Document ID: SEC-2006-0962-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-07-27T04:00Z

[Federal Register: July 27, 2006 (Volume 71, Number 144)]
[Notices]               
[Page 42698-42700]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy06-92]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54186; File No. SR-NASD-2006-081]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Adopt New 
NASD Rule 5150 Relating to Trade-Throughs

July 20, 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 July 11, 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, II, 
and III below, which Items have been prepared by the NASD. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to adopt, in anticipation of The NASDAQ Stock 
Market LLC (the ``Nasdaq Exchange'') beginning to trade non-Nasdaq 
exchange-listed securities on an unlisted trading privileges (``UTP'') 
basis, new NASD Rule 5150 to require an NASD member that is registered 
as a market maker with the Nasdaq Exchange in a non-Nasdaq exchange-
listed security to comply with the provisions of NASD Rule 5262 
relating to trade-throughs with respect to that security for trades 
reported to the NASD. Below is the text of the proposed rule change. 
Proposed new language is in italics.
* * * * *

5000. Other Nasdaq and NASD Markets

* * * * *

5150. Applicability of Trade-Through Rule to Nasdaq Market Makers

    An NASD member shall comply with the provisions of Rule 5262 
(Trade-Throughs), as if it were an ITS/CAES market maker, for purposes 
of transactions that are reported to NASD in any ITS Security, as that 
term is defined in Rule 5210(c), in which such member is registered as 
a market maker with The NASDAQ Stock Market LLC. For purposes of this 
Rule 5150, the term ``Block Transaction'' under Rule 5262(a)(7)(B) 
shall mean any trade that involves 10,000 or more shares of an ITS 
security or a quantity of any such security having a market value of 
$200,000 or more.
* * * * *

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 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. The 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
    The proposed rule change is filed in anticipation of the Nasdaq 
Exchange operating as a national securities exchange for purposes of 
trading non-Nasdaq exchange-listed securities on a UTP basis. The NASD 
is proposing a new rule to require an NASD member that is registered as 
a market maker with the Nasdaq Exchange in an ITS Security, as defined 
Rule 5210(c), to comply with the provisions of NASD Rule 5262 (Trade-
Throughs) with respect to that security for trades reported to the 
NASD.

Background

    On July 11, 2005, the NASD filed with the Commission proposed rule 
change SR-NASD-2005-087, which, among other things, proposed amendments 
to the Plan of Allocation and Delegation of Functions by the NASD to 
Subsidiaries, NASD By-Laws and NASD rules to reflect The Nasdaq Stock 
Market, Inc.'s (``Nasdaq'') separation from the NASD upon the Nasdaq 
Exchange's operation as a national securities exchange.\3\ On June 15, 
2006, the NASD filed Amendment No. 1 to SR-NASD-2005-087, which, among 
other things, proposed the NASD's and Nasdaq's implementation strategy 
for Nasdaq's operation as a national securities exchange. On June 30, 
2006, the Commission approved SR-NASD-2005-087, as amended, the 
effective date of which will be the date upon which the Nasdaq Exchange 
operates as an exchange for Nasdaq-listed securities.\4\ The NASD 
intends to file a second proposed rule change proposing an NASD 
facility for over-the-counter quoting and trading of non-Nasdaq 
exchange-listed securities, to be made available when the Nasdaq 
Exchange begins to trade such securities on a UTP basis.
---------------------------------------------------------------------------

    \3\ The Commission approved the Nasdaq Exchange application on 
January 13, 2006. See Securities Exchange Act Release No. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006).
    \4\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006).
---------------------------------------------------------------------------

    Currently, NASD Rule 5262, also known as the Trade-Through Rule, 
restricts a member registered as an NASD ITS/CAES Market Maker \5\ in 
an ITS/CAES security \6\ from purchasing or selling such security, 
whether as principal or agent, at a price that is lower than the bid or 
higher than the offer displayed from an ITS Participant Exchange or 
ITS/CAES Market Maker. Current NASD Rule 5262 applies to all over-the-
counter trading by NASD ITS/CAES Market Makers in that security, 
including trades executed outside of CAES and reported to the NASD.
---------------------------------------------------------------------------

    \5\ For purposes of NASD Rule 5262, ``ITS/CAES Market Maker'' is 
defined in NASD Rule 5210(e) as a member that is registered as a 
market maker for the purposes of participating in the Intermarket 
Trading System (``ITS'') through the Computer Assisted Execution 
System (``CAES'') with respect to one or more specified ITS 
securities in which the member is then actively registered. The term 
also includes members that meet the definition of electronic 
communications network or alternative trading network. CAES is an 
automated system that is currently operated by The Nasdaq Stock 
Market, Inc. NASD members can direct agency and principal orders in 
exchange-listed securities to CAES for automated execution in the 
third market.
    \6\ The term ``ITS Security'' is defined in NASD Rule 5210(c) as 
``any security which may be traded through the [ITS] System by an 
ITS/CAES Market Maker.''
---------------------------------------------------------------------------

    The Nasdaq Exchange established a substantially similar rule, 
Nasdaq Rule 5262, which, by its terms, would apply to market makers 
registered with the Nasdaq Exchange (``Nasdaq market

[[Page 42699]]

makers'') in ITS Securities. However, because the ITS Plan does not 
require the Nasdaq Exchange, or any other exchange, to have a trade-
through rule applicable to its individual market participants, the 
Nasdaq Exchange has proposed to delete the rule upon integration of the 
Nasdaq Market Center and Nasdaq's Brut and INET systems into a single 
book.\7\ If approved, the Nasdaq Exchange's rule would be replaced with 
a trade-through obligation imposed on the Nasdaq Exchange itself.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 53583 (March 31, 
2006), 71 FR 19573 (April 14, 2006) (SR-NASDAQ-2006-001).
---------------------------------------------------------------------------

    Further, once the Nasdaq Exchange is operating as an exchange for 
non-Nasdaq exchange-listed securities, it is expected that some of the 
current NASD ITS/CAES Market Makers will no longer be registered with 
the NASD in this capacity, but instead will become registered solely as 
Nasdaq Market Makers. As such, no trade-through rule would apply to 
over-the-counter trading activity by these Nasdaq market makers that 
are not also registered as NASD ITS/CAES market makers. Specifically, 
NASD Rule 5262 only applies to trading by NASD ITS/CAES market makers. 
Nasdaq Rule 5262 would be similarly limited in its application to 
Nasdaq market makers trading on or through the Nasdaq Exchange, and is 
expected to be eliminated altogether upon approval of the Nasdaq 
Exchange's system integration.

Proposed New NASD Rule 5150

    The NASD is proposing new NASD Rule 5150 \8\ that would subject an 
NASD member registered as a market maker with the Nasdaq Exchange in an 
ITS Security to the provisions of NASD Rule 5262 for purposes of trades 
in that ITS Security reported to the NASD, as if such market maker were 
an ITS/CAES Market Maker. Thus, an NASD member that is a Nasdaq market 
maker trading ITS Securities otherwise than on an exchange--for 
example, through the Trade Reporting Facility approved as part of SR-
NASD-2005-087--would be subject to the provisions of NASD Rule 5262, 
including its trade-through complaint procedures.
---------------------------------------------------------------------------

    \8\ Pursuant to SR-NASD-2005-087, the NASD Rule 5000 Series will 
be renamed ``Trading Otherwise Than On An Exchange'' and for 
purposes of the NASD Rule 5000 Series, ``otherwise than on an 
exchange'' will mean a trade effected by an NASD member otherwise 
than on or through a national securities exchange.
---------------------------------------------------------------------------

    All of the exclusions to the Trade-Through Rule applicable under 
NASD Rule 5262(a) would be available to Nasdaq market makers subject to 
proposed NASD Rule 5150 and would apply as they do today to ITS/CAES 
Market Makers, with one limited exception. The NASD is proposing that, 
for purposes of applying the term ``Block Transaction'' under NASD Rule 
5262(a)(7)(B) to Nasdaq market makers that are not NASD ITS/CAES Market 
Makers, the term mean any trade that involves 10,000 or more shares of 
an ITS security or a quantity of any such security having a market 
value of $200,000 or more. This limitation makes the term consistent 
with the definition of ``block size'' in Regulation NMS Rule 600, which 
currently serves to exempt certain NASD members from a requirement to 
become NASD ITS/CAES Market Makers under certain circumstances. As 
such, Nasdaq market makers that are not also NASD ITS/CAES Market 
Makers would not be subject to the requirement in Rule 5264(a) to send 
commitments to other venues when executing block size trades or the 
other block transaction requirements in NASD Rule 5264(b)(2) and (3), 
such as the requirement to effect a block trade as a cross or at a 
price other than the ITS/CAES Market Maker's quote.
    The NASD believes proposed NASD Rule 5150 is necessary to maintain 
the application of the Trade-Through Rule until implementation of 
Regulation NMS, and specifically the Order Protection Rule mandating 
intermarket protection against trade-throughs for all Nasdaq and 
exchange-listed securities.\9\ Effective upon the implementation of the 
Order Protection Rule, the NASD would repeal NASD Rule 5150 in favor of 
a more general rule complying with Regulation NMS.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (Final Rule). The effective date 
for NMS Rule 611, the Order Protection Rule, was August 29, 2005; 
however, the initial compliance date has been extended from June 29, 
2006 to a series of five dates, beginning on October 16, 2006. See 
Securities Exchange Act Release No. 53829 (May 18, 2006), 71 FR 
30038 (May 24, 2006).
---------------------------------------------------------------------------

    The effective date of the proposed rule change will be the date 
upon which the Nasdaq Exchange begins to trade non-Nasdaq exchange-
listed securities on a UTP basis.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\10\ which requires, 
among other things, that NASD rules 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. The NASD believes that the proposed rule change will 
enhance investor protection by maintaining trade through protection for 
over-the-counter trades in exchange-listed securities.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The 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.

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-2006-081 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-2006-081. 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

[[Page 42700]]

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 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-2006-081 and should be 
submitted on or before August 17, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-11984 Filed 7-26-06; 8:45 am]

BILLING CODE 8010-01-P