Document ID: SEC-2005-0220-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-11-09T05:00Z

[Federal Register: November 9, 2005 (Volume 70, Number 216)]
[Notices]               
[Page 68120-68122]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no05-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52722; File No. SR-NASD-2005-124]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Repeal NASD Rule 6440(f)

November 2, 2005.
    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 October 24, 2005, 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 filed this 
proposal as a ``non-controversial'' rule change pursuant to section 
19(b)(3)(A)(i) \3\ of the Act, and Rule 19b-4(f)(6) \4\ thereunder, 
which renders the proposal effective upon filing with the 
Commission.\5\ 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\ 217 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ Rule 19b-4(f)(6) allows for a proposed rule change to take 
effect upon filing with the Commission provided that the self-
regulatory organization 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. NASD 
complied with this pre-filing requirement. See e-mail from Stephanie 
Dumont, NASD to Katherine A. England, Assistant Director, Division 
of Market Regulation, dated October 11, 2005.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to repeal NASD Rule 6440(f) in light of proposed 
rule changes that have recently been approved by the Commission 
expanding market order protection and limit order protection to 
exchange-listed securities.\6\ NASD proposes to make the proposed rule 
change operative on January 9, 2006. Below is the text of the proposed 
rule change. Proposed deletions are in brackets.
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    \6\ See footnotes 8 and 9, infra.
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* * * * *
6440. Trading Practices
    (a) through (e) No change.
    [(f)(1) No member shall:]
    [(A) personally buy or initiate the purchase of an eligible 
security for its own account or for any account in which it or any 
person associated with it is directly or indirectly interested, while 
such member holds or has knowledge that any person associated with it 
holds an unexecuted market order to buy such security in the unit of 
trading for a customer; or]
    [(B) sell or initiate the sale of any such security for any such 
account, while it personally holds or has knowledge that any person 
associated with it holds an unexecuted market order to sell such 
security in the unit of trading for a customer.]
    [(2) No member shall:]
    [(A) buy or initiate the purchase of any such security for any such 
account, at or below the price at which it personally holds or has 
knowledge that any person associated with it holds an unexecuted 
limited price order to buy such security in the unit of trading for a 
customer; or]
    [(B) sell or initiate the sale of any such security for any such 
account at or above the price at which it personally holds or has 
knowledge that any person associated with it holds an unexecuted 
limited price order to sell such security in the unit of trading for a 
customer.]
    [(3) The provisions of this paragraph shall not apply:]
    [(A) to any purchase or sale of any such security in an amount less 
than the unit of trading made by a member to offset odd-lot orders for 
customers,]
    [(B) to any purchase or sale of any such security upon terms for 
delivery other than those specified in such unexecuted market or 
limited price order,]
    [(C) to any unexecuted order that is subject to a condition that 
has not been satisfied.]
    [(D) to any purchase or sale for which a member has negotiated 
specific terms and conditions applicable to the acceptance of limit 
orders that are:]
    [(i) for customer accounts that meet the definition of an 
``institutional account'' as that term is defined in Rule 3110(c)(4); 
or]
    [(ii) for 10,000 shares or more, unless such orders are less than 
$100,000 in value.]
    (g) through (j) redesignated as (f) through (i).
* * * * *

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

[[Page 68121]]

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 Rule 6440(f)(1) prohibits a member from personally buying 
(selling) an exchange-listed security \7\ for its own account while 
such member holds an unexecuted market order to buy (sell) such 
security for a customer. Similarly, NASD Rule 6440(f)(2) prohibits a 
member from buying (selling) an exchange-listed security for its own 
account while such member holds an unexecuted limit order to buy (sell) 
such security for a customer. NASD seeks to repeal NASD Rule 6440(f) in 
light of two proposed rule changes that have recently been approved by 
the Commission that also restrict a member's trading when holding 
customer market and limit orders in exchange-listed securities.
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    \7\ NASD Rule 6440(f) applies to over-the-counter transactions 
in ``eligible securities,'' which are defined in NASD Rule 6410(d) 
as ``all common stocks, preferred stocks, long-term warrants, and 
rights entitling the holder to acquire an eligible security, listed 
or admitted to unlisted trading privileges on the American Stock 
Exchange or the New York Stock Exchange, and securities listed on 
regional stock exchanges, which substantially meet the original 
listing requirements of the New York Stock Exchange or the American 
Stock Exchange.''
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    Specifically, on August 4, 2005, the Commission approved proposed 
rule change SR-NASD-2004-089,\8\ which, among other things, expands the 
application of NASD Interpretative Material (IM) 2110-2, Trading Ahead 
of Customer Limit Order (commonly referred to as the ``Manning Rule'') 
to exchange-listed securities. NASD Interpretive Material 2110-2 
generally prohibits a member from trading for its own account at prices 
that would satisfy a customer's limit order, unless the member 
immediately thereafter executes the customer's limit order. In 
addition, on August 9, 2005, the Commission approved proposed rule 
change SR-NASD-2004-045 adopting NASD Rule 2111, which prohibits a 
member that accepts and holds a customer market order from trading for 
its own account at prices that would satisfy the customer market order 
in a Nasdaq or exchange-listed security, unless the member immediately 
thereafter executes the customer market order.\9\
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    \8\ See Securities Exchange Act Release No. 52210 (August 4, 
2005), 70 FR 46897 (August 11, 2005)(SR-NASD-2004-089).
    \9\ See Securities Exchange Act Release No. 52226 (August 9, 
2005), 70 FR 48219 (August 16, 2005)(SR-NASD-2004-045).
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    NASD believes that NASD Rule 6440(f) overlaps and is generally 
duplicative of the above-referenced rule changes.\10\ Accordingly, NASD 
is proposing to repeal NASD Rule 6440(f) to ensure consistency in the 
application of limit order and market order protection and to eliminate 
potential confusion as to members' obligations with respect to these 
orders in exchange-listed securities.
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    \10\ In SR-NASD-2004-045 and SR-NASD-2004-089, NASD specifically 
noted its intent to repeal NASD Rule 6440(f) in light of the overlap 
between the proposed rule changes and NASD Rule 6440(f).
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    NASD has filed the proposed rule change for immediate 
effectiveness. The implementation date will be January 9, 2006, such 
that both SR-NASD-2004-045 and SR-NASD-2004-089 will be in effect by 
that date.
2. Statutory basis
    NASD believes that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\11\ 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 ensure consistency in the 
treatment of customer limit orders and customer market orders for 
exchange-listed securities and will enhance the integrity of the 
market.
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    \11\ 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 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

    NASD has neither solicited nor received comments on the proposed 
rule change.

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, and NASD provided 
the Commission with written notice of its intent to file the proposed 
rule change at least five days prior to the filing date, the proposed 
rule change has become effective pursuant to section 19(b)(3)(A)(i) 
\12\ of the Act and Rule 19b-4(f)(6) \13\ thereunder. NASD has complied 
with this pre-filing requirement.\14\ NASD proposes to make the 
proposed rule change operative on January 9, 2006 to coincide with the 
implementation of SR-NASD-2004-045 and SR-NASD-2004-089.\15\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(i).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ See footnote 5, supra.
    \15\ See discussion footnotes 8-10, supra.
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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.

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-2005-124 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-124. 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

[[Page 68122]]

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 the filing also will be available for 
inspection and copying at the principal offices of 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-2005-124 and should be 
submitted on or before November 30, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-22333 Filed 11-8-05; 8:45 am]

BILLING CODE 8010-01-P