[Federal Register Volume 66, Number 105 (Thursday, May 31, 2001)]
[Notices]
[Pages 29610-29612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44348; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments and Order Approving 
Request to Extend Exchange on an Unlisted or Listed Basis, Submitted by 
the National Association of Securities Dealers, Inc., the Pacific 
Exchange, Inc. and the Boston, Chicago, Philadelphia, and Cincinnati 
Stock Exchanges

 May 24, 2001.

I. Introduction

    On May 23, 2001, the Cincinnati Stock Exchange, Inc. (``CSE'') on 
behalf of itself and the National Association of Securities Dealers, 
Inc. (``NASD''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Stock Exchange, Inc. (``CHX''), Pacific Exchange, Inc. (``PCX''), and 
the Philadelphia Stock Exchange, Inc. (``Phlx'') (hereinafter referred 
to as the ``Participants'') \1\ submitted to the Securities and 
Exchange Commission (``Commission'' or ``SEC'') a proposal to extend 
the operation of the Plan \2\ for Nasdaq/National Market (``Nasdaq/
NM'') securities traded on an exchange on an unlisted basis.\3\ The May 
2001 Extension Request would extend the effectiveness of the Plan 
through July 19, 2001 and also would extend certain exemptive relief as 
described below. The May 2001 Extension Request does not seek permanent 
approval of the Plan because the Participants currently are negotiating 
certain amendments to the Plan for which they will seek approval in the 
future.\4\
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    \1\ The CSE was elected as chair of the Operating Committee for 
the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Exchange-Listed Nasdaq/National Market 
System Securities and for Nasdaq/National Market System Securities 
Traded on Exchange on an Unlisted Trading Privileges Basis 
(``Plan'') by the Participants.
    \2\ See Letter from Jeffrey T. Brown, Vice President Regulation 
and General Counsel, CSE, to Jonathan G. Katz, Secretary, 
Commission, dated May 21, 2001 (``May 2001 Extension Request''). The 
signatories to the Plan are the Participants for purposes of this 
release; however, the BSE joined the Plan as a ``limited 
participant'' and reports quotation information and transaction 
reports only in Nasdaq/National Market securities listed on the BSE. 
Originally, the American Stock Exchange Inc. (``Amex'') was a 
Participant but withdrew its participation from the Plan in August 
1994.
    \3\ Section 12 of the Securities Exchange Act of 1934 (``Act'') 
generally requires an exchange to trade only those securities that 
the exchange lists, except that section 12(f) of the Act permits 
unlisted traded privileges (``UTP'') under certain circumstances. 
For example, section 12(f), among other things, permits exchanges to 
trade certain securities that are traded over-the-counter (``OTC/
UTP''), but only pursuant to a Commission order or rule. The present 
order fulfills this section 12(f) requirement. For a more complete 
discussion of the section 12(f) requirement, see November 1995 
Extension Order, infra note 7.
    \4\ In accordance with the Commission's statements in its order 
approving the establishment of the Nasdaq Order Display Facility and 
Order Collector Facility (``SuperMontage''), the Participants 
represent that they are revising the Plan. See Securities Exchange 
Act Release No. 43863 (January 19, 2001) 66 FR 8020 (January 26, 
2001).
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II. Background

    The Plan governs the collection, consolidation, and dissemination 
of quotation and transaction information for Nasdaq/NM securities 
listed on an exchange or traded on an exchange pursuant to a grant of 
UTP.\5\ The Commission originally approved the Plan on a pilot basis on 
June 26, 1990.\6\ The parties did not begin trading until July 12, 
1993, accordingly, the pilot period commenced on July 12, 1993. The 
Plan as since been in operation on an extended pilot basis.\7\
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    \5\ See Section 12(f)(2) of the Act, 15 U.S.C. 781(f)(2).
    \6\ See Securities Exchange Act Release No. 28146, 55 FR 27917 
(July 6, 1990) (``1990 Plan Approval Order'').
    \7\ See Securities Exchange Act Release Nos. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); 35221 (January 11, 1995), 60 FR 
3886 (January 19, 1995); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995); 36226 (September 13, 1995), 60 FR 49029 
(September 21, 1995); 36368 (October 13, 1995), 60 FR 54091 (October 
19, 1995); 36481 (November 13, 1995), 60 FR 58119 (November 24, 
1995) (``November 1995 Extension Order''); 36589 (December 13, 
1995), 60 FR 65696 (December 20, 1995); 36650 (December 28, 1995), 
61 FR 358 (January 4, 1996); 36934 (March 6, 1996), 61 FR 10408 
(March 13, 1996); 36985 (March 18, 1996), 61 FR 12122 (March 25, 
1996); 37689 (September 16, 1996), 61 FR 50058 (September 24, 1996); 
37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); 38457 (March 
31, 1997), 62 FR 16880 (April 8, 1997); 38794 (June 30, 1997) 62 FR 
365486 (July 8, 1997); 39505 (December 31, 1997) 63 FR 1515 (January 
9, 1998); 40151 (July 1, 1998) 63 FR 36979 (July 8, 1998); 40896 
(December 31, 1998), 64 FR 1834 (January 12, 1999); 41392 (May 12, 
1999), 64 FR 27839 (May 21, 1999) (``May 1999 Approval Order''); 
42268 (December 23, 1999), 65 FR 1202 (January 6, 2000); 43005 (June 
30, 2000), 65 FR 42411 (July 10, 2000); and 44099 (March 23, 2001), 
66 FR 17457 (March 30, 2001).
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III. Description of the Plan

    The Plan provides for the collection from Plan Participants, and 
the consolidation and dissemination to vendors, subscribers and others, 
of quotation and transaction information in ``eligible securities.'' 
\8\ The Plan contains various provisions concerning its operation, 
including: Implementation of the Plan; Manner of Collecting, 
Processing, Sequencing, Making Available and Disseminating Last Sale 
Information; Report Requirements (including hours of operation); 
Standards and Methods of Ensuring Promptness, Accuracy and Completeness 
of Transaction Reports; Terms and Conditions of Access; Description of 
Operation of Facility Contemplated by the Plan; Method and Frequency of 
Processor Evaluation; Written Understanding of Agreements Relating to 
Interpretation of, or Participation in, the Plan; Calculation of the 
Best Bid and Offer (``BBO''); dispute Resolution; and Method of 
Determination and Imposition, and Amount of Fees and Charges.\9\
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    \8\ The Plan defines ``eligible security'' as any Nasdaq/NM 
security as to which unlisted trading privileges have been granted 
to a national securities exchange pursuant to Section 12(f) of the 
Act or that is listed on a national securities exchange. On May 12, 
1999, in response to a request from the CHX, the Commission expanded 
the number of eligible Nasdaq/NM securities that may be traded by 
the CHX pursuant to the Plan from 500 to 1000. See May 1999 Approval 
Order, supra note 7. On November 9, 2000, the Commission notices and 
requested comment on a proposal by the PCX to expand the maximum 
number of securities eligible to trade all Nasdaq/NM securities. See 
Securities Exchange Act Release No. 43545, 65 FR 69581 (November 17, 
2000).
    \9\ The full text of the Plan, as well as a ``Concept Paper'' 
describing the requirements of the Plan, are contained in the 
original filing, which is available for inspection and copying in 
the Commission's public reference room.
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IV. Exemptive Relief

    In conjunction with the Plan, on a temporary basis, the Commission 
granted an exemption to vendors from Rule 11 Ac1-2 \10\ under the Act

[[Page 29611]]

regarding the calculation of the BBO \11\ and granted the BSE an 
exemption from the provision of Rule 11Aa3-1 \12\ under the Act that 
requires transaction reporting plans to include market identifiers for 
transaction reports and last sale data. In the May 2001 Extension 
Request, the Participants ask that the Commission grant an extension of 
the exemptive relief described above to vendors until the BBO 
calculation issue is fully resolved. In addition, in the May 2001 
Extension Request, the Participants request that the Commission grant 
an extension of the exemptive relief described above to the BSE until 
July 19, 2001.
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    \10\ 17 CFR 240.11 Ac1-2.
    \11\ Rule 11 Ac1-2 under the Act requires that the best bid or 
best offer to be computed on a price/size/time algorithm in certain 
circumstances. Specifically, Rule 11 Ac1-2 under the Act provides 
that ``in the event two or more reporting market centers make 
available identical bids or offers for a reported security, the best 
bid or offer * * * shall be computed by ranking all such identical 
bids or offers * * * first by size * * * then by time.'' The 
exemption permits vendors to display the BBO for Nasdaq securities 
subject to the Plan on a price/time/size basis.
    \12\ 17 CFR 11 Aa3-1.
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V. Solicitation of Comment

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it is consistent 
with the Act. The Commission continues to solicit comment regarding the 
BBO calculation, the trade-through rule and any issues presented by 
changes occurring in the market place. 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 proposal that are filed with the 
Commission, and all written communications relating to the proposal 
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. All submissions should refer to File No. S7-24-
89 and should be submitted by June 21, 2001.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through July 19, 2001, is 
appropriate and in furtherance of Section 11A \13\ of the Act.\14\ The 
Commission has previously stated that a revised Plan must be filed with 
the Commission by July 19, 2001, or the Commission will amend the Plan 
directly.\15\ The Participants represent in their proposal that they 
are negotiating certain amendments to be included in an interim plan, 
which would be effective from the date of Commission approval, and no 
later than the expiration of this extension on July 19, 2001. The 
Participants also represent that they are considering a permanent plan 
(that would include a fully viable alternative exclusive or non-
exclusive securities information processor) to be filed with the 
Commission on July 19, 2001. In light of the current negotiations 
regarding the existing Plan and the representations of the Participants 
in their request to the Commission, the Commission approves the 
requested extension of the Plan until July 19, 2001.
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    \13\ 15 U.S.C. 78k-1.
    \14\ In approving this extension, the Commission has considered 
the extension's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \15\ See supra note 4.
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    The Commission notes that the revised Plan, which must be filed 
with the Commission by July 19, 2001, must provide for either (1) a 
fully viable alternative exclusive securities information processor 
(``SIP'') for all Nasdaq securities, or (2) a fully viable alternative 
non-exclusive SIP in the event that the Plan does not provide for an 
exclusive SIP. If the revised Plan provides for an exclusive 
consolidating SIP, a function currently performed by Nasdaq, the 
Commission believes that, to avoid conflicts of interest, there should 
be a presumption that a Plan Participant, and in particular Nasdaq, 
should not operate such exclusive consolidating SIP. The presumption 
may be overcome if: (1) The Plan processor is chosen on the basis of 
bona fide competitive bidding and the Participant submits the 
successful bid; and (2) any decision to award a contract to a Plan 
Participant, and any ensuing review or renewal of such contract, is 
made without that Plan Participant's direct or indirect voting 
participation. If a Plan Participant is chosen to operate such 
exclusive SIP, the Commission believes there should be a further 
presumption that the Participant-operated exclusive SIP shall operate 
completely separate from any order matching facility operated by that 
Participant and that any order matching facility operated by that 
Participant must interact with the plan-operated SIP on the same terms 
and conditions as any other market center trading Nasdaq listed 
securities. Further, the Commission will expect the NASD to provide 
direct or indirect access to the alternative SIP, whether exclusive or 
non-exclusive, by any of its members that qualify, and to disseminate 
transaction information and individually identified quotation 
information for these members through the SIP.
    In addition, the revised Plan should resolve the issues, which have 
been pending since the implementation of the Plan, of whether there is 
a need for an intermarket linkage for order routing and execution, 
whether there is a need for a trade-through rule to facilitate the 
trading of OTC securities pursuant to UTP, and how the BBO calculation 
should be determined for securities traded pursuant to the Plan.
    Furthermore, the revised Plan should be open to all SROs, and the 
Plan should share governance of all matters subject to the Plan 
equitably among the SRO Participants. The Plan also should provide for 
sharing of market data revenues among SRO Participants. Finally, the 
Plan should provide a role for participation in decision making to non-
SROs, that have direct or indirect access to the alternative SIP 
provided by the NASD. The Commission expects the parties to continue to 
negotiate in good faith on the above matters \16\ as well as any other 
issues that arise during Plan negotiations.
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    \16\ See also discussion in the SuperMontage order, supra note 
4.
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    The Commission also finds that it is appropriate to extend the 
exemptive relief from Rule 11Ac1-2 \17\ under the Act until the earlier 
of July 19, 2001, or until such time as the calculation methodology of 
the BBO is based on a mutual agreement among the Participants approved 
by the Commission. The Commission further finds that it is appropriate 
to extend the exemptive relief from Rule 11Aa3-1\18\ under the Act to 
the BSE through July 19, 2001. The Commission believes that the 
temporary extensions of the exemptive relief provided to vendors and 
the BSE, respectively, are consistent with the Act, the Rules 
thereunder, and specifically with the objectives set forth in sections 
12(f) \19\ and 11A \20\ of the Act and in Rules 11Aa3-1 \21\ and 11Aa3-
2 \22\ thereunder.
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    \17\ 17 CFR 11Ac1-2.
    \18\ 17 CFR 11Aa3-1.
    \19\ 15 U.S.C. 781(f).
    \20\ 15 U.S.C. 78k-1.
    \21\ 17 CFR 240.11Aa3-1.
    \22\ 17 CFR 240.11Aa3-2.

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VII. Conclusion

    It is Therefore Ordered, pursuant to sections 12(f) \23\ and 11A 
\24\ of the Act and paragraph (c)(2) of Rule 11Aa3-2 \25\ thereunder, 
that the Participants' request to extend the effectiveness of the Plan, 
as amended, for Nasdaq/NM securities traded on an exchange on an 
unlisted or listed basis through July 19, 2001, and certain exemptive 
relief through July 19, 2001, is approved.
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    \23\ 15 U.S.C. 781(f).
    \24\ 15 U.S.C. 78k-1.
    \25\ 17 CFR 240.11Aa3-2(c)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13631 Filed 5-30-01; 8:45 am]
BILLING CODE 8010-01-M