388 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

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

2 17 CFR 240.19b–4.

3Letter from Alden S. Adkins, Senior Vice

President, NASD Market Operations

Administration, to Katherine A. England, Assistant

Director, Division of Market Regulation,

Commission, dated December 14, 2001

(‘‘Amendment No. 1’’). First, Amendment No. 1

revises proposed Rule 4200(a)(12) to (i) clarify that

the market where the security is listed, rather than

the NASD, determines whether a normal unit of

trading should be an amount other than 100 shares

and (ii) delete an inadvertent reference to Nasdaq.

Second, Amendment No. 1 deletes the phrase ‘‘that

enters into a contractual relationship with an NASD

Market Participant’’ from the definition of

‘‘customer broker/dealer’’ in proposed Rule

4300(d)(1) and adds the word ‘‘not’’ to the

definition of ‘‘Indirect electronic access’’ before the

word ‘‘affiliates’’ in the first sentence of proposed

Rule 4300(d)(3). Finally, Amendment No. 1 waives

the 35-day period for Commission action until such

time as the waiver is withdrawn by the NASD.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45156; File No. SR–NASD–

2001–90]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to Nasdaq’s

Proposed Separation From the NASD

and the Establishment of the NASD

Alternative Display Facility

December 14, 2001.

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

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on December

7, 2001, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the NASD. The NASD

amended the proposed rule change on

December 14, 2001.3 The Commission is

publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to amend its

rules to reflect Nasdaq’s separation from

the NASD upon its approval as a

national securities exchange and to

establish rules that would govern

trading otherwise than on an exchange,

including rules governing the NASD

Alternative Display Facility (‘‘ADF’’).

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

* * * * *

0100. General Provisions

0120. Definitions.

(a) No Change.

(b) ‘‘Association’

The term ‘‘Association’’ means,

collectively, the NASD, NASD

Regulation, [Nasdaq,] and NASD

Dispute Resolution.

(c) through (q) No Change.

0130. Delegation, Authority and Access

(a) The National Association of

Securities Dealers, Inc., delegates to its

subsidiaries (NASD Regulation, Inc. and

NASD Dispute Resolution, Inc. [The

Nasdaq Stock Market, Inc.], hereinafter

‘‘Subsidiaries’’) the authority to act on

behalf of the Association as set forth in

a Plan of Allocation and Delegation

adopted by the Board of Governors and

approved by the Commission pursuant

to its authority under the Act.

(b) No Change.

* * * * *

1000. MEMBERSHIP, REGISTRATION

AND QUALIFICATION

REQUIREMENTS

* * * * *

1022. Categories of Principal

Registration

(a) through (d) No Change.

(e) Limited Principal—Direct

Participation Programs

(1) No Change.

(2) For purposes of the Rule 1000

Series, ‘‘direct participation programs’’

shall mean programs [which] that

provide for flow-through tax

consequences regardless of the structure

of the legal entity or vehicle for

distribution including, but not limited

to, oil and gas programs, cattle

programs, condominium securities,

Subchapter S corporate offerings and all

other programs of a similar nature,

regardless of the industry represented

by the program, or any combination

thereof. Excluded from this definition

are real estate investment trusts, tax

qualified pension and profit sharing

plans pursuant to Sections 401 and

403(a) of the Internal Revenue Code

(Code) and individual retirement plans

under Section 408 of the Code, tax

sheltered annuities pursuant to the

provisions of Section 403(b) of the Code

and any company including separate

accounts registered pursuant to the

Investment Company Act of 1940. Also

excluded from this definition is any

program [for which quotations are

displayed on Nasdaq or which] that is

listed on a registered national securities

exchange or any program for which an

application for [quotation on Nasdaq or]

listing on a registered national securities

exchange has been made.

(3) No Change.

(f) through (g) No Change.

* * * * *

2000. BUSINESS CONDUCT

2100. GENERAL STANDARDS

2110. Standards of Commercial Honor

and Principles of Trade

A member, in the conduct of [his] its

business, shall observe high standards

of commercial honor and just and

equitable principles of trade.

IM–2110–1. ‘‘Free-Riding and

Withholding’

(a) No Change.

(b) Violations of Rule 2110

Except as provided herein, it shall be

inconsistent with high standards of

commercial honor and just and

equitable principles of trade and a

violation of Rule 2110 for a member, or

a person associated with a member, to

fail to make a bona fide public

distribution at the public offering price

of securities of a public offering which

trade at a premium in the secondary

market whenever such secondary

market begins regardless of whether

such securities are acquired by the

member as an underwriter, a selling

group member or from a member

participating in the distribution as an

underwriter or selling group or

otherwise. Therefore, it shall be a

violation of Rule 2110 for a member, or

a person associated with a member, to:

(1) through (8) No Change.

(9) Sell any of the securities to any

person, or to a member of the immediate

family of such person who is supported

directly or indirectly to a material extent

by such person, who owns or has

contributed capital to a broker/dealer,

other than solely a limited business

broker/dealer as defined in paragraph

(c) of this interpretation, or the account

in which any such person has a

beneficial interest, provided, however,

that:

(A) The prohibition shall not apply to

any person who directly or indirectly

owns any class of equity securities of, or

who has made a contribution of capital

to, a member, and whose ownership or

capital interest is passive and is less

than 10% of the equity or capital of a

member, as long as:

(i) Such person purchases hot issues

from a person other than the member in

which it has such passive ownership

and such person is not in a position by

virtue of its passive ownership interest

to direct the allocation of hot issues, or

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 389

1FN1 For purposes of the pilot program

expanding the operation of certain Nasdaq

transaction and quotation reporting systems and

facilities in SR-NASD–99–57 during the period

from 4 p.m. to 6:30 p.m. Eastern Time, members

may generally limit the life of a customer limit

order to the period of 9:30 a.m. to 4 p.m. Eastern

Time. If a customer does not formally assent (‘‘optin’’) to processing of their limit order(s) during the

extended hours period commencing after the

normal close of the Nasdaq market, limit order

protection will not apply to that customer’s

order(s).

(ii) such member’s shares or shares of

a parent of such member are publicly

traded on a[n] registered national

securities exchange [or Nasdaq].

(B) and (C) No Change.

(c) through (m) No Change.

* * * * *

IM–2110–2. Trading Ahead of Customer

Limit Order

(a) General Application

To continue to ensure investor

protection and enhance market quality,

the Association’s Board of Governors is

issuing an interpretation to the Rules of

the Association dealing with member

firms’ treatment of their customer limit

orders in Nasdaq-listed securities. This

interpretation, which is applicable from

9:30 a.m. to 6:30 p.m. Eastern Time, 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 Association 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 marketmaking firm.]1

[Rule 2110 of the Association’s Rules

states that:]

[A member, in the conduct of [his] its

business, shall observe high standards

of commercial honor and just and

equitable principles of trade.]

[Rule 2320, the Best Execution Rule,

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.]

Interpretation

The following interpretation of Rule

2110 has been approved by the Board:

A member firm that accepts and holds

an unexecuted limit order from its

customer (whether its own customer or

a customer of another member) in a

Nasdaq-listed 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, shall be deemed to have acted in

a manner inconsistent with just and

equitable principles of trade, in

violation of Rule 2110, 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 that of 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 that are: (a) For customer

accounts that meet the definition of an

‘‘institutional account’’ as that term is

defined in Rule 3110(c)(4); or (b) 10,000

shares or more, unless such orders are

less than $100,000 in value. Nothing in

this interpretation, however, requires

members to accept limit orders from any

customer.

[By rescinding the safe harbor

position and adopting this

interpretation,] [t]The Association

wishes to emphasize that members may

not trade ahead of their 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

Association believes that, pursuant to

Rule 2110, 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 or appropriately sized 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 firm’s 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 Association 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 Rule] Rule

2320 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 Association emphasizes

that order entry firms should continue

to routinely monitor the handling of

their customers’ limit orders regarding

the quality of the execution received.

(b) No Change.

* * * * *

IM–2110–3. Front Running Policy

It shall be considered conduct

inconsistent with just and equitable

principles of trade for a member or

person associated with a member, for an

account in which such member or

person associated with a member has an

interest, for an account with respect to

which such member or person

associated with a member exercises

investment discretion, or for certain

customer accounts, to cause to be

executed:

(a) No Change.

(b) an order to buy or sell an

underlying security when such member

or person associated with a member

causing such order to be executed has

material, non-public market information

concerning an imminent block

transaction in an option overlying that

security, or when a customer has been

provided such material, non-public

market information by the member or

any person associated with a member;

prior to the time information concerning

the block transaction has been made

publicly available.

The violative practice noted above

may include transactions [which] that

are executed based upon knowledge of

less than all of the terms of the block

transaction, so long as there is

knowledge that all of the material terms

of the transaction have been or will be

agreed upon imminently.

390 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

The general prohibitions stated above

shall not apply to transactions executed

by member participants in automatic

execution systems in those instances

where participants must accept

automatic executions.

These prohibitions also do not

include situations in which a member or

person associated with a member

receives a customer’s order of block size

relating to both an option and the

underlying security. In such cases, the

member and person associated with a

member may position the other side of

one or both components of the order.

However, in these instances, the

member and person associated with a

member would not be able to cover any

resulting proprietary position(s) by

entering an offsetting order until

information concerning the block

transaction involved has been made

publicly available.

The application of this front running

policy is limited to transactions that are

required to be reported on the last sale

reporting systems administered by

Nasdaq, Consolidated Tape Association

(CTA), or Option Price Reporting

Authority (OPRA). Information as to a

block transaction shall be considered to

be publicly available when it has been

disseminated via the tape or high speed

communications line of one of those

systems or of a third-party news wire

service.

A transaction involving 10,000 shares

or more of an underlying security or

options covering such number of shares

is generally deemed to be a block

transaction, although a transaction of

less than 10,000 shares could be

considered a block transaction in

appropriate cases. A block transaction

that has been agreed upon does not lose

its identity as such by arranging for

partial executions of the full transaction

in portions [which] that themselves are

not of block size if the execution of the

full transaction may have a material

impact on the market. In this situation,

the requirement that information

concerning the block transaction be

made publicly available will not be

satisfied until the entire block

transaction has been completed and

publicly reported.

IM–2110–4. Trading Ahead of Research

Reports

The Board of Governors, under its

statutory obligation to protect investors

and enhance market quality, is issuing

an interpretation to the Rules regarding

a member firm’s trading activities that

occur in anticipation of a firm’s

issuance of a research report regarding

a security. The Board of Governors is

concerned with activities of member

firms that purposefully establish or

adjust the firm’s inventory position in

[Nasdaq-listed securities,] an exchangelisted security traded otherwise than on

an exchange [in the OTC market,] or a

derivative security based primarily on a

specific [Nasdaq or] exchange-listed

security in anticipation of the issuance

of a research report in that same

security. For example, a firm’s research

department may prepare a research

report recommending the purchase of a

particular Nasdaq-listed security. Prior

to the publication and dissemination of

the report, however, the trading

department of the member firm might

purposefully accumulate a position in

that security to meet anticipated

customer demand for that security. After

the firm had established its position, the

firm would issue the report, and

thereafter fill customer orders from the

member firm’s inventory positions.

The Association believes that such

activity is conduct [which] that is

inconsistent with just and equitable

principles of trade, and not in the best

interests of the investors. Thus, this

interpretation prohibits a member from

purposefully establishing, creating or

changing the firm’s inventory position

in [a Nasdaq-listed security,] an

exchange-listed security traded

otherwise than on an exchange [in the

third market] or a derivative security

related to the underlying equity

security, in anticipation of the issuance

of a research report regarding such

security by the member firm.

[Rule 2110 states that:

A member in the conduct of its

business, shall observe high standards

of commercial honor and just and

equitable principles of trade.]

In accordance with Article VII,

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

the Association’s Board of Governors

has approved the following

interpretation of Rule 2110:

Trading activity purposefully

establishing, increasing, decreasing, or

liquidating a position in [a Nasdaq

security,] an exchange-listed security

traded otherwise than on an exchange

[in the over-the-counter market] or a

derivative security based primarily

upon a specific [Nasdaq or] exchangelisted security, in anticipation of the

issuance of a research report in that

security is inconsistent with just and

equitable principles of trade and is a

violation of Rule 2110.

For purposes of this interpretation, a

‘‘purposeful’’ change in the firm’s

inventory position means any trading

activities undertaken with the intent of

altering a firm’s position in a security in

anticipation of accommodating investor

interest once the research report has

been published. Hence, the

interpretation does not apply to changes

in an inventory position related to

unsolicited order flow from a firm’s

retail or broker/dealer client base or to

research done solely for in-house

trading and not in any way used for

external publication.

Under this interpretation, the Board

recommends, but does not require, that

member firms develop and implement

policies and procedures to establish

effective internal control systems and

procedures that would isolate specific

information within research and other

relevant departments of the firm so as to

prevent the trading department from

utilizing the advance knowledge of the

issuance of a research report. Firms that

choose not to develop ‘‘Chinese Wall’’

procedures bear the burden of

demonstrating that the basis for changes

in inventory positions in advance of

research reports was not purposeful.

* * * * *

IM–2110–5. Anti-Intimidation/

Coordination

The Board of Governors is issuing this

interpretation to codify a longstanding

policy. It is conduct inconsistent with

just and equitable principles of trade for

any member or person associated with

a member to coordinate the prices

(including quotations), trades, or trade

reports of such member with any other

member or person associated with a

member; to direct or request another

member to alter a price (including a

quotation); or to engage, directly or

indirectly, in any conduct that

threatens, harasses, coerces, intimidates,

or otherwise attempts improperly to

influence another member or person

associated with a member. This

includes, but is not limited to, any

attempt to influence another member or

person associated with a member to

adjust or maintain a price or quotation,

whether displayed on any [automated

system] facility operated by the NASD

[The Nasdaq Stock Market, Inc.

(Nasdaq),] or otherwise, or refusals to

trade or other conduct that retaliates

against or discourages the competitive

activities of another market maker or

market participant. Nothing in this

interpretation respecting coordination of

quotes, trades, or trade reports shall be

deemed to limit, constrain, or otherwise

inhibit the freedom of a member or

person associated with a member to:

(1) Set unilaterally its own bid [and]

or ask in any [Nasdaq] security, the

prices at which it is willing to buy or

sell any [Nasdaq] security, and the

quantity of shares of any [Nasdaq]

security that it is willing to buy or sell;

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 391

(2) set unilaterally its own dealer

spread, quote increment, or quantity of

shares for its quotations (or set any

relationship between or among its

dealer spread, inside spread, or the size

of any quote increment) in any [Nasdaq]

security;

(3) communicate its own bid or ask,

or the prices at or the quantity of shares

in which it is willing to buy or sell any

[Nasdaq] security to any person, for the

purpose of exploring the possibility of a

purchase or sale of that security, and to

negotiate for or agree to such purchase

or sale;

(4) communicate its own bid or ask,

or the price at or the quantity of shares

in which it is willing to buy or sell any

[Nasdaq] security, to any person for the

purpose of retaining such person as an

agent or subagent for the member or for

a customer of the member (or for the

purpose of seeking to be retained as an

agent or subagent), and to negotiate for

or agree to such purchase or sale;

(5) through (7) No Change.

* * * * *

2200. Communications with Customers

and the Public

2210. Communications with the Public

(a) and (b) No Change.

(c) Filing Requirements and Review

Procedures

(1) through (6) No Change.

(7) The following types of material are

excluded from the foregoing filing

requirements and (except for research

reports under paragraph (G)) spot-check

procedures:

(A) No Change.

(B) Advertisements or sales literature

[which] that do no more than identify

the [Nasdaq] symbol of the member and/

or of a security in which the member is

a [Nasdaq] registered market maker;

(C) through (G) No Change.

(8) and (9) No Change.

* * * * *

2300. TRANSACTIONS WITH

CUSTOMERS

2310. No Change.

* * * * *

IM–2310–1. Possible Application of SEC

Rules 15g–1 through 15g–9

Members should be aware that,

effective January 1, 1990, any

transaction [which] that involves a

[non-Nasdaq,] non-exchange-listed

equity security trading for less than five

dollars per share may be subject to the

provisions of SEC Rules 15g–1 through

15g–9, and those Rules should be

reviewed to determine if an executed

customer suitability agreement is

required.

Accounts opened, and

recommendations made, prior to

January 1, 1991 remain subject to former

Article III, Sections 2 and 21(c) of the

Rules of Fair Practice as previously in

effect, as set forth in Notice to Members

90–52 (August 1990).

* * * * *

IM–2310–2. Fair Dealing with

Customers

(a) through (d) No Change.

(e) Fair Dealing with Customers with

Regard to Derivative Products or New

Financial Products.

The Board emphasizes members’

obligations for fair dealing with

customers when making

recommendations or accepting orders

for new financial products. As new

products are introduced from time to

time, it is important that members make

every effort to familiarize themselves

with each customer’s financial situation,

trading experience, and ability to meet

the risks involved with such products

and to make every effort to make

customers aware of the pertinent

information regarding the products.

Members must follow specific

guidelines, set forth below, for

qualifying the accounts to trade the

products and for supervising the

accounts thereafter.

(1) Index Warrants

Members are obliged to comply with

the Rules, regulations and procedures

applicable to index warrants and foreign

currency warrants contained in the Rule

2840 Series.

(2) Hybrid Securities and Selected

Equity-Linked Debt Securities

(‘‘SEEDS’’) Designated as Nasdaq

National Market Securities [Pursuant to

the Rule 4400 Series]

With respect to Hybrid Securities and

Selected Equity-Linked Debt Securities

(‘‘SEEDS’’) that have been designated as

Nasdaq National Market Securities,

[M]members are obligated to comply

with any Rules, regulations, or

procedures applicable to such securities

[pursuant to the Rule 4420 Series],

including those of Nasdaq, as well as

any other applicable Rule, regulation, or

procedure of the Association. Prior to

the commencement of trading of a

particular SEEDS, Nasdaq or the

Association will distribute a circular

providing guidance regarding member

firm compliance responsibilities

(including suitability recommendations

and account approval) when handling

transactions in SEEDS.

* * * * *

2320. Best Execution and

Interpositioning

(a) through (f) No Change.

(g) (1) Unless two or more priced

quotations for a [non-Nasdaq] nonexchange-listed security (as defined in

the Rule [6700] 6600 Series) are

displayed in an inter-dealer quotation

system that permits quotation updates

on a real-time basis, in any transaction

for or with a customer pertaining to the

execution of an order in a [non-Nasdaq]

non-exchange-listed security, a member

or person associated with a member[,]

shall contact and obtain quotations from

three dealers (or all dealers if three or

less) to determine the best inter-dealer

market for the subject security.

(2) Members that display priced

quotations on a real-time basis for a

[non-Nasdaq] non-exchange-listed

security in two or more quotation

mediums that permit quotation updates

on a real-time basis must display the

same priced quotations for the security

in each medium.

(3) through (5) No Change.

* * * * *

2340. Customer Account Statements

(a) through (b) No Change.

(c) Definitions.

For purposes of this Rule, the

following terms will have the stated

meanings:

(1) through (2) No Change.

(3) direct participation program or

direct participation program security

refers to the publicly issued equity

securities of a direct participation

program as defined in Rule 2810

(including limited liability companies),

but does not include securities on

deposit in a registered securities

depository and settled regular way,

securities listed on a national securities

exchange [or The Nasdaq Stock Market],

or any program registered as a

commodity pool with the Commodities

Futures Trading Commission.

(4) ‘‘real estate investment trust’’ or

‘‘real estate investment trust security’’

refers to the publicly issued equity

securities of a real estate investment

trust as defined in Section 856 of the

Internal Revenue Code, but does not

include securities on deposit in a

registered securities depository and

settled regular way or securities listed

on a national securities exchange [or

The Nasdaq Stock Market].

(5) No Change.

(d) No Change.

* * * * *

2520. Margin Requirements

(a)–(e) No Change.

392 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(f) Other Provisions

(1) Determination of Value for Margin

Purposes

Active securities dealt in on a

national securities exchange [or OTC

Marginable securities listed on Nasdaq]

shall, for margin purposes, be valued at

current market prices provided that,

whether or not dealt in on an exchange

[or listed on Nasdaq], only those options

contracts on a stock or stock index, or

a stock index warrant, having an

expiration that exceeds nine months

and that are listed or guaranteed by the

carrying broker-dealer, may be deemed

to have market value for the purposes of

Rule 2520. Other securities shall be

valued conservatively in view of current

market prices and the amount [which]

that might be realized upon liquidation.

Substantial additional margin must be

required in all cases where the

securities carried in ‘‘long’’ or ‘‘short’’

positions are subject to unusually rapid

or violent changes in value, or do not

have an active market [on Nasdaq or] on

a national securities exchange, or where

the amount carried is such that the

position(s) cannot be liquidated

promptly.

(2)–(9) No Change.

(10) Margin For Index/Currency

Warrants

(A) This subparagraph (10) sets forth

the minimum amount of margin [which]

that must be deposited and maintained

in margin accounts of customers having

positions in index warrants, currency

index warrants or currency warrants

dealt in on [Nasdaq or] a national

securities exchange. The Association

may at any time impose higher margin

requirements in respect of such

positions when it deems such higher

margin requirements to be advisable.

The initial deposit of margin required

under this Rule must be made within

five full business days after the date on

which a transaction giving rise to a

margin requirement is effected. The

margin requirements set forth in this

subparagraph (J) are applicable only to

index warrants, currency index warrants

and currency warrants listed for trading

on Nasdaq or a national securities

exchange on or after September 28,

1995.

(B) Definitions

The following definitions shall apply

to transactions in index warrants,

currency index warrants, and currency

warrants.

(i) through (ii) No Change.

(iii) The term ‘‘current market value’’

of an index warrant, currency index

warrant or currency warrant shall mean

the total cost or net proceeds of the

transaction on the day the warrant was

purchased or sold and at any other time

shall mean the most recent closing price

of that issue of warrants on [Nasdaq, in

the case of a Nasdaq-listed index

warrants, or] the exchange on which it

is listed on any day with respect to

which a determination of current market

value is made.

(iv) through (xiv) No Change.

(C) through (D) No Change.

* * * * *

2522. Definitions Related to Options,

Currency Warrants, Currency Index

Warrants and Stock Index Warrants

Transactions

(a) The following definitions shall

apply to the margin requirements for

options, currency warrants, currency

index warrants and stock index

warrants transactions:

(1) through (46) No Change.

(47) Options Trading

The term ‘‘options trading’’ means

trading in any option issued by The

Options Clearing Corporation, whether

or not of a type, class or series [which]

that has been approved for trading [on

Nasdaq or] on a national securities

exchange.

(48) through (49) No Change.

(50) Primary Market

The term ‘‘primary market’’ means (A)

in respect of an underlying security that

is principally traded on a national

securities exchange, the principal

exchange market in which the

underlying security is traded and (B) in

respect of an underlying security that is

principally traded in the over-thecounter market, the market reflected by

any widely recognized quotation

dissemination system or service

[(Nasdaq in the case of a Nasdaq stock)].

(51) through (77) No Change.

* * * * *

2700. SECURITIES DISTRIBUTIONS

* * * * *

2720. Distribution of Securities of

Members and Affiliates—Conflicts of

Interest

(a) No Change.

(b) Definitions

For purposes of this Rule, the

following words shall have the stated

meanings:

(1) through (2) No Change.

(3) Bona fide independent market—a

market in a security [which] that:

(A) through (D) No Change.

(4) Bona fide independent market

maker—a market maker [which] that:

(A) is registered with the NASD [as a

Nasdaq] or a national securities

exchange as a market maker in the

security to be distributed pursuant to

this Rule;

(B) through (C) No Change.

(5) through (18) No Change.

(c) through (p) No Change.

* * * * *

2800. SPECIAL PRODUCTS

2810. Direct Participation Programs

(a) No Change.

(b) Requirements

(1) No Change.

(2) Suitability

(A) through (C) No Change.

(D) Subparagraphs (A) and (B), and,

only in situations where the member is

not affiliated with the direct

participation program, subparagraph (C)

shall not apply to:

(i) A secondary public offering of or

a secondary market transaction in a

unit, depositary receipt, or other interest

in a direct participation program [for

which quotations are displayed on

Nasdaq or which] that is listed on a

registered national securities exchange;

or

(ii) an initial public offering of a unit,

depositary receipt or other interest in a

direct participation program for which

an application for [inclusion on Nasdaq

or] listing on a registered national

securities exchange has been approved

by [Nasdaq or] such exchange and the

applicant makes a good faith

representation that it believes such

[inclusion on Nasdaq or] listing on an

exchange will occur within a reasonable

period of time following the formation

of the program.

(3) through (5) No Change.

(6) Participation in Rollups

(A) through (B) No Change.

(C) No member or person associated

with a member shall participate in any

capacity in a limited partnership rollup

transaction if the transaction is unfair or

unreasonable.

(i) A limited partnership rollup

transaction will be presumed not to be

unfair or unreasonable if the limited

partnership rollup transaction provides

for the right of dissenting limited

partners:

a. to receive compensation for their

limited partnership units based on an

appraisal of the limited partnership

assets performed by an independent

appraiser unaffiliated with the sponsor

or general partner of the program

[which] that values the assets as if sold

in an orderly manner in a reasonable

period of time, plus or minus other

balance sheet items, and less the cost of

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 393

sale or refinancing and in a manner

consistent with the appropriate industry

practice. Compensation to dissenting

limited partners of limited partnership

rollup transactions may be cash, secured

debt instruments, unsecured debt

instruments, or freely[-] tradeable

securities; provided, however, that:

1. through 3. No Change.

4. freely[-] tradeable securities

[utilized] used as compensation to

dissenting limited partners must be

previously listed on a registered

national securities exchange [or

previously traded on Nasdaq] prior to

the limited partnership rollup

transaction, and the number of

securities to be received in return for

limited partnership interests must be

determined in relation to the average

last sale price of the freely[-] tradeable

securities in the 20-day period following

the date of the meeting at which the

vote on the limited partnership rollup

transaction occurs. If the issuer of the

freely[-] tradeable securities is affiliated

with the sponsor or general partner,

newly issued securities to be [utilized]

used as compensation to dissenting

limited partners shall not represent

more than 20 percent of the issued and

outstanding shares of that class of

securities after giving effect to the

issuance. For purposes of the preceding

sentence, a sponsor or general partner is

‘‘affiliated’’ with the issuer of the

freely[-] tradeable securities if the

sponsor or general partner receives any

material compensation from the issuer

or its affiliates in conjunction with the

limited partnership rollup transaction or

the purchase of the general partner’s

interest; provided, however, that

nothing herein shall restrict the ability

of a sponsor or general partner to

receive any payment for its equity

interests and compensation as otherwise

provided by this subparagraph.

b. and c. No Change.

(ii) No Change.

(c) No Change.

* * * * *

2840. Trading in Index Warrants,

Currency Index Warrants, and

Currency Warrants

2841. General

(a) Applicability—This Rule 2840

Series shall be applicable[: (1) To the

conduct of accounts, the execution of

transactions, and the handling of orders

in index warrants listed on The Nasdaq

Stock Market (‘‘Nasdaq’’); and (2)] to the

extent appropriate unless otherwise

stated herein, to the conduct of

accounts, the execution of transactions,

and the handling of orders in exchangelisted stock index warrants, currency

index warrants, and currency warrants

by members who are not members of the

exchange on which the warrant is listed

or traded.

(b) and (c) No Change.

* * * * *

2850. Position Limits

[(a)] Except with the prior written

approval of the Association pursuant to

the Rule 9600 Series for good cause

shown in each instance, no member

shall effect for any account in which

such member has an interest, or for the

account of any partner, officer, director

or employee thereof, or for the account

of any customer, a purchase or sale

transaction in an index warrant listed

[on Nasdaq or] on a national securities

exchange if the member has reason to

believe that as a result of such

transaction the member, or partner,

officer, director or employee thereof, or

customer would, acting alone or in

concert with others, directly or

indirectly, hold or control an aggregate

position in an index warrant issue on

the same side of the market, combining

such index warrant position with

positions in index warrants overlying

the same index on the same side of the

market, in excess of the position limits

established by the Association[, in the

case of Nasdaq-listed index warrants,] or

the exchange on which the index

warrant is listed.

[(b) In determining compliance with

this Rule, the position limits for Nasdaqlisted index warrants are as follows:]

[(1) Fifteen million warrants with

respect to warrants on the same stock

index (other than the Standard & Poor’s

MidCap 400 Index) with an original

issue price of ten dollars or less.]

[(2) Seven million five hundred

thousand warrants, with respect to

warrants on the Standard & Poor’s

MidCap 400 Index with an original

issue price of ten dollars or less.]

[(3) For stock index warrants with an

original issue price greater than ten

dollars, positions in these warrants must

be converted to the equivalent-of

warrants on the same index priced

initially at ten dollars by dividing the

original issue price of the index

warrants priced above ten dollars by ten

and multiplying this number by the size

of such index warrant position. After

recalculating a warrant position

pursuant to this subparagraph, such

recalculated warrant position shall be

aggregated with other warrant positions

on the same underlying index on the

same side of the market and subjected

to the applicable position limit set forth

in subparagraph (1) or (2) above. For

example, if an investor held 100,000

Nasdaq 100 Index warrants offered

originally at $20 per warrant, the size of

this position for the purpose of

calculating position limits would be

200,000, or 100,000 times 20/10.]

2851. Exercise Limits

(a) Except with the prior written

approval of the Association pursuant to

the Rule 9600 Series for good cause

shown, in each instance, no member or

person associated with a member shall

exercise, for any account in which such

member or person associated with such

member has an interest, or for the

account of any partner, officer, director

or employee thereof, or for the account

of any customer, a long position in any

index warrant if as a result thereof such

member or partner, officer, director or

employee thereof or customer, acting

alone or in concert with others, directly

or indirectly,[:]

[(1) Has or will have exercised within

any five (5) consecutive business days a

number of index warrants overlying the

same index in excess of the limits for

index warrant positions contained in

Rule 2850; or

(2)] Has or will have exceeded the

applicable exercise limit fixed from time

to time by an exchange for an index

warrant [not dealt in on Nasdaq].

(b) The Association, pursuant to the

Rule 9600 Series for good cause shown,

may institute other limitations

concerning the exercise of index

warrants from time to time by action of

the Association. Reasonable notice shall

be given of each new limitation fixed by

the Association. These exercise

limitations are separate and distinct

from any other exercise limitations

imposed by the issuers of index

warrants.

[2852. Reporting Requirements]

Reserved

[(a) Each member shall file with the

Association a report with respect to

each account in which the member has

an interest, each account of a partner,

officer, director or employee of such

member, and each customer account of

the member, which has established an

aggregate position of 100,000 index

warrants on the same side of the market

in an index warrant issue listed on

Nasdaq, combining such index warrant

position with positions in index

warrants overlying the same index on

the same side of the market traded on

Nasdaq or a national securities

exchange.]

[(b) Such report shall identify the

person or persons having an interest in

such account and shall identify

separately the total number of each type

of index warrant that comprises the

reportable position in such account. The

394 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

report shall be in such form as may be

prescribed by the Association and shall

be filed no later than the close of

business on the next business day

following the day on which the

transaction or transactions necessitating

the filing of such report occurred.

Whenever a report shall be required to

be filed with respect to an account

pursuant to this Rule, the member filing

such report shall file with the

Association such additional periodic

reports with respect to such account as

the Association may from time to time

prescribe.]

* * * * *

2854. [Trading Halts or Suspensions]

Reserved

[(a) The trading in an index warrant

on Nasdaq shall be halted whenever the

Senior Vice President for Market

Regulation, or its designee, shall

conclude that such action is appropriate

in the interests of a fair and orderly

market and to protect investors. Among

the factors that may be considered are

the following:]

[(1) Trading has been halted or

suspended in underlying stocks whose

weighted value represents 20% or more

of the index value;]

[(2) the current calculation of the

index derived from the current market

prices of the stocks is not available;]

[(3) other unusual conditions or

circumstances detrimental to the

maintenance of a fair and orderly

market are present.]

[(b) Trading in index warrants that

has been the subject of a trading halt or

suspension may resume if the Senior

Vice President for Market Regulation, or

its designee, determines that the

conditions which led to the halt or

suspension are no longer present or that

the interests of a fair and orderly market

are served by a resumption of trading.

In either event, the reopening may not

occur until the Association has

determined that trading in underlying

stocks whose weighted value represents

more than 50% of the index is

occurring.]

* * * * *

2860. Options

(a) No Change.

(b) Requirements

(1) General

(A) Applicability—This Rule shall be

applicable (i) [to the trading of options

contracts issued by The Options

Clearing Corporation and displayed on

The Nasdaq Stock Market and to the

terms and conditions of such contracts;

(ii)] to the extent appropriate unless

otherwise stated herein, to the conduct

of accounts, the execution of

transactions, and the handling of orders

in exchange-listed options by members

[who] that are not members of an

exchange on which the option executed

is listed; [(iii)] (ii) to the extent

appropriate unless otherwise stated

herein, to the conduct of accounts, the

execution of transactions, and the

handling of orders in conventional

options; and [(iv)] (iii) other matters

related to options trading.

Unless otherwise indicated herein,

subparagraphs (3) through (12) shall

apply only to [options displayed on

Nasdaq and] standardized and

conventional options on common stock

and subparagraphs (13) through (24)

shall apply to transactions in all options

as defined in paragraph (a), including

common stock. The position and

exercise limits for FLEX Equity Options

for members [who] that are not also

members of the exchange on which

FLEX Equity Options trade shall be the

same as the position and exercise limits

as applicable to members of the

exchange on which such FLEX Equity

Options are traded.

(B) through (C) No Change.

(2) Definitions

The following terms shall, unless the

context otherwise requires, have the

stated meanings:

(A) through (F) No Change.

(G) Call—The term ‘‘call’’ means an

option contract under which the holder

of the option has the right, in

accordance with the terms of the option,

to purchase the number of units of the

underlying security or to receive a

dollar equivalent of the underlying

index covered by the option contract. In

the case of a ‘‘call’’ issued by The

Options Clearing Corporation on

common stock [or on an option

displayed on The Nasdaq Stock Market],

it shall mean an option contract under

which the holder of the option has the

right, in accordance with the terms of

the option, to purchase from The

Options Clearing Corporation the

number of units of the underlying

security or receive a dollar equivalent of

the underlying index covered by the

option contract.

(H) through (DD) No Change. [(EE)

Nasdaq Market Index Option—The term

‘‘Nasdaq market index option’’ means

an option contract issued by The

Options Clearing Corporation and

displayed on Nasdaq based upon an

underlying index which has been

deemed by the Commission to be a

market index.]

[(FF) Nasdaq Option Transaction—

The term ‘‘Nasdaq option transaction’’

means a transaction effected by a

member of the Association for the

purchase or sale of an option contract

which is displayed on The Nasdaq

Stock Market or for the closing out of a

long or short position in such option

contract.]

(GG) through (II) are renumbered as

(EE) through (GG).

[(JJ)] (HH) Options Contract—The

term ‘‘options contract’’ means any

option as defined in paragraph (a). For

purposes of subparagraphs (3) through

(12), an option to purchase or sell

common stock shall be deemed to cover

100 shares of such stock at the time the

contract granting such option is written.

[A Nasdaq index option shall be deemed

to cover a dollar equivalent to the

numerical value of the underlying index

multiplied by the applicable index

multiplier.] If a stock option is granted

covering some other number of shares,

then for purposes of subparagraphs (3)

through (12), it shall be deemed to

constitute as many option contracts as

that other number of shares divided by

100 (e.g., an option to buy or sell five

hundred shares of common stock shall

be considered as five option contracts).

A stock option contract [which] that,

when written, grants the right to

purchase or sell 100 shares of common

stock shall continue to be considered as

one contract throughout its life,

notwithstanding that, pursuant to its

terms, the number of shares [which] that

it covers may be adjusted to reflect stock

dividends, stock splits, reverse splits, or

other similar actions by the issuer of

such stock.

(KK) through (NN) are renumbered as

(II) through (LL).

[(OO)] (MM) Put—The term ‘‘put’’

means an option contract under which

the holder of the option has the right, in

accordance with the terms of the option,

to sell the number of units of the

underlying security or deliver a dollar

equivalent of the underlying index

covered by the option contract. In the

case of a ‘‘put’’ issued by The Options

Clearing Corporation on common stock

[or on an option displayed on The

Nasdaq Stock Market], it shall mean an

option contract under which the holder

of the option has the right, in

accordance with terms of the option, to

sell to The Options Clearing Corporation

the number of units of the underlying

security covered by the option contract

or to tender the dollar equivalent of the

underlying index.

[(PP) Registered Nasdaq Index

Options Market Maker—The term

‘‘registered Nasdaq index options

market maker’’ means a member who

meets the qualifications for such, as set

forth in subparagraph (3), is willing and

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 395

able to serve as such in connection with

Nasdaq index option contracts and who

is authorized by the Association to do

so.]

(QQ) through (VV) are renumbered as

(NN) through (SS).

[(WW)] (TT) The Options Clearing

Corporation—The term ‘‘The Options

Clearing Corporation’’ means The

Options Clearing Corporation, the issuer

of exchange-listed options [and options

displayed on The Nasdaq Stock Market].

(XX) through (YY) are renumbered as

(UU) through (VV).

[(ZZ) Underlying Index—The term

‘‘underlying index’’ means an index

upon which a Nasdaq index option

contract is based.]

(AAA) through (BBB) are renumbered

as (YY) through (ZZ).

(3) Position Limits

(A) Stock Options—Except in highly

unusual circumstances, and with the

prior written approval of the

Association pursuant to the Rule 9600

Series for good cause shown in each

instance, no member shall effect for any

account in which such member has an

interest, or for the account of any

partner, officer, director or employee

thereof, or for the account of any

customer, non-member broker, or nonmember dealer, an opening transaction

through [Nasdaq,] the over-the-counter

market or on any exchange in a stock

option contract of any class of stock

options if the member has reason to

believe that as a result of such

transaction the member or partner,

officer, director or employee thereof, or

customer, non-member broker, or nonmember dealer, would, acting alone or

in concert with others, directly or

indirectly, hold or control or be

obligated in respect of an aggregate

equity options position in excess of:

(i) No Change.

(ii) 22,500 options contracts of the put

class and the call class on the same side

of the market covering the same

underlying security, provid[ing]ed that

the 22,500 contract position limit shall

only be available for option contracts on

securities [which] that underlie [Nasdaq

or] exchange-traded options qualifying

under applicable rules for a position

limit of 22,500 option contracts; or

(iii) 31,500 option contracts of the put

class and the call class on the same side

of the market covering the same

underlying security provid[ing]ed that

the 31,500 contract position limit shall

only be available for option contracts on

securities [which] that underlie [Nasdaq

or] exchange-traded options qualifying

under applicable rules for a position

limit of 31,500 option contracts; or

(iv) 60,000 options contracts of the

put and the call class on the same side

of the market covering the same

underlying security, provid[ing]ed that

the 60,000 contract position limit shall

only be available for option contracts on

securities [which] that underlie [Nasdaq

or] exchange-traded options qualifying

under applicable rules for a position

limit of 60,000 option contracts; or

(v) 75,000 options contracts of the put

and the call class on the same side of

the market covering the same

underlying security, provid[ing]ed that

the 75,000 contract position limit shall

only be available for option contracts on

securities [which] that underlie [Nasdaq

or] exchange-traded options qualifying

under applicable rules for a position

limit of 75,000 option contracts; or

(vi) through (ix) No Change.

(B) Index Options

[(i)] Except in highly unusual

circumstances, and with the prior

written approval of the Association

pursuant to the Rule 9600 Series for

good cause shown in each instance, no

member shall effect for any account in

which such member has an interest, or

for the account of any partner, officer,

director or employee thereof, or for the

account of any customer, an opening

transaction in an option contract of any

class of index options [displayed on

Nasdaq or] dealt in on an exchange if

the member has reason to believe that as

a result of such transaction the member

or partner, officer, director or employee

thereof, or customer, would, acting

alone or in concert with others, directly

or indirectly, hold or control or be

obligated in respect of an aggregate

position in excess of position limits

established by [the Association, in the

case of Nasdaq index options, or] the

exchange on which the option trades.

[(ii) In determining compliance with

this subparagraph (3), option contracts

on a market index displayed in Nasdaq

shall be subject to a contract limitation

fixed by the Association, which shall

not be larger than the equivalent of a

$300 million position. For this purpose,

a position shall be determined by the

product of the closing index value times

the index multiplier times the number

of contracts on the same side of the

market.]

(C) through (D) No Change.

(4) through (6) No Change.

(7) Limit on Uncovered Short Positions

Whenever the Association shall

determine in light of current conditions

in the markets for options, or in the

markets for underlying securities, that

there are outstanding a number of

uncovered short positions in option

contracts of a given class in excess of

the limits established by the Association

for purposes of this subparagraph or that

a percentage of outstanding short

positions in option contracts of a given

class are uncovered, in excess of the

limits established by the Association for

purposes of this subparagraph, the

Association, upon its determination that

such action is in the public interest and

necessary for the protection of investors

and the maintenance of a fair and

orderly market in the option contracts or

underlying securities, may prohibit any

further opening writing transactions in

option contracts of that class unless the

resulting short position will be covered,

and it may prohibit the uncovering of

any existing covered short position in

option contracts of one or more series of

options of that class. [The Association

may exempt transactions in Nasdaq

options by registered Nasdaq options

market makers from restrictions

imposed under this subparagraph and it

shall rescind such restrictions upon its

determination that they are no longer

appropriate.]

(8) through (11) No Change.

(12) Confirmations

Every member shall promptly furnish

to each customer a written confirmation

of each transaction in option contracts

for such customer’s account. Each such

confirmation shall show the type of

option, the underlying security or index,

the expiration month, the exercise price,

the number of option contracts, the

premium, the commission, the trade and

settlement dates, whether the

transaction was a purchase or a sale

(writing) transaction, whether the

transaction was an opening or a closing

transaction, whether the transaction was

effected on a principal or agency basis

and, for other than options issued by

The Options Clearing Corporation, the

date of expiration. The confirmation

shall by appropriate symbols

distinguish between exchange listed

[and Nasdaq option transactions] and

other transactions in option contracts.

(13) through (22) No Change.

(23) Tendering Procedures for Exercise

of Options

(A) Exercise of Options Contracts

(i) Subject to the restrictions

established pursuant to paragraph (b)(4)

hereof and such other restrictions

[which] that may be imposed by the

Association, The Options Clearing

Corporation or an options exchange

pursuant to appropriate rules, an

outstanding option contract issued by

The Options Clearing Corporation may

be exercised during the time period

specified in the rules of The Options

396 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

Clearing Corporation. An exercise notice

may be tendered to The Options

Clearing Corporation only by the

clearing member in whose account the

option contract is carried. Exercise

instructions of their customers relating

to exchange listed [or Nasdaq] option

contracts shall not be accepted by

members after 5:30 p.m. (Eastern Time)

on the business day immediately prior

to the expiration date of any option

contract. Exercise instructions in respect

of such option contracts carried in any

proprietary account of a member shall

similarly not be accepted by any other

member with [whom] which such

member maintains an account after 5:30

p.m. (Eastern Time) on the business day

immediately prior to the expiration date

of any option contract.

(ii) through (iii) No Change.

(B) through (D) No Change.

[(E) Exercise of Nasdaq Index Option

Contracts

(i) With respect to Nasdaq index

option contracts, clearing members are

required to follow the procedures of The

Options Clearing Corporation for

tendering exercise notices, and member

organizations also are required to

comply with the following procedures:]

[a. A memorandum to exercise any

Nasdaq index option contract issued or

to be issued in a customer or market

maker account at The Options Clearing

Corporation must be received or

prepared by the member organization no

later than 4:10 p.m. (Eastern Time) and

must be time-stamped at the time it is

received or prepared. Member

organizations must accept exercise

instructions until 4:10 p.m. (Eastern

Time) each business day.]

[b. A memorandum to exercise any

Nasdaq index option contract issued or

to be issued in a firm account at The

Options Clearing Corporation must be

prepared by the member organization no

later than 4:10 p.m. (Eastern Time) and

must be time-stamped at the time it is

prepared.]

[c. Any member or member

organization that intends to submit an

exercise notice for 25 or more contracts

in the same series of Nasdaq index

options on the same business day on

behalf of an individual customer,

registered Nasdaq options market maker

or firm account must notify the

Association of such exercises in a

manner prescribed by the Association

no later than 4:10 p.m. (Eastern Time)

on that day. For purposes of this

subparagraph (E), exercises for all

accounts controlled by the same

individual must be aggregated.]

[(ii) The provisions of subparagraphs

(i) a. and b. above are not applicable in

respect to any series of Nasdaq index

options on the last day of trading prior

to the expiration date of such series.]

(24) No Change.

* * * * *

2870. [Nasdaq Index Options] Reserved

[2871. Definitions]

[(a) Aggregate Current Index Value—

The term ‘‘aggregate current index

value’’ means the value required to be

delivered to the holder of a call or by

the holder of a put (against payment of

the aggregate exercise price) upon the

valid exercise of an index option. Such

value is equal to the index multiplier

times the current index value on the

trading day on which an exercise notice

is properly tendered to The Options

Clearing Corporation, or, if the day on

which such notice is so tendered is not

a trading day, then on the most recent

trading day.]

[(b) Aggregate Index Option Exercise

Price—The term ‘‘aggregate index

option exercise price’’ in respect of an

index option means the exercise price of

such option times the index multiplier.]

[(c) Best Bid and Asked—The term

‘‘best bid’’ means the best or highest

price of all the open, active bids. The

term ‘‘best asked’’ means the best or

lowest (but greater than zero) price of all

the open active offers.]

[(d) Cabinet Transaction—The term

‘‘cabinet transaction’’ means a

transaction in a Nasdaq index option

executed at a price of $1.00 per contract

for the purpose of opening or closing a

position in an index option having a

nominal market value.]

[(e) Call—The term ‘‘call’’ means an

option contract under which the holder

of the options has the right, in

accordance with the terms of the option,

to buy a number of units of the

underlying security or to receive a

dollar equivalent of the underlying

index covered by the option contract.]

[(f) Class of Options—The term ‘‘class

of options’’ means all option contracts

of the same type of option covering the

same underlying security or index.]

[(g) Clearing Member—The term

‘‘clearing member’’ means a member of

the Association which has been

admitted to membership in The Options

Clearing Corporation pursuant to the

provisions of the rules of The Options

Clearing Corporation.]

[(h) Closing Purchase Transaction—

The term ‘‘closing purchase transaction’’

means an option transaction in which

the purchaser’s intention is to reduce or

eliminate a short position in the series

of options involved in such transaction.]

[(i) Closing Sale Transaction—The

term ‘‘closing sale transaction’’ means

an option transaction in which the

seller’s intention is to reduce or

eliminate a long position in the series of

options involved in such transaction.]

[(j) Combination Order—The term

‘‘combination order’’ means an order to

buy a number of call option contracts

and the same number of put option

contracts with respect to the same

underlying security or index or put and

call option contracts representing the

same number of shares or units of

trading at option, which contracts do

not have both the same exercise price

and expiration date; or an order to sell

a number of call option contracts and

the same number of put option contracts

with respect to the same underlying

security or index, or put and call option

contracts representing the same number

of shares, or units of trading at option,

which contracts do not have both the

same exercise price and expiration date

(e.g., an order to buy two XYZ April 50

calls and to buy two XYZ July 40 puts

is a combination order). In the case of

adjusted option contracts, a

combination order need not consist of

the same number of put and call

contracts if such contracts represent the

same number of shares or units of

trading at option.]

[(k) Covered—The term ‘‘covered’’ in

respect of a short position in a call

option contract means that the writer’s

obligation is secured by a ‘‘specific

deposit’’ or an ‘‘escrow deposit,’’

meeting the conditions of Rules 610(e)

or 610(h), respectively, of the rules of

The Options Clearing Corporation, or

the writer holds in the same account as

the short position, on a unit-for-unit

basis, a long position either in the

underlying security or in an option

contract of the same class of options

where the exercise price of the option

contract in such long position is equal

to or less than the exercise price of the

option contract in such short position.

The term ‘‘covered’’ in respect of a short

position in a put option contract means

that the writer holds in the same

account as the short position, on a unitfor-unit basis, a long position in an

option contract of the same class of

options having an exercise price equal

to or greater than the exercise price of

the option contract in such short

position.]

[(l) Current Index Value—The term

‘‘current index value’’ means the level

of a particular index (derived from the

current market prices and capitalization

of the underlying securities in the index

group) at the close of trading on any

trading day, or any multiple or fraction

thereof specified by the Association as

such value is reported by the reporting

authority.]

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 397

[(m) Expiration Cycle—The term

‘‘expiration cycle’’ means all option

contracts covering the same underlying

security or index having the same

expiration month, or the time period

during which such options are

authorized for trading.]

[(n) Expiration Date—The term

‘‘expiration date’’ of a Nasdaq option

contract issued by The Options Clearing

Corporation means the day and time

fixed by the rules of The Options

Clearing Corporation for the expiration

of all option contracts having the same

expiration month as such option

contract.]

[(o) Expiration Month—The term

‘‘expiration month’’ in respect of an

option contract means the month and

year in which such option contract

expires.]

[(p) Index Dollar Equivalent—The

term ‘‘index dollar equivalent’’ is the

dollar amount which results when the

index value is multiplied by the

appropriate index multiplier.]

[(q) Index Group—The term ‘‘index

group’’ means a group of securities,

whose inclusion and relative

representation in the group is

determined by the inclusion and

relative representation of their current

market values in a widely disseminated

securities index specified by the

Association.]

[(r) Index Multiplier—The term

‘‘index multiplier’’ as used in reference

to an index option contract means the

dollar amount (as specified by the

Association) by which the current index

value is multiplied to arrive at the index

dollar equivalent. Such term replaces

the term ‘‘unit of trading’’ used in

reference to other kinds of options.]

[(s) Index Option Exercise Price—The

term ‘‘index option exercise price’’ in

respect of an index option means the

specified index value which, when

multiplied by the index multiplier, will

yield the aggregate exercise price at

which the aggregate current index value

may be purchased (in the case of a call)

or sold (in the case of a put) upon the

exercise of such option.]

[(t) Index Option Premium—The term

‘‘index option premium’’ means the

price of each such option (expressed in

points), as agreed upon by the purchaser

and seller in such transaction, times the

index multiplier and the number of

options subject to the transaction.]

[(u) Index Underlying Security—The

term index underlying security means

any of the securities included in an

index group underlying a class of

Nasdaq index options.]

[(v) Internalized Trade Transaction—

The term ‘‘Internalized Trade

Transaction’’ or ‘‘ITT’’ means an OCT

entered into The Nasdaq Stock Market

by a participant containing the terms of

a transaction executed by the

participant as principal where the

participant is also the order entry firm.]

[(w) Long Position—The term ‘‘long

position’’ means the number of

outstanding option contracts of a given

series of options held by a person

(purchaser).]

[(x) Nasdaq Index Option Contract—

The term ‘‘Nasdaq index option

contract’’ means an option contract

which is authorized for quotation

display on The Nasdaq Stock Market.]

[(y) Nasdaq Index Options Order

Entry Firm—The term ‘‘order entry

firm’’ shall mean a member of the

Association who is registered as an

order entry firm for purposes of

participation in the Nasdaq Index

Options Service which permits the firm

to enter options orders via Order

Confirmation Transactions (OCT) or

Internalized Trade Transaction (ITT).]

[(z) Nasdaq Index Options

Participant—The term ‘‘participant’’

shall mean either a Nasdaq index

options market maker or Nasdaq index

options order entry firm registered as

such with the Association for

participation in the Nasdaq Index

Options Service.]

[(aa) Nasdaq Index Options Service—

The term ‘‘Nasdaq Index Option

Service’’ or ‘‘Service’’ means the Service

owned and operated by The Nasdaq

Stock Market, Inc. which enables

participants to report transaction in

Nasdaq index options, to have reports of

all Nasdaq index options transactions

automatically forwarded to the Options

Price Reporting Authority (OPRA) for

dissemination to the public and the

industry, and to ‘‘lock-in’’ these trades

by sending both sides to The Options

Clearing Corporation for clearance and

settlement; and to provide participants

with sufficient monitoring and updating

capabilities to participate in such

trading environment.]

[(bb) Nasdaq Market Index Option—

The term ‘‘Nasdaq market index option’’

means an option contract issued by The

Options Clearing Corporation and

displayed on The Nasdaq Stock Market

based upon an underlying index which

has been deemed by the Commission to

be a market index.]

[(cc) Opening Purchase Transaction—

The term ‘‘opening purchase

transaction’’ means an option

transaction in which the buyer’s

intention is to create or increase a long

position in the series of options

involved in such transaction.]

[(dd) Opening Writing Transaction—

The term ‘‘opening writing transaction’’

means an option transaction in which

the seller’s (writer’s) intention is to

create or increase a short position in the

series of options involved in such

transaction.]

[(ee) Options Clearing Corporation—

The term ‘‘Options Clearing

Corporation’’ (OCC) means The Options

Clearing Corporation, the issuer of

options displayed on The Nasdaq Stock

Market.]

[(ff) Order Confirmation

Transaction—The term ‘‘Order

Confirmation Transaction’’ or ‘‘OCT’’

means a message entered into The

Nasdaq Stock Market by an order entry

firm which is directed to a market

maker not simultaneously acting as both

a market maker and an order entry firm,

which message contains the information

specified by the Association as

necessary for trade reporting purposes

and for submission of trade detail to The

Options Clearing Corporation.]

[(gg) Outstanding—The term

‘‘outstanding’’ in respect of an option

contract means an option contract

which has neither been the subject of a

closing sale transaction nor has been

exercised nor has reached its expiration

date.]

[(hh) Put—The term ‘‘put’’ means an

option contract under which the holder

of the option has the right, in

accordance with the terms of the option,

to sell the number of units of the

underlying security or deliver a dollar

equivalent of the underlying index

covered by the option contract.]

[(ii) Registered Nasdaq Index Options

Market Maker—The term ‘‘registered

Nasdaq index options market maker’’

means a member who meets the

qualifications for such as set forth in

Rule 2873, is willing and able to serve

as such in connection with Nasdaq

index option contracts and who is

authorized by the Association to do so.]

[(jj) Rules of The Options Clearing

Corporation—The term ‘‘rules of The

Options Clearing Corporation’’ means

the by-laws and the rules of The Option

Clearing Corporation, and all written

interpretations thereof as may be in

effect from time to time.]

[(kk) Series of Options—The term

‘‘series of options’’ means all option

contracts of the same class of options

having the same exercise price and

expiration date and which cover the

same number of units of the underlying

security or index.]

[(ll) Short Position—The term ‘‘short

position’’ means the number of

outstanding option contracts of a given

series of options with respect to which

a person is obligated as a writer (seller).]

[(mm) Spread Order—The term

‘‘spread order’’ means an order to buy

a stated number of option contracts and

398 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

to sell the same number of option

contracts, or contracts representing the

same number of shares or units of

trading at option in a different series of

the same class of options.]

[(nn) Straddle Order—The term

‘‘straddle order’’ means an order to buy

a number of call option contracts and

the same number of put option contracts

with respect to the same underlying

security or index, or put and call option

contracts representing the same number

of shares or units of trading at option,

and having the same exercise price and

expiration date; or an order to sell a

number of call option contracts and the

same number of put option contracts

with respect to the same underlying

security or index, or put and call option

contracts representing the same number

of shares or units of trading at option

and having the same exercise price and

expiration date, (e.g., an order to buy

two XYZ July 50 calls and to buy two

XYZ July 50 puts is a straddle order). In

the case of adjusted option contracts, a

straddle order need not consist of the

same number of put and call contracts

if such contracts both represent the

same number of shares, or units of

trading at option.]

[(oo) Type of Options—The term

‘‘type of options’’ means the

classification of an option contract as

either a put or a call.]

[(pp) Uncovered—The term

‘‘uncovered’’ in respect of a short

position in an option contract means the

short position is not covered.]

[(qq) Underlying Index—The term

‘‘underlying index’’ means an index

upon which a Nasdaq index option

contract is based.]

[(rr) Unit of Trading—The term ‘‘unit

of trading’’ means the number of units

of the underlying security designated by

The Options Clearing Corporation as the

subject of a single option contract. In the

absence of any other designation, the

unit of trading for a common stock is

100 shares.]

[2872. Nasdaq Index Option Services

Available]

[(a) Level 2 Nasdaq Index Options

Service]

[(1) Nature of Service

This service will provide the

subscriber with access to the quotations

of all of the registered Nasdaq index

options market makers entering quotes

on each of the Nasdaq index options, in

addition to the last reported sale for

each Nasdaq index option, the most

recent index computation for the

underlying index, daily high and low,

daily volume, time of last sale and

inside quotations.]

[(2) Availability

This service is available only to

persons approved and authorized by the

Association for retrieval of Nasdaq

index options quotation and last sale

data.]

[(b) Level 3 Nasdaq Index Options

Service]

[(1) Nature of Service

This service will enable a registered

Nasdaq index options market maker to

enter quotations in The Nasdaq Stock

Market only on the Nasdaq index

options as to which the Association has

authorized it to enter quotes pursuant to

the procedures set forth in Rule 2873. A

subscriber to Level 3 Nasdaq Index

Options Service shall also receive Level

2 Nasdaq Index Options Service.]

[(2) Availability

Level 3 Nasdaq Index Options Service

is available to any member which, upon

application, is approved and authorized

by the Association to participate in The

Nasdaq Stock Market as a registered

Nasdaq index options market maker.]

[2873. Registration, Qualification and

Other General Requirements

Applicable to All Nasdaq Index Options

Market Makers]

[(a) Registration of Nasdaq Index

Options Market Makers—Prior to acting

as a market maker in Nasdaq index

options, a member must make

application to the Association on a form

prescribed by the Association and

become registered as such with it. In

connection with such application, a

member must submit to the Association

such financial and other information as

required by the Association to

determine if such member meets the

qualifications of a registered Nasdaq

index options market maker specified

herein. Such other information will

include those classes and series of

Nasdaq options in which such member

desires to be registered as an index

options market maker.]

[(b) Participation in the Nasdaq Index

Options Service shall be mandatory for

all Nasdaq index options market

makers. Accordingly, a Nasdaq index

options market maker’s registration as

such shall be conditioned upon the

member’s initial and continuing

compliance with the following

requirements:]

[(1) execution of a Nasdaq Index

Options Service participant application

agreement with the Association;]

[(2) maintenance of the physical

security of the equipment located on the

premises of the Nasdaq index options

market maker to prevent the

unauthorized entry of information into

the Nasdaq Index Options Service;]

[(3) acceptance and settlement of each

NASD index option trade that the

Service identifies as having been

effected by such Nasdaq index options

market maker, or if settlement is to be

made through another clearing member,

guarantee of the acceptance and

settlement of such identified trade by

the clearing member on the regularly

scheduled settlement date;]

[(4) membership in The Options

Clearing Corporation, or a clearing

arrangement with such member; and]

[(5) compliance with all applicable

rules and operating procedures of the

Association and the Commission.]

[(c) Nasdaq index options market

makers shall be under a continuing

obligation to inform the Association of

non-compliance with any of the

registration requirements set forth

above.]

[(d) Obligation to Honor Trades—If a

Nasdaq index options market maker, or

clearing member acting on his behalf, is

reported by the Service to clearing at the

close of any trading day, or shown by

the activity reports generated by the

Service as constituting a side of a trade,

such market maker, or clearing member

acting on his behalf, shall honor such

trade on the scheduled settlement date.]

[(e) Compliance with Rules and

Registration Requirements—Failure by

Nasdaq index options market makers to

comply with any of the Rules or

registration requirements applicable to

the Service identified herein shall

subject such participants to censure,

fine, suspension or revocation of its

registration as Nasdaq index options

market maker and/or order entry firm or

any other fitting penalty under the Rules

of the Association.]

[(f) Market Maker Financial

Requirements—A registered Nasdaq

index options market maker shall

continuously maintain net capital of at

least $50,000 computed in accordance

with the provisions of SEC Rule 15c3–

1(c)(2) under the Act, plus $5,000 per

options series up to a maximum

requirement of $150,000.]

[(g) Normal Business Hours—A

registered Nasdaq index options market

maker shall keep the Association

advised as to the normal business hours

during which it shall enter quotations.

All firms should be open and active

between the hours of 9:30 a.m. and 4:10

p.m. (Eastern Time). Nasdaq shall

publish a ‘‘close symbol’’ for a

registered Nasdaq index options market

maker on Level 2 and Level 3 terminals

at the close of such firm’s normal

business hours.]

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 399

[(h) Initiation of Service—Upon initial

application, the registration of a Nasdaq

index options market maker in a Nasdaq

index options series shall be effective at

the start of business on the second

business day following receipt of his

registration application by the

Association; provided, however, said

registration is accepted by the

Association. If said initial registration is

received for a Nasdaq index options

series which has not previously been

authorized by the Association, the

registered Nasdaq index options market

maker’s registration shall be effective at

the start of business on the first day that

the Nasdaq options series is authorized

for quotation by the Association;

provided, however, said registration is

accepted by the Association. A Nasdaq

index options market maker shall

commence market making and

participation in the Service by initially

contacting the Nasdaq Market

Operations Center to obtain

authorization for the trading of a

particular Nasdaq index options series

and identifying those terminals on

which the Service information is to be

displayed and thereafter by an

appropriate keyboard entry which

obligates him to execute transactions for

at least one contract at the market

maker’s displayed quotations so long as

the market maker remains active. All

entries shall be made in accordance

with the requirements set forth in the

User Guide.]

[(i) Withdrawal Procedure for Nasdaq

Index Options Market Makers]

[(1) With the approval of the

Association, a registered Nasdaq index

options market maker may suspend its

quotations in a Nasdaq index options

series for a specified period of time

upon a showing that it is seriously

impaired in its ability to enter

quotations, or, in the case of a

contemplated financing in the

underlying security, the presence of

statutory prohibitions or restrictions, or

such other reason acceptable to the

Association.]

[(2) In the event of a malfunction in

the Nasdaq index options market

maker’s equipment rendering on-line

communications with the Service

inoperable, the Nasdaq index options

market maker is obligated to

immediately contact the Nasdaq Market

Operations Center by telephone to

request withdrawal from the Service.

Nasdaq operational personnel will in

turn enter the withdrawal notification

from a supervisory terminal. Such

manual intervention, however, will take

a certain period of time for completion

and any transaction occurring prior to

the effectiveness of the withdrawal shall

remain the responsibility of the

withdrawing market maker.]

[(3) A registered Nasdaq index options

market maker who suspends its

quotations in a Nasdaq index options

series pursuant to subparagraphs (1) and

(2) above may not re-enter quotations in

such series during the same trading day

without the prior approval of the

Association.]

[(j) Voluntary Termination—A

registered Nasdaq index options market

maker may voluntarily terminate its

registration as to any Nasdaq options

series by withdrawing its quotations

from the Service without prior approval

of the Association, subject to the

conditions set forth in Rules 2875 and

2876. Such Nasdaq index options

market maker may, by making

application to the Association under the

procedures and requirements set forth

in this Rule, re-register as a Nasdaq

index options market maker in a Nasdaq

options series in which his registration

is terminated.]

[(k) A Nasdaq index options market

maker withdrawing option quotations

from the Nasdaq Index Options Service

for any reason has a specific obligation

to monitor his status to assure that a

withdrawal has in fact occurred. Any

transaction occurring prior to the

effectiveness of the withdrawal shall

remain the responsibility of the

withdrawing market maker.]

[(l) Suspension and Termination of a

Registered Nasdaq Index Options

Market Maker’s Authority to Enter

Quotations by Action of the

Association—The Association may,

pursuant to provisions specified in the

Code of Procedure as set forth in the

Rule 9000 Series, suspend, condition or

terminate a registered index options

market maker’s authority to enter

quotations on one or more series of

Nasdaq index options for violations of

applicable Rules of the Association.]

[(m) Termination of Service on the

Failure to Promptly Pay Fines and

Assessments]

[(1) The Association, upon notice,

may terminate service on any level of

Nasdaq Index Options Service for

failure of a subscriber to maintain the

standards of availability specified in

this Rule for such service or to pay the

Service operator for services rendered.]

[(2) Any member which is a

respondent in a complaint pursuant to

any Rule of the Association is required

promptly to pay any fine or costs

imposed to the Treasurer of the

Association. In the event that the

respondent fails to do so, the

Association may, after ten business days

notice in writing to such respondent,

suspend his authority to enter options

quotations into or receive options

quotations from Level 2 and 3 of the

Nasdaq Index Options Services.]

[2874. Character of Index Options

Quotations Entered Into the Nasdaq

Index Options Service by All Nasdaq

Index Options Market Makers]

[(a) All bids or offers for Nasdaq index

options shall be for at least one option

contract or the minimum unit of

trading.]

[(b) All bids and offers for Nasdaq

index options shall be expressed in

terms of the applicable index multiplier

(e.g., a bid of five for a Nasdaq index

option having an index multiplier of

$100 shall represent a bid to pay a

premium of $500 for an option

contract).]

[(c) All bids or offers for a Nasdaq

index option contract for which The

Options Clearing Corporation has

established an adjusted unit of trading

in accordance with paragraphs (c) and

(d) of Section 11 of Article VI of the

OCC’s By-Laws shall be expressed in

terms of dollars per the appropriate

fractional part of the total securities

and/or other property constituting such

adjusted unit of trading.]

[(d) A registered Nasdaq index

options market maker who receives a

buy or sell order must execute a trade

for at least one contract at his quotation

as they appear on the Nasdaq CRT

screen at the time of receipt of any such

buy or sell order. Each quotation

entered by a registered Nasdaq index

options market maker must be

reasonably related to the prevailing

market.]

[(e) A registered Nasdaq index options

market maker will be permitted to enter

a one-sided quotation (0–1/16) with

respect to those options which have no

present market value.]

[(f) Crossed Markets—A registered

Nasdaq index options market maker

shall not be permitted, except under

extraordinary circumstances, to enter

quotations into the Nasdaq Index

Options Service if (1) the bid quotation

entered is greater than the ask quotation

of another registered market maker in

the same options series or (2) the asked

quotation is less than the bid quotation

of another registered market maker in

the same options series.]

[(g) Quote Spread Parameters—A

registered Nasdaq index options market

maker shall not be permitted, except

under extraordinary circumstances, to

enter index option quotations into the

Nasdaq Index Options Service if the

spread between the market maker’s bid

and ask exceeds the following

parameters:]

400 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

[(1) 1⁄4 of $1, if the member’s bid price

is $.50 or less;]

[(2) 1⁄2 of $1, if the bid price is more

than $.50 but does not exceed $10;]

[(3) 3⁄4 of $1, if the bid price is more

than $10 but does not exceed $20; or]

[(4) $1, if the bid price is more than

$20;]

[Providing, however, that the allowable

quote spread differentials for the longest

term options series open for trading in

each option class shall be twice the

amounts stated in subparagraphs (1)

through (4) above.]

[(h) Except under extraordinary

circumstances, a registered Nasdaq

index options market maker shall not be

permitted to enter on an intra-day basis

a bid quotation more than $1 lower and/

or an offering more than $1 higher than

the last reported transaction for the

particular index option contract.

However, this standard shall not

ordinarily apply if the price per share

(or other unit of trading of the

underlying index value has changed

since the last preceding transaction for

the particular option contract, in which

event a market maker may then bid no

lower than or offer no more than $1 plus

the aggregate change in the price per

unit of trading) of the underlying index

value since the time of the last

preceding transaction for the particular

index option contract. Nothing in this

paragraph shall alter the maximum bidask differential established by paragraph

(g) above.]

[(i) Whenever, in the judgment of the

Association, the interest of maintaining

a fair and orderly market so requires, the

Association may waive the requirements

of paragraph (h) above on a case by case

basis.]

[(j) When unusual trading conditions

exist, and the interest of maintaining a

fair and orderly market, the Association

may waive the requirements of

paragraph (g) above in those option

series 10 or more points in the money

to allow market makers to make bid/ask

differentials as wide as the quotation in

the primary market as determined by

the inside quotation displayed on

Nasdaq. Such waiver shall not

automatically carry over from one day to

the next.]

[2875. Commitment Rules Applicable to

Options Market Makers in Nasdaq

Index Options]

[(a) Commitment Rule for Index

Options Market Makers. A market maker

in a Nasdaq index option, unless

excused from entering quotations

pursuant to Rule 2873(i) shall, during

normal options business hours,

continuously quote all options series in

such index option through the

expiration of the longest term index

options authorized for trading at the

time the member commences such

market making. Failure to abide by this

commitment shall cause the index

options market maker to be subject to

the sanctions contained in Rule 2876.]

[(b) The following examples illustrate

the commitment rule for index option

market makers established by this Rule.]

[(1) Member A is authorized as a

Nasdaq index options market maker

prior to the expiration of January

Nasdaq-100 Index Options. Member A

is thus obligated to continuously quote

all series of Nasdaq-100 put and call

options authorized for trading in the

January, February and March

expirations through the expiration of the

March options.]

[(2) Member B is authorized as a

market maker in Nasdaq-100 Index

Options at the time these options are

authorized for the Nasdaq Options

Program, but prior to the

commencement of trading in these

index options. The first authorized

expiration cycle in Nasdaq-100 Index

options will consist of options expiring

in April, May and June with trading to

commence in March. Member B would

be obligated to continuously quote all

authorized Nasdaq-100 Index option

series from the commencement of

trading in such options in March

through the expiration of June Nasdaq100 Index options.]

[2876. Sanctions Applicable to Nasdaq

Index Options Market Makers]

[(a) A registered Nasdaq market maker

in index options whose quotation for

any option series in which the member

is a market maker is withdrawn without

the approval of the Association shall, at

or before the daily close of the Nasdaq

Index Options Service, have its

registration terminated in all Nasdaq

index options series covering the same

underlying index as that for which

option quotations were suspended by

the member, subject, however, to the reregistration procedures set forth in

paragraph (b) below.]

[(b) A Nasdaq index options market

maker in index options whose

registration in options classes is

terminated pursuant to paragraph (a)

above may, by making application to the

Association under the procedures and

requirements set forth in Rule 2873, reregister as a Nasdaq index options

market maker in any Nasdaq index

options series in the options classes in

which his registration was terminated

pursuant to paragraph (a) above

providing, however, that the

Association shall not grant effectiveness

to such registration until the near-term

options and those in the following

expiration cycle have expired.]

[(c) The following example illustrates

the sanction for index options market

makers established by paragraph (a)

above.]

[(1) Market Maker A, without

approval of the Association, withdraws

quotations from the Nasdaq Index

Options Service for a series of Nasdaq100 Index options causing the

member’s registration in all Nasdaq-100

Index options series to be terminated

pursuant to paragraph (a) above.]

[(2) At the time Market Maker A’s

registration is terminated, January,

February and March Nasdaq-100 Index

options are trading. Pursuant to

paragraph (b), any application by

member A to again register as a market

maker in Nasdaq-100 Index options

would not be granted effectiveness by

the Association until the expiration of

the February Nasdaq-100 Index

options.]

[(d) A registered market maker in

Nasdaq index options who withdraws

index options quotations from the

Nasdaq Index Options Service in any

options series without prior

authorization during the 15 business

days preceding the expiration of the

near-term options on the same

underlying index may be deemed to be

in violation of Rule 2110.]

[2877. Requirements Applicable to

Nasdaq Index Options Order Entry

Firms]

[(a) Participation in the Nasdaq Index

Options Service as an order entry firm

requires current registration as such

with the Association. Such registration

shall be conditioned upon the order

entry firm’s initial and continuing

compliance with the following

requirements:]

[(1) Execution of a Nasdaq Index

Options Service participant application

agreement with the Association;]

[(2) membership in, or a clearing

arrangement with, a member of The

Options Clearing Corporation;]

[(3) compliance with all applicable

rules and operating procedures of the

Association and the Commission;]

[(4) maintenance of the physical

security of the equipment located on the

premises of the Nasdaq index options

order entry firm to prevent the

unauthorized entry of information into

the Nasdaq Index Options Service; and]

[(5) acceptance and settlement of each

trade that the Service identifies as

having been effected by such Nasdaq

index options order entry firm or, if

settlement is to be made through

another clearing member, guarantee of

the acceptance and settlement of such

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 401

identified trade by the clearing member

on the regularly scheduled settlement

date.]

[(b) The registration required

hereunder will apply solely to the

qualification of a participant to

participate in the Nasdaq Index Options

Service. Such registration shall not be

conditioned upon registration in any

particular eligible or active Nasdaq

index options contracts.]

[(c) Each participant shall be under a

continuing obligation to inform the

Association of non-compliance with any

of the registration requirements set forth

above.]

[(d) Upon the effectiveness of

registration as a Nasdaq index options

order entry firm, the participant may

commence activity for entry of orders,

as applicable. The operating hours of

the Nasdaq Index Options Service are

currently 9:30 a.m. to 4:10 p.m. (Eastern

Time), but may be modified by the

Association. The extent of participation

in Nasdaq by a Nasdaq index options

order entry firm shall be determined

solely by the firm in the exercise of its

ability to enter orders into Nasdaq.]

[(e) Market orders shall not be

permitted in the Nasdaq Index Options

Service. All orders entered into the

Service other than accommodation

transactions shall be priced and all

orders shall be directed to a specified

Nasdaq index options market maker.

Nasdaq index options order entry firms

will be immediately notified on the

terminal screen and printer, if

requested, of the execution or rejection

of an order entered into via OCT.]

[(f) If a Nasdaq index options order

entry firm or clearing member acting on

his behalf, is reported by the Service to

clearing at the close of any trading day,

or shown by the activity reports

generated by the Service as constituting

a side of a Nasdaq index option trade,

such order entry firm or clearing

member acting on his behalf, shall

honor such trade on the scheduled

settlement date.]

[(g) Failure by a Nasdaq index options

order entry firm to comply with any of

the Rules or registration requirements

applicable to the Service identified

herein shall subject such participant to

censure, fine, suspension or revocation

of its registration as a Nasdaq index

options order entry and/or market

maker firm or any other fitting sanction

under the Rules of the Association.]

[2878. Transaction Reporting and Other

Reporting Requirements]

[(a) All Nasdaq index options

participants, upon becoming so

registered and qualified, shall have

access to, and be required to utilize, the

Order Confirmation Transaction (OCT)

and Internalized Trade Transaction

(ITT) trade reporting systems

established by the Association for

Nasdaq index options transactions.

Such trade reporting systems are

designed to ‘‘lock-in’’ all Nasdaq index

options transactions. Thus these

systems serve trade comparison and

clearing functions as well as trade

reporting functions, and require the

participation of both the order entry and

the market making firms in the reporting

process. Because these procedures,

which are detailed in the User Guide,

vary from those applying to transaction

reporting in other Nasdaq securities, it

is imperative that all Nasdaq index

options participants become familiar

with and comply with the provisions of

this Rule. Failure on the part of a

Nasdaq index options participant to

comply with Nasdaq index options

reporting provisions may subject

participants to censure, fine, suspension

or revocation of registration as a Nasdaq

index options market maker and/or

order entry firm or any other fitting

sanction under the Rules of the

Association.]

[(b) Order Confirmation Transaction

(OCT)—Nasdaq index options order

entry firms shall enter an OCT into the

Service promptly upon the execution of

their order. Upon the acceptance by a

market maker of an OCT, the Service

shall automatically forward a trade

report to the Options Price Reporting

Authority (OPRA). Nasdaq index

options market makers shall accept an

OCT via terminal entry within two

minutes as specified by the Association,

or the OCT shall be ‘‘timed-out,’’ in

which case the Service will notify the

order entry firm of the market maker’s

non-acceptance of the order. The order

entry firm will also be notified if the

market maker affirmatively rejects the

order via terminal entry. If the market

maker wishes to subsequently confirm

an OCT which has been timed-out or

rejected, a new OCT must be entered

into the Service by the order entry firm

with a late trade indicator. Once

accepted, an OCT may only be canceled

or corrected by mutual consent of the

market maker and order entry firm.]

[(c) Unsolicited Orders—Nasdaq

index options market makers are not

obligated to accept an OCT which is

unsolicited but, if they choose to do so,

must accept the order within two

minutes of its receipt as specified by the

Association. Upon the acceptance of an

unsolicited OCT order by a Nasdaq

index options market maker, the system

will automatically forward a trade

report to OPRA. Once accepted by the

market maker, the OCT may only be

canceled or corrected with the mutual

consent of the market maker and the

order entry firm.]

[(d) Internalized Trade Transaction

(ITT)—Nasdaq Index Options Service

participants shall, where appropriate,

enter an ITT message into the Service

within two minutes of the execution of

an internalized trade. Upon the entry of

an ITT message, the Service shall

automatically forward a trade report to

OPRA. An ITT may be subsequently

canceled or corrected by the member.]

[(e) A Nasdaq index options order

entry firm shall transmit OCT and ITT

for transactions in Nasdaq index options

other than cabinet transactions at the

price recorded on the trade ticket

exclusive of commission, taxes or other

charges.]

[(f) Nasdaq index options participants

may effect cabinet transactions in any

class of options contracts authorized for

trading via the Service at a price of

$1.00 per contract, providing such price

is reasonably related to the prevailing

market for the option. In reporting

cabinet transactions, participants shall

designate these transactions as such

with the appropriate indicator on OCT

or ITT entered into the Service. Cabinet

transactions will not be disseminated to

OPRA but will be reported to OCC for

clearance.]

[(g) Weekly and/or Monthly Reports—

A member shall report weekly and/or

monthly to the Association such data on

Nasdaq index options quoted in the

Service as the Board of Governors shall

require. Such report shall be on a form

prescribed by the Association.]

[(h) Trade Tickets—All trade tickets

on transactions in Nasdaq index options

and authorized underlying securities

must indicate the time the order was

received and the time the order was

executed or canceled.]

[2879. Authorization of Nasdaq Index

Option Market Making]

[(a) The Association shall not

authorize index option market making

in any options series unless, at the time

such market making activity is to

commence, there are a minimum of five

registered Nasdaq index options market

makers in the index option.]

[(b) Once market making has

commenced in any class of Nasdaq

index options, the Association shall

withdraw approval of further market

making activity with respect to any

succeeding options series to be opened

in that Nasdaq index option if there are

fewer than three registered market

makers in the index option.]

[(c) Whenever the Association shall

withdraw its approval for index option

market making activity in a particular

402 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

Nasdaq index options series pursuant to

paragraph (b) above, it shall not

reinstate such market making until the

provisions of paragraph (a) above have

been satisfied.]

* * * * *

[2880. Nasdaq Index Option Contracts

Authorized for Trading]

[The Association may from time to

time approve for display on Nasdaq put

option contracts and call option

contracts in respect of underlying

indexes which have been selected by

the Association and approved for

trading. All such option contracts shall

be designated as to the type of option,

the underlying index, the expiration

month and the exercise price. Only

quotations in respect to option contracts

in a class or series of options approved

by the Association and currently open

for display on the Service may be

quoted by a registered Nasdaq index

options market maker on the Nasdaq

Index Options Service.]

[2881. Series of Nasdaq Index Options

for Trading]

[(a) Nasdaq Index Options—After a

particular class of index options has

been approved for display on the

Service and quotation thereon by

registered Nasdaq index options market

makers, the Association shall from time

to time open for trading series of options

therein. Prior to the opening of trading

in any series of options the Association

shall fix the expiration month and

exercise price of options contracts

included in each such series.]

[(1) Expiration Months—At the

commencement of trading in a

particular class of Nasdaq index

options, series of options having three

different expiration months will

normally be opened. Such expirations

shall occur in consecutive months. The

first such expiration will occur in the

month following the month in which

such options are introduced, the second

expiration will occur in the month

following the first, and the third

expiration will occur in the month

following the second. Additional series

of index options of the same class may

be opened for trading at or about the

time a prior series expires and the

expiration month of each such series

will normally be approximately three

months following the opening of such

series.]

[(2) Exercise Prices—The procedures

for fixing the exercise or strike price of

each series of index options opened for

trading shall be as follows:]

[(A) Strike prices shall be fixed at an

index value which is an integer.]

[(B) Regardless of the value of an

index, the interval between strike prices

will be $5.00.]

[(C) New series of index option

contracts may be added up to the fifth

business day prior to expiration.]

[(D) When new series of index option

contracts within a new expiration cycle

are opened for trading, two strike prices

above and two strike prices below the

current index value may be added.]

[(E) When the value of the index

underlying a class of index options

reaches a strike price, the Association

may add one or more additional strike

prices such that there are at least two

strike prices above and two strike prices

below the strike price which has been

reached.]

[(F) In unusual market conditions, the

Association may add additional series of

index option contracts up to three strike

prices above and three strike prices

below the current index price.]

[(b) Specification Adjustments—The

unit of trading and the exercise price

initially established for index option

contracts of a particular series are

subject to adjustment in accordance

with the rules of The Options Clearing

Corporation. When such adjustment(s)

have been determined, announcement

thereof shall be made by the Association

and, effective as of the time specified in

such announcement, the adjusted unit

of trading and the adjusted exercise

price shall be applicable with respect to

all subsequent transactions in such

series.]

[(c) Contract Adjustments—Index

option contracts shall be subject to

adjustments in accordance with the

rules of The Options Clearing

Corporation.]

[(d) Puts and Calls—When calls are

first opened for trading on an

underlying index stock group, the

Association may open a series of puts

corresponding to each series of calls

open or to be opened for trading on the

same underlying index stock group.]

[2882. Unit of Trading]

[The unit of trading in each series of

options displayed on the Service shall

be the unit of trading established by The

Options Clearing Corporation pursuant

to the rules of The Options Clearing

Corporation.]

[2883. Suspension of Authorization of

Nasdaq Index Option Contracts]

[(a) The Association shall have the

authority to suspend trading in Nasdaq

index option contracts by either one or

more market maker or all market makers

where it deems it necessary and

appropriate:]

[(1) to prevent fraudulent and

manipulative acts and practices;]

[(2) to promote just and equitable

principles of trade; or]

[(3) to prevent excessive speculation

and promote the likelihood of a

competitive and orderly market.]

[(b) The Association shall suspend

trading in Nasdaq index options

contracts by all market makers:]

[(1) If the underlying index is not

being computed or disseminated; or]

[(2) if trading is halted or suspended

in underlying stocks that collectively

contribute (A) 20 percent of the current

index group value (in the case of index

stock groups comprised of more than 50

stocks); and (B) 10 percent of the current

index group value (in the case of index

stock groups comprised of 50 or fewer

stocks).]

[2884. Trade Comparison Procedures

for Nasdaq Index Options]

[(a) Scope and Applicability—All

transactions in Nasdaq index options

shall be reported to the Association

pursuant to reporting procedures

established by the Association. The

Association shall report all compared

transactions to The Options Clearing

Corporation for clearance and

settlement. All compared transactions in

Nasdaq options which are cleared and

settled through the facilities of The

Options Clearing Corporation shall be

subject to the rules of The Options

Clearing Corporation.]

[(b) Responsibility of Clearing

Members—Every member which is a

member of The Options Clearing

Corporation (a ‘‘clearing member’’) shall

be responsible for the clearance and

settlement of every Nasdaq index option

transaction to which it is a party and for

each Nasdaq index option transaction of

a member for which it acts as

correspondent and/or clearing agent

pursuant to agreement. Unless

specifically authorized by The Options

Clearing Corporation, no member shall

be permitted to have more than one

such agreement with a clearing member

in effect at any time.]

[(c) Reporting of Clearing Information]

[(1) Filing of Trade Information—Each

Nasdaq index option participant shall

individually report each transaction in a

Nasdaq index option, for which it has a

responsibility to report, each business

day to the Association via OCT or ITT

in the manner specified by the

Association.]

[(2) (A) The Association will provide

each Nasdaq index options participant

with the opportunity to review on trade

date OCT and ITT transactions to which

the participant is a party.]

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 403

[(B) All OCT orders which are

accepted by the contra party and all ITT

which have not been canceled shall be

considered to be compared trades, i.e.,

trades where the trade information

agrees as to the identity of the other

party to the transaction, the type of

option contract, the underlying index,

the exercise price, the expiration month,

the number of options contracts, the

amount of the premium, the designation

of the parties as purchaser and writer,

respectively, and the trade date, if other

than the date of submission.]

[(3) Verification of Nasdaq Index

Options Transactions—Each participant

shall promptly review each OCT or ITT

execution report received and report

corrected trade information to the

Association as soon as possible, but in

any event, not later than the hour which

shall be from time to time prescribed by

the Association. It shall be the sole

responsibility of participants to review

the accuracy of all reports promptly

upon receipt, and the Association shall

not assume any responsibility for

reviewing such reports for accuracy or

for making any corrections not reported

by a participant.]

[(4) Reporting of Compared Trades to

The Options Clearing Corporation—On

each business day, at or prior to such

time as may be prescribed by The

Options Clearing Corporation, the

Association shall furnish The Options

Clearing Corporation a report of each

clearing member’s compared trades as

reported to the Association on that day.

Only those trades which have been

confirmed by both parties shall be

furnished by the Association to The

Options Clearing Corporation, and the

Association shall assume no

responsibility with respect to any

unaccepted order nor for any delays or

errors in the reporting of trades.]

[2885. Clearance and Settlement

Procedures for Nasdaq Index Options]

[(a) Failure to Pay Premium]

[(1) Whenever The Options Clearing

Corporation shall reject a Nasdaq index

option transaction because of the failure

of a clearing member acting on behalf of

the purchaser to pay the premium due

thereon as required by the rules of The

Options Clearing Corporation, the

member acting as or on behalf of the

seller (writer) shall have the right either

to cancel the transaction by giving

notices thereof to the defaulting clearing

member or to enter into either a new

opening writing transaction or closing

sale transaction, as the case may be, in

respect of the same Nasdaq index option

contract that was the subject of the

rejected Nasdaq index option

transaction, charging any loss resulting

therefrom (including any commissions

paid or payable in connection with such

new transaction) to the defaulting

clearing member. Such action shall be

taken on the day the Nasdaq index

option transaction was rejected by The

Options Clearing Corporation, unless

the Association shall extend such time.]

[(2) In the event the rejected

transaction involves a Nasdaq index

option contract of a series in which

trading has been terminated or

suspended before a new Nasdaq index

option transaction can be effected to

establish the amount of loss, the

member acting as or on behalf of the

seller shall have a claim against the

defaulting clearing member for the

amount of the premium due thereon.]

[(b) Index Option Contracts of

Suspended Members—When

announcement is made of the

suspension from membership in the

Association of a member, other than a

clearing member of The Options

Clearing Corporation (a ‘‘non-clearing

member’’), pursuant to the By-Laws of

the Association, all open short positions

in option contracts of such member and

all open positions that are secured in

full by a specific deposit or evidenced

by an escrow receipt in accordance with

the rules of The Options Clearing

Corporation, shall be closed out without

unnecessary delay by all members

carrying such positions for the account

of the suspended non-clearing member;

provided, however, that upon any such

suspension, the Association may, in its

discretion and where it determines that

such is necessary for the protection of

investors, suspend the mandatory closeout provisions hereof and may, in its

discretion and where it determines that

such is necessary for the protection of

investors, reinstate such provisions at

such time as it may determine. No

temporary suspension of the mandatory

close-out provisions hereof shall relieve

any suspended non-clearing member of

its obligations or of any damages

incurred by members carrying positions

for the account of such suspended nonclearing member. Should an open short

position or an open position resulting

from an exercise of an option contract

not be closed when required by this

Rule, the price for the purpose of

determining claims shall be fixed by the

price current at the time when such

position should have been closed under

this Rule. When a member of The

Options Clearing Corporation is

suspended pursuant to the provisions of

the By-Laws, the positions of such

clearing member shall be closed out in

accordance with the rules of The

Options Clearing Corporation.]

* * * * *

3100. BOOKS AND RECORDS, AND

FINANCIAL CONDITION

3110. Books and Records

(a) No Change.

(b) Marking of Customer Order Tickets

(1) No Change.

(2) A person associated with a

member shall indicate on the

memorandum for each transaction in a

[non-Nasdaq] non-exchange-listed

security, as that term is defined in the

Rule [6700] 6600 Series, the name of

each dealer contacted and the

quotations received to determine the

best inter-dealer market; however, the

requirements of this subparagraph shall

not apply if two or more priced

quotations for the security are displayed

in an inter-dealer quotation system, as

defined in Rule 2320(g), that permits

quotation updates on a real-time basis

for which NASD Regulation has access

to historical quotation information.

(c) No Change.

* * * * *

IM–3110. Customer Account

Information

(a) Members should be aware that,

effective January 1, 1990, any

transaction [which] that involves a

[non-Nasdaq,] non-exchange-listed

equity security trading for less than five

dollars per share may be subject to the

provisions of SEC Rules 15g–1 through

15g–9, and those rules should be

reviewed to determine if an executed

customer suitability agreement is

required.

(b) through (h) No Change.

* * * * *

[3350] 5100. Short Sale Rule

(a) No member shall effect a short sale

in a Nasdaq National Market Security

(as that term is defined in Rule 4200)

otherwise than on an exchange for the

account of a customer or for its own

account in a Nasdaq National Market

security at or below the current national

best (inside) bid when the current

national best (inside) bid [as displayed

by The Nasdaq Stock Market] is below

the preceding national best (inside) bid

in the security.

(b) No change.

(c) The provisions of paragraph (a)

shall not apply to:

(1) Sales by a [qualified] registered

market maker registered in the security

with NASD [on Nasdaq] in connection

with bona fide market making activity.

For purposes of this paragraph,

404 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

transactions unrelated to normal market

making activity, such as index arbitrage

and risk arbitrage that are independent

from a member’s market making

functions, will not be considered bona

fide market-making activity.

(2) through (8) No Change.

(d) through (e) No Change.

(f) A member that is not currently

registered as NASD [Nasdaq] market

maker in a security and that has

acquired a security while acting in the

capacity of a block positioner shall be

deemed to own such security for the

purposes of this Rule notwithstanding

that such member may not have a net

long position in such security if and to

the extent that such member’s short

position in such security is the subject

of one or more offsetting positions

created in the course of bona fide

arbitrage, risk arbitrage, or bona fide

hedge activities.

(g) through (h) No Change

(i) (1) A member shall be permitted,

consistent with its quotation

obligations, to execute a short sale for

the account of a warrant market maker

that would otherwise be in

contravention of this Rule, if:

(A) The warrant market maker is a

registered [Nasdaq] NASD market maker

for the warrant; and

(B) No Change.

(j) No Change.

(k) Definitions

(1) through (2) No Change.

[(3)(A) Until February 1, 1996, the

term ‘‘qualified market maker’’ shall

mean a registered Nasdaq market maker

that has maintained, without

interruption, quotations in the subject

security for the preceding 20 business

days. Notwithstanding the 20-day

period specified in this subparagraph,

after an offering in a stock has been

publicly announced, a registration

statement has been filed, or a merger or

acquisition involving two issues has

been announced, no market maker may

register in the stock as a qualified

market maker unless it meets the

requirements set forth below:]

[(i) For secondary offerings, the

offering has become effective and the

market maker has been registered in and

maintained quotations without

interruption in the subject security for

40 calendar days;]

[(ii) For initial public offerings, the

market maker may register in the

offering and immediately become a

qualified market maker; provided

however, that if the market maker

withdraws on an unexcused basis from

the security within the first 20 days of

the offering, it shall not be designated as

a qualified market maker on any

subsequent initial public offerings for

the next 10 business days;]

[(iii) After a merger or acquisition

involving an exchange of stock has been

publicly announced and not yet

consummated or terminated, a market

maker may immediately register in

either or both of the two affected

securities as a qualified market maker

pursuant to the same-day registration

procedures in Rule 4611; provided,

however, that if the market maker

withdraws on an unexcused basis from

any stock in which it has registered

pursuant to this paragraph within 20

days of so registering, it shall not be

designated as a qualified market maker

pursuant to this subparagraph (3) for

any subsequent merger or acquisition

announced within three months

subsequent to such unexcused

withdrawal.]

[(B) For purposes of this subparagraph

(3), a market maker will be deemed to

have maintained quotations without

interruption if the market maker is

registered in the security and has

continued publication of quotations in

the security through Nasdaq on a

continuous basis; provided however,

that if a market maker is granted an

excused withdrawal pursuant to the

requirements of Rule 4619, the 20

business day standard will be

considered uninterrupted and will be

calculated without regard to the period

of the excused withdrawal. Beginning

February 1, 1996, the term ‘‘qualified

market maker’’ shall mean a registered

Nasdaq market maker that meets the

criteria for a Primary Nasdaq Market

Maker as set forth in Rule 4612.]

[(l) This Rule shall be in effect until

March 1, 2002.]

* * * * *

IM–[3350]5100. Short Sale Rule

(a) (1) In developing a Short Sale Rule

for Nasdaq National Market securities

effected otherwise than on an exchange,

the Association has adopted an

exemption to the Rule for certain market

making activity. This exemption [was

deemed] is an essential component of

the Rule because bona fide market

making activity is necessary and

appropriate to maintain continuous,

liquid markets in Nasdaq National

Market securities. Rule 3350(c)(1) states

that short selling prohibitions shall not

apply to sales by [qualified] registered

[Nasdaq] NASD market makers in

connection with bona fide market

making activity and specifies that

transactions unrelated to normal market

making activity, such as index arbitrage

and risk arbitrage that are independent

from a member’s market making

functions, will not be considered as

bona fide market making. Thus two

standards are to be applied: one must be

a [’qualified’’ Nasdaq] registered NASD

market maker and one must engage in

‘‘bona fide’’ market making activity to

take advantage of this exemption. With

this interpretation, the Association

wishes to clarify for members some of

the factors that will be taken into

consideration when reviewing market

making activity that may not be deemed

to be bona fide market making activity

and therefore would not be exempted

from the Rule’s application.

(2) through (3) No change.

(b) (1) Rule [3350] 5100 requires that

no member shall effect a short sale

otherwise than on an exchange for the

account of a customer or for its own

account in a Nasdaq National Market

security at or below the current national

best (inside) bid when the current

national best (inside) bid [as displayed

by The Nasdaq Stock Market] is below

the preceding best (inside) bid in the

security. The Association has

determined that in order to effect a

‘‘legal’’ short sale when the current best

bid is lower than the preceding best bid

the short sale must be executed at a

price of at least 1⁄16th point above the

current national inside bid when the

current inside spread is 1⁄16th point or

greater. The last sale report for such a

trade would, therefore, be above the

national inside bid by at least 1⁄16th of

a point. If the current spread is less than

1⁄16th of a point, however, the short sale

must be executed at a price equal to or

greater than the current inside offer

price.

(2) Moreover, the Association believes

that requiring short sales to be a

minimum increment of 1⁄16th point

above the national best bid when the

current spread is 1⁄16th or greater and

equal to or greater than the offer when

the current spread is less than 1⁄16th

ensures that transactions are not

effected at prices inconsistent with the

underlying purpose of the Rule. It

would be inconsistent with Rule [3350]

5100 for a member or customer to cause

the inside spread for an issue to narrow

when the current best bid is lower than

the preceding best bid (e.g., lowering its

offer to create an inside spread less than

1⁄16th) for the purpose of facilitating the

execution of a short sale at a price less

than 1⁄16th above the inside bid.

(3) For Nasdaq National Market

securities trading in decimals pursuant

to the Decimals Implementation Plan for

Equity and Options Markets, the

Association has determined that in

order to effect a ‘‘legal’’ short sale in

such securities when the current bid is

lower than the preceding bid the short

sale must be executed at least $0.01

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 405

above the current inside bid. The last

sale report for such a trade would,

therefore, be above the inside bid by at

least $0.01.

(c) (1) No Change.

(2) For example, in instances where

the current best bid is below the

preceding best bid, if a market maker

alone at the inside best bid were to

lower its bid and then raise it to create

an ‘‘up bid’’ for the purpose of

facilitating a short sale, the Association

would consider such activity to be a

manipulative act and a violation of the

Association’s Short Sale Rule. The

Association also would consider it a

manipulative act and a violation of the

Rule if a market maker with a long stock

position were to raise its bid above the

inside bid and then lower it to create a

‘‘down bid’’ for the purpose of

precluding market participants from

selling short. In addition, if a market

maker agrees to an arrangement

proposed by a member or a customer

whereby the market maker raises its bid

[in The Nasdaq Stock Market] in order

to effect a short sale for the other party

and is protected against any loss on the

trade or on any other executions

effected at its new bid price, the market

maker would be deemed to be in

violation of Rule [3350] 5100. Similarly,

a market maker would be deemed in

violation of the Rule if it entered into an

arrangement with a member or a

customer whereby it used its exemption

from the rule to sell short at the bid at

successively lower prices, accumulating

a short position, and subsequently

offsetting those sales through a

transaction at a prearranged price, for

the purpose of avoiding compliance

with the Rule, and with the

understanding that the market maker

would be guaranteed by the member or

customer against losses on the trades.

(3) No Change.

* * * * *

The 4000 Series is replaced in its

entirety by the following proposed rule

language.

4000. NASD Alternative Display

Facility

4100. General

The NASD Alternative Display

Facility is the facility to be operated by

the NASD for members that effect trades

in Nasdaq and CQS/CTA (‘‘ADFeligible’’) securities otherwise than on

an exchange. The NASD Alternative

Display Facility will collect and

disseminate quotations, compare trades,

and collect and disseminate trade

reports.

4110. Use of NASD Alternative

Display Facility Data Systems

NASD may at any time authorize the

use of NASD’s Alternative Display

Facility data systems on a test basis for

whatever studies it considers necessary

and appropriate.

4200. DEFINITIONS

(a) Unless the context requires

otherwise, the terms used in the Rule

4000 through 6000 Series shall have the

meanings below. Terms not specifically

defined below shall have the meaning in

NASD’s By-Laws and Rules and SEC

Rule 11Aa3–1.

(1) ‘‘Act’’ means the Securities

Exchange Act of 1934.

(2) ‘‘ADF-eligible security’’ means a

Nasdaq or CQS/CTA security.

(3) ‘‘CQS/CTA security’’ means a

security that is eligible for inclusion in

the CQ/CTA Plan as from time to time

amended in accordance with the

provisions of the Plan and with the

approval of the SEC.

(4) ‘‘Nasdaq’’ means the registered

national securities exchange and its

facilities operated by The Nasdaq Stock

Market, Inc.

(5) ‘‘Nasdaq market maker’’ shall

have the meaning as defined in the

Nasdaq rules.

(6) ‘‘Nasdaq National Market’’ or

‘‘NNM’’ is a distinct tier of the Nasdaq

Stock Market comprised of securities

that meet the requirements of and are

authorized as a Nasdaq National Market

Security.

(7) ‘‘Nasdaq National Market

security’’ or ‘‘NNM security’’ shall have

the meaning as defined in the Nasdaq

rules.

(8) ‘‘Nasdaq security’’ means a

security that is listed on the Nasdaq

Stock Exchange.

(9) ‘‘Nasdaq SmallCap Market’’ or

‘‘SCM’’ is a distinct tier of The Nasdaq

Stock Market compromised of securities

that meet the requirements of and are

authorized as a Nasdaq SmallCap

Security.

(10) ‘‘Nasdaq SmallCap Market

security’’ shall have the meaning as

defined in the Nasdaq rules.

(11) ‘‘Non-Registered Member’’ means

a member of NASD that is not a

Registered Market Maker or a Registered

ECN.

(12) ‘‘Normal unit of trading’’ means

100 shares of a security unless, with

respect to a particular security, the

market where the security is listed

determines that a normal unit of trading

shall constitute other than 100 shares. If

a normal unit of trading is other than

100 shares, a special identifier shall be

appended to the issuer’s symbol.

(13) ‘‘Otherwise than on an exchange’’

means a trade effected by an NASD

member otherwise than on or through a

national securities exchange. The

determination of what constitutes a

trade ‘‘on or through’’ a particular

national securities exchange shall be

determined by that exchange in

accordance with all applicable statutes,

rules and regulations, and with any

necessary SEC approval.

(14) ‘‘Registered ECN’’ means a

member of NASD that is an electronic

communications network (‘‘ECN’’) that

elects to display orders in the NASD

Alternative Display Facility. A member

is a Registered ECN in only those

designated securities for which it is

registered with NASD. A member shall

cease being a Registered ECN in a

designated security when it has

withdrawn or voluntarily terminated its

quotations in that security or when its

quotations have been suspended or

terminated by action of NASD.

(15) ‘‘Registered Market Maker’’

means a member of NASD that is

registered as an NASD market maker in

a particular designated security and,

with respect to that security, holds itself

out (by entering quotations in the NASD

Alternative Display Facility) as being

willing to buy and sell such security for

its own account on a regular and

continuous basis. A member is a

Registered Market Maker in only those

designated securities for which it is

registered as an NASD market maker. A

member shall cease being a Registered

Market Maker in a designated security

when it has withdrawn or voluntarily

terminated its quotations in that

security or when its quotations have

been suspended or terminated by action

of NASD.

(16) ‘‘SEC Rule 100,’’ ‘‘SEC Rule 101,’’

‘‘SEC Rule 103,’’ and ‘‘SEC Rule 104’’

mean the rules adopted by the

Commission under Regulation M, and

any amendments thereto.

(17) ‘‘Stabilizing bid’’ means the terms

‘‘stabilizing’’ or to ‘‘stabilize’’ as defined

in SEC Rule 100.

(18) ‘‘Underwriting Activity Report’’ is

a report provided by the Corporate

Financing Department of NASD

Regulation, Inc. in connection with a

distribution of securities subject to SEC

Rule 101 pursuant to NASD Rule

2710(b)(11) and includes forms that are

submitted by members to comply with

their notification obligations under

Rules 4614, 4619, and 4623.

(b) For purposes of Rules 4619, and

4623, the following terms shall have the

meanings as defined in SEC Rule 100:

‘‘affiliated purchaser,’’ ‘‘distribution,’’

‘‘distribution participant,’’

‘‘independent bid,’’ ‘‘net purchases,’’

406 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

‘‘passive market maker,’’ ‘‘penalty bid,’’

‘‘reference security,’’ ‘‘restricted

period,’’ ‘‘subject security,’’ and

‘‘syndicate covering transaction.’’

Selected NASD Notices to Members:

94–70, 95–64, 95–82.

4300. Quote and Order Access

Requirements

(a) To ensure that NASD Market

Participants comply with their quote

and order access obligations as defined

below, for each security in which they

elect to display a bid and offer (for

Registered Market Makers), or a bid or

offer (for Registered ECNs), in the

Alternative Display Facility, NASD

Market Participants must:

(1) Provide other NASD Market

Participants direct electronic access, as

defined below; and

(2) Provide NASD member brokerdealers that are not NASD Market

Participants direct electronic access or

allow for indirect electronic access, as

defined below. Indirect electronic access

must be readily available to brokerdealers seeking access, otherwise the

NASD Market Participant must provide

direct electronic access. In any event, an

NASD Market Participant is prohibited

from (A) in any way directly or

indirectly influencing or prescribing the

prices that their customer broker-dealer

may choose to impose for providing

indirect access; and (B) precluding or

discouraging indirect electronic access,

including through the imposition of

discriminatory pricing or quality of

service with regard to a broker-dealer

that is providing indirect electronic

access.

(b) Subject to the terms and

conditions contained herein, all NASD

Market Participants that display

quotations in the NASD Alternative

Display Facility must record each item

of information described in paragraphs

(b)(1) and (2) of this Rule for all orders

they receive via direct or indirect

electronic access, and report this

information to the NASD as specified

below.

(1) NASD Market Participants must

record the following information for

every order they receive via direct or

indirect electronic access during the

trading day:

(A) Unique Order Identifier

(B) Order Entry Firm (OEID)

(C) Order Side (Buy/Sell)

(D) Order Quantity

(E) Issue Identifier

(F) Order Price

(G) Order Price Modifier (i.e. .N)

(H) Time In Force (i.e. 3 minutes, day,

etc.)

(I) Order Date

(J) Order Time (including seconds)

(K) Minimal Acceptable Quantity (i.e.

C1, M1, AON, etc.)

(L) Market Making Firm (MMID)

The information described in

paragraphs (A) through (L) must be

reported to the NASD within 10 seconds

of receipt of the order.

(2) In addition to the information

previously provided pursuant to

paragraph (b)(1), NASD Market

Participants must record the following

information, as applicable, for every

order that has been acted upon or

responded to:

(A) Unique Order Identifier (as provided

in paragraph (b)(1)(A)) 

(B) Order Response (i.e. E=Execute,

D=Decline, X=Cancel, T=timed out,

P=partial, etc.) 

(C) Order Response Time (including

seconds)

(D) Partial Quantity

(E) Counter Price 

(F) Total Execution Quantity

(G) Execution Price

The information described in

paragraphs (A) through (G) must be

reported to the NASD within 10 seconds

of any response to or action taken

regarding an order. 

(3) Maintaining and Preserving Records

(A) In addition to submitting the

information described herein to the

NASD, each member shall maintain and

preserve records of the information

required to be recorded under this Rule

for the period of time and accessibility

specified in SEC Rule 17a–4(b).

(B) The records required to be

maintained and preserved under this

Rule may be immediately produced or

reproduced on ‘‘micrographic media’’ as

defined in SEC Rule 17a–4(f)(1)(i) or by

means of ‘‘electronic storage media’’ as

defined in SEC Rule 17a–4(f)(1)(ii) that

meet the conditions set forth in SEC

Rule 17a–4(f) and may be maintained

and preserved for the required time in

that form. 

(4) Orders Not Required To Be Recorded

The recording and reporting

requirements contained in paragraphs

(a) and (b) of this Rule shall not apply

to orders received via ITS or any system

operated by a national securities

exchange or national securities

association. 

(5) Method of Transmitting Data

Members shall transmit this

information in such form as prescribed

by the Association. 

(6) Reporting Agent Agreements

(A) ‘‘Reporting Agent’’ shall mean a

third party that enters into any

agreement with a member pursuant to

which such third party agrees to fulfill

such member’s obligations under this

Rule. 

(B) Any member may enter into an

agreement with a Reporting Agent

pursuant to which the Reporting Agent

agrees to fulfill the obligations of such

member under this Rule. Any such

agreement shall be evidenced in writing,

which shall specify the respective

functions and responsibilities of each

party to the agreement that are required

to effect full compliance with the

requirements of this Rule. 

(C) All written documents evidencing

an agreement described in paragraph

(6)(B) shall be maintained by each party

to the agreement. 

(D) Each member remains responsible

for compliance with the requirements of

this Rule, notwithstanding the existence

of an agreement described in this

paragraph. 

(7) Withdrawal of Quotations

If an NASD Market Participant knows

or has reason to believe that it or its

Reporting Agent is not complying with

the requirements of this Rule, the

member must withdraw its quotations

from the NASD Alternative Display

Facility until such time that the member

is satisfied that its order information is

being properly recorded and reported.

(c) NASD Market Participants are

required to specify as part of their

NASD Alternative Display Facility

Workstation Subscriber Agreement the

method and terms by which they will

comply with the requirements of this

Rule. NASD Regulation staff will not

approve a Market Participant’s

Subscriber Agreement unless the

method and terms provided by the

Market Participant are in compliance

with this Rule. 

(d) Definitions

(1) Customer broker-dealer is any

broker-dealer that has, or seeks to have,

an ongoing relationship with a Market

Participant, including an ECN

subscriber, for the purposes of executing

securities transactions.

(2) Direct electronic access means the

ability to deliver an order for execution

directly against an individual NASD

Market Participant’s best bid and offer

subject to quote and order access

obligations, as defined herein, without

the need for voice communication, with

the equivalent speed, reliability,

availability, and cost, as are made

available to the NASD Market

Participant’s own customer brokerdealers or other active customers or

subscribers. 

(3) Indirect electronic access means

the ability to route an order through

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 407

customer broker-dealers of an NASD

Market Participant that are not affiliates

of the NASD Market Participant, for

execution against the NASD Market

Participant’s best bid and offer subject

to quote and order access obligations,

without the need for voice

communication, with equivalent speed,

reliability, availability, and cost, as are

made available to the Market

Participant’s customer broker-dealer

providing the indirect access or other

active customers or subscribers. The

NASD Market Participant’s customer

broker-dealers providing indirect

electronic access shall remain

responsible for all orders routed through

them as though the orders were the

firms’ own orders. 

(4) NASD Market Participant means

(a) an NASD Registered Market

Maker,(b) an ATS, (c) or an NASD

Registered ECN. 

(5) Best bid and offer for purposes of

this Rule includes the best-priced buy

and sell orders of an NASD Registered

ECN. 

(6) Quote and Order Access

Obligations include the requirements

under this Rule and the firm quote

obligations under Rule 11Ac1–1 under

the Act, the standards under Rule

11Ac1–1(c)(5)(ii)(A)(2) under the Act,

Sections 301(b)(3) through (5) of

Regulation ATS and other order accessrelated regulatory requirements for

ATSs, ECNs and market makers.

Obligations under this Rule include

providing the ability to send or receive

Trade-or-Move messages, identifiable as

such, as required by Rule 4613(d) and

providing access to any reserved size

orders as required by Rule 4623(c).

* * * * *

4600. TRADING IN NASDAQ

SECURITIES 

4610. Registration and Other

Requirements 

4611. Registration as a Market

Maker 

(a) Quotations and quotation sizes in

Nasdaq securities may be entered into

the NASD Alternative Display Facility

only by a Registered Market Maker or

other entity approved by NASD to

function in a market-making capacity. 

(b) An NASD member seeking

registration as a market maker shall file

an application with NASD. The

application shall certify the member’s

good standing with NASD and shall

demonstrate compliance with the net

capital and other financial

responsibility provisions of the Act. It

shall be sufficient to obtain registration

as a market maker for a member to

demonstrate proof that it is a registered

Nasdaq market maker in good standing.

A member’s registration as a market

maker shall become effective upon

receipt by the member of notice of

approval of registration from NASD. 

(c) A market maker may become

registered in an issue by entering a

registration request via an NASD

terminal or other NASD approved

electronic interface with NASD’s

systems or by contacting NASD

Alternative Display Facility Operations.

If the requirements of paragraph (b)

above are satisfied, registration shall

become effective on the day the

registration request is entered. It shall be

sufficient to obtain registration in an

issue for a member to demonstrate proof

that it is currently registered in that

issue as a Nasdaq market maker and is

in good standing. 

(d) A market maker’s registration in

an issue shall be terminated if the

market maker fails to enter quotations

in the issue within five (5) business days

after the market maker’s registration in

the issue becomes effective. 

Selected NASD Notices to Members:

93–24, 94–68, 94–83. 

4612. Reserved

4613. Character of Quotations 

(a) Two-Sided Quotations

(1) For each Nasdaq security for

which a member is a Registered Market

Maker, the member shall be willing to

buy and sell such security for its own

account on a continuous basis and shall

enter and maintain two-sided

quotations through the NASD

Alternative Display Facility, subject to

the procedures for excused withdrawal

set forth in Rule 4619. 

(A) A Registered Market Maker in a

security listed on Nasdaq must display

a quotation size for at least one normal

unit of trading (or a larger multiple

thereof) when it is not displaying a limit

order in compliance with SEC Rule

11Ac1–4, provided, however, that a

Registered Market Maker may augment

its displayed quotation size to display

limit orders priced at the market

maker’s quotation. 

(B) Minimum Price Variation for

Decimal-based Quotations 

The minimum quotation increment

for securities authorized for decimal

pricing as part of the SEC-approved

Decimals Implementation Plan for the

Equities and Options Markets shall be

$0.01. Quotations failing to meet this

standard shall be rejected. 

(b) Firm Quotations

(1) A Registered Market Maker that

receives an offer to buy or sell from

another NASD member shall execute a

transaction for at least a normal unit of

trading at its displayed quotations as

disseminated through the NASD

Alternative Display Facility at the time

of receipt of any such offer. If a

Registered Market Maker displays a

quotation for a size greater than a

normal unit of trading, it shall, upon

receipt of an offer to buy or sell from

another NASD member, execute a

transaction at least at the size

displayed. 

(2) If a Registered Market Maker, upon

receipt of an offer to buy or sell from

another NASD member in any amount

that is at least one normal unit of

trading greater than its published

quotation size as disseminated through

the NASD Alternative Display Facility at

the time of receipt of any such offer,

executes a transaction in an amount of

shares less than the size of the offer,

then such Registered Market Maker

shall, immediately after such execution,

display a revised quotation at a price

that is inferior to its previous published

quotation. The failure of a Registered

Market Maker to execute the offer in an

amount greater than its published

quotation size shall not constitute a

violation of subparagraph (b)(1) of this

rule. 

(c) Quotations Reasonably Related to

the Market

A Registered Market Maker shall enter

and maintain quotations that are

reasonably related to the prevailing

market. In the event it appears that a

Registered Market Maker’s quotations

are no longer reasonably related to the

prevailing market, NASD may require

the market maker to re-enter its

quotations. If a Registered Market Maker

whose quotations are no longer

reasonably related to the prevailing

market fails to re-enter its quotations,

NASD may suspend the market maker’s

quotations in one or all securities. 

(1) In the event that a Registered

Market Maker’s ability to enter or

update quotations is impaired, the

Registered Market Maker shall

immediately contact NASD Alternative

Display Facility Operations to request

the withdrawal of its quotations. 

(2) In the event that a Registered

Market Maker’s ability to enter or

update quotations is impaired and the

Registered Market Maker elects to

continue to participate through the

NASD Alternative Display Facility, the

Registered Market shall execute an offer

to buy or sell received from another

NASD member at its quotations as

disseminated through the NASD

Alternative Display Facility.

408 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(d) Locked and Crossed Markets

(1) A Registered Market Maker shall

not, except under extraordinary

circumstances, enter or maintain

quotations through the NASD

Alternative Display Facility during

normal business hours if: 

(A) the bid quotation entered is equal

to (‘‘lock’’) or greater than (‘‘cross’’) the

asked quotation of another market

maker entering quotations in the same

security; or 

(B) the asked quotation is equal to

(‘‘lock’’) or less than (‘‘cross’’) the bid

quotation of another market maker

entering quotations in the same security. 

(2) Obligations Regarding Locked/

Crossed Market Conditions Prior to

Market Opening 

(A) Locked/Crossed Market Prior to

9:20 a.m.—For locks/crosses that occur

prior to 9:20 a.m. Eastern Time, a

Registered Market Maker that is a party

to a lock/cross because the Registered

Market Maker either has entered a bid

(ask) quotation that locks/crosses

another market maker’s quotation(s) or

has had its quotation(s) locked/crossed

by another market maker (‘‘party to a

lock/cross’’) may, beginning at 9:20 a.m.

Eastern Time, send a message, making

use of direct electronic access in

accordance with Rule 4300, of any size,

that is at the receiving market maker’s

quoted price (‘‘Trade-or-Move

Message’’). Any Registered Market

Maker that receives a Trade-or-Move

Message at or after 9:20 a.m. Eastern

Time, and that is a party to a lock/cross,

must within 30 seconds of receiving

such message either: fill the incoming

Trade-or-Move Message for the full size

of the message; or move its bid down

(offer up) by a quotation increment that

unlocks/uncrosses the market. 

(B) Locked/Crossed Market Between

9:20 and 9:29:59 a.m.—If a Registered

Market Maker locks or crosses the

market between 9:20 and 9:29:59 a.m.

Eastern Time, the Registered Market

Maker must immediately send, making

use of direct electronic access in

accordance with Rule 4300, to the

market maker whose quotes it is locking

or crossing a Trade-or-Move message

that is at the receiving market maker’s

quoted price and that is for at least

5,000 shares (in instances where there

are multiple market makers to a lock/

cross, the locking/crossing market

maker must send a message to each

party to the lock/cross and the aggregate

size of all such messages must be at

least 5,000 shares); provided, however,

that if a market participant is

representing an agency order, the

market participant shall be required to

send a Trade-or-Move Message(s) in an

amount equal to the agency order, even

if that order is less than 5,000 shares. A

Registered Market Maker that receives a

Trade-or-Move Message during this

period and that is a party to a lock/

cross, must within 30 seconds of

receiving such message either: fill the

incoming Trade-or-Move Message for

the full size of the message; or move its

bid down (offer up) by a quotation

increment that unlocks/uncrosses the

market. 

(C) A Registered Market Maker that

sends a Trade-or-Move Message

pursuant to of this rule must append to

the message a symbol indicating that it

is a Trade-or-Move Message. 

(D) For the purposes of this rule

‘‘agency order’’ shall mean an order(s)

that is for the benefit of the account of

a natural person executing securities

transactions with or through or

receiving investment banking services

from a broker/dealer, or for the benefit

of an ‘‘institutional account’’ as defined

in NASD Rule 3110. An agency order

shall not include an order(s) that is for

the benefit of a market maker in the

security at issue, but shall include an

order(s) that is for the benefit of a

broker/dealer that is not a market maker

in the security at issue. 

(3) A Registered Market Maker, prior

to entering a quotation that locks or

crosses another quotation, must make

reasonable efforts to avoid such locked

or crossed market by executing

transactions with all market makers

whose quotations would be locked or

crossed. Reasonable efforts shall include

making use of direct electronic access in

accordance with Rule 4300. Pursuant to

the provisions of paragraph (b) of this

Rule, a Registered Market Maker whose

quotations are causing a locked or

crossed market is required to execute

transactions at its quotations as

displayed through the NASD Alternative

Display Facility at the time of receipt of

any order. 

(4) For purposes of this Rule 4613(d),

the term ‘‘Registered Market Maker’’

shall include: 

(A) any NASD member that enters

into an ECN, as that term is defined in

SEC Rule 11Ac1–1(a)(8), a order that is

displayed through the NASD Alternative

Display Facility; 

(B) any NASD member that operates

the ECN when the order being displayed

has been entered by a person or entity

that is not an NASD member; 

(C) any NASD member that enters into

an ATS, as that term is defined in SEC

Regulation ATS, a priced order that is

displayed through the NASD Alternative

Display Facility; and 

(D) any NASD member that operates

the ATS when the priced order being

displayed has been entered by a person

or entity that is not an NASD member. 

(e) Other Quotation Obligations

(1) Members that display priced

quotations on a real-time basis for

Nasdaq securities in two or more market

centers that permit quotation updates

on a real-time basis must display the

same priced quotations for the security

in each market center.

(2) A member that is registered as a

market maker in a Nasdaq security shall

be obligated to have available in close

proximity to the NASD Alternative

Display Facility terminal at which it

makes a market in a Nasdaq security a

quotation service that disseminates the

bid price and offer price then being

furnished by or on behalf of national

securities exchanges and other market

makers trading and quoting that Nasdaq

security.

Selected NASD Notices to Members:

91–37, 93–2, 93–43, 99–61.

IM–4613. Autoquote Policy

(a) General Prohibition—NASD bans

the automated update of quotations by

market makers through the NASD

Alternative Display Facility. Except as

provided below, this policy prohibits

systems known as ‘‘autoquote’’ systems

from effecting automated quote updates

or tracking of inside quotations through

the NASD Alternative Display Facility.

This ban is necessary to offset the

negative impact on the capacity and

operation of the NASD Alternative

Display Facility caused by certain

autoquote techniques that track changes

to the inside quotation and

automatically react by generating

another quote to keep the market

maker’s quote away from the best

market.

(b) Exceptions to the General

Prohibition—Automated updating of

quotations is permitted when: (1) the

update is in response to an execution in

the security by that firm (such as

execution of an order that partially fills

a market maker’s quotation size), and is

in compliance with Rule 4613(b)(2); (2)

it requires a physical entry (such as a

manual entry to the market maker’s

internal system which then

automatically forwards the update to

Nasdaq); or (3) the update is to reflect

the receipt, execution, or cancellation of

a customer limit order. elected NASD

Notices to Members: 99–61.

4614. Reserved

4615. Reserved

4616. Reserved

4617. Normal Business Hours

A Registered Market Maker shall be

open for business as of 9:30 a.m.

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 409

Eastern Time and shall close no earlier

than 4:00 p.m. Eastern Time. An NASD

Registered Market Maker may remain

open for business on a voluntary basis

for any period of time between 4:00 p.m.

Eastern time and 6:30 p.m. Eastern

Time. Registered Market Makers whose

quotes are open after 4:00 p.m. Eastern

Time shall be obligated to comply, while

their quotes are open, with all NASD

Rules that are not by their express

terms, or by an official interpretation of

NASD, inapplicable to any part of the

4:00 p.m. to 6:30 p.m. Eastern Time

period.

4618. Reserved

4619. Withdrawal of Quotations and

Passive Market Making

(a) A Registered Market Maker that

wishes to withdraw quotations in a

security or have its quotations identified

as the quotations of a passive market

maker shall contact NASD Alternative

Display Facility Operations to obtain

excused withdrawal status prior to

withdrawing its quotations or

identification as a passive market

maker. Withdrawals of quotations or

identifications of quotations as those of

a passive market maker shall be granted

by NASD Alternative Display Facility

Operations only upon satisfying one of

the conditions specified in this Rule.

(b) Excused withdrawal status based

on circumstances beyond the market

maker’s control may be granted for up

to five (5) business days, unless

extended by NASD Alternative Display

Facility Operations. Excused withdrawal

status based on demonstrated legal or

regulatory requirements, supported by

appropriate documentation and

accompanied by a representation that

the condition necessitating the

withdrawal of quotations is not

permanent in nature, may, upon

notification, be granted for not more

than sixty (60) days (unless such request

is required to be made pursuant to

paragraph (d) below). Excused

withdrawal status based on religious

holidays may be granted only if notice

is received by NASD one business day

in advance and is approved by NASD.

Excused withdrawal status based on

vacation may be granted only if:

(1) The request for withdrawal is

received by NASD one business day in

advance, and is approved by NASD;

(2) the request includes a list of the

securities for which withdrawal is

requested; and

(c) Excused withdrawal status may be

granted to a Registered Market Maker

that has withdrawn from an issue prior

to the public announcement of a merger

or acquisition and wishes to re-register

in the issue pursuant to the same-day

registration procedures contained in

Rule 4611, above, provided the

Registered Market Maker has remained

registered in one of the affected issues.

The withdrawal of quotations because of

pending news, a sudden influx of orders

or price changes, or to effect

transactions with competitors shall not

constitute acceptable reasons for

granting excused withdrawal status; or

(d) Excused withdrawal status may be

granted to a member that experiences a

documented problem or failure

impacting the operation or utilization of

any automated system operated by or on

behalf of the firm (chronic system

failures within the control of the

member will not constitute a problem or

failure impacting a firm’s automated

system).

(e) Excused withdrawal status may be

granted to a Registered Market Maker

that fails to maintain a clearing

arrangement with a registered clearing

agency or with a member of such an

agency, thereby terminating its

registration as a Registered Market

Maker; provided however, that if NASD

finds that the Registered Market Maker’s

failure to maintain a clearing

arrangement is voluntary, the

withdrawal of quotations will be

considered voluntary and unexcused

pursuant to Rule 4620.

(f) Excused withdrawal status or

passive market maker status may be

granted to a Registered Market Maker

that is a distribution participant (or, in

the case of excused withdrawal status,

an affiliated purchaser) in order to

comply with SEC Rules 101, 103, or 104

under the Act on the following

conditions:

(1) A member acting as a manager (or

in a similar capacity) of a distribution

of a security that is a subject security or

reference security under Rule 101 and

any member that is a distribution

participant or an affiliated purchaser in

such a distribution that does not have

a manager shall provide written notice

to NASD Alternative Display Facility

Operations and the Market Regulation

Department of NASD Regulation, Inc.

no later than the business day prior to

the first entire trading session of the

one-day or five-day restricted period

under SEC Rule 101, unless later

notification is necessary under the

specific circumstances.

(A) The notice required by

subparagraph (f)(1) of this Rule shall be

provided by submitting a completed

Underwriting Activity Report that

includes a request on behalf of each

market maker that is a distribution

participant or an affiliated purchaser to

withdraw the market maker’s

quotations, or that includes a request on

behalf of each market maker that is a

distribution participant (or an affiliated

purchaser of a distribution participant)

that its quotations be identified as those

of a passive market maker and includes

the contemplated date and time of the

commencement of the restricted period.

(B) The managing underwriter shall

advise each Registered Market Maker

that it has been identified as a

distribution participant or an affiliated

purchaser to NASD Alternative Display

Facility Operations and that its

quotations will be automatically

withdrawn or identified as passive

market maker quotations, unless a

market maker that is a distribution

participant (or an affiliated purchaser of

a distribution participant) notifies

NASD Alternative Display Facility

Operations as required by subparagraph

(f)(2), below.

(2) A Registered Market Maker that

has been identified to NASD Alternative

Display Facility Operations as a

distribution participant (or an affiliated

purchaser of a distribution participant)

shall promptly notify NASD Alternative

Display Facility Operations and the

manager of its intention not to

participate in the prospective

distribution or not to act as a passive

market maker in order to avoid having

its quotations withdrawn or identified as

the quotations of a passive market

maker.

(3) If a Registered Market Maker that

is a distribution participant withdraws

its quotations in a Nasdaq security in

order to comply with the net purchases

limitation of SEC Rule 103 or with any

other provision of SEC Rules 101, 103,

or 104 and promptly notifies NASD

Alternative Display Facility Operations

of its action, the withdrawal shall be

deemed an excused withdrawal.

Nothing in this subparagraph shall

prohibit NASD from taking such action

as is necessary under the circumstances

against a member and its associated

persons for failure to contact NASD

Alternative Display Facility Operations

to obtain an excused withdrawal as

required by subparagraphs (a) of this

Rule.

(4) The quotations of a passive market

maker shall be identified on NASD

Alternative Display Facility Data

Systems as those of a passive market

maker.

(5) A member acting as a manager (or

in a similar capacity) of a distribution

subject to subparagraph (f)(1) of this

Rule shall submit a request to NASD

Alternative Display Facility Operations

and the Market Regulation Department

of NASD Regulation, Inc. to rescind the

excused withdrawal status or passive

market making status of distribution

410 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

participants and affiliated purchasers,

which request shall include the date

and time of the pricing of the offering,

the offering price, and the time the

offering terminated, and, if not in

writing, shall be confirmed in writing no

later than the close of business the day

the offering terminates. The request

referenced in this subparagraph may be

submitted on the Underwriting Activity

Report.

(g) The NASD Alternative Display

Facility Operations Review Committee

shall have jurisdiction over proceedings

brought by market makers seeking

review of a denial of an excused

withdrawal pursuant to this Rule, or the

conditions imposed on their reentry.

Selected NASD Notices to Members: 88–

69, 89–15, 93–29, 93–41.

4620. Voluntary Termination of

Registration 

A Registered Market Maker may

voluntarily terminate its registration in

a security by (1) withdrawing its

quotations from the NASD Alternative

Display Facility and not re-entering its

quotations for five (5) minutes or (2)

failing to re-enter quotations within

thirty (30) minutes of the end of a

trading halt. A Registered Market Maker

that voluntarily terminates its

registration in a security may not reregister as a market maker in that

security for twenty (20) business days,

absent an excused withdrawal specified

in Rule 4619. Withdrawal from

participation as a Registered Market

Maker in the NASD Alternative Display

Facility shall constitute termination of

registration as a market maker in that

security for purposes of this Rule;

provided, however, that a Registered

Market Maker that fails to maintain a

clearing arrangement with a registered

clearing agency or with a member of

such an agency and thereby terminates

its registration as a market maker in

Nasdaq securities may register as a

market maker at any time after a

clearing arrangement has been

reestablished.

4621. Suspension and Termination

of Quotations by NASD Action 

NASD may, pursuant to the

procedures set forth in the Rule 9000

Series, suspend, condition, limit,

prohibit or terminate a Registered

Market Maker’s authority to enter

quotations in one or more authorized

securities for violations of applicable

requirements or prohibitions.

4622. Termination of NASD

Alternative Display Facility Data

System Service 

NASD may, upon notice, terminate

NASD Alternative Display Facility Data

System service in the event that a

Registered Market Maker fails to qualify

under specified standards of eligibility

or fails to pay promptly for services

rendered by NASD. Selected NASD

Notices to Members: 88–43.

4623. Alternative Trading Systems 

(a) NASD may provide a means to

permit alternative trading systems

(‘‘ATSs’’), as such term is defined in

Regulation ATS, and electronic

communications networks (‘‘ECNs’’), as

such term is defined in SEC Rule

11Ac1–1(a)(8), to comply with the

display requirements of SEC Rule

301(b)(3) and the terms of the ECN

display alternative provided for in SEC

Rule 11Ac1–1(c)(5)(ii)(A) and (B) (‘‘ECN

display alternatives’’). NASD will not

facilitate compliance with access

requirements, which are the

responsibility of Market Participants

under Rule 4300.

(b) An ATS or ECN that seeks to use

the NASD-provided means to comply

with SEC Rule 301(b)(3), the ECN

display alternatives shall:

(1) Demonstrate to NASD that it is in

compliance with Regulation ATS or that

it qualifies as an ECN meeting the

definition in the SEC Rule;

(2) be registered as an NASD member;

(3) enter into and comply with the

terms of an NASD Alternative Display

Facility Workstation Subscriber

Agreement, as amended for ATSs and

ECNs;

(4) agree to provide for NASD’s

dissemination in the quotation data

made available to quotation vendors the

prices and sizes of NASD Registered

Market Maker orders (and orders from

other subscribers of the ATS or ECN, if

the ATS or ECN so chooses or is

required by SEC Rule 301(b)(3) to

display a subscriber’s order in the

NASD Alternative Display Facility), at

the highest buy price and the lowest sell

price for each Nasdaq security entered

in and widely disseminated by the ATS

or ECN; and prior to entering such

prices and sizes, register with NASD

Alternative Display Facility Operations

as an ATS or ECN; and

(5) comply with Rule 4300.

(c) When an NASD member attempts

to access electronically an ATS or ECNdisplayed order by sending an order

that is larger than the ATS’s or ECN’s

Nasdaq-displayed size and the ATS or

ECN is displaying the order on a

reserved size basis, the NASD member

that operates the ATS or ECN shall

execute such delivered order:

(1) Up to the size of the delivered

order, if the ATS or ECN order

(including the reserved size and

displayed portions) is the same size or

larger than the NASD-delivered order;

or

(2) up to the size of the ATS or ECN

order (including the reserved size and

displayed portions), if the delivered

order is the same size or larger than the

ATS or ECN order (including the

reserved size and displayed portions).

No ATS or ECN operating through the

NASD Alternative Display Facility

pursuant to this Rule is permitted to

provide a reserved-size function unless

the size of the order displayed through

the NASD Alternative Display Facility is

100 shares or greater. For purposes of

this Rule, the term ‘‘reserved size’’ shall

mean that a customer entering an order

into an ATS or ECN has authorized the

ATS or ECN to display publicly part of

the full size of the customer’s order with

the remainder held in reserve on an

undisplayed basis to be displayed in

whole or in part as the displayed part

is executed.

4624. Reserved

4625. Regulatory Cooperation 

(a) The NASD may enter into

agreements with other self-regulatory

organizations, markets, associations

and other entities that provide for the

exchange of information and other

forms of mutual assistance for

regulatory purposes.

(b) No member or associated person

shall refuse a request to appear and

testify before, or provide documents or

other information to, another selfregulatory organization, market,

association or other entity with which

NASD has entered into an agreement

pursuant to paragraph (a) of this Rule,

provided that the request is made in

connection with an investigation or

proceeding covered by the agreement

with NASD. The requirements of this

paragraph (b) shall apply irrespective of

whether the NASD has initiated its own

investigation or proceeding.

(c) Whenever a member or associated

person responds to a request pursuant

to this Rule, the member or associated

person shall have all the same rights

and obligations that would be accorded

if the request had been made pursuant

to Rule 8210.

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 411

4630. Reporting Transactions in

Securities Listed on Nasdaq 

4631. Reserved

4632. Reserved

4633. Transactions Reported by

Members

(a) General

(1) This Rule governs the reporting of

trades through the NASD’s Trade

Reporting and Comparison Service

(‘‘TRACS’’) in Nasdaq securities effected

otherwise than on an exchange.

(2) All times referenced in this Rule

are Eastern time.

(3) For Purposes of this Rule, the term

‘‘Reporting NASD Member’’ or

‘‘Reporting Member’’ shall mean an

NASD member with the trade reporting

obligation as set forth in Rule 4633(d).

(4) For purposes of this Rule, the term

‘‘Non-Reporting NASD Member’’ or

‘‘Non-Reporting Member’’ shall mean

the contra side of a trade reported by a

Reporting Member.

(5) For purposes of this Rule, the term

‘‘normal market hours’’ means from

9:30 a.m. to 4:00 p.m.

(6) Times in trade reports shall be

expressed in hours, minutes, and

seconds according to the 24 hour clock

(e.g., a trade executed at 1:30:45 p.m.

Eastern Time shall be reported as

executed at 13:30:45). All times

referenced in this Rule are Eastern

Time.

(7) Participation in the trade reporting

function of TRACS is mandatory for all

members that have trade reporting

obligations under this Rule.

Participation in the trade reporting

function of TRACS is conditioned upon

(a) execution of, and continuing

compliance with, a TRACS trade

reporting Participant Application

Agreement and (b) maintenance of the

physical security of the equipment on

the premises of the member to prevent

unauthorized entry of information into

the trade reporting function of TRACS.

(b) Normal Market Hours

Reporting NASD Members shall

transmit last sale reports in Nasdaq

securities effected otherwise than on an

exchange to TRACS within 90 seconds

after execution. Transactions not

reported within 90 seconds after

execution shall be designated as late

and such trade reports must include the

time of execution.

(c) Outside Normal Market Hours

Transactions in Nasdaq securities

effected otherwise than on an exchange

outside normal market hours shall be

reported by members to TRACS as set

out below.

(1) For transactions effected otherwise

than on an exchange between the hours

of 8:00 a.m. and 9:30 a.m. and 4:00 p.m.

and 6:30 p.m.,

(A) A Reporting NASD Member shall

transmit last sale reports to TRACS

within 90 seconds after execution. Such

last sale reports shall be designated as

‘‘.T’’ trades to denote their execution

outside normal market hours.

Transactions not reported within 90

seconds must include the time of

execution on the trade report.

(2) For transactions effected otherwise

than on an exchange between the hours

of midnight and 8:00 a.m.,

(A) A Reporting NASD Member shall

transmit last sale reports to TRACS

between 8:00 a.m. and 9:30 a.m. on

trade date. Such last sale reports shall

be designated as ‘‘.T’’ trades, to denote

their execution outside normal market

hours, and must include the time of

execution.

(3) For securities transactions effected

otherwise than on an exchange between

the hours of 6:30 p.m. and 12:00 p.m.

(A) A Reporting NASD Member shall

transmit last sale reports to TRACS on

the next business day (T+1) between

8:00 a.m. and 6:30 p.m. Such last sale

reports shall be designated ‘‘as/of’’

trades, to denote their execution on a

prior day, and must include the time of

execution.

(d) Determining Which Party Reports a

Transaction

(1) For transactions between two

Registered Market Makers or Registered

ECNs, the Registered Market Maker or

ECN representing the sell side shall

report the transaction.

(2) For transactions between a

Registered Market Maker or Registered

ECN and a Non-Registered Member, the

Registered Market Maker or ECN shall

report the transaction.

(3) For transactions between two NonRegistered Members, the Non-Registered

Member representing the sell side shall

report the transaction.

(4) For transactions between a

member and a customer, the member

shall report the transaction.

(5) For transactions between a

member and a broker-dealer that is not

a member of NASD, the member shall

report the transaction.

(6) For all transactions between an

NASD member and an NASD member

that is also a member of Nasdaq or

another national securities exchange,

where the reporting party has a choice

of reporting venues and chooses not to

report to Nasdaq or another national

securities exchange, the reporting party

described in (1) through (5) above shall

report the transaction to the NASD.

(e) Information To Be Reported—Two

Party Trade Reports

(1) A two party trade report is a last

sale report that denotes a trade between

one Reporting NASD member and one

Non-Reporting Member. The Reporting

NASD Member is denoted as the

(‘‘MMID’’) side of the trade report and

the Non-Reporting Member is denoted

as the (‘‘OEID’’) side of the report.

(2) Each Two Party Last Sale Report

Submitted by a Reporting NASD

Member Should Contain:

(A) Security identification symbol

(SECID);

(B) Number of shares or bonds;

(C) Price of the transaction as

required by paragraph (h) below;

(D) A designated symbol denoting

whether the transaction, from the

Reporting NASD Member’s perspective,

is a buy, sell, sell short, sell short

exempt, or cross;

(E) If known, a designated symbol

denoting whether the transaction, from

the perspective of the Non-Reporting

Member, is a buy, sell, sell short, or sell

short exempt;

(F) A designated symbol denoting

whether the transaction, from the

perspective of the Reporting Member, is

a principal, riskless principal, or agent;

(G) If known, a designated symbol

denoting whether the transaction, from

the perspective of the Non-Reporting

Member, is a principal, riskless

principal, or agent;

(H) For any transaction in an order for

which a member has recording and

reporting obligations under NASD Rules

6954 and 6955, the trade report must

include:

(i) An order identifier, meeting such

parameters as may be prescribed by the

NASD, assigned to the order that

uniquely identifies the order for the date

it was received (see Rule 6954(b)(1));

(ii) The time of execution. This

information must be reported regardless

of the period of time between execution

of the trade and the NASD report.

(I) Execution time for any transaction

not reported within 90 seconds of

execution;

(J) The market participant identifier of

the Reporting Member and the NonReporting Member;

(K) Reporting Member clearing broker;

(L) Reporting Member Executing

Broker in case of a ‘‘give up;’’

(M) Non-Reporting Member Executing

Broker;

(N) Non-Reporting Member

introducing broker in case of a ‘‘give

up;’’

(O) Non-Reporting Member clearing

broker;

412 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(P) A designated symbol denoting

whether the trade report should be

published;

(Q) A designated symbol denoting

whether the trade report should be

compared in TRACS;

(R) If the contra side to the trade

report is a customer of the Reporting

Member, the Reporting Member shall

denote that the trade is an internalized

trade with the designated symbol;

(S) If the contra side to the trade

report is a Non-NASD member, the

Reporting Member shall indicate with

the designated symbol that the contra

side is a non-member.

(T) For two party trade reports

submitted pursuant to an Automated

Give Up (‘‘AGU’’) arrangement or a

Qualified Service Representative

(‘‘QSR’’) Agreement, disclosure of the

information set forth in subparagraphs

(e) (2) (E) and (G) is mandatory.

(f) Information To Be Reported—Three

Party Trade Reports

(1) A three party trade report is a

single last sale trade report that denotes

one Reporting Member and two contra

parties. The Reporting Member is

denoted as the MMID side of the trade

report and the two non-reporting sides

are denoted as the OEID side of the

trade report. In a three party report, the

Reporting Member is the buyer to one

OEID and the seller to the other OEID.

Registered ECNs shall only submit three

party trade reports. Riskless principal

trades may be submitted by reporting

members as three party trade reports.

(2) Each Three Party Trade Report

Submitted by a Reporting Member shall

contain the following information:

Transaction Information

(A) Security Identification Symbol

(SECID);

(B) Number of shares or bonds;

(C) Price of the transaction as

required by paragraph (h) below;

(D) Execution time for any transaction

not reported within 90 seconds of

execution;

(E) The market participant identifier

of the Reporting Member and the two

Non-Reporting Members;

(F) A designated symbol denoting

whether the trade should be published;

(G) For any transaction in an order for

which a member has recording and

reporting obligations under NASD Rules

6954 and 6955, the trade report must

include:

(i) An order identifier, meeting such

parameters as may be prescribed by the

NASD, assigned to the order that

uniquely identifies the order for the date

it was received (see Rule 6954(b)(1)).

This order number must associate both

the buy side and sell side OATS

Execution Reports to the TRACS report;

(ii) The time of execution. This

information must be reported regardless

of the period of time between execution

of the trade and the NASD report.

MMID Side

(H) All three party trade reports from

ECNs must be marked as agency cross

transactions;

(I) All three party trade reports from

Non-ECNs must be denoted as riskless

principal trade reports and shall

include a designated symbol denoting

whether the trade between the non-ECN

and the buy-side OEID is a sell, sell

short, or sell short exempt transaction;

(J) Reporting Member clearing broker;

(K) Reporting Member Executing

Broker in the case of a ‘‘give up’’;

Buy Side OEID

(L) Buy Side OEID executing broker;

(M) Buy Side OEID introducing broker

in case of a ‘‘give up’’;

(N) Buy Side OEID clearing broker;

(O) If known, a designated symbol

denoting whether the trade, from the

Buy Side OEID’s perspective, is as

principal, riskless principal, or agent;

(P) If the Buy Side OEID is a customer

of the Reporting Member, the Reporting

Member shall denote that the trade is an

internalized trade with the designated

symbol;

(Q) If the Buy Side OEID is a nonNASD member, the Reporting Member

shall indicate with the designated

symbol that the buy side OEID is a nonmember;

(R) A designated symbol denoting

whether the trade between the MMID

and the Buy Side OEID shall be

compared in TRACS;

Sell Side OEID

(S) Sell Side OEID executing broker;

(T) Sell Side OEID introducing broker

in case of a ‘‘give up’’;

(U) Sell Side OEID clearing broker;

(V) If known, a designated symbol

denoting whether the trade, from the

Sell Side OEID’s perspective, is as

principal, riskless principal, or agent;

(W) If known, a symbol denoting

whether the trade, from the Sell Side

OEID’s perspective, is a sell, sell short,

or sell short exempt transaction; 

(X) If the Sell Side OEID is a customer

of the Reporting Member, the Reporting

Member shall denote that the trade is an

internalized trade with the designated

symbol;

(Y) If the Sell Side OEID is a nonNASD Member, the Reporting Member

shall indicate with the designated

symbol that the buy side OEID is a nonmember;

(Z) A designated symbol denoting

whether the trade between the MMID

and the Sell Side OEID shall be

compared in TRACS;

(AA) If the transactions between the

Buy Side OEID and the Reporting

Member is reported pursuant to an AGU

arrangement or a QSR agreement,

disclosure of the information set forth in

subparagraph (f) (2) (O) is mandatory;

and

(BB) If the transaction between the

Sell Side OEID and the Reporting

Member is reported pursuant to an AGU

arrangement or a QSR agreement,

disclosure of the information set forth in

subparagraphs (f) (2) (V) and (W) is

mandatory.

(g) Trade Report Modifiers

(1) Reporting Members shall append

the following trade report modifiers to a

last sale report if applicable:

(A) .SLD, if the trade is executed

during normal market hours and it is

reported later than 90 seconds after

execution;

(B) .PRP, if the trade reflects a price

different from the current market when

the execution is based on a prior

reference point in time during normal

market hours, which time shall be

denoted in the trade report;

(C) .B, if the trade is executed during

market hours and is an aggregation of

transaction reports meeting the

conditions set forth in paragraph (h)

below;

(D) .SB, if the trade is executed during

market hours and is a .B trade that is

reported later than 90 seconds after

execution;

(E) .SNN, if the trade is a Seller’s

Option Trade, .NN denotes the number

of days for delivery; 

(F) .C, if the trade is a Cash Trade;

(G) .ND, if the trade is a Next Day

Trade;

(H) .W, if the trade occurs at a price

based on an average weighting or

another special pricing formula;

(I) .T, if the trade is executed outside

of normal market hours;

(J) .O, if the trade is priced beyond

certain price validation parameters as

established by the NASD; and 

(K) Any other trade report modifier

approved for use by the Securities and

Exchange Commission.

(2) It will be a violation of this Rule

for a Reporting Member to fail to

append a required trade modifier or to

append a modifier that is not required. 

(3) A Reporting Member shall not

append a .O modifier to a trade report

unless the trade price is beyond certain

price validation parameters as

established by the NASD. 

(4) The Association seeks to

emphasize the obligations of members

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 413

to report securities transactions within

90 seconds after execution. All

reportable transactions not reported

within 90 seconds after execution shall

be reported as late, and the Association

routinely monitors members’

compliance with the 90 second

requirement. If the Association finds a

pattern or practice of unexcused late

reporting, that is, repeated reports of

executions after 90 seconds without

reasonable justification or exceptional

circumstances, the member may be

found to be in violation of Rule 2110.

Exceptional circumstances will be

determined on a case by case basis and

may include instances of system failure

by a member or service bureau, or

unusual market conditions, such as

extreme volatility in a security, or in the

market as a whole. Timely reporting of

all transactions is necessary and

appropriate for the fair and orderly

operation of the Association’s

marketplace, and the Association will

view noncompliance as a rule violation.

(h) Procedures for Reporting Price and

Volume

(1) Members that are required to

report transactions pursuant to

paragraph (d) above shall transmit last

sale reports in the following manner: 

(A) For agency transactions, report the

number of shares (or bonds) and the

price excluding the commission

charged. 

Example:

SELL as agent 100 shares at 40 less a

commission of $12.50;

REPORT 100 shares at 40.

(B) For dual agency transactions,

report the number of shares (or bonds)

only once, and report the price

excluding the commission charged.

Example:

SELL as agent 100 shares at 40 less a

commission of $12.50;

BUY as agent 100 shares at 40 plus a

commission of $12.50;

REPORT 100 shares at 40.

(C) (i) For principal transactions,

except as provided below, report each

purchase and sale transaction

separately and report the number of

shares (or bonds) and the price. For

principal transactions that are executed

at a price that includes a mark-up,

mark-down or service charge, the price

reported shall exclude the mark-up,

mark-down or service charge. Such

reported price shall be reasonably

related to the prevailing market, taking

into consideration all relevant

circumstances including, but not limited

to, market conditions with respect to the

security, the number of shares (or

bonds) involved in the transaction, the

published bids and offers with size at

the time of the execution (including the

reporting firm’s own quotation), the cost

of execution and the expenses involved

in clearing the transaction.

Example:

BUY as principal 100 shares from

another member at 40 (no mark-down

included);

REPORT 100 shares at 40.

Example:

BUY as principal 100 shares from a

customer at 39.85 which includes a .15

mark-down from prevailing market at

40;

REPORT 100 shares at 40.

Example:

SELL as principal 100 shares to a

customer at 40.15, which includes a .15

mark-up from the prevailing market of

40;

REPORT 100 shares at 40.

Example:

BUY as principal 10,000 shares from

a customer at 39.75, which includes a

.25 mark-down or service charge from

the prevailing market of 40;

REPORT 10,000 shares at 40.

(ii) Exception: A ‘‘riskless’’ principal

transaction in which a member after

having received an order to buy a

security, purchases the security as

principal at the same price to satisfy the

order to buy or, after having received an

order to sell, sells the security as

principal at the same price to satisfy the

order to sell, shall be reported as one

three party transaction, excluding the

mark-up or mark-down, commissionequivalent, or other fee. Alternatively, a

member may report a riskless principal

transaction by submitting the following

report(s) to the NASD:

a. The member with the obligation to

report the transaction pursuant to

paragraph (d) above must submit a last

sale report for the initial leg of the

transaction.

b. Regardless of whether a member

has a reporting obligation pursuant to

paragraph (d) above, the firm must

submit, for the offsetting, ‘‘riskless’’

portion of the transaction, either: 

1. a clearing-only report with a

capacity indicator of ‘‘riskless

principal,’’ if a clearing report is

necessary to clear the transaction; or 

2. a non-tape, non-clearing report

with a capacity indicator of ‘‘riskless

principal,’’ if a clearing report is not

necessary to clear the transaction.

Example:

SELL as a principal 100 shares to

another member at 40 to fill an existing

order;

BUY as principal 100 shares from a

customer at 40 minus a mark-down of

$12.50;

REPORT 100 shares at 40 by

submitting to the NASD either a single

trade report marked with a ‘‘riskless

principal’’ capacity indicator or by

submitting the following reports:

3. where required by this Rule, a tape

report marked with a ‘‘principal’’

capacity indicator; and

4. either a non-tape, non-clearing

report or a clearing-only report marked

with a ‘‘riskless principal’’ capacity

indicator.

(D) For transactions that are executed

at a price different from the current

market when the execution is based on

a prior reference point in time, members

shall append to the transaction report a

trade report modifier designated by

NASD and shall include in the

transaction report the prior reference

time.

Example:

At 9:45 a.m., a member discovers that

a customer’s order to BUY 100 shares at

the opening price has not been

executed. The member executes the

customer’s order at 9:45 a.m. at the

opening price (40). Current market is 41.

REPORT 100 shares at 40 and append

the .PRP modifier with the time 9:30.

(i) Aggregation of Transaction Reports

(1) Under the following conditions,

individual executions of orders in a

security at the same price may be

aggregated, for transaction reporting

purposes, into a single transaction

report. Individual transactions in

convertible debt securities cannot be

aggregated pursuant to this paragraph.

(A) Orders received prior to the

opening of the reporting member’s

market in the security and

simultaneously executed at the opening.

Also, orders received during a trading or

quotation halt in the security and

executed simultaneously when trading

or quotations resume. In no event shall

a member delay its opening or

resumption of quotations for the

purpose of aggregating transactions. 

Example:

A firm receives, prior to its market

opening, several market orders to sell

which total 10,000 shares. All such

orders are simultaneously executed at

the opening at a reported price of 40. 

REPORT 10,000 shares at 40. 

(B) Simultaneous executions by the

member of customer transactions at the

same price, e.g., a number of limit

orders being executed at the same time

when a limit price has been reached. 

Example: 

A firm has several customer limit

orders to sell which total 10,000 shares

at a limit price of 40. That price is

reached and all such orders are

executed simultaneously. 

REPORT 10,000 shares at 40. 

(C) Orders relayed to the trading

department of the reporting member for

414 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

simultaneous execution at the same

price. 

Example: 

A firm purchases a block of 50,000

shares from an institution at a reported

price of 40. 

REPORT 50,000 at 40. 

Subsequently, one of the firm’s

branch offices transmits to the firm’s

trading department for execution

customer buy orders in the security

totaling 12,500 shares at a reported

price of 40. 

REPORT 12,500 at 40. 

Subsequently, another branch office

transmits to the firm’s trading

department for execution customer buy

orders totaling 15,000 shares in the

security at a reported price of 40. 

REPORT 15,000 at 40. 

Example: 

Due to a major change in market

conditions, a firm’s trading department

receives from a branch office for

execution customer market orders to sell

totaling 10,000 shares. All are executed

at a reported price of 40. 

REPORT 10,000 at 40. 

(D) Orders received or initiated by the

reporting member that are impractical

to report individually and are executed

at the same price within 60 seconds of

execution of the initial transaction;

provided however, that no individual

order of 10,000 shares or more may be

aggregated in a transaction report and

that the aggregated transaction report

shall be made within 90 seconds of the

initial execution reported therein.

Furthermore, it is not permissible for a

member to withhold reporting a trade in

anticipation of aggregating the

transaction with other transactions. The

limitation on aggregating individual

orders of 10,000 shares or more for a

particular security shall not apply on

the first day of secondary market

trading of an IPO for that security. 

Examples: 

A reporting member receives and

executes the following orders at the

following times and desires to aggregate

reports to the maximum extent

permitted under this Rule. 

First Example

11:01:00 500 shares at 40 

11:01:05 500 shares at 40 

11:01:10 9,000 shares at 40 

11:01:15 500 shares at 40 

REPORT 10,500 shares at 40 within

ninety seconds of 11:01. 

Second Example

11:01:00 100 shares at 40 

11:01:10 11,000 shares at 40 

11:01:30 300 shares at 40 

REPORT 400 shares within ninety

seconds of 11:01 and 11,000 shares

within ninety seconds of 11:01:10

(individual transactions of 10,000

shares or more must be reported

separately). 

Third Example

11:01:00 100 shares at 40 

11:01:15 500 shares at 40 

11:01:30 200 shares at 40 

11:02:30 400 shares at 40 

REPORT 800 shares at 40 within

ninety seconds of 11:01 and 400 shares

at 40 within ninety seconds of 11:02:30

(the last trade is not within sixty

seconds of the first and must, therefore,

be reported separately). 

(2) The reporting member shall

identify aggregated transaction reports

and order tickets of aggregated trades in

a manner directed by Nasdaq. 

(j) Reporting Transactions on Form T

All Reporting NASD Members

required (or that elect) to report

transactions to the NASD shall report,

as soon as practicable to NASD

Regulation’s Market Regulation

Department on Form T, last sale reports

of transactions in designated securities

for which electronic submission into the

NASD is not possible (e.g., the ticker

symbol for the security is no longer

available, a market participant

identifier is no longer active, or the

NASD will not accept the date of

execution because the NASD

Alternative Display Facility was closed

on that date). Transactions that can be

reported into the NASD, whether on

trade date or on a subsequent date on

an ‘‘as of’’ basis (T+N), shall not be

reported on Form T. 

(k) Trade Tickets

All trade tickets for transactions in

Nasdaq securities shall be time-stamped

at the time of execution. 

(l) Special Trade Indicator

A Reporting Member shall append the

designated symbol for special trades,

step out trades, reversals, and as-of

trades. 

(m) Clearing Indicators

A Reporting Member shall use a

designated symbol to denote whether

the trade is to be: (i) compared in

TRACS; (ii) not compared in TRACS;

(iii) compared in TRACS pursuant to an

Automatic Give Up Agreement

(‘‘AGU’’); or (iv) not compared in

TRACS, but locked in pursuant to a

Qualified Service Representation

Agreement (‘‘QSR’’). 

(n) Transactions Not To Be Reported To

NASD

The following types of transactions

effected by NASD members otherwise

than on an exchange shall not be

reported to TRACS for publication: 

(1) Odd-lot transactions;

(2) transactions that are part of a

primary distribution by an issuer or of

a registered secondary distribution

(other than ‘‘shelf distributions’’) or of

an unregistered secondary distribution; 

(3) transactions made in reliance on

Section 4(2) of the Securities Act of

1933; 

(4) transactions where the buyer and

seller have agreed to trade at a price

substantially unrelated to the current

market for the security (e.g., to enable

the seller to make a gift); 

(5) purchases or sales of securities

effected upon the exercise of an option

pursuant to the terms thereof or the

exercise of any other right to acquire

securities at a pre-established

consideration unrelated to the current

market.

(o) Dissemination of Transaction

Reports in Convertible Debt Securities

For surveillance purposes, NASD will

collect and process trade reports for all

transactions in convertible debt

securities listed on Nasdaq and effected

through the NASD Alternative Display

Facility. On a real-time basis, NASD will

disseminate to members and the public

through NASD, and through securities

information processors, transactions in

convertible debt securities reported to it

equaling 99 bonds or less. Selected

NASD Notices to Members: 83–1, 87–85,

93–9, 93–25, 93–83, 94–71, 98–82, 99–

65, 99–66.

* * * * *

5000. [OTHER NASDAQ AND NASD

MARKETS] TRADING OTHERWISE

THAN ON AN EXCHANGE

[5100. NASDAQ INTERNATIONAL

SERVICE RULES]

[5101. Applicability]

[(a) These Rules shall be known as the

‘‘International Rules’’ and govern

operation of the Nasdaq International

Service (‘‘Nasdaq International’’ or

‘‘Service’’), as well as the obligations,

access to and use of the Service by the

following parties: broker/dealers

admitted to membership in the

Association (collectively, ‘‘Association

members’’); associated persons of such

Association members; and any nonmember broker/dealer having the status

of an approved affiliate. Unless

otherwise indicated, the requirements of

the International Rules are in addition

to those contained in the By-Laws and

other Rules of the Association.]

[(b) Rules 5106, 5108, 5109, and 5112

of the International Rules establish

requirements that apply exclusively to

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 415

participation in the Service during the

European Session. As such, these

provisions of the International Rules

supersede the Rule 2870, 4640, 6300

and 6600 Series: and Rules 6410, 6420

and 6450. Non-compliance with any

applicable requirement will subject the

Association member and/or its

associated person(s) to regulatory action

under the Association’s Code of

Procedure, the Rule 9000 Series.]

[(c) Unless otherwise indicated within

a particular provision of the

International Rules, all procedures,

requirements, and prohibitions shall

apply with equal force to Association

members, their associated persons, and

approved affiliates that participate in

the Service.]

[5102. Definitions]

[Unless the context otherwise

requires, or unless defined in the

International Rules, the terms used

herein shall retain their present

meanings as defined in the By-Laws and

other Rules of the Association.]

[(a) ‘‘Approved affiliate’’ means a

broker/dealer that meets all of the

following requirements:]

[(1) it is not admitted to membership

in the Association or any registered

national securities exchange;]

[(2) it is authorized to conduct

securities business in the United

Kingdom in accord with all applicable

provisions of the Financial Services Act

of 1986;]

[(3) it controls, is controlled by, or is

under common control with an

Association member (hereinafter

referred to as a ‘‘control relationship’’);

and]

[(4) it has been approved by the

Association to participate as a Service

market maker, in an agency capacity, on

behalf of the Association member with

whom it has a control relationship.]

[(b) ‘‘Domestic Session’’ refers to the

market session operated by the

Association between the hours of 9:30

a.m. and 4:00 p.m. Eastern Time on each

U.S. business day.]

[(c) ‘‘European-only market maker’’

means a broker/dealer that is registered

with the Association to make markets in

one or more qualified securities in the

SERVICE, but is not registered in the

same security(ies) for purposes of

making a market during the Domestic

Session.]

[(d) European Session refers to the

market session supported by the Service

during the hours specified in Rule

5103.]

[(e) ‘‘International market maker’’

means a broker/dealer that is registered

with the Association to make markets in

one or more qualified securities in the

SERVICE and is also registered with the

Association to make markets in the

same security(ies) during the Domestic

Session.]

[(f) The terms ‘‘Nasdaq International’’

and ‘‘Service refer to an extension of the

basic automation capabilities that

support Association members’ market

making in the Nasdaq National Market

(NNM), and exchange-listed securities

to the business hours fixed by Rule

5103.]

[(g) ‘‘Non-NNM security’’ means every

qualified security in the subset defined

by Rule 5104(b).]

[(h) Qualified security’’ means any

security that satisfies the requirements

contained in Rule 5104.]

[(i) ‘‘Service market maker’’ includes

any Association member that is

registered as a European-only or

International market maker in one or

more qualified securities, and any

approved affiliate registered as a

European-only market maker in one or

more qualified securities.]

[5103. Normal Business Hours]

[The Nasdaq International market

session (hereinafter referred to as the

‘‘European Session’’) will run from 3:30

a.m. to 9:00 a.m. Eastern Time on each

business day in the U.S.; pre-opening

procedures will commence at 2:30 a.m.

Eastern Time. Appropriate adjustments

will be made in the event that the U.S.

and the U.K. move to (or from) daylightsaving time on different dates. All times

referenced in the International Rules

relate to the Eastern Time zone of the

U.S.]

[5104. Qualified Securities]

[The Association deems the following

classes of securities qualified for

inclusion in Nasdaq International:]

[(a) any Nasdaq security that is

designated an NNM security;]

[(b) any non-Canadian, foreign

security or ADR that is included in

Nasdaq but not designated an NNM

security; and]

[(c) any equity security that is listed

on a registered national securities

exchange.]

[Inclusion of a qualified security in

Nasdaq International requires a market

making commitment by one or more

broker/dealers that participate as

Service market makers.]

[5105. Access]

[(a) Access to the market making

capabilities provided by Nasdaq

International is restricted to broker/

dealers that are either Association

members or approved affiliates and that

have all equipment and communication

lines specified by the Association for

receipt of Nasdaq Workstation Service.

Additionally, Association members that

participate as Service market makers,

either directly or through the agency of

an approved affiliate, must satisfy the

same financial and operational

requirements applicable to market

makers in Nasdaq securities and/or

exchange-listed securities traded offboard during the Domestic Session.]

[(b) Association members that utilize

Nasdaq Workstation units to receive

Level 2 Nasdaq Service during the

Domestic Session can also receive realtime quotation information entered by

Service market makers. Similar access

terms will be provided to non-member,

Level 2 subscribers utilizing Nasdaq

Workstation units.]

[5106. Requirements Applicable to

Market Makers]

[(a) Service Market Maker]

[Association members and approved

affiliates can function as Service market

makers by registering with the

Association in one or more qualified

securities. Two classifications of market

makers are authorized: (1) Europeanonly and (2) International. Association

members can register in either capacity

in any qualified security; approved

affiliates are limited to European-only

registration. At the time of registration,

a Service market maker must select one

of the following time periods to define

its daily market making commitment, on

a security-by-security basis: 3:30 a.m. to

9:00 a.m.; 5:30 a.m. to 9:00 a.m., and

7:30 a.m. to 9:00 a.m. Every Service

market maker must fulfill the market

making obligations specified below in

each of its registered securities while

participating in the European Session.

Based on experience gained with

Service market makers’ use of the

multiple openings, the Association may

determine to alter the specified times by

up to one hour or to eliminate an

opening altogether.]

[(b) Market Maker Obligations]

[The following requirements and

procedures govern a broker/dealer’s

participation in Nasdaq International as

a Service market maker.]

[(1) Registration]

[(A) Quotations and quotation size

may be entered into the Service only by

a Service market maker.]

[(B) To function as a Service market

maker, an Association member must

initially obtain registration as a

European-only or International market

maker by filing an application with the

Association. The application shall

certify the Association member’s good

standing with the Association,

416 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

demonstrate compliance with the net

capital and other financial

responsibility provisions of the Act and

the rules thereunder, and specify the

qualified security(ies) in which the

member is seeking to register as a

European-only or International market

maker. Initial registration as a Service

market maker shall become effective

upon the member’s receipt of the

Association’s notice approving such

registration.]

[(C) For an approved affiliate to

function as a Service market maker, it

must initially obtain registration as a

European-only market maker by filing

an application with the Association.

Such application must be co-signed by

a registered principal of the Association

member for whom the approved affiliate

will act as agent. The application shall

certify the following: the Association

member’s good standing with the

Association; the approved affiliate’s

authorization to conduct securities

business in the United Kingdom in

accord with all applicable provisions of

the Financial Services Act of 1986; and

the Association member’s ability to

comply and its assumption of

compliance with the net capital and

other financial responsibility

requirements of the Act and the rules

thereunder in respect of the approved

affiliate’s market making in the Service

as agent for the Association member.

The application shall also specify the

qualified security(ies) in which the

approved affiliate is seeking to register

as a European-only market maker. Initial

registration as a Service market maker

shall become effective upon the

approved affiliate’s receipt of the

Association’s notice approving such

registration.]

[(D) A Service market maker may

become registered in a newly qualified

security by telephoning Market

Operations. If registration is requested

within five (5) business days after the

issue becomes qualified, registration

shall take effect at the time the request

is entered.]

[(E) A Service market maker may

register in additional qualified securities

by entering a registration request via its

Nasdaq Workstation unit authorized for

receipt of the Service. If registration is

requested respecting a security that has

been a qualified security for more than

five (5) days, and the requirements of

either subparagraph (B) or (C) above are

satisfied, registration shall take effect on

the day after the registration request is

entered.]

[(F) Registration in a qualified

security shall be terminated by the

Association if the Service market maker

fails to enter quotations in that security

within five (5) business days after its

registration in that security first became

effective.]

[(2) Normal Business Hours]

[Service market makers must be open

for business, on each U.S. business day,

during the time periods established by

their registration in one or more

qualified securities. By virtue of the

multiple openings feature, a Service

market maker would have the

flexibility, for example, to register and

quote markets in some securities during

the 5:30 a.m. to 9:00 a.m. segment and

others during the 7:30 a.m. to 9:00 a.m.

segment. This flexibility is equally

available to Association members and

approved affiliates that participate as

Service market makers. Appropriate

adjustments will be made in the event

that the U.S. and U.K. move to (or from)

daylight savings time on different

dates.]

[(3) Character of Quotations]

[(A) For each security in which an

Association member has registered as a

Service market maker, it shall be willing

to buy and sell such security for its own

account on a continuous basis and shall

enter and maintain two-sided quotations

in the Service during the hours

specified above in subparagraph (2),

above, subject to the procedures for

excused withdrawal set forth in

subparagraph (4) below. An approved

affiliate registered as a Service market

maker shall assume identical obligations

in each of its registered securities.

Purchases and sales effected to fulfill

those obligations shall be deemed to be

made for the account of the Association

member on whose behalf the approved

affiliate acts as agent.]

[(B) A Service market maker that

receives an offer to buy or sell from

another Association member or

approved affiliate shall execute a

transaction for at least a normal unit of

trading at its displayed quotations as

disseminated through the Service at the

time of receipt of any such offer. If a

Service market maker displays a

quotation for a size greater than a

normal unit of trading, it shall, upon

receipt of an offer to buy or sell from

another Association member or

approved affiliate, execute a transaction

at least at the size displayed.]

[(C) A Service market maker shall

enter and maintain quotations that are

reasonably related to the prevailing

market. If it appears that such market

maker’s quotations are no longer

reasonably related to the prevailing

market, the Association may require the

firm to re-enter its quotations. However,

if that Service market maker fails to reenter its quotations, the Association

may suspend the market maker’s

quotations in one or all of the qualified

securities in which it is registered.]

[(D) If a Service market maker’s ability

to enter or update quotations is

impaired, the market maker shall

immediately contact Market Operations

to request the withdrawal of its

quotations.] [(E) If a Service market

maker’s ability to enter or update

quotations is impaired and it elects to

remain in the Service, the market maker

shall execute an offer to buy or sell

received from another Association

member or approved affiliate at its

quotations as disseminated through the

Service.]

[(F) A Service market maker should

refrain from entering quotations into the

Service that exceed the guidelines for

maximum allowable spreads set forth

below:]

SPREAD GUIDELINES

Average spread

Maximum

allowable

spread

1⁄8 or less .................................. 1⁄4

1⁄4 .............................................. 1⁄2

3⁄8 .............................................. 3⁄4

1⁄2 .............................................. 1 5⁄8 .............................................. 1 3⁄4 .............................................. 11⁄2

7⁄8 .............................................. 11⁄2

1 ................................................ 11⁄2

11⁄8 ............................................ 15⁄8

11⁄4 ............................................ 13⁄4

13⁄8 ............................................ 17⁄8

11⁄2 ............................................ 2

15⁄8 ............................................ 2

13⁄4 ............................................ 3

17⁄8 ............................................ 3

2 ................................................ 3

21⁄8 ............................................ 3

21⁄4 ............................................ 3

23⁄8 ............................................ 3

21⁄2 ............................................ 3

25⁄8 ............................................ 4

23⁄4 ............................................ 4

27⁄8 ............................................ 4

[For an average spread of 3 or more,

the maximum allowable spread is 125

percent of the average spread rounded

to the next highest whole number.]

[The Association regards these spread

parameters as guidelines rather than

absolute requirements. Nonetheless, the

Association will continuously monitor

the quotation spreads of every Service

market maker and consider taking

regulatory action upon finding a pattern

of excessive spreads disseminated

during European Sessions. A pattern of

excessive spreads will be deemed to

exist where a Service market maker

exceeds the applicable guideline on five

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 417

or more occasions in the same qualified

security during a calendar month or

exceeds the applicable guideline

respecting at least 10% of its quotation

updates entered into the Service during

a calendar month.]

[(G) A Service market maker shall not,

except under extraordinary

circumstances, enter or maintain

quotations in the Service during the

European Session if: the bid quotation

entered is equal to or greater than the

asked quotation of another Service

market maker displaying quotations in

the same qualified security; or the asked

quotation is equal to or less than the bid

quotation of another Service market

maker displaying quotations in the same

qualified security.]

[(H) A Service market maker shall,

prior to entering a quotation that locks

or crosses another quotation, make

reasonable efforts to avoid such locked

or crossed market by executing

transactions with all Service market

makers whose quotations would be

locked or crossed. A Service market

maker whose quotations are causing a

locked or crossed market is required to

execute transactions at its quotations as

displayed through the Service at the

time of receipt of any order.]

[(4) Withdrawal of Quotations]

[(A) A Service market maker that

wishes to withdraw its quotations in a

qualified security shall contact Market

Operations to obtain excused

withdrawal status prior to effecting

withdrawal. Excused withdrawals shall

be granted by Market Operations only

upon the demonstration of the existence

of one of the circumstances set forth in

subparagraphs (B) and (C) below.]

[(B) Excused withdrawal status based

on physical circumstances beyond the

Service market maker’s control may be

granted for up to five (5) business days,

unless extended by Market Operations.

Excused withdrawal status based on

demonstrated legal or regulatory

requirements, supported by appropriate

documentation and accompanied by a

representation that the condition

necessitating the withdrawal of

quotations is not permanent in nature,

may, upon written request, be granted

for not more than sixty (60) days.

Excused withdrawal status based on

religious holidays or national holidays

in the U.K. may be granted only if the

request is received by the Association

five (5) business days in advance and is

approved by the Association. Excused

withdrawal status based on vacation

may be granted only if: the request for

withdrawal is received by the

Association twenty (20) business days

in advance, and is approved by the

Association; the request includes a list

of the securities for which withdrawal is

requested; and the request is made by a

Service market maker with three (3) or

fewer Nasdaq Workstation units

authorized for market making in the

Service. The following shall not

constitute acceptable reasons for

granting excused withdrawal status:

pending news, a sudden influx of orders

or price changes, or the desire to effect

transactions with competitors.]

[(C) Excused withdrawal status may

be granted to a Service market maker

that fails to maintain a clearing

arrangement with a registered clearing

agency or with another party that is a

member of such an agency and is

therefore withdrawn from participation

in the Association’s Automated

Confirmation Transaction Service.

However, if the Association finds that

the Service market maker’s failure to

maintain a clearing arrangement is

voluntary, the withdrawal of quotations

will be deemed a voluntary termination

pursuant to subparagraph (5) below.]

[(5) Voluntary Termination of

Registration]

[A Service market maker may

voluntarily terminate its registration in

a qualified security by withdrawing its

quotations in that security from the

Service. A market maker that

voluntarily terminates its registration in

a qualified security may re-register to

quote that security in the Service in

accord with procedures contained in

paragraph (b)(1)(E) above. Nonetheless,

if an International market maker

voluntarily terminates both the

domestic and European components of

its registration in a qualified security

that is included in Nasdaq (qualified

Nasdaq security), this Association

member cannot re-register to quote that

qualified Nasdaq security during the

Domestic Session until twenty (20)

business days have elapsed. This

waiting period would not apply where

an International market maker in a

qualified Nasdaq security had

terminated the European component of

its registration but maintained the

domestic component.]

[(6) Stabilizing Bids]

[(A) A Service market maker may

enter a stabilizing bid in the Service for

a qualified Nasdaq security, which bid

will be identified with the appropriate

identifier on the quotation display. Only

one market maker in an issue may enter

a stabilizing bid. A stabilizing bid will

not be displayed unless one market

maker in addition to the market maker

entering the stabilizing bid is registered

in the issue and enters quotations

during the European Session.]

[(B) A stabilizing bid, a pre-effective

stabilizing bid, or a penalty bid may be

entered into the Service. A stabilizing

bid must be available for all freely

tradeable outstanding securities of the

same class being offered.]

[(C) Notice to the Association]

[(i) A Service market maker that

wishes to enter a stabilizing bid shall so

notify Market Operations in writing

prior to the first day on which the

stabilizing bid is to appear in the

Service. The notice shall include: the

name of the qualified Nasdaq security

and its Nasdaq symbol; the date on

which the security’s registration will

become effective, if it is already quoted

in the Service; whether the stabilizing

bid will be a penalty bid or a penaltyfree bid; and a copy of the preliminary

prospectus or shelf registration

statement, unless the Association

determines otherwise.]

[(ii) In the case of a pre-effective

stabilizing bid, the notice shall include:

the name of the qualified Nasdaq

security and its Nasdaq symbol; the

contemplated effective date of the

offering; whether it is contemplated that

the pre-effective stabilizing bid will be

converted to a stabilizing bid and, if so,

whether the stabilizing bid will be a

penalty bid or a penalty-free bid; and a

copy of the preliminary prospectus,

unless the Association determines

otherwise.]

[(iii) A service market maker that has

provided the written notice prescribed

above shall also contact Market

Operations for authorization on the day

the market maker wishes to enter the

stabilizing bid into the Service.]

[(D) A Service market maker shall not

enter a stabilizing bid at the same time

that it is quoting any other bid or offer

in the qualified Nasdaq security.]

[(E) A Service market maker entering

a stabilizing bid shall report all

purchases made on the stabilizing bid

and enter ‘‘zero volume’’ for sales

during the period in which the

stabilizing bid is in effect.]

[5107. Automated Submission of

Trading Data]

[Reserved for Future Use. Redesignated

as 8212 by SR–NASD–97–81 eff. Jan. 16,

1998.]

[5108. Reports]

[Every Association member and

approved affiliate that functions as a

Service market maker shall submit the

following reports to the Association at

the frequency specified:]

418 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

[(a) A Service market maker shall

report each business day any data

relating to qualified securities quoted in

the Service as the Association shall

require.]

[(b) A Service market maker shall

report monthly such data on qualified

securities that are quoted in the Service

as the Association shall require.]

[(c) A Service market maker shall

make such other reports as the

Association may prescribe from time to

time.]

[5109. Clearance and Settlement of

International Transactions]

[(a) Association members and

approved affiliates that effect

international transactions must clear

and settle all such transactions through

a clearing agency registered with the

Commission that uses a continuous net

settlement system. This requirement

may be satisfied through direct

participation in a suitable clearing

agency or through a clearing

arrangement with another party.]

[(b) For purposes of this Rule, the

term ‘‘international transaction’’ means

every transaction having the following

three characteristics: (1) the transaction

involves a qualified security quoted in

the Service by at least one registered

market maker; (2) the transaction is

consummated during the hours of the

European Session between two

Association members, two approved

affiliates, or an Association member and

an approved affiliate; and (3) the

transaction involves at least one

Association member (acting in a

principal or agency capacity) that is

registered as a European-only or

International market maker in any

qualified security, or alternatively, at

least one approved affiliate (acting in a

principal or agency capacity) that is

registered as a European-only market

maker in any qualified security.]

[(c) Participation in the Automated

Confirmation Transaction Service is

mandatory for self-clearing Association

members participating in the Service

directly or through an approved

affiliate.]

[5110. Suspension and Termination of

Quotations by Association Action]

[The Association may, pursuant to the

procedures set forth in the Association

Code of Procedure, the Rule 9000 Series,

suspend, condition, limit, prohibit or

terminate a Service market maker’s

authority to enter quotations in one or

more qualified securities for violations

of the applicable requirements or

prohibitions contained in the By-Laws

or Rules of the Association.]

[5111. Termination of Access]

[The Association may, upon notice,

terminate access to Nasdaq International

in the event that a Service market maker

fails to qualify under specified

standards of eligibility for Association

membership or participation in the

Service, or fails to pay promptly for

services rendered by the Association or

its subsidiaries.]

[5112. Transaction Reporting

Requirements]

[During the European Session, broker/

dealers registered as International or

European-only market makers shall

observe the following requirements for

reporting transaction information to the

Association on qualified securities

quoted in Nasdaq International:]

[(a) Definitions]

[(1) ‘‘International Participant’’

includes any Association member

registered as an International or

European-only market maker in at least

one qualified security, and any

approved affiliate registered as a

European-only market maker in at least

one qualified security.]

[(2) ‘‘Reportable transaction’’ means

any round-lot or mixed-lot transaction

in a Service security effected during the

European Session with an International

Participant being on one or both sides.

The following are not deemed to be

reportable transactions:]

[(A) transactions which are part of a

primary distribution by an issuer or of

a registered secondary distribution

(other than shelf registrations) or of an

unregistered secondary distribution; ]

[(B) transactions executed on and

reported to a securities exchange

domiciled outside the U.S.; ]

[(C) transactions made in reliance on

Section 4(2) of the Securities Act of

1933; ]

[(D) transactions where the buyer and

seller have agreed to trade at a price

substantially unrelated to the current

market for a Service security, e.g., to

enable the seller to make a gift; and ]

[(E) purchases or sales of Service

securities effected upon the exercise of

an option pursuant to the terms thereof

or the exercise of any other right to

acquire securities at a preestablished

consideration unrelated to the current

market.]

[(3) ‘‘Service security’’ means any

qualified security that is quoted in

Nasdaq International by at least one

registered market maker.]

[(4) ‘‘Trade report’’ refers to the entry

of the following elements of information

for each reportable trans security

symbol, price (exclusive of commission,

mark-up, or mark-down), volume, and a

symbol indicating whether the

transaction is a buy, sell or cross.]

[(b) Timely Trade Reports]

[International Participants shall enter

trade reports on all reportable

transactions within three minutes of

execution via a Nasdaq Workstation unit

authorized for receipt of Nasdaq

International or through a CTCI. Trade

reports not submitted within three

minutes of execution shall be

designated as late by addition of the

‘‘SLD’’ indicator. A pattern or practice

of late reporting without exceptional

circumstances may be considered

conduct inconsistent with high

standards of commercial honor and just

and equitable principles of trade, in

violation of Rule 2110 of the

Association’s Rules.]

[(c) Obligation To Submit Trade

Reports on Reportable Transactions]

[(1) In transactions between two

International Participants that are both

Service market makers in the affected

Service security, only the party

representing the sell side shall report.]

[(2) In transactions between two

International Participants where only

one is a Service market maker in the

affected Service security, the latter party

shall report.]

[(3) In transactions between two

International Participants where neither

is a Service market maker in the affected

Service security, only the party

representing the sell side shall report.]

[(4) In transactions between an

International Participant and a nonmember (other than an approved

affiliate), the International Participant

shall report. Where an International

Participant acts as a dual agent in a

reportable transaction, it shall be

reported only once by the International

Participant.]

[(5) In transactions between an

International Participant and another

Association member that is not an

International Participant, only the

International Participant shall report.]

[(d) Aggregation of Trade Reports]

[(1) The following procedures and

requirements apply exclusively to an

International Participant registered as a

Service market maker in a particular

Service security.]

[(2) Under the following conditions,

individual trade reports in a Service

security at the same price may be

aggregated into a single trade report by

a Service market maker in that security:]

[(A) orders received prior to opening

of the European Session and

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 419

simultaneously executed at the

opening;]

[(B) orders received during a trading

halt and executed simultaneously when

trading resumes;]

[(C) orders relayed to the trading

department of the Service market maker

for simultaneous execution at the same

price;]

[(D) simultaneous executions by the

Service market maker of customer

transactions at the same price, e.g.,

multiple limit orders being executed at

the same time when a limit price has

been reached; or]

[(E) orders received or initiated by the

Service market maker that are

impractical to report individually and

are executed at the same price within

two minutes of execution of the initial

transaction; provided, however, that no

individual order of 10,000 shares or

more may be aggregated in a trade report

and that the aggregated trade report

shall be made within three minutes of

the initial execution reported therein.]

[(3) In no instance shall a Service

market maker delay entry of its opening

quotations or resumption of trading in a

Service security for the purpose of

aggregating trade reports. Further, a

Service market maker is prohibited from

withholding a trade report in

anticipation of aggregating the

transaction with others.]

[(4) A Service market maker shall

identify aggregated trade reports and the

underlying order tickets in a manner

prescribed by the Association.]

[(e) Time Stamping of Transactions]

[All trade tickets for reportable

transactions shall be time-stamped at

the time of execution. Association

members and approved affiliates that

utilize screen-based systems for

executing transactions shall satisfy this

requirement by ensuring that such a

system assigns an appropriate execution

time to each reportable transaction.]

[(f) Weekly Reports]

[International Participants shall

submit trade reports weekly respecting

Service securities in the following

circumstances:]

[(1) European-only market makers.

Transactions in Service securities

executed outside hours of the European

Session;]

[(2) International market makers.

Transactions in Service securities

executed outside the hours of both the

European Session and the Domestic

Session;]

[(3) European-only and International

Market Makers. Transactions in Service

securities that were effected during the

European Session and were omitted

inadvertently from reported volume

during the preceding week’s European

Sessions.]

[5113. Audit Trail Requirements]

[All existing requirements for

submitting audit trail information to the

Association, either directly or through a

registered clearing agency, shall extend

to Association members’/approved

affiliates’ participation in Nasdaq

International. The applicable

requirements were published in NASD

Notices to Members 84–55 (October 15,

1984), 85–24 (April 12, 1985), and 85–

72 (October 30, 1985), which notices are

hereby incorporated by reference.]

* * * * *

5200. Trading Halts

(a) Authority To Initiate Halts in

Trading Otherwise Than on an

Exchange

NASD, pursuant to the procedures set

forth in paragraph(b): 

(1) shall halt trading otherwise than

on an exchange an ADF-eligible security

whenever any market eligible to trade

that security imposes a trading halt, or

suspends the listing, in order to: 

(A) Permit dissemination of material

news; 

(B) obtain information from the issuer

relating to material news; 

(C) obtain information relating to the

issuer’s ability to meet listing

qualification requirements; or 

(D) obtain any other information that

is necessary to protect investors and the

public interest. 

(2) shall halt trading otherwise than

on an exchange in an American

Depository Receipt (‘‘ADR’’) listed on a

national securities exchange, when the

security underlying the ADR is listed on

or registered with a national or foreign

securities exchange or market, and the

national or foreign securities exchange

or market, or regulatory authority

overseeing such exchange or market,

halts trading in such security for

regulatory reasons. 

(3) shall halt all trading through the

NASD Alternative Display Facility (a)

whenever the NASD Alternative Display

Facility is unable to transmit real-time

quotation or trade reporting information

to the applicable Securities Information

Processor, or (b) whenever a marketwide trading halt is in effect under

circuit breaker rules of a primary

exchange. 

(4) may, in its discretion, halt all

trading otherwise than on an exchange

in a security listed on a national

securities exchange when (i) a national

securities exchange imposes a trading

halt in that security because of an order

imbalance or influx (‘‘operational

trading halt’’), or (ii) when the security

is a derivative or component of a

security listed on a national securities

exchange and a national securities

exchange imposes an operational

trading halt in that security. In the event

that the NASD, in its discretion, chooses

not to halt trading otherwise than on an

exchange in a security when the

conditions of this paragraph exist,

NASD members may continue to

conduct trading in such security during

the period of any such halt and shall

continue to report all last sale prices

reflecting transactions in such security.

Members shall promptly notify NASD

whenever they have knowledge of any

matter related to a security or the issuer

thereof that has not been adequately

disclosed to the public or where they

have knowledge of a regulatory problem

relating to such security. 

(b) Commencement and Termination of

a Trading Halt

(1) In the event NASD determines that

a basis exists under Rule 5200(a) to

initiate a trading halt, the

commencement of the trading halt will

be effective simultaneously with

appropriate notice via an administrative

message.

(2) Trading in a halted security shall

resume upon notice via an

administrative message that a trading

halt is no longer in effect. 

(c) Authority To Initiate Trading and

Quotation Halts in Non-Exchange-Listed

Foreign Securities

In circumstances in which it is

necessary to protect investors and the

public interest, NASD Regulation may

direct members, pursuant to the

procedures set forth in paragraph (d), to

halt trading and quotations in a

quotation medium other than an

exchange or the NASD Alternative

Display Facility of an American

Depository Receipt (‘‘OTC ADR’’) or a

security (‘‘OTC Security’’) that is traded

in the OTC market and that is not

otherwise listed on a national securities

exchange or included in the OTC

Bulletin Board Service (‘‘OTCBB’’) when

the OTC Security or the security

underlying the OTC ADR is listed on or

registered with a foreign securities

exchange or market, and the foreign

securities exchange, market, or

regulatory authority overseeing such

issuer, exchange or market halts trading

in such security for regulatory reasons

(‘‘Foreign Regulatory Halt’’); provided,

however, that NASD Regulation will not

impose a trading and quotation halt if

the Foreign Regulatory Halt was

imposed solely for the dissemination of

420 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

material news, a regulatory filing

deficiency, or operational reasons. 

(d) Procedure for Initiating a Trading

and Quotation Halt

(1) For a halt initiated under

subparagraph (c) of this rule, NASD

Regulation will promptly evaluate

information received from a foreign

securities exchange or market on which

the OTC Security or the security

underlying the OTC ADR is listed or

registered or from a foreign regulatory

authority overseeing such issuer,

exchange, or market about a Foreign

Regulatory Halt and determine whether

a trading and quotation halt in the OTC

Security is appropriate. 

(2) Should NASD Regulation

determine that a basis exists under this

Rule for initiating a trading and

quotation halt, NASD Regulation shall

disseminate appropriate public notice

that a trading and quotation halt is in

effect and the commencement of the

trading halt will be effective

simultaneously with appropriate public

notice. 

(3) Trading and quotations in the OTC

market may resume when NASD

Regulation determines that the basis for

the halt no longer exists or when five

business days have elapsed from the

date NASD Regulation initiated the

trading and quotation halt in the

security, whichever occurs first. NASD

Regulation shall disseminate

appropriate public notice that a trading

and quotation halt is no longer in effect. 

Selected NASD Notices to Members:

88–46, 94–98.

5300. Transactions Related to

Initial Public Offerings

No member or person associated with

a member shall execute or cause to be

executed, directly or indirectly, an overthe-counter transaction in a security

subject to an initial public offering until

such security has first opened for

trading on the national securities

exchange listing the security, as

indicated by the dissemination of an

opening transaction in the security by

the listing exchange via the

Consolidated Tape or, for Nasdaq, the

Nasdaq Tape.

[5200] 6500. INTERMARKET

TRADING SYSTEM[/COMPUTER

ASSISTED EXECUTION SYSTEM]

[5210] 6510. Definitions

(a) The term ‘‘ITS Participant

Exchange’’ shall mean a participant in

the ITS Plan that is a national securities

exchange.

(b) The term ‘‘ITS Plan’’ shall mean

the plan agreed upon by the ITS

participants, as from time to time

amended in accordance with the

provisions therein, and approved by the

Commission pursuant to Section

11A(a)(3)(B) of the Act and SEC Rule

11Aa3–2 thereunder.

(c) The term ‘‘ITS Security’’ shall

mean any security [which] that may be

traded through the System by an ITS/

ADF[CAES] Market Maker.

(d) The term ‘‘ITS System’’ shall mean

the communications network and

related equipment that links

electronically the ITS Participant

Exchanges and ITS/ADF[CAES] Market

Makers as described in the Plan.

(e) The term ‘‘ITS/ADF[CAES]

Market’’ Maker shall mean a member of

the Association that is registered as a

market maker with the Association for

the purposes of participation in ITS

[through CAES] with respect to one or

more specified ITS securities in which

[he] it is then actively registered.

Registration as an ITS/ADF[CAES]

Market Maker is [mandatory] optional

for all registered CQS market makers in

securities eligible for inclusion in the

ITS/ADF[CAES] linkage.

(f) The term ‘‘Participant Market’’

shall mean the securities trading floor of

each participating ITS Exchange and the

markets of ITS/ADF[CAES] Market

Makers in ITS securities.

(g) The term ‘‘Pre-Opening

Application’’ shall mean the application

of the System which permits a specialist

or ITS/ADF[CAES] Market Maker who

wishes to open [his] its market in an ITS

Security to obtain pre-opening interests

from other specialists and ITS/

ADF[CAES] Market Makers.

(h) The term ‘‘Previous Day’s

Consolidated Closing Price’’ shall mean

the last price at which a transaction in

a security was reported by the

consolidated last sale reporting system

on the last previous day on which

transactions were reported by such

system; provided, however, that the

‘‘previous day’s consolidated closing

price’’ for all Network A or Network B

eligible [S]securities shall be the last

price at which a transaction in the stock

was reported by the New York Stock

Exchange, Inc. (NYSE) or the American

Stock Exchange, Inc. (Amex), if, because

of unusual market conditions, the NYSE

or the Amex price is designated as such

pursuant to the ITS plan.

(i) A ‘‘Third Participating Market

Center Trade-Through,’’ as that term is

used in this Rule, occurs whenever an

ITS/ADF[CAES] Market Maker initiates

the purchase of an ITS Security by

sending a commitment to trade through

the System and such commitment

results in an execution at a price

[which] that is higher than the price at

which the security is being offered (or

initiates the sale of such a security by

sending a commitment to trade through

the System and such commitment

results in an execution at a price which

is lower than the price at which the

security is being bid for) at the time of

the purchase (or sale) in another ITS

participating market center as reflected

by the offer (bid) then being displayed

by [ITS/ CAES] Market Makers from

such other market center. The member

described in the foregoing sentence is

referred to in this Rule as the ‘‘member

who initiated a third participating

market center trade-through.’’

[Amended eff. Nov. 24, 1989; Aug. 5,

1991; amended by SR–NASD–93–10 eff.

Oct. 31, 1994; amended by SR–NASD–

97–09 eff. May 30, 1997.] Selected

Notices to Members: 94–81.

[5220] 6520. ITS/ADF[CAES]

Registration

In order to participate in ITS, a market

maker must be registered with the

Association as an ITS/ADF[CAES]

Market Maker in each security in which

a market will be made in ITS. Such

registration shall be conditioned upon

the ITS/ADF[CAES] Market Maker’s

continuing compliance with the

following requirements:

(a) Registration as a CQS market

maker pursuant to Rule 6320 and

compliance with the Rule 6300 Series;

(b) execution of an ITS/ADF[CAES]

Market Maker application agreement

with the Association at least two days

prior to the requested date of

registration;

(c) compliance with SEC Rule 15c3–

1;

(d) compliance with the ITS Plan, SEC

Rule 11Ac1–1 and all applicable Rules

of the Association;

(e) the maintenance of continuous

two-sided quotations in the absence of

the grant of an excused withdrawal or

a functional excused withdrawal by the

Association. Any registered ITS Market

Maker (excluding ECNs) that

participates in a pre-opening

application process and does not enter

and maintain continuous two-sided

quotations in the security on that same

trading day may not re-register to

participate in ITS in such security for

twenty (20) business days unless NASD

Alternative Display Facility Operations

grants an excused withdraw;

(f) maintenance of the physical

security of the equipment used to

interface with the ITS System located on

the premises of the ITS/ADF[CAES]

Market Makers to prevent the

unauthorized entry of communications

into the ITS System; and

(g) acceptance and settlement of each

ITS System trade that the ITS System

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 421

identifies as effected by such ITS/

ADF[CAES] Market Maker, or if

settlement is to be made through

another clearing member, guarantee of

the acceptance of settlement of such

identified ITS System trade by the

clearing member on the regularly

scheduled settlement date.

[5221] 6521. Suspension or Revocation

of ITS/ADF[CAES] Registration

Failure by an ITS/ADF[CAES] Market

Maker to comply with the ITS Plan or

any of the rules identified herein shall

subject such ITS/ADF[CAES] Market

Maker to censure, fine, suspension or

revocation of its registration as an ITS/

ADF[CAES] Market Maker, or any other

fitting penalty.

[5230] 6530. ITS Operations

(a) All transactions effected through

ITS shall be on a ‘‘regular way’’ basis.

Each transaction effected through ITS

shall be cleared and settled through a

clearing agency registered with the

Commission [which] that maintains

facilities through which ITS

transactions may be compared and

settled.

(b) Any ‘‘commitment to trade,’’

which is transmitted by an ITS/

ADF[CAES] Market Maker to another

ITS participating market center through

ITS, shall be firm and irrevocable for the

period of thirty (30) seconds, [either]

one minute or two minutes (specified in

accordance with subparagraph (7)

below) following transmission by the

sender. All such commitments to trade

shall, at a minimum:

(1) Include the number or symbol

which identifies the ITS/ADF[CAES]

Market Maker;

(2) direct the commitment to a

particular participant market;

(3) specify the security which is the

subject of the commitment;

(4) designate the commitment as

either a commitment to buy or a

commitment to sell;

(5) specify the amount of the security

to be bought or sold, which amount

shall be for one unit of trading or any

multiple thereof;

(6) specify:

(A) A price equal to the offer or bid

price then being furnished by the

destination Participant Market, which

price shall represent the price at or

below which the security is to be bought

or the price at or above which the

security is to be sold, respectively;

(B) a price at the execution price in

the case of a commitment to trade sent

in compliance with the block trade rule;

or

(C) that the commitment is a

commitment to trade ‘‘at the market;’’

(7) specify [either] thirty (30) seconds,

one minute or two minutes as the time

period during which the commitment

shall be irrevocable, but if the time

period is not specified in the

commitment, a two minute period shall

be assumed. It should be noted that the

period of time represented by these

designations may be changed in the

future by action of the ITS Operating

Committee, whose decision as to the

applicable period shall be binding upon

ITS/ADF[CAES] Market Makers;

(8) designate the commitment ‘‘short’’

or ‘‘short exempt’’ whenever it is a

commitment to sell which, if it should

result in an execution in the receiving

market, would result in a short sale to

which the provisions of SEC Rule 10a–

1(a) under the Act would apply.

(c) If a commitment to trade is

directed to an ITS/ADF[CAES] Market

Maker, and the execution of such

commitment exhausts the size of the

quotation being displayed by the ITS/

ADF[CAES] Market Maker, then such

ITS/ADF[CAES] Market Maker shall be

placed in a functional excused

withdrawal state pending the input of a

new two-sided quotation with size into

the Association’s [Consolidated

Quotation Service] ADF. The new twosided quotation required of the ITS/

ADF[CAES] Market Maker will be

entered as promptly as possible into the

Association’s [Consolidated Quotation

Service] ADF.

(d) Transactions in ITS securities

executed [in CAES] by ITS/ADF[CAES]

Market Makers or received through the

ITS System and executed by an ITS/

ADF[CAES] Market Maker are reported

to the CTA Plan Processor [by the CAES

System] at the price specified in the

commitment or if executed at a better

price, the execution price.

[5240] 6540. Pre-Opening

Application—Opening by ITS/

ADF[CAES] Market Maker

The pre-opening application enables

an ITS/ADF[CAES] Market Maker or ITS

Participant Exchange in any participant

market who wishes to open [his] its

market in an ITS Security to obtain

through the ITS System [or CAES], any

pre-opening interest of an ITS

Participant Exchange or other ITS/

ADF[CAES] Market Makers registered in

that security and/or market makers in

other participant markets.

(a) Notification Requirement—

Applicable Price Change, Initial

Notification

(1) Whenever an ITS/ADF[CAES]

Market Maker, in an opening transaction

in any ITS/ADF[/CAES] Security,

anticipates that the opening transaction

will be at a price that represents a

change from the security’s previous

day’s consolidated closing price of more

than the ‘‘applicable price change’’ (as

defined below), [he] its shall notify the

other Participant markets of the

situation by sending a ‘‘pre-opening

notification’’ through the System.

Thereafter, the ITS/ADF[CAES] Market

Maker shall not open the security in

[his] its market until not less than three

minutes after [his] its transmission of

the pre-opening notification. The

‘‘applicable price changes’’ are:

Security Consolidated closing

price

Applicable price

change

(more

than)

Network A ........................................................................................ Under $15 ...................................................................................... 1⁄8 point.

$15 or over .................................................................................... 1⁄4 point.1

Network B ........................................................................................ Under $5 ........................................................................................ 1⁄8 point.

$5 or over ...................................................................................... 1⁄4 point.2

For transactions involving securities trading in decimal-based increments, the ‘‘applicable price changes’’ are:

Network A ................................................................................ Under $15 ...................................................................................... $0.10

$15 or over .................................................................................... $0.25 3

Network B ................................................................................ Under $5 ........................................................................................ $0.10

$5 or over ...................................................................................... $0.25 4

(2) a pre-opening notification shall:

(A) be designated as a pre-opening notification (POA);

422 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(B) identify the ITS/ADF[CAES] Market Maker and the security involved; and

(C) indicate the ‘‘applicable price range’’ by being formatted as a standardized pre-opening administrative message

as follows:

POA MMID/XYZ

(3) The price range shall not exceed the ‘‘applicable price range’’ shown below:

Security Consolidated closing price

Applicable price

change

(more

than)

Network A ....................................................................................... Under $50 ...................................................................................... 1⁄2 point.

$50 or over .................................................................................... 1 point.5

Network B ....................................................................................... Under $10 ...................................................................................... 1⁄2 point.

$10 or over .................................................................................... 1 point.6

For transactions involving securities trading in decimal-based increments, the price range shall not exceed the ‘‘applicable price range’’ shown below:

Security Consolidated price Price

range

Network A ....................................................................................... Under $50 ...................................................................................... $0.50

$50 or over .................................................................................... $1.00 7

Network B ....................................................................................... Under $20 ...................................................................................... $0.50

$10 or over .................................................................................... $1.00 8

1 If the previous day’s consolidated closing price of a Network A Eligible Security exceeded $100 dollars and the security does not underlie an

individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is one dollar. 2 If the previous day’s consolidated closing price of a Network B Eligible Security exceeded $75 and the security is not a Portfolio Deposit Receipt, Index Funds Share, or Trust Issued Receipt, or does not underlie an individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is one dollar. 3 If the previous day’s consolidated closing price of a Network A Eligible Security exceeded $100 dollars and the security does not underlie an

individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is one dollar. 4 If the previous day’s consolidated closing price of a Network B Eligible Security exceeded $75 and the security is not a Portfolio Deposit Receipt, Index Funds Share, or Trust Issued Receipt, or does not underlie an individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is one dollar. 5 If the previous day’s consolidated closing price of an ITS security exceeded $100 dollars and the Security does not underlie an individual

stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is two dollars. 6 If the previous day’s consolidated closing price of a Network B Eligible Security exceeded $75 and the security is not a Portfolio Deposit Receipt, Index Fund[s] Share, or Trust Issued Receipt, or does not underlie an individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is two dollars. 7 If the previous day’s consolidated closing price of an ITS security exceeded $100 dollars and the Security does not underlie an individual

stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is two dollars. 8 If the previous day’s consolidated closing price of a Network B Eligible Security exceeded $75 and the security is not a Portfolio Deposit Receipt, Index Fund[s] Share, or Trust Issued Receipt, or does not underlie an individual stock option contract listed and currently trading on a national securities exchange the ‘‘applicable price change’’ is two dollars.

The price range also shall not straddle

the previous day’s consolidated closing

price, although it may include it as an

endpoint (e.g., a 1⁄8–5⁄8 price range

would be permissible if the previous

day’s consolidated closing price were 1⁄8

or 5⁄8, but not if the closing price were 1⁄4, 3⁄8 or 1⁄8).

For transactions involving securities

trading in decimal-based increments,

the price range also shall not straddle

the previous day’s consolidated closing

price, although it may include it as an

endpoint (e.g., a 40.15—40.65 price

range would be permissible if the

previous day’s consolidated closing

price were 40.15—40.65, but not if the

closing price were within the price

range 40.16—40.64).

(b) Subsequent Notifications

If, after sending a pre-opening

notification, the situation in an ITS/

ADF[CAES] Market Maker’s market

changes [he] it may have to issue a

subsequent pre-opening notification.

The three situations requiring

subsequent notifications are described

below. Subsequent pre-opening

notifications shall be standardized preopening administrative messages. After

sending a subsequent notification, the

ITS/ADF[CAES] Market Maker shall

wait either (1) one minute or (2) until

the balance of the original three-minute

waiting period expires, whichever is

longer, before opening [his] its market

(i.e., if more than one minute of the

initial waiting period has not yet

expired at the time the subsequent

notification is sent, the ITS/ADF[CAES]

Market Maker must wait for the rest of

the period to pass before opening [his]

its market).

(1) Increase or Decrease in Applicable

Price Range

Where, prior to the ITS/ADF[CAES]

Market Maker’s opening of [his] its

market in the security, [his] its

anticipated opening price shifts so that

it (A) is outside of the price range

specified in [his] its pre-opening

notification but (B) still represents a

change from the previous day’s

consolidated closing price of more than

the applicable price change, [he] it shall

issue a replacement pre-opening

notification (an ‘‘additional’’

notification) through the system before

opening [his] its market in the security.

An additional notification contains the

same kind of information as is required

in an original pre-opening notification.

(2) Shift to Within Applicable Price

Change Parameter

(A) The ITS/ADF[CAES] Market

Maker shall, by issuing a ‘‘cancellation’’

notification through the system, notify

the Participant market(s) of the

receiving market maker(s) prior to

opening the security if the price at

which [he] it anticipates opening [his]

its market shifts so that it (i) is outside

of the price range specified in [his] its

pre-opening notification but (ii) does

not represent a change from the

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 423

previous day’s consolidated closing

price of more than the applicable price

change.

(B) Notwithstanding the preceding

sentence, in situations where the price

range in an initial or additional

notification includes price variations

equal to or less than the applicable price

change parameters, the ‘‘cancellation’’

notification signifies that the anticipated

opening price (i) may or may not be

outside of the price range specified in

the pre-opening notification and (ii)

does not represent a change from the

previous day’s consolidated closing

price of more than the applicable price

change.

Example: CTA close at 30. Pre–

Opening Notification sent with any one

of the following price ranges: 30–301⁄2;

301⁄8–305⁄8; or 301⁄4–303⁄4. It is then

determined that the stock will open at

293⁄4 or 297⁄8. Under paragraph (b)(2)(A),

the specialist ‘‘shall’’ send cancellation

notification. If it is subsequently

determined that stock will open at 30,

301⁄8, or 301⁄4, the specialist need not

reindicate stock pursuant to paragraph

(b)(2)(B).

Example for Decimal-Based

Securities: CTA close at 30. Pre-Opening

Notification sent with a price range at or

within the following range: 30.10–30.60.

It is then determined that the stock will

open at a price within the range of 29.75

to 29.99. Under paragraph (b)(2)(A), the

specialist ‘‘shall’’ send cancellation

notification. If it is subsequently

determined that stock will open at a

price within the range of 30–30.25, the

specialist need not reindicate stock

pursuant to paragraph (b)(2)(B).

(3) Participation as Principal Precluded

(‘‘Second Look’’)

If a responding market maker who has

shown in [his] its pre-opening response

interest as a principal at a price better

than the anticipated opening price

would be precluded from participation

as principal in the opening transaction

(e.g., [his] its responding principal

interest is to sell at a price 1⁄8 or more

below the opening price established by

paired agency orders), the ITS/

ADF[CAES] Market Maker[s] shall send

a ‘‘second look’’ notification through the

System, notifying such responding

market maker of the price and size at

which [he] it could participate as

principal (i.e., in the parenthetical

example above, the total amount of the

security that [he] it would have to sell

at the 1⁄8-better price to permit the

opening transaction to occur at that

price).

For securities trading in decimalbased increments, if a responding

market maker who has shown in [his] its

pre-opening response interest as a

principal at a price better than the

anticipated opening price would be

precluded from participation as

principal in the opening transaction

(e.g. [his] its responding principal

interest is to sell at a price .01 or more

below the opening price established by

paired agency orders), the ITS/

ADF[CAES] Market Maker[s] shall send

a ‘‘second look’’ notification through the

System, notifying such responding

market maker of the .01 price and size

at which [he] it could participate as

principal (i.e., in the parenthetical

example above, the total amount of the

security that [he] it would have to sell

at the .01 better price to permit the

opening transaction to occur at that

price).

(c) Tape Indications

If the CTA Plan or the Association’s

rules require[s] or permits that an

‘‘indication of interest’’ (i.e., an

anticipated opening price range) in a

security be furnished to the

consolidated last sale reporting system

prior to the opening of trading or the

reopening of trading following a halt or

suspension in trading in one or more

ITS Securities, then the furnishing of an

indication of interest in such situations

shall, without any other additional

action required of the ITS/ADF[CAES]

Market Maker, (1) initiate the preopening process, and (2) if applicable,

substitute for and satisfy the

requirements of paragraphs (a), (b)(1),

and (b)(2) (while the furnishing of an

indication of interest to the consolidated

last sale reporting system satisfies the

notification requirements of this rule, an

ITS/ADF[CAES] Market Maker should

also transmit the indication through the

System in the format of a standardized

pre-opening administrative message). In

any such situation, the ITS/ADF[/CAES]

Market Maker shall not open or reopen

the security until not less than three

minutes after [his] its transmission of

the opening or reopening indication of

interest. For the purpose of paragraphs

(b)(3), (d), (f), and (g) through (i), ‘‘preopening notification’’ includes an

indication of interest furnished to the

consolidated last sale reporting system.

(d) Pre-Opening Responses—Decision

on Opening Transaction

Subject to paragraph (e), [I]if an ITS/

ADF[CAES] Market Maker [who] that

has issued a pre-opening notification

receives ‘‘pre-opening responses’’

through the system containing

‘‘obligations to trade’’ from market

makers in other Participant markets

(‘‘responding market makers’’), [he] it

shall combine those obligations with

orders [he] it already holds in the

security and, on the basis of this

aggregated information, decide upon the

opening transaction in the security. If

the ITS/ADF[CAES] Market Maker has

received more than one pre-opening

response from a Participant market, [he]

it shall include in such combination

only those obligations to trade from

such Participant market as are specified

in the most recent response, whether or

not the most recent response expressly

cancels the preceding response(s). An

original or revised response received

after the ITS/ADF[CAES] Market Maker

has effected [his] its opening transaction

shall be to no effect.

(e) Pre-Opening Responses From Open

Markets

(1) An ITS/ADF[CAES] Market Maker

must accept only those pre-opening

responses sent to the Association by

market makers in other [p]Participant

markets prior to the opening of their

markets for trading in the security.

Following a halt or suspension in

trading declared by the Association in

an ITS Security, an ITS/ADF[CAES]

Market Maker must accept only those

pre-opening responses sent by market

makers to the Association from other

[p]Participant markets that halted

trading in the security

contemporaneously with the

Association and that had not resumed

trading in the security at the time the

pre-opening response was sent.

(2) In the event that one or more

market makers from [p]Participant

markets that have already opened

trading in a security or, with respect to

a halt or suspension in trading, either

did not halt trading in the security

contemporaneously with the

Association, or has already resumed

trading in the security, respond to a preopening notification in that security, the

ITS/ADF[CAES] Market Maker need not,

but may in [his] its discretion, accept

such responses for the purpose of

inclusion in the opening or reopening

transaction. In the event that a

Participant market opens or, with

respect to a halt or suspension in

trading, resumes trading in a security

subsequent to a market maker in the

Participant market sending a preopening response but prior to the

opening or reopening transaction in

ITS/ADF[CAES], the market maker who

sent the pre-opening response to the

Association must confirm the preopening response by sending an

administrative message through the

[s]System stating that the response

remains valid. If the market maker fails

to so confirm the pre-opening response,

the ITS/ADF[CAES] Market Maker need

424 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

not, but may in [his] its discretion,

accept the original response for the

purpose of inclusion in the opening or

reopening transaction.

(f) Allocation of Imbalances

Whenever pre-opening responses

from one or more responding market

makers include obligations to take or

supply as principal more than 50

percent of the opening imbalance, the

ITS/ADF[CAES] Market Maker may take

or supply as principal 50 percent of the

imbalance at the opening price, rounded

up or down as may be necessary to

avoid the allocation of odd lots. In any

such case, where the pre-opening

response is from more than one

responding market maker, the ITS/

ADF[CAES] Market Maker shall allocate

the remaining imbalance (which may be

greater than 50 percent if the ITS/

ADF[CAES] Market Maker elects to take

or supply less than 50 percent of the

imbalance) among them in proportion to

the amount each obligated [himself]

itself to take or supply as principal at

the opening price in [his] its preopening response, rounded up or down

as may be necessary to avoid the

allocation of odd lots. For the purpose

of this paragraph, multiple responding

market makers in the same ITS Security

in the same Participant market shall be

deemed to be a single responding

market maker.

(g) Treatment of Obligations To Trade

In receiving a pre-opening response,

an ITS/ADF[CAES] Market Maker shall

accord to any obligation to trade as

agent included in the response the same

treatment as [he] it would to an order

entrusted to [him]it as agent at the same

time such obligation was received.

(h) Responses Increasing the

Imbalances

An ITS/ADF[CAES] Market Maker

shall not reject a pre-opening response

that has the effect of further increasing

the existing imbalance for that reason

alone.

(i) Reports of Participation

Promptly following the opening in

any security as to which an ITS/

ADF[CAES] Market Maker issued a preopening notification, the ITS/ADF[/

CAES] Market Maker shall report to

each Participant responsible for a

market in which one or more

responding market makers are located

(1) the amount of the security purchased

and/or sold, if any, by the responding

market maker(s) in the opening

transaction and the price thereof, or (2)

if the responding market maker(s)’s

response included agency or principal

interest at the opening price that did not

participate in the opening transaction,

the fact that such interest did not so

participate.

[Amended eff. Aug. 5, 1991; Mar. 31,

1993; amended by SR–NASD–97–09 eff.

May 30, 1997; amended by SR–NASD–

00–46 eff. Aug. 28, 2000.]

* * * * *

[5250] 6550. Pre-Opening

Application—Openings on Other

Participant Markets

(a) Pre-Opening Responses

Whenever an ITS/ADF[CAES] Market

Maker [who] that has received a preopening notification from another ITS/

ADF[CAES] Market Maker or ITS

Participant Exchange as provided in the

ITS Plan in any ITS Security as to which

[he] it is registered as an ITS/

ADF[CAES] Market Maker wishes to

participate in the opening of that

security in the Participant market from

which the pre-opening notification was

issued, [he] it may do so by sending

obligations to trade through the System

to such Participant market in a preopening response. A pre-opening

response shall be designated as a preopening response (POR), identify the

security, and show the ITS/ADF[CAES]

Market Maker’s buy and/or sell[,]

interest, (if any), both as principal for

[his] its own account (‘‘P’’) and as agent

for orders left with [him]it (‘‘A’’), at each

price level within the price-range

indicated in the pre-opening

notification (e.g., 403⁄8), reflected on a

netted share basis.

For securities trading in decimalbased increments, whenever an ITS/

ADF[CAES] Market Maker [who] that

has received a pre-opening notification

from another ITS/ADF[CAES] Market

Maker or ITS Participant Exchange as

provided in the ITS Plan in any ITS

Security as to which [he] it is registered

as an ITS/ADF[CAES] Market Maker

wishes to participate in the opening of

that security in the Participant market

from which the pre-opening notification

was issued, [he] it may do so by sending

obligations to trade through the System

to such Participant market in a preopening response. A pre-opening

response shall be designated as a preopening response (POR), identify the

security, and show the ITS/ADF[CAES]

Market Maker’s buy and/or sell[,]

interest, (if any), both as principal for

[his] its own account (‘‘P’’) and as agent

for orders left with [him] it (‘‘A’’), at

each price level within the price-range

indicated in the pre-opening

notification (e.g., 40.40 ), reflected on a

netted share basis.

The pre-opening response shall be

formatted as follows:

POR (MMID) BUY [SELL] A–P 403⁄8

For securities trading in decimalbased increments the pre-opening

response shall be:

POR (MMID) BUY (SELL) A–P 40.40

The response may also show market

orders separately.

(b) Revised Responses

An ITS/ADF[CAES] Market Maker

may cancel or modify [his] its preopening response by sending through

the System a revised response that

cancels the obligations to trade

contained in [his] its original response

and, if a modification is desired, that

substitutes new obligations to trade

stating the ITS/ADF[CAES] Market

Maker’s aggregate interest (i.e., [his] its

interest reflected in the original

response plus any additional interest

and/or minus any withdrawn interest) at

each price level. Each succeeding

response, even if it fails to expressly

cancel its predecessor response, shall

supersede the predecessor response in

its entirety. Any revised response shall

be to no effect if received in the

Participant market from which the preopening notification was issued after the

security has opened in such Participant

market.

(c) Pre-Opening Notification From

Other Markets

No ITS/ADF[CAES] Market Maker,

whether acting as principal or agent,

shall send an obligation to trade,

commitment to trade or order in any

security through the System to any other

[p]Participant market[,] prior to the

opening of trading in such security on

such other market (or prior to the

resumption of trading in such security

on such other market following the

initiation of a halt or suspension in

trading in the security) until a preopening notification as to such security

has been issued from such other market

or a quotation has been disseminated

from such other market pursuant to SEC

Rule 11Ac1–1. No ITS/ADF[CAES]

Market Maker that has opened for

trading or, with respect to a halt or

suspension of trading initiated by

another Participant [M]market, did not

halt trading in the security reasonably

contemporaneously with the Participant

[M]market or resumed trading during

such trading halt or suspension, shall

respond to a pre-opening notification.

(d) Sole Means of Pre-Opening Routing

Once a pre-opening notification as to

any security is received by the ITS/

ADF[CAES] Market Maker through the

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 425

System, the ITS/ADF[CAES] Market

Maker[s] in such security shall submit

obligations to trade that security as

principal for [his] its own account to the

market from which the pre-opening

notification was issued only through the

Pre-Opening Application and shall not

send orders to trade that security for

[his] its own account to such market for

participation at the opening in that

market by any other means. However,

this restriction shall not apply to any

order sent to such market by the ITS/

ADF[CAES] Market Maker prior to the

issuance of the pre-opening notification.

(e) Duration of Obligations To Trade

Responses to pre-opening

notifications shall be voluntary, but

each obligation to trade that an ITS/

ADF[CAES] Market Maker includes in

any pre-opening response, or in any

modification of a pre-opening response,

shall remain binding on [him] it, until

the security has opened in the market

from which the pre-opening notification

was issued or until a cancellation or

modification of such obligation has been

received in such market, and until a

subsequent cancellation or modification

thereof has been received in such

market.

(f) Request for Participation Report

The ITS Plan anticipates that an ITS/

ADF[CAES] Market Maker [who] that

has sent one or more obligations to trade

in response to a pre-opening notification

will request a report through the System

as to [his] its participation if [he] it does

not receive a report as required

promptly following the opening. If, on

or following trade date, [he] it does

request a report through the System as

to [his] its participation before 4:00 p.m.

Eastern Time, and [he] it does not

receive a response by 9:30 a.m. Eastern

Time on the next trading day, [he] it

need not accept a later report. If [he] it

fails to so request a report, [he] it must

accept a report until 4:00 p.m. Eastern

Time on the third trading day following

the trade date (i.e., on T+3). The

Association does not intend this

paragraph to relieve [him] U the ITS/

ASD Market Maker of the obligation,

when [he] it does not receive a report,

to request a report as soon as [he] it

reasonably should expect to have

received it.

[Amended eff. Nov. 24, 1989; May 15,

1991; Aug. 5, 1991; amended by SR–

NASD–97–09 eff. May 30, 1997;

amended by SR–NASD–00–46 eff. Aug.

28, 2000.]

[5260]6560. System Trade and

Quotations

[5261]6561. [Obligation To Honor

System Trades] Obligation Before

Issuing External ITS Commitments

[If an ITS/CAES Market Maker or

clearing member acting on his behalf is

reported on the clearing tape (as

adjusted) at the close of any trading day,

or shown by the activity reports

developed by CAES as constituting a

side of a System trade, such ITS/CAES

Market Maker or clearing member shall

honor such trade on the scheduled

settlement date.]

Before formatting any order, bid or

offer into an ITS commitment to trade

and issuing such a commitment to

another ITS participant market, a

member registered as an ITS Market

Maker in an ITS Security shall first

exhaust all interest at or better than

such order, bid or offer which is resident

in the ADF, and then expose for thirty

seconds any remaining balance to all

ADF Participants, whether or not

registered in the ITS Security involved.

[5262]6562. Trade-Throughs

(a) A member registered as an ITS/

ADF[CAES] Market Maker in an ITS/

ADF[CAES] [s]Security, shall avoid

purchasing or selling such security,

whether as principal or agent, at a price

[which] that is lower than the bid or

higher than the offer displayed from an

ITS Participant Exchange or ITS/

ADF[CAES] Market Maker (‘‘tradethrough’’), unless the following

conditions apply:

(1) The size of the bid or offer that is

traded-through is for 100 shares;

(2) the ITS/ADF[CAES] Market Maker

is unable to avoid the trade-through

because of [the] a systems/equipment

failure or malfunction;

(3) the transaction which constituted

the trade-through is not a ‘‘regular way’’

contract;

(4) the bid or offer that is traded[-]

through is being displayed from a

[M]market [C]center whose members are

relieved of their obligations under SEC

Rule 11Ac1–1([C]c)(2) with respect to

such bid or offer;

(5) the bid or offer that is traded[-]

through has caused a locked or crossed

market in the ITS Security;

(6) the commitment received by an

ITS/ADF[CAES] Market Maker which

caused the trade-through was originated

by an ITS Participant Exchange;

(7) The transaction involves (A)

purchases and sales effected by ITS/

ADF[CAES] Market Makers participating

in an opening (or reopening) transaction

or (B) any ‘‘Block Transaction’’ as

defined in the ITS/ADF[CAES] Rules; or

(8) In the case of a third participating

market center trade-through, either:

(A) the ITS/ADF[CAES] Market Maker

who initiated the trade-through (i) had

sent a commitment to trade promptly

following the trade-through that satisfies

the bid or offer traded[-] through, and

(ii) preceded the commitment with an

administrative message stating that the

commitment was in satisfaction of a

third participating market center tradethrough; or

(B) a complaint with respect to the

trade-through was not received by the

Association through the System from

the aggrieved party promptly following

the trade-through, and, in any event,

within ten (10) minutes from the time

the aggrieved party sent a complaint

through the System to the ITS

[p]Participating [m]Market [c]Center that

received the commitment to trade that

caused the trade-through, which first

complaint must have been received

within five (5) minutes from the time

the report of the transaction that

constituted the trade-through was

disseminated over the high speed line of

the consolidated last sale reporting

system.

(b) (1) If a trade-through occurs and a

complaint is promptly received by the

Association either through the ITS

System from the appropriate ITS

Participant Exchange whose member is

the aggrieved party or from an ITS/

ADF[CAES] Market Maker, then:

(A) If ITS/ADF[CAES] Market Makers

are on both sides of a principal trade,

the price of the transaction which

constituted the trade-through shall be

corrected, by agreement of the parties, to

a price at which a trade-through would

not have occurred and the price

correction shall be reported through the

consolidated last sale reporting system;

otherwise (i) the initiating ITS/

ADF[CAES] Market Maker shall satisfy,

or cause to be satisfied, the bid or offer

traded-through in its entirety at the

price of such bid or offer or at the price

that caused the trade-through (as

determined in accordance with

subparagraph (E) below, or, if the

initiating ITS/ADF[CAES] Market Maker

elects not to do so, (ii) the transaction

shall be voided.

(B) If an ITS/ADF[CAES] Market

Maker executed the transaction and the

contra-side was not an ITS/ADF[CAES]

Market Maker (i) the ITS/ADF[CAES]

Market Maker registered in the security

shall satisfy, or cause to be satisfied, the

bid or offer traded-through in its

entirety at the price of such bid or offer,

or, if the ITS/ADF[CAES] Market Maker

elects not to do so, (ii) the price of the

transaction [which] that constituted the

trade-through shall be corrected by the

426 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

ITS/ADF[CAES] Market Maker to a price

at which a trade-through would not

have occurred and the price correction

shall be reported through the

consolidated last sale reporting system.

(C) If ITS/ADF[CAES] Market Makers

are on both sides of a trade and one or

both are acting as agent, the price of the

transaction which constituted the tradethrough shall be corrected, by agreement

of the parties, to a price at which a

trade-through would not have occurred

and the price correction shall be

reported through the consolidated last

sale reporting system; otherwise, the

ITS/ADF[CAES] Market Maker that

initiated the transaction shall satisfy, or

cause to be satisfied, the bid or offer

traded-through in its entirety at the

price of such bid or offer.

(D) Whenever the provisions of

subparagraphs (B) and (C) above apply,

the customer’s order or a portion thereof

[which] that was executed in the

transaction [which] that constituted the

trade-through (whether such order or a

portion thereof was executed by the

member who initiated the trade-through

or by the member on the contra-side of

the transaction, or both) shall receive

the price [which] that caused the tradethrough, or the price at which the bid

or offer traded-through was satisfied, if

it was satisfied pursuant to

subparagraph (B) above, or the adjusted

price, if there was an adjustment

pursuant to subparagraph (B) above,

whichever price is most beneficial to the

order or a portion thereof. Money

differences resulting from the

application of this paragraph shall be

the liability of the member who initiated

the trade-through.

(E) The price at which the bid or offer

traded-through shall be satisfied shall be

the price of such bid or offer except if

(i) the transaction that constituted the

trade-through was of ‘‘block size’’ but

did not constitute a ‘‘block trade’’ (as

those terms are defined in the Block

Trade Rule) and (ii) the ITS/ADF[CAES]

Market Maker who initiated the tradethrough did not make every reasonable

effort to satisfy, or cause to be satisfied,

through the System the bid or offer

traded-through at its price and in its

entirety within two (2) minutes from the

time the report of the transaction that

constituted the trade-through was

disseminated over the high speed line of

the consolidated last sale reporting

system. In the case of such exception,

the price at which the bid or offer

traded-through shall be satisfied shall be

the price that caused the trade-through.

(2) Such complaint shall be

considered promptly received when no

more than five minutes expire from the

time the report of the transaction was

disseminated over the high speed line of

the consolidated last sale reporting

system, unless the transaction is

between an ITS/ADF[CAES] Market

Maker and another ITS/ADF[CAES]

Market Maker or ITS Participant

Exchange. In the latter case, the

complaint must be received within ten

minutes from the time the aggrieved

party sent a complaint through the

System to the ITS/ADF[CAES] Market

Maker or ITS Participant Exchange that

received the commitment to trade that

caused the trade-through, which first

complaint must have been received

within five minutes from the time the

report of the transaction was

disseminated over the high speed line of

the consolidated last sale reporting

system.

(c) (1) The Association shall notify the

ITS/ADF[CAES] Market Maker of any

trade-through complaint received from

an ITS Participant Exchange or ITS/

ADF[CAES] Market Maker. Upon receipt

of such notification, the ITS/ADF[CAES]

Market Maker shall promptly respond to

the complaining ITS Participant

Exchange or ITS/ADF[CAES] Market

Maker. Such response shall set forth

either: (A) the conditions specified in

paragraph (a) above, or (B) the corrective

action to be taken under paragraph (b)

above. If there is more than one ITS/

ADF[CAES] Market Maker that is

registered in the ITS Security and

participating in the transaction, then the

ITS/ADF[CAES] Market Maker that

initiated the transaction will receive

notification of the trade-through

complaint.

(2) If it is ultimately determined that

an ITS/ADF[CAES] Market Maker has

engaged in a trade-through but has not

taken corrective action required by

paragraph (b) above, then the ITS/

ADF[CAES] Market Maker shall be

liable for the lesser of (A) the actual loss

proximately caused by the trade-through

and suffered by the aggrieved party, or

(B) the loss proximately caused by the

trade-through which would have been

suffered by the aggrieved party had [he]

it purchased or sold the security subject

to the trade-through in order to mitigate

[his] its loss and had such purchase or

sale been effected at the ‘‘loss basis

price.’’ For purposes of this

subparagraph the ‘‘loss basis price’’

shall be the price of the next

transaction, as reported by the high

speed line of the consolidated last sale

reporting system in the security in

question, after one hour has elapsed

from the time the complaint is received

(or, if the complaint is so received

within the last hour in which

transactions are reported on the high

speed line of the consolidated last sale

reporting system on any day, then the

price of the opening transaction in such

security reported on such high speed

line on the next day on which the

security is traded).

(3) Any ITS/ADF[CAES] Market

Maker that becomes the subject of a

trade-through by another ITS Participant

Exchange or ITS/ADF[CAES] Market

Maker may take whatever steps [are]

necessary to mitigate any potential loss

resulting from the trade-through of his

bid or offer. Such action shall be

promptly communicated to the

offending ITS Participant market.

(4) The provisions of this tradethrough rule shall not apply in respect

to any Participant Exchange [which]

that does not have in effect a similar

rule imposing similar obligations and

responsibilities.

(5) If a complaint of a purported tradethrough is received by the Association

and the complained-of transaction

resulted from an ITS/ADF[CAES]

Market Maker’s execution of a

commitment to trade received from

another ITS/ADF[CAES] Market Maker

or ITS Participant Exchange, the ITS/

ADF[CAES] Market Maker should, if

circumstances permit, make reasonable

efforts to notify the complaining party,

as promptly as practicable following

receipt of the complaint, (A) that the

transaction was not initiated by the ITS/

ADF[CAES] Market Maker and (B) [of]

the identity of the ITS/ADF[CAES]

Market Maker or ITS Participant

Exchange that originated the

commitment. Neither compliance nor

non-compliance with the preceding

sentence shall be the basis for any

liability of the ITS/ADF[CAES] Market

Maker for any loss associated with the

complained-of transaction.

[5263]6563. Locked or Crossed Markets

(a) A member registered as an ITS/

ADF[CAES] Market Maker in an ITS/

ADF[CAES] Security that makes a bid

(offer) for such security at a price

[which] that equals the offering (bid)

price at that time from an ITS

Participant Exchange or ITS/ADF[CAES]

Market Maker has created what is

referred to in this [r]Rule as a ‘‘locked

market.’’

(b) A member registered as an ITS/

ADF[CAES] Market Maker in an ITS/

ADF[CAES] Security that makes a bid

(offer) for such security at a price

[which] that exceeds (is less than) the

offering (bid) price at that time from an

ITS Participant Exchange or ITS/

ADF[CAES] Market Maker has created

what is referred to in this [r]Rule as a

‘‘crossed market.’’

(c) An ITS/ADF[CAES] Market Maker

[who] that makes a bid or offer and in

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 427

so doing creates a locked or crossed

market with another ITS Participant or

ITS/ADF[CAES] Market Maker shall

promptly send to such other ITS

Participant Exchange or ITS/ADF[CAES]

Market Maker a commitment to trade

seeking either the bid or offer [which]

that was locked or crossed, unless

excused by operation of paragraph (d)

below. Such commitment shall be for

either the number of shares [he] it has

bid for (offered) or the number of shares

offered (bid for) on the ITS Participant

Exchange or by the ITS/ADF[CAES]

Market Maker, whichever is less.

(d) The provisions of paragraph (c)

above shall not apply when:

(1) The bid or offer in the ITS

Participating [m]Market [c]Center is for

100 shares;

(2) the issuance of the commitment to

trade referred to above would be

prohibited by SEC Rule 10a–1 under the

Act;

(3) the ITS/ADF[CAES] Market Maker

[who] that causes a locked or crossed

market is unable to comply with the

provisions of paragraph (c) above

because of a systems/equipment failure

or malfunction;

(4) the bid or offer that causes the

locked or crossed market is not for a

‘‘regular way’’ contract;

(5) the locked or crossed market

occurs at a time when, with respect to

the ITS Security [which] that is the

subject of the locked or crossed market,

members of the ITS [p]Participating

[m]Market [c]Center to which the

commitment to trade would be sent

pursuant to paragraph (c) above are

relieved of their obligations under SEC

Rule 11Ac1–1(c)(2);

(6) the transaction involves (A)

purchases and sales effected by ITS/

[CAES]ADF Market Maker[’]s

participating in an opening or

(reopening) transaction or (B) any

‘‘Block Transaction’’ as defined in the

ITS[/CAES] Rules.

[5264] 6564. Block Transactions

(a) An ITS/ADF[CAES] Market Maker

[who] that executes a ‘‘block

transaction’’ in an ITS[/CAES]

[s]Security in which [he] it is registered

as an ITS/ADF[CAES] Market Maker at

an execution price outside the best

quotation for the security displayed by

any ITS [p]Participant market or other

ITS/ADF[CAES] Market Maker, shall,

upon executing the block trade, send to

each other [p]Participant market and

each ITS/ADF[CAES] Market Maker

displaying a bid or offer (as the case

may be) superior to the execution price,

a commitment to trade, at the execution

price, to satisfy the number of shares

displayed in that [p]Participant market’s

bid or offer.

(b) For purposes of this Rule, a block

transaction shall be a trade that:

(1) Involves 10,000 or more shares of

a common stock traded through ITS (an

‘‘ITS Security’’) or a quantity of any

such security having a market value of

$200,000 or more (‘‘block size’’);

(2) is effected at a price outside the

bid or offer displayed from another ITS

[p]Participating [m]Market [c]Center;

and

(3) involves either:

(A) a cross of block size (where the

member represents all of one side of the

transaction and all or a portion of the

other side); or

(B) any other transaction of block size

(i.e., in which the ITS/ADF[CAES]

Market Maker represents an order of

block size on one side of the transaction

only) that is not the result of an

execution at the current bid or offer of

the ITS/ADF[CAES] Market Maker.

Contemporaneous transactions at the

same price filling an order or orders

then or theretofore represented by the

ITS/ADF[CAES] Market Maker

(including transactions resulting from

commitments to trade sent by the ITS/

ADF[CAES] Market Maker pursuant to

paragraph (a) above) shall be deemed to

constitute a single transaction for the

purpose of this definition.

(c) A ‘‘current bid or offer’’ of the ITS/

ADF[CAES] Market Maker, as that term

is used in paragraph (b)(3)(B) above,

means the price of the current quotation

displayed by the ITS/ADF[CAES]

Market Maker established

independently of the order to buy or

sell.

(d) A ‘‘bid or offer’’ displayed from

another ITS [p]Participating [m]Market

[c]Center (or any derivative phrase), as

that term is used in this Rule, means the

current quotations from another ITS

[p]Participating [m]Market [c]Center

displayed to the ITS/ADF[CAES] Market

Maker as required by the ITS Plan, and

does not include ‘‘away-from-themarket’’ limit orders or other interests

that may be represented in such other

ITS [p]Participating [m]Market

[c]Center.

(e) Inapplicability. Paragraph (a)

above shall not apply under the

following conditions:

(1) The size of the better priced bid or

offer displayed by another ITS

[p]Participating [m]Market [c]Center was

for 100 shares;

(2) the ITS/ADF[CAES] Market Maker

representing the block-size order(s)

made every reasonable effort to satisfy

through ITS a better-priced bid or offer

displayed by another ITS

[p]Participating [m]Market [c]Center but

was unable to because of a systems/

equipment failure or malfunction;

(3) the block trade was not a ‘‘regular

way’’ contract;

(4) the bid or offer that is traded

through is being displayed from a

[m]Market [c]Center whose members are

relieved of their obligations under SEC

Rule 11Ac1–1(c)(2) with respect to such

bid or offer;

(5) the bid or offer that is traded

through has caused a locked or crossed

market in the ITS Security;

(6) the better priced bid or offer was

being displayed from an ITS

[p]Participating [m]Market [c]Center

whose members were relieved of their

obligations with respect to such bid or

offer under SEC Rule 11Ac 1–1(c)(2)

pursuant to the ‘‘unusual market’’

exception to SEC Rule 11Ac1–1(b)(3); or

(7) the better priced bid or offer had

caused a ‘‘locked or crossed market[,]’’

in the ITS Security that was the subject

of the block trade.

[5265. Authority To Cancel or Adjust

Transactions]

[(a) In circumstances in which the

Association deems it necessary to

maintain a fair and orderly market and

to protect investors and the public

interest, the Association may, pursuant

to the procedures set forth in Rule

11890 of the Uniform Practice Code,

declare any transaction arising out of

the use or operation of the ITS[/CAES]

System, null and void on the grounds

that one or more of the terms of the

transaction are clearly erroneous; and

the Association may reallocate stock

between ITS[/CAES] Market Makers to

correct an erroneous transaction.]

[(b) For purposes of this Rule, the

terms of the transaction are clearly

erroneous when there is an obvious

error in any term, such as price, number

of shares or other unit of trading,

identification of the security, or if a

specific commitment to trade has been

executed with the wrong ITS/CAES

Market Maker.]

[5300]6700. THE PORTAL MARKET

[5310]6710. Definitions

For purposes of the PORTAL Market

Rules, unless the context requires

otherwise:

(a) ‘‘Association’’ means the National

Association of Securities Dealers, Inc.

(Association) or its wholly owned

subsidiary, NASD Regulation, Inc. [The

Nasdaq Stock Market, Inc.,] as

determined by the Association.

(a) through (aa) No Change.

428 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

[5320]6720. Requirements Applicable

to PORTAL Securities

[5321]6721. Application for

Designation

(a) Application for designation as a

PORTAL security shall be in the form

required by the Association and shall be

filed by a PORTAL participant.

Applications may be made with or

without the concurrence of the issuer.

The application shall demonstrate to the

satisfaction of the Association that the

security meets or exceeds the

qualification requirements set forth in

Rule 5322.

(b) Designation of a security as a

PORTAL security shall be declared

effective within a reasonable time after

determination of qualification. The

effective date of designation as a

PORTAL security shall be determined

by the Association giving due regard to

the requirements of the PORTAL

Market.

[5322]6722. Qualification Requirements

for PORTAL Securities

(a) To qualify for initial designation

and continued designation in the

PORTAL Market, a security shall:

(1) be:

(A) a restricted security, as defined in

SEC Rule 144(a)(3) under the Securities

Act; or

(B) a security that upon issuance and

continually thereafter only can be sold

pursuant to Regulation S under the

Securities Act, SEC Rule 144A, or SEC

Rule 144 under the Securities Act, or in

a transaction exempt from the

registration requirements of the

Securities Act pursuant to Section 4

thereof and not involving any public

offering;

provided, however, that if the security

is a depositary receipt, the underlying

security shall also be a security that

meets the criteria set forth in

subparagraphs (A) or (B) hereof;

(2) be eligible to be sold pursuant to

SEC Rule 144A under the Securities

Act;

(3) be in negotiable form and not

subject to any restriction, condition or

requirement that would impose an

unreasonable burden on any PORTAL

participant;

(4) be assigned a CUSIP or CINS

security identification number that is

different from any identification number

assigned to any unrestricted securities

of the same class [which] that do not

satisfy paragraph (a)(1)(B); or, if issued

in physical certificate form to investors,

have a legend placed on each certificate

stating that the securities have not been

registered under the Securities Act and

cannot be resold without registration

under the Securities Act or an

exemption therefrom; and

(5) satisfy such additional criteria or

requirements as the Association may

prescribe.

(b) Notwithstanding the provisions of

paragraph (a)(1)(B) of this Rule, if a

PORTAL security is sold pursuant to the

provisions of Rule 144, including Rule

144(k), it will thereby cease being a

PORTAL security and it must be

assigned a CUSIP or CINS security

identification number that is different

from the identification number assigned

to a PORTAL security of the same class.

[5323]6723. Suspension or Termination

of a PORTAL Security Designation

(a) The Association may, in its

discretion, suspend or terminate

designation as a PORTAL security if it

determines that:

(1) The security is not in compliance

with the requirements of the PORTAL

Rules;

(2) a holder or prospective purchaser

that requested issuer information

pursuant to SEC Rule 144A(d)(4) did not

receive the information;

(3) any application or other document

relative to such securities submitted to

the Association contained an untrue

statement of a material fact or omitted

to state a material fact necessary to make

the statements therein not misleading;

or

(4) failure to withdraw designation of

such securities would for any reason be

detrimental to the interests and welfare

of PORTAL participants or the

Association.

(b) The Association will promptly

notify PORTAL participants of the

suspension or termination of a security’s

designation as a PORTAL security. Such

notification may be made through the

facilities of the PORTAL Market.

Suspension or termination shall become

effective in accordance with the terms of

notice by the Association. The

Association also will promptly notify

The Depository Trust Company of the

suspension or termination.

(c) Notwithstanding the suspension or

termination of designation of a security

as a PORTAL security, such security

shall remain subject to all rules of the

Association applicable to the PORTAL

Market until the security is sold in

accordance with the terms of notice by

the Association of the suspension or

termination.

[5324]6724. PORTAL Entry Fees

When a PORTAL participant submits

an application for designation of any

class of securities as a PORTAL security,

it shall pay to the Association a filing

fee of $2,000.00 for an application

covering a security or group of

identifiable securities issuable as part of

a single private placement covered by

the same offering documents, plus

$200.00 per assigned security symbol

that is in addition to the first symbol

assigned.

[5330]6730. Requirements Applicable

to Members of the Association

[5331]6731. Limitations on

Transactions in PORTAL Securities

(a) No member shall sell a PORTAL

security unless:

(1) The sale is to:

(A) an investor or member that the

member reasonably believes is a

‘‘qualified institutional buyer’’ in a

transaction exempt from registration

under the Securities Act by reason of

compliance with Rule 144A;

(B) an investor or member in a

transaction that is exempt from

registration under the Securities Act by

reason of compliance with an applicable

exemption under the Securities Act

other than Rule 144A; or

(C) a member acting as an agent in a

transaction that the member acting as

agent determines is in compliance with

subparagraphs (A) or (B) hereof, and the

selling member determines is exempt

from registration under the Securities

Act by reason of compliance with SEC

Rule 144A or an applicable exemption

under the Securities Act other than SEC

Rule 144A; and

(2) the member maintains in its files

information demonstrating that the

transaction is in compliance with Rule

144A or with any other applicable

exemption from registration under the

Securities Act.

[5332]6732. Reporting Debt and Equity

Transactions in PORTAL Securities

(a) A transaction in a PORTAL

security in which a PORTAL dealer or

PORTAL broker participates shall be

reported to the PORTAL Market system

in a PORTAL transaction report

complying with Rule [5334] 6734 by:

(1) The seller, if each party in the

transaction is either a PORTAL dealer or

a PORTAL broker;

(2) the PORTAL dealer or PORTAL

broker participating in the transaction, if

only one party in the transaction is a

PORTAL dealer or PORTAL broker;

provided, however, that with respect to

transactions that are part of the initial

offering by or on behalf of the issuer or

an affiliate thereof, a PORTAL dealer or

PORTAL broker may comply with its

obligation to submit a PORTAL

transaction report by submitting,

instead, a PORTAL surveillance report

[which] that reports such transaction to

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 429

the Market Regulation Department of

the Association as set forth in Rule

[5336] 6736.

(b) A transaction in a PORTAL

security in which a member

participates, but in which no PORTAL

dealer or PORTAL broker participates,

shall be reported to the Market

Regulation Department of the

Association in a PORTAL nonparticipant report complying with Rule

[5335] 6735 by:

(1) The seller, if each party in the

transaction is a member; or

(2) The member, if only one party in

the transaction is a member.

(c) The member responsible for

submitting a PORTAL transaction report

shall also submit to the Market

Regulation Department of the

Association a PORTAL surveillance

report as set forth in Rule [5336] 6736.

(d) The reporting requirements of this

Rule shall apply to any transaction in a

PORTAL security, including

transactions in reliance on SEC Rule 144

and sales to or purchases from a nonU.S. securities market.

[Rule [5332] 6732 will not be effective

until a date is announced by the NASD.]

[5333]6733. PORTAL Settlement

(a) Transactions in the PORTAL

Market where the PORTAL dealer or

PORTAL broker that enters the PORTAL

transaction report in the PORTAL

Market system designates settlement in

the PORTAL clearance and depository

systems will settle five (5) business days

after the date of the execution of the

transaction, except as otherwise agreed

between the PORTAL participants, in

any currency accepted by the PORTAL

depository organization.

(b) PORTAL securities and funds will

be transferred on the books of the

PORTAL depository system upon

receipt from the PORTAL clearing

system of the necessary settlement

instructions designating settlement in

the PORTAL clearance and depository

systems from the PORTAL transaction

report entered in the PORTAL Market

system by the appropriate PORTAL

dealer or PORTAL broker and subject to

the purchaser meeting the requirements

of the relevant PORTAL depository

organization concerning deposit and

availability of funds in accordance with

the depository organization’s

procedures.

(c) PORTAL dealers and PORTAL

brokers that settle a PORTAL

transaction outside the PORTAL

clearance and depository systems

assume responsibility for the prompt

settlement of the transaction in

accordance with the protocols of the

settlement method used and the

transaction will not be compared in the

PORTAL Market.

[5334]6734. PORTAL Transaction

Reports

(a) Each PORTAL transaction report

shall include: whether the report should

be forwarded to the PORTAL depository

and clearance systems for the clearance

and settlement of the transaction; if the

PORTAL depository and clearance

system is to be used, the identity of the

account where the transaction is to be

settled; if the PORTAL depository and

clearance system is not to be used and

the contra-party is an Association

member, the identity of the Association

member that is the contra-party;

whether the transaction is on an agency

or principal basis; whether the

transaction is a purchase or sale;

whether a sale is a ‘‘short’’ sale; the

quantity of the security; the price of the

security expressed in the currency in

which the security was quoted in the

PORTAL Market; and such additional

information as the Association may

require.

(b) PORTAL transaction reports shall

be entered within 15 minutes after

execution of the transaction during

hours that the PORTAL Market system

accepts PORTAL transaction reports.

The PORTAL Market system shall

accept PORTAL transaction reports from

8:30 a.m. Eastern Time to 6:30 p.m.

Eastern Time. If a transaction is

executed during hours that the PORTAL

Market system does not accept PORTAL

transaction reports, the PORTAL

transaction report shall be entered

between 8:30 a.m. Eastern Time and

9:30 a.m. Eastern Time when the

PORTAL Market system is next open,

with the trade date [of] the date of

execution of the transaction. The

Association, in its discretion, will

establish hours for and additional time

limitations on the entry of PORTAL

transaction reports.

(c) Modification, correction or

cancellation of a PORTAL transaction

report must be entered in the PORTAL

Market system.

(d) The Association will not

disseminate PORTAL transaction

reports that are entered in the PORTAL

Market system between 8:30 a.m.

Eastern Time and 9:30 a.m. Eastern

Time, and between 4:00 p.m. Eastern

Time and 6:30 p.m. Eastern Time. The

Association shall, however, display

daily aggregate volume of transactions

effected pursuant to SEC Rule 144A,

including the volume of transactions

that are entered in the PORTAL Market

system between 8:30 a.m. Eastern Time

and 6:30 p.m. Eastern Time.

[Rule [5334] 6734 will not be effective

until a date is announced by the NASD.]

[5335]6735. PORTAL Non-Participant

Report

(a) Each PORTAL non-participant

report shall include: whether the

transaction is on an agency or principal

basis, whether the transaction is a

purchase or sale; whether a sale is a

‘‘short’’ sale; the quantity of the

security; the price of the security

expressed in the currency in which the

security was quoted in the PORTAL

Market; a representation as to whether

the buyer was a ‘‘qualified institutional

buyer’’ under Rule 144A, a ‘‘nonqualified institutional buyer’’

institution, or an individual investor;

and such additional information as the

Association may require.

(b) PORTAL non-participant reports

shall be submitted to the Market

Regulation Department of the

Association no later than the fifth day

of the month following the month in

which the transaction was effected.

(c) Modification, correction, or

cancellation of a PORTAL nonparticipant report must be submitted in

the manner specified by the

Association.

[Rule [5335] 6735 will not be effective

until a date is announced by the NASD.]

Selected Notices to Members: 95–34.

[5336] 6736. PORTAL Surveillance

Report

(a) Each PORTAL dealer or PORTAL

broker shall submit to the Market

Regulation Department of the

Association, no later than the fifth day

of each month, a PORTAL surveillance

report [which] that reports every

transaction effected during the

preceding month (including

transactions that are part of the initial

offering by or on behalf of the issuer or

an affiliate thereof) for which the

PORTAL dealer or PORTAL broker was

required to submit a PORTAL

transaction report under Rule [5332]

6732, including transactions that are

part of the initial offering by or on

behalf of the issuer or an affiliate

thereof; provided, however, that a

member shall not be required to submit

a PORTAL surveillance report with

respect to any transaction for which the

member was not required to submit a

PORTAL transaction report.

(b) The PORTAL surveillance report

shall be submitted in the manner

specified by the Association and shall

include for each transaction reported: a

representation as to whether the buyer

was a ‘‘qualified institutional buyer’’

under Rule 144A, a ‘‘non-qualified

430 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

institutional buyer’’ institution, or an

individual investor; the information

required under Rule [5334] 6734; and

such additional information as the

Association may require.

(c) Modification, correction, or

cancellation of a PORTAL surveillance

report must be submitted in the manner

specified by the Association.

[Rule [5336] 6736 will not be effective

until a date is announced by the NASD.]

[5337]6737. Comparison of PORTAL

Transaction Reports Entered in the

PORTAL Market System

Each PORTAL dealer and PORTAL

broker that executes a purchase

transaction in a PORTAL security with

another PORTAL dealer or PORTAL

broker shall, within 30 minutes after

execution of a transaction for which a

report is entered into the PORTAL

Market system that designates

settlement in the PORTAL clearance

and depository system:

(a) Accept a PORTAL transaction

report entered by the seller by entering

in the PORTAL Market system a

matching PORTAL comparison report

with the same terms as the seller’s

PORTAL transaction report;

(b) reject a PORTAL transaction report

entered by the seller by entering a

PORTAL comparison report in the

PORTAL Market system with different

terms than those included in the seller’s

PORTAL transaction report; or

(c) enter an affirmation or rejection in

the PORTAL Market system with

respect to the PORTAL transaction

report entered by the seller.

[5338]6738. Registration Requirements

for PORTAL Dealers

(a) A member of the Association that

registers as a PORTAL dealer shall also

be registered as a PORTAL qualified

investor.

(b) To register as a PORTAL dealer, a

member shall:

(1) Execute a participation agreement;

(2) demonstrate to the satisfaction of

the Association that it is eligible to

purchase securities under the financial

criteria of SEC Rule 144A as it applies

to a dealer registered under Section 15

of the Exchange Act by submission of

the member’s most recent Audited

Financial Statements filed with the SEC

pursuant to SEC Rule 17a–5(d) under

the Exchange Act, with the supporting

schedules required pursuant to

subparagraph (3) thereof, and any other

information that the Association, in its

discretion, may require to be submitted

to the Association;

(3) be a member of the Association

and qualified to do business as a general

securities firm; and

(4) agree to comply with the

requirements of the PORTAL Rules,

including the filing of such documents

and the payment of such fees as may be

required by the Association.

[5339]6739. Registration Requirements

for PORTAL Brokers

To register as a PORTAL broker a

member shall comply with Rule [5338]

6738(b)(1), (b)(3), and (b)(4).

[5340]6740. Continuing Requirements

for PORTAL Dealers and PORTAL

Brokers

(a) For a PORTAL dealer to continue

to be eligible to participate as a PORTAL

dealer in the PORTAL Market, the

PORTAL dealer shall demonstrate to the

satisfaction of the Association that it

continues to be eligible to purchase

securities under the financial criteria of

SEC Rule 144A as it applies to a dealer

registered under Section 15 of the

Exchange Act by submitting to the

Association, concurrent with the

dealer’s SEC filing, the dealer’s Audited

Financial Statements filed with the SEC

pursuant to SEC Rule 17a-5(d) under the

Exchange Act, with the supporting

schedules required pursuant to

subparagraph (3) thereof, and any other

information that the Association, in its

discretion, may require to be submitted

to the Association.

(b) The Association may suspend or

terminate the registration of a PORTAL

dealer or PORTAL broker if:

(1) It fails to comply with any

requirement of the PORTAL Rules with

respect to any PORTAL security;

(2) any application or other document

submitted by or on behalf of it

contained an untrue statement of a

material fact or omitted to state a

material fact necessary to make the

statements therein not misleading; or

(3) it fails to file any documents or to

pay any fee as may be required by the

Association.

(c) Nothing in paragraph (b) shall

prohibit the Association from taking

such other action as it deems necessary

under the circumstances against a

PORTAL dealer or a PORTAL broker for

violations of the requirements of the

PORTAL Rules, any other rule or

regulation of the Association, or any

rule or regulation of the SEC.

[5350]6750. Requirements Applicable

to PORTAL Qualified Investors

[5351]6751. Registration Requirements

for PORTAL Qualified Investors

(a) No investor other than a dealer

registered under Section 15 of the

Exchange Act shall subscribe to

PORTAL Market information directly

through the PORTAL Market system or

indirectly through a third-party

distributor unless:

(1) The investor executes a subscriber

agreement;

(2) a PORTAL dealer represents to the

Association that it reasonably believes

that the investor is a ‘‘qualified

institutional buyer’’ under SEC Rule

144A; or

(3) the investor demonstrates to the

satisfaction of the Association that it is

a ‘‘qualified institutional buyer’’ under

SEC Rule 144A; or

(4) the Association reasonably

believes that the investor is a ‘‘qualified

buyer’’ under SEC Rule 144A.

(b) The Association may classify

PORTAL qualified investors in such

manner as it deems advisable for the

purpose of conforming with SEC Rule

144A.

(c) A PORTAL dealer that submits a

representation to the Association

pursuant to paragraph (a)(2) shall

maintain in its files the basis for its

representation that it reasonably

believes that the investor satisfies the

‘‘qualified institutional buyer’’

requirements of SEC Rule 144A.

(d) No member of the Association may

register as a PORTAL qualified investor

unless the member is also registered as

a PORTAL dealer.

[5352]6752. Continuing Requirements

for PORTAL Qualified Investors

(a) For an investor other than a dealer

registered under Section 15 of the

Exchange Act, to continue to be eligible

to subscribe to PORTAL Market

information:

(1) A PORTAL dealer shall represent

annually to the Association that it

reasonably believes that the investor is

a ‘‘qualified institutional buyer’’ under

SEC Rule 144A; or

(2) the investor shall demonstrate to

the satisfaction of the Association or the

Association shall form a reasonable

belief that the investor is a ‘‘qualified

institutional buyer’’ under SEC Rule

144A.

(b) A PORTAL dealer that submits a

representation to the Association

pursuant to paragraph (a)(1) shall

maintain in its files the basis for its

representation that it reasonably

believes that an investor satisfied the

‘‘qualified institutional buyer’’

requirements of SEC Rule 144A.

[5353]6753. Suspension or Termination

of the Registration of a PORTAL

Qualified Investor

(a) The Association shall suspend or

terminate the registration of a PORTAL

qualified investor if:

(1) Any application or document

submitted by or on behalf of the

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 431

PORTAL qualified investor contained

an untrue statement of material fact or

omitted to state a material fact necessary

to make the statements therein not

misleading; or

(2) the investor fails to comply with

any requirements of the PORTAL Rules,

or to file any documents or to pay any

fee as may be required by the

Association.

(b) Nothing in paragraph (a) shall

prohibit the Association from taking

such action as it deems necessary under

the circumstances against a PORTAL

qualified investor that is also a member

of the Association for violations of the

requirements of the PORTAL Rules, any

other rule or regulation of the

Association, or any rule or regulation of

the SEC.

[5360]6760. Denial, Suspension or

Termination Procedures

A determination by the Association to

deny, suspend or terminate the

designation of a PORTAL security or

registration of a PORTAL participant

may be reviewed upon application by

the aggrieved person pursuant to the

provisions of the Rule [4800] 9700

Series.

[5370]6770. PORTAL Market

Transactions

[5371]6771. Normal PORTAL Market

Hours of Operation

The PORTAL Market shall be open for

business from 9:30 a.m. Eastern Time to

4:00 p.m. Eastern Time, or as otherwise

determined by the Association.

[5372]6772. PORTAL Quotations

The PORTAL Market will accept

prices and quotations from PORTAL

dealers and PORTAL brokers that are

one- or two-sided, firm or indicative.

[5373]6773. PORTAL Contracts

The existence and terms of each

PORTAL contract shall be conclusively

established by a compared PORTAL

transaction report pertaining to the

underlying transaction in a PORTAL

security. Notwithstanding the foregoing,

the parties to any PORTAL contract may

modify or correct the terms of any

transaction in a PORTAL security in a

manner consistent with the rules of the

PORTAL Market.

[5374]6774. PORTAL Fees

PORTAL participants shall pay to the

Association a fee for PORTAL

transactions or such other fees as

determined by the Association,

including those set forth in Rule [5324]

6724. The Board of Governors shall have

the power to impose, alter, or amend

such fees from time to time pursuant to

Article VI, Section 1 of the By-Laws.

[5375]6775. ‘‘When, As and If Issued’’

Trading

PORTAL securities that are of a new

issue of securities, primary or

secondary, may trade ‘‘when, as and if

issued’’ in the PORTAL Market

subsequent to effectiveness of the

designation of the securities as PORTAL

securities, provided; however, that the

lead manager shall:

(a) Establish a settlement date for the

securities based on their anticipated

availability; and

(b) in the event of any subsequent

delay in the established settlement date,

shall enter in the PORTAL Market a

corrected PORTAL transaction report

designating a substitute date for

settlement and cancel the existing

PORTAL transaction report.

[5376]6576. ‘‘Short’’ Sales

(a) ‘‘Short’’ sale transactions in

PORTAL securities may be entered in

the PORTAL Market. ‘‘Short’’ sale

transactions shall be identified as such

in the PORTAL transaction report.

(b) The settlement date for ‘‘short’’

sales in PORTAL securities shall be

negotiated by the parties.

(c) The provisions of Rule [3370] 5100

and IM–5100 that relate to ‘‘short’’ sale

transactions are applicable to

transactions in PORTAL securities.

(d) The Association may adopt such

restrictions on ‘‘short’’ sales, and the

borrowing and return of securities, as it

may deem necessary to prevent

violation of the registration

requirements of the Securities Act in

connection with the transactions in the

PORTAL Market.

[5377]6577. Stabilizing Bids

(a) A PORTAL dealer may enter a

stabilizing bid in the PORTAL Market

subject to compliance with SEC Rules

10b-6 and 10b-7 under the Exchange

Act, which bid shall be identified in the

PORTAL Market. When a stabilizing bid

is entered, it shall be available for all

outstanding securities in the PORTAL

Market of the same class being offered.

(b) A PORTAL dealer shall notify the

Association in writing prior to the first

day in which the stabilizing bid is to

appear in the PORTAL Market. The

notice shall include:

(1) The name of the security and its

PORTAL symbol;

(2) the date on which the distribution

of the security will commence; and

(3) a copy of any offering document

related to the distribution.

The PORTAL dealer shall contact the

Association for authorization on the day

that the dealer wishes to enter the

stabilizing bid.

(c) A PORTAL dealer shall not enter

a stabilizing bid at the same time it is

quoting any other bid or offer in the

issue.

[5378]6578. Partial Delivery

A PORTAL qualified investor is

required to accept a partial delivery on

any PORTAL contract due, provided the

portion remaining undelivered is not an

amount that includes an odd-lot [which]

that was not part of the original

transaction.

[5379]6779. Close-out Procedures—

‘‘Buying-In’’

A PORTAL contract [which] that has

not been completed by the seller

according to its terms may be closed by

the buyer not sooner than the third

business day following the date delivery

was due, in accordance with the

following procedure:

(a) Notice of ‘‘Buy-In’’

(1) Written notice of ‘‘buy-in’’ shall be

delivered to the seller at the seller’s

office not later than 12 noon, the seller’s

local time, two business days preceding

the execution of the proposed ‘‘buy-in.’’

(2) For purposes of this provision,

written notice shall include an

electronic notice through a medium that

provides for an immediate return receipt

capability. Such electronic media shall

include but not be limited to facsimile

transmission and a computerized

network facility.

(b) Information Contained in the ‘‘BuyIn’’ Notice

(1) Every notice of ‘‘buy-in’’ shall state

the date of the PORTAL contract to be

closed, the quantity and contract price

of the PORTAL securities covered by

said contract, the settlement date of said

PORTAL contract and any other

information deemed necessary to

properly identify the PORTAL contract

to be closed. Such notice shall state

further that unless delivery is effected at

or before a certain specified time, which

may not be prior to 2:30 p.m. Eastern

Time, the PORTAL security may be

‘‘bought-in’’ on the date specified for the

account of the seller.

(2) Notice may be redelivered

immediately to another PORTAL dealer

or PORTAL broker from whom the

securities involved are due in the form

of a re-transmitted notice (re-transmit).

Re-transmitted notice of buy-in must be

delivered to subsequent PORTAL

dealers or PORTAL brokers not later

than one business day preceding the

time and date of execution of the

proposed buy-in.

432 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(c) Seller’s Failure to Deliver After

Receipt of Notice

On failure of the seller to effect

delivery in accordance with the ‘‘buyin’’ notice, or to obtain a stay as

hereinafter provided, the buyer may

close the PORTAL contract by

purchasing all or part of the PORTAL

securities necessary to satisfy the

amount requested in the ‘‘buy-in’’

notice. Securities delivered subsequent

to the receipt of the ‘‘buy-in’’ notice

should be considered as delivered

pursuant to the ‘‘buy-in’’ notice.

Delivery of the requisite amount of

securities as stated in the ‘‘buy-in’’

notice or execution will also operate to

close-out all PORTAL contracts covered

under re-transmitted notices of buy-in

issued pursuant to the original notice of

buy-in. A ‘‘buy-in’’ may be executed by

a PORTAL dealer from its long position

and/or from customers’ accounts

maintained with such PORTAL dealer.

In all cases, PORTAL dealers must be

prepared to defend the price at which

the ‘‘buy-in’’ is executed relative to the

current market at the time of the ‘‘buyin’’.

(d) ‘‘Buy-In’’ Not Completed

In the event that a ‘‘buy-in’’ is not

completed pursuant to the provisions of

paragraph (b) hereof on the day

specified in the notice of ‘‘buy-in,’’ or as

such date may be extended pursuant to

the provisions of paragraph (f) hereof,

said notice shall expire at the close of

business on the day specified in the

notice of buy-in.

(e) Partial Delivery by Seller

Prior to the closing of a PORTAL

contract on which a ‘‘buy-in’’ notice has

been given, the buyer shall accept any

portion of the PORTAL securities called

for by the PORTAL contract, provided

the portion remaining undelivered at

the time the buyer proposes to execute

the ‘‘buy-in’’ is not an amount which

includes an odd-lot [which] that was

not part of the original transaction.

(f) Securities in Transit

If prior to the closing of a PORTAL

contract on which a ‘‘buy-in’’ notice has

been given, the buyer receives from the

seller written or comparable electronic

notice stating that the securities are: (1)

In transfer; (2) in transit; (3) are being

shipped that day; or (4) are due from a

depository and giving the certificate

numbers, except for those securities due

from the depository, then the buyer

must extend the execution date of the

‘‘buy-in’’ for a period of seven (7)

calendar days from the date delivery

was due under the ‘‘buy-in.’’

(g) Notice of Executed ‘‘Buy-In’’

The party executing the ‘‘buy-in’’

shall immediately upon execution, but

not later than the close of business, local

time where the seller maintains its

office, notify the PORTAL dealer or

PORTAL broker for whose account the

securities were bought as to the quantity

purchased and the price paid. Such

notification should be in written or

electronic form having immediate

receipt capabilities. If this written media

is not available, the telephone shall be

used for the purpose of same day

notification, and written or similar

electronic notification having next day

receipt capabilities must also be sent out

simultaneously. In either case, formal

confirmation of purchase along with a

billing or payment (depending upon

which is applicable) should be

forwarded as promptly as possible after

the execution of the buy-in. Notification

of the execution of a ‘‘buy-in’’ shall be

given to succeeding broker/dealers to

whom a re-transmitted notice was

issued pursuant to paragraph (b) using

the same procedures stated herein. If a

re-transmitted ‘‘buy-in’’ is executed, it

will operate to close-out all contracts

covered under the re-transmitted

notices.

(h) ‘‘Close-Out’’ under Association or

Exchange Rulings

(1) When a national securities

exchange makes a ruling that all open

contracts with a particular member, who

is also a PORTAL dealer or PORTAL

broker, should be closed-out

immediately (or any similar ruling),

PORTAL dealers and PORTAL brokers

may close-out contracts as directed by

the exchange.

(2) When the Association issues

notification that all open contracts with

the PORTAL dealer or PORTAL broker

in question should be closed-out

immediately, PORTAL dealers or

PORTAL brokers may close-out

contracts as directed by the Association.

(3) Within the meaning of this section,

to close-out immediately shall mean

that (A) ‘‘buy-ins’’ may be executed

without prior notice of intent to ‘‘buyin’’ and (B) ‘‘sell-outs’’ may be executed

without making prior delivery of the

securities called for.

(4) All close-outs executed pursuant

to the provisions of this subparagraph

shall be executed for the account and

liability of the PORTAL dealer or

PORTAL broker in question.

Notification of all close-outs shall

immediately be sent to such PORTAL

dealer or PORTAL broker.

(i) Failure to Deliver and Liability

Notice Procedures

(1) If a contract is for warrants, rights,

convertible securities or other securities

[which] that (A) have been called for

redemption; (B) are due to expire by

their terms; (C) are the subject of a

tender or exchange offer; or (D) are

subject to other expiring events such as

the record date for the underlying

security and the last day on which the

securities must be delivered or

surrendered (the ‘‘expiration date’’) is

the settlement date of the contract or

any later day, the receiving member may

deliver a Liability Notice to the

delivering member as an alternative to

the close-out procedures set forth in

paragraphs (a) through (g) of this Rule.

Such Notice must be issued using

written or comparable electronic media

having immediate receipt capabilities

no later than one business day prior to

the latest time and date of the offer or

other event in order to obtain the

protection provided by this provision.

(2) If the delivering PORTAL dealer or

PORTAL broker fails to deliver the

securities on the expiration date, the

delivering PORTAL dealer or PORTAL

broker shall be liable for any damages

[which] that may accrue thereby. A

Liability Notice delivered in accordance

with this provision shall serve as

notification by the receiving member of

the existence of a claim for damages. All

claims for such damages shall be made

promptly.

(3) If the above procedures are not

utilized, contracts may be ‘‘bought-in’’

without prior notice, after normal

delivery hours established in the

community where the buyer maintains

its office, on the expiration date. Such

buy-in execution shall be for the

account and risk of the defaulting

PORTAL dealer or PORTAL broker.

(j) Information on Notices

Notices of ‘‘buy-in’’ and ‘‘retransmitted buy-in’’ shall include all

information contained in the sample

forms prescribed by the Association.

(k) ‘‘Buy-In’’ Desk Required

PORTAL dealers or PORTAL brokers

shall have a ‘‘buy-in’’ section or desk

adequately staffed to process and

research all ‘‘buy-ins’’ during normal

business hours.

(l) ‘‘Buy-In’’ of Accrued Securities

Securities in the form of stock, rights

or warrants [which] that accrue to a

purchaser shall be deemed due and

deliverable to the purchaser on the

payable date. Any such securities

remaining undelivered at that time shall

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 433

be subject to the ‘‘buy-in’’ procedures as

provided in this Rule.

[5380]6780. Close-Out Procedures—

‘‘Selling-Out’’

A contract [which] that has not been

completed by the buyer according to its

terms may be closed by the seller in

accordance with the following

procedures:

(a) Conditions Permitting ‘‘Sell-Out’’

Upon failure of the buyer to accept

delivery in accordance with the terms of

the contract, and lacking a properly

executed Reclamation Form, the seller

may, without notice, ‘‘sell-out’’ in the

PORTAL Market and for the account

and liability of the party in default all

or any part of the securities due or

deliverable under the contract.

(b) Notice of ‘‘Sell-Out’’

The party executing a ‘‘sell-out’’ as

prescribed above shall, as promptly as

possible on the day of execution, by

written or comparable electronic notice,

notify the PORTAL dealer or PORTAL

broker for whose account and risk such

securities were sold of the quantity sold

and the price received, and shall

promptly mail or deliver formal

confirmation of such sale.

[5390]6790. Miscellaneous

[5391]6791. Arbitration

The facilities of [the Association’s

Arbitration Department] NASD Dispute

Resolution, Inc., and the procedures of

the Code of Arbitration Procedure shall

be available to PORTAL participants to

resolve disputes arising from PORTAL

transactions and transfers or activities

related thereto.

[5392]6792. Rules of the Association

(a) The following Rules of the

Association and Interpretative Material

thereunder are specifically applicable to

transactions and business activities

relating to the PORTAL Market:

(1) Rules 0113, 0114, 0115, 2110,

2120, 2230, 2240, 2250, 2260, 2270,

2310, 2410, 2420, 2430, 2440, 2510,

2760, 2770, 2780, 3010, 3120, 3310,

3320, 3330, 3370, and 8210;

(2) the Rule 8100 and 8300 Series; and

(3) IM–2310–2, IM–2420–1, IM–2440,

IM–3310, and IM–3320.

(b) The following Rules of the

Association and Interpretative Material

thereunder are specifically applicable to

transactions and business activities

relating to the PORTAL Market, with the

exceptions specified below:

(1) Rule 2320, except for paragraph

(g), which requires that a member obtain

quotations from three dealers to

determine the best inter-dealer market

for the subject security;

(2) Rule 2330, except for paragraph

(d); and

(3) Rule 3110, except paragraph (b)(2).

(c) The following Rules of the

Association are applicable to members

and persons associated with members

regardless of the member’s participation

in transactions in the PORTAL Market:

(1) Rules 0111, 0112, 0120, and 0121.

(2) Rules 2210, 3020, 3030, 3040,

3050, 3060, 3130, 3140, and 3340.

(d) The following Rules of the

Association and Interpretative Material

thereunder are not applicable to

transactions and business activities

relating to the PORTAL Market:

(1) Rules 1130, 2450, 2520, 2710,

2730, 2740, 2750, 2810, 2820, 2830,

2860, 3210, and 3360; and

(2) IM–2110–1.

* * * * *

5400. Clearance and Settlement

(a) A market maker shall clear and

settle transactions effected otherwise

than on an exchange in ADF-eligible

securities that are eligible for net

settlement through the facilities of a

registered clearing agency that uses a

continuous net settlement system. This

requirement may be satisfied by direct

participation, use of direct clearing

services, or by entry into a

correspondent clearing arrangement

with another member that clears trades

through such an agency.

(b) Notwithstanding paragraph (a),

transactions in listed securities may be

settled ‘‘ex-clearing’’ provided that both

parties to the transaction agree.

Selected NASD Notices to Members:

94–73.

* * * * *

6000. NASD SYSTEMS AND

PROGRAMS

The 6100 Series is replaced in its

entirety by the following proposed rule

language:

6100. TRACS TRADE COMPARISON

SERVICE

6110. Definitions

(a) The term ‘‘Browse’’ shall mean the

function of TRACS that permits a

Participant to review (or query) for

trades in the system identifying the

Participant as a party to the transaction,

subject to the specific uses contained in

the TRACS Users Guide.

(b) The term ‘‘Clearing Broker/Dealer’’

or ‘‘Clearing Broker’’ shall mean the

member firm that has been identified in

the TRACS system as principal for

clearing and settling a trade, whether for

its own account or for a correspondent

firm.

(c) The term ‘‘Correspondent

Executing Broker/Dealer’’ or

‘‘Correspondent Executing Broker’’ shall

mean the member firm that has been

identified in the TRACS system as

having a correspondent relationship

with a clearing firm whereby it executes

trades and the clearing function is the

responsibility of the clearing firm.

(d) The term ‘‘Introducing Broker/

Dealer’’ or ‘‘introducing broker’’ shall

mean the member firm that has been

identified in the TRACS system as a

party to the transaction, but does not

execute or clear trades.

(e) The term ‘‘Participant’’ shall mean

any member of NASD in good standing

that uses the TRACS system as an

NASD Registered Market Maker or CQS

Market Maker according to the

requirements of Rule 4611 or Rule 6320,

an ECN registered in accordance with

Rule 4623, an Order Entry Firm, or a

clearing broker/dealer, correspondent

executing broker/dealer, or introducing

broker/dealer.

(f) The terms ‘‘Participant,’’ ‘‘TRACS

Order Entry Firm,’’ ‘‘correspondent

executing broker/dealer,’’

‘‘correspondent executing broker,’’

‘‘introducing broker/dealer,’’

‘‘introducing broker,’’ ‘‘clearing broker/

dealer,’’ and ‘‘clearing broker’’ shall

also include, where appropriate, the

Non-Member Clearing Organizations

listed in Rule 6120(a)(5) below and their

qualifying members.

(g) The term ‘‘Parties to the

Transaction’’ shall mean the executing

brokers, introducing brokers and

clearing brokers, if any.

(h) The term ‘‘Reportable TRACS

Transaction’’ shall mean those

transactions in a TRACS eligible

security that are required to be

submitted to NASD pursuant to the Rule

4630, 6400, and 6620 Series. The term

shall also include transactions in

TRACS eligible securities that are for

less than one round lot, and those

transactions that are to be compared

and locked-in for settlement.

(i) The term ‘‘Reporting Party’’ shall

mean the TRACS Participant that is

required to input the trade information,

according to the requirements in NASD

Rule 4633.

(j) The term ‘‘Trade Reporting and

Comparison Service’’ or ‘‘TRACS’’ shall

mean the automated system owned and

operated by NASD that reports trades

and compares trade information entered

by TRACS participants and submits

‘‘locked-in’’ trades to Depository Trust

Clearing Corporation (DTCC) for

clearance and settlement; transmits

reports of the transactions automatically

to the Securities Information Processor,

if required, for dissemination to the

434 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

public and the industry; and provides

participants with monitoring

capabilities to facilitate participation in

a ‘‘locked-in’’ trading environment.

(k) The term ‘‘TRACS ECN’’ shall

mean a member of NASD that is an

electronic communications network

(‘‘ECN’’) that elects to display orders in

the NASD Alternative Display Facility

pursuant to Rule 4623 and is a member

of a registered clearing agency for

clearing or comparison purposes or has

a clearing arrangement with such a

member. This term shall also include an

NASD member that is an alternative

trading system (‘‘ATS’’) that displays

orders in the NASD Alternative Display

Facility pursuant to Rule 4623 and is a

member of a registered clearing agency

for clearing or comparison purposes or

has a clearing arrangement with such a

member.

(l) The term ‘‘TRACS Eligible

Security’’ shall mean all Nasdaq

securities, all Consolidated Quotation

Service (CQS) securities traded pursuant

to unlisted trading privileges, all nonexchange-listed securities as defined in

the Rule 6600 series, and all Direct

Participation Programs as defined in the

Rule 6900 series.

(m) The term ‘‘TRACS Market Maker’’

shall mean a member of NASD that is

registered as an NASD or CQS Market

Maker and is a member of a registered

clearing agency for clearing or

comparison purposes or has a clearing

arrangement with such a member.

(n) The term ‘‘TRACS Order Entry

Firm’’ shall mean a member of NASD

that is a firm that executes orders but

does not act as a market maker in the

instant transaction and is a member of

a registered clearing agency for clearing

or comparison purposes or has a

clearing arrangement with such a

member.

6120. Participation in TRACS Trade

Comparison Feature by

Participants in the NASD

Alternative Display Facility 

The following Rules 6120 through

6190 apply to members that effect

transactions in ADF-eligible securities

otherwise than on an exchange.

(a) Mandatory Participation for Clearing

Agency Members

(1) Participation in TRACS trade

comparison feature is mandatory for

any NASD member that effects

transactions in ADF-eligible securities

otherwise than on an exchange that are

not locked-in and sent directly to

Deposit Trust Clearing Corporation

(‘‘DTCC’’) by that member. All members,

whether or not they must participate in

the TRACS trade comparison feature,

must comply with the trade reporting

requirements described in Rule 4633.

(2) Participation in the TRACS trade

comparison feature as a Market Maker

shall be conditioned upon the TRACS

Market Maker’s initial and continuing

compliance with the following

requirements:

(A) Execution of, and continuing

compliance with, a TRACS trade

comparison Participant Application

Agreement;

(B) membership in, or maintenance

of, an effective clearing arrangement

with a member of a clearing agency

registered pursuant to the Act;

(C) registration as an NASD Market

Maker or ECN for Nasdaq or CQS

securities pursuant to Rule 4611 or Rule

6320, if applicable, and compliance

with all applicable rules and operating

procedures of NASD and the

Commission;

(D) maintenance of the physical

security of the equipment located on the

premises of the TRACS Market Maker to

prevent unauthorized entry of

information into the TRACS trade

comparison feature; and 

(E) acceptance and settlement of each

trade that the TRACS trade comparison

feature identifies as having been

effected by such TRACS Market Maker,

or if settlement is to be made through

a clearing member, guarantee or the

acceptance and settlement of each

TRACS identified trade by the clearing

member on the regularly scheduled

settlement date. 

(3) Participation in the TRACS trade

comparison feature as an Order Entry

Firm shall be conditioned upon the

Order Entry Firm’s initial and

continuing compliance with the

following requirements: 

(A) Execution of, and continuing

compliance with, a TRACS trade

comparison Participant Application

Agreement; 

(B) membership in, or maintenance

of, an effective clearing arrangement

with a member of a clearing agency

registered pursuant to the Act; 

(C) compliance with all applicable

rules and operating procedures of NASD

and the Commission; 

(D) maintenance of the physical

security of the equipment located on the

premises of the TRACS Order Entry

Firm to prevent the unauthorized entry

of information into the TRACS trade

comparison feature; and 

(E) acceptance and settlement of each

trade that the TRACS trade comparison

feature identifies as having been

effected by such TRACS Order Entry

Firm, or if settlement is to be made

through a clearing member, guarantee of

the acceptance and settlement of each

TRACS identified trade by the clearing

member on the regularly scheduled

settlement date. 

(4) Participation in the TRACS trade

comparison feature as a Clearing Broker

shall be conditioned upon the Clearing

Broker’s initial and continuing

compliance with the following

requirements: 

(A) Execution of, and continuing

compliance with, a TRACS trade

comparison Participant Application

Agreement; 

(B) membership in a clearing agency

registered pursuant to the Act; 

(C) compliance with all applicable

rules and operating procedures of NASD

and the Commission; 

(D) maintenance of the physical

security of the equipment located on the

premises of the TRACS Clearing Broker

to prevent the unauthorized entry of

information into the TRACS trade

comparison feature; and 

(E) acceptance and settlement of each

trade that the TRACS trade comparison

feature identifies as having been

effected by itself or any of its

correspondents on the regularly

scheduled settlement date. 

(5) Participation in the TRACS trade

comparison feature as an ECN shall be

conditioned upon the ECN’s initial and

continuing compliance with the

following requirements: 

(A) execution of, and continuing

compliance with, a TRACS trade

comparison Participant Application

Agreement; 

(B) membership in, or maintenance of

an effective clearing arrangement with a

member of, a clearing agency registered

pursuant to the Act; 

(C) compliance with all applicable

rules and operating procedures of NASD

and the Commission; 

(D) maintenance of the physical

security of the equipment located on the

premises of the ECN to prevent the

unauthorized entry of information into

the TRACS trade comparison feature;

and

(E) acceptance and settlement of each

trade that the TRACS trade comparison

feature identifies as having been

effected by such TRACS ECN, or if

settlement is to be made through a

clearing member, guarantee of the

acceptance and settlement of each

TRACS identified trade by the clearing

member on the regularly scheduled

settlement date.

(6) Each TRACS trade comparison

Participant shall be obligated to inform

NASD of non-compliance with any of

the participation requirements set forth

above.

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 435

(b) Participant Obligations in TRACS

(1) Access to TRACS

Upon execution and receipt by NASD

of the TRACS trade comparison

Participant Application Agreement, a

TRACS trade comparison Participant

may commence input and validation of

trade information in TRACS eligible

securities. TRACS trade comparison

Participants may access the service via

NASD terminals or Workstations or

through computer interface during the

hours of operation specified in the

TRACS Users Guide. Prior to such

input, all TRACS comparison

Participants, including those that have

trade report information submitted to

NASD by any third party, must obtain

from NASD a unique identifying Market

Participant Symbol (‘‘MMID’’ or

‘‘MPID’’), and use that identifier for

trade reporting and audit trail purposes.

(2) Market Maker Obligations

(A) TRACS Market Makers shall

commence participation in the TRACS

trade comparison feature by initially

contacting the TRACS Operation Center

to verify authorization for submitting

trade data to the TRACS system for

TRACS eligible securities.

(B) A TRACS Market Maker that is a

self-clearing firm shall be obligated to

accept and clear each trade that the

TRACS trade comparison feature

identifies as having been effected by

that Market Maker.

(C) A TRACS Market Maker that is an

introducing broker or a correspondent

executing broker shall identify its

clearing broker when it becomes an

TRACS trade comparison participant

and notify the TRACS Operation Center

if its clearing broker is to be changed;

this will necessitate execution of a

revised TRACS trade comparison

Participant Application Agreement.

(D) If at any time a TRACS Market

Maker fails to maintain a clearing

arrangement, it shall be removed from

the TRACS trade comparison feature,

and be precluded from participation as

a Market Maker in Nasdaq and CQS

securities pursuant to the requirements

of 6300 Series until such time as a

clearing arrangement is reestablished

and notice of such arrangement, with an

amended TRACS trade comparison

Participant Application Agreement, is

filed with NASD. If, however, the NASD

finds that the TRACS Market Maker’s

failure to maintain a clearing

arrangement is voluntary, the

withdrawal of quotations will be

considered voluntary and unexcused

pursuant to Rule 4619.

(3) Order Entry Firm Obligations

(A) TRACS Order Entry Firms shall

commence participation in the TRACS

trade comparison feature by initially

contacting the TRACS Operation Center

to verify authorization for submitting

trade data to the TRACS system for

TRACS eligible securities.

(B) A TRACS Order Entry Firm that is

a self-clearing firm shall be obligated to

accept and clear each trade that the

TRACS trade comparison feature

identifies as having been effected by the

Order Entry Firm.

(C) A TRACS Order Entry Firm that is

an introducing broker or a

correspondent executing broker shall

identify its clearing broker when it

becomes a TRACS trade comparison

Participant and notify the TRACS

Operations Center if its clearing broker

is to be changed; this change will

necessitate execution of a revised

TRACS trade comparison Participant

Application Agreement.

(D) If at any time a TRACS Order

Entry Firm fails to maintain a clearing

arrangement, it shall be removed from

the TRACS trade comparison feature

until such time as a clearing

arrangement is reestablished, and notice

of such arrangement, with an amended

TRACS trade comparison Participant

Application Agreement, is filed with

NASD.

(4) Clearing Broker Obligation

TRACS clearing brokers shall be

obligated to accept and clear as a party

to the transaction each trade that the

system identifies as having been effected

by itself or any of its correspondent

executing brokers. Clearing brokers may

cease to act as principal for a

correspondent executing broker at any

time provided that notification has been

given to, received and acknowledged by

the TRACS Operations Center and

affirmative action has been completed

by the Center to remove the clearing

broker from the TRACS trade

comparison feature for that

correspondent executing broker. The

clearing broker’s obligation to accept

and clear trades for its correspondents

shall not cease prior to the completion

of all of the steps detailed in this

subparagraph (4).

(5) ECN Obligations

(A) TRACS ECNs shall commence

participation in the TRACS trade

comparison feature by initially

contacting the TRACS Operations

Center to verify authorization for

submitting trade data to the TRACS

trade comparison feature for TRACS

eligible securities.

(B) A TRACS ECN that is a selfclearing firm shall be obligated to

accept and clear each trade that the

TRACS trade comparison feature

identifies as having been effected by the

ECN.

(C) A TRACS ECN that is an

introducing broker or a correspondent

executing broker shall identify its

clearing broker when it becomes a

TRACS trade comparison Participant

and notify the TRACS Operations

Center if its clearing broker is to be

changed; this change will necessitate

execution of a revised TRACS trade

comparison Participant Application

Agreement.

(D) If at any time a TRACS ECN fails

to maintain a clearing arrangement, it

shall be removed from the TRACS trade

comparison feature until such time as a

clearing arrangement is reestablished,

and notice of such arrangement, with an

amended TRACS trade comparison

Participant Application Agreement, is

filed with NASD.

Selected NASD Notices to Members:

Notice to Members 98–82.

6130. Trade Report Input

(a) Reportable TRACS Transactions

A member choosing to submit a trade

to the NASD for comparison shall report

the trade to TRACS. TRACS will also

process trades that are submitted on an

automatic locked-in basis for

transmission to NSCC. All trades that

are reportable transactions pursuant to

NASD Rule 4633 will be transmitted to

the applicable securities information

processor; however, only those trades

that are subject to regular way

settlement and are not already lockedin trades will be compared and lockedin through TRACS. Trades that are

reported as other than regular way

settlement (i.e., Cash, Next-Day, Seller’s

Option) will not be compared in TRACS

or reported to DTCC. All transactions in

Direct Participation Program securities

shall be reported to TRACS pursuant to

the Rule 6900 Series as set forth therein.

(b) When and How Trade Reports Are

Submitted to TRACS

(1) TRACS trade comparison

Participants who are Reporting

Members that choose to submit a trade

for comparison shall transmit to TRACS

the information required by Rule 4633

(e) or (f), as applicable, within 90

seconds of execution.

(2) A TRACS trade comparison

Participant who is a Non-Reporting

Member to a transaction shall, within

twenty (20) minutes after execution

accept (or decline, if applicable) a

transaction submitted by the Reporting

436 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

Member for comparison through

TRACS. A Non-Reporting Member has

an obligation to ensure that the

information that it transmits or accepts

in TRACS is timely, accurate and

complete. Therefore, if a Non-Reporting

Member accepts a transaction in TRACS

transmitted by the Reporting Member

for comparison through TRACS, then

the Non-Reporting Member shall be

deemed to have adopted all of the data

elements required by Rule 4633(e) or (f),

as applicable, concerning the NonReporting Member’s side of the

transaction, absent any subsequent

modification of the trade through

TRACS.

(3) Trades not required to be reported

for public dissemination may still be

compared and locked-in through

TRACS.

(4) Reporting NASD Members may

conduct the following functions in

TRACS pursuant to TRACS

specifications established by the NASD:

(i) MMID Trade Entry; (ii) Trade

Cancellation; and (iii) Trade Break.

(5) Non-Reporting NASD Members

may conduct the following functions in

TRACS pursuant to TRACS

specifications established by the NASD:

(i) Trade Accept; (ii) Trade Decline; and

(iii) Trade Break.

(6) If a TRACS Report from a

Reporting Member did not include a

necessary OATS order number for

OATS/TRACS matching from the NonReporting Member’s perspective, the

Non-Reporting Member shall submit a

non-published TRACS Report to

compare the trades.

(7) A party entering a trade report into

the TRACS trade comparison feature

shall use a designated symbol to denote

whether the party is submitting the

trade report as the Reporting Member or

the Non-Reporting Member.

6140. TRACS Processing

Locked-in trades may be determined

through the TRACS trade comparison

feature through one of the following

methods:

(a) Trade Acceptance

The reporting party enters its version

of the trade into the system and the

contra party reviews the trade report

and accepts or declines the trade. An

acceptance results in a locked-in trade;

a declined trade report is purged from

the TRACS system at the end of trade

date processing;

(b) Aggregate Volume Match

A batch type comparison will be run

at the end of trade date and will

aggregate volume of previously entered

uncompared trade reports (if all other

matching fields agree) in order to effect

matching;

(c) T+N Trade Processing

T+N entries may be submitted until

5:15 p.m. each business day. At the end

of daily matching, all declined trade

entries will be purged from the TRACS

system. TRACS will not purge any open

trade (i.e. unmatched or unaccepted) at

the end of its entry day, but will carryover such trades to the next business

day for continued comparison and

reconciliation. TRACS will

automatically lock in and submit to

NSCC as such any carried-over T to

T+21 (calendar day) trade if it remains

open as of 2:30 p.m. on the next

business day. TRACS will not

automatically lock in T+22 (calendar

day) or older open ‘‘as-of’’ trades that

were carried-over from the previous

business day; these trades will be

purged by TRACS at the end of the

carry-over day if such trades remain

open. Members may re-submit these

T+22 or older ‘‘as-of’’ trades into

TRACS on the next business day for

continued comparison and

reconciliation for up to one calendar

year.

Selected NASD Notices to Members

94–73.

6150. Reserved

6160. Obligation to Honor Trades

If a TRACS trade comparison

Participant is reported by TRACS as a

party to a trade that has been treated as

locked-in and sent to DTCC,

notwithstanding any other agreement to

the contrary, that party shall be

obligated to act as a principal to the

trade and shall honor such trade on the

scheduled settlement date.

6170. Audit Trail Requirements

The data elements specified in Rule

6130(b) are critical to NASD’s

compilation of a transaction audit trail

for regulatory purposes. As such, all

member firms using the TRACS Service

have an ongoing obligation to input

Rule 6130(b) information accurately and

completely.

6180. Reserved

6190. Termination of TRACS Service

NASD may, upon notice, terminate

TRACS service as to a Participant in the

event that a TRACS Participant fails to

abide by any of the rules or operating

procedures of the TRACS service or

NASD, or fails to honor contractual

agreements entered into with NASD or

its subsidiaries, or fails to pay promptly

for services rendered by the TRACS

Service.

* * * * *

6200. To be replaced in its entirety by

SR–NASD–99–65, which currently is

expected to be effective on February 1,

2002.

* * * * *

The 6300 through 6500 Series are

replaced in their entirety by the

following proposed rule language.

6300. CONSOLIDATED

QUOTATIONS SERVICE (CQS)

6310. General

The Rule 6300 through 6500 Series

govern trading by members in CQS/CTA

securities otherwise than on an

exchange.

6320. Registration as a CQS Market

Maker

(a) Quotations and quotation sizes in

reported securities may be entered into

the Consolidated Quotations Service

(CQS) through the NASD Alternative

Display Facility only by an NASD

member registered with it as a CQS

market maker.

(b) An NASD member, including an

operator of an ECN/ATS seeking

registration as a CQS market maker,

shall file an application with NASD.

The application shall certify the

member’s good standing with NASD

and shall demonstrate compliance with

the net capital and other financial

responsibility provisions of the Act. A

member’s registration as a CQS market

maker shall become effective upon

receipt by the member of notice of

approval of registration by NASD. It

shall be sufficient to obtain registration

as a CQS market maker with NASD for

a member to demonstrate proof that it

is a registered CQS market maker with

Nasdaq in good standing.

(c) A CQS market maker registered in

a reported security may become

registered in additional reported

securities by entering a registration

request via an NASD Alternative

Display Facility terminal. Registration

shall become effective at the time the

registration request is entered.

(d) An NASD member that becomes

registered as a CQS market maker in an

issue shall enter quotations in the issue

on the effective date of the issue’s

authorization. If quotations are not

entered on the effective date of

authorization and the CQS market

maker remains inactive in the issue for

five (5) business days, the CQS market

maker’s registration in the issue will be

terminated.

(e) Any CQS market makers registered

in reported securities that are eligible

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 437

for inclusion in the Intermarket Trading

System (ITS) may be registered as

market makers in ITS and, if they so

choose, shall be subject to the Rule 6500

Series.

6330. Obligations of CQS Market

Makers

(a) Pursuant to SEC Rule 11Ac1–1, a

CQS market maker’s quotations in

reported securities are required to be

firm for the size displayed or, if no size

is displayed, for a normal unit of

trading. If a market maker displays

quotations in a reported security in both

a national securities exchange and

NASD’s CQS System, the market maker

shall maintain identical quotations in

each system.

(b) A CQS market maker’s quotation

must be at least one normal unit of

trading.

(c) A CQS market maker shall be

obligated to have available in close

proximity to the NASD Alternative

Display Facility terminal at which it

makes a market in a CQS security a

quotation service that disseminates the

bid price and offer price then being

furnished by or on behalf of other

national securities exchanges and CQS

market makers trading and quoting that

CQS security.

(d) Computer-Generated Quotations

(1) General Prohibition—Except as

provided below, this Rule prohibits the

automatic updating or tracking of inside

quotations in CQS by computergenerated quote systems. This ban is

necessary to offset the negative impact

on the capacity and operation of NASD

systems regarding certain systems that

track changes to the inside quotation

and automatically react by generating

another quote to keep the market

maker’s quote away from the best

market, without any cognizable human

intervention.

(2) Exceptions to the General

Prohibition—Automated updating of

quotations is permitted when:

(A) The update is in response to an

execution in the security by that firm

(such as execution of an order that

partially fills a market maker’s

quotation size);

(B) it requires a physical, cognizable

entry (such as a manual entry to the

market maker’s internal system which

then automatically forwards the update

to the NASD system);

(C) the update is to reflect the receipt,

execution, or cancellation of a customer

limit order;

(D) it is used to expose a customer’s

market or marketable limit order for

price improvement opportunities; or 

(E) it is used to equal or improve

either or both sides of the national best

bid or offer (‘‘NBBO’’), or add size to the

NBBO. 

(e) Minimum Price Variation for

Decimal-Based Quotations

(1) The minimum quotation

increment for securities authorized for

decimal pricing as part of the SECapproved Decimals Implementation

Plan for the Equities and Options

Markets shall be $0.01. 

(f) Members that display priced

quotations on a real-time basis for CQS

securities in two or more market centers

that permit quotation updates on a realtime basis must display the same priced

quotations for the security in each

market center. 

Cross Reference—IM–4613, Autoquote

Policy

6340. Normal Business Hours

A CQS market maker shall be open

for business as of 9:30 a.m. Eastern

Time and shall close no earlier than

4:00 p.m. Eastern Time. An NASD

market maker may remain open for

business on a voluntary basis for any

period of time between 4:00 p.m.

Eastern time and 6:30 p.m. Eastern

Time. A CQS market maker whose

quotes are open after 4:00 p.m. Eastern

Time shall be obligated to comply, while

their quotes are open, with all NASD

Rules that are not by their express

terms, or by an official interpretation of

NASD, inapplicable to any part of the

4:00 p.m. to 6:30 p.m. Eastern Time

period. 

6350. Withdrawal of Quotations

(a) Any registered CQS market maker

(excluding ECNs) that initiates a preopening application and does not enter

and maintain continuous two-sided

quotations in the security on the same

trading day may not re-register to enter

quotations in such security for twenty

(20) business days unless NASD

Alternative Display Facility Operations

grants an excused withdrawal. 

(b) A CQS market maker that wishes

to withdraw quotations in a reported

security shall contact NASD Alternative

Display Facility Operations to obtain

excused withdrawal status prior to

withdrawing its quotations. Excused

withdrawal status based on illness,

vacations or physical circumstances

beyond the CQS market maker’s control

may be granted for up to five (5)

business days, unless extended by

NASD Alternative Display Facility

Operations. Excused withdrawal status

based on investment activity or advice

of legal counsel, accompanied by a

representation that the condition

necessitating the withdrawal of

quotations is not permanent in nature,

may, upon written request, be granted

for not more than sixty (60) days. The

withdrawal of quotations because of

pending news, a sudden influx of orders

or price changes, or to effect

transactions with competitors shall not

normally constitute acceptable reasons

for granting excused withdrawal status,

unless NASD has initiated a trading halt

for ITS Market Makers in the security,

pursuant to Rule 5200. 

6360. Voluntary Termination of

Registration

A CQS market maker may voluntarily

terminate its registration in a reported

security by withdrawing its quotations

from the NASD Alternative Display

Facility. A CQS market maker that

voluntarily terminates its registration in

a reported security may not, however,

re-register as a CQS market maker in

that security for two (2) business days. 

6370. Suspension and Termination

of Quotations by NASD Action

NASD may, pursuant to the

procedures set forth in NASD’s Code of

Procedure as set forth in the Rule 9000

Series, suspend, condition, limit,

prohibit or terminate a CQS market

maker’s authority to enter quotations in

one or more reported securities for

violations of the applicable

requirements or prohibitions of the Rule

4000, 5000 and 6300 Series. Selected

NASD Notices to Members: 94–81. 

6400. REPORTING

TRANSACTIONS IN CTA-ELIGIBLE

SECURITIES

The provisions of this Rule 6400

Series shall apply to all transactions

effected by members otherwise than on

an exchange in securities listed on an

exchange (other than Nasdaq) that are

required to be reported to the

Consolidated Tape (‘‘eligible

securities’’), as provided in the Plan

filed by NASD pursuant to SEC Rule

11Aa3–1 under the Act (‘‘Plan’’). Rule

6420 shall not apply to transactions

executed through the Intermarket

Trading System by market makers

registered as CQS market makers. 

Selected NASD Notices to Members:

94–81.

6410. Definitions

(a) Unless the context requires

otherwise, terms used herein shall have

the meaning below. Terms not

specifically defined below shall have the

meaning in the By-Laws and NASD

Rules, SEC Rule 11Aa3–1 and the Plan.

438 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

(b) ‘‘Consolidated Tape’’ means the

consolidated transaction reporting

system for the dissemination of last sale

reports in eligible securities required to

be reported pursuant to the Plan. 

(c) ‘‘Eligible securities’’ means all

common stocks, preferred stocks, longterm warrants, and rights entitling the

holder to acquire an eligible security,

listed or admitted to unlisted trading

privileges on the American Stock

Exchange or the New York Stock

Exchange, and securities listed on

regional stock exchanges, which

substantially meet the original listing

requirements of the New York Stock

Exchange or the American Stock

Exchange. A list of eligible securities

listed on regional stock exchanges is

contained in Rule 6450. An updated list

of eligible securities will be provided to

members from time to time. 

(d) ‘‘Initial Public Offering’’—a

security is subject to an ‘‘initial public

offering’’ if: (1) the offering of the

security is registered under the

Securities Act of 1933; and (2) the issuer

of the security, immediately prior to

filing the registration statement with

respect to such offering, was not subject

to the reporting requirements of Section

13 or 15(d) of the Act. 

(e) ‘‘Non-Registered Member’’ shall

have the meaning as defined in NASD

Rule 4200. 

(f) ‘‘Transaction effected through the

NASD Alternative Display Facility’’

shall have the meaning as defined in

Rule 4100. 

(g) ‘‘Registered Member’’ means a

member of NASD that is registered as a

CQS market maker, pursuant to Rule

6320, in a particular eligible security. A

member is a Registered Member in only

those eligible securities for which it has

registered as a CQS market maker. A

member shall cease being a Registered

Member in an eligible security when it

has withdrawn or voluntarily terminated

its quotations in that security or when

its quotations have been suspended or

terminated by action of NASD. 

(h) ‘‘Registered ECN’’ means a

member of NASD that is an electronic

communications network (‘‘ECN’’) that

has chosen to register with NASD and

meets the terms of registration set forth

in the NASD-provided agreement. A

member is a Registered ECN in only

those eligible securities for which it is

registered with NASD. A member shall

cease being a Registered ECN in an

eligible security when it has withdrawn

or voluntarily terminated its quotations

in that security or when its quotations

have been suspended or terminated by

action of NASD. The term ‘‘Registered

ECN’’ shall also include NASD members

that are alternative trading systems

(‘‘ATS’’), subject to SEC Regulation

ATS, that comply with the requirements

of this paragraph. 

6420. Transaction Reporting

(a) General

(1) This Rule governs the reporting of

trades in eligible securities through the

NASD’s Trade Reporting and

Comparison Service (‘‘TRACS’’). 

(2) All times referenced in this Rule

are Eastern time. 

(3) For Purposes of this Rule, the term

‘‘Reporting NASD Member’’ or

‘‘Reporting Member’’ shall mean an

NASD member with the trade reporting

obligation as set forth in Rule 6420(c). 

(4) For purposes of this Rule, the term

‘‘Non-Reporting NASD Member’’ or

‘‘Non-Reporting Member’’ shall mean

the contra side of a trade reported by a

Reporting Member. 

(5) For purposes of this Rule, the term

‘‘normal market hours’’ means from

9:30 a.m. to 4:00 p.m. All times

referenced in this Rule are Eastern

Time. 

(b) When and How Transactions are

Reported

(1) Reporting NASD Members shall

transmit to TRACS, within 90 seconds

after execution, last sale reports of

transactions in eligible securities

effected by members otherwise than on

an exchange during the trading hours of

the Consolidated Tape. Transactions

not reported within 90 seconds after

execution shall be designated as late

and such trade reports must include the

time of execution. Reporting NASD

Members shall also transmit to TRACS,

within 90 seconds after execution, last

sale reports of transactions in eligible

securities effected by members

otherwise than on an exchange between

4:00 p.m. and 6:30 p.m.; trades executed

and reported after 4:00 p.m. shall be

designated as ‘‘.T’’ trades to denote their

execution outside normal market hours.

Transactions not reported within 90

seconds after execution must include

the time of execution on the trade

report.

(2) (A) Reporting NASD Members

shall report transactions in eligible

securities effected otherwise than on an

exchange outside the hours of 9:30 a.m.

and 6:30 p.m. Eastern Time as follows:

(i) By transmitting the individual

trade reports to TRACS on the next

business day (T+1) between 8:00 a.m.

and 6:30 p.m. Eastern Time; 

(ii) by designating the entries ‘‘as/of’’

trades to denote their execution on a

prior day; and 

(iii) by including the time of

execution. 

(c) Which Party Reports Transaction

(1) Transactions executed on an

exchange are reported by the exchange

and shall not be reported by members. 

(2) For transactions between two

Registered Members or Registered ECNs,

the Registered Market Maker or ECN

representing the sell side shall report

the transaction. 

(3) For transactions between a

Registered Member or Registered ECN

and a Non-Registered Member, the

Registered Member or Registered ECN

shall report the transaction. 

(4) For transactions between two NonRegistered Members, the Non-Registered

Member representing the sell side shall

report the transaction.

(5) For transactions between a

member and a customer, the member

shall report the transaction. 

(6) For transactions between a

member and a broker-dealer that is not

a member of NASD, the member shall

report the transaction. 

(7) For all transactions between an

NASD member and an NASD member

that is also a member of Nasdaq or

another national securities exchange,

where the reporting party has a choice

of reporting venues and chooses not to

report to Nasdaq or another national

securities exchange, the reporting party

described in (1) through (6) above shall

report the transaction to the NASD. 

(d) Information To Be Reported—Two

Party Trade Reports

(1) A two party trade report is a last

sale report that denotes a trade between

one Reporting NASD member and one

Non-Reporting Member. The Reporting

NASD Member is denoted as the

(‘‘MMID’’) side of the trade report and

the Non-Reporting Member is denoted

as the (‘‘OEID’’) side of the report. 

(2) Each Two Party Last Sale Report

Submitted by a Reporting NASD

Member Should Contain: 

(A) Security identification symbol

(SECID); 

(B) Number of shares or bonds; 

(C) Price of the transaction as

required by paragraph (g) below;

(D) A designated symbol denoting

whether the transaction, from the

Reporting NASD Member’s perspective,

is a buy, sell, sell short, sell short

exempt, or cross; 

(E) If known, a designated symbol

denoting whether the transaction, from

the perspective of the Non-Reporting

Member, is a buy, sell, sell short, or sell

short exempt; 

(F) A designated symbol denoting

whether the transaction, from the

perspective of the Reporting Member, is

as principal, riskless principal, or agent; 

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 439

(G) If known, a designated symbol

denoting whether the transaction, from

the perspective of the Non-Reporting

Member, is as principal, riskless

principal, or agent; 

(H) Execution time for any transaction

not reported within 90 seconds of

execution; 

(I) The market participant identifier of

the Reporting Member and the NonReporting Member; 

(J) Reporting Member clearing broker; 

(K) Reporting Member Executing

Broker in case of a ‘‘give up;’

(L) Non-Reporting Member Executing

Broker; 

(M) Non-Reporting Member

introducing broker in case of a ‘‘give

up;’

(N) Non-Reporting Member clearing

broker; 

(O) A designated symbol denoting

whether the trade report should be

published; 

(P) A designated symbol denoting

whether the trade report should be

compared in TRACS; 

(Q) If the contra side to the trade

report is a customer of the Reporting

Member, the Reporting Member shall

denote that the trade is an internalized

trade with the designated symbol; 

(R) If the contra side to the trade

report is a Non-NASD member, the

Reporting Member shall indicate with

the designated symbol that the contra

side is a non-member. 

(S) For two party trade reports

submitted pursuant to an Automated

Give Up (‘‘AGU’’) arrangement or a

Qualified Service Representative

(‘‘QSR’’) Agreement, subparagraphs (d)

(2) (E) and (G) are mandatory. 

(e) Information To Be Reported—Three

Party Trade Reports

(1) A three party trade report is a

single last sale trade report that denotes

one Reporting Member and two contra

parties. The Reporting Member is

denoted as the MMID side of the trade

report and the two non-reporting sides

are denoted as the OEID side of the

trade report. In a three party report, the

Reporting Member is the buyer to one

OEID and the seller to the other OEID.

Registered ECNs shall only submit three

party trade reports. Risklnnnqess

principal trades may be submitted as

three party trade reports. 

(2) Each Three Party Trade Report

Submitted by a Reporting Member shall

contain the following information: 

Transaction Information

(A) Security Identification Symbol

(SECID); 

(B) Number of shares or bonds; 

(C) Price of the transaction as

required by paragraph (g) below; 

(D) Execution time for any transaction

not reported within 90 seconds of

execution; 

(E) The market participant identifies

of the Reporting Member and the two

Non-Reporting Members; 

(F) A designated symbol denoting

whether the trade should be published;

MMID Side

(G) All three party trade reports from

ECNs must be marked as agency cross

transactions; 

(H) All three party trade reports from

Non-ECNs must be denoted as riskless

principal trade reports and shall

include a designated symbol denoting

whether the trade between the non-ECN

and the buy-side OEID is a sell, sell

short, or sell short exempt transaction; 

(I) Reporting Member clearing broker; 

(J) Reporting Member Executing

Broker in the case of a ‘‘give up,’’ if

applicable; 

Buy Side OEID

(K) Buy Side OEID executing broker; 

(L) Buy Side OEID introducing broker

in case of a ‘‘give up’’; 

(M) Buy Side OEID clearing broker; 

(N) If known, a designated symbol

denoting whether the trade, from the

Buy Side OEID’s perspective, is as

principal, riskless principal, or agent; 

(O) If the Buy Side OEID is a customer

of the Reporting Member, the Reporting

Member shall denote that the trade is an

internalized trade with the designated

symbol; 

(P) If the Buy Side OEID is a nonNASD member, the Reporting Member

shall indicate with the designated

symbol that the buy side OEID is a nonmember; 

(Q) A designated symbol denoting

whether the trade between the MMID

and the Buy Side OEID shall be

compared in TRACS; 

Sell Side OEID

(R) Sell Side OEID executing broker; 

(S) Sell Side OEID introducing broker

in case of a ‘‘give up’’; 

(T) Sell Side OEID clearing broker; 

(U) If known, a designated symbol

denoting whether the trade, from the

Sell Side OEID’s perspective, is as

principal, riskless principal, or agent; 

(V) If known, a symbol denoting

whether the trade, from the Sell Side

OEID’s perspective, is a sell, sell short,

or sell short exempt transaction; 

(W) If the Sell Side OEID is a customer

of the Reporting Member, the Reporting

Member shall denote that the trade is an

internalized trade with the designated

symbol; 

(X) If the Sell Side OEID is a nonNASD Member, the Reporting Member

shall indicate with the designated

symbol that the buy side OEID is a nonmember; and 

(Y) A designated symbol denoting

whether the trade between the MMID

and the Sell Side OEID shall be

compared in TRACS. 

(Z) If the transactions between the

Buy Side OEID and the Reporting

Member is reported pursuant to an AGU

arrangement or a QSR agreement,

subparagraphs (e) (2) (N) is mandatory. 

(AA) If the transaction between the

Sell Side OEID and the Reporting

Member is reported pursuant to an AGU

arrangement or a QSR agreement,

subparagraphs (e) (2) (U) and (V) are

mandatory. 

(f) Trade Report Modifiers

(1) Reporting Members shall append

the following trade report modifiers to a

last sale report if applicable: 

(A) .SLD, if the trade is executed

during normal market hours and it is

reported later than 90 seconds after

execution; 

(B) .SNN, if the trade is a Seller’s

Option Trade, .NN denotes the number

of days for delivery; 

(C) .C, if the trade is a Cash Trade; 

(D) .ND, if the trade is a Next Day

Trade; 

(E) .W, if the trade occurs at a price

based on an average weighting or

another special pricing formula; 

(F) .T, if the trade is executed outside

of normal market hours; 

(G) .O, if the trade is price beyond

certain price validation parameters as

established by the NASD; and 

(H) Any other trade report modifier

approved for use by the Securities and

Exchange Commission. 

(2) It will be a violation of this Rule

for a Reporting Member to fail to

append a required trade modifier or to

append a modifier that is not required. 

(3) A Reporting Member shall not

append a .O modifier to a trade report

unless the trade price is beyond certain

price validation parameters as

established by the NASD. 

(4) The Association seeks to

emphasize the obligations of members

to report securities transactions within

90 seconds after execution. All

reportable transactions not reported

within 90 seconds after execution shall

be reported as late, and the Association

routinely monitors members’

compliance with the 90 second

requirement. If the Association finds a

pattern or practice of unexcused late

reporting, that is, repeated reports of

executions after 90 seconds without

reasonable justification or exceptional

circumstances, the member may be

found to be in violation of Rule 2110.

440 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

Exceptional circumstances will be

determined on a case by case basis and

may include instances of system failure

by a member or service bureau, or

unusual market conditions, such as

extreme volatility in a security, or in the

market as a whole. Timely reporting of

all transactions is necessary and

appropriate for the fair and orderly

operation of the Association’s

marketplace, and the Association will

view noncompliance as a rule violation. 

(g) Procedures for Reporting Price and

Volume

Members that are required to report

pursuant to paragraph (b) above shall

transmit last sale reports for all

purchases and sales in eligible securities

in the following manner: 

(1) For agency transactions, report the

number of shares and the price

excluding the commission charged. 

Example: 

SELL as agent 100 shares at 40 less a

commission of $12.50; REPORT 100

shares at 40. 

(2) For dual agency transactions,

report the number of shares only once,

and report the price excluding the

commission charged. 

Example: 

SELL as agent 100 shares at 40 less a

commission of $12.50; BUY as agent

100 shares at 40 plus a commission of

$12.50; REPORT 100 shares at 40. 

(3) (A) For principal transactions,

except as provided below, report each

purchase and sale transaction

separately and report the number of

shares and the price. For principal

transactions that are executed at a price

that includes a mark-up, mark-down or

service charge, the price reported shall

exclude the mark-up, mark-down or

service charge. 

Example: 

BUY as principal 100 shares from

another member at 40 (no mark-down

included). 

REPORT 100 shares at 40. 

Example: 

BUY as principal 100 shares from a

customer at 393⁄4, which includes a 1⁄8

mark-down from prevailing market of

397⁄8; REPORT 100 shares at 397⁄8.

Example 

BUY as principal 100 shares from a

customer at 39.75, which includes a

$0.10 mark-down from prevailing

market at $39.85; REPORT 100 shares at

39.85. 

Example: 

SELL as principal 100 shares to a

customer at 401⁄8, which includes a 1⁄8

mark-up from the prevailing market of

40; REPORT 100 shares at 40. 

Example: 

SELL as principal 100 shares to a

customer at 40.10, which includes a .10

mark-up from the prevailing market of

40;

REPORT 100 shares at 40.

(B) Exception: A ‘‘riskless’’ principal

transaction in which a member, after

having received from a customer an

order to buy, purchases the security as

principal from another member or

customer to satisfy the order to buy or,

after having received from a customer

an order to sell, sells the security as

principal to another member or

customer to satisfy the order to sell,

shall be reported as one three party

transaction in the same manner as an

agency transaction, excluding the markup or mark-down, commissionequivalent, or other fee. Alternatively, a

member may report a riskless principal

transaction by submitting the following

report(s) to the NASD: 

(i) The member with the obligation to

report the transaction pursuant to

paragraph (b) above must submit a last

sale report for the initial leg of the

transaction. 

(ii) Regardless of whether a member

has a reporting obligation pursuant to

paragraph (b) above, the firm must

submit, for the offsetting, ‘‘riskless’’

portion of the transaction, either:

a. a clearing-only report with a

capacity indicator of ‘‘riskless

principal,’’ if a clearing report is

necessary to clear the transaction; or

b. a non-tape, non-clearing report

with a capacity indicator of ‘‘riskless

principal,’’ if a clearing report is not

necessary to clear the transaction.

A riskless principal transaction in

which a member purchases or sells the

security on an exchange to satisfy a

customer’s order will be reported by the

exchange and the member shall not

report. 

Example:

BUY as principal 100 shares from

another member at 40 to fill an existing

order;

SELL as principal 100 shares to a

customer at 40 plus mark-up of $12.50;

REPORT 100 shares at 40 by

submitting to the NASD either a single

trade report marked with a ‘‘riskless

principal’’ capacity indicator or by

submitting the following reports: 

(1) Where required by this Rule, a tape

report marked with a ‘‘principal’’

capacity indicator; and 

(2) either a non-tape, non-clearing

report or a clearing-only report marked

with a ‘‘riskless principal’’ capacity

indicator. 

Example: 

BUY as principal 100 shares on an

exchange at 40 to fill an existing order;

SELL as principal 100 shares to a

customer at 40 plus a mark-up of

$12.50. 

DO NOT REPORT (will be reported by

exchange). 

(h) Reporting Transactions on Form T

All Reporting NASD Members

required (or that elect) to report

transactions in eligible securities to the

NASD shall report, as soon as

practicable to NASD Regulation’s

Market Regulation Department on Form

T, last sale reports of transactions in

designated securities for which

electronic submission into the NASD is

not possible (e.g., the ticker symbol for

the security is no longer available, a

market participant identifier is no

longer active, or the NASD will not

accept the date of execution because the

NASD Alternative Display Facility was

closed on that date). Transactions that

can be reported into the NASD, whether

on trade date or on a subsequent date

on an ‘‘as of’’ basis (T+N), shall not be

reported on Form T. 

(i) Trade Tickets 

All trade tickets for transactions in

eligible securities shall be time-stamped

at the time of execution. 

(j) Special Trade Indicator 

A Reporting Member shall append the

designated symbol for special trades,

step out trades, reversals, and as-of

trades. 

(k) Clearing Indicators 

A Reporting Member shall use a

designated symbol to denote whether

the trade is to be: (i) Compared in

TRACS; (ii) not compared in TRACS;

(iii) compared in TRACS pursuant to an

Automatic Give Up Agreement

(‘‘AGU’’); or (iv) not compared in

TRACS, but locked in pursuant to a

Qualified Service Representation

Agreement (‘‘QSR’’). 

(l) Transactions Not Required To Be

Reported 

The following types of transactions

shall not be reported for inclusion on

the Consolidated Tape: 

(1) Transactions executed on an

exchange; 

(2) odd-lot transactions; 

(3) transactions that are part of a

primary distribution by an issuer or of

a registered secondary distribution

(other than shelf distributions) or of an

unregistered secondary distribution

effected off the floor of an exchange; 

(4) transactions made in reliance on

Section 4(2) of the Securities Act of

1933; 

(5) transactions where the buyer and

seller have agreed to trade at a price

substantially unrelated to the current

market for the security, e.g., to enable

the seller to make a gift;

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 441

(6) the acquisition of securities by a

member as principal in anticipation of

making an immediate exchange

distribution or exchange offering on an

exchange; 

(7) purchases of securities off the floor

of an exchange pursuant to a tender

offer, and 

(8) purchases or sales of securities

effected upon the exercise of an option

pursuant to the terms thereof or the

exercise of any other right to acquire

securities at a pre-established

consideration unrelated to the current

market. 

Selected Notices to Members: 94–71;

99–66. 

6430. Reserved

6440. Trading Practices

(a) No member shall execute or cause

to be executed or participate in an

account for which there are executed

purchases of any eligible security at

successively higher prices, or sales of

any such security at successively lower

prices, for the purpose of creating or

inducing a false, misleading or artificial

appearance of activity in such security

or for the purpose of unduly or

improperly influencing the market price

for such security or for the purpose of

establishing a price that does not reflect

the true state of the market in such

security. 

(b) No member shall, for the purpose

of creating or inducing a false or

misleading appearance of activity in an

eligible security or creating or inducing

a false or misleading appearance with

respect to the market in such security: 

(1) Execute any transaction in such

security which involves no change in the

beneficial ownership thereof; or 

(2) enter any order or orders for the

purchase of such security with the

knowledge that an order or orders of

substantially the same size, and at

substantially the same price, for the sale

of any such security, has been or will be

entered by or for the same or different

parties; or 

(3) enter any order or orders for the

sale of any such security with the

knowledge that an order or orders of

substantially the same size, and at

substantially the same price, for the

purchase of such security, has been or

will be entered by or for the same or

different parties. 

(c) No member shall execute

purchases or sales of any eligible

security for any account in which such

member is directly or indirectly

interested, which purchases or sales are

excessive in view of the member’s

financial resources or in view of the

market for such security. 

(d) No member shall participate or

have any interest, directly or indirectly,

in the profits of a manipulative

operation or knowingly manage or

finance a manipulative operation. 

(1) Any pool, syndicate or joint

account organized or used intentionally

for the purpose of unfairly influencing

the market price of an eligible security

shall be deemed to be a manipulative

operation. 

(2) The solicitation of subscriptions to

or the acceptance of discretionary

orders from any such pool, syndicate or

joint account shall be deemed to be

managing a manipulative operation. 

(3) The carrying on margin of a

position in such securities or the

advancing of credit through loans to any

such pool, syndicate or joint account

shall be deemed to be financing a

manipulative operation. 

(e) No member shall make any

statement or circulate and disseminate

any information concerning any eligible

security that such member knows or has

reasonable grounds for believing is false

or misleading or would improperly

influence the market price of such

security. 

(f) (1) No member shall: 

(A) Personally buy or initiate the

purchase of an eligible security for its

own account or for any account in

which it or any person associated with

it is directly or indirectly interested,

while such member holds or has

knowledge that any person associated

with it holds an unexecuted market

order to buy such security in the unit of

trading for a customer; or 

(B) sell or initiate the sale of any such

security for any such account, while it

personally holds or has knowledge that

any person associated with it holds an

unexecuted market order to sell such

security in the unit of trading for a

customer. 

(2) No member shall: 

(A) Buy or initiate the purchase of any

eligible security for any such account, at

or below the price at which it personally

holds or has knowledge that any person

associated with it holds an unexecuted

limited price order to buy such security

in the unit of trading for a customer; or 

(B) sell or initiate the sale of any

eligible security for any such account at

or above the price at which it personally

holds or has knowledge that any person

associated with it holds an unexecuted

limited price order to sell such security

in the unit of trading for a customer. 

(3) The provisions of this paragraph

shall not apply: 

(A) To any purchase or sale of any

eligible security in an amount less than

the unit of trading made by a member

to offset odd-lot orders for customers,

(B) to any purchase or sale of any

eligible security upon terms for delivery

other than those specified in such

unexecuted market or limited price

order,

(C) to any unexecuted order that is

subject to a condition that has not been

satisfied. 

(g) No member or person associated

with a member shall, directly or

indirectly, hold any interest or

participation in any joint account for

buying or selling an eligible security,

unless such joint account is promptly

reported to NASD. The report should

contain the following information for

each account: 

(1) Name of the account, with names

of all participants and their respective

interests in profits and losses; 

(2) a statement regarding the purpose

of the account; 

(3) name of the member carrying and

clearing the account; and 

(4) a copy of any written agreement or

instrument relating to the account. 

(h) No member shall offer that a

transaction or transactions to buy or sell

an eligible security will influence the

closing transaction on the Consolidated

Tape. 

(i)(1) A member may, but is not

obligated to, accept a stop order in an

eligible security. 

(A) A buy stop order is an order to buy

that becomes a market order when a

transaction takes place at or above the

stop price. 

(B) A sell stop order is an order to sell

that becomes a market order when a

transaction takes place at or below the

stop price. 

(2) A member may, but is not

obligated to, accept stop limit orders in

eligible securities. When a transaction

occurs at the stop price, the stop limit

order to buy or sell becomes a limit

order at the limit price. 

(j) No member or person associated

with a member shall execute or cause to

be executed, directly or indirectly, an

over-the-counter transaction in a

security subject to an initial public

offering until such security has first

opened for trading on the national

securities exchange listing the security,

as indicated by the dissemination of an

opening transaction in the security by

the listing exchange via the

Consolidated Tape. 

6450. Eligible Securities

Transactions required to be reported

on the Consolidated Tape (eligible

securities) include all common stocks,

preferred stocks, long-term warrants,

and rights entitling the holder to acquire

an eligible security, listed on the

American Stock Exchange and/or the

442 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

New York Stock Exchange and the

following securities listed on regional

stock exchanges.

Symbol Security

ALK$ .............. Alaska Airlines $2.77 Pfd.

ADN ............... Alden Electronic

AFI$D ............ Amer. Financial Corp. Pfd.D

AFI$E ............. Amer. Financial Corp. Pfd.E

AFI$F ............. Amer. Financial Corp. Pfd.F

AFI$G ............ Amer. Financial Corp. Pfd.G

AFI$H ............ Amer. Financial Corp. Pfd.H

BPP ............... Ballys Park Place

BSI ................. Bastian Inds., Inc.

BSI$ ............... Bastian Inds., Inc. $1.00 Pfd

BBM ............... Berkeley Bio Medical

CSW .............. Canada Southern Petroleum

CNO ............... Casco Northern Corp.

CJI ................. Central Jersey Industries

CTE ............... Columbia Chase Corp.

DCT ............... DC Trading Development

Corp.

EDG ............... Enterprise Devel. Group, Inc.

GEO ............... Geothermal Resources

GLR ............... Grolier Inc.

HWK .............. Hardwicke Companies, Inc.

MOD .............. Modine Manufacturing Company

OKC ............... OKC Limited Partnership

OGS ............... O’s Gold Seed Company

PRI ................. Pacific Resources

PJH ................ Piper Jaffray, Inc.

PRB ............... Provident Bancorp, Inc.

REL.Z ............ Reliance Group 87 Wts.

SOU$A .......... Southern Cal Gas 6% A Pfd.

SOU$Q .......... Southern Cal Gas 6% Pfd.

SYN$B ........... Syntex Corp. Pfd.B

TEP$ .............. Tucson Elec. Power Pfd.

UTC ............... United Canso Oil and Gas

WH ................. White Motor Corporation

Selected Notices to Members: 85–27,

87–12, 93–9, 93–25.

* * * * *

6600. REPORTING TRANSACTIONS

IN [OVER-THE-COUNTER EQUITY]

NON-EXCHANGE-LISTED SECURITIES

This Rule 6600 Series sets forth the

trade reporting requirements applicable

to members’ transactions in equity

securities effected otherwise than on an

exchange for which real-time trade

reporting is not otherwise required

(hereinafter referred to as ‘‘nonexchange-listed securities [OTC Equity

Securities]’’). Members shall [utilize]

use the Automated Confirmation

Transaction (ACT) for trade reporting in

non-exchange-listed securities [OTC

Equity Securities].

Those members effecting transactions

otherwise than on an exchange in nonexchange-listed securities shall have in

place contractual agreements with

Nasdaq to use ACT for trade reporting.

Members who use ACT to compare

trades must comply with the applicable

Nasdaq trade comparison rules.

Members should refer to the Nasdaq

rules for the specific rules that govern

trade comparison through ACT.

6610. Definitions

(a) Terms used in this Rule shall have

the same meaning as those defined in

the Association’s By-Laws and Rules

unless otherwise specified herein.

(b) ‘‘Automated Confirmation

Transaction Service’’ or ACT is the

Nasdaq service that, among other

things, accommodates reporting and

dissemination of last sale reports in

non-exchange-listed securities [OTC

Equity Securities]. Regarding those nonexchange-listed securities [OTC Equity

Securities] that are not eligible for

clearance and settlement through the

facilities of the National Securities

Clearing Corporation, the ACT

comparison function will not be

available. However, ACT will support

the entry and dissemination of last sale

data on such securities.

(c) ‘‘Non-Market Maker’’ means a

member of the Association that is not an

OTC Market Maker with respect to a

particular non-exchange-listed security

[OTC Equity Security].

(d) ‘‘Non-exchange-listed security’’

[‘‘OTC Equity Security’’] means any

equity security that is not traded on any

national securities exchange. [not

classified as a ‘‘designated security,’’ for

purposes of the Rule 4630 and 4640

Series. This term also includes certain

exchange-listed securities that do not

otherwise qualify for real-time trade

reporting because they are not ‘‘eligible

securities’’ as defined in Rule 6410(d).]

The term ‘‘non-exchange-listed

securities’’ [‘‘OTC Equity Security’’]

shall not include ‘‘restricted securities,’’

as defined by SEC Rule 144(a)(3) under

the Securities Act of 1933, nor any

securities designated in the PORTAL

Market, the Rule [5300] 6700 Series.

(e) ‘‘OTC Market Maker’’ means a

member of the Association that holds

itself out as a market maker by entering

proprietary quotations or indications of

interest for a particular non-exchangelisted security [OTC Equity Security] in

any inter-dealer quotation system,

including any system that the

Commission has qualified pursuant to

Section 17B of the Act. A member is an

OTC Market Maker only in those nonexchange-listed securities [OTC Equity

Securities] in which it displays market

making interest via an inter-dealer

quotation system.

6620. Transaction Reporting

(a) When and How Transactions are

Reported

(1) OTC Market Makers shall, within

90 seconds after execution, transmit

through ACT last sale reports of

transactions in non-exchange-listed

securities [OTC Equity Securities]

executed during normal market hours.

Transactions not reported within 90

seconds after execution shall be

designated as late.

(2) Non-Market Makers shall, within

90 seconds after execution, transmit

through ACT or the Nasdaq ACT service

desk (if qualified pursuant to Rule

7010(i)), or if ACT is unavailable due to

system or transmission failure, by

telephone to the Nasdaq Market

Operations Department, last sale reports

of transactions in non-exchange-listed

securities [OTC Equity Securities]

executed during normal market hours.

Transactions not reported within 90

seconds after execution shall be

designated as late.

(3) Transaction Reporting Outside

Normal Market Hours

(A) Last sale reports of transactions in

Non-exchange-listed securities [OTC

Equity Securities] executed between

8:00 a.m. and 9:30 a.m. Eastern Time

shall be transmitted through ACT

within 90 seconds after execution and

shall be designated as ‘‘.T’’ trades to

denote their execution outside normal

market hours. Last sale reports of

transactions in non-exchange-listed

securities [OTC Equity Securities]

executed between the hours of 4:00 p.m.

and 5:15 p.m. Eastern Time shall also be

transmitted through the NASD [ACT]

within 90 seconds after execution;

trades executed and reported after 4:00

p.m. Eastern Time shall be designated as

‘‘.T’’ to denote their execution outside

normal market hours. Transactions not

reported within 90 seconds must

include the time of execution on the

trade report.

(B) Last sale reports of transactions in

non-exchange-listed securities [OTC

Equity Securities] executed outside the

hours of 8:00 a.m. and 5:15 p.m. Eastern

Time shall be reported as follows:

(i) Last sale reports of transactions in

American Depository Receipts (ADRs),

Canadian issues, or domestic nonexchange-listed securities [OTC Equity

Securities] that are executed between

midnight and 8:00 a.m. Eastern Time

shall be transmitted through ACT

between 8:00 a.m. and 9:30 a.m. Eastern

Time on trade date, be designated as

‘‘.T’’ trades to denote their execution

outside normal market hours, and be

accompanied by the time of execution.

The party responsible for reporting on

trade date, the trade details to be

reported, and the applicable procedures

shall be governed, respectively, by

paragraphs (b), (c), and (d) below;

(ii) Last sale reports of transactions in

ADRs, Canadian issues, or domestic

non-exchange-listed securities [OTC

Equity Securities] that are executed

between 5:15 p.m. and midnight Eastern

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 443

Time shall be transmitted through ACT

on the next business day (T+1) between

8:00 a.m. and 5:15 p.m. Eastern Time, be

designated ‘‘as/of’’ trades to denote their

execution on a prior day, and be

accompanied by the time of execution.

The party responsible for reporting on

T+1, the trade details to be reported,

and the applicable procedures shall be

governed, respectively, by paragraphs

(b), (c), and (d) below; and

(iii) Last sale reports of transactions in

foreign securities (excluding ADRs and

Canadian issues) shall be transmitted

through ACT on T+1 regardless of time

of execution. Such reports shall be made

between 8:00 a.m. and 1:30 p.m. Eastern

Time in the same manner as described

in subparagraph (3)(B)(ii) above.

(4) All members shall report as soon

as practicable to the Market

[Surveillance] Regulation Department

on Form T, last sale reports of

transactions in non-exchange-listed

securities [OTC Equity Securities] for

which electronic submission into ACT

is not possible (e.g., the ticker symbol

for the security is no longer available or

a market participant identifier is no

longer active). Transactions that can be

reported into ACT, whether on trade

date or on a subsequent date on an ‘‘as

of’’ basis (T+N), shall not be reported on

Form T.

(5) A pattern or practice of late

reporting without exceptional

circumstances may be considered

conduct inconsistent with high

standards of commercial honor and just

and equitable principles of trade, in

violation of Rule 2110.

(6) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) Which Party Reports Transaction

(1) In a transaction[s] between two

OTC Market Makers, only the member

representing the sell side shall report

the transaction.

(2) In a transaction[s] between an OTC

Market Maker and a Non-Market Maker,

only the OTC Market Maker shall report

the transaction.

(3) In a transaction[s] between two

Non-Market Makers, only the member

representing the sell side shall report

the transaction.

(4) In a transaction[s] between a

member and a customer, the member

shall report the transaction.

(c) Information To Be Reported

Each last sale report shall contain the

following information:

(1) Symbol of the non-exchange-listed

security [OTC Equity Security];

(2) Number of shares;

(3) Price of the transaction as required

by paragraph (d) below; and

(4) A symbol indicating whether the

transaction is a buy, sell, or cross.

(d) Procedures for Reporting Price and

Volume

Members that are required to report

pursuant to paragraph (b) above shall

transmit last sale reports for all

purchases and sales in non-exchangelisted securities [OTC Equity Securities]

in the following manner:

(1) For agency transactions, report the

number of shares and the price

excluding the commission charged.

(2) For dual agency transactions,

report the number of shares only once,

and report the price excluding the

commission charged.

(3) (A) For principal transactions,

except as provided in subparagraph (B)

hereof, report each purchase and sale

transaction separately and report the

number of shares and the price. For

principal transactions that are executed

at a price [which] that includes a markup, mark-down or service charge, the

price reported shall exclude the markup, mark-down or service charge. Such

reported price shall be reasonably

related to the prevailing market, taking

into consideration all relevant

circumstances including, but not

limited to, market conditions with

respect to the non-exchange-listed

securities [OTC Equity Security], the

number of shares involved in the

transaction, the published bids and

offers with size displayed in any interdealer quotation system at the time of

the execution (including the reporting

firm’s own quotation), the cost of

execution and the expenses involved in

clearing the transaction.

(B) Exception: A ‘‘riskless’’ principal

transaction in which a member, after

having received an order to buy a

security, purchases the security as

principal at the same price to satisfy the

order to buy or, after receiving an order

to sell, sells the security as principal at

the same price to satisfy the order to

sell, shall be reported as one transaction

in the same manner as an agency

transaction, excluding the mark-up or

mark-down, commission-equivalent, or

other fee.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be reported:

(1) Transactions [which] that are part

of a primary distribution by an issuer or

a registered secondary distribution

(other than ‘‘shelf distributions’’) or of

an unregistered secondary distribution;

(2) Transactions made in reliance on

Section 4(2) of the Securities Act of

1933;

(3) Transactions where the buyer and

seller have agreed to trade at a price

substantially unrelated to the current

market for the security;

(4) Purchases or sales of securities

effected upon the exercise of an option

pursuant to the terms thereof or the

exercise of any other right to acquire

securities at a pre-established

consideration unrelated to the current

market.

* * * * *

[6700. REPORTING TRANSACTIONS

IN NON-NASDAQ SECURITIES]

[6710. Definitions]

[For the purposes of this Rule 6700

Series, unless the context requires

otherwise:]

[(a) ‘‘Issuer,’’ in the case of quotations

for American Depository Receipts

(ADRs), shall mean the issuer of the

deposited shares represented by such

ADRs.]

[(b) ‘‘Non-Nasdaq Reporting System’’

means the electronic price and volume

reporting system operated by the

Association for non-Nasdaq securities.]

[(c) ‘‘Non-Nasdaq security’’ means any

equity security that is neither included

in The Nasdaq Stock Market nor traded

on any national securities exchange. For

purposes of Rules 6720 and 6730 of this

Series, the term ‘‘non-Nasdaq security’’

shall also mean any Nasdaq security, if

transactions in that security are effected

by market makers that are not registered

Nasdaq market makers pursuant to Rule

4611, and any security listed on an

exchange, if transactions are required to

be reported pursuant to the Rule 6400

Series.]

[(d) ‘‘Priced entry’’ shall mean a

quotation consisting of a bid, offer, or

both at a specified price.]

[(e) ‘‘Quotation’’ shall mean any bid

or offer at a specified price with respect

to a non-Nasdaq security, or any

indication of interest by a broker or

dealer in receiving bids or offers from

others for such a security, or any

indication by a broker or dealer that it

wishes to advertise its general interest

in buying or selling a particular nonNasdaq security.]

[(f) ‘‘Quotation medium’’ means any

inter-dealer quotation system (except for

the PORTAL Market) or any publication

or electronic communications network

or other device that is used by brokers

444 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

or dealers to make known to others their

interest in transactions in any nonNasdaq security, including offers to buy

or sell at a stated price or otherwise, or

invitations of offers to buy or sell.]

[6720. Price and Volume Reporting]

[(a) Each member shall report through

the Non-Nasdaq Reporting System the

following information on all principal

transactions in non-Nasdaq securities:]

[(1) The highest price at which it sold

and the lowest price at which it

purchased each non-Nasdaq security;]

[(2) the total volume of purchases and

sales executed by it in each non-Nasdaq

security; and]

[(3) whether the trades establishing

the highest price at which the member

sold and the lowest price at which the

member purchased the security

represented an execution with a

customer or with another broker/dealer.

The price to be reported for principal

sales and purchases from customers

shall be inclusive of mark-up or markdown.]

[(b) Members shall report the price

and volume information required by

paragraph (a) of this Rule through the

Non-Nasdaq Reporting System between

the hours of 4 p.m. and 6:30 p.m.

Eastern Time on the trade date or

between 7:30 a.m. and 9 a.m. Eastern

Time on the next business day, or at

such other time as determined by the

Association.]

[(c) The reporting requirements

contained in paragraphs (a) and (b) of

this Rule shall not apply to any nonNasdaq security for which members are

required to report individual

transactions pursuant to the Rule 6600

Series.]

[6730. Automated Submission of Trade

Data]

[RESERVED FOR FUTURE USE.

REDESIGNATED AS 8213 BY SR–

NASD–97–81 EFF. JAN. 16, 1998.]

6630[6740]. Submission of Rule 15c2–

11 Information on [Non-Nasdaq] NonExchange-Listed Securities

(a) Except as provided in SEC Rule

15c2–11(f)(1), (2), (3) and (5) under the

Act, no member shall initiate or resume

the quotation of a non-exchange-listed

[Nasdaq] security in any quotation

medium unless the member has

demonstrated compliance with this Rule

and the applicable requirements for

information maintenance under Rule

15c2–11. A member shall demonstrate

compliance by making a filing with, and

in the form required by, the Association,

which filing must be received at least

three business days before the member’s

quotation is published or displayed in

the quotation medium.

(b) The information to be filed shall

contain one copy of all information

required to be maintained under SEC

Rule 15c2–11(a)(1), (2), (3)(iii), (4)(ii), or

(5), including any information that may

be required by future amendments

thereto. In addition, this filing shall

identify the issuer, the issuer’s

predecessor in the event of a merger or

reorganization within the previous 12

months, the type of non-exchange-listed

[Nasdaq] security to be quoted (e.g.,

ADR, warrant, unit, or common stock),

the quotation medium to be used, the

member’s initial or resumed quotation,

and the particular subsection of Rule

15c2–11 with which the member is

demonstrating compliance.

Additionally, if a member is initiating or

resuming quotation of a non-exchangelisted [Nasdaq] security with a priced

entry, the member’s filing must specify

the basis upon which that priced entry

was determined and the factors

considered in making that

determination.

(c) If a member’s initial or resumed

quotation does not include a priced

entry, a member shall supplement its

prior filing under this Rule, in the form

required by the Association, before

inserting a priced entry for the affected

non-exchange-listed [Nasdaq] security

in a quotation medium. The

supplemental filing shall specify the

basis upon which the proposed priced

entry was determined and the factors

considered in making that

determination. The supplemental filing

must be received by the Association at

least three business days before the

member’s priced entry first appears in a

quotation medium.

(d) No Change.

6640. Limit Order Protection

(a) Members shall be prohibited from

‘‘trading ahead’’ of customer limit

orders that a member accepts in nonexchange-listed securities quoted on a

quotation medium. Members handling

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 customer limit order without

executing the limit order. Members are

under no obligation to accept limit

orders from any customer.

(b) Members may avoid the obligation

specified in paragraph (a) through the

provision of price improvement. If a

customer limit order is priced at or

inside the current inside spread,

however, the price improvement must

be for a minimum of the lesser of $0.01

or one-half (1⁄2) of the current inside

spread. For purposes of this rule, the

inside spread shall be defined as the

difference between the best reasonably

available bid and offer in the subject

security.

(c) Notwithstanding subparagraph (a)

of this rule, a member may negotiate

specific terms and conditions applicable

to the acceptance of limit orders only

with respect to such orders that are:

(1) For customer accounts that meet

the definition of an ‘‘institutional

account’’ as that term is defined in Rule

3110(c)(4); or

(2) for 10,000 shares or more, and

greater than $200,000 in value.

(d) Contemporaneous trades.

A member that trades through a held

limit order must execute such limit

order contemporaneously, or as soon as

practicable, but in no case later than

five minutes after the member has

traded at a price more favorable than

the customer’s price.

(e) Application.

(1) This rule shall apply only to nonexchange-listed securities specifically

identified as such on the NASD website.

(2) This rule shall apply from 9:30

a.m. to 4:00 p.m. Eastern Time.

(3) This rule shall be in effect until

February 8, 2002.

[67]6650. Minimum Quotation Size

Requirements For [OTC] NonExchange-Listed Equity Securities

[(a)] Every member firm that functions

as a market maker in [OTC] NonExchange-Listed Equity Securities by

entering firm quotations into [the OTC

Bulletin Board Service (OTCBB) (or] any

[other] inter-dealer quotation system

that permits quotation updates on a realtime basis[)] must honor those

quotations for the minimum size

defined in the table below. In this

regard, it is the market maker’s

responsibility to determine the

minimum size requirement applicable

to its firm bid and/or offer in each of its

registered securities [(excluding OTC

Equity Securities for which the OTCBB

will not accept firm quotations)].

Depending on the price level of the bid

or offer, a different minimum size can

apply to each side of the market being

quoted by the member firm in a given

security.

Price (bid or offer) Minimum

quote size

0–.50* ....................................... 5,000

.51–1.00 .................................... 2,500

1.01–10.00 ................................ 500

10.01–100.00 ............................ 200

100.01–200.00 .......................... 100

200.01–+ ................................... 50

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 445

An [Nasdaq] NASD officer at the

Executive Vice President level or above,

within its discretion may modify the

minimum quotation size for those

securities with a price exceeding $200.

[(b) For purposes of this Rule, the

term ‘‘OTC Equity Security’’ means any

equity security not classified as a

‘‘designated security’’ for purposes of

the Rule 4630 and 4640 Series, or as an

‘‘eligible security,’’ for purposes of the

Rule 6400 Series. The term does not

include ‘‘restricted securities,’’ as

defined by SEC Rule 144(a)(3) under the

Securities Act of 1933, nor any

securities designated in the PORTAL

Market.SM]

* * * * *

6900. REPORTING TRANSACTIONS

IN DIRECT PARTICIPATION

PROGRAMS

All secondary market transactions by

members in Direct Participation

Program securities other than

transactions executed on a registered

national securities exchange [or through

Nasdaq] shall be reported to the

Association in accordance with the

procedures set forth below. All trade

tickets shall be time-stamped at the time

of execution.

* * * * *

6920. Transaction Reporting

(a) through (d) No Changes.

(e) Transactions Not Required To Be

Reported

The following transactions are not

required to be reported under the

foregoing procedures:

(1) through (2) No Changes.

(3) Transactions executed on a

registered national securities exchange

[or through Nasdaq].

* * * * *

7000. CHARGES FOR SERVICES AND

EQUIPMENT—TO BE DETERMINED

* * * * *

8200. INVESTIGATIONS

8210. No Change.

[8212. Automated Submission of

Trading Data for the Nasdaq

International Service Requested by the

Association] Reserved

[(a) Every Association member and

approved affiliate that participates in

the Nasdaq International Service as

defined in the Rule 5100 Series

(‘‘Nasdaq International’’) as a Service

market maker or an order-entry firm

shall submit to the Association the trade

data specified below in automated

format as may be prescribed by the

Association from time to time. This

information shall be supplied with

respect to any transaction or

transactions that are the subject of a

request for information made by the

Association. In this rule the terms

‘‘participating firm’’ and ‘‘firm’’ include

both Association members and

approved affiliates that utilize the

Service.]

[(b) If the transaction was a

proprietary transaction effected or

caused to be effected by the

participating firm for any account in

which such firm, or person associated

with the firm, is directly or indirectly

interested, the participating firm shall

submit or cause to be submitted the

following information:]

[(1) Clearing house number, or alpha

symbol as used by the participating firm

submitting the data;]

[(2) Clearing house number(s), or

alpha symbol(s) as may be used from

time to time, of the participating firm on

the opposite side of the transaction;]

[(3) Identifying symbol assigned to the

security;]

[(4) Date transaction was executed;]

[(5) Number of shares, ADRs, units,

warrants or rights for each specific

transaction and whether each

transaction was a purchase, sale or short

sale;]

[(6) Transaction price;]

[(7) Account number; and]

[(8) Market center where transaction

was executed.]

[(c) If the transaction was effected or

caused to be effected by the

participating firm for any customer

account, such firm shall submit or cause

to be submitted the following

information:]

[(1) The data described in

subparagraphs (b)(1) through (8);]

[(2) Customer name, address(es),

branch office number, registered

representative number, whether order

was solicited or unsolicited, date

account opened and employer name,

and the tax identification number(s);

and]

[(3) If the transaction was effected for

another Association member or

participating firm, whether the other

party was acting as principal or agent on

the transaction or transactions that are

the subject of the Association’s request.]

[(d) In addition to the above trade

data, a participating firm shall submit

such other information in such

automated format as may from time to

time be required by the Association.]

[(e) Pursuant to the Rule 9600 Series,

the Association may exempt a person

from the requirement that the data

prescribed in paragraphs (b) through (d)

above be submitted to the Association in

an automated format for good cause

shown.]

8213. Automated Submission of

Trading Data for Non-Exchange-Listed

[Nasdaq] Securities Requested by the

Association

Each member shall submit trade data

specified in Rule 8211 in automated

format as may be prescribed by the

Association from time to time with

respect to any transaction or

transactions involving non-exchangelisted [Nasdaq] securities as defined in

the Rule [6700]6600 Series that are the

subject of a request for information

made by the Association. Pursuant to

the Rule 9600 Series, the Association

may exempt a member from the

requirement that the data prescribed in

paragraphs (b) through (d) of Rule 8211

be submitted to the Association in an

automated format for good cause shown.

* * * * *

9000. CODE OF PROCEDURE

9100. APPLICATION AND PURPOSE

9110. Application

(a) through (b) No Change.

(c) Incorporation of Defined Terms and

Cross References

Unless otherwise provided, terms

used in the Rule 9000 Series shall have

the meaning as defined in Rule 0120

and Rule 9120. References within the

Rule 9000 Series to Association offices

or departments refer to offices so

designated by the NASD[,] or NASD

Regulation [or Nasdaq].

* * * * *

9120. Definitions

(a) through (r) No Change.

(s) ‘‘Market Regulation Committee’’

The term ‘‘Market Regulation

Committee’’ means the committee of

NASD Regulation designated to

consider the federal securities laws and

the rules and regulations adopted

thereunder and various Rules of the

Association and policies relating to:

(1) through (3) No Change.

(4) trading practices, including rules

prohibiting manipulation and insider

trading, and those Rules designated as

Trading Rules (Rule 3300 Series), [the

Nasdaq Stock Market Rules] the NASD

Alternative Display Facility Rules (Rule

4000 Series), other [Nasdaq and] NASD

[Market] Reporting Facility Rules (Rule

5000 Series), NASD Systems and

Programs Rules (Rule 6000 Series), and

Charges for Services and Equipment

Rules (Rule 7000 Series).

(t) through (cc) No Change.

* * * * *

446 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

9160. Recusal or Disqualification

No person shall participate as an

Adjudicator in a matter governed by the

Code as to which he or she has a

conflict of interest or bias, or

circumstances otherwise exist where his

or her fairness might reasonably be

questioned. In any such case the person

shall recuse himself or herself, or shall

be disqualified as follows:

(a) through (c) No Change.

(d) Rule 9514 Hearing Panel

The NASD Regulation Board [or

Nasdaq Board] shall have authority to

order the disqualification of a member

of a Hearing Panel appointed by such

Board under Rule 9514(b);

(e) through (g) No Change.

* * * * *

9230. Appointment of Hearing Panel,

Extended Hearing Panel

9231. Appointment by the Chief

Hearing Officer of Hearing Panel or

Extended Hearing Panel

(a) No Change.

(b) Hearing Panel

The Hearing Panel shall be composed

of a Hearing Officer and two Panelists,

except as provided in Rule 9234 (a), (c),

(d), or (e). The Hearing Officer shall

serve as the chair of the Hearing Panel.

Each Panelist shall be associated with a

member of the Association or retired

therefrom.

(1) Except as provided in (2), the

Chief Hearing Officer shall select as a

Panelist a person who:

(A) through (C) No Change.

(D) previously served as a Director[, a

director of the Nasdaq Board of

Directors,] or a Governor, but does not

serve currently in any of these positions.

(2) No Change.

(c) through (d) No Change.

* * * * *

9500. OTHER PROCEEDINGS

9510. Summary and Non-Summary

Proceedings

9511. No Change

9512. Initiation of Summary Proceeding

(a) Authorization

(1) No Change.

(2) The NASD Board may authorize

the President of NASD Regulation [or

the President of Nasdaq] to issue on a

case-by-case basis a written notice that

summarily limits or prohibits any

person with respect to access to services

offered by the Association if paragraph

(a)(1) applies to such person or, in the

case of a person who is not a member,

if the NASD Board determines that such

person does not meet the qualification

requirements or other prerequisites for

such access and such person cannot be

permitted to continue to have such

access with safety to investors,

creditors, members, or the Association.

(b) through (c) No Change.

* * * * *

9514. Hearing and Decision

(a) No Change.

(b) Designation of Party for the

Association and Appointment of

Hearing Panel

If a member, associated person, or

other person subject to a notice under

Rule 2210, 2220, 9512, or 9513 files a

written request for a hearing, an

appropriate department or office of the

Association shall be designated as a

Party in the proceeding, and a Hearing

Panel shall be appointed.

[(1)] If the President of NASD

Regulation or NASD Regulation staff

issued the notice initiating the

proceeding under Rule 2210, 2220,

9512(a), or 9513(a), the President of

NASD Regulation shall designate an

appropriate NASD Regulation

department or office as a Party. For

proceedings initiated under Rule

9513(a) concerning failure to comply

with an arbitration award or a

settlement agreement related to an

NASD arbitration or mediation, the

Chief Hearing Officer shall appoint a

Hearing Panel composed of a Hearing

Officer. For any other proceedings

initiated under Rule 2210, 2220,

9512(a), or 9513(a) by the President of

NASD Regulation or NASD Regulation

staff, the NASD Regulation Board shall

appoint a Hearing Panel composed of

two or more members; one member

shall be a Director of NASD Regulation,

and the remaining member or members

shall be current or former Directors of

NASD Regulation or Governors. The

President of NASD Regulation may not

serve on a Hearing Panel.

[(2) If the President of Nasdaq or

Nasdaq staff issued the notice under

Rule 9512(a) or 9513(a), the President of

Nasdaq shall designate an appropriate

Nasdaq department or office as a Party,

and the Nasdaq Board shall appoint a

Hearing Panel. The Hearing Panel shall

be composed of two or more members.

One member shall be a director of

Nasdaq, and the remaining member or

members shall be current or former

directors of Nasdaq or Governors. The

President of Nasdaq may not serve on

the Hearing Panel.]

(c) through (e) No Change.

(f) Hearing Panel Consideration

(1) through (4) No Change.

(5) Custodian of the Record

If the President of NASD Regulation

or NASD Regulation staff initiated the

proceeding under Rule 2210, 2220,

9512, or 9513, the Office of the General

Counsel of NASD Regulation shall be

the custodian of the record, except that

the Office of Hearing Officers shall be

the custodian of record for proceedings

initiated under Rule 9513(a) concerning

failure to comply with an arbitration

award or a settlement agreement related

to an NASD arbitration or mediation. [If

the President of Nasdaq or Nasdaq staff

initiated the proceeding under Rule

9512 or 9513, the Office of the General

Counsel of Nasdaq shall be the

custodian of the record.]

(6) No Change.

(g) No Change.

* * * * *

9700. PROCEDURES ON GRIEVANCES

CONCERNING THE AUTOMATED

SYSTEMS

9710. Purpose

The purpose of this Rule 9700 Series

is to provide, where justified, redress for

persons aggrieved by the operations of

any automated quotation, execution, or

communication system owned or

operated by the Association, or any

subsidiary thereof, and approved by the

Commission, not otherwise provided for

by the Code of Procedure as set forth in

the Rule 9000 Series, the Uniform

Practice Code as set forth in the Rule

11000 Series.[, or the Procedures for

Review of Nasdaq Listing

Determinations as set forth in the Rule

4800 Series.]

9720. Form of Application

All applications shall be in writing,

and shall specify in reasonable detail

the nature of and basis for the redress

requested. If the application consists of

several allegations, each allegation shall

be stated separately. All applications

must be signed and shall be directed to

the NASD [Nasdaq].

* * * * *

9730. Request for Hearing

Upon request, the applicant shall be

granted a hearing after reasonable

notice. In the absence of such request

for a hearing, [Nasdaq] the NASD may,

in its discretion, have any application

set down for hearing or consider the

matter on the basis of the application

and supporting documents.

* * * * *

9760. Reserved [Review by the Nasdaq

Listing and Hearing Review Council]

[The decision shall be subject to

review by the Nasdaq Listing and

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 447

Hearing Review Council on its own

motion within 45 calendar days after

issuance of the written decision. Any

such decision shall also be subject to

review upon application of any person

aggrieved thereby, filed within 15

calendar days after issuance. The

institution of a review, whether on

application or on the initiative of the

Nasdaq Listing and Hearing Review

Council, shall not operate as a stay of

the decision.]

* * * * *

9770. Reserved [Findings of the Nasdaq

Listing and Hearing Review Council on

Review]

[Upon consideration of the record,

and after such further hearings as it

shall order, the Nasdaq Listing and

Hearing Review Council shall affirm,

modify, reverse, dismiss, or remand the

decision. The Nasdaq Listing and

Hearing Review Council shall set forth

specific grounds upon which its

determination is based.]

* * * * *

9780. Reserved [Discretionary Review

by the Board]

[Determinations of the Nasdaq Listing

and Hearing Review Council may be

reviewed by the NASD Board of

Governors solely upon the request of

one or more Governors not later than the

NASD Board meeting next following the

Nasdaq Listing and Hearing Review

Council’s decision but which is 15

calendar days or more following the

decision of the Nasdaq Listing and

Hearing Review Council.

Notwithstanding the preceding

sentence, the NASD Board may

determine it is advisable to call for

review any decision of the Nasdaq

Listing and Hearing Review Council

within the 15 calendar day period

following the decision of the Nasdaq

Listing and Hearing Review Council.

Such review, which may be undertaken

solely at the discretion of the Board,

shall be in accordance with resolutions

of the Board governing the review of

Nasdaq Listing and Hearing Review

Council determinations. The Board shall

affirm, modify or reverse the

determinations of the Nasdaq Listing

and Hearing Review Council or remand

the matter to the Nasdaq Listing and

Hearing Review Council with

appropriate instructions. The institution

of discretionary review by the Board

shall not operate as a stay of the

decision.]

* * * * *

11300. DELIVERY OF SECURITIES

11310. Book-Entry Settlement

(a) through (c) No Change.

(d) (1) No Change.

(2) A determination under r[R]ules

[4310(c)(23) or under the corresponding

rule] of a national securities exchange

that a security depository has included

a CUSIP number identifying a security

in its file of eligible issues does not

render the security ‘‘depository eligible’’

under this Rule until:

(A) in the case of any new issue

distributed by an underwriting

syndicate on or after the date a

securities depository system for

monitoring repurchases of distributed

shares by the underwriting syndicate is

available, the date of the

commencement of trading in such

security on [The Nasdaq Stock Market]

the exchange; or

(B) in the case of any new issue

distributed by an underwriting

syndicate prior to the date a securities

depository system for monitoring

repurchases of distributed shares by the

underwriting syndicate is available

where the managing underwriter elects

not to deposit the securities on the date

of the commencement of trading in such

security on [The Nasdaq Stock Market]

the exchange, such later date designated

by the managing underwriter in a

notification submitted to the securities

depository; but in no event more than

three (3) months after the

commencement of trading in such

security on [The Nasdaq Stock Market]

the exchange.

(e) through (g) No Change.

* * * * *

11500. DELIVERY OF SECURITIES

WITH RESTRICTIONS

11580. Transfer of Limited Partnership

Securities

(a) Each member [who] that

participates in the transfer of limited

partnership securities, as defined in

Rule 2810, shall use standard transfer

forms in the same form as set forth in

IM–11580. This Rule shall not apply to

limited partnership securities [which]

that are traded on [The Nasdaq Stock

Market or] a registered national

securities exchange, or are on deposit in

a registered securities depository and

settle regular way.

* * * * *

11800. CLOSE-OUT PROCEDURES

11810. No Change

IM–11810. Sample Buy-In Forms

(a) through (b) No Change.

(c) Seller’s Failure to Deliver After

Receipt of Notice

(1) (A) No Change.

(B) For transactions in [Nasdaq]

exchange-listed [S]securities where the

buyer is a customer (other than another

member), upon failure of a clearing

corporation to effect delivery in

accordance with a buy-in notice, the

contract must be closed by purchasing

for ‘‘cash’’ in the best available market,

or at the option of the buyer for

guaranteed delivery, for the account and

liability of the party in default all or any

part of the securities necessary to

complete the contract.

(2) No Change.

(d) through (m) No Change.

* * * * *

[11890. Clearly Erroneous

Transactions]

[(a) Authority to Review Transactions]

[(1) For the purposes of this Rule, the

terms of a transaction are clearly

erroneous when there is an obvious

error in any term, such as price, number

of shares or other unit of trading, or

identification of the security.]

[(2) Officers of The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) designated by

the President of Nasdaq shall, pursuant

to the procedures set forth in paragraph

(b) below, have the authority to review

any transaction arising out of the use or

operation of any automated quotation,

execution, or communication system

owned or operated by Nasdaq and

approved by the Commission, excluding

transactions arising from use of the

Nasdaq Application of OptiMark. A

Nasdaq officer shall review transactions

with a view toward maintaining a fair

and orderly market and the protection of

investors and the public interest. Based

upon this review, the officer shall

decline to act upon a disputed

transaction if the officer believes that

the transaction under dispute is not

clearly erroneous, or, if the officer

determines the transaction in dispute is

clearly erroneous, he or she shall

declare that the transaction is null and

void or modify one or more terms of the

transaction. When adjusting the terms of

a transaction, the Nasdaq officer shall

seek to adjust the price and/or size of

the transaction to achieve an equitable

rectification of the error that would

place the parties to a transaction in the

same position, or as close as possible to

the same position, that they would have

been in had the error not occurred.

Nasdaq shall promptly provide oral

notification of a determination to the

parties involved in a disputed

transaction and thereafter issue a

448 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

4Securities Exchange Act Release No. 44396

(June 7, 2001), 66 FR 31952 (June 13, 2001).

written confirmation of the

determination.]

[(b) Procedures for Reviewing

Transactions]

[(1) Any member or person associated

with a member that seeks to have a

transaction reviewed pursuant to

paragraph (a) hereof, shall submit a

written complaint, via facsimile or

otherwise, to Nasdaq Market Operations

in accordance with the following time

parameters:]

[(A) For transactions occurring at or

after 9:30 a.m., Eastern Time, but prior

to 10:00 a.m., Eastern Time, complaints

must be submitted by 10:30 a.m.,

Eastern Time; and]

[(B) for transactions occurring prior to

9:30 a.m., Eastern Time and at or after

10:00 a.m., Eastern Time, complaints

must be submitted within thirty

minutes.]

[(2) Once a complaint has been

received in accord with subparagraph

(b)(1) above:]

[(A) The complainant shall have up to

thirty (30) minutes, or such longer

period as specified by Nasdaq staff, to

submit any supporting written

information concerning the complaint

necessary for a determination under

paragraph (a)(2), via facsimile or

otherwise;]

[(B) the counterparty to the trade shall

be verbally notified of the complaint by

Nasdaq staff and shall have up to thirty

(30) minutes, or such longer period as

specified by Nasdaq staff, to submit any

supporting written information

concerning the complaint necessary for

a determination under paragraph (a)(2),

via facsimile or otherwise; and]

[(C) either party to a disputed trade

may request the written information

provided by the other party pursuant to

this subparagraph.]

[(3) Notwithstanding paragraph (b)(2)

above, once a party to a disputed trade

communicates that it does not intend to

submit any further information

concerning a complaint, the party may

not thereafter provide additional

information unless requested to do so by

Nasdaq staff. If both parties to a

disputed trade indicate that they have

no further information to provide

concerning the complaint before their

respective thirty-minute information

submission period has elapsed, then the

matter may be immediately presented to

a Nasdaq officer for a determination

pursuant to paragraph (a)(2) above.]

[(4) Each member and/or person

associated with a member involved in

the transaction shall provide Nasdaq

with any information that it requests in

order to resolve the matter on a timely

basis notwithstanding the time

parameters set forth in paragraph (b)(2)

above.]

[(5) Once a party has applied to

Nasdaq for review, the transaction shall

be reviewed and a determination

rendered, unless both parties to the

transaction agree to withdraw the

application for review prior to the time

a decision is rendered pursuant to

paragraph (a)(2).]

[(c) Procedures for Reviewing

Transactions Executed During System

Disruptions or Malfunctions]

[In the event of a disruption or

malfunction in the use or operation of

any automated quotation, execution, or

communication system owned or

operated by Nasdaq and approved by

the Commission, Nasdaq acting through

an officer designated by the President of

Nasdaq pursuant to paragraph (a)(2),

may, on its own motion pursuant to the

standards set forth in paragraph (a),

declare transactions arising out of the

use or operation of such systems during

the period of such disruption or

malfunction null and void or modify the

terms of these transactions; provided

that, in the absence of extraordinary

circumstances, a Nasdaq officer must

take action pursuant to this paragraph

within thirty (30) minutes of detection

of the erroneous transaction(s), but in no

event later than 6:00 p.m., Eastern Time,

on the next trading day following the

date of the trade at issue. When Nasdaq

takes action pursuant to this

subparagraph, the member firms

involved in the transaction shall be

notified as soon as is practicable and

shall have a right to appeal such action

in accordance with paragraph (d)(1)

below.]

[(d) Review by the Market Operations

Review Committee (‘‘MORC’’)]

[(1) A member or person associated

with a member may appeal a

determination made under paragraphs

(a)(2) or (c) to the MORC provided such

appeal is made in writing, via facsimile

or otherwise, within thirty (30) minutes

after the member or person associated

with a member receives verbal

notification of such determination,

except that if Nasdaq notifies the parties

of action taken pursuant to paragraph (c)

after 4:00 p.m., either party has until

9:30 a.m. the next trading day to appeal.

Once a written appeal has been

received, the counterparty to the trade

will be notified of the appeal and both

parties shall be able to submit any

additional supporting written

information, via facsimile or otherwise,

up until the time the appeal is

considered by the Committee. Either

party to a disputed trade may request

the written information provided by the

other party during the appeal process.

An appeal to the Committee shall not

operate as a stay of the determination

made pursuant to paragraph (a)(2) or (c)

above. Once a party has appealed a

determination to the Committee, the

determination shall be reviewed and a

decision rendered, unless both parties to

the transaction agree to withdraw the

appeal prior to the time a decision is

rendered by the Committee. Upon

consideration of the record, and after

such hearings as it may in its discretion

order, the Committee, pursuant to the

standards set forth in paragraph (a),

shall affirm, modify, reverse, or remand

the determination made under

paragraph (a)(2) or (c) above.]

[(2) The decision of the Committee

shall be final and binding upon any

member or person associated with a

member and shall constitute final

Association action on the matter in

issue. Any adverse determination by a

Nasdaq officer pursuant to paragraph

(a)(2) or (c) or any adverse decision by

the Committee pursuant to paragraph

(d)(1) shall be rendered without

prejudice as to the rights of the parties

to the transaction to submit their

dispute to arbitration.]

* * * * *

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 statutory 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

Background

The purpose of the proposed rule

change is twofold: (1) to amend the

Association’s rules to reflect the

anticipated approval of Nasdaq as a

national securities exchange 4 and its

resultant separation from NASD; and (2)

to establish the rules that would govern

trading otherwise than on an exchange,

including the implementation and

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 449

5Securities Exchange Act Release No. 43863 (Jan.

19, 2001), 66 FR 8020 (Jan. 26, 2001).

6Securities Exchange Act Release No. 44396

(June 7, 2001), 66 FR 31952 (June 13, 2001) (File

No. 10–131).

7See SR–NASD–2001–82, which is currently

being reviewed by the Commission.

operation of the ADF. The ADF is a

quotation collection, trade comparison,

and trade reporting facility being

developed by NASD in accordance with

the Commission’s SuperMontage

Approval Order 5 and in conjunction

with Nasdaq’s anticipated registration as

a national securities exchange.

Proposed Rule Change Relating to the

Separation of Nasdaq

The NASD is in the process of

spinning off its Nasdaq subsidiary as an

independent, for-profit company. As the

result of a second private placement of

Nasdaq shares completed on January 18,

2001, the NASD’s ownership interest in

Nasdaq was reduced to a minority

interest. Before Nasdaq can fully

separate from the NASD, it must become

registered as a national securities

exchange with the SEC. Nasdaq has

filed a Form 1 with the SEC requesting

such registration. Notice and a request

for comments on Nasdaq’s completed

application for exchange registration

was published for comment in the

Federal Register on June 13, 2001,6 and

the comment period expired on August

29, 2001.

Upon Nasdaq’s registration as a

national securities exchange, the NASD

will no longer control the voting rights

in the common stock of Nasdaq. At that

point, Nasdaq and the NASD will be

unaffiliated corporate entities, and

therefore each will need separate rules

applicable to their respective members.

To effectuate that change, the NASD

must modify existing NASD rules,

effective upon Nasdaq’s registration as

an exchange, to reflect this separation of

Nasdaq from the NASD. These changes

include deleting Nasdaq-specific rules,

such as listing and qualification

requirements; replacing references to

‘‘Nasdaq’’ with ‘‘NASD’’ or ‘‘exchange,’’

as applicable; and renaming and

renumbering certain rules. The

proposed rule change also includes

corrections of minor grammatical or

typographical errors and other

miscellaneous non-substantive changes.

Deleted Rules: The Association

proposes to delete the following rules in

their entirety because they either relate

exclusively to participation in, and

operation of, the Nasdaq Stock Market

or would no longer be applicable upon

the establishment of the ADF: 2852,

2854, 2870 through 2885; 5100 through

5113; 6700 through 6740; 8212 and

11890.

IM–2110–2 and Rule 6640 Trading

Ahead of Customer Orders: The

proposed rule change would eliminate

an exemption in IM–2110–2 for certain

customer limit orders received prior to

September 1, 1995. The passage of time

has rendered this exemptive language

obsolete and therefore it no longer bears

on the existing application of the

interpretation. This change is consistent

with Nasdaq’s rule filing in connection

with its exchange registration

application, which contains an identical

proposed rule change.

Existing Rule 6541 extends the

principles of IM–2110–2 to certain OTC

Bulletin Board stocks as part of a pilot

program that will continue at least until

February 8, 2002. Rule 6541 is

renumbered in the rule proposal as new

Rule 6640, and the language is changed

to include ‘‘non-exchange-listed’’

securities, rather than ‘‘Bulletin Board’’

securities. Initially, Rule 6640 would

cover the same Bulletin Board stocks

that are part of the ongoing pilot

program. The language change is made

in anticipation of the Bulletin Board

becoming part of the Nasdaq-listed stock

market,7 and its listed securities

becoming subject to IM–2110–2. At that

time, the NASD may extend the scope

of Rule 6640 to include additional nonexchange-listed securities. The language

change in the rule proposal would allow

NASD that flexibility without having to

amend the rule.

IM–2310–2 SEEDS Transactions: As

a result of Nasdaq’s anticipated

separation from the NASD, the proposed

rule change deletes Rule 4420, which

primarily involves quantitative listing

criteria for Nasdaq National Market

securities. However, existing Rule

4420(g)(5) describes an obligation on the

part of the Association to distribute a

circular to member firms that provides

guidance when handling Hybrid

Securities and Selected Equity-linked

Debt Securities (‘‘SEEDS’’) transactions.

Since that provision applies to the

NASD and is regulatory in nature, it has

been retained and moved to IM–2310–

2. The proposed rule change also would

allow either Nasdaq or the NASD to

distribute the compliance circular.

Rule 2840 Trading in Index

Warrants: The proposed rule change

would delete language in Rule 2840

related to index warrants listed on the

Nasdaq Stock Market. The existing rule

was promulgated because Nasdaq

expected eventually to list such index

warrants. However, as evidenced by

Nasdaq’s proposed rule filing in

connection with its application for

exchange registration, Nasdaq no longer

intends to list index warrants. The

remainder of Rule 2840 remains

unchanged, as it has continued

applicability to NASD members that are

not also members of an exchange on

which they trade index warrants.

Rules 2850 through 2885 Position

Limits and Options Trading: To reflect

Nasdaq’s separation from the NASD, the

proposed rule change deletes from Rules

2850 through 2885 all language related

to position limits and transactions in

index warrants and options traded on

Nasdaq. However, the rule change

retains all provisions related to options

trading in the over-the-counter market.

Rule 6600 Transactions in NonExchange-Listed Securities: The

proposed rule change would combine

the existing Rule 6600 and 6700 Series

into a single Rule 6600 Series that

governs transactions in non-exchangelisted equity securities. The proposed

combination is intended to eliminate

redundancies in the existing rules,

while maintaining all of the regulatory

requirements for trading and reporting

transactions in such securities.

Proposed Rule 6620 also would

require those NASD members that effect

trades otherwise than on an exchange in

non-exchange-listed securities to enter

into contractual agreements to use

Nasdaq’s ACT system for trade

comparison and trade reporting. The

NASD has determined that this

contractual agreement with Nasdaq

would be the most practical, efficient

and fair means to provide access to the

ACT system for members that effect

such trades.

First, most NASD members are

already connected to ACT, since ACT is

used currently to report these

transactions. Second, this approach

would relieve the NASD of significant

additional cost to process and

administer these services, and Nasdaq

already has these operations in place.

Third, the subject securities do not trade

on Nasdaq; therefore, no competitive

issues would be raised. Finally, the

NASD would maintain regulatory

responsibility to monitor and enforce

compliance with the ACT rules by its

members that effect transactions in nonexchange-listed securities. Nasdaq

would function only as a vendor and

systems operator.

The proposed rule change also would

amend the minimum quotation size

requirements required by Rule 6750 to

reflect the fact that upon Nasdaq

exchange registration, the NASD would

no longer operate the OTC Bulletin

Board Service. Therefore, references to

the OTC Bulletin Board would be

deleted from the rule.

450 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

8See e.g., the new Rule 5000 Series, which sets

forth rules that apply generally to trading otherwise

than on an exchange (short selling and trading

halts) and Rule 4633, which governs specifically

transactions effected otherwise than on an exchange

in Nasdaq securities.

9Nasdaq initially will be the designated SIP for

all transactions in Nasdaq securities, while the

Securities Industry Automation Corporation will

continue to function as the SIP for transactions in

listed securities.

10Should Nasdaq amend its exchange registration

with respect to matters such as trade reporting,

short selling, or quotation obligations, we anticipate

making similar amendments to the proposed NASD

rules.

11Securities Exchange Act Release No. 44396

(June 7, 2001), 66 FR 31952 (June 13, 2001) (File

No. 10–131). But see note 10, supra.

Proposed Rule Change Relating to

Trading Otherwise Than on an

Exchange

The proposed rule change generally

would clarify that NASD rules that

relate to trading practices (e.g.,

quotations, trade reporting, short

selling, trading halts) apply only to

transactions otherwise than on an

exchange. To achieve this, the proposal

would add a definition of the term

‘‘otherwise than on an exchange’’ in

Rule 4200 and also specify in particular

rules where the rule applies only to

trading otherwise than on an exchange.8

The term ‘‘otherwise than on an

exchange’’ is defined in the proposal to

mean a trade effected by an NASD

member otherwise than on or through a

national securities exchange. The

determination of what constitutes a

trade ‘‘on or through’’ a national

securities exchange would be left to the

respective exchanges and applicable

statutes, rules and regulations, as

approved by the SEC.

The rule proposal, for the most part,

maintains the same organization as the

existing NASD rules. For example, rules

related to trading Nasdaq securities

otherwise than on an exchange are

found in the Rule 4600 Series. Rules

related to trading in Consolidated

Quotation Service (‘‘CQS’’) securities

otherwise than on an exchange similarly

remain in the Rule 6300 Series. While

the rules governing CQS securities are

similar to those governing Nasdaq

securities (e.g., the trade reporting rules)

the proposal maintains the historically

separate rule structure that has been

considered helpful by many market

participants.

The NASD is considering combining

the similar rules, where possible, and

placing them in a section that would

encompass all rules related to trading

otherwise than on an exchange. The

current rule proposal begins such a

process by establishing a new Rule 5000

Series, Trading Otherwise Than On An

Exchange, that would contain some

rules that apply both to Nasdaq and

CQS securities, such as the short sale

rule, trading halts, transactions

involving initial public offerings, and

clearance and settlement. Rules that

previously resided in the Rule 5000

Series, and have not otherwise been

deleted, have been moved. Under the

proposal, rules related to the

Intermarket Trading System (‘‘ITS’’)

(Rule 5200 Series) would be moved to

the Rule 6500 Series. Rules related to

The Portal Market (Rule 5300 Series)

would be moved to the Rule 6700

Series.

The NASD Alternative Display

Facility: The NASD would build a quote

collection, trade comparison and trade

reporting facility that meets specific

performance and security standards and

provides users with the necessary

functionality to make it a viable

alternative display facility to Nasdaq.

The facility would provide market

participants—market makers, ECNs and

order entry firms—the ability to collect

and view quotations, and to report

transactions to the appropriate

Securities Information Processor

(‘‘SIP’’)9 for consolidation and

dissemination of data to vendors and

ADF market participants. The facility

also would provide for trade

comparison through the Trade

Comparison and Reporting Service

(‘‘TRACS’’), the details of which are

described below. The facility further

would provide for real-time data

delivery to NASD Regulation for

regulatory purposes, including

enforcement of firm quote and related

rules.

The ADF is expected to launch by the

end of the first quarter of calendar year

2002, provided that Nasdaq has been

approved as a national securities

exchange. The NASD or a vendor (other

than Nasdaq) would maintain and

operate the facility. The NASD would

establish the rules that govern the ADF,

and NASD Regulation will enforce the

rules and provide market surveillance.

The proposed rule change also

includes a number of changes that more

specifically reflect the implementation

and operation of the ADF. Most

significantly, the proposed rule change

would replace in their entirety the

existing Rule 4000 Series and Rules

6100, 6300, 6400 and 6500 with a new

set of rules to govern the ADF. For the

most part, the proposed ADF rules

closely track existing Nasdaq rules or

rules proposed by Nasdaq in its

exchange registration and existing rules

that govern the CQS.10 The ADF would

provide trade comparison and trade

reporting services that would be similar

to Nasdaq’s ACT system. However, the

proposed ADF rules have been refined

to reflect the more limited functionality

of the ADF, most particularly the

absence of an automatic execution or

order routing system. Instead, the

proposed rule change would require

ADF market participants to provide

direct or indirect access to their

quotations, as described in more detail

below.

As required by existing Nasdaq rules,

ADF participants would be required to

register as market makers or ECNs for

each security in which they make a

market or display orders. Market makers

would receive approval for registration

upon demonstration that they are

members in good standing and comply

with the net capital and other financial

responsibility requirements of the Act.

To ease the administrative burden on

NASD members, the NASD rules

initially would allow registration as a

market maker in the ADF upon proof

that a firm is a registered Nasdaq market

maker. Eventually, members seeking to

become an NASD registered market

maker would have to comply either

with Rule 1017(a)(5) (which requires an

application for approval for a material

change in business operations) or Rule

1010 (application for initial membership

in the NASD).

Additionally, the proposed rule

change tracks Nasdaq requirements that

market makers maintain continuous

two-sided, firm quotations and

prescribes market maker obligations

when a bid or offer locks or crosses the

market. However, as described in more

detail below, the rule proposal does not

provide for stabilizing or penalty bids,

as existing Nasdaq rules do. The

proposal generally adopts Nasdaq’s

anticipated approach to trade reporting:

the seller reports both intramarket and

intermarket trades between market

makers, the market maker reports trades

between it and a customer, and an

NASD member reports trades between it

and a non-member.11 ECNs would

report all trades effected within the ECN

(i.e., when a market maker sells through

an ECN). As described below, the ADF

also would support a ‘‘three party trade

report’’ for ECNs.

Order Access Rule: The ADF rules

differ from existing Nasdaq rules most

significantly with respect to

participants’ ability to reach quotes

displayed in the ADF. The NASD would

not provide ADF market participants an

order routing capability, other than

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 451

12The NASD does not intend to provide an order

routing capability other than ITS because it believes

it can better perform our core investor protection

mission by focusing on regulation rather than

market operations. The NASD also believes that

market participants already do, and can continue to,

establish and run order linkage facilities that are

more efficient and innovative than a facility the

NASD could provide. The ITS ‘‘exception’’ is based

upon the fact that ITS is in place and is the current

accepted mechanism for intermarket linkage for

CQS securities. As discussed below, we would

make use of ITS optional. 13This order access rule would be the basis for

satisfying, among other things, locked and crossed

quotation obligations. While this rule would require

intermarket links with other market centers, as well

as intra-ADF links, the proposed locked and crossed

rule, Rule 4612(d), unlike other market center

locked and crossed rules, is based on the ADF’s

own quotations. In the event that the markets agree

on a locked and crossed rule approach that

encompasses quotations in all markets, proposed

Rule 4300 would still facilitate compliance.

14See Securities Exchange Act Release No. 44918

(Oct. 10, 2001), 66 FR 52814 (Oct. 17, 2001).

15The NASD service would not perform risk

management services that are provided by Nasdaq’s

ACT service.

16The NASD has not yet resolved how to

compare and report trades between an ADF market

participant and a Nasdaq market participant that

has access to Nasdaq’s ACT service. The NASD is

engaged in discussions with DTCC about the

possibility of DTCC continuing its existing trade

comparison service for over-the-counter equity

securities to provide for those intermarket trades.

ITS.12 In order to provide a means to

enforce compliance with firm quote

obligations, locked and crossed

quotation obligations,13 and to provide

other market participants within the

ADF and in other markets the ability to

provide best execution, in the absence

of an NASD-provided router, the

proposed rule change contains new Rule

4300. This rule would require market

participants to provide direct electronic

access to other market participants and

direct or indirect electronic access to all

other NASD members seeking access.

Proposed Rule 4300 defines ‘‘direct

electronic access’’ as the ability to

deliver an order for execution directly

against an individual NASD market

participant’s best bid and offer without

the need for voice communication, and

with the equivalent speed, reliability,

availability and cost as are made

available to the NASD market

participant’s own customer broker/

dealers or other active customers or

subscribers. The proposal would not,

however, preclude market participants

from charging more for the access

required by the rule—sometimes called

‘‘hit or take’’ access—than for full

service access, so long as hit or take

access is not charged discriminatorily,

i.e., charged differently for one group of

users (e.g., subscribers) than for others

(e.g., non-subscribers). While ‘‘hit or

take’’ is more limited functionally than

full book access, it also is a liquidity

taking function and some markets—

including Nasdaq—charge more for

taking liquidity than providing it.14

The proposed rule change defines

‘‘indirect electronic access’’ as the

ability to route an order through

customer broker/dealers of an NASD

market participant for execution against

the NASD market participant’s best bid

and offer, without the need for voice

communication, and with equivalent

speed, reliability, availability and cost

as are available to the market

participant’s customer broker/dealer

providing the indirect access or other

active customers or subscribers. Market

participants would be prohibited from

influencing the prices that customer

broker/dealers impose for providing

indirect access or in any way

discouraging the provision of indirect

access.

ADF market participants could satisfy

these requirements either by providing

their own bilateral linkages or by

participating in multilateral linkage

facilities provided by private vendors.

In addition, with respect to links with

exchanges, market participants could

satisfy these requirements either by

linking with the exchange or by linking

with market participants operating

within those exchanges.

To allow NASD Regulation to monitor

compliance with certain trading rules,

such as the firm quote rule and ‘‘trade

or move’’ rules, the proposed rule also

requires that all NASD market

participants that display quotations or

orders in the ADF record specified items

of information pertaining to orders they

receive via direct or indirect electronic

access, and report this information to

NASD Regulation on a real-time basis.

The proposed rule requires this

information to be provided to NASD

Regulation within 10 seconds of the

receipt of an order and, if applicable,

when an order is acted upon or

responded to. As part of the subscriber

agreement approval process, market

participants would be required to

provide the terms and methods by

which they would comply with these

rules. The NASD would review these

terms prior to approving a subscriber

agreement.

Trade Reporting and Trade

Comparison Service: As noted above,

the NASD intends to operate trade

reporting and comparison services as

part of the ADF. The trade reporting

service would collect trade reports for

NASD registered market participants, as

well as any NASD member required to

report transactions occurring otherwise

than on an exchange. The service would

transmit the reports automatically to the

respective SIPs, if required, for

dissemination to the public and the

industry. This mechanism would

operate similar to the trade reporting

functions of Nasdaq’s ACT Service,15

but would contain one notable

distinguishing feature.

The ADF would support a ‘‘three

party trade report’’ that would make it

easier for ECNs to submit trade reports

involving their subscribers and for

market makers to submit riskless

principal trade reports. A three party

trade report would be a single last sale

trade report that would denote one

reporting member (i.e., the party with

the trade reporting responsibility as

defined in Rules 4633 and 6420) and

two contra parties. The ADF would be

designed to split the three party trade

report into two separate reports that

would then be processed independently

in accordance with existing trade

reporting rules. Each of these reports

would contain its own identifier and a

reference to the original three party

trade report, so that the separate reports

can be mapped to the same transaction.

Therefore, the ADF trade reporting

system would streamline the reporting

process by reducing from three or two

to one the number of trade reports for

most ECN and riskless principal

transactions. The proposed rules would

require three party trade reports when

the reporting party is a registered ECN,

and would permit such reports by

market makers that execute riskless

principal transactions.

The NASD also intends to operate a

trade comparison service as part of

TRACS that would: (1) Compare trade

information entered by TRACS

participants and submit ‘‘locked-in’’

trades to Depository Trust Clearing

Corporation (‘‘DTCC’’) for clearance and

settlement; (2) transmit reports of the

transactions automatically to the

respective SIPs, if required, for

dissemination to the public and the

industry; and (3) provide participants

with monitoring capabilities to facilitate

participation in a ‘‘locked-in’’ trading

environment. The proposed trade

comparison rules are found in proposed

Rule 6100.

The NASD expects that a significant

volume of trades would be locked-in

and submitted directly to DTCC by way

of agreements between market

participants and Qualified Service

Representatives (‘‘QSR’’). As a result,

NASD expects the volume of trades sent

through TRACS to be relatively low.16

The proposed TRACS rules would apply

only to those members that from time to

452 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

17Securities Exchange Act Release No. 44396

(June 7, 2001), 66 FR 31952 (June 13, 2001) (File

No. 10–131). But see note 10, supra.

time need to compare trades in Nasdaq

or CQS securities that are effected

otherwise than on an exchange and are

not subject to QSR agreements that

result in direct submission to DTCC.

Rules 4633(c) and 6420(b) Which

Party Reports a Transaction: The

proposed rule change adopts what the

NASD understands to be the current

Nasdaq approach to trade reporting. In

its exchange application rule proposal,

Nasdaq provides that the seller reports

trades between market makers, the

market maker reports trades between it

and a customer, and an ECN reports

only those trades where it is deemed to

be the liquidity provider. The NASD’s

current best understanding is that

Nasdaq has decided that the seller,

rather than the liquidity provider,

should report transactions between two

market makers or ECNs.17

Rule 5100 Short Sale Rule and Rule

4612 Primary Market Maker

Standards: The proposed rule change

would amend the short sale rule and its

accompanying interpretation to make

them applicable to trading in Nasdaqlisted issues otherwise than on an

exchange (including through the ADF),

rather than Nasdaq. The rule proposal

would renumber the rule and

interpretation as Rule 5100 and IM–

5100–1, respectively.

The proposed rule change would

establish a different bid on which to

base the applicability of the short sale

rule. The existing rule prohibits

members from effecting short sales in

Nasdaq National Market securities at or

below the best bid, when the current

best bid as displayed in the Nasdaq

Stock Market is below the preceding

best bid in that security. The proposed

amendment would substitute the

national best (inside) bid for the Nasdaq

best bid as the basis for determining

when the rule applies. Although a best

(inside) bid would be calculated for the

ADF, the NASD believes that for the

purposes of the short sale rule, the

national best (inside) bid would be more

reflective of market-wide trading in a

security and therefore would better

further the purposes of the rule.

Aside from the changes noted above,

the NASD intends to have a short sale

rule that mirrors Nasdaq’s short sale

rule. The rule proposal represents

NASD’s best understanding as to the

content of Nasdaq’s short sale rule. The

existing Nasdaq rule provides an

exemption from the rule for a ‘‘qualified

market maker’’ engaged in bona fide

market making activity. The existing

rule—and Nasdaq’s proposed rule filing

in connection with its exchange

registration—defines ‘‘qualified market

maker’’ as a registered market maker

that meets the requirement set forth in

Rule 4612 to be deemed a Primary

Market Maker. The proposed rule

change would eliminate the ‘‘qualified

market maker’’ and ‘‘Primary Market

Maker’’ standards, and consequently

delete Rule 4612. The existing Primary

Market Maker Standards rule has been

suspended since implementation of the

SEC’s Order Handling Rules in early

1997. In the event that Nasdaq makes

the current Primary Market Maker

Standard rule—or an amended rule—

effective, the NASD would amend its

rules accordingly. Until then, the NASD

intends to have a short sale rule that

reflects the current exemption for

registered market makers engaged in

bona fide market making activity.

Rule 5200 Trading Halts: Proposed

Rule 5200 would provide NASD with

authority to halt trading otherwise than

on an exchange in securities quoted

(i.e., listed securities) through the ADF.

The rule proposal also would provide

NASD with the authority to halt trading

in non-exchange-listed foreign securities

that trade in a quotation medium other

than a national securities exchange or

through the ADF.

As under current NASD rules, trading

halts require NASD members to cease

effecting trades as agent or principal,

but do not preclude customer-tocustomer trades. For ADF-eligible

securities, the proposed rule would

mandate a trade halt when another

market halts trading in a security for

regulatory reasons and would give the

NASD discretionary authority to halt

trading when another market halts

trading for operational reasons. Any

trading halt initiated by the NASD

would become effective simultaneously

with notification via an administrative

message sent through the ADF terminal

or interface. Trading similarly would

resume after an administrative notice

has been issued.

Specifically, the proposed rule would

require that the NASD halt trading

through the ADF of a security listed on

a national securities exchange whenever

a market eligible to trade that security

imposes a trading halt, or suspends a

listing, for one of the following reasons:

(1) To permit dissemination of material

news; (2) to obtain information from the

issuer related to material news; (3) to

obtain information related to an issuer’s

ability to meet listing qualifications; or

(4) to obtain other information that is

necessary to protect investors and the

public interest. The proposed rule

change would further require the NASD

to halt trading through the ADF in an

American Depository Receipt (‘‘ADR’’),

if that security is listed on a national

securities exchange or foreign securities

exchange, and one of those exchanges,

or an overseeing regulatory authority,

halts trading in the security. Finally, the

rule would require the NASD to halt

trading through the ADF whenever that

system is unable to transmit real-time

quotation or trade reporting information

to the applicable SIP, or whenever a

market-wide trading halt is in effect

under circuit breaker rules of a primary

exchange.

Since the proposed trading halt rules

do not differentiate between Nasdaq and

other exchange-listed securities, there

no longer is a need for the separate

trading halt provisions of existing Rule

6430, which apply only to those

securities eligible for trading and

reporting to the Consolidated Tape, as

described in Rule 6400. Accordingly,

Rule 6430 would be deleted and its

provisions would be absorbed in Rule

5200, including the obligation of

members to notify the NASD whenever

they have knowledge of information

related to a security or issuer that has

not been adequately disclosed to the

public.

The rule proposal would grant

discretionary authority to the NASD to

halt trading otherwise than on an

exchange by its members through the

ADF whenever another national

securities exchange halts trading in a

security for operational reasons, defined

as an order imbalance or influx. Similar

discretionary authority would extend to

circumstances where a security traded

through the ADF is a derivative or

component of a security that has been

halted by a national securities exchange.

In the event that NASD chooses not to

halt trading under the aforementioned

discretionary circumstances, market

participants could continue to trade

through the ADF and would be required

to meet all applicable trade reporting

requirements.

With respect to non-exchange-listed

foreign securities, which do not trade

through the ADF but only over-thecounter, the proposed rule allows the

NASD to impose halts for over-thecounter trading in conjunction with

regulatory halts imposed by foreign

regulatory authorities because of

potential fraudulent conduct. The

proposal would not give the NASD

authority to impose a trading and

quotation halt if the foreign regulatory

halt was imposed solely for the

dissemination of material news, a

regulatory filing deficiency, or

operational reasons. Currently, the

NASD has no authority to impose

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 453

18See Rule 11Ac1–1 under the Act. 17 CFR

240.11Ac1–1.

19Concurrent with this filing, the NASD plans to

request an exemption from the Vendor Display

Rule, as Nasdaq did with its similar CQS rule.

trading and quotation halts in securities

that are quoted and traded in other

quotation media, such as the National

Quotation Bureau’s Pink Sheets. This

proposed rule would grant such

authority with respect to foreign

securities in circumstances in which it

is necessary to protect investors and the

public interest.

Rule 4619 Withdrawal of Quotations

and Passive Market Making: The

proposed rule change eliminates a

condition in existing Rule 4619(b)(3) for

a market maker seeking excused

withdrawal status based on vacation.

Under the current rule, excused

withdrawal status may only be granted

to a market maker that has three or

fewer Nasdaq Level 3 terminals. The

proposal does not replicate that

requirement for ADF market makers

because the ADF will not operate as a

primary market. As such, the absence of

a market maker with more than three

ADF terminals would not have a

significant impact on the liquidity in

those securities in which it makes a

market.

Rules 4614 and 4624 Stabilizing

Bids and Penalty Bids: The proposed

rule change would delete existing Rules

4614 and 4624 relating to stabilizing

and penalty bids. These rules allow a

market maker—usually the underwriter

of a securities offering—to enter these

special bids in connection with a

distribution of securities under Rules

101 and 104 of SEC Regulation M. The

NASD believes such activity should

occur on the market listing the issue and

thus proposes to delete these rules.

Obligations When Quoting in Multiple

Market Centers: Existing Rule 2320(g)(2)

requires members that display

quotations for non-Nasdaq securities in

two or more quotation mediums to post

the same priced quotations in each

medium. To reflect Nasdaq’s registration

as an exchange, the proposed rule

change would amend the language of

that provision to apply to ‘‘nonexchange-listed’’ securities. At the same

time, the rule proposal would add a

similar obligation for members that

display quotations for Nasdaq and CQS

securities in two or more market

centers, including the ADF. The

obligations for members quoting Nasdaq

and CQS securities are found in

proposed Rules 4613(e)(1) and 6330(f),

respectively. Note that the proposed

rules do not prohibit displaying

different size quotations in two or more

mediums or market centers, provided

that the price displayed is the same.

Obligation To Have Quotations From

Other Market Centers in Close

Proximity: Proposed Rule 4613(e)(2)

would require a registered NASD market

maker to have in close proximity to the

ADF terminal or interface at which it

makes a market in a Nasdaq security, a

quotation service that disseminates

quotations in that security on behalf of

national securities exchanges and other

market centers. A similar rule, Rule

6330(c), currently exists with respect to

CQS market makers. As with the CQS

rule, it is the NASD’s intention for the

quotations displayed in the ADF

terminals or interfaces to function as a

verification mechanism whereby ADF

market participants can monitor their

current ADF quotations and ensure that

the NASD is timely updating and

disseminating their quotations. The

NASD would not disseminate to ADF

market participants any consolidated

quotation or trade data in a security

from securities exchanges and market

centers. To ensure that ADF participants

have the data necessary to make sound

order routing decisions and to satisfy

the Vendor Display Rule,18 the NASD

would require ADF market participants

to obtain from vendors dynamic

quotations and last-sale information on

the securities they trade through the

ADF, and to display this data in close

proximity to the ADF data displayed on

their terminals—just as is currently

required by Nasdaq of CQS market

makers in Rule 6330(c).19

A requirement to disseminate

consolidated quotation and trade data

from securities exchanges and other

market centers would result in

significantly increased costs to build the

ADF because it would necessitate

substantially greater capacity and would

require a more complex technical design

of the ADF terminals and user interfaces

to allow for receipt of that information.

Rule 4620 Voluntary Termination of

Registration: The proposal contains a

new provision related to voluntary

termination as an NASD market maker.

Proposed Rule 4620 provides that

registration as a market maker in a

security is voluntarily terminated where

the market maker (1) withdraws its

quotations from the ADF and does not

re-enter quotations in the security for

five minutes or (2) fails to re-enter

quotations within 30 minutes of the end

of a trading halt. In either circumstance,

a market maker would be prohibited

from re-registering as a market maker in

that security for twenty (20) business

days, unless the market maker meets the

conditions for excused withdrawal

specified in Rule 4619.

Rules 6350(a) and 6520(e) Obligations

of CQS and ITS Market Makers Related

to Pre-Opening Applications: The

proposed rule change contains new

obligations on registered CQS and ITS

market makers that participate in the

pre-opening application process.

Proposed Rule 6350(a) (CQS) and Rule

6520(e) (ITS) would provide that a

registered market maker that

participates in the pre-opening

application process and does not enter

and maintain two-sided quotations in

the security on that same trading day

may not re-register to participate as a

market maker in that security for twenty

(20) business days, unless the market

maker is granted an excused withdrawal

from the NASD.

Rule 6500 Intermarket Trading

System: The proposed rule change

reflects the NASD’s anticipated

participation in the ITS through the

ADF. In many respects, the NASD

anticipates participating in ITS in a

manner similar to Nasdaq’s current

participation in ITS. However, the ITS

rules have been amended in the

proposal to reflect that the ADF will not

use Nasdaq’s Computer Assisted

Execution System (‘‘CAES’’) to effect

ITS trades. As such, the proposed rule

change deletes all references to ‘‘CAES’’

in the ITS rules and elsewhere. In

addition, the proposal refers to market

makers and ECNs participating in ITS as

ITS/ADF market makers.

The rule proposal would renumber

and move the ITS rules to the 6500

Series. Furthermore, unlike Nasdaq,

NASD market participants that register

to enter quotations in CQS securities

would not be obligated to participate in

ITS. Participation in ITS, with the

associated obligations such as

compliance with the trade-through rule

and the market probing requirement,

would be completely voluntary. If a

market participant determines to

participate in ITS, then it must abide by

all rules applicable to ITS, including the

trade-through rule and the market

probing requirement. Also, the NASD

would not provide an intra-market order

routing system such as CAES.

Accordingly, market participants would

be responsible under Rule 4300 to

establish links to facilitate execution of

CQS securities in the intra-market and,

in the case of non-ITS participants,

direct or indirect linkages to the

exchanges.

The quote access requirements of

proposed Rule 4300 would not extend

to intermarket access for trading Nasdaq

securities. Unlike for CQS securities, the

Commission has not mandated an

intermarket linkage like ITS for Nasdaq

securities. Moreover, intermarket

454 Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices

20 15 U.S.C. 78o–3(b)(6).

21Securities Exchange Act Release No. 43863

(Jan. 19, 2001), 66 FR 8020 (Jan. 26, 2001).

22 17 CFR 240.11Ac1–1(b)(1)(ii).

23The proposed effective date is based upon

NASD’s assumption that Nasdaq’s exchange

registration will be approved before SuperMontage

launches. If that turns out not to be the case, the

NASD would have to revisit the effective date of the

proposed rule change, including whether the rules

related to the ADF should become effective at a

different time from the rules resulting from Nasdaq

separation.

24See Amendment No. 1, supra note 3.

25 15 U.S.C. 78o-3(b)(11).

26 15 U.S.C. 78k-1(c)(1); See also Section

11A(c)(3)(A) of the Act.

27See Exchange Act Release No. 37619A

(September 6, 1996), 61 FR 48290 (September 12,

1996) (Order Handling Rules); Exchange Act

Release No. 40760 (December 8, 1998), 63 FR 70844

(December 22, 1998) (Regulation ATS).

linkage for trading Nasdaq securities is

fundamentally a multilateral,

intermarket structural issue.

Accordingly, the NASD does not believe

it appropriate for the NASD to

unilaterally impose such an intermarket

linkage obligation. Rather, the NASD

would propose—as is the case today—

that members of another market that

desire to access an ADF market

participant’s quotes in Nasdaq securities

establish an execution arrangement with

that ADF market participant or,

alternatively, become a member of the

NASD.

Additionally, the proposed rule

change would add the option of a 30-

second commitment to trade period for

ITS/ADF Market Makers. This option is

permitted under an ongoing ITS Plan

pilot program, and the NASD believes it

would benefit our member participants.

Fees and Assessments: The proposed

rule change does not include any

proposed fees or assessments

specifically related to the ADF. Existing

fees and assessments, including the

gross assessment and Section 8 fees,

would continue to apply to NASD

members. Any specific fees or

assessments with respect to the ADF

would be the subject of a future rule

filing.

2. Statutory Basis

The NASD believes that the proposed

rule change is consistent with Section

15A(b)(6) of the Act,20 which requires a

national securities association to have

rules that prevent fraudulent and

manipulative acts, promote just and

equitable principles of trade, foster

cooperation and coordination among

persons engaged in regulating, clearing,

settling, processing information and

facilitating transactions in securities,

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. In addition, this rule

proposal is consistent with Section

15A(b)(6) because it does not permit

unfair discrimination between

customers, issuers, brokers, or dealers,

fix minimum profits, impose any

schedule or fix rates of commissions,

allowances, discounts, or other fees to

be charged by members, or regulate

matters not related to the purposes of

the Act or the administration of the

Association.

Moreover, in the SuperMontage

Order,21 the SEC required the NASD to

create a facility that ‘‘permits NASD

members to comply with their

obligations under Commission and

NASD rules (including Exchange Act

Rule 11Ac1–1(c)(5) and Regulation

ATS) without participating in the

Nasdaq execution facility. The facility

will identify through the central

processor the identity of the NASD

member that is the source of each

quote,’’ as is required by Exchange Act

Rule 11Ac1–1(b)(1)(ii).22 Furthermore,

the Commission stated that ‘‘[t]he

facility will provide a market neutral

linkage to the Nasdaq and other

marketplaces, but not an execution

service.’’ The NASD believes that the

proposed rule change fulfills the

obligations specified by the Commission

in the SuperMontage Order. In

particular, the NASD believes that this

proposal would provide a market

neutral linkage by requiring market

participants to link, either directly or

indirectly, to all those seeking access to

the market participants’ quotations as

required in proposed Rule 4300.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change, as amended, will

result in any burden on competition that

is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change were not solicited or

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.

The NASD has requested that the

proposed rule change become effective

upon the later of Commission approval

or the effectiveness of Nasdaq’s

Exchange Registration.23 The NASD has

waived the requirement that the

Commission either approve the

proposed rule change, or institute

disapproval proceedings, within thirtyfive days of publication of the proposed

rule change in the Federal Register.24

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposal, as

amended, is consistent with the Act. In

particular, the Commission solicits

comment on whether the proposed rules

are sufficient to meet the NASD’s

obligations under Sections 15A(b)(11) 25

and 11A(c)(1) 26 of the Act with respect

to the over-the-counter market,

including providing NASD market

makers and ECNs with the ability to

comply with their obligations under the

Commission’s Order Handling Rules

and Regulation ATS.27

In addition, in Rule 4300 the NASD

proposes certain quote and order access

obligations. The Commission requests

comment on whether this rule will

provide potential users with adequate

access to quotations displayed through

the ADF and will allow the NASD to

effectively enforce its access

requirements. In particular, the

Commission requests comment on what

it means to make indirect electronic

access ‘‘readily available’’ (see proposed

Rule 4300(a)(2)).

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

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

available for inspection and copying in

Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 / Notices 455

28 17 CFR 200.30–3(a)(12).

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to the File No.

SR–NASD–2001–90 and should be

submitted by January 21, 2002.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.28

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–31481 Filed 12–21–01; 8:45 am]

BILLING CODE 8010–01–P