Document ID: SEC-2006-0421-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-03-29T05:00Z

[Federal Register: March 29, 2006 (Volume 71, Number 60)]
[Notices]               
[Page 15792-15794]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr06-147]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53541; File No. SR-NASD-2006-033]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendments No. 1 and 2 Thereto To Amend NASD Rule 11890

March 22, 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 March 1, 2006, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 Nasdaq. On March 13, 2006 
and March 22, 2006, Nasdaq submitted Amendments No. 1\3\ and 2,\4\ 
respectively, to the proposed rule change. Nasdaq has designated the 
proposed rule change as constituting a non-controversial rule change 
under Rule 19b-4(f)(6) under the Act,\5\ which renders the proposal 
effective upon filing with the Commission. 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\ See Form 19b-4 dated March 13, 2006 (``Amendment No. 1''). 
In Amendment No. 1, Nasdaq amended its filing to indicate that 
Nasdaq proposes to implement the proposed rule change on March 13, 
2006, rather than immediately, in the event the Commission waives 
the 30-day operative waiting period.
    \4\ See Form 19b-4 dated March 21, 2006 (``Amendment No. 2''). 
In Amendment No. 2, Nasdaq amended its proposed definition of 
``Nasdaq security'' and ``non-Nasdaq security.''
    \5\ 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

    Nasdaq proposes to clarify the scope of NASD Rule 11890. Nasdaq 
proposes to implement the proposed rule change on March 13, 2006.\6\ 
The text of the proposed rule change is below.\7\ Proposed new language 
is italicized; proposed deletions are in brackets.
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    \6\ See Amendment No. 1, supra note 3.
    \7\ The proposed rule change is marked to show changes from the 
rule as it appears in the electronic NASD Manual available at http://www.nasd.com.
 Prior to the date when The NASDAQ Stock Market LLC 

(``NASDAQ LLC'') commences operations, NASDAQ LLC will file a 
conforming change to the rules of NASDAQ LLC approved in Securities 
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006).
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11890. Clearly Erroneous Transactions
    (a) Authority To Review Transactions Pursuant to Complaint of 
Market Participant
    (1) No change.
    (2) Procedures for Reviewing Transactions
    (A)--(B) No change.
    (C) Following the expiration of the period for submission of 
supporting material, a Nasdaq officer shall determine whether the 
complaint is eligible for review. A complaint shall not be eligible for 
review under paragraph (a) unless:
    (i) The complainant has provided all of the supporting information 
required under paragraph (a)(2)(B), and
    (ii) For trades in Nasdaq securities executed between 9:30 a.m. and 
4 p.m. Eastern Time, or trades in non-Nasdaq securities executed 
between the time when the primary market for the security first posts 
an executable two-sided quote for its regular market trading session 
and 4 p.m. Eastern Time, the price of transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the best offer 
(best bid) by an amount that equals or exceeds the minimum threshold 
set forth below:

Inside Price Minimum Threshold

$0-$0.99--$0.02 + (0.10 x Inside Price)
$1.00-$4.99--$0.12 + (0.07 x (Inside Price--$1.00))
$5.00-$14.99--$0.40 + (0.06 x (Inside Price--$5.00))
$15 or more $1.00

For a transaction to buy (sell) a Nasdaq [listed] security, the inside 
price shall be the best offer (best bid) in Nasdaq at the time that the 
first share of the order that resulted in the disputed transaction was 
executed, and for a transaction to buy (sell) a[n exchange-listed] non-
Nasdaq security, the inside price shall be the national best offer 
(best bid) at the time that the first share of the order that resulted 
in the disputed transaction was executed. A ``Nasdaq security'' means a 
security for which transaction reports are disseminated under the 
Nasdaq UTP Plan, and a ``non-Nasdaq security'' means a security for 
which transaction reports are disseminated under the Consolidated Tape 
Association Plan. The ``primary market'' for a non-Nasdaq Security is 
the market designated as the primary market under the Consolidated Tape 
Association Plan.

    (D)-(G) No change.
    (b)-(d) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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 Rule 11890(a) allows designated officers of Nasdaq to declare 
transactions that arise out of the use or operation of Nasdaq execution 
or communications systems to be clearly erroneous and to nullify or 
modify the terms of such transactions. In SR-NASD-2004-009,\8\ Nasdaq 
established a minimum price deviation threshold to provide a ``bright 
line'' rule standard for determining when transactions are considered 
eligible for review. A transaction price that meets these thresholds 
does not automatically trigger a clearly erroneous determination, but 
if the transaction price does not meet these thresholds the transaction 
will not be considered for clearly erroneous review. Thus, there is now 
a conclusive presumption that a transaction to buy (sell) is not 
clearly erroneous unless its price is greater than (less than) the best 
offer (best bid) by an amount that equals or exceeds the minimum 
threshold set forth below:
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    \8\ See Securities Exchange Act Release No. 52141 (July 27, 
2005), 70 FR 44709 (August 3, 2005) (SR-NASD-2004-009).

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            Inside price                       Minimum threshold
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$0-$0.99............................  $0.02 + (0.10 x Inside Price).

[[Page 15793]]

$1.00-$4.99.........................  $0.12 + (0.07 x (Inside Price--
                                       $1.00)).
$5.00-$14.99........................  $0.40 + (0.06 x (Inside Price--
                                       $5.00)).
$15 or more.........................  $1.00
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    In SR-NASD-2005-115,\9\ Nasdaq amended this rule to clarify that 
the minimum price deviation thresholds are applicable only to 
transactions executed during regular market hours, i.e., between 9:30 
a.m. and 4 p.m. This amendment reflected the fact that the analysis 
conducted by Nasdaq to determine the appropriate levels for the 
thresholds was based on pricing during normal market hours, and that 
therefore application of the thresholds during other trading sessions 
was not consistent with the intent underlying the rule. During pre-
market and post-market trading sessions, the inside price of many 
stocks may not fully reflect trading interest in the stock, since the 
range of market participants in these trading sessions is far more 
limited than during regular market hours. As a result, a trade that 
occurs at a price that deviates significantly from a stock's trading 
range during the most recent regular market session may nevertheless be 
sufficiently close to the pre-market or post-market inside price that 
it would not meet the minimum deviation threshold for the stock. 
Because the thresholds established by Nasdaq were based on analysis of 
trading patterns during regular market hours, Nasdaq concluded that the 
rule should be clarified by limiting the thresholds' application to 
such hours. The change has resulted in a larger number of transactions 
being eligible for review under NASD Rule 11890, since transactions 
occurring during pre-market and post-market sessions are always be 
eligible for adjudication under the rule unless the market participant 
seeking an adjudication failed to provide the information required 
under NASD Rule 11890(a)(2)(B) (i.e., the approximate time of 
transaction(s), security symbol, number of shares, price(s), contra 
broker(s) if the transactions are not anonymous, Nasdaq system used to 
execute the transactions, and the reason the review is being sought).
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    \9\ See Securities Exchange Act Release No. 52549 (October 3, 
2005), 70 FR 58762 (October 7, 2005) (SR-NASD-2005-115).
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    Nasdaq has now concluded that further clarification of the rule, in 
accordance with the foregoing discussion, is needed with respect to 
non-Nasdaq stocks (i.e., stocks for which transaction reports are 
disseminated through the Consolidated Tape Association Plan).\10\ 
Because the primary market \11\ for such stocks may not post an 
executable two-sided quotation precisely at 9:30 a.m., the pre-market 
trading session for such stocks may, in effect, run beyond that time. 
As a result, Nasdaq has found that trades in these stocks occurring 
after 9:30 but before the time when the primary market quote is 
available are frequently not subject to adjudication even though the 
price of the trades may deviate significantly from a stock's trading 
range during the most recent regular market session. The proposed rule 
change will address this concern by clarifying that for non-Nasdaq 
securities, the thresholds do not apply before the time when the 
primary market for the security first posts an executable two-sided 
quote for its regular market trading session.
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    \10\ See Amendment No. 2, supra note 4.
    \11\ The rule defines ``primary market'' with reference to the 
Consolidated Tape Association Plan (``CTA Plan''), which references 
the market in which the greatest number of transactions in the 
security reported on the consolidated tape during the preceding six 
month period (or such shorter period as the security has been 
reported on the consolidated tape if it has not been so reported for 
a full six month period) has taken place. See CTA Plan (second 
restatement), Section XI, Operational Matters.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\12\ in 
general and with Section 15A(b)(6) of the Act,\13\ in particular, in 
that the proposal is designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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. The proposed rule change will ensure that NASD Rule 11890's 
minimum price deviation thresholds do not bar adjudication of clearly 
erroneous petitions in circumstances where the wider spreads prevailing 
before the primary market for a non-Nasdaq stock posts a quotation may 
make the application of such thresholds excessively restrictive.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
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

    Nasdaq neither solicited nor received any written comments.

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

    Because the foregoing proposed rule change, as amended, 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 after the date of the filing or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 30-day operative 
delay to permit Nasdaq to implement the rule proposal on March 13, 
2006. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because such waiver will ensure that NASD Rule 11890's minimum price 
deviation thresholds do not bar adjudication of clearly erroneous 
petitions for transactions occurring prior to the time that the primary 
market for a non-Nasdaq security disseminates a two-sided quote for the 
security, which is a period when wider spreads can prevail. 
Accordingly, the Commission has determined to waive the operative 
delay, and the proposed rule change has become effective upon filing 
with the Commission and operative as of March 13, 2006.\16\ 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,

[[Page 15794]]

or otherwise in furtherance of the purposes of the Act.\17\
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    \16\ For purposes only of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition and capital formation. See 15 U.S.C. 
78c(f).
    \17\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, as 
amended, under Section 19(b)(3)(C) of the Act, the Commission 
considers the period to commence on March 22, 2006, the date on 
which Nasdaq submitted Amendment No. 2. 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, as amended, 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-2006-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-033. 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, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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-NASD-2006-033 and should be 
submitted on or before April 19, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-4541 Filed 3-28-06; 8:45 am]

BILLING CODE 8010-01-P