Document ID: SEC-2006-1061-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-08-17T04:00Z

[Federal Register: August 17, 2006 (Volume 71, Number 159)]
[Notices]               
[Page 47551-47554]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17au06-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54307; File No. SR-NASD-2006-096]

 
Self-Regulatory Organizations: National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Additional Market Participant Identifier 
Functionality on the Alternative Display Facility

August 11, 2006.
    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 August 8, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange

[[Page 47552]]

Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by NASD. 
NASD has 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.\5\ 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).
    \5\ NASD has requested the Commission to waive the 30-day pre-
operative delay required by Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii). See discussion infra Section III.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 4613A and adopt IM-4613A-1 to 
enable electronic communications network (``ECN'') members that post 
quotations through the Alternative Display Facility (``ADF'') (i.e., 
Registered Reporting ADF ECNs), to request and receive multiple market 
participant identifiers (``MPIDs'') with which to enter multiple 
quotes/orders in the ADF and report trades through the ADF trade 
reporting facility, the Trade Reporting and Comparison Service 
(``TRACS''), pursuant to the NASD Rule 4000A Series. Below is the text 
of the proposed rule change. Proposed new language is in italics.
4613A. Character of Quotations
    (a) No Change.
    (b) Primary and Additional MPIDs
    (1) The first Market Participant Identifier (``MPID'') issued to an 
NASD Market Participant shall be referred to as the NASD Market 
Participant's ``Primary MPID.'' For a pilot period ending January 26, 
2007, a Registered Reporting ADF ECN may request the use of Additional 
MPIDs for displaying quotes/orders and reporting trades through TRACS 
for any ADF-Eligible Security (as defined in NASD Rule 4100A). A 
Registered Reporting ADF ECN that ceases to meet the obligations 
appurtenant to its Primary MPID in any security shall not be permitted 
to use Additional MPIDs for any purpose in that security.
    (b) through (e) renumbered as (c) through (f).

IM-4613A-1 Procedures For Allocation of Multiple MPIDs

    NASD considers the issuance of, the display of, and the trade 
reporting with Additional MPIDs to be a privilege and not a right. NASD 
has developed the following method for allocating the privilege of 
receiving, displaying, and trade reporting with Additional MPIDs in an 
orderly, predictable, and fair manner. While NASD does not intend to 
place a numerical limit on the number of Additional MPIDs it may grant 
to Registered Reporting ADF ECNs, given the agent business model of 
ECNs, NASD does not anticipate the granting of many additional MPIDs to 
Registered Reporting ADF ECNs.
    As described in Rule 4613A, NASD will automatically designate a 
Registered Reporting ADF ECN's first MPID as a ``Primary MPID.'' 
Additional MPIDs will be designated as such. Registered Reporting ADF 
ECNs are required to use their Primary MPID in accordance with the 
requirements of NASD Rule 4613A as well as all existing requirements 
for the use of MPIDs in NASD systems and under NASD rules. Each of an 
ECN's MPID will be subject to the requirements of NASD Rule 4623A.
    If it is determined that one or more Additional MPIDs are being 
used improperly, NASD staff retains full discretion to limit or 
withdraw its grant of the Additional MPID(s) for all purposes for all 
securities. In addition, if a Registered Reporting ADF ECN no longer 
fulfills the conditions appurtenant to its Primary MPID (e.g., by being 
placed into an unexcused withdrawal), it may not use an Additional MPID 
for any purpose in that security.
    The first priority of NASD's method for allocating the privilege of 
displaying and trade reporting with Additional MPIDs is that each 
Registered Reporting ADF ECN should be permitted to display quotations 
and report trades under a Primary MPID before any is permitted to 
display additional quotations under and report trades with Additional 
MPIDs. If all requests for Primary MPIDs have been satisfied, NASD will 
then register Additional MPIDs on a first-come-first-served basis, 
consistent with the procedures listed below.
    A Registered Reporting ADF ECN shall contact NASD in writing 
setting forth the bona fide business and/or regulatory reasons for 
requesting an Additional MPID. NASD will consider the business and/or 
regulatory reasons demonstrated by the Registered Reporting ADF ECN and 
promptly respond to the Registered Reporting ADF ECN. If an Additional 
MPID is granted, it will be subject to the same requirements applicable 
to a Primary MPID. NASD staff retains full discretion to limit or 
withdraw the Additional MPID privileges of a Registered Reporting ADF 
ECN.
    A Registered Reporting ADF ECN that posts a quotation through 
either a Primary MPID or Additional MPID and reports a trade to TRACS 
as a result of such a posted quotation must utilize the corresponding 
Primary MPID or Additional MPID for reporting purposes through which 
the quotation was originally posted (i.e., Registered Reporting ADF 
ECNs must use the same MPID for TRACS trade reporting as was used for 
ADF quotation posting).
* * * * *

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
    An NASD member that registers as a market maker or ECN is currently 
permitted to enter one two-sided quotation per security in the ADF and 
is assigned a unique MPID with which to enter such quotations. The NASD 
4600A Rule Series governs the character of such quotations and the 
rights and obligations of members that display quotations in the ADF 
via their MPIDs.
    NASD proposes to amend NASD Rule 4613A and adopt IM-4613A-1 to 
permit NASD Registered Reporting ADF ECNs to request the use of 
additional MPIDs for a pilot period ending January 26, 2007.\6\ At this 
time only ECNs have been certified for posting quotations through the 
ADF and at no time has a registered market maker been certified for the 
ADF. Accordingly, NASD believes it appropriate to limit the scope of 
this proposed rule to Registered Reporting ADF ECNs.\7\ An ECN would be 
entitled

[[Page 47553]]

to request additional MPIDs for displaying quotes/orders and reporting 
trades through the ADF trade reporting facility, TRACS, pursuant to the 
NASD Rule 4000A Series.
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    \6\ This date coincides with the expiration of the current ADF 
pilot period. See Securities Exchange Act Release No. 53699 (April 
21, 2006), 71 FR 25271 (April 28, 2006). Accordingly, the provisions 
set forth in Rule 4613A and IM-4613A-1 will be extended with any 
extension of an ADF pilot period.
    \7\ In support of the requirement under the Act that NASD rules 
not result in unfair discrimination between members (see 15 U.S.C. 
78o-(b)(6)), NASD commits to expand additional MPID privilege 
functionality to Registered Reporting ADF Market Makers at such time 
that at least one broker-dealer NASD member becomes certified for 
posting quotations through the ADF and demonstrates a bona fide 
business and/or regulatory need for additional MPID functionality.
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    Registered Reporting ADF ECNs that are permitted the use of 
additional MPIDs for displaying quotes/orders would be subject to the 
same rules applicable to the members' first quotation. In other words, 
ECNs that display one or more additional quotes/orders would be 
required to comply with all rules applicable to ECNs in their display 
of quotes/orders.
    NASD believes that the ability to enter quotes and orders and to 
display quotations under an additional MPID would potentially carry 
with it similar benefits that have resulted from the supplemental MPID 
Program of the Nasdaq Stock Market LLC (``Nasdaq'').\8\ Specifically, 
the introduction of additional MPIDs on the ADF may enable Registered 
Reporting ADF ECNs to contribute more liquidity to the market, add to 
the transparency of trading interest, and better serve the needs of 
investors and the needs of Registered Reporting ADF ECNs themselves.\9\ 
As noted above, Registered Reporting ADF ECNs that use an additional 
MPID would be required to comply with all NASD and Commission rules 
applicable to their current use of a single MPID. Registered Reporting 
ADF ECNs would be prohibited from using an additional MPID to 
accomplish indirectly what they are prohibited from doing directly 
through their Primary MPID. To the extent that the allocation of 
additional MPIDs were to create regulatory confusion or ambiguity or 
would diminish the quality or rigor of the regulation of the over-the-
counter (``OTC'') market, every inference would be drawn against the 
use of additional MPIDs. Moreover, pursuant to the proposed rule and 
interpretive material, NASD staff retains full discretion to determine 
whether a bona fide regulatory and/or business need exists for being 
granted the additional MPID privilege and to limit or withdraw the 
additional MPID display privilege at any time.
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    \8\ See Securities Exchange Act Release No. 47954 (May 30, 
2003), 68 FR 34017 (June 6, 2003). See also Securities Exchange Act 
Release No. 53192 (January 30, 2006), 71 FR 6302 (February 4, 2006).
    \9\ NASD will assess no fees for the issuance or use of an 
additional MPID, other than the Commission-approved fees set forth 
in NASD Rule 7010.
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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 is 
consistent with these requirements because it will provide a process by 
which ECNs can request, and NASD can properly allocate, the use of 
additional MPIDs for displaying quotes and orders through the ADF.
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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 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

    Because the foregoing proposed rule change does not: (1) 
Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposal has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.\11\
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    \11\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii),\12\ a proposed ``non-
controversial'' rule change 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. NASD has asked the Commission to 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.\13\ The proposal will extend for ECN participants on the ADF 
a functionality that has been widely available to ECNs on Nasdaq 
through a pilot program. Allowing this proposal to become operative 
immediately is consistent with the protection of investors and the 
public interest because the benefits of the pilot and the use of 
multiple MPIDs can continue without undue disruption. For this reason, 
the Commission designates the proposed rule change to be effective and 
operative upon filing with the Commission.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
    \13\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the rule's impact on 
efficiency, competition, and capital formation. See 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, 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-2006-096 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-2006-096. 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

[[Page 47554]]

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-2006-096 and should be 
submitted on or before September 7, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-13568 Filed 8-16-06; 8:45 am]

BILLING CODE 8010-01-P