Document ID: SEC-2007-0916-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc
Posted Date: 2007-07-09T04:00Z

[Federal Register: July 9, 2007 (Volume 72, Number 130)]
[Notices]               
[Page 37285-37287]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy07-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56004; File No. SR-NASD-2004-130]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Amendment No. 3 and Order Granting 
Accelerated Approval of a Proposed Rule Change as Modified by Amendment 
Nos. 2 and 3 Relating to Amendments to Rule 2320(g) (Three Quote Rule) 
and Corresponding Recordkeeping Requirements under Rule 3110(b)

July 2, 2007.

I. Introduction

    On August 27, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder, \2\ a proposed rule change to amend NASD Rule 2320(g) 
(``Three Quote Rule'') to exempt from the Three Quote Rule certain 
transactions in foreign securities of a foreign issuer that are part of 
an index calculated by the FTSE Group. On May 8, 2006, NASD filed 
Amendment No. 1 to the proposed rule change.\3\ On October 19, 2006, 
NASD filed Amendment No. 2 to the proposed rule change.\4\ The proposed 
rule change, as modified by Amendment No. 2, was published for comment 
in the Federal Register on October 31, 2006.\5\ The Commission received 
ten comment letters on the proposal.\6\ On April 3, 2007, NASD filed 
Amendment No. 3 to the proposed rule change \7\ and a response to the 
comment letters.\8\ This order provides notice of Amendment No. 3 and 
approves the proposed rule change as modified by Amendment Nos. 2 and 3 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded in its entirety the 
text of the original filing.
    \4\ Amendment No. 2 replaced and superseded in its entirety the 
text of the original filing, as amended.
    \5\ See Securities Exchange Act Release No. 54650 (October 25, 
2006), 71 FR 63812 (``Notice'').
    \6\ See letters from James Duncan, Senior Vice President & 
Director, International Trading, and Andrew Jappy, Chief Information 
Officer & EVP, Canaccord Capital Corporation, dated November 21, 
2006 (``Canaccord Letter''); Achilles M. Perry, Associate General 
Counsel, CIBC World Markets Corp., dated November 21, 2006 (``CIBC 
Letter''); Grant Vingoe, Esq., Partner, Arnold Porter LLP, dated 
November 21, 2006 (``Arnold Porter Letter''); Bill Yancey, Chairman 
of the Board, and John C. Giesea, President and CEO, Security 
Traders Association, dated November 21, 2006 (``STA Letter''); Rik 
Parkhill, Executive Vice President, TSX Group, Inc., President, TSX 
Markets, dated November 29, 2006 (``TSX Letter''); George W. Lennon, 
President, Canadian Security Traders Association, Inc., dated 
December 1, 2006 (``CSTA Letter''); Christopher Climo, Managing 
Director, Compliance and Chief Compliance Officer, TD Securities, 
Inc., dated December 7, 2006 (``TD Securities Letter''); James E. 
Twiss, Chief Policy Counsel, Market Regulation Services Inc., dated 
December 8, 2006 (``RS Letter''); Debra V. Moore, Manager--NASDAQ/
OTC Equity Trading, and Glenn A. Hoback, Implementation Consultant--
Internal Controls, Wachovia Securities, LLC, dated December 14, 2006 
(``Wachovia Letter''); and Bryce Engel, Chief Brokerage Operations 
Officer, TD AMERITRADE, Inc., dated December 21, 2006 (``TD 
Ameritrade Letter'').
    \7\ In Amendment No. 3, NASD proposes, among other things, to 
codify the existing exemptions relating to transactions in a non-
exchange-listed security (as defined below) that are securities 
listed on a Canadian exchange.
    \8\ See letter from Andrea D. Orr, Assistant General Counsel, 
NASD, to Nancy M. Morris, Secretary, Commission, dated April 3, 2007 
(``NASD Response Letter'').
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II. Description of the Proposal

    Currently, the Three Quote Rule requires NASD members who execute a 
transaction in a non-exchange-listed security \9\ for or with a 
customer to contact and obtain the quotations from three dealers (or 
all dealers if less than three) to determine the best inter-dealer 
market for that security. The Three Quote Rule, however, does not apply 
if two or more priced quotations for a non-exchange-listed security are 
displayed in an inter-dealer quotation system that permits quotation 
updates on a real-time basis. NASD proposes to expand the categories of 
transactions that would be exempted from the Three Quote Rule. First, 
NASD proposes to exempt a transaction for or with a customer in a non-
exchange-listed security of a foreign issuer that is part of the FTSE 
All-World Index, if such transaction is executed during the regular 
business hours of the foreign market for the foreign security and no 
trading halt or other similar trading or quoting restriction is in 
effect in any foreign market on which such security is listed. Second, 
in response to comments following publication of its proposal, NASD 
proposes to codify certain exemptions previously issued by NASD staff 
under the Three Quote Rule's exemptive process.\10\ Specifically, NASD 
proposes to exempt a transaction for or with a customer pertaining to 
the execution of an order in a non-exchange-listed security that is 
listed on a Canadian exchange as long as the customer order is executed 
by the NASD member or a person associated with the member on a Canadian 
exchange in an agency or riskless principal capacity and the member or 
a person associated with the member conducts regular and rigorous 
reviews of the equality of the execution of such orders in such 
securities, pursuant to the member's duty of best execution. NASD has 
also proposed to amend its recordkeeping requirement to provide a 
corresponding exclusion with respect to these proposed exemptions.
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    \9\ NASD Rule 6610(c) defines the term ``non-exchange-listed 
security'' as ``any equity security that is not traded on any 
national securities exchange'' and ``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 6700 Series.''
    \10\ See, e.g., Letter to Kenneth W. Perlman, General Counsel, 
Mayer & Schweitzer, Inc., from Alden S. Adkins, Senior Vice 
President and General Counsel, NASD Regulation, Inc., on May 29, 
1998.
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    Under the proposed rule change, NASD members would continue to be 
required to comply with their best execution obligations under NASD 
Rule 2320 and, to the extent applicable, the suitability obligations 
under NASD Rule 2310.

III. Summary of Comments and NASD's Response

    The Commission received ten comment letters on the proposal.\11\ 
NASD submitted the NASD Response Letter,\12\ and corresponding 
Amendment No. 3 to address the issue regarding application of the 
proposed rule change to Canadian-listed securities that was raised by 
the commenters. While some commenters expressed general support for 
NASD's proposal to exempt from the Three Quote Rule

[[Page 37286]]

foreign securities that are part of the FTSE All-World Index,\13\ all 
of the commenters objected to NASD's proposed withdrawal of the 
exemptions from the Three Quote Rule for Canadian issuers' securities. 
Specifically, NASD proposed to withdraw all existing exemptions granted 
under the Three Quote Rule with respect to Canadian securities executed 
on a Canadian exchange in an agency or riskless principal basis.\14\ 
Were these exemptions withdrawn, NASD members would be required to 
comply with the Three Quote Rule in connection with transactions in 
Canadian securities that are not part of the FTSE All-World Index. The 
commenters argued that this result would be contrary to the duty of 
best execution,\15\ would cause significant delays in execution,\16\ 
and would increase the cost of transactions in Canadian securities that 
are not part of the FTSE All-World Index.\17\
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    \11\ See supra note 6.
    \12\ See supra note 8.
    \13\ See, e.g., Canaccord Letter, CIBC Letter, STA Letter, TSX 
Letter, CSTA Letter, and TD Ameritrade Letter.
    \14\ See Notice, supra note 5, 71 FR at 63813 n.13.
    \15\ See, e.g., Canaccord Letter, STA Letter, TXS Letter, CSTA 
Letter, RS Letter, and Wachovia Letter.
    \16\ See, e.g., Canaccord Letter, CIBC Letter, Arnold Porter 
Letter, STA Letter, TD Securities Letter, Wachovia Letter, and TD 
Ameritrade Letter.
    \17\ See, e.g., STA Letter and TD Securities Letter.
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    In light of the comments, NASD revised its previous position and 
clarified that the proposal would not supersede any exemptions 
previously granted. Contemporaneously with the NASD Response Letter, 
NASD filed Amendment No. 3 to codify the relief previously granted in 
the existing exemptions.

IV. Discussion

    After careful review, the Commission believes that the proposed 
rule change is consistent with the requirements of the Act and the 
regulations thereunder applicable to NASD.\18\ In particular, the 
Commission believes that the proposal is consistent with section 
15A(b)(6) of the Act \19\ and section 15A(b)(9) of the Act.\20\ Section 
15A(b)(6) of the Act requires that the rules of a national securities 
association be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and 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. Section 15A(b)(9) of the Act 
requires that rules of an association not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
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    \18\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(9).
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    The Commission approved NASD's proposal to institute the Three 
Quote Rule in 1988.\21\ The Three Quote Rule was an amendment to NASD's 
interpretation relating to best execution of retail transactions in 
non-Nasdaq securities. The Three Quote Rule's purpose is to assure that 
NASD members fulfill their duty to provide customers with best 
execution for transactions in non-exchange-listed securities, 
especially illiquid securities with non-transparent prices. The 
Commission subsequently approved NASD's proposal providing NASD staff 
authority to grant exemptions from the Three Quote Rule in 1997.\22\ 
Subsequently, NASD granted exemptions from the Three Quote Rule for 
customer transactions in Canadian securities executed on a Canadian 
exchange.\23\ In 2000, the Commission approved NASD's proposal to limit 
the Three Quote Rule's applicability to those situations when fewer 
than two priced quotes for a non-Nasdaq security are posted in an 
inter-dealer quotation medium.\24\
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    \21\ See Securities Exchange Act Release No. 25637 (May 2, 
1988), 53 FR 16488 (May 9, 1988).
    \22\ See Securities Exchange Act Release No. 39266 (October 22, 
1997), 62 FR 56217 (October 29, 1997).
    \23\ See supra note 10.
    \24\ See Securities Exchange Act Release No. 43319 (September 
21, 2000), 65 FR 58589 (September 29, 2000). Pursuant to this 
exception, if two or more priced quotations for a non-exchange-
listed security are displayed in an inter-dealer quotation system 
that permits quotation updates on a real-time basis, then NASD 
members are not required to obtain quotes from three dealers.
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    The Commission finds that NASD's proposal to add the two new 
exceptions to the Three Quote Rule is consistent with the Act. In its 
order granting NASD staff exemptive authority with respect to the Three 
Quote Rule, the Commission noted that ``one situation where exemptive 
relief might be applied would be trading in certain foreign securities. 
In some circumstances the foreign exchange market may constitute the 
best market for the securities that are listed on that market, and the 
time delay involved in contacting three dealers in advance of a 
customer transaction could hinder obtaining the best execution for the 
customer.''\25\
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    \25\ Securities Exchange Act Release No. 39266 (October 22, 
1997), 62 FR 56217 (October 29, 1997).
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    Thus, the Commission believes that it is reasonable for NASD to 
exempt from the Three Quote Rule transactions in a foreign security 
that are included in the FTSE All-World Index and transactions in a 
security listed on a Canadian exchange, subject to the conditions 
specified in the amended Three Quote Rule. The Commission notes that, 
whether or not a transaction in a non-exchange-listed security is 
subject to the Three Quote Rule, the NASD member executing the 
transaction must satisfy its duty of best execution.

V. Accelerated Approval

    The Commission finds good cause to approve NASD's proposal, as 
amended, prior to the thirtieth day after the amendment is published 
for comment in the Federal Register pursuant to section 19(b)(2) of the 
Act. NASD submitted Amendment No. 3 in response to comments received on 
its proposal. The amendment codifies exemptions NASD staff previously 
issued under the Three Quote Rule's exemptive process,\26\ and as 
described above, proposes a corresponding exclusion to the 
recordkeeping requirements if a member establishes and documents the 
exemption. Accordingly, Amendment No. 3 does not raise any new issues.
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    \26\ See supra note 22.
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    The Commission therefore finds good cause to approval NASD's 
proposal on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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-2004-130 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2004-130. 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

[[Page 37287]]

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, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2004-130 and should be submitted on or before July 
30, 2007.

VII. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-NASD-2004-130), as modified 
by Amendment Nos. 2 and 3, be, and hereby is, approved on an 
accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13200 Filed 7-6-07;8:45 am]

BILLING CODE 8010-01-P