Document ID: SEC-2006-1455-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-11-09T05:00Z

[Federal Register: November 9, 2006 (Volume 71, Number 217)]
[Notices]               
[Page 65860-65862]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no06-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54702; File No. SR-NASD-2006-121]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend NASD Rule 11890(b)(2) To Allow NASD To Designate 
Officers To Take Action Under the Rule With Respect to Clearly 
Erroneous Transactions

November 3, 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 October 30, 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 proposed rule change as constituting a ``non-controversial'' rule 
change under Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

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

    NASD is proposing to amend NASD Rule 11890 (Clearly Erroneous 
Transactions) to allow any NASD officer designated by an Executive Vice 
President of NASD's Market Regulation Department or an Executive Vice 
President of NASD's Transparency Services Department to, on his or her 
own motion, review any transaction in a Nasdaq-listed security or an 
OTC equity security, as defined in NASD Rule 6610, arising out of or 
reported through any quotation, communication, or trade reporting 
system owned or operated by NASD or its subsidiaries. The text of the 
proposed rule change is available on NASD's Web site (http://www.nasd.com
), at the NASD's Office of the Secretary, and at the 

Commission's Public Reference Room.

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
    Currently, NASD Rule 11890(b)(2) provides that, in the event of (1) 
a disruption or malfunction in the use or operation of any quotation, 
communication, or trade reporting system owned or operated by NASD or 
its subsidiaries and approved by the Commission, or (2) extraordinary 
market conditions in which the nullification or modification of 
transactions may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest, an 
Executive Vice President of NASD's Market Regulation Department or an 
Executive Vice President of NASD's Transparency Services Department 
may, on his or her own motion, review any transaction in a Nasdaq-
listed security or an OTC equity security, as defined in NASD Rule 
6610, arising out of or reported through any such quotation,

[[Page 65861]]

communication, or trade reporting system.\5\
    On October 1, 2005, NASD assumed direct authority for OTC equities 
operations, in place of a prior delegation to Nasdaq.\6\ At that time, 
NASD amended NASD Rule 11890(b)(2) to provide NASD (rather than Nasdaq) 
with the authority to declare, on its own motion, clearly erroneous 
transactions in OTC equity securities (e.g., OTCBB and Pink Sheets 
securities) in the event of a disruption or malfunction in the use of 
an NASD system or due to extraordinary market conditions. Additionally, 
NASD amended NASD Rule 11890(b)(2) to provide NASD with similar clearly 
erroneous authority with respect to all transactions in Nasdaq-listed 
securities reported to NASD.\7\ Thus, NASD Rule 11890(b)(2) also 
provides NASD with the authority to declare, on its own motion, clearly 
erroneous transactions in Nasdaq-listed securities reported to NASD's 
Alternative Display Facility or an NASD Trade Reporting Facility \8\ in 
the event of a disruption or malfunction in the use of an NASD system 
or due to extraordinary market conditions.
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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).
    \5\ NASD has filed a proposed rule change that would (1) 
renumber NASD Rule 11890(b)(2) as Rule 11890(a) and rename it as 
``Procedures for Reviewing Transactions on NASD's Own Motion;'' and 
(2) expand the scope of the rule to transactions in all securities 
by deleting the reference to Nasdaq-listed and OTC equity 
securities. See Securities Exchange Act Release No. 54451 (September 
15, 2006), 71 FR 55243 (September 21, 2006) (notice of filing of SR-
NASD-2006-104).
    \6\ See Securities Exchange Act Release No. 52508 (September 26, 
2005), 70 FR 57346 (September 30, 2005) (order approving SR-NASD-
2005-089).
    \7\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving SR-NASD-2005-
087). Prior to these amendments, such authority was delegated to 
Nasdaq with respect to trades reported through Nasdaq's Automated 
Confirmation Transaction (ACT) Service and there was no such 
authority with respect to trades reported to NASD's Alternative 
Display Facility.
    \8\ See Securities Exchange Act Release Nos. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving SR-NASD-2005-087 
relating to the NASD/Nasdaq Trade Reporting Facility); 54479 
(September 21, 2006), 71 FR 56573 (September 27, 2006) (notice of 
filing of SR-NASD-2006-108 relating to the proposed NASD/National 
Stock Exchange Trade Reporting Facility); and 54591 (October 12, 
2006), 71 FR 61519 (October 18, 2006) (notice of filing of SR-NASD-
2006-115 relating to the proposed NASD/Boston Stock Exchange Trade 
Reporting Facility).
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    By its terms, NASD Rule 11890(b)(2) authorizes an Executive Vice 
President of NASD's Market Regulation Department or an Executive Vice 
President of NASD's Transparency Services Department to take action 
with respect to clearly erroneous transactions. Currently, NASD has one 
Executive Vice President of Market Regulation, and one Executive Vice 
President of Transparency Services. NASD is proposing to amend NASD 
Rule 11890(b)(2) to provide that an Executive Vice President of NASD's 
Market Regulation Department or an Executive Vice President of NASD's 
Transparency Services Department may also designate any NASD officer 
(i.e., an NASD employee with the title of Vice President or above) to 
take action under this Rule. NASD believes that such designation is 
consistent with current NASD Rules 11890(a)(1) and (b)(1), which 
authorize officers of Nasdaq designated by its President, or any 
Executive Vice President of Nasdaq designated by its President, 
respectively, to act under the Rule.
    NASD applies this authority in only very limited circumstances, for 
example, where there is an extraordinary event and multiple self-
regulatory organizations are canceling or modifying trades. However, 
since implementation of the aforementioned rule changes, it has become 
apparent to NASD that having just two NASD officers authorized to act 
under the Rule is insufficient to review and consider promptly 
potential clearly erroneous transactions as they arise. For example, if 
the Executive Vice President of Market Regulation and Executive Vice 
President of Transparency Services are unreachable at the same time 
because they are in meetings or on travel or out of the office for any 
other reason, potential clearly erroneous transactions cannot be 
reviewed in a timely manner. NASD staff believes that delays in 
reviewing these transactions should be avoided and the proposed rule 
change will allow NASD to take prompt and effective action with respect 
to clearly erroneous trades.
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 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 
lessen the impact of clearly erroneous transactions on the market and 
the public by allowing NASD to empower designated NASD officers with 
the authority to take prompt action with respect to such transactions.
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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, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.\10\ In accordance with Rule 19b-4(f)(6)(iii),\11\ 
NASD provided the Commission with 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f)(6), 
respectively.
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative for 30 days after the date of its filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. NASD has requested that the Commission waive the 
30-day operative delay based upon a representation that the requested 
waiver is necessary to enable NASD to take prompt and effective action 
with respect to clearly erroneous transactions as they arise. NASD 
noted that there have been instances where the review of potential 
clearly erroneous transactions has been delayed because both Executive 
Vice Presidents authorized under the Rule have been unreachable. NASD 
wishes to remedy this situation as quickly as possible. In light of the 
foregoing, the Commission believes that such waiver is consistent with 
the protection of investors and the public interest. Accordingly, the 
Commission designates the proposal to be effective

[[Page 65862]]

and operative upon filing with the Commission.\12\
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    \12\ For purposes only of waiving the 30-day operative delay 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).
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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 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-2006-121 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-2006-121. 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 should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2006-121 and should be submitted on or before November 30, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-18957 Filed 11-8-06; 8:45 am]

BILLING CODE 8011-01-P