Document ID: SEC-2006-0675-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-05-25T04:00Z

[Federal Register: May 25, 2006 (Volume 71, Number 101)]
[Notices]               
[Page 30207-30209]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25my06-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53833; File No. SR-NASDAQ-2006-010]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval to a Proposed 
Rule Change To Establish Certain Fees With Respect to Transactions 
Executed Through the Intermarket Trading System

May 18, 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 May 15, 2006, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons, and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to enter into arrangements with other 
national securities exchanges to pass certain fees they have collected 
from members for transactions executed on another exchange through the 
Intermarket Trading System (``ITS''). This proposal does not require 
changes to Nasdaq rule text. Nasdaq will implement the proposed rule 
change immediately upon approval by the Commission.

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

    In its filing with the Commission, the Exchange 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 III below. The Exchange 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
    Section 31 of the Act \3\ requires each national securities 
exchange to pay the Commission a fee based on the aggregate dollar 
amount of certain sales of securities (``covered sales''). Rules 31 and 
31T, adopted by the Commission in June 2004,\4\ established procedures 
for the calculation and collection of Section 31 fees on such covered 
sales. Rule 31 requires each national securities exchange that owes 
Section 31 fees to submit a completed Form R31 to the Commission each 
month, beginning with July 2004. Rule 31T required each exchange to 
submit a completed Form R31 for each of the months September 2003 to 
June 2004, inclusive. Each national securities exchange must report its 
covered sales volume based on the data from a designated clearing 
agency, when available. The designated clearing agency for covered 
sales of equity securities is the National Securities Clearing 
Corporation (``NSCC''). These covered sales are reported in Part I of 
Form R31, and each exchange is required to ``provide in Part I only the 
data supplied to it by a designated clearing agency.'' \5\ The data 
supplied by NSCC for the period September 2003 through August 2004 did 
not accurately reflect the aggregate dollar value of the covered sales 
occurring on each exchange to permit reports to be made in accordance 
with new Rules 31 and 31T. In particular, the data NSCC reported to 
each national securities exchange included non-covered sales data for 
sales originating on one exchange and executed on another exchange 
through the ITS.\6\
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    \3\ 15 U.S.C. 78ee.
    \4\ See Securities Exchange Act Release No. 49928 (June 28, 
2004), 69 FR 41060 (July 7, 2004) (``Adopting Release'').
    \5\ 17 CFR 240.31(b)(5).
    \6\ As a result of this and other inaccuracies in the data 
reported by NSCC, the national securities exchanges were unable to 
report accurate information on Form R31, unless they made 
adjustments to the NSCC data based on data other than that provided 
by NSCC. On October 6, 2004, the Commission's Division of Market 
Regulation (``Division'') issued a ``no-action'' letter advising 
exchanges for whom NSCC acts as a designated clearing agency under 
Rule 31, that the Division staff would not recommend that the 
Commission take enforcement action if a national securities exchange 
adjusts the data provided by NSCC to accurately reflect covered 
sales occurring on the national securities exchange. See letter from 
Robert L.D. Colby, Deputy Director, Division, Commission to Ellen J. 
Neely, Senior Vice President and General Counsel, Chicago Stock 
Exchange, Inc. (``CHX''), dated October 6, 2004.
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    Section 31 requires that national securities exchanges pay a fee 
based on the aggregate dollar amount of sales of securities transacted 
on the exchange. Given the specific language of Section 31, the 
Commission in the Adopting Release for Rules 31 and 31T advised that 
the current methodology for treating sales of securities that occur 
through ITS \7\ was no longer appropriate and that ``it would be 
simpler and more transparent for each covered [self-regulatory 
organization (``SRO'')] to report all covered sales that occur on its 
market.'' The Commission further stated:
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    \7\ In the Adopting Release, the Commission described the 
current methodology: ``SRO A sends an ITS commitment to a member of 
SRO B to sell a security, and the commitment is executed on SRO B. 
Under existing arrangements, SRO A pays the Section 31 fee arising 
from this trade and passes the fee to its member that initiated the 
trade. * * * [T]he SROs devised this system because SRO B does not 
have the ability to require members of SRO A to reimburse it for the 
cost of its Section 31 fees.'' Adopting Release, 69 FR at 41067.

    The Commission acknowledges that a covered SRO on which a 
covered sale occurs as a result of an incoming ITS order may not

[[Page 30208]]

be able to collect funds to pay the Section 31 fee from one of its 
own members. However, Section 31 does not address the manner or 
extent to which covered SROs may seek to recover the amounts that 
they pay pursuant to Section 31 from their members. Covered SROs may 
wish to devise new arrangements for passing fees between themselves 
so that the funds are collected from the covered SRO that originated 
the ITS order.\8\
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    \8\ Id.

    The Commission further noted that any such arrangements devised by 
the SROs would have to be established pursuant to Section 19(b) of the 
Act and Rule 19b-4 thereunder.
    Working through a subcommittee of the ITS Operating Committee \9\ 
(``Subcommittee''), the national securities exchanges that are ITS 
participants devised new arrangements for passing fees between the ITS 
participants that were collected from their members. This proposed rule 
change is being submitted by Nasdaq based on the substantially similar 
rule change proposals submitted by other exchanges participating in the 
arrangement.\10\
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    \9\ The ITS participants are American Stock Exchange LLC, Boston 
Stock Exchange (``BSE''), Chicago Board Options Exchange, CHX, 
National Association of Securities Dealers (``NASD''), National 
Stock Exchange, New York Stock Exchange, Pacific Exchange, and 
Philadelphia Stock Exchange. Nasdaq is now also an ITS participant.
    \10\ See, e.g., Securities Exchange Act Release No. 52593 
(October 12, 2005), 70 FR 60584 (October 18, 2005) (SR-Amex-2005-
083). NASD determined not to participate in the arrangement for 
passing fees between exchanges.
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    Pursuant to the arrangement, each ITS participant exchange 
determines whether it has received and executed more in dollar value of 
covered sales than it has originated and sent to each other ITS 
participant exchange. For example, for the historical period, September 
2003 through August 2004, SRO A sent ITS commitments for covered sales 
whose dollar value was $150 million to SRO B for execution. SRO A 
collected fees from its members to fund its Section 31 obligation for 
those covered sales executed on SRO B. SRO B, as the executing market 
center, is obligated to pay the Section 31 fee to the SEC. During the 
same period, SRO B sent ITS commitments for covered sales whose dollar 
value was $210 million to SRO A. SRO B collected fees from its members 
for those covered sales executed on SRO A. SRO A, as the executing 
market center, is obligated to pay the Section 31 fee to the SEC. Since 
SRO A executed a greater dollar value of covered sales from SRO B than 
it sent to SRO B, the proposed arrangement requires SRO A to determine 
the amount of the fees collected by SRO B from its members based on the 
aggregate dollar value of covered sales from SRO B and executed on SRO 
A through ITS commitments. When invoicing SRO B, SRO A will deduct the 
amount of the fee it owes to SRO B (i.e., the fee amount based on SRO 
A's $210 million in aggregate covered sales less the fee amount based 
on SRO B's $150 million in aggregate covered sales) and will invoice 
only for the difference of $60 million. The invoicing process under the 
arrangement occurs twice yearly to coincide with the March 15 and 
September 30 payment schedule for Section 31 fees set forth in the Act.
    To implement this proposed arrangement, an ITS participant exchange 
will require access to the aggregate dollar value of buy and sell 
transactions occurring through ITS. The Securities Industry Automation 
Corporation (``SIAC'') uses the ITS database that it maintains to 
provide reports of the aggregate dollar value of buy and sell 
transactions occurring through ITS to the ITS participants. The reports 
provided by SIAC are used by ITS participants in connection with 
determining which ITS participant will pay the fee for transactions 
occurring through ITS and which ITS participant has collect the fee 
from its members.
    Nasdaq believes that the proposed arrangement is a fair and 
efficient means for passing fees collected at one ITS participant 
exchange based upon executions of covered sales occurring at another 
ITS participant exchange. Nasdaq acknowledges that the legal duty to 
report and pay the Section 31 fee remains with the ITS participant on 
which the sale was in fact transacted.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\11\ in general, and with 
Sections 6(b)(4) \12\ and 6(b)(5) \13\ of the Act, in particular, in 
that the proposal provides for the equitable allocation of reasonable 
dues, fees, and other charges among Nasdaq's members and issuers and 
other persons using its facilities, and 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 the 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. This proposal will allow 
Nasdaq to participant in the process established by other SROs to pass 
fees they have collected from members for transactions executed on 
another SRO through ITS.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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-NASDAQ-2006-010 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-NASDAQ-2006-010. 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

[[Page 30209]]

the Commission's Public Reference Room. Copies of such filing also will 
be available for inspection and copying at the principal office of 
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-
NASDAQ-2006-010 and should be submitted on or before June 15, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\14\ In 
particular, the Commission believes that the proposal is consistent 
with Section 6(b)(4) of the Act,\15\ which requires that the rules of 
an exchange provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities. National securities exchanges obtain funds to pay 
their Section 31 fees to the Commission by charging fees to broker-
dealers who generate the covered sales on which Section 31 fees are 
based. An exchange can obtain most of these funds by imposing a fee on 
one of its members whenever the member is on the sell side of a 
transaction. However, when the exchange accepts an ITS commitment to 
buy, the ultimate seller is a party on another market. The exchange 
lacks the ability to pass a fee to that seller directly, because the 
seller may not be a member of the exchange. Under the proposed 
arrangement, which has been adopted by each of the ITS participant 
exchanges other than NASD,\16\ the exchange that routed the ITS 
commitment away will continue to collect a fee from the broker-dealer 
that placed the sell order. Then, with respect to each ITS participant 
exchange, the exchange will determine whether it is a net sender or net 
receiver of ITS trades and send fees to or accept fees from each other 
exchange accordingly. The Commission believes this is an equitable 
manner for the exchanges to obtain funds to pay their Section 31 fees 
on covered sales resulting from ITS trades.
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    \14\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(4).
    \16\ See letter from George W. Mann, Jr., Executive Vice 
President and General Counsel, BSE, and Chairman, Subcommittee, to 
Michael Gaw, Assistant Director, Division, Commission, dated 
September 29, 2005.
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    Under Section 19(b)(2) of the Act,\17\ the Commission may not 
approve any proposed rule change prior to the thirtieth day after the 
date of publication of the notice of filing thereof, unless the 
Commission finds good cause for so doing. The Commission hereby finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after publishing notice of filing thereof in the Federal 
Register. In this case, the Commission does not believe a comment 
period is necessary because all of the parties affected by the proposed 
fee--the other ITS participant exchanges--have already adopted the same 
fee arrangement.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ See supra note 16.
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    For the reasons set forth above, the Commission finds good cause to 
accelerate approval of the proposed rule change pursuant to Section 
19(b)(2) of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASDAQ-2006-010) is hereby approved 
on an accelerated basis.
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    \19\ CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-7990 Filed 5-24-06; 8:45 am]

BILLING CODE 8010-01-P