Document ID: SEC-2007-0078-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-01-17T05:00Z

[Federal Register: January 17, 2007 (Volume 72, Number 10)]
[Notices]               
[Page 2052-2055]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ja07-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55061; File No. SR-NASDAQ-2006-061]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the NASDAQ Stock Market LLC To 
Codify Sponsored Access Rule

January 8, 2007.
    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ The 
NASDAQ Stock Market LLC (``Nasdaq'') is filing with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq is filing with the Commission a proposed rule change to 
update and clarify the requirements for members that provide electronic 
access to Nasdaq's execution services, and to codify these requirements 
in Nasdaq's rules.
    Nasdaq has designated this proposal as one effecting a change that: 
(i) Does not significantly affect the protection of investors or the 
public interest; (ii) does not impose any significant burden on 
competition; and (iii) by its terms, does not become operative for 30 
days after the date of the filing.
    Nasdaq has provided the Commission with written notice of its 
intent to file this 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 
pursuant to Section 19(b)(3)\3\ and Rule 19b-4(f)(6) thereunder.\4\ The 
proposed rule change will become operative 30 days after the date of 
the filing.
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    \3\ 15 U.S.C. 78s(b)(3).
    \4\ 17 CFR 240.19b-4.(f)(6).
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    The text of the proposed rule change is below. The proposed new 
language is italicized.
* * * * *

4611. Nasdaq Market Center Participant Registration

    (a)-(c) No change.
    (d) Members may provide sponsored access in accordance with the 
provisions below:
    (1) Definition. Sponsored Access is the practice by a member firm 
(``Sponsoring Member'') of providing access to the Nasdaq Execution 
System (``Nasdaq'') on an agency basis to another firm or customer 
(``Sponsored Firm''). Sponsored access can be of two forms: (a) pass-
through access, whereby a Sponsored Firm enters orders that pass 
through the Sponsoring Member's systems and then into Nasdaq (``Pass-
through Sponsored Access''), and (b) direct access, whereby the 
Sponsored Firm enters orders directly into Nasdaq (``Direct Sponsored 
Access'').
    (2) Sponsoring Members that provide Sponsored Access to Nasdaq 
shall be responsible for complying with the obligations in Rule 4611 
with respect to any activity conducted by a Sponsored Firm using a 
market participant identifier (``MPID'') assigned to the Sponsoring 
Member.
    (3) A Sponsoring Member that provides Direct Sponsored Access to 
Nasdaq shall execute and file with Nasdaq the Addendum to the Nasdaq 
Services Agreement for Sponsored Access to Nasdaq (``Sponsored Access 
Agreement'') and any other such agreements as specified by Nasdaq. 
Sponsored Firms shall also execute and file with Nasdaq a Sponsored 
Access Agreement and any other such agreements as specified by Nasdaq.

Interpretive Material 4611-1--Sponsored Access

    (1) Compliance with Nasdaq Supervision and Customer Protection 
Requirements
    Sponsoring Members have responsibility for the conduct of their 
Sponsored Firms as if the conduct were their own. Sponsoring Members 
that provide Sponsored Access, whether Pass-through or Direct, have a 
continuing obligation to comply with all Nasdaq rules and procedures 
and the federal securities laws and rules, and must, in accordance with 
Rule 3010, have supervisory systems and written procedures reasonably 
designed to achieve compliance with these obligations. For example, 
Sponsoring Members must have systems and written procedures to 
supervise the activity of Sponsored Firms, including obligations with 
respect to the Nasdaq and SEC short sale rules (Rule 3350 and SEC Rule 
10a-1 and Regulation SHO), and the requirements articulated in Rule 
3370. Further, Sponsoring Members must satisfy their obligations under 
IM-2110-2 or Rule 6440 to not trade ahead of customers. Similarly, a 
limit order from a Sponsored Firm is subject to the SEC limit order 
display rule (Rule 604 under Regulation NMS) and the order must be 
handled in compliance with the rule. Sponsoring Members also must 
possess sufficient information about their Sponsored Firms to satisfy 
the ``know your customer'' obligation that is embedded in the Nasdaq 
Conduct Rules.

(2) Compliance With Other Nasdaq Requirements

    (a) Rule 8210. Sponsoring Members are responsible for complying 
with all

[[Page 2053]]

requests for information pursuant to Rule 8210. The Sponsored Access 
Agreement described in Rule 4611(d)(3) shall provide that Sponsored 
Firms and Sponsoring Members must comply with Rule 8210.
    (b) Fees. Sponsoring Members are responsible for paying all Nasdaq 
fees accrued under their MPIDs, irrespective of the fact that 
particular charges may be associated with orders entered by Sponsored 
Firms.
    (c) Services Agreement; Termination. The fact that a member is 
providing Sponsored Access does not alter Nasdaq's rights with regard 
to the Sponsoring Member that are articulated in Nasdaq's agreements 
with members (e.g., the Nasdaq Services Agreement). In particular, if 
the Sponsoring Member's provision of Sponsored Access threatens the 
integrity of Nasdaq systems, Nasdaq reserves the right under the Nasdaq 
Services Agreement to unilaterally and immediately terminate the 
Sponsoring Member's access.
    (d) Examinations. Sponsoring Members are reminded that, as a self-
regulatory organization responsible for examining the activity of a 
member, Nasdaq may examine the Sponsoring Member's books, records, and 
facilities to determine whether a violation of Nasdaq rules and/or 
federal securities laws, rules, and regulations have occurred. Such 
examination may include an examination of the Sponsoring Member's 
internal systems, as well as the member's records regarding its 
customers and their activity.

(3) Obligation To Ensure Accuracy of Orders Entered into Nasdaq

    Sponsoring Members have an obligation under Nasdaq Rule 3010 to 
have in place a supervisory system and written supervisory procedures 
reasonably designed to ensure that orders placed by Sponsored Firms 
into Nasdaq are not entered in error or in a manner inconsistent with 
Nasdaq rules. Sponsoring Members should consider the following factors 
when developing a supervisory system and written supervisory 
procedures:
    (a) Sponsoring Member order management systems should include 
controls that limit the use of such systems to authorized persons, 
check for order accuracy, prevent orders that exceed preset credit- and 
order-size parameters from being transmitted to Nasdaq, and prevent the 
unwanted generation, cancellation, repricing, resizing, duplication, or 
re-transmission of orders.
    (b) Safeguards should be in place to ensure that the operation, 
testing, or maintenance of a Sponsoring Member's order management 
system does not result in the inadvertent disabling of Nasdaq, mistaken 
executions, errors, or other trading problems.
    (c) Sponsoring Members and Direct Sponsored Access Sponsored Firms 
should ensure that they do not test their systems' connectivity to 
Nasdaq by sending orders that are not executable, such as by sending 
orders during normal market hours that are priced far outside a 
security's current price. Firms must test pursuant to established 
protocols and test messages should be clearly denoted as such.
    (d) Before sponsoring access to Nasdaq, a Sponsoring Member must 
have a supervisory system and written supervisory procedures in place 
reasonably designed to ensure that such orders are not entered in error 
or in a manner inconsistent with Nasdaq rules (including, but not 
limited to, Rule 3310 and IM-3310) or with the Nasdaq Services 
Agreement.
    (e) Procedures that are available to adjudicate clearly erroneous 
transactions are to be used only in cases of clear or obvious errors 
and should not be used as a proxy for proper system use or trading 
procedures. Other errors, whether as a result of a system problem or 
human error, will not be dealt with through the rules applicable to 
clearly erroneous transactions.
* * * * *

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.

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

1. Purpose
    Nasdaq proposes to amend the rules governing Nasdaq to update and 
codify the requirements applicable to Nasdaq members that provide 
access to other firms and customers to the Nasdaq execution system 
(``Sponsored Access''). With one exception, members will be subject to 
the requirements articulated in NASD Notice to Members 98-66 (``Notice 
to Members'' or ``Notice'') and which were reiterated and updated by 
the NASD in Notice to Members 04-66.\5\
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    \5\ The Notice to Members described Sponsored Access as 
``electronic pass-through services.''
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    Notice to Members 98-66, which was filed with the Commission as an 
interpretation of the NASD rules and the Nasdaq subscriber agreement, 
clarified that members could provide Sponsored Access and remain in 
compliance with their rule and contract obligations to safeguard Nasdaq 
equipment and to prevent unauthorized access to Nasdaq systems.\6\ In 
addition, the Notice re-emphasized members' existing obligations to 
monitor the trading activity by their customers, including those being 
provided Sponsored Access, and to have written procedures governing 
customer trading. Notice to Members 04-66 also re-asserted that members 
are responsible for all trading conducted in their name, and that the 
member is responsible for the fees associated with that trading.
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    \6\ Securities Exchange Act Release No. 40354 (Aug. 24, 1998), 
63 FR 46264 (Aug. 31, 1998).
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    The proposed rule change amends the Nasdaq rules governing Nasdaq's 
execution system to articulate specifically that members providing 
Sponsored Access are responsible for all activity conducted using their 
market participant identifier (``MPID''). In addition, the proposal 
adds an Interpretive Material to Rule 4611 (IM-4611-1--Sponsored 
Access) that discusses members' ongoing responsibilities to comply with 
all Nasdaq rules and operating procedures, as well as the federal 
securities laws and rules, and to have systems and written procedures 
reasonably designed to achieve compliance with these obligations. For 
example, IM-4611-1 discusses that members must continue to comply with 
the Nasdaq and SEC short sale rules, including the requirements of Rule 
3370, when a firm sells securities under a Sponsored Access 
arrangement, and that members also must fulfill their ``know your 
customer'' obligations that are embedded in the Nasdaq Conduct Rules. 
The interpretive material also states that members must continue to 
satisfy any limit order protection and display obligations that arise 
from limit orders submitted by sponsored firms.
    The interpretive material also reminds members that they remain 
responsible for all Nasdaq fees accrued under their MPID, irrespective 
of the fact that some of the fees may be attributable to orders 
submitted by sponsored firms.

[[Page 2054]]

Similarly, the interpretive material states that Nasdaq's rights with 
regard to the Sponsoring Member that are articulated in Nasdaq's 
agreements with members (e.g., the Nasdaq Services Agreement) are not 
altered by fact that a member is providing Sponsored Access.
    As stated earlier, with one exception, members will continue to be 
subject to the same requirements as imposed by the Notice to Members 
when providing Sponsored Access. Specifically, Nasdaq is eliminating 
the requirement that orders must be entered into a member's system (or 
a service bureau's system provided by the member) before being 
transmitted to Nasdaq (i.e., the electronic pass-through requirement). 
Nasdaq does not expect many members to provide such ``direct access'' 
to Nasdaq. Nasdaq stresses, however, that eliminating this requirement 
does not diminish a member's responsibility for ensuring that trading 
occurring under its MPID is in compliance with Nasdaq's rules and 
procedures and the federal securities laws. For example, members 
considering providing such direct access must, in accordance with Rule 
3010, have systems and written procedures to supervise the activity of 
a sponsored firm with direct access to Nasdaq.\7\ In addition, members 
also must fulfill their ``know your customer'' obligations that are 
embedded in the Nasdaq Conduct Rules.
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    \7\ A member's system and procedures would need to be reasonably 
designed to achieve compliance with, for example, the requirements 
of Rule 3370.
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    To limit its exposure in commercial disputes and to protect its 
intellectual property when a sponsored firm can submit orders to Nasdaq 
directly, Nasdaq is proposing to require sponsored firms with this type 
of access to execute an agreement (``Sponsored Access Agreement'') that 
will require them to abide by the Nasdaq Services Agreement, which is 
executed by all members accessing Nasdaq's systems.\8\ Requiring the 
Sponsored Access Agreement ensures that Nasdaq has an agreement with 
the party actually submitting orders to Nasdaq, although the member 
remains responsible for the trading, including compliance with Nasdaq 
rules and procedures and the federal securities laws and rules.
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    \8\ The Sponsoring Member also would be required to execute the 
Sponsored Access Agreement.
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    An executed Sponsored Access Agreement will not be necessary when a 
sponsored firm does not enter orders directly into Nasdaq Market Center 
(i.e., submits orders utilizing an electronic pass-through), because 
the orders are entering Nasdaq through a system provided by a party 
with whom Nasdaq already has an agreement: A member.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 6 of the Act,\9\ in general and with section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest. The proposal is consistent with these 
obligations because it updates the standards for providing Sponsored 
Access, and clearly articulates the obligations in the Nasdaq's rules.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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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 rule change has become effective pursuant to section 
19(b)(3)(A) of the Act and subparagraph (f)(6)(iii) of rule 19b-4 
thereunder in that it effects a change that does not become operative 
for 30 days after the date of the 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 written notice of 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. The proposed rule change will become operative 30 days 
after the date of the filing.
    At any time within 60 days of the filing of a rule change pursuant 
to section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

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-NASDAQ-2006-061 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2006-061. 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 Nasdaq. 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-NASDAQ-2006-061 and 
should be submitted on or before February 7, 2007.

[[Page 2055]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-543 Filed 1-16-07; 8:45 am]

BILLING CODE 8011-01-P