[Federal Register Volume 66, Number 89 (Tuesday, May 8, 2001)]
[Notices]
[Pages 23289-23291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11518]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44246; File No. SR-NASD-2001-29]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. To Establish the Nasdaq 
ReSource <SUP>SM</SUP> Service

May 2, 2001.
    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 April 24, 2001, the National Association of

[[Page 23290]]

Securities Dealers, Inc. (``NASD''), through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II 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. For the reasons 
discussed below, the Commission is granting accelerated approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) of the Act, and Rule 
19b-4 thereunder, Nasdaq is herewith filing a proposed rule change of 
the NASD to establish Nasdaq's new ReSource <SUP>SM</SUP> Service. The 
ReSource <SUP>SM</SUP> Service is voluntary and is designed to assist 
NASD members in complying with Rule 11Ac1-5 under the Act.\3\ Nasdaq 
will file a separate proposed rule change outlining the fee schedule 
for the ReSource <SUP>SM</SUP> Service.
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    \3\ 17 CFR 240.11Ac1-5.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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 III 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. Purpose
    On November 17, 2000, the Commission adopted Rules 11Ac1-5 \4\ and 
11Ac1-6 \5\ under the Act.\6\ Generally, the Rules seek to improve the 
ability of public investors to evaluate how their orders are handled 
after being submitted to a broker-dealer for execution. Rule 11Ac1-5 
(the ``Rule'') requires ``market centers'' that trade national market 
system securities to prepare and make publicly available standardized, 
monthly reports containing statistical information concerning the 
handling and execution of their ``covered orders.'' \7\ A ``market 
center'' under the Rule is defined as ``any exchange market maker, OTC 
market maker, alternative trading system, national securities exchange, 
or national securities association.'' \8\ To facilitate cross-market 
comparisons, the Rule establishes and defines uniform measures of 
execution quality, including effective spread, rate of price 
improvement and disimprovement, fill rate, and execution speed.
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    \4\ 17 CFR 240.11Ac1-5.
    \5\ 17 CFR 240.11Ac1-6.
    \6\ See Securities Exchange Act Release No. 43590 (November 17, 
2000), 65 FR 75414 (``Adopting Release'').
    \7\ The Rule defines ``covered order'' as any market order or 
any limit order (including immediate-or-cancel orders) received by a 
market center during regular trading hours at a time when a 
consolidated best bid and offer is being disseminated, and, if 
executed, is executed during regular trading hours. Excluded from 
the definition of ``covered order'' is any order for which the 
customer requests special handling for execution, including, but not 
limited to, orders to be executed at a market opening or closing 
price, orders submitted with stop prices, orders to be executed only 
at their full size, orders to be executed on a particular type of 
tick or bid, orders submitted on a ``not held'' basis, orders for 
other than regular settlement, and orders to be executed at prices 
unrelated to the market price at the time of execution. 17 CFR 
240.11Ac1-5(a)(8).
    \8\ 17 CFR 240.11Ac1-5(a)(14).
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    Nasdaq proposes to offer a new voluntary service--Nasdaq ReSource 
<SUP>SM</SUP>--to assist NASD member market centers in meeting their 
reporting obligations under Rule 11Ac1-5. Nasdaq plans to collect, 
compile, and web-host the reports required by the Rule. These reports 
will be referred to as Execution Quality Reports (or ``XQ Reports 
<SUP>SM</SUP>'') and will be made available on a free, publicly 
accessible web site. Through certain existing systems, members already 
provide Nasdaq with a portion of the data required to complete XQ 
Reports <SUP>SM</SUP>. In order to ensure complete XQ Reports 
<SUP>SM</SUP>, however, firms will be required to submit additional 
data to Nasdaq for certain categories of orders. Member firms will be 
required to provide an electronic file containing execution and 
cancellation information for orders routed to Nasdaq execution systems, 
orders routed to ECNs, orders routed to non-NASD members, and certain 
orders executed as riskless principal, depending on which method the 
subscriber chooses to report riskless principal transactions.\9\
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    \9\ See NASD Rule 4632(d)(B) and NASD Notice to Members 00-79.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 11A(a)(1)(C) of the Act, which provides, in relevant part, that 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure: 
(1) Economically efficient execution of securities transactions; (2) 
fair competition among brokers and dealers; (3) the availability to 
brokers, dealers and investors of information with respect to 
quotations and transactions in securities; (4) the practicability of 
brokers executing investors' orders in the best market; and (5) an 
opportunity for investors orders to be executed without the 
participation of a dealer.\10\ In adopting Rule 11Ac1-5, the Commission 
stated that the Rules would help further these important national 
market system objectives. Nasdaq represents that many market centers, 
however, do not have the necessary systems in place to collect and 
disseminate the required statistical information. Moreover, developing 
such systems and allocating firm personnel necessary to produce 
internally the reports required by the Rule may be a significant burden 
on some firms and may not be completed by the applicable compliance 
dates. Nasdaq believes that the ReSource <SUP>SM</SUP> Service will 
enable NASD member market centers to comply with Rule 11Ac1-5 in a more 
cost-effective and timely manner. By facilitating compliance with Rule 
11Ac1-5 by NASD members that are market centers, the ReSource 
<SUP>SM</SUP> Service would serve to advance the purposes of Section 
11A(a)(1)(C).
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    \10\ 15 U.S.C. 78k-1(a)(1)(C).
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    In addition, Nasdaq believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act.\11\ Section 15A(b)(6) 
requires the NASD's rules, among other things, to protect investors and 
the public interest. As described above, the Nasdaq ReSource 
<SUP>SM</SUP> Service is designed to assist NASD members in complying 
with SEC Rule 11Ac1-5, and the rule is designed to improve the ability 
of public investors to evaluate how broker-dealers are handling their 
orders. Nasdaq believes that by providing the service to members, it 
will both facilitate the Commission's goals and fulfill its own 
obligations to protect investors and the public interest.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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.

[[Page 23291]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Nasdaq did not solicit or receive written comments on the proposed 
rule change.

III. Solicitation 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, NW., Washington, DC 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 at 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 No. SR-NASD-2001-29 and 
should be submitted by May 29, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association.\12\ In 
particular, the proposed rule change is consistent with the 
requirements of Section 15A(b)(6) \13\ of the Act in that it is 
designed to foster cooperation and coordination with persons engaged in 
processing information with respect to 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.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    In addition, the proposed rule change is consistent with Section 
11A(a)(1)(C) of the Act,\14\ which provides that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations and transactions in securities. In adopting Rule 11Ac1-5, 
the Commission stated that the Rules would help further this and other 
national market system objectives.\15\ Many market centers may not have 
the necessary systems in place to collect and disseminate the 
statistical information required by the Rule. Moreover, developing such 
systems and allocating firm personnel necessary to produce internally 
the reports required by the rule may be a significant burden on some 
firms and may not be completed by the applicable compliance dates.\16\ 
The Commission anticipated that self-regulatory organizations might 
choose to provide services to assist their members in complying with 
the Rule.\17\ The ReSource\SM\ Service could enable many NASD member 
market centers to comply with Rule 11Acl-5 in a more cost-effect and 
timely manner.
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    \14\ 15 U.S.C. 78k-1(a)(1)(C).
    \15\ See supra note 6.
    \16\ The initial compliance date for the reporting of listed 
securities under Rule 11Acl-5 was May 1, 2001. The Commission has 
temporarily exempted (until July 31, 2001) all orders in Nasdaq 
securities. Letter from Annette L. Nazareth, Director, Division of 
Market Regulation, SEC, to Stuart J. Kaswell, Senior Vice President 
and General Counsel, Securities Industry Association, dated April 
12, 2001.
    \17\ See supra note 6.
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    Pursuant to Seciton 19(b)(2),\18\ the Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register. 
Accelerated approval of the ReSource\SM\ Service will give subscribing 
firms an alternative means to comply with Rule 11Ac1-5 and allow 
sufficient time for market centers to develop and test their systems. 
Members must begin this process as soon as possible to ensure that they 
are prepared to comply with the Rule on August 1, 2001. Nasdaq states 
that many NASD members have inquired as to whether Nasdaq will offer 
such a service. Nasdaq believes that members may be hesitant to 
subscribe to the Service due to concern the ReSource\SM\ Service may 
not be approved or approved too late to enable members to comply with 
Rule 11Ac1-5. Moreover, a prospective subscriber of Nasdaq's 
ReSource\SM\ Service may be hesitant to commit resources to programming 
and testing systems for ReSource\SM\ if there is a possibility that 
approval will be delayed. Accelerated approval will eliminate 
uncertainty regarding the ReSource\SM\ Service.
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    \18\ 15 U.S.C. 78s(b)(2).
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    Accelerated approval of the ReSource\SM\ Service also will 
facilitate Nasdaq's ability to develop and test systems. Nasdaq 
represents that based on conversations with members, it has developed 
an estimate of the number of firms that are likely to subscribe and the 
resources required to provide the ReSource\SM\ Service. However, Nasdaq 
cannot confirm its estimates until it confirms the number of 
subscribers, which practically can be accomplished only when a 
subscriber pays for the ReSource\SM\ service. In addition, the cost of 
the ReSource\SM\ Service will be an important factor that potential 
subscribers will consider in determining whether to subscribe. 
Accelerated approval of the ReSource\SM\ service will enable Nasdaq to 
finalize their fee schedule sooner.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change, SR-NASD-2001-29 is approved on 
an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-11518 Filed 5-7-01; 8:45 am]
BILLING CODE 8010-01-M