Document ID: SEC-2006-0776-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-06-19T04:00Z

[Federal Register: June 19, 2006 (Volume 71, Number 117)]
[Notices]               
[Page 35315-35317]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19jn06-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53972; File No. SR-NASD-2006-069]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Extending the Pilot Relating To Manning Price-Improvement 
Standards for Decimalized Securities

June 12, 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 June 1, 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 prepared by NASD. NASD has designated 
the proposal as constituting a ``non-controversial'' proposed rule 
change under section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders it 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 is proposing to extend through December 31, 2006, the current 
pilot price-improvement standards for decimalized securities contained 
in NASD Interpretive Material (``IM'') 2110-2--Trading Ahead of 
Customer Limit Order (``Manning Rule''). There are no proposed changes 
to rule text.

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
    NASD's Manning Rule requires an NASD member firm to provide a 
minimum level of price improvement to incoming orders in Nasdaq and 
exchange-listed securities if the firm chooses to trade as principal 
with those incoming orders at prices equal to or better than customer 
limit orders the firm currently holds.\5\ If a firm fails to provide 
the minimum level of price improvement to the incoming order, the firm 
must execute its held customer limit orders at the price at which the 
firm traded for its own account or better. Generally, if a firm fails 
to provide the requisite amount of price improvement and also fails to 
execute its held

[[Page 35316]]

customer limit orders, it is in violation of the Manning Rule.
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    \5\ The Commission recently approved amendments to the Manning 
Rule to require members to provide price improvement to customer 
limit orders in certain circumstances and expand the application of 
the Manning Rule to exchange-listed securities. See Securities 
Exchange Act Release No. 52210 (August 4, 2005), 70 FR 46897 (August 
11, 2005) (SR-NASD-2004-089). These amendments became effective 
January 2, 2006. See NASD Notice to Members 05-64.
    The Commission also recently approved further amendments to the 
Manning Rule to codify NASD's existing position that the Manning 
Rule applies to all members, whether acting as a market maker or 
not. These amendments became effective April 14, 2006. See 
Securities Exchange Act Release No. 53653 (April 14, 2006), 71 FR 
20429 (April 20, 2006) (SR-NASD-2006-035).
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    On April 6, 2001,\6\ the Commission approved, on a pilot basis, 
price improvement standards for decimalized securities contained in the 
Manning Rule, which added the following language to IM-2110-2:
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    \6\ See Securities Exchange Act Release No. 44165 (April 6, 
2001), 66 FR 19268 (April 13, 2001) (SR-NASD-2001-27).

    For Nasdaq securities authorized for trading in decimals 
pursuant to the Decimals Implementation Plan For the Equities and 
Options Markets, the minimum amount of price improvement necessary 
in order for a market maker to execute an incoming order on a 
proprietary basis in a security trading in decimals when holding an 
unexecuted limit order in that same security, and not be required to 
execute the held limit order, is as follows:
    (1) For customer limit orders priced at or inside the best 
inside market displayed in Nasdaq, the minimum amount of price 
improvement required is $0.01; and
    (2) For customer limit orders priced outside the best inside 
market displayed in Nasdaq, the market maker must price improve the 
incoming order by executing the incoming order at a price at least 
equal to the next superior minimum quotation increment in Nasdaq 
(currently $0.01).\7\
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    \7\ Pursuant to the terms of the Decimals Implementation Plan 
for the Equities and Options Markets, the minimum quotation 
increment for Nasdaq securities at the outset of decimal pricing is 
$0.01. On June 9, 2005, the Commission adopted Rule 612 of 
Regulation NMS which establishes minimum pricing increments for NMS 
stocks (e.g., Nasdaq and exchange-listed securities). Rule 612 of 
Regulation NMS prohibits market participants from displaying, 
ranking, or accepting quotations, orders, or indications of interest 
in any NMS stock priced in an increment smaller than $0.01 if the 
quotation, order, or indication of interest is priced equal to or 
greater than $1.00 per share. If the quotation, order, or indication 
of interest is priced less than $1.00 per share, the minimum pricing 
increment is $0.0001. See Securities Exchange Act Release No. 51808 
(June 9, 2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04). 
Rule 612 of Regulation NMS became effective on January 31, 2006. See 
Securities Exchange Act Release No. 52196 (August 2, 2005), 70 FR 
45529 (August 8, 2005).
    Given the adoption and implementation of Rule 612 of Regulation 
NMS, Nasdaq, among other market centers, implemented changes to its 
trading systems to accept, rank, execute and disseminate priced 
quotations in accordance with Rule 612 of Regulation NMS. Quotations 
submitted to Nasdaq that are not in compliance with Rule 612 of 
Regulation NMS are rejected.
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    Since approval, these standards continue to operate on a pilot 
basis that terminates on June 30, 2006.\8\ NASD has determined to seek 
an extension of its current Manning Rule pilot until December 31, 2006. 
NASD believes that such an extension provides for an appropriate 
continuation of the current Manning Rule price improvement standards 
while the Commission continues to analyze the issues related to 
customer limit order protection in a decimalized environment. NASD is 
not proposing any other changes to the pilot at this time. NASD 
proposes to make the proposed rule change operative on July 1, 2006.
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    \8\ See Securities Exchange Act Release No. 53026 (December 27, 
2005), 71 FR 377 (January 4, 2006) (SR-NASD-2005-152).
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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,\9\ 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. NASD believes that the proposed rule change will 
improve treatment of customer limit orders and enhance the integrity of 
the market.
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    \9\ 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 by NASD.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change 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 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, provided that NASD 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission,\10\ the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) 
thereunder.
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    \10\ Rule 19b-4(f)(6)(iii) under the Act requires that a self-
regulatory organization submit to the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
NASD provided notice to the Commission four business days prior to 
filing the proposed rule change, and the Commission has determined 
to waive the five business day pre-filing notice requirement.
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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.\11\
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    \11\ See 15 U.S.C. 78s(b)(3)(C).
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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-2006-069 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-2006-069. 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 NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You

[[Page 35317]]

should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASD-2006-069 
and should be submitted on or before July 10, 2006.

    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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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-9530 Filed 6-16-06; 8:45 am]

BILLING CODE 8010-01-P