Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 57909 

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

16 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 43344 

(September 26, 2000), 65 FR 59038. 

4See letters to Jonathan G. Katz, Secretary, 

Commission, from Harold M. Golz, Krys Boyle 

Freedman & Sawyer, P.C. on behalf of Rocky 

Mountain Securities & Investments, Inc., dated 

October 20, 2000 (‘‘Rocky Mountain Letter’’); 

Mitchell M. Almy, President, Mitchell Securities 

Corporation of Oregon, dated October 20, 2000 

(‘‘Mitchell Securities Letter’’); Joanne Ferrari, 

Compliance Manager, Weeden & Co., dated October 

23, 2000 (‘‘Weeden Letter’’); Bonnie K. Wachtel, 

CEO and Wendie L. Wachtel, COO, Wachtel & Co., 

Inc. dated October 24, 2000 and March 26, 2001 

(‘‘Watchel Letters—1’’); Laurence Storch, Storch & 

Brenner, LLP, dated October 24, 2000 (‘‘Stroch & 

Brenner Letter’’); Allen Thomas, Vice President, 

A.G. Edwards & Sons, Inc., dated October 24, 2000 

(‘‘A.G. Edwards Letter’’); Stuart J. Kaswell, Senior 

Vice President and General Counsel, Securities 

Industry Association, Ad Hoc Committee, dated 

October 24, 2000 (‘‘SIA Letter-1’’); W. Leo McBlain, 

Chairman and Thomas J. Jordan, Executive Director, 

Financial Information Forum, dated October 24, 

2000 (‘‘FIF Letter-1’’); Thomas F. Guinan, Senior 

Vice President, Pershing Division of Donaldson, 

Lufkin & Jenrette Securities Corporation, dated 

October, 24, 2000 (‘‘Pershing Letter’’); Paul A 

Merolla, Senior Vice President and General 

Counsel, Instinet Corporation, dated October 25, 

2000 (‘‘Instinet Letter’’); Richard E. Schell, Vice 

President and Assistant General Counsel, First 

Options of Chicago, dated October 25, 2000 (‘‘First 

Options Letter’’); Jill W. Ostergaard, Vice President, 

Morgan Stanley Dean Witter, dated October 27, 

2000 (‘‘MSDW Letter’’). 

5See Securities Exchange Act Release No. 51890 

(June 21, 2005), 70 FR 36985. 

6See letters to Jonathan G. Katz, Secretary, 

Commission, from Chris Charles, President, Wulff, 

Hansen & Co., dated July 12, 2005 (‘‘Wulff Letter’’); 

Bonnie K. Wachtel, CEO and Wendie L. Wachtel, 

COO, Wachtel & Co., Inc. dated July 18, 2005 

(‘‘Wachtel Letter-2’’); Ronald C. Long, Senior Vice 

President, Wachovia Securities, LLC, dated July 18, 

2005 (‘‘Wachovia Letter’’); Howard Meyerson, 

General Counsel, Liquidnet, Inc., dated July 19, 

2005 (‘‘Liquidnet Letter’’); Bob Linville, ADP/SIS 

Service Bureau Committee Co-Chair, Deborah 

Mittelman, Sunguard Service Bureau Committee 

Co-Chair, W. Leo McBain, Chairman, Manisha 

Kulkarni, Executive Director, Financial Information 

Forum, dated July 22, 2005 (‘‘FIF Letter-2’’); Ira 

Hammerman, Senior Vice President and general 

Counsel, Securities Industry Association, dated July 

26, 2005 (‘‘SIA Letter-2’’). 

January 1, 2006 or on the date all of the 

proposed enhancements to the MFQS 

system have been implemented. The 

Commission believes that this change to 

the proposal sufficiently addresses the 

concerns expressed by the commenter. 

The Commissioner finds good cause 

for approving proposed Amendment No. 

2 before the 30th day after the date of 

publication of notice of filing thereof in 

the Federal Register. Nasdaq filed 

Amendment No. 2 in response to 

comments it received after publication 

of the notice of filing of the proposed 

rule change, to address the commenter’s 

concerns. Because Amendment No. 2 is 

responsive to the commenter’s concerns, 

the Commission finds good cause for 

accelerating approval of Amendment 

No. 2. 

V. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning Amendment No. 

2, including whether Amendment No. 2 

is consistent with the Act. Comments 

may be submitted by any of the 

following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2005–059 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–9303. 

All submissions should refer to File 

Number SR–NASD–2005–059. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 also will be 

available for inspection and copying at 

the principal office of the NASD. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASD–2005–059 and 

should be submitted on or before 

October 25, 2005. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,15 that the 

proposed rule change (File No. SR–

NASD 2005–059), as modified by 

Amendment No. 1, thereto, be, and it 

hereby is, approved and that 

Amendment No. 2 be, and hereby is, 

approved on an accelerated basis. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.16

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–19808 Filed 10–3–05; 8:45 am] 

BILLING CODE 8010–01–M 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52521; File No. SR–NASD–

00–23] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Order Approving 

Amendment No. 2 to Proposed Rule 

Change by Relating to Amendments To 

Order Audit Trail System Rules and 

Notice of and Order Granting 

Accelerated Approval to Amendment 

No. 3 

September 28, 2005. 

I. Introduction 

On April 19, 2000, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend its rules relating to its Order 

Audit Trail System (‘‘OATS’’). On 

September 5, 2000, NASD filed 

Amendment No. 1 to the proposed rule 

change. The proposed rule change, as 

amended by Amendment No. 1, was 

published for comment in the Federal 

Register on October 3, 2000.3 The 

Commission received 13 comment 

letters from 12 commenters in response 

to the publication.4

In response to those comments, on 

June 10, 2005, NASD filed Amendment 

No. 2 to the proposed rule change. 

Amendment No. 2 was published for 

comment in the Federal Register on 

June 27, 2005.5 The Commission 

received six comment letters in 

response to the publication.6 On 

September 14, 2005, NASD filed 

Amendment No. 3 to the proposed rule 

change to address the concerns raised in 

those comment letters, and to make a 

technical change to the rule text. This 

order approves Amendment No. 2 to the 

proposed rule change. In addition, the 

Commission is publishing this notice to 

solicit comments on Amendment No. 3 

to the proposed rule change and is 

57910 Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 

7See Securities Exchange Act Release No. 39729, 

63 FR 12559 (March 13, 1998). 

8OATS is intended to fulfill one of the 

undertakings contained in the order issued by the 

Commission relating to the settlement of an 

enforcement action against the NASD for failure to 

adequately enforce its rules. See In the Matter of 

National Association of Securities Dealers, Inc., 

Securities Exchange Act Release No. 37538, August 

8, 1996; Administrative Proceeding File No. 3–

9056. 

9The original effective date for Phase Three was 

July 31, 2000. NASD filed a proposed amendment 

with the SEC for immediate effectiveness to extend 

the implementation date of Phase Three to 120 days 

after SEC approval of SR–NASD–00–23. See 

Securities Exchange Act Release No. 43654 

(December 1, 2000), 65 FR 77405 (December 11, 

2000). 

10See Securities Exchange Act Release No. 

37619A (September 6, 1996), 61 FR 48290 

(September 12, 1996). 

11Because certain order handling rules may apply 

differently to block orders of 10,000 shares or 

greater, NASD proposed, in Amendment No. 1, to 

define the time of receipt differently depending on 

the size of the order. 

12See Mitchell Securities Letter. 

13See SIA Letter-1; MSDW Letter; Pershing Letter; 

A.G. Edwards Letter; and Rocky Mountain Letter. 

14See SIA Letter-1 and A.G. Edwards Letter. 

15 17 CFR 240.17a–3(a)(6); See SIA–1 Letter; 

MSDW Letter; A.G. Edwards Letter; and Pershing 

Letter. 

simultaneously approving the 

amendment on an accelerated basis. 

II. Background 

On March 6, 1998, the Commission 

approved NASD Rules 6950 through 

6957 (‘‘OATS Rules’’).7 OATS provides 

information regarding orders and 

transactions that allows NASD to 

conduct surveillance and investigations 

of member firms for potential violations 

of NASD rules and the federal securities 

laws. OATS is designed,8 at a minimum, 

to: (1) Provide an accurate, timesequenced record of orders and 

transactions, beginning with the receipt 

of an order at the first point of contact 

between the broker/dealer and the 

customer or counterparty and further 

documenting the life of the order 

through the process of execution; and 

(2) provide for market-wide 

synchronization of clocks used in 

connection with the recording of market 

events. 

The OATS Rules generally impose 

obligations on member firms to record 

in electronic form and report to NASD 

on a daily basis certain information with 

respect to orders originated or received 

by NASD members relating to securities 

listed on Nasdaq. OATS captures this 

order information reported by NASD 

members and integrates it with quote 

and transaction information to create a 

time-sequenced record of orders and 

transactions. This information is used 

by NASD staff in conducting 

surveillance and investigations of 

member firms for violations of federal 

securities laws and NASD rules. 

The OATS requirements were 

implemented in three phases. All 

members were required to synchronize 

their computer system clocks and all 

mechanical clocks that record times for 

regulatory purposes by August 7, 1998, 

and July 1, 1999, respectively. In 

addition, electronic orders received at 

the trading department of a market 

maker and those received by ECNs were 

required to be reported to OATS as of 

March 1, 1999 (‘‘Phase One’’). 

Additional information relating to 

market maker and ECN electronic orders 

and all other electronic orders were 

required to be reported to OATS by 

August 1, 1999 (‘‘Phase Two’’). Finally, 

pursuant to Rule 6957(c), the OATS 

Rules were to apply to all manual orders 

effective 120 days after Commission 

approval of the instant filing, SR–

NASD–00–23, (‘‘Phase Three’’).9

During the implementation of OATS, 

NASD has identified several changes to 

OATS that it believes would enhance 

NASD’s automated surveillance for 

compliance with trading and market 

making rules such as Interpretive 

Material (IM) 2110–2, (commonly 

referred to as the ‘‘NASD’s Limit Order 

Protection Interpretation’’), the SEC’s 

Order Handling Rules 10 and a member 

firm’s best execution obligations. In 

addition to implementing Phase Three 

of OATS, NASD proposed these changes 

in SR–NASD–00–23 and Amendment 

No. 1 thereto. Provided below is a 

description of the original proposal, as 

modified by Amendment No. 1, a 

summary of the comments received in 

response to the proposed changes, and 

a description of NASD’s response 

(‘‘Amendment No. 2’’). 

III. Description of Initial Proposal and 

Amendment No. 1, Comments Received 

and NASD’s Response Thereto 

(Amendment No. 2) 

A. Proposed Definition of Time of 

Receipt 

1. Description 

NASD Rule 6954 requires certain 

identifying information be recorded at 

various critical points during the life of 

an order, thereby assisting NASD in 

carrying out its regulatory 

responsibilities. In particular, NASD 

Rule 6954(b)(16) requires that members 

record and report the date and time the 

order is originated or received by a 

Reporting Member (‘‘time of receipt’’). 

The OATS Rules, which currently only 

apply to electronic orders, require that 

the time of receipt for an electronic 

order be the time an order is received 

by a firm’s electronic order handling 

system. Upon approval of the instant 

proposed rule change, members will be 

required to record and report OATS 

information for manual orders as well. 

The time of receipt for manual orders 

is the time the order is received by the 

member from the customer, whether 

that is at a trading desk or at another 

location. In the original filing, NASD 

proposed that the time of receipt for 

manual orders be the time the order is 

received by the member firm’s trading 

desk or trading department for 

execution or further routing purposes. 

NASD also proposed to codify the staff’s 

position that the time of receipt for 

electronic orders is the time the order is 

captured by a member’s electronic 

order-routing or execution system. 

In Amendment No. 1, NASD amended 

its original filing and proposed that the 

time of receipt for manual orders of less 

than 10,000 shares be the time the order 

is received by the member’s trading 

desk or trading department for 

execution or routing purposes. For 

manual orders that are 10,000 shares or 

greater, the time of receipt would 

continue to be the time the order is 

received by the member from the 

customer.11

2. Comments and NASD’s Response 

One commenter supported the 

proposed definitions,12 while several 

commenters opposed having two 

definitions of time of receipt for manual 

orders.13 Specifically, commenters 

opposed the requirement that the time 

of receipt for a manual order of 10,000 

shares or greater be the time the order 

is received by the member from the 

customer, rather than the time the order 

is received at the member’s trading desk 

or trading department for execution or 

routing purposes. Commenters asserted 

that eliminating the time a 10,000 share 

or greater order is received by the 

trading desk for OATS purposes would 

impede NASD surveillance capabilities 

while, conversely, the inclusion of the 

customer order receipt time for these 

orders would not improve significantly 

NASD’s ability to oversee and enforce 

sales practice violations.14 Further, 

commenters noted that NASD, where 

necessary, could obtain from members 

the customer order receipt time from 

members, which is required to be 

maintained under Rule 17a–3(a)(6) of 

the Act.15 In addition, commenters 

indicated that the two differing 

definitions of receipt time would create 

unnecessary costs and burdens for 

members in establishing automated 

systems to capture OATS data at branch 

locations, as well as confusion for 

salespersons in the branches and trading 

Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 57911 

16See SIA–1 Letter; MSDW Letter; and A.G. 

Edwards Letter. 

17NASD Rule 6954(c) currently requires that 

certain information be recorded when an order is 

transmitted to a department within a firm, other 

than the trading department. In furtherance of this 

provision, the OATS Reporting Technical 

Specifications requires that this information be 

reported to OATS via a ‘‘Desk Report.’’ When the 

OATS Rules originally were adopted in 1998, the 

OATS reporting framework was based on NASD 

staff’s understanding that most electronic orders 

received by members were transferred to the trading 

department for execution and that such transfer was 

instantaneous with receipt of the order. Members 

had indicated that the ‘‘routine’’ order flow from 

point of receipt to the trading department would 

generate a significant number of OATS Desk 

Reports, and that reporting that information to 

OATS would be very burdensome and provide little 

additional information, since the transfer was 

instantaneous. As a result, Desk Reports were 

required only in those instances where orders were 

transmitted to departments other than the trading 

department (e.g., block desk, arbitrage desk). Since 

that time, member order routing and handling 

systems have changed and a larger percentage of 

orders are not routed immediately to the trading 

desk. Therefore, NASD staff believes the exclusion 

for orders routed to the trading department no 

longer makes sense and may result in gaps in the 

audit trail. 

18 If any delay results in the routing of an order 

due to systems problems or other reasons, the 

member with which the order originated would be 

required to report OATS data. 

19See Rocky Mountain Letter. 20See Rocky Mountain Letter. 21See Pershing Letter. 22See FIF Letter-1. 

23See SIA Letter-1. 

24See SIA Letter-1. 

25See SIA Letter-1. 

desk personnel of firms, and would lead 

to inadvertent mistakes and delays in 

executions.16

NASD agreed with commenters that 

having two differing definitions of time 

of receipt based solely on the size of the 

order would create burdens for 

members. However, because NASD 

believes that it is critical that OATS 

capture the time that an order is 

received by the trading desk, and have 

an electronic record of when orders, 

especially larger orders, are received at 

a firm to enable the staff to perform 

surveillance to detect violations such as 

frontrunning, as reflected in 

Amendment No. 2, NASD determined 

that OATS should capture both the time 

the order is received by the member 

from the customer and the time the 

order is received by the member’s 

trading desk or trading department, if 

those times are different. 

Given that orders may be routed to 

multiple locations within a firm prior to 

reaching the trading desk (or even 

routed outside the firm directly from a 

desk other than the trading desk), in 

Amendment No. 2, NASD proposes to 

capture the various receipt times 

(customer receipt time, trading desk 

receipt time, etc.) by expanding the 

OATS order transmittal requirements 

that apply to intra-firm routes to include 

orders routed to the trading 

department.17 Specifically, if an order 

were not received immediately at the 

trading department, members would be 

required to capture information relating 

to the transfer of that order to the 

trading department under the order 

transmittal requirements of NASD Rule 

6954(c). To the extent that the time of 

receipt of the order from the customer 

and receipt of the order by the trading 

department are the same, no Desk 

Report would be required, given that the 

New Order Report would accurately 

capture the time of receipt at the trading 

department. 

The proposed rule change, as 

reflected in Amendment No. 2, would 

apply equally to both electronic and 

manual orders. In other words, the time 

of receipt for purposes of order 

origination would always be the time 

the order is received from the customer. 

Amendment No. 2 also would require 

that members provide information on 

the nature of the department to which 

an order was transmitted, the number of 

shares to which the transmission 

applies, and any special handling 

requests. As with other technical 

requirements relating to OATS, NASD 

represented that it will specify in the 

OATS Reporting Technical 

Specifications how firms should report 

this information. 

B. Proposed Exclusion From the 

Definition of ‘‘Reporting Member’’

1. Description 

Certain NASD members engage in 

non-discretionary order routing 

processes whereby, immediately after 

receipt of a customer order, the member 

routes the order, by electronic or other 

means, to another member (‘‘receiving 

Reporting Member’’) for further routing 

or execution at the receiving Reporting 

Member’s discretion. Currently, the 

OATS Rules require both the member 

with which the order originated and the 

receiving Reporting Member to create 

and report New Order Reports and 

possibly Route Reports. This results in 

the receipt of duplicative information by 

OATS. Therefore, NASD proposed in 

the original filing that the OATS Rules 

be amended to require, in such 

instances, that only the receiving 

Reporting Member report OATS data. 

NASD proposed that a member would 

not be required to report OATS data 

regarding an order, if the following 

conditions are met: 

(1) the member engages in a nondiscretionary order routing process, 

pursuant to which it immediately 

routes, by electronic or other means, all 

of its orders to a single receiving 

Reporting Member;18

(2) the member does not direct or 

maintain control over subsequent 

routing or execution by the receiving 

Reporting Member; 

(3) the receiving Reporting Member 

records and reports all information 

required under NASD Rules 6954 and 

6955 with respect to the order; and 

(4) the member has a written 

agreement with the receiving Reporting 

Member specifying the respective 

functions and responsibilities of each 

party to effect full compliance with the 

requirements of NASD Rules 6954 and 

6955. 

2. Comments and NASD’s Response 

One commenter suggested that the 

exclusion from the definition of 

‘‘Reporting Member’’ for members that 

use a non-discretionary order routing 

process as described in the proposed 

rule change be expanded to allow for an 

additional exclusion for members that 

regularly route all of a particular type of 

order or class of securities to a single 

receiving Reporting Member pursuant to 

a contractual arrangement.19 For 

example, if a firm regularly routes to a 

receiving Reporting Member all 

transactions in margin accounts and the 

receiving Reporting Member otherwise 

has total execution discretion and meets 

the other requirements set forth in the 

proposed rule change, the firm should 

be excluded from reporting these orders 

under the OATS Rules. The commenter 

noted that such an exclusion could be 

limited to no more that two or three 

such relationships.20 One commenter 

also suggested an order-by-order 

exclusion.21 Another commenter 

suggested allowing firms to handle an 

occasional order in a discretionary 

manner, but still be eligible for the 

exclusion.22

Another commenter stated that it is 

inequitable to provide an exclusion to 

correspondent firms that send all their 

order flow to their clearing firm, but not 

other kinds of order entry firms.23 The 

commenter generally argued that this 

proposed exclusion is unfair to other 

firms with different business models 

and is likely to hasten the decision by 

some firms to entrust all of their order 

flow with one executing party.24 This 

commenter suggested that the 

exemption be extended to all reporting 

firms based on the number of manual 

orders they handle as a percentage of 

total volume.25

In response, NASD states that the 

proposed exclusion from the definition 

57912 Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 

26See SIA Letter-1; FIF Letter-1; MSDW Letter; 

Wachtel Letters-1; Pershing Letter; and Mitchell 

Securities Letter. 

27See SIA Letter-1; FIF Letter-1; Pershing Letter; 

and Mitchell Securities Letter. 

28See SIA Letter-1; A.G. Edwards Letter; MSDW 

Letter; Pershing Letter; and Wachtel Letters-1. 

29See SIA Letter-1. 

30See SIA Letter-1 and A.G. Edwards Letter. 

of Reporting Member is directed at those 

members that use a non-discretionary 

order routing process whereby, 

immediately after receipt of its customer 

orders, the member routes all its orders, 

by electronic or other means, to a single 

receiving Reporting Member for further 

routing or execution at the receiving 

Reporting Member’s discretion. NASD 

states that the proposed exclusion is not 

limited to correspondent/clearing 

relationships, but applies to any 

relationship that meets the proposed 

conditions. 

NASD explained that the goal of the 

proposed rule is to eliminate the 

reporting of duplicative information to 

OATS where all of the OATS data of 

one member would be captured by the 

receiving Reporting Member. NASD 

noted that if the proposed rule were to 

permit deviations from this as 

commenters suggest, the exclusion 

would, in effect, permit an exclusion for 

almost any category of orders that are 

routed to another firm. Without the 

condition that all orders be routed to 

one firm, NASD would not have the 

ability to easily identify which receiving 

Reporting Member is providing the 

OATS order information that 

corresponds to the orders initially 

received by the member. Therefore, 

NASD declined to make any further 

changes to this proposed rule as 

described by commenters. However, in 

Amendment No. 2, NASD proposes to 

modify the rule text to clarify that, to 

qualify for the proposed exclusion to the 

definition of ‘‘Reporting Member,’’ the 

member must route all of its orders to 

a single receiving Reporting Member. 

C. Recording and Reporting a Routed 

Order Identifier 

1. Description 

OATS has the capability of tracking 

the history of an order by linking such 

orders across firms through the use of a 

routed order identifier. If the order does 

not contain a routed order identifier, the 

order cannot be linked systematically to 

subsequent actions, such as further 

routing or execution by other firms or 

Nasdaq systems. In this regard, the 

complete history of a significant 

percentage of orders may not be tracked 

because the OATS rules do not require 

a receiving Reporting Member to 

capture and report a routed order 

identifier if the order is routed to it 

manually. 

2. Comments and NASD’s Response 

Several commenters opposed the 

proposed requirement that members be 

required to capture and report a 

transmitting member’s unique identifier 

for all manually routed orders.26

Commenters stated that members 

should not be responsible for capturing 

accurately on a manual basis the routed 

order identifier from other firms noting 

that errors will be frequent and carried 

on to the next firm to which the order 

is routed.27

Commenters further noted that the 

proposed requirement would lead to 

delays in order communication and 

executions and ultimately harm public 

investors.28 Because orders that are 

transmitted manually may not be 

entered into a firm’s system and no 

systematic order identifier generated, 

commenters indicated that the proposed 

requirement would pose serious 

operational and logistical problems.29

Commenters also argued that NASD 

could effectively link or match together 

routed orders with new orders of the 

firm they are routed to without the 

routed order identifier information.30

In response to these comments, NASD 

reiterated that the use of a routed order 

identifier reported through OATS 

permits NASD to track the history of 

orders routed between firms on an 

automated basis and that if the order 

does not contain a routed order 

identifier, the order cannot be linked 

systematically on an automated basis to 

subsequent actions, such as further 

routing or execution by other firms. In 

the case of manually routed orders, 

however, NASD stated that it does not 

believe that the benefits provided by 

such an identifier clearly outweigh the 

related costs to members. In support of 

this, NASD noted in particular the 

commenters’ concerns that requiring 

routed order identifiers for manuallyrouted orders creates potential delays in 

the handling and execution of customer 

orders and creates the likelihood of high 

levels of data errors. Further, NASD 

recognized that while it would not be 

able to track the history of manual 

orders between firms on an automated 

basis without a routed order identifier, 

the staff could create, on an order by 

order basis, a process that links manual 

orders to subsequent events with an 

acceptable level of accuracy. Therefore, 

NASD concluded that the costs imposed 

by this proposed requirement relating to 

manually routed orders as described by 

commenters are not outweighed by the 

incremental benefits to NASD regulatory 

data and surveillance systems and in 

Amendment No. 2, deleted this 

proposed requirement. 

D. Proposed Exemptive Relief 

1. Description 

Finally, NASD proposed in 

Amendment No. 1 new paragraph (d) of 

NASD Rule 6955 and an amendment to 

NASD Rule 9610(a) to permit NASD to 

grant exemptive relief to certain 

members from the reporting 

requirements of the OATS Rules under 

the procedures set forth in the NASD 

Rule 9600 series. Specifically, members 

that meet the following criteria would 

be eligible to request an exemption to 

the OATS reporting requirements for 

manual orders: 

(1) the member and current control 

affiliates and associated persons of the 

member have not been subject within 

the last five years to any disciplinary 

action, and within the last ten years to 

any disciplinary action involving fraud; 

(2) the member has annual revenues 

of less than $2 million; 

(3) the member does not conduct any 

market making activities in Nasdaq 

Stock Market equity securities; 

(4) the member does not execute 

principal transactions with its 

customers (with limited exceptions for 

error corrections); and 

(5) the member does not conduct 

clearing or carrying activities for other 

firms. 

Under the proposed rule change, any 

exemptive relief granted would expire 

no later than two years from the date the 

member receives the exemptive relief. 

At or prior to the expiration of a grant 

of exemptive relief, members meeting 

the specified criteria may request a 

subsequent exemption. In addition, 

under the proposed rule change, 

NASD’s exemptive authority would be 

in effect for five years from the effective 

date of the proposed rule change. 

The proposed exemptive authority 

would provide NASD the ability to grant 

relief to members meeting the specified 

criteria in situations where, for example, 

reporting of such information would be 

unduly burdensome for the member or 

where temporary relief from the rules 

(in the form of additional time to 

achieve compliance) would permit the 

member to avoid unnecessary expense 

or hardship. 

2. Comments and NASD’s Response 

Commenters generally supported the 

proposed rule change that would 

provide NASD with the authority to 

exempt certain members from OATS 

reporting for manual orders, but 

opposed many of the conditions placed 

Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 57913 

31See Mitchell Securities Letter; Wachtel Letters1; Storch & Brenner Letter; and First Options Letter. 

32See Watchel Letters-1. 

33See Watchel Letters-1. 

34See Watchel Letters-1. 

35See Watchel Letters-1. 

36See Storch & Brenner Letter. 

37See Mitchell Securities Letter. 

38See Wachtel Letters-1. 

39See Watchel Letters-1. 

40See Watchel Letters-1. 

41See First Options Letter. 

42 17 CFR 240.19d-1(c)(2). 

43See SIA Letter-1; FIF Letter-1; MSDW Letter; 

A.G. Edwards Letter; Weeden Letter; and Pershing 

Letter. 

44See note 5, supra. 

45See note 6, supra. 

46See Wachovia Letter. 

47See Section IV.E., infra. 

48See Wachovia Letter; SIA Letter-2; Wachtel 

Letter-2. 

49See SIA Letter-2. 

50See Wachtel Letter-2. 

51See Wulff Letter. 

52See SIA Letter-2. 

on members in order for them to request 

exemptive relief.31 For example, several 

commenters suggested changes to the 

proposed condition that requires that 

members requesting exemptive relief 

not have been subject within the last 

five years to any disciplinary action, 

and within the last ten years to any 

disciplinary action involving fraud.32

One commenter indicated that the five 

and ten year disciplinary action test 

should commence from the date the 

disciplinary action is initiated, rather 

than when the disciplinary action is 

finalized.33 The commenter indicated 

that the date of initiation of the 

disciplinary action is the date most 

closely linked to the conduct that is 

triggering the sanction and that 

members should not be discouraged 

from seeking a hearing or other recourse 

due to the proposed condition on 

obtaining exemptive relief for OATS 

purposes.34 One commenter suggested a 

de minimis exception for single 

disciplinary action incurring a fine of 

not more than $10,000,35 while another 

commenter suggested that NASD be 

provided discretion to consider a firm’s 

overall disciplinary history in 

determining whether to grant an 

exemption.36

One commenter suggested that 

exemptive relief be available for market 

makers that conduct principal trades.37

Another commenter recommended 

eliminating the condition restricting 

firms that clear for others from obtaining 

exemptive relief where the introducing 

firm is not a reporting member under 

NASD Rule 6951 (except the exclusion 

that another member report its trades) 

and/or the introducing firm obtains an 

exemption under NASD Rule 6955.38

This commenter also suggested that the 

provision stating that a firm seeking an 

exemption cannot clear for other firm 

might disrupt a longstanding 

relationship that is integral to the 

introducing firm’s business.39

One commenter noted that the fiveyear ‘‘sunset’’ provision on NASD’s 

ability to grant exemptions should be 

extended indefinitely, noting that there 

currently is no reason to believe the 

rationale for providing NASD exemptive 

authority will be any different in five 

years. Moreover, the procedural 

impediments necessary for NASD to 

request that its exemptive authority be 

extended would be very burdensome.40

Another commenter stated that 

exemptive relief should be provided 

from all OATS reporting requirements 

for any NASD member that: (1) Carries 

no accounts for customers; (2) provides 

execution services in Nasdaq equity 

securities only to other dealers who are 

acting as market makers or proprietary 

traders and not on behalf of a customer; 

and (3) does not itself (other than in an 

error account) engage in market making 

or proprietary trading.41

NASD did not propose any changes to 

this exemptive provision in Amendment 

No. 2. However, NASD staff committed 

to review and analyze closely the 

application of such conditions to 

exemptive authority and determine 

whether it would be appropriate to seek 

changes to these conditions, including 

the types of changes suggested by 

commenters. 

In Amendment No. 2, however, NASD 

proposes to amend NASD Rule 

6955(d)(1)(A) to clarify that the 

condition on members that may request 

exemptive relief under the proposed 

rule applies only to final disciplinary 

actions within the last five years and 

does not include minor rule violations 

pursuant to Rule 19d-1(c)(2) of the 

Act.42

E. Comments on Implementation 

Schedule 

Several commenters requested 

additional time to comply with the 

proposed Phase Three requirements.43

In recognition of the technological 

burdens that may be imposed on 

members as a result of the changes 

proposed, in Amendment No. 2, NASD 

proposes to provide an implementation 

date 120 days from Commission 

approval of the proposed rule change. 

Amendment No. 2 was published for 

comment in the Federal Register on 

June 27, 2005.44 The Commission 

received six comment letters in 

response to the publication.45

IV. Summary of Comments on 

Amendment No. 2 and NASD’s 

Response Thereto (Amendment No. 3) 

A. Definition of Time of Receipt 

One commenter indicated that 

requiring members to capture the time 

the order is received by the member 

from the customer would create 

unnecessary costs and burdens for 

members in establishing automated 

systems to capture OATS data.46 In 

response, NASD stated that it recognizes 

that this requirement may impose 

additional costs on member firms, 

however NASD believes that it is critical 

to NASD’s surveillance systems and 

regulatory program that OATS capture 

the full lifecycle of an order within a 

firm and, in particular, the time that an 

order is received from the customer. 

However, in recognition of these 

burdens, NASD proposed to extend the 

implementation period of the proposed 

rule change.47

B. Exemptive Authority 

Commenters generally supported the 

proposed rule change that would 

provide NASD with the authority to 

exempt certain members from OATS 

reporting for manual orders, but 

opposed the limited nature of NASD’s 

exemptive authority.48 For example, one 

commenter suggested that an exemption 

be provided to any member that handles 

a small percentage of manual orders as 

compared to its overall volume, 49 while 

another opposed the expiration of 

NASD’s exemptive authority in five 

years.50

One commenter suggested revising 

the condition that only members with 

annual revenues of less than $2 million 

may request exemptive relief. 

Specifically, the commenter suggested 

that annual revenues for this purpose be 

based only on revenues from 

transactions in Nasdaq securities.51

In response to these comments, NASD 

committed to review and analyze 

closely its exemptive authority and 

determine whether it would be 

appropriate to seek any changes, 

including the types of changes 

suggested by commenters to the 

proposed rule change, but declined to 

make the changes suggested by 

commenters in Amendment No. 3. 

C. Application to Preferred and 

Convertible Securities 

One commenter suggested that NASD 

grant a carve-out or phased 

implementation for preferred securities 

and convertible securities, given the 

manual nature of the trading in these 

securities.52 In response to this 

57914 Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 

53The Commission notes that when the OATS 

Rules where originally proposed, a commenter 

argued that order information on preferred stocks 

should not be required to be included in OATS. The 

NASD disagreed, as did the Commission, which 

stated in the original approval order, ‘‘The 

Commission believes that NASDR’s decision not to 

provide a specific exemption from OATS 

requirements for preferred stock is appropriate 

because the preferred stock is an equity security 

that poses many of the same surveillance concerns 

as common stock.’’ See note 7, supra at 12568. The 

Commission believes this rationale continues to 

apply. 

54See FIF Letter-2. 

55See Letter from NASD Regulation to Charles R. 

Hood, dated July 30, 1998. Specifically, NASD 

stated that the term ‘‘trading department’’ is 

intended to refer to the function within the firm 

that is responsible for executing orders in Nasdaq 

equity securities. For an ECN, for example, this may 

be interpreted as either the trading system (where 

orders are executed automatically without trader 

intervention) or the trading department (where 

orders are executed with the assistance of traders). 

56See FIF Letter-2. 

57See id. 

58See Wachovia Letter. 

59See Wachovia Letter; Liquidnet Letter; FIF 

Letter-2; and SIA Letter-2. 

60See id. 

61NASD Rule 6954(b)(4) requires members to 

record the identification of any department or the 

number of any terminal where an order is received 

directly from a customer when an order is received. 

62NASD Rule 6954(b)(5) requires members to 

record, where the order is originated by a Reporting 

Member, the identification of the member that 

originates the order when an order is received. 

63As proposed in Amendment No. 2, NASD Rule 

6954(c)(1) would require members to record certain 

order information when a member transmits an 

order to another department within the member. 

64 In approving this rule, the Commission notes 

that it has considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

65 15 U.S.C. 78o-3(b)(6). 

comment, NASD stated that it does not 

believe it poses any additional burdens 

than those associated with manual 

orders of other securities. NASD noted 

that it proposed to extend the 

implementation time for the proposed 

rule change, which it believes will 

provide members adequate time for any 

technological or system changes 

required to address OATS reporting of 

manual orders in convertible and 

preferred securities.53

D. Comments Requesting Clarification 

One commenter requested 

clarification on how the term ‘‘trading 

desk’’ or ‘‘trading department’’ would 

apply, particularly for firms that do not 

have a trading desk.54 In response, 

NASD noted that it had previously 

issued guidance relating to the term 

‘‘trading department’’ and that this same 

guidance will continue to apply with 

respect to the proposed rule change.55

One commenter requested 

clarification as to the time parameter 

associated with the term ‘‘immediately’’

in the context of order receipt time 

under the proposed rule change.56 In 

response NASD explained that if an 

order were not received immediately at 

the trading department, members would 

be required to capture information 

relating to the transfer of that order to 

the trading department under the order 

transmittal requirements of Rule 

6954(c). In Amendment No. 3, NASD 

stated that it believes that where a 

member receives and handles an order 

within the same second, the member 

would not be required to report a Desk 

Report relating to that order. 

One commenter requested 

clarification on order receipt time in the 

context of third party Internet service 

providers. The commenter indicated 

that a third party Internet service 

provider may capture orders on behalf 

of a member after trading hours and 

submit these orders in batch the next 

trading day. The commenter indicated 

that order receipt data is not transmitted 

by the third party Internet service 

provider as part of the order data.57 In 

response, NASD explained that, as with 

any requirement under the OATS Rules, 

the decision by a member to use a third 

party provider does not change the 

member’s obligation under the rules. As 

such, NASD stated that the member is 

required to capture order receipt time 

on all orders. The batching or other 

transmittal practices of a third party 

vendor would not change this 

requirement. 

Another commenter supported the 

proposed exclusion from the definition 

of ‘‘Reporting Member’’ under the OATS 

Rules, but suggested that NASD provide 

additional guidance in the future 

regarding the condition that the member 

does not direct or maintain control over 

subsequent routing or execution by the 

receiving Reporting Member.58 NASD 

responded that if the proposed rule 

change is approved, it would issue a 

Notice to Members announcing approval 

of the proposed rule change and, as part 

of that Notice, it would provide 

additional guidance on a number of 

issues, including the exclusion from the 

definition of ‘‘Reporting Member.’’

E. Implementation Issues Relating to the 

Proposed Rule Change 

Several commenters suggested that 

the proposed implementation period of 

the proposed rule change should be 

extended, noting the significant 

technological changes needed to 

implement OATS reporting 

requirements for manual orders.59

Commenters also requested that NASD 

promptly publish the OATS Reporting 

Technical Specifications relating to the 

proposed rule change and that the 

implementation date be linked to its 

publication, and that NASD provide 

adequate time for testing.60

In response to commenters and in 

recognition of the technological burdens 

that may be imposed on members as a 

result of this proposal, in Amendment 

No. 3, NASD proposes to amend the text 

of NASD Rule 6957(c) to provide an 

implementation date that is six months 

after publication of the OATS Reporting 

Technical Specifications relating to SR–

NASD–00–23, rather than 120 days from 

Commission approval of the proposed 

rule change. In Amendment No. 3, 

NASD also committed to publish the 

OATS Reporting Technical 

Specifications within 45 days of 

Commission approval. In addition, 

NASD states that it would ensure that 

adequate time for testing is incorporated 

into the implementation schedule and 

will make the testing environment 

available at least six weeks prior to the 

implementation date of the proposed 

rule change. 

F. Technical Amendments 

In Amendment No. 3, NASD also 

proposes to make technical amendments 

to NASD Rule 6957(c) to clarify the 

OATS order information required under 

NASD Rule 6954(b)(4) 61 and (5) 62 and 

the OATS order transmittal 

requirements under NASD Rule 

6954(c)(1) apply to manual orders.63

NASD explained that, as stated in 

Amendment No. 2, the proposed rule 

change applies to both electronic and 

manual orders. As such, NASD clearly 

intended to have the inter-departmental 

order transmittal requirements apply to 

manual orders. Similarly, department 

identification information concerning 

where a manual order was originated 

also was intended to be included. 

Therefore, NASD proposes to eliminate 

the prior exclusion of this information 

from the OATS requirements for manual 

orders. 

V. Discussion 

After careful review, 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.64 Specifically, the 

Commission believes the proposal is 

consistent with the requirements of 

Section 15A(b)(6) of the Act.65 That 

section 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 and 

coordination with persons engaged in 

Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 57915 

66This exclusion would not change a member’s 

requirement to capture and retain the time an order 

was received from a customer under SEC Rule 17a–

3(a)(6). 

regulating, clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, 

and in general, to protect investors and 

the public interest. 

A. Definition of Time of Receipt 

Currently, members are required to 

capture the time of receipt of an order 

pursuant to NASD Rule 6954(b)(16). In 

Amendment No. 2, NASD proposed to 

define the order origination or receipt 

time for an order as the time the order 

is received from the customer. The 

Commission believes that this change, 

along with a new requirement that 

members must record the date and time 

they transmit orders to their trading 

departments, should ensure that OATS 

captures both the time the order is 

received by the member from the 

customer and the time the order is 

received by the member’s trading desk 

or trading department. Importantly, 

these changes will apply to both 

electronic and manual orders so that the 

time of receipt for purposes of order 

origination should always be the time 

the order is received from the customer. 

The Commission believes that it is 

important to NASD’s automated 

surveillance systems that OATS capture 

the time that an order is received by the 

trading desk, and have an electronic 

record of when orders, especially larger 

orders, are received at a firm to enable 

NASD to perform surveillance to detect 

certain violations, such as frontrunning. 

Therefore, the Commission believes that 

it is appropriate for OATS to capture 

both the time the order is received by 

the member from the customer and the 

time the order is received by the 

member’s trading desk or trading 

department, if those times are different. 

By proposing these changes, NASD 

would capture the complete lifecycle of 

an order within a firm, even in those 

situations where an order is held at the 

sales trading or other desk within a 

member firm, and then later routed to 

the trading desk. Although the 

Commission recognizes that this 

requirement may impose additional 

costs on member firms, the Commission 

agrees with NASD it is important to 

NASD’s surveillance systems and 

regulatory program that OATS capture 

the full lifecycle of an order within a 

firm and, in particular, both the time 

that an order is received from the 

customer and the time the order is 

received by the trading desk. 

B. Definition of Reporting Member 

The proposed exclusion from the 

definition of Reporting Member is 

directed at those members that use a 

non-discretionary order routing process 

whereby, immediately after receipt of its 

customer orders, the member routes all 

its orders, by electronic or other means, 

to a single receiving Reporting Member 

for further routing or execution at the 

receiving Reporting Member’s 

discretion. The NASD has explained 

that the proposed exclusion is not 

limited to correspondent/clearing 

relationships, but applies to any 

relationship that meets the proposed 

conditions. 

The Commission believes that this 

proposed rule should eliminate the 

reporting of duplicative information to 

OATS where all of the OATS data of 

one member would be captured by the 

receiving Reporting Member. The 

Commission also agrees with NASD’s 

proposal to impose a condition on the 

exclusion that all of a member’s orders 

must be routed to a single firm. The 

Commission believes that without this 

requirement, NASD would lack the 

ability to easily identify which receiving 

Reporting Member is providing the 

OATS order information that 

corresponds to the orders initially 

received by the member, thus 

decreasing NASD’s ability to efficiently 

surveil its members. 

In addition to eliminating the 

reporting of duplicative information to 

OATS, the Commission believes that 

proposed rule change should reduce the 

regulatory burdens on members, 

particularly smaller members, that route 

all their orders to another receiving 

Reporting Member by means of a nondiscretionary order routing process, for 

execution or further routing purposes.66

C. Routed Order Identifier 

After considering comments regarding 

the pitfalls associated with requiring 

members to capture and report a 

transmitting member’s unique identifier 

for all manually routed orders, in 

Amendment No. 2, NASD concluded 

that the benefits provided by requiring 

the capture and reporting of such an 

identifier do not outweigh the related 

costs to members. In reaching this 

decision, NASD recognized the concern 

that requiring routed order identifiers 

for manually routed orders could create 

delays in the handling and execution of 

customer orders and could result in a 

high level of data errors. NASD 

explained that although it would not be 

able to track the history of manual 

orders between firms on an automated 

basis without a routed order identifier, 

the staff could create, on an order by 

order basis, a process that links manual 

orders to subsequent events with an 

acceptable level of accuracy. 

While the Commission believes that 

requiring the capture and reporting of a 

routed order identifier for all manually 

routed orders would enhance NASD’s 

ability to track the history of orders 

routed between firms on an automated 

basis, the Commission understands 

NASD’s reluctance to impose such a 

burdensome requirement on members 

given that a history of manual orders 

can be created, albeit in a less efficient 

fashion, and believes that it is 

acceptable to relieve members of the 

burden of capturing a routed order 

identifier for manual orders at this time. 

D. Exemptive Relief 

The Commission believes that the 

exemptive authority proposed by the 

NASD is appropriate in that it is 

narrowly tailored to provide NASD the 

ability to grant relief to members 

meeting the specified criteria in 

situations where, for example, reporting 

of such information would be unduly 

burdensome for the member or where 

temporary relief from the rules (in the 

form of additional time to achieve 

compliance) would permit the member 

to avoid unnecessary expense or 

hardship. 

VI. Amendment No. 3 

The Commission finds good cause for 

approving proposed Amendment No. 3 

prior to the thirtieth day after the date 

of publication of the notice of filing 

thereof in the Federal Register. In 

Amendment No. 3, NASD proposes 

changes to the implementation schedule 

for the proposed new OATS Rules and 

proposes a technical change relating to 

data required to be reported for manual 

orders. Accordingly, the Commission 

believes that Amendment No. 3 raises 

no issues of regulatory concern. 

In Amendment No. 2, NASD proposes 

an implementation date for the 

proposed OATS Rules of 120 days from 

Commission approval of the proposed 

rule change. A number of commenters, 

however, argued that the proposed 

implementation schedule should be 

extended to allow member firms 

additional time to prepare to comply 

with the new OATS Rules. In response 

to these comments, NASD proposed to 

amend the text of NASD Rule 6957(c) to 

provide an implementation date that is 

six months after publication of the 

OATS Reporting Technical 

Specifications relating to SR–NASD–00–

23, rather than 120 days from 

Commission approval of the proposed 

rule change. In Amendment No. 3, 

NASD also committed to publish the 

57916 Federal Register / Vol. 70, No. 191 / Tuesday, October 4, 2005 / Notices 

67 15 U.S.C. 78o–3(b)(6). 

68 15 U.S.C. 78o–3(b)(6). 

69 15 U.S.C. 78s(b)(2). 

70 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(iii). 

4 17 CFR 240.19b–4(f)(6). 

OATS Reporting Technical 

Specifications within 45 days of 

Commission approval. In addition, 

NASD stated that it would ensure that 

adequate time for testing is incorporated 

into the implementation schedule and 

will make the testing environment 

available at least six weeks prior to the 

implementation date of the proposed 

rule change. 

The Commission believes that the 

proposed changes to the 

implementation schedule for the 

proposed OATS Rules are reasonable as 

the additional time provided should 

allow member firms ample opportunity 

to develop and test their systems to 

ensure compliance with the 

requirements of the proposed rules. 

In Amendment No. 3, NASD also 

proposes to make technical amendments 

to NASD Rule 6957(c) to clarify that the 

OATS order information required under 

NASD Rule 6954(b)(4) and (5) and the 

OATS order transmittal requirements 

under NASD Rule 6954(c)(1) apply to 

manual orders. Currently, NASD Rule 

6957 provides that for manual orders, 

firms shall not be required to record this 

information. However, the Commission 

notes that in Amendment No. 2, NASD 

stated that the proposed rule change 

was to apply to both electronic and 

manual orders. As such, the 

Commission believes that NASD clearly 

intended to have the inter-departmental 

order transmittal requirements apply to 

manual orders. Similarly, the 

Commission believes that it was clear 

that NASD intended that department 

identification information concerning 

where a manual order was originated 

also was intended to be included. 

Therefore, the Commission finds that it 

is consistent with the Act in general, 

and with Section 15A(b)(6) of the Act in 

particular,67 to approve Amendment 

No. 3 to the proposed rule change, as 

reflected in Amendment No.2, on an 

accelerated basis. 

VII. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning Amendment No. 

3, including whether the amendment is 

consistent with the Act. Comments may 

be submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–00–23 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–NASD–00–23. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 also will be 

available for inspection and copying at 

the principal office of NASD. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to the File 

Number SR–NASD–00–23 and should 

be submitted on or before October 25, 

2005. 

VIII. Conclusion 

The Commission believes that the 

proposed rule change, as reflected in 

Amendments No. 2 and 3, is appropriate 

and consistent with the requirements of 

the Act applicable to a national 

securities association, and in particular, 

with the requirements of Section 

15A(b)(6) of the Act 68 and the rules and 

regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,69 that 

Amendment No. 2 to the proposed rule 

change (SR–NASD–00–23) is hereby 

approved, and Amendment No. 3 is 

approved on an accelerated basis. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.70

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–19809 Filed 10–3–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52513; File No. SR–PCX–

2005–106] 

Self-Regulatory Organizations; Pacific 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Rescinding Pilot Rules 

Relating to the Waiver of the California 

Ethics Standards for Neutral 

Arbitrators in Contractual Arbitration 

and Section 1281.92 of the California 

Code of Civil Procedure 

September 27, 2005. 

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 

September 20, 2005, the Pacific 

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by PCX. PCX has 

designated this proposal as ‘‘noncontroversial’’ pursuant to Section 

19(b)(3)(A)(iii) of the Act,3 and Rule 

19b–4(f)(6) thereunder,4 which renders 

the proposed rule change effective 

immediately upon filing with the 

Commission. 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 

PCX is proposing to amend the PCX 

Options and PCX Equities, Inc. 

(‘‘PCXE’’) arbitration rules to rescind the 

pilot rules (the ‘‘Pilot Rules’’) relating to 

the waiver of the California Ethics 

Standards for Neutral Arbitrators in 

Contractual Arbitration (the ‘‘California 

Standards’’) and the waiver of California 

Code of Civil Procedure Section 1281.92 

(‘‘CCCP Claims’’). The text of the 

proposed rule change is available on the 

PCX’s Web site (http:// 

www.pacificex.com), at the PCX’s Office