27996 Federal Register / Vol. 60, No. 102 / Friday, May 26, 1995 / Notices

1 15 U.S.C. § 78s(b)(1) (1988).

2The Commission has modified the language in

these sections.

3Securities Exchange Act Releases Nos. 33023

(October 6, 1993), 58 FR 52891 (adoption of Rule

15c6–1) and 34952 (November 9, 1994), 59 FR

59137 (change of effective date of Rule 15c6–1 from

June 1, 1995 to June 7, 1995).

4 15 U.S.C. § 78q–1 (1988).

5 15 U.S.C. § 78f(b)(5) (1988).

6Supra note 3 and accompanying text.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 95–12986 Filed 5–25–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35740 ; File No. SR–PSE–

95–14]

Self-Regulatory Organizations; The

Pacific Stock Exchange, Incorporated;

Notice of Filing of Proposed Rule

Change Regarding Depository

Eligibility Requirements

May 19, 1995.

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

Securities Exchange Act of 1934

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

May 15, 1995, The Pacific Stock

Exchange, Incorporated (‘‘PSE’’) filed

with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which items

have been prepared primarily by PSE.

The Commission is publishing this

notice to solicit comments from

interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

PSE proposes to adopt a rule which

will set forth depository eligibility

requirements for issuers that apply to

list their securities on PSE.

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 IV 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.2

Self-Regultory Organization’s Statement

of the Purpose of, and Statutory Basis

for, the Proposed Rule Change

Under the proposed rule change, PSE

will adopt a uniform depository

eligibility rule for issuers that desire to

list their securities on PSE. The uniform

rule has been developed by the Legal

and Regulatory Subgroup of the U.S.

Working Committee of the Group of

Thirty in coordination with each of the

national securities exchanges and the

National Association of Securities

Dealers (‘‘NASD’’). It is anticipated that

each national securities exchange and

the NASD will file rule changes

proposing adoption of depository

eligibility standards substantially

similar to PSE’s proposed rule and will

seek to make such changes effective

contemporaneously with the effective

date of the transition from a five-day

(‘‘T+5’’) to a three-day (‘‘T+3’’)

settlement cycle. The transition is set to

occur June 7, 1995.3

The proposed rule change will require

domestic issuers to represent to PSE

before issues of securities are listed that

the CUSIP numbers identifying the

securities have been included in the file

of eligible issues maintained by a

securities depository registered as a

clearing agency under Section 17A of

the Act.4 This requirement will not

apply to a security if the terms of such

security cannot be reasonably modified

to meet the criteria for depository

eligibility at all securities depositories.

In addition, the rule will not apply to

American Depository Receipts for

securities of a foreign issuer.

The proposed rule change sets forth

additional requirements that must be

met before a security will be deemed to

be ‘‘depository eligible’’ within the

meaning of PSE Rule 5.9(c)(4). The

proposed rule specifies different

requirements for depository eligibility

depending upon whether a new issue is

distributed by an underwriting

syndicate before or after the date a

securities depository system is available

for monitoring repurchases of the

distributed shares by syndicate

members (‘‘flipping tracking system’’).

Currently, a flipping tracking system

is being developed that will include a

securities depository service that (i) can

be activated upon the request of the

managing underwriter for a period of

time that the managing underwriter

specifies, (ii) in certain circumstances,

will require the delivering participant to

provide to the depository information

sufficient to identify the seller of such

shares as a precondition to the

processing of book-entry delivery

instructions for distributed shares, and

(iii) will report to the managing

underwriter the identity of any other

syndicate member or selling group

member whose customer(s) sold

distributed shares (but will not report to

the managing underwriter the identity

of such customer[s]) and, in certain

circumstances, will report to such

syndicate member or selling group

member the identity of such

customer(s). Prior to the availability of

a flipping tracking system, the managing

underwriter may delay the date a

security is deemed ‘‘depository eligible’’

for up to three months after trading has

commenced in the security. After the

availability of a flipping tracking

system, a new issue will be deemed to

be depository eligible upon

commencement of trading on PSE.

The proposed rule change is

consistent with Section 6(b)(5) of the

Act 5 in that it is designed to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

in securities and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

PSE does not believe that the

proposed rule change will 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

Written comments on the proposed

rule change were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety 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 PSE 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.

PSE has requested accelerated

effectiveness of the proposed rule

change in order that the rule can

become effective on June 7, 1995.6
Federal Register / Vol. 60, No. 102 / Friday, May 26, 1995 / Notices 27997

7 17 CFR 200.30–3(a)(12) (1994).

1On February 15, 1995, the NASD filed

Amendment No. 1 with the Commission on March

7, 1995 the NASD filed Amendment No. 2 with the

Commission. See infra notes 6–7 and accompanying

text.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4NASD Manual, Rules of Fair Practice, Art. III,

Sec. 1 (CCH) ¶ 2151.07.

5See Letter from James T. Halverson, Esq.,

Shearman & Sterling, on behalf of Herzog, Heine,

Geduld, Inc. (‘‘Herzog’’) to Jonathan G. Katz,

Secretary, SEC, dated January 12, 1995 (‘‘January

Herzog Letter’’); and Letter from James F. Duffy,

Executive Vice President and General Counsel,

Legal & Regulatory Policy, American Stock

Exchange (‘‘Amex’’) to Jonathan G. Klatz, Secretary

SEC, dated January 18, 1995 (‘‘Amex Letter’’).

6NASD Manual, Rules of Fair Practice, Art. III,

Sec. 21 (CCH) ¶ 2171.

7See Letter from James T. Halverson, Esq.,

Shearman & Sterling, on behalf of Herzog, to

Jonathan G. Katz, Secretary, SEC, dated March 27,

1995 (‘‘March Herzog Letter’’) (the January Herzog

Letter and the March Herzog Letter are referred to

collectively as ‘‘Herzog Letters’’).

8Securities Exchange Act Release No. 33697

(March 1, 1994), 59 FR 10842 (March 8, 1994).

The Commission first addressed the issue of

customer limit order protection in the Nasdaq

market in the co-called Manning decision in 1988.

In that decision, the Commission affirmed, based on

principles of agency law, an NASD determination

that it is inconsistent with just and equitable

principles of trade for a market maker to trade

ahead of a customer limit order unless the

customers is first informed of the firm’s limit order

policy. See In re E.F. Hutton & Co. (the so-called

‘‘Manning decision’’), Securities Exchange Act

Release No. 25887 (July 6, 1988), 41 SEC Doc. 473,

appeal filed sub nom Hutton & Co. Inc. v. SEC, Dec.

No. 88–1649 (D.C. Cir. Sept. 2, 1988), (Stipulation

of Dismissal Filed, Jan. 11, 1989).

9Securities Exchange Act Release No. 34279

(June 29, 1994), 59 FR 34883 (July 7, 1994)

(‘‘Release 34–34279’’).

10 Division of Market Regulation, SEC, Market

2000: An Examination of Current Equity Market

Developments (‘‘Market 2000 Study’’), V–8 (1994).

11 Id.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submission

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington DC 20549. Copies of the

submissions, 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

Section, 450 5th Street, NW.,

Washington, DC 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of PSE. All submissions should

refer to file number SR–PSE–95–14 and

should be submitted by June 15, 1995.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.7

Jonathan G. Katz,

Secretary.

[FR Doc. 95–12925 Filed 5–25–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35751; File No. SR–NASD–

94–62]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to Limit Order

Protection and Nasdaq

May 22, 1995.

On November 22, 1994, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed a

proposed rule change with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) 1 pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),2 and

Rule 19b–4 thereunder.3 The proposed

rule change amends the NASD’s

Interpretation to Article III, Section 1 of

the NASD Rules of Fair Practice

(‘‘Interpretation’’) 4 to prohibit a member

firm that accepts and holds an

unexecuted limit order from its own

customer or from a customer of another

member in a Nasdaq security from

trading ahead of the customer’s limit

order—that is to trade the subject

security for its own market-making

account at prices that would satisfy the

customer’s limit order—unless it also

executes that limit order.

Notice of the proposed rule change,

together with the substance of the

proposal as initially filed, was provided

by issuance of a Commission release

(Securities Exchange Act Release No.

35122, Dec. 20, 1994) and by

publication in the Federal Register (59

FR 66389, Dec. 23, 1994, ‘‘Release 34–

35122’’). Two comment letters were

received.5

On February 15, 1995, the NASD filed

Amendment No. 1 with the

Commission. Amendment No. 1

clarified that the ‘‘terms and

conditions’’ exception to the

Interpretation applies only to limit

orders from institutional accounts, as

defined in Article III, Section 21(c)(4) of

the NASD Rules of Fair Practice,6

whether such limit orders originate with

a firm’s own customers or are sent to it

for execution by another member firm.

Notice of the proposed rule change, as

amended, together with the substance of

the proposal, was provided by issuance

of a Commission release (Securities

Exchange Act Release No. 35391, Feb.

16, 1995) and by publication in the

Federal Register (60 FR 9878, Feb. 22,

1995, ‘‘Release 34–35391’’). No

comment letters were received in

response to Amendment No. 1.

On March 7, 1995, the NASD filed

Amendment No. 2 with the

Commission. Amendment No. 2

amended the proposed rule change to

extend the ‘‘terms and conditions’’

exception to the Interpretation to limit

orders for 10,000 shares or more, unless

such orders are less than $100,000 in

value, as well as to limit orders from

institutional accounts.

Notice of the proposed rule change, as

amended, together with the substance of

the proposal, was provided by issuance

of a Commission release (Securities

Exchange Act Release No. 35454, Mar.

8, 1995) and by publication in the

Federal Register (60 FR 13199, Mar. 10,

1995, ‘‘Release 34–35454’’). One

comment letter was received in

response to Amendment No. 2.7 This

order approves the proposed rule

change.

I. Introduction and Background

Last year, the NASD submitted to the

Commission a proposed Interpretation

to its Rules of Fair Practice to prohibit

member firms from trading ahead of

their customers’ limit orders in their

market making capacity.8 The

Commission approved the NASD

Interpretation on June 29, 1994, but

expressed concern that the prohibition

did not extent to trading ahead of limit

orders of other firm’s customers that

have been sent to the market maker for

execution.9 In fact, the Commission’s

Division of Market Regulation, in its

Market 2000 Study, previously had

examined this practice and

recommended that a ban apply to

trading of all customer limit orders, not

just those of a firm’s own customer.10

The Study noted that the adverse effects

of trading ahead exist whether the

customer’s order is handled by the

customer’s firm or by another market

maker.11

Upon Commission approval the

NASD Interpretation, the NASD

convened a special task force (‘‘Task

Force’’) to study the potential effect of

expanded limit order protection on

market liquidity and market maker

capital commitment and to report to the

NASD Board of Directors in September

1994. At the time, the Commission