Document ID: SEC-2005-0058-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-09-30T04:00Z

[Federal Register: September 30, 2005 (Volume 70, Number 189)]
[Notices]               
[Page 57346-57348]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se05-161]                         

[[Page 57346]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52508; File No. SR-NASD-2005-089]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment No. 1 Thereto, and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 2, 3, and 4 Thereto, Relating to 
NASD's Direct Authority for the Activities Related to or in Support of 
Trading in Over-the-Counter Equity Securities

September 26, 2005.

I. Introduction

    On July 19, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission''), 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's Plan of Allocation and Delegation 
of Functions by the NASD to Subsidiaries (``Delegation Plan'') and 
certain NASD rules to reflect the NASD's direct authority for the 
activities related to or in support of trading in over-the-counter 
(``OTC'') equity securities,\3\ including, but not limited to, the OTC 
Bulletin Board (``OTCBB''). Currently, this authority is delegated to 
The Nasdaq Stock Market, Inc. (``Nasdaq''). On July 22, 2005, the NASD 
filed Amendment No. 1 to the proposed rule change.\4\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on July 29, 2005.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``OTC equity securities'' herein refers to OTC 
Equity Securities as defined in NASD Rule 6610, including, but not 
limited to, OTC Bulletin Board securities.
    \4\ Amendment No. 1, which replaced and superceded the original 
filing in its entirety, revised NASD Rule 11890 to transfer the 
authority to nullify or modify transactions in OTC equity securities 
under certain circumstances to the NASD; made conforming changes to 
Interpretive Material (``IM'') 11890-1 and 11890-2; revised NASD 
Rule 6620 in light of the changes to NASD Rule 11890 contained in 
Amendment No. 1; and made several minor and technical changes to the 
filing.
    \5\ See Securities Exchange Act Release No. 52119 (July 25, 
2005), 70 FR 43918 (``Notice'').
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    The Commission received two comment letters in response to the 
proposal.\6\ On September 13, 2005, the NASD filed Amendment No. 2 to 
the proposed rule change.\7\ On September 23, 2005, the NASD filed 
Amendment Nos. 3 and 4 to the proposed rule change.\8\ The amended rule 
text set forth in Amendment No. 2 and the text of Amendment Nos. 3 and 
4 are available on the NASD's Web site (http://www.nasd.com), at the 

NASD's Office of the Secretary, and at the Commission's Public 
Reference Room.
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    \6\ See Letter from R. Cromwell Coulson, Chief Executive 
Officer, Pink Sheets LLC, to Jonathan G. Katz, Secretary, 
Commission, dated August 31, 2005 (``Pink Sheets Letter''), and 
Letter from William A. Vance, President and Kimberly Unger, 
Executive Director, The Security Traders Association of New York, 
Inc., to Jonathan G. Katz, Secretary, Commission, dated September 
19, 2005 (``STANY Letter'').
    \7\ In Amendment No. 2, the NASD revised the text of NASD Rule 
11890 and IM-11890-2 to reflect amendments to those provisions that 
were approved by the Commission shortly before publication of the 
Notice. See Securities Exchange Act Release No. 52141 (July 27, 
2005), 70 FR 44709 (August 3, 2005) (SR-NASD-2004-009). These recent 
revisions to NASD Rule 11890 and IM-11890-2 do not affect the 
substance of the instant proposed rule change. In addition, 
Amendment No. 2 changed the effective date of the proposed rule 
change from September 1, 2005 to October 1, 2005, and proposed 
amendments to NASD Rule 11890(b)(1) and (2) to clarify the time 
frame for action by Nasdaq or NASD officials under those paragraphs 
of NASD's clearly erroneous rule.
    \8\ In Amendment No. 3, the NASD made a non-substantive change 
to Exhibit 4 that was included in Amendment No. 2 to reflect changes 
to the text of NASD Rule 11890 submitted in Amendment No. 2. The 
NASD subsequently filed Amendment No. 4 to make a non-substantive 
edit to the formatting of the text of IM-11890-2.
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    This order approves the proposed rule change, as amended. In 
addition, the Commission provides notice of filing of Amendment Nos. 2, 
3, and 4, grants accelerated approval to Amendment Nos. 2, 3, and 4, 
and solicits comments from interested persons on Amendment Nos. 2, 3, 
and 4.

II. Description of the Proposal

    Pursuant to the Delegation Plan, activities related to or in 
support of the trading in OTC equity securities, including, but not 
limited to, operation of the OTCBB \9\ (collectively, ``OTC equity 
operations''), have been delegated from the NASD to Nasdaq. In this 
context, OTC equity operations include services such as trade 
reporting, comparison, quote collection and dissemination, as 
applicable, and the related rulemaking functions in this area.
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    \9\ The OTCBB provides an electronic quotation medium for 
subscribing members to enter, update, and display quotations in 
individual securities on a real-time basis. Such quotation entries 
may consist of a priced bid and/or offer, an unpriced indication of 
interest, or a bid/offer accompanied by a modifier to reflect 
unsolicited customer interest. The OTCBB is not an issuer listing 
service and therefore does not maintain a relationship with quoted 
issuers or impose quantitative listing standards as do Nasdaq and 
the exchanges. To be eligible for quotation on the OTCBB, issuers 
must be current in their filings with the Commission or applicable 
regulatory authority.
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    Under the proposal to amend the Delegation Plan, the NASD would 
assume direct authority for OTC equity operations rather than delegate 
this authority to Nasdaq. In addition, the NASD would delegate to NASD 
Regulation, Inc. (``NASDR'') the rulemaking authority relating to 
trading practices for OTC equity securities. The NASD intends, however, 
to contract with Nasdaq to have it continue to provide certain 
operational systems and support, OTCBB quotation and trade reporting 
platform and certain other services that Nasdaq currently provides with 
respect to OTC equity operations.
    The NASD also proposes to: (1) Amend NASD Rule 6545 to transfer 
trading and quotation halt authority for OTCBB-eligible securities from 
Nasdaq to the NASD; (2) amend NASD Rule 11890 to transfer from Nasdaq 
to the NASD the ability to nullify or modify a transaction in an OTC 
equity security in certain circumstances; (3) amend NASD Rule 11890 to 
incorporate revisions to that rule that were approved by the Commission 
shortly before publication of the Notice and to clarify the time frame 
for action by NASD or Nasdaq officials to nullify or adjust the terms 
of a trade under paragraph (b) of NASD Rule 11890; \10\ (4) amend NASD 
Rule 6620(f) to conform the portion of the rule governing reporting of 
cancelled trades to reflect the proposed changes to NASD Rule 11890; 
and (5) amend NASD Rule 7010(p)(3) to transfer the authority to set 
certain fees for historical research reports for OTCBB-eligible 
securities from Nasdaq to the NASD.
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    \10\ See Amendment No. 2, supra note 7.
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    The NASD intends that the proposed rule change, as amended, will 
become effective on October 1, 2005, pending Commission approval prior 
to that date.

III. Summary of Comments and the NASD's Response

    The Commission received two comment letters relating to the NASD's 
proposed rule change as modified by Amendment No. 1.\11\ The Pink 
Sheets Letter and STANY Letter supported the NASD's proposed rule 
change.
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    \11\ See Pink Sheets Letter and STANY Letter, supra note 6.
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    The Pink Sheets Letter further suggested that the Nasdaq Quotation 
Dissemination Service (``Service'') disseminate real-time trade and 
volume data for non-Nasdaq American Depositary Receipts (``ADRs'') that 
are traded in the over-the-counter market, which currently are 
disseminated at the end of the trading day. In addition, the Pink 
Sheets Letter stated that the Service should disseminate real-time 
trade and volume data for odd-lot transactions in all OTC equity 
securities

[[Page 57347]]

that are sold for a price greater than $200 per share. The Pink Sheets 
Letter noted that the Service currently disseminates such information 
for securities that are quoted on the OTCBB, but not for other OTC 
equity securities.
    The STANY Letter shared the views presented in the Pink Sheets 
Letter relating to the dissemination of trade and volume data for OTC 
equity securities. Specifically, the STANY Letter stated that it 
believed that no valid reason existed for Nasdaq to distinguish between 
the data it disseminates for domestic OTC equity securities and ADRs 
traded in the over-the-counter market, and that Nasdaq should 
disseminate real-time trade and volume data for odd-lot transactions in 
OTC equity securities, including Pink Sheets securities, that are sold 
for a price greater than $200 per share.
    The Pink Sheets Letter also recommended that the NASD prepare a 
Notice to Members to remind broker-dealers about their obligation not 
to participate in unlawful securities distributions. Further, the Pink 
Sheets Letter recommended that NASDR review this issue with a view to 
proposing rules that would preclude the participation of broker-dealers 
in unlawful distributions of securities by their customers. In 
addition, the Pink Sheets Letter advocated extending trade halt 
authority under NASD Rule 6545 to all OTC equity securities, rather 
than limiting it to OTCBB-eligible securities, and to extend the 
authority to situations where fraudulent or manipulative acts are 
strongly suspected, rather than relying on actions by other markets. 
Further, the Pink Sheets Letter suggested limiting such trade halt 
authority to four days so that ``piggyback'' eligibility under Rule 
15c2-11 under the Act \12\ is not affected. Finally, the Pink Sheets 
Letter recommended that the NASD's authority to cancel clearly 
erroneous trades pursuant to NASD Rule 11890 should extend until the 
settlement date for the transactions in question.
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    \12\ 17 CFR 240.15c2-11.
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    In Amendment No. 2, the NASD noted that because the recommendations 
in the Pink Sheets Letter are outside the scope of the proposed rule 
change, it is not specifically responding to those recommendations in 
the context of the proposed rule change. The NASD, however, indicated 
that it will review and analyze the recommendations set forth in the 
Pink Sheets Letter 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 those recommendations is 
appropriate.\13\
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    \13\ The Commission notes that the NASD did not respond to the 
STANY Letter because it was submitted after the NASD had filed 
Amendment No. 2. As noted above, the STANY Letter adopted the views 
of the Pink Sheets Letter with respect to the dissemination of trade 
and volume data for OTC equity securities.
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IV. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of the Act,\14\ 
which requires, among other things, that NASD rules must 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.\15\
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    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    Under the proposal, the NASD will assume direct authority for OTC 
equity operations that it previously had delegated to Nasdaq. The NASD 
represents that, pursuant to a contractual arrangement with Nasdaq, 
Nasdaq will continue to provide certain operational systems and 
support, including the OTCBB quotation and trade reporting platform and 
certain other services that Nasdaq currently provides with respect to 
OTC equity operations. In addition, the NASD proposes to delegate to 
NASDR the authority to develop and adopt rule changes to establish 
trading practices with respect to OTC equity securities. The Commission 
believes that the proposal by the NASD to assume direct responsibility 
for OTC equity operations, including operation of the OTCBB, and to 
delegate to NASDR the authority to develop and adopt rule changes to 
establish trading practices with respect to OTC equity securities is 
consistent with the Act. In the Commission's view, since the NASD is 
the self-regulatory organization with authority over and responsibility 
for the oversight of the OTC equity market, it is reasonable for the 
NASD to revise its Delegation Plan to assume direct authority for OTC 
equity operations and to delegate to NASDR rulemaking authority for 
trading practices involving OTC equity securities.
    In addition, the proposal would amend NASD Rule 11890 to grant the 
NASD direct authority to determine, on its own motion, whether certain 
transactions in OTC equity securities should be modified or nullified 
in the event of a disruption or malfunction of any NASD quotation, 
communication, or trade reporting system or in the event of 
extraordinary market conditions in which nullification or modification 
of transactions may be necessary for the maintenance of a fair and 
orderly market or the protection of investors and the public interest. 
The proposal also provides a process by which a determination under 
NASD Rule 11890 could be appealed to the Uniform Practice Code 
(``UPC'') Committee, unless the Executive Vice President who makes the 
initial determination specifies at that time that the number of 
affected transactions is such that immediate finality is necessary to 
maintain a fair and orderly market and to protect investors and the 
public interest. The Commission believes that the assumption of direct 
authority by the NASD to nullify or modify the terms of trades in OTC 
equity securities under certain conditions is appropriate and should 
help clarify for OTC equity market participants the NASD's authority to 
nullify or modify the terms of clearly erroneous transactions in OTC 
equity securities.
    The proposal would amend certain other rules, including NASD Rule 
6620(f) and NASD Rule 7010(p)(3), to reflect the transfer of authority 
from Nasdaq to the NASD with respect to the reporting of trades 
cancelled pursuant to NASD Rule 11890 and the authority to set fees for 
historical research reports for OTCBB-eligible securities, 
respectively. The Commission believes that these changes are 
appropriate to conform the applicable rule text to reflect the 
assumption of direct responsibility for OTC equity securities by the 
NASD.
    The Commission finds good cause for approving Amendment Nos. 2, 3, 
and 4 to the proposed rule change prior to the thirtieth day after the 
date of the publication of notice thereof in the Federal Register. The 
Commission notes that Amendment No. 2 is a non-substantive amendment to 
revise the effective date of the proposed rule change; to reflect 
changes to NASD Rule 11890 and IM-11890-2 that were approved by the 
Commission shortly before publication of the Notice; and to clarify the 
timeframe for NASD or Nasdaq officials to act on their own motion to 
nullify or modify the terms of a trade under NASD Rule 11890. Further, 
Amendment No. 3 is a non-substantive amendment to revise Exhibit 4 
contained in Amendment No. 2 to reflect the changes to the text of NASD 
Rule 11890 submitted in

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Amendment No. 2, and Amendment No. 4 is a non-substantive amendment to 
IM-11890-2. The Commission therefore believes that it is appropriate to 
accelerate approval of Amendment Nos. 2, 3, and 4 so that the proposed 
rule change, as amended, may be implemented in full without delay.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 2, 
3, and 4 to the proposed rule change, as amended, are 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-2005-089 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-089. 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 the 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-NASD-2005-089 and should be submitted on or before 
October 21, 2005.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NASD-2005-089), as amended, 
be, and it hereby is, approved, and Amendment Nos. 2, 3, and 4 are 
hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5334 Filed 9-29-05; 8:45 am]

BILLING CODE 8010-01-P