Document ID: SEC-2005-0083-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-10-07T04:00Z

[Federal Register: October 7, 2005 (Volume 70, Number 194)]
[Notices]               
[Page 58762-58764]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc05-144]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52549; File No. SR-NASD-2005-115]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Amend NASD Rule 11890

October 3, 2005
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 22, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. Nasdaq filed the 
proposal as a ``non-controversial'' rule change pursuant to Section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to clarify the scope of a recent amendment to NASD 
Rule 11890. Nasdaq proposes to implement the proposed rule change on 
September 26, 2005. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].\5\
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    \5\ The proposed rule change is marked to show changes from the 
rule as it appears in the electronic NASD Manual available at http://www.nasd.com
.

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* * * * *

11890. Clearly Erroneous Transactions

(a) Authority to Review Transactions Pursuant to Complaint of Market 
Participant
    (1) No change.
(2) Procedures for Reviewing Transactions
    (A)-(B) No change.
    (C) Following the expiration of the period for submission of 
supporting material, a Nasdaq officer shall determine whether the 
complaint is eligible for review. A complaint shall not be eligible for 
review under paragraph (a) unless:
    (i) the complainant has provided all of the supporting information 
required under paragraph (a)(2)(B), and
    (ii) For trades executed between 9:30 a.m. and 4:00 p.m. Eastern 
Time, [T]the price of transaction to buy (sell) that is the subject of 
the complaint is greater than (less than) the best offer (best bid) by 
an amount that equals or exceeds the minimum threshold set forth below:

------------------------------------------------------------------------
               Inside price                       Minimum threshold
------------------------------------------------------------------------
$0-0.99...................................  $0.02 + (0.10 x Inside
                                             Price)
1.00-4.99.................................  0.12 + (0.07 x (Inside Price-
                                             1.00))
5.00-14.99................................  0.40 + (0.06 x (Inside
                                             Price--5.00))
15 or more................................  1.00
------------------------------------------------------------------------

    For a transaction to buy (sell) a Nasdaq listed security, the 
inside price shall be the best offer (best bid) in Nasdaq at the time 
that the first share of the order that resulted in the disputed 
transaction was executed, and for a transaction to buy (sell) an 
exchange-listed security, the inside price shall be the national best 
offer (best bid) at the time that the first share of the order that 
resulted in the disputed transaction was executed.
    (D)-(G) No change.
    (b) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 58763]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Rule 11890(a) allows designated officers of Nasdaq to declare 
transactions that arise out of the use or operation of Nasdaq execution 
or communications systems to be clearly erroneous and to nullify or 
modify the terms of such transactions. In SR-NASD-2004-009,\6\ Nasdaq 
established a minimum price deviation threshold to provide a ``bright 
line'' rule standard for determining when transactions are considered 
eligible for review. A transaction price that meets these thresholds 
does not automatically trigger a clearly erroneous determination, but 
if the transaction price does not meet these thresholds the transaction 
will not be considered for clearly erroneous review. Thus, there is now 
a conclusive presumption that a transaction to buy (sell) is not 
clearly erroneous unless its price is greater than (less than) the best 
offer (best bid) by an amount that equals or exceeds the minimum 
threshold set forth below:
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    \6\ Securities Exchange Act Release No. 52141 (July 27, 2005), 
70 FR 44709 (August 3, 2005) (SR-NASD-2004-009).

------------------------------------------------------------------------
               Inside price                       Minimum threshold
------------------------------------------------------------------------
$0-$.99...................................  $0.02 + (0.10 x Inside
                                             Price)
1.00-4.99.................................  0.12 + (0.07 x (Inside
                                             Price--1.00))
5.00-14.99................................  $0.40 + (0.06 x (Inside
                                             Price--5.00))
15 or more................................  1.00
------------------------------------------------------------------------

    Nasdaq proposes an amendment to NASD Rule 11890 to clarify that the 
minimum price deviation thresholds are applicable only to transactions 
executed during regular market hours, i.e., between 9:30 a.m. and 4:00 
p.m. According to Nasdaq, this amendment reflects the fact that the 
analysis conducted by Nasdaq to determine the appropriate levels for 
the thresholds was based on pricing during normal market hours, and 
that therefore application of the thresholds during other trading 
sessions is not consistent with the intent underlying the rule. Nasdaq 
believes that, during pre-market and post-market trading sessions, the 
inside price of many stocks may not fully reflect trading interest in 
the stock, since the range of market participants in these trading 
sessions is far more limited than during regular market hours. As a 
result, a trade that occurs at a price that deviates significantly from 
a stock's trading range during the most recent regular market session 
may nevertheless be sufficiently close to the pre-market or post-market 
inside price that it would not meet the minimum deviation threshold for 
the stock. Because the thresholds established by Nasdaq were based on 
analysis of trading patterns during regular market hours, Nasdaq 
believes that the rule should be clarified by limiting the thresholds' 
application to such hours. Nasdaq believes the change would result in a 
larger number of transactions being eligible for review under NASD Rule 
11890, since transactions occurring during pre-market and post-market 
sessions would always be eligible for adjudication under the rule 
unless the market participant seeking an adjudication failed to provide 
the information required under NASD Rule 11890(a)(2)(B) (i.e., the 
approximate time of transaction(s), security symbol, number of shares, 
price(s), contra broker(s) if the transactions are not anonymous, 
Nasdaq system used to execute the transactions, and the reason the 
review is being sought).
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\7\ in general and with 
Section 15A(b)(6) of the Act,\8\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Nasdaq 
believes that the proposed rule change would ensure that NASD Rule 
11890's minimum price deviation thresholds do not bar adjudication of 
clearly erroneous petitions in circumstances where the wider spreads 
prevailing in pre-market and post-market trading may make the 
application of such thresholds excessively restrictive.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will 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 were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change is subject to Section 
19(b)(3)(A)(iii) of the Act\9\ and Rule 19b-4(f)(6) thereunder\10\ 
because the proposal: (i) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
prior to 30 days after the date of filing or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the self-regulatory organization 
has given the Commission notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 30-day operative 
delay. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because such waiver would make immediately eligible for adjudication 
clearly erroneous petitions in circumstances where the wider spreads 
prevailing in pre-market and post-market trading otherwise may make the 
application of NASD Rule 11890's minimum price deviation thresholds 
overly restrictive. For these reasons, the Commission designates the 
proposal to be effective upon filing with the Commission.\11\
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    \11\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors,

[[Page 58764]]

or otherwise in furtherance of the purposes of the Act.\12\
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    \12\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/.
 rules/sro.shtml); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-115 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-115. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2005-115 and should be submitted on or before 
October 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5533 Filed 10-6-05; 8:45 am]

BILLING CODE 8010-01-P