9878 Federal Register / Vol. 60, No. 35 / Wednesday, February 22, 1995 / Notices

6 17 CFR 200.30–3(a)(12) (1994).

1NASD Manual, Rules of Fair Practice, Art. III,

Sec. 1 (CCH) ¶ 2151.07.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Commission believes MSTC’s

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to registered transfer agents.

The proposed rule change will allow

MSTC to comply with Commission Rule

17Ad–16 which, among other things,

require each qualified registered

securities depository to provide its

participants the notices it receives from

transfer agents, directly or through the

appropriate qualified registered security

depository, when the transfer agent is

terminating or assuming transfer agent

services on behalf of an issuer or

changing its name or address. Rule

17Ad–16 became effective on February

6, 1995.

MSTC also has requested that the

Commission find good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of the filing in

the Federal Register. Accelerated

approval will permit MSTC to comply

immediately with the requirements of

Rule 17Ad–16. Thereby, the

Commission finds good cause for so

approving the proposed rule change.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of the above-referenced selfregulatory organization. All submissions

should refer to the File No. SR–MSTC–

95–02 and should be submitted by

March 15, 1995.

It is therefore ordered, pursuant to

Section 19(b)(2) that the proposed rule

change (File No. SR–MSTC–95–02) is

hereby approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4276 Filed 2–21–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35391; File No. SR–NASD–

94–62, Amendment No. 1]

Self-Regulatory Organizations; Notice

of Filing of Amendment No. 1 to

Proposed Rule Change by National

Association of Securities Dealers, Inc.,

Relating to Limit Order Protection for

Member-to-Member Limit Order

Handling on Nasdaq

February 16, 1995.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on February 15, 1995,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

an amendment to the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the NASD. 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

The NASD proposes to amend SR–

NASD–94–62 relating to limit order

protection for member-to-member limit

order handling in the Nasdaq Stock

Market. Currently, the NASD’s

Interpretation to the Rules of Fair

Practice 1 makes it a violation of just and

equitable principles of trade for a

member firm to trade ahead of its own

customer’s limit orders. In this

amendment to its proposed expansion

of the Interpretation, the NASD is

proposing to amend the Interpretation to

clarify that the ‘‘terms and conditions’’

exception to the Interpretation applies

only to limit orders from institutional

accounts, whether such limit orders

come from a firm’s own customers or

are member-to-member limit orders. The

term ‘‘institutional account’’ is defined

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

Rules of Fair Practice. Below is the text

of the proposed rule change. Proposed

new language, including the language

that was added in the original proposal,

is italicized; language to be deleted is

bracketed.

Limit Order Protection Interpretation to

Article III, Section 1 of the NASD Rules

of Fair Practice

To continue to ensure investor

protection and enhance market quality,

the NASD Board of Governors is issuing

an Interpretation to the Rules of Fair

Practice dealing with member firm

treatment of [their] customer limit

orders in Nasdaq securities. This

Interpretation will require members

acting as market makers to handle

[their] customer limit orders with all

due care so that market makers do not

‘‘trade ahead’’ of those limit orders.

Thus, members acting as market makers

that handle customer limit orders,

whether received from their own

customers or from another member, are

prohibited from trading at prices equal

or superior to that of the limit order

without executing the limit order,

provided that, prior to September 1,

1995, this prohibition shall not apply to

customer limit orders that a member

firm receives from another member firm

and that are greater than 1,000 shares.

Such orders shall be protected from

executions at prices that are superior

but not equal to that of the limit order.

In the interests of investor protection,

the NASD is eliminating the so-called

disclosure ‘‘safe harbor’’ previously

established for members that fully

disclosed to their customers the practice

of trading ahead of a customer limit

order by a market-making firm.

Interpretation

Article III, Section 1 of the Rules of

Fair Practice states that:

A member, in the conduct of his

business, shall observe high standards

of commercial honor and just and

equitable principles of trade.

The Best Execution Interpretation

states that: In any transaction for or with

a customer, a member and persons

associated with a member shall use

reasonable diligence to ascertain the

best inter-dealer market for the subject

security and buy or sell in such a market

so that the resultant price to the

customer is as favorable as possible to

the customer under prevailing market

conditions. Failure to exercise such

diligence shall constitute conduct

inconsistent with just and equitable

principles of trade in violation of Article

III, Section 1 of the Rules of Fair

Practice.

In accordance with Article VII,

Section 1(a)(2) of the NASD By-Laws,

the following interpretation under

Article III, Section 1 of the Rules of Fair
Federal Register / Vol. 60, No. 35 / Wednesday, February 22, 1995 / Notices 9879

2Securities Exchange Act Release No. 35122 (Dec.

20, 1994), 59 FR 66389 (Dec. 23, 1994).

Practice has been approved by the

Board.

A member firm that accepts and holds an

unexecuted limit order from a customer

(whether its own customer or a customer of

another member) in a Nasdaq security and

that continues to trade the subject security

for its own market-making account at prices

that would satisfy the customer’s limit order,

without executing that limit order [under the

specific terms and conditions by which the

order was accepted by the firm], shall be

deemed to have acted in a manner

inconsistent with just and equitable

principles of trade, in violation of Article III,

Section 1 of the Rules of Fair Practice,

provided that, until September 1, 1995,

customer limit orders in excess of 1,000

shares received from another member firm

shall be protected from the market maker’s

executions at prices that are superior but not

equal to the limit order, and provided

further, that a member firm may negotiate

specific terms and conditions applicable to

the acceptance of limit orders only with

respect to limit orders for customer accounts

that meet the definition of an ‘‘institutional

account’’ as that term is defined in Article III,

Section 21(c)(4) of the Rules of Fair Practice.

Nothing in this section, however, requires

members to accept limit orders from any

customer[s].

By rescinding the safe harbor position

and adopting this Interpretation of the

Rules of Fair Practice, the NASD Board

wishes to emphasize that members may

not trade ahead of customer limit orders

in their market-making capacity even if

the member had in the past fully

disclosed the practice to its customers

prior to accepting limit orders. The

NASD believes that, pursuant to Article

III, Section 1 of the Rules of Fair

Practice, members accepting and

holding unexecuted customer limit

orders owe certain duties to their

customers and the customers of other

member firms that may not be overcome

or cured with disclosure of trading

practices that include trading ahead of

the customer’s order. The terms and

conditions under which institutional

account customer limit orders are

accepted must be made clear to

customers at the time the order is

accepted by the firm so that trading

ahead in the firms’ market making

capacity does not occur. For purposes of

this Interpretation, a member that

controls or is controlled by another

member shall be considered a single

entity so that if a customer’s limit order

is accepted by one affiliate and

forwarded to another affiliate for

execution, the firms are considered a

single entity and the market making unit

may not trade ahead of that customer’s

limit order.

The Board also wishes to emphasize

that all members accepting customer

limit orders owe those customers duties

of ‘‘best execution’’ regardless of

whether the orders are executed through

the member’s market making capacity or

sent to another member for execution.

As set out above, the best execution

Interpretation requires members to use

reasonable diligence to ascertain the

best inter-dealer market for the security

and buy or sell in such a market so that

the price to the customer is as favorable

as possible under prevailing market

conditions. The NASD emphasizes that

the order entry firms should continue to

routinely monitor the handling of their

customers’ limit orders regarding the

quality of the execution received.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NASD included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The NASD 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

The purpose of the amendment to the

proposed rule change is to clarify that

the Interpretation’s ‘‘terms and

conditions’’ exception to the protection

of customer limit orders, whether the

order is from a member’s own customer

or is a customer limit order sent to it for

execution from another member (socalled ‘‘member-to-member’’ limit

orders), is intended to apply only to

limit orders from institutional accounts

as that term is defined in Article III,

Section 21(c)(4) of the Rules of Fair

Practice. The background and rationale

for this amendment to the proposed rule

change are discussed below.

On December 23, 1994, the

Commission published for comment the

NASD’s proposed rule to expand the

scope of limit order protection beyond

that presently afforded by member firms

to their customers in the Nasdaq Stock

Market.2 The NASD’S current

Interpretation to the Rules of Fair

Practice makes it a violation of just and

equitable principles of trade for a

member firm to trade ahead of its own

customer’s limit orders. The proposal

before the Commission now would

extend this protection to limit orders

from a customer of a firm that sends that

customer’s limit order to another

member for execution (so-called

‘‘member-to-member’’ limit orders). In

addition, the proposal has a phase-in

period until September 1, 1995, in

which a firm receiving a member-tomember limit order of greater than 1,000

shares would be prohibited from trading

for its own account at prices that are

superior but not equal to the limit order

price. The NASD’s proposal also

maintained language from the existing

Interpretation regarding the member’s

ability to negotiate with any customer

specific terms and conditions regarding

its acceptance of limit orders, provided

that the member makes these conditions

clear to the customer. It is that language

that this amendment is intended to

affect.

The NASD believes that it is

necessary to clarify that the terms and

conditions exception to the handling of

limit orders is intended to apply only to

customer orders from institutional

accounts as that term is defined in

Article III, Section 21(c)(4) of the Rules

of Fair Practice. Using that definition, a

firm could negotiate limit order terms

and conditions if the order came from:

• Banks, savings and loan

associations, insurance companies, or

registered investment companies;

• Investment advisers registered

under Section 203 of the Investment

Advisers Act of 1940; and

• Any other entity (whether a natural

person, corporation, partnership, trust,

or otherwise) with total assets of at least

$50 million.

Accordingly, under the amended

language, a member firm that accepts a

limit order from a person or entity that

does not fall within the definition of

institutional account may not initiate

the negotiation of any terms and

conditions on the acceptance of that

limit order. On the other hand, if the

account placing the limit order meets

the terms of the definition of

institutional account, the firm may

negotiate special terms and conditions

with the customer of that account, or its

representative, that permit the firm to

trade ahead of or at the same price as

the limit order. The amended

Interpretation would apply to limit

orders placed by the firm’s own

customers and member-to-member limit

orders.

The NASD believes that this approach

should minimize a retail customer’s

potential for confusion regarding the

acceptance of a limit order that, under

the existing Interpretation, could have
9880 Federal Register / Vol. 60, No. 35 / Wednesday, February 22, 1995 / Notices

3See Securities Exchange Act Release No. 34279

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

4See Securities Exchange Act Release No. 34753

(Sept. 29, 1994), 59 FR 50866 (Oct. 6, 1994). 1See Rule 1101A(b)(iii).

qualified the protection of the limit

order rule’s scope. At the same time, the

amendment accurately reflects the

ordinary framework in which firms and

institutions typically negotiate the

conditions under which an institution’s

limit order is to be handled. For

example, in its approval of the original

NASD Interpretation regarding the

handling of customer limit orders,3 the

Commission specifically indicated its

view that the terms and conditions

language of the original NASD

Interpretation was included to permit

special treatment for institutional

customer limit orders. In addition, in its

own proposal regarding customer limit

order protection for Nasdaq National

Market securities, proposed Rule 15c5–

1,4 the Commission solicited comment

on the ‘‘terms and conditions’’

provisions in its rule, which would

allow the parties to a trade to set special

conditions to allow a market maker to

employ an appropriate strategy in filling

an institutional customer’s order

without violating the proposed rule. Of

course, the clarification of the

Interpretation continues to permit a

member to establish with its customers

or the order entry firm commissioner or

commission equivalents regarding the

handling of a limit order, provided that

the member makes these charges clear to

the customer. In this connection, the

NASD notes that Nasdaq market makers

are free to negotiate additional

compensation from order routing firms

to the extent that such compensation is

economically and competitively

justified. Similarly, the Interpretation

continues in place the understanding

that nothing in the Interpretation would

obligate a market maker to accept limit

orders from any or all customers or

member firms.

The NASD believes that the proposed

rule change is consistent with section

15A(b)(6) of the Act in that these

proposed changes are designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to facilitate

transactions in these securities, to

remove impediments to and to perfect

the mechanism of a free and open

market and a national market system,

and in general to protect investors and

the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

Accordingly, while the NASD will

monitor carefully for any adverse

competitive effects of the Interpretation,

it believes that any adverse effects are

far outweighed by the enhanced

execution opportunities provided public

investors.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the NASD consents, the

Commission will:

(A) By order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to SR–NASD–

94–62, Amendment No. 1 and should be

submitted by March 7, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4358 Filed 2–16–95; 5:00 pm]

BILLING CODE 8010–01–M

[Release No. 34–35376; File No. SR–Phlx–

095–11]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.,

Relating to the Listing of Five Year

Long-Term Index Options

February 14, 1995.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 73s(b)(1), notice is

hereby given that on February 8, 1995,

the Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the Phlx. 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

The Phlx, pursuant to Rule 19b–4 of

the Act, proposes to amend its Rule

1101A to permit the listing of index

option series with up to 60 months (five

years) until expiration. Currently, Rule

1101A permits ‘‘long-term’’ options up

to 36 months until expiration.1 The text

of the proposed rule change is available

at the Office of the Secretary, the Phlx,

and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Phlx included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The Phlx has prepared

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

and (C) below, of the most significant

aspects of such statements.