasdaq operated systems.

(b) An [electronic communications

network] ECN that seeks to utilize the

Nasdaq-provided means to comply with

the [electronic communications

network] ECN display alternative shall:

(1) demonstrate to the Association

that it qualifies as an [electronic

communications network] ECN meeting

the definition in the SEC Rule;

(2) be registered as a[n] NASD

member;

(3) enter into and comply with the

terms of a Nasdaq WorkStation

Subscriber Agreement, as amended for

ECNs;

(4) agree to provide for Nasdaq’s

dissemination in the quotation data

made available to quotation vendors the

prices and sizes of Nasdaq market maker

orders (and other entities, if the

[electronic communications network]

ECN so chooses) at the highest buy price

and the lowest sell price for each

Nasdaq security entered in and widely

disseminated by the [electronic

communications network] ECN, and

prior to entering such prices and sizes,

register with Nasdaq Market Operations

for each such security as an ECN; and

(5) provide an automated execution

or, if the price is no longer available, an

automated rejection of any order routed

to the [electronic communications

network] ECN through the Nasdaqprovided display alternative.

(c) When a NASD member attempts to

electronically access through a Nasdaqprovided system an ECN-displayed

order by sending an order that is larger

than the ECN’s Nasdaq-displayed size

and the ECN is displaying the order in

Nasdaq on a reserved size basis, the

NASD member that operates the ECN

shall execute such Nasdaq-delivered

order:

(1) up to the size of the Nasdaqdelivered order, if the ECN order

(including the reserved size and

displayed portions) is the same size or

larger than the Nasdaq-delivered order;

or

(2) up to the size of the ECN order

(including the reserved size and

displayed portions), if the Nasdaqdelivered order is the same size or larger

than the ECN order (including the

reserved size and displayed portions).

No ECN operating in Nasdaq

pursuant to this rule is permitted to

provide a reserved-size function unless

the size of the order displayed in

Nasdaq is 100 shares or greater. For

purposes of this rule, the term ‘‘reserved

size’’ shall mean that a customer

entering an order into an ECN has

authorized the ECN to display publicly

part of the full size of the customer’s

order with the remainder held in reserve

on an undisplayed basis to be displayed

in whole or in part as the displayed part

is executed.

Rule 4613 Character of Quotations

(a)–(d) No Change

(e) Locked and Crossed Markets

(1) A market maker shall not, except

under extraordinary circumstances,

enter or maintain quotations in Nasdaq

during normal business hours if:

(A) the bid quotation entered is equal

to or greater than the asked quotation of

another market maker entering

quotations in the same security; or

(B) the asked quotation is equal to or

less than the bid quotation of another

market maker entering quotations in the

same security.

The prohibitions of this rule include

the entry of a locking or crossing

quotation at or after 9:25 a.m Eastern

Time if such quotation continues to lock

or cross the market at the market’s

opening, and requires a market maker

or ECN that enters a locking or crossing

quotation at or after 9:25 a.m. Eastern

Time to take action to avoid the lock or

cross at the market’s open or

immediately thereafter, but in no case

more than 30 seconds after 9:30 a.m.

(2) No Change

(3) For purposes of this [paragraph]

rule, the term ‘‘market maker’’ shall

include: any NASD member that enters

into an [electronic communications

network] ECN, as defined in SEC Rule

11Ac1–1(a)(8), a priced order that is

displayed in The Nasdaq Stock Market;

and [Such term also shall include] any

NASD member that operates the

[electronic communication network]

ECN when the priced order being

displayed has been entered by a person

or entity that is not a[n] NASD member.

Rule 4625. Obligation to Provide

Information

(1) A NASD member operating in or

participating in the third market. The

Nasdaq Stock Market, or other Nasdaqoperated system, shall provide

information orally, in writing, or

electronically (if such information is, or

is required to be, maintained in

electronic form) to the staff of Nasdaq

when:

(a) Nasdaq MarketWatch staff makes

an oral, written, or electronically

communicated request for information

relating to a specific NASD rule, SEC

rule, or provision of a joint industry

plan (e.g., ITS, UTP, CTA, and CQA) (as

promulgated and amended from timeto-time) that Nasdaq MarketWatch is

responsible for administering or to other

duties and/or obligations imposed on

Nasdaq MarketWatch by the Association

under the Plan of Allocation and

Delegation of Function by the NASD to

Subsidiaries or otherwise; this shall

include, but not be limited to,

information relating to:

(i) a locked or crossed market;

(ii) a trade reported by a member or

ECN to the Automated Transaction

Confirmation Service (‘‘ACT’’); or

(iii) trading activity, rumors, or

information that a member may possess

that may assist in determining whether

there is a basis to initiate a trading halt,

pursuant to NASD Rule 4120 and IM–

4120–1; or

(iv) a quotation that appears not to be

reasonably related to the prevailing

market.

(b) Nasdaq Market Operations staff

makes an oral, written, or electronically

communicated request for information

relating to a specific NASD rule, SEC

rule, provision of a joint industry plan

(e.g., ITS, UTP, CTA, and CQA) (as

promulgated and amended from timeto-time) that Nasdaq Market Operations

is responsible for administering or to

other duties and/or obligations imposed

on Nasdaq Market Operations by the

Association under the Plan of

Allocation and Delegation of Function

by the NASD to Subsidiaries or
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Notices 39921

5The ECN Rules is embodied in SEC Rule 11Ac1–

1 (‘‘Firm Quote Rule’’). See 17 CFR 240.11Ac1–1.

6Each ECN that chooses to link to Nasdaq must

sign a contract that imposes certain obligations on

the ECN. Among the requirements are: (1)

immediate display of orders; (2) rapid and nondiscriminatory execution of SelectNet orders that

seek to access the ECN’s quotation; and (3)

provision of system description regarding the

operation of the ECN. While in the past the use of

contracts has worked successfully in establishing

basic standards for ECN operation and activity, as

the number of ECNs has increased since January

1997 it is less efficient to attempt to fashion changes

to the contract to address the issues described in

this filing. Nasdaq has determined that it is

appropriate to propose changes to the rules

governing ECNs to address uniformly, across all

ECNs, the issues described in this filing.

7A locked market occurs when the quoted bid

price is the same as the quoted ask price. A crossed

market occurs when the quoted bid price is greater

than the quoted ask price.

8Nasdaq has noted that ECNs have the capability

to accept, and fromm time to time will accept,

SelectNet orders for more than the displayed size.

Telephone Conversation between Gail MarshallSmith, Special Counsel, Division, SEC and John F.

Malitzis, Senior Attorney, Nasdaq, on July 14, 1998.

9Market makers and ECNs are required to use

reasonable means not to lock or cross the market.

The NASD has interpreted ‘‘reasonable means’’ to

include perferencing a SelectNet order to the

firms(s) at the bid or offer. See NASD Notice to

Members 97–49. See also Letter to Joseph R.

Hardiman, President, NASD, for Richard R.

Lindsey, Director, Division of Market Regulation,

SEC, dated November 22, 1996 (noting that, in the

OTC market, a Nasdaq market maker holding a limit

order that is marketable against another market

maker’s or ECN’s quote may send a SelectNet

message to the market maker or ECN displaying the

existing quote. However, after using reasonable

efforts to execute against the existing quote, the

market maker should display the limit order even

if it locks the market).

10See NASD rule 4613(b).

otherwise; this shall include, but not be

limited to, information relating to:

(i) a clearly erroneous transaction,

pursuant to NASD Rule 11890;

(ii) a request to reconsider a

determination to withhold a primary

market maker designation, pursuant to

NASD Rule 4612;

(iii) a request for an excused

withdrawal or reinstatement, pursuant

to NASD Rules 4619, 4620, 4730, 5106

and 6350;

(iv) the resolution of a trade-through

complaint, pursuant to NASD Rules

5262, 5265, and 11890;

(v) an ACT input error;

(vi) an equipment failure; or

(vii) a request to submit a stabilizing

bid, pursuant to NASD Rules 4614 and

5106, or a request to have a quotation

identified as a penalty bid on Nasdaq,

pursuant to NASD Rule 4624.

(2) A failure to comply in a timely,

truthful, and/or complete manner with

a request for information made

pursuant to this rule may be deemed

conduct inconsistent with just and

equitable principles of trade.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In the NASD’s filing with the

Commission, Nasdaq included

statements concerning the purpose of,

and statutory basis for, the proposed

rule change and discussed any

comments it received on the proposed

rule change. The test of these statements

may be examined at the places specified

in Item IV below. Nasdaq 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. Background

Under SEC Rule 11Ac1–1(c)(5) (‘‘ECN

Rule’’),5 Nasdaq market maker must

reflect in its public quotes any superior

prices for those orders that the market

maker privately places within an ECN.

The ECN Rule provides an alternative to

this requirement referred to as the ‘‘ECN

Display Alternative.’’ Under the ECN

Display Alternative, a market maker will

be deemed to have complied with the

ECN Rule if the ECN in which the

market maker has placed s superior

priced order has: established a link to

Nasdaq by displaying the best ECN

prices in Nasdaq’s quote montage; and

provided non-subscribers access,

through Nasdaq, to such publicly

displayed prices. To accommodate the

alternative, Nasdaq created the

‘‘SelectNet Linkage’’ which allows: (1)

ECNs to display their best prices from

market makers and other ECN

subscribers in the Nasdaq quote

montage, including the inside market

display; and (2) Nasdaq member firms to

access those prices by sending orders to

an ECN through SelectNet. Subsequent

to the implementation of the ECN Rule,

the following issues have come to the

attention of the Association, which have

necessitated amending NASD Rules

4613(e) and 4623 and promulgating

NASD Rule 4625.6

2. Reserved Size

Nasdaq is proposing amendments to

NASD Rule 4623 to establish the

manner in which orders having a

reserved size that are entered into an

ECN must interact with SelectNet

orders. Since ECNs have been integrated

into the Nasdaq market, Nasdaq has

observed that ECNs cause a percentage

of locked and crossed markets.7

Frequently, locks or crosses are caused

by an ECN’s use of ‘‘reserved’’ size.

Specifically, an ECN may publicly

display one size of an order (e.g. 1,000

shares), while maintaining a

significantly larger size of the order in

reserve (e.g., 10,000 shares) that is not

displayed until the displayed size is

executed against, that is, every time a

1,000 share order is executed against the

ECN, the ECN displays another 1,000

shares at the same price until the full

size of the order is exhausted. The

market maker, however, does not know

how many 1,000 share orders it must

send to exhaust the ECN’s size and take

out its quote. As a result, a market

maker often will send an ECN multiple

SelectNet orders for the displayed size

in an attempt to take the quote out. If

this practice fails to take out the ECN

quote, a market maker will then often

send another order for a size larger than

the ECN’s displayed size to try to take

out not only the displayed order but

also any undisplayed reserved size.

Generally, however, ECNs execute

SelectNet orders only for the displayed

size (i.e., the market maker can only

execute 1,000 shares at a time, not the

full 10,000 share order.8 A market

maker will, after making these efforts to

take out the ECN quote, post the quote

it had orginially wanted to post, which

often results in market maker and ECN

quotations locking or crossing.9

Nasdaq believes that this is

inappropriate for several reasons. First,

an ECN’s unwillingness to execute

against an order to the full extent of the

ECN’s reserved size may violate the best

execution duty 10 of the broker/dealer

that is operating the ECN. Specifically,

Nasdaq believes that the broker/dealer

sponsoring the ECN may not be

complying fully with best execution

obligations if that broker/dealer fills the

order in small pieces at the displayed

size rather than accepting an order that

would fill a customer’s entire order.

This type of piecemeal execution is also

economically inefficient and may cause

customers to incur unnecessary

transaction costs because multiple

executions are required to fill the

customer’s order in full. Additionally,

this type of piecemeal execution

contributes to locking and crossing

problems in Nasdaq, and thus has a

negative impact on market quality and

the maintenance of orderly markets.

Accordingly, Nasdaq is proposing an

amendment to NASD Rule 4623. Under

the proposal, if an ECN displays in

Nasdaq an order having a reserved size

and a market participant attempts to

access the ECN’s Nasdaq-displayed

order by sending (via a Nasdaq-provided

means) an order that is larger than the

ECN’s Nasdaq-displayed size, the ECN
39922 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Notices

11Nasdaq has previously noted that it is

especially important at the opening that members

monitor their quotes as well as any orders placed

in ECNs to avoid locking or crossing the market

during the opening. See Notice to Members 97–49.

12Staff may request information on the identity

of the customers, trade information, the reason for

the lock or cross (e.g., system error), and other

information related to the locked or crossed market

situation.

13 In addition to the locks and crosses, there are

other instances when staff must gather information

from market makers and ECNs on a real-time basis.

For example, Nasdaq Market Watch may need to

contact a market maker or ECN to determine

quickly if a trade, quotation, or series of trades

appearing to be aberrations, were caused by a

malfunction of a computer system (which could

pose a threat to the integrity of Nasdaq from a

technological prospective) or by some other source.

14While staff of NASD Regulation currently has

authority under Rule 8210 to request information

from members, such authority may be exercised

only in connection with a current investigation,

filed complaint, examination, or authorized

disciplinary proceeding. Nasdaq staff requests

information to administer a rule, and does not

request information in connection with a filed

complaint.

would be required to execute the

Nasdaq-delivered order: (1) up to the

size of the Nasdaq-delivered order, if the

ECN order (including the reserved size

and displayed portions) is the same size

as or larger than the Nasdaq-delivered

order; or (2) up to the size of the ECN

order (including the reserved size and

displayed portions), if the Nasdaqdelivered order is the same size as or

larger than the ECN order (including the

reserved size and displayed portions).

3. Locked/Crossed Markets

Nasdaq also is proposing to amend

the NASD’s rule governing locked and

crossed markets, NASD Rule 4613(e).

Nasdaq has observed instances of

market makers and ECNs entering

orders at 9:29 a.m. (prior to the opening

when quotes are not firm) that lock or

cross the market and then leaving these

orders in place at 9:30 a.m. when the

market opens and quotes become firm.

This effectively locks/crosses the market

on the opening and, therefore, disrupts

the market’s opening.

Although NASD Rule 4613(e)

addresses the responsibility to avoid

locking and crossing the market during

normal business hours, the rule

currently does not specifically set out

the responsibility to avoid entering and

leaving in place quotations that lock or

cross the market on open (although

Nasdaq believes that it is clear that such

activity is contrary to the rule).11

Accordingly, the NASD and Nasdaq are

proposing to amend NASD Rule 4613(e)

to clarify that if a market maker or ECN

enters, at or after 9:25:00 a.m. Eastern

Time, a quotation that locks or crosses

the market on the opening, that market

maker or ECN has an obligation to take

action to avoid locking or crossing the

market immediately at the market’s

open, but in no case later than 30

seconds thereafter (i.e., 9:30:30 a.m.). By

including the 9:25 a.m. benchmark,

market makers and ECNs will be better

able to determine which party entered a

market-locking/crossing quotation, and

thus which party has the obligation to

execute a transaction against a quote to

unlock/uncross the market at the

opening. The rule further provides that

it is the responsibility of the market

maker or ECN that entered the locking

or crossing quotation at or after 9:25

a.m. to take action (such as sending a

SelectNet order to takeout the quotation

that will be crossed or locked or taking

down its own quotation) to unlock/

uncross the market immediately at the

open, but in no case later than 9:30:30

a.m. The 30 second period should give

a market participant ample time to send

a SelectNet message to the party that it

locked or crossed or to take down its

quote. Additionally, this provision

establishes a standard by when the

market participant must resolve the

locked/crossed market situation—

9:30:30 a.m.

Although Nasdaq believes that market

participants should always monitor

their preopening quotes to ensure that

they do not lock/cross the market on the

opening, the proposed rule includes a

specific time designation of when

market participants should begin

monitoring their quotes, an allocation of

which party is responsible for

unlocking/uncrossing the market, and a

specific time designation of when the

locking/crossing quote must be

removed. Without such standards, there

could be confusion as to which quote

caused the lock/cross and who has the

affirmative obligation to unlock/uncross

the market.

4. Staff Information Requests

Nasdaq also is proposing NASD Rule

4625 regarding a member’s obligation to

supply Nasdaq staff with certain

information upon request. Nasdaq’s

MarketWatch and Market Operations

departments have day-to-day

responsibilities for administering

various NASD and SEC rules, as well as

for carrying out duties delegated to them

by the Association. For example,

Nasdaq’s MarketWatch Department is

responsible for, among other things,

initiating trading halts and monitoring

locked and crossed market situations,

while Nasdaq’s Market Operations

Department is responsible for, among

other things, reviewing ITS tradethrough complaints, clearly erroneous

transactions, and requests for excused

withdrawals or reinstatements from

unexecuted withdrawals.

In order to properly rule or to carry

out a departmental function, Nasdaq

staff often must obtain information on a

real-time basis from a market

participant. For example, when

monitoring for locked and crossed

markets, Nasdaq Market Watch

routinely will contact the parties to the

lock or cross (e.g., a market maker and/

or ECN) to request relevant

information.12 Staff then will review

this information on a real-time basis and

assist in resolving the locked or crossed

market situation.13

While Nasdaq staff must request

information to properly carry out its

duties and responsibilities, currently

there is no explicit authority in the

NASD’s rules that allows Nasdaq staff to

do so or that requires members to

comply with such requests.14 While in

the past, members generally have

cooperated with Nasdaq staff and

voluntarily provided requested

information, recently some members

have refused to comply with such

requests. The inability to obtain

necessary information frustrates the

Nasdaq staff’s ability to properly

administer NASD and SEC rules and

frustrates Nasdaq’s responsibility of

maintaining fair and orderly markets.

To remedy this situation, Nasdaq is

proposing the adoption of NASD Rule

4625. This rule will authorize Nasdaq

staff to request information in specific

circumstances and will obligate

members to comply with such requests.

Specifically, under NASD Rule 4625

Nasdaq staff would be permitted to

request from a member information

directly related: to an SEC or NASD rule

that the Nasdaq department is

responsible for administering; or to

other duties/responsibilities imposed on

the Nasdaq department by the Plan of

Allocation and Delegation of Function

or otherwise delegated by the

Associated to such department. The rule

also states that the failure to provide

information could subject the member

to a disciplinary action.

5. Statutory Basis

Nasdaq believes that the proposed

rule changes are consistent with

Sections 15A(b)(6), 15A(b)(11), and

11A(a)(1)(C) of the Act. 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
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Notices 39923

15 15 U.S.C. 78o–3(b)(6).

16 15 U.S.C. 78o–3(b)(11).

17 15 U.S.C. 78k–1(a)(1)(C).

18 17 CFR 200.30–3(a)(12).

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

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in

securities, to remove impediments to an

perfect the mechanisms of a free and

open market and a national market

system and in general to protect

investors and the public interest.15

Section 15A(b)(11) empowers the NASD

to adopt rules governing the form and

content of quotations relating to

securities in the Nasdaq market.16 Such

rules must be designed to produce fair

and informative quotations, prevent

fictitious or misleading quotations, and

promote orderly procedures for

collecting, distributing, and publishing

quotations. Section 11A(a)(1)(C)

provides that it is in the public interest

and appropriate for the protection of

investors and the maintenance of fair

and orderly markets to, among other

things, assure the economically efficient

execution of securities transactions and

the availability to brokers, dealers, and

investors of information with respect to

quotations for and transactions in

securities, and to assure fair competition

among brokers and dealers.17

Specifically, the reserved size

proposal is consistent with Sections

11A(a)(1)(C) and 15A(b)(6). This

proposal helps to ensure that members

meet their best execution obligations

and discourages piecemeal executions,

which may be economically inefficient

and costly to the customer. Thus, the

proposal promotes just and equitable

principles of trade and the protection of

investors and the public interest.

Additionally, the rule helps remove

impediments to and perfect the

mechanism of a free and open market,

and ensures economically efficient

executions by discouraging piecemeal

executions of large orders.

The proposal to require members to

provide Nasdaq staff with information

and the amendments to NASD Rule

4613(e) are consistent with Sections

15A(b)(6) and 11A(a)(1)(C). By requiring

market makers and ECNs to avoid locks

and crosses on the market’s opening and

to provide Nasdaq staff with

information necessary to administer

NASD and SEC rules, these proposed

rules foster cooperation and

coordination with members. These two

proposals also ensure the fair and

orderly operation of Nasdaq, as they

clearly delineate the obligations

regarding the entry of quotations that

lock/cross the market at the opening and

permit staff to gather information

necessary to administer particular rules

or to discharge particular departmental

duties.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq 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.

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 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 NASD 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. Solicitations of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed 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. 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–98–01 and should be

submitted by August 14, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Jonathan G.Katz,

Secretary.

[FR Doc. 98–19807 Filed 7–23–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40224; File No. SR–NSCC–

98–2]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Notice of Filing and Order

Granting Accelerated Approval of a

Proposed Rule Change Allowing Users

of NSCC’s Mutual Fund Services

(‘‘MFS’’) Access to Annuity Processing

Services (‘‘APS’’) and to Allow Users

of APS Access to MFS

July 16, 1998.

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

Securities Exchange Act of 1934

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

March 12, 1998, the National Securities

Clearing Corporation (‘‘NSCC’’) filed

with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change and on March 26,

1998, amended the proposed rule

change as described in Items I and II

below, which items have been prepared

primarily by NSCC. The Commission is

publishing this notice and order to

solicit comments from interested

persons and to grant accelerated

approval of the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change amends

NSCC’s rules to allow users of NSCC’s

Mutual Fund Services (‘‘MFS’’) access

to Annuity Processing Services (‘‘APS’’)

and to allow users of APS access to

MFS.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NSCC 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. NSCC has prepared

summaries, set forth in sections (A), (B),