Document ID: SEC-2006-0001-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-01-03T05:00Z

[Federal Register: January 3, 2006 (Volume 71, Number 1)]
[Notices]               
[Page 159-162]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja06-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53024; File No. SR-NASD-2005-095]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 2 Thereto Relating to Sub-Penny Restrictions for Non-Nasdaq Over-
the-Counter Equity Securities

December 27, 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 July 28, 2005, the National Association of

[[Page 160]]

Securities Dealers, Inc. (``NASD'') filed 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 NASD. On August 16, 2005, NASD filed Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on August 25, 2005.\4\ On December 22, 
2005, NASD filed Amendment No. 2 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NASD made certain technical changes 
to the rule text.
    \4\ Securities Exchange Act Release No. 52280 (August 17, 2005), 
70 FR 49959.
    \5\ In Amendment No. 2, the NASD altered the proposed rule text 
in response to a commenter, and made a technical change to the rule 
text.
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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 6750 to impose restrictions on 
the display of quotes and orders in sub-penny increments for non-Nasdaq 
OTC equity securities.
    Below is the text of the proposed rule change. Proposed new 
language is underlined; proposed deletions are in brackets.
* * * * *

6540. Requirements Applicable to Market Makers

    (a) No change.
    (b) No change.
    [(c) A participating ATS or ECN shall reflect non-subscriber access 
or post-transaction fees in the ATS's or ECN's posted quote in the OTC 
Bulletin Board montage.]
    [(d)](c) OTCBB-eligible securities that meet the frequency-of-
quotation requirement for the so called ``piggyback'' exception in SEC 
Rule 15c2-11(f)(3)(i) are identified in the Service as ``active'' 
securities. A member can commence market making in any active security 
by registering as a market maker through a Nasdaq Workstation at the 
firm. In all other instances, a member must follow the procedure 
contained in this Rule to become qualified as a market maker in a 
particular OTCBB-eligible security.\1\

(1) Permissible Quotation Entries

    (A) No change.
    (B) No change.
    (C) No change.
    (D) No change.
    (E) The written notice required by subparagraphs [(d)](c)(1)(D)(i), 
(iii) and (iv) of this Rule may be submitted on the Underwriting 
Activity Report provided by the Market Regulation Department.
    (F) For purposes of subparagraph [(d)](c)(1)(D), SEC Rules 100, 
101, 103 and 104 are rules of the Commission adopted under Regulation M 
and the following terms shall have the meanings as defined in SEC Rule 
100: ``affiliated purchaser,'' ``distribution,'' ``distribution 
participant,'' ``penalty bid,'' ``reference security,'' ``restricted 
period,'' ``stabilizing,'' ``subject security,'' and ``syndicate 
covering transaction.''
    (2) No change.
    (3) No change.
    (4) No change.
    (5) No change.
    [(e)](d) Compliance with Market Maker Requirements
    Failure of a member or a person associated with a member to comply 
with this Rule may be considered conduct inconsistent with high 
standards of commercial honor and just and equitable principles of 
trade, in violation of Rule 2110.

    \1\ No change to footnote.
* * * * *

6750. [Minimum] Quotation [Size] Requirements for OTC Equity Securities

    (a) No change.
    (b) No member shall display, rank, or accept a bid or offer, an 
order, or an indication of interest in any OTC Equity Security priced 
in an increment smaller than $0.01 if that bid or offer, order or 
indication of interest is priced equal to or greater than $1.00 per 
share.
    (c) No member shall display, rank, or accept a bid or offer, an 
order, or an indication of interest in any OTC Equity Security priced 
in an increment smaller than $0.0001 if that bid or offer, order or 
indication of interest is priced equal to or greater than $0.01 per 
share and less than $1.00 per share.
    [(b)](d) For purposes of this Rule, the term ``OTC Equity 
Security'' means any equity security not classified as a ``designated 
security'' for purposes of the Rule 4630 and 4640 Series, or as an 
``eligible security,'' for purposes of the Rule 6400 Series. The term 
does 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\SM\.

    * The OTCBB can accept bids/offers expressed in fractions as 
small as \1/2\ or in decimals up to four [six] places. In applying 
the price test for minimum quotation size, any increment beyond an 
upper limit in the right hand column will trigger application of the 
minimum quote size for the next tier. For example, a bid (or offer) 
of $.505 must be firm for a size of 2,500 shares.
* * * * *

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
    Based on comments received in response to the publication of the 
proposed rule change and Amendment No. 1 thereto, NASD is filing this 
Amendment No. 2 to SR-NASD-2005-095 to respond to the comments received 
and to make a technical change as described herein.
    Proposal. As described in the original filing and Amendment No. 1, 
NASD is proposing amendments to NASD Rule 6750 that would prohibit 
members from displaying, ranking, or accepting a bid or offer, an 
order, or an indication of interest in any non-Nasdaq OTC equity 
securities in any quotation medium priced in an increment smaller than 
$0.01 if such bid or offer, order, or indication of interest is priced 
equal to or greater than $1.00 per share. In addition, members also 
would be prohibited from displaying, ranking, or accepting a bid, 
offer, an order, or an indication of interest in any non-Nasdaq OTC 
Equity Security priced in an increment smaller than $0.0001 if such bid 
or offer, order, or indication of interest is priced equal to or 
greater than $0.01 per share and less than $1.00 per share.
    Comments to the Proposed Rule Change. The Commission received two 
comment letters in response to the publication of the proposed rule 
change.\6\ The first commenter supports

[[Page 161]]

the proposal, but states the proposed sub-penny requirements conflict 
with Rule 6540(c), which requires alternative trading systems 
(``ATSs'') and electronic communications networks (``ECNs'') to reflect 
non-subscriber access or post-transaction fees in their posted quote in 
the over-the-counter Bulletin Board (``OTCBB'') montage. Specifically, 
the commenter states that, because ATS access fees generally are in 
sub-penny amounts, ATSs would not be able to reflect those access fees 
in their quotes if sub-penny quoting were prohibited. In addition, the 
commenter contends that there is no legitimate policy rationale for 
keeping Rule 6540(c) for the OTCBB, particularly in light of the 
Commission's recent adoption of Regulation NMS, which permits ECNs and 
ATS to charge access fees in national market system securities.
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    \6\ See Letter to Jonathan G. Katz, Secretary, Commission, from 
Phylis M. Esposito, Executive Vice President, Chief Strategy 
Officer, Ameritrade, Inc., dated October 31, 2005; Letter to 
Jonathan G. Katz, Secretary, Commission, from Kevin J.P. O'Hara, 
Chief Administrative Officer and General Counsel, Archipelago 
Trading Services, Inc., dated September 23, 2005.
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    NASD agrees with the commenter that, absent eliminating the access 
fee display requirement Rule 6540(c), it would conflict with the 
proposed amendments to Rule 6750. Accordingly, NASD is proposing to 
delete the text of Rule 6540(c).
    The second commenter also supports the proposal, but argues that 
further rulemaking related to the OTC market is required. Specifically, 
the commenter suggests that NASD impose limit order display 
requirements for OTC equity securities, together with or prior to the 
implementation of this proposal. The commenter indicates that, unlike 
Rule 612 under Regulation NMS,\7\ which was preceded by the 
Commission's Order Handling Rules, including the Limit Order Display 
Rule,\8\ no similar requirements currently exist in the OTC market.
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    \7\ 17 CFR 242.612.
    \8\ 17 CFR 242.604.
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    Because the changes recommended by the commenter are outside the 
scope of the proposed changes that are part of this rule filing, NASD 
is not responding to these recommendations specifically herein. NASD 
will review and analyze these recommendations in the same manner in 
which it would consider any requests for rulemaking, and, based on such 
review and analysis, will determine whether further action on these 
recommendations is appropriate.
    Technical Change. NASD also is proposing to make a technical change 
to the footnote in Rule 6750 relating to OTCBB system technology. 
Specifically, the footnote in Rule 6750 provides, among other things, 
that the OTCBB can accept bids/offers expressed in decimals up to six 
decimal places. The footnote text does not reflect the current OTCBB 
technology. Therefore, NASD is proposing to amend the text of the 
footnote in Rule 6750 to reflect that the OTCBB can accept bids/offers 
expressed in decimals up to four decimal places.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act,\9\ in 
general, and with section 15A(b)(6) of the Act,\10\ in particular, in 
that it is 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 would reduce the potential harms 
associated with sub-penny quoting in non-Nasdaq OTC equity securities.
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    \9\ 15 U.S.C. 78o-3.
    \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, as amended, 
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 on the proposed rule change and Amendment No. 1 
thereto were solicited by the Commission in response to the publication 
of the proposed rule change and Amendment No. 1 thereto. The Commission 
received two comment letters.\11\ The comments are summarized above.
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    \11\ See supra note 6.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2005-095 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 20549-2001.
    All submissions should refer to File Number SR-NASD-2005-095. 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, 100 F Street, 
NE., Washington, DC 20549. 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 the File Number SR-NASD-2005-095 and should 
be submitted on or before January 24, 2006.

[[Page 162]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E5-8196 Filed 12-30-05; 8:45 am]

BILLING CODE 8010-01-P