Document ID: SEC-2006-1704-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-12-28T05:00Z

[Federal Register: December 28, 2006 (Volume 71, Number 249)]
[Notices]               
[Page 78245-78247]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de06-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54984; File No. SR-NASD-2006-135]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposal 
Relating to Implementation of Certain Approved Rule Changes Reflecting 
the Complete Separation of Nasdaq from NASD

December 20, 2006.

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\1 and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 20, 2006, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
NASD. NASD has filed this proposal 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

    NASD has filed a proposed rule change relating to a phased 
implementation of SR-NASD-2006-104, which was approved by the 
Commission on November 21, 2006.\5\ Specifically, NASD is proposing to 
implement on December 20, 2006, amendments to the Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries (``Delegation 
Plan'') and the By-Laws of NASD, NASD Regulation and NASD Dispute 
Resolution, and the deletion of The Nasdaq Stock Market Inc. 
(``Nasdaq'') By-Laws, which were previously approved in SR-NASD-2006-
104, to reflect Nasdaq's complete separation from NASD, and, on that 
same date, dissolve NASD's controlling share in Nasdaq.
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    \5\ >See Securities Exchange Act Release No. 54798, 71 FR 69156 
(November 29, 2006) (order approving SR-NASD-2006-104).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. 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

1. Purpose
Background
    On June 30, 2006, the Commission approved proposed rule change SR-
NASD-2005-087, which, among other things, amended NASD's Delegation 
Plan, By-Laws and NASD rules to reflect the operation of The NASDAQ 
Stock Market LLC (the ``Nasdaq Exchange'') as a national securities 
exchange for Nasdaq-listed securities.\6\ For a transitional period 
that commenced on August 1, 2006, the Nasdaq Exchange has been 
operating as an exchange for Nasdaq-listed securities only. Nasdaq, as 
a subsidiary of NASD, continues to perform its obligations under the 
Delegation Plan with respect to over-the-counter (``OTC'') quoting, 
trading and execution of non-Nasdaq exchange-listed securities, 
including the operation of, among other things, its SuperIntermarket 
(``SiM'') trading platform. Nasdaq no longer performs any functions 
under the Delegation Plan relating to Nasdaq-listed securities.
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    \6\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving SR-NASD-2005-
087).
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    On November 21, 2006, the Commission approved SR-NASD-2006-104.\7\ 
Pursuant to SR-NASD-2006-104, NASD proposed to delete the Nasdaq By-
Laws and amend the Delegation Plan, the By-Laws of NASD, NASD 
Regulation and NASD Dispute Resolution, and NASD rules to reflect the 
separation of Nasdaq from NASD upon the operation of the Nasdaq 
Exchange as a national securities exchange for non-Nasdaq exchange-
listed securities. In addition, NASD proposed to amend NASD rules for 
OTC quoting and trading in non-Nasdaq exchange-listed securities to 
reflect the manner in which NASD will be satisfying its regulatory 
obligations under the Exchange Act and the rules thereunder on a 
temporary basis until NASD's Alternative Display Facility (``ADF'') is 
able to satisfy those obligations (``Modified SiM Rules'').\8\ Finally, 
NASD proposed to expand the scope of the NASD/Nasdaq Trade Reporting 
Facility rules to include trade reporting in non-Nasdaq exchange-listed 
securities and make other clarifying and conforming changes. As 
approved, SR-NASD-2006-104 will be effective on the date on which the 
Nasdaq Exchange operates as a national securities exchange with respect 
to non-Nasdaq exchange-listed securities. When SR-NASD-2006-104 was 
originally filed, that date was anticipated to be October 2006; 
however, it is now anticipated to be in the first quarter of 2007.
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    \7\ See note 5 supra.
    \8\ This is one of the conditions required by the Commission 
before the Nasdaq Exchange can operate as an exchange for non-Nasdaq 
exchange-listed securities. The Commission approved the Nasdaq 
Exchange application on January 13, 2006. See Securities Exchange 
Act Release No. 53128, 71 FR 3550 (January 23, 2006) (File No. 10-
131). See also Securities Exchange Act Release No. 54085 (June 30, 
2006), 71 FR 38910 (July 10, 2006), which modified the conditions 
set forth in the Nasdaq Exchange approval order to allow the Nasdaq 
Exchange to operate as a national securities exchange solely with 
respect to Nasdaq-listed securities.
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Separation of Nasdaq from NASD and Proposed Phased Implementation of 
SR-NASD-2006-104

    As noted above, Nasdaq continues to exercise regulatory authority 
under the Delegation Plan. Therefore, NASD retains control of Nasdaq 
through a single share of Series D Preferred Stock (the ``Series D 
Share'') that allows NASD to cast a majority of the votes in any matter 
submitted to Nasdaq's stockholders, including the election of Nasdaq 
directors. Once the delegation to Nasdaq is no longer necessary, the 
Series D Share will automatically lose its voting rights and will be 
redeemed by Nasdaq for $1.00.
    In light of the delay in implementation of portions of SR-NASD-
2006-104, NASD is proposing to eliminate its delegation and effectuate

[[Page 78246]]

complete separation with Nasdaq, including dissolution of the Series D 
Share, prior to commencement of operation of the Nasdaq Exchange as an 
exchange for non-Nasdaq exchange-listed securities. However, for a 
transitional period, Nasdaq will continue to perform the same services 
it does today, including operation of the SiM trading platform, on 
NASD's behalf via the Transitional System and Regulatory Services 
Agreement. NASD anticipates that this transitional period will be 
brief, commencing on December 20, 2006 and concluding once SR-NASD-
2006-104 is fully implemented in the first quarter of 2007.
    To effectuate this phased implementation, NASD is proposing to 
implement on December 20, 2006 certain portions of SR-NASD-2006-104 to 
reflect the separation of Nasdaq from NASD and that Nasdaq will no 
longer be operating under the Delegation Plan. Specifically, NASD is 
proposing to: (1) Remove references in the Delegation Plan to Nasdaq as 
a subsidiary and remove the delegation of authority to Nasdaq (Section 
III) and the delegation of authority relating to Stockwatch (Section 
IV); (2) revise the NASD By-Laws, NASD Regulation By-Laws and NASD 
Dispute Resolution By-Laws to remove references to Nasdaq as a 
subsidiary of NASD; and (3) delete the Nasdaq By-Laws. During this 
transitional period, references to ``Nasdaq'' in NASD's rules shall be 
deemed to mean ``Nasdaq operating on behalf of NASD via the 
Transitional System and Regulatory Services Agreement.'' Additionally, 
NASD notes that during this transitional period, the Market Operations 
Review Committee, which was validly constituted pursuant to a 
delegation by the NASD Board, will continue to exist in its current 
form and perform the functions set forth in NASD Rules 5265 and 11890. 
All remaining changes approved in SR-NASD-2006-104 will become 
effective on the date upon which the Nasdaq Exchange operates as an 
exchange for non-Nasdaq exchange-listed securities.\9\ As such, during 
this transitional period, there will be no changes from the perspective 
of users or participants of NASD facilities operated by Nasdaq.
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    \9\ As permitted by the terms of the Transitional System and 
Regulatory Services Agreement, NASD may, in its sole discretion, 
determine to continue to use Nasdaq as a vendor to operate SiM, even 
upon the Nasdaq Exchange's operation as an exchange for non-Nasdaq 
exchange-listed securities. In that event, the current rules 
relating to SiM will remain in place and the approved rule changes 
in SR-NASD-2006-104 relating to Modified SiM Rules will not be 
implemented. All other rule changes that are part of SR-NASD-2006-
104 (e.g., amendments to the NASD/Nasdaq Trade Reporting Facility 
Rules) will become operative upon the operation of NASD's ADF for 
non-Nasdaq exchange-listed securities as approved by the Commission 
on September 28, 2006. See Securities Exchange Act Release No. 54537 
(September 28, 2006), 71 FR 59173 (October 6, 2006) (order approving 
SR-NASD-2006-91). NASD will submit a filing to the Commission to 
effectuate this.
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    NASD has filed the proposed rule change for immediate 
effectiveness. NASD is proposing that the operative date of the 
proposed rule change be December 20, 2006, the date on which NASD 
proposes to effectuate the complete separation of Nasdaq from NASD.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ which requires, among 
other things, that NASD rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change will 
provide an effective mechanism and regulatory framework for 
effectuating Nasdaq's complete separation from NASD.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change would 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

    Because the proposal does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) 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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). As required by Rule 19b-
4(f)(6)(iii) of the Act, NASD provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description of the text of the proposed rule change, at least 
five business days prior to the date of the filing of the proposed 
rule change.
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    NASD has requested that the Commission waive the 30-day operative 
delay under Rule 19b-4(f)(6)(iii),\13\ and designate the proposed rule 
change effective immediately. The Commission believes that it is 
consistent with the protection of investors and the public interest to 
waive the 30-day operative delay,\14\ as such waiver is necessary so 
that the complete separation of Nasdaq from NASD can be effectuated on 
December 20, 2006.\15\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \15\ Furthermore, the amendments proposed herein were subject to 
notice and comment and approved by the Commission on November 21, 
2006. See note 5 supra.
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    At any time within 60 days of the filing of such 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, 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-NASD-2006-135 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE, Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-135. 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

[[Page 78247]]

with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of NASD. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASD-2006-135 
and should be submitted on or before January 18, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22199 Filed 12-27-06; 8:45 am]

BILLING CODE 8011-01-P