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Notice

Self Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the National Association of Securities Dealers, Inc. To Establish the Nasdaq ReSource SM

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Start Preamble May 2, 2001.

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 April 24, 2001, the National Association of Start Printed Page 23290Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“SEC” or “Commission”) 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. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change.

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

Pursuant to the provisions of Section 19(b)(1) of the Act, and Rule 19b-4 thereunder, Nasdaq is herewith filing a proposed rule change of the NASD to establish Nasdaq's new ReSource SM Service. The ReSource SM Service is voluntary and is designed to assist NASD members in complying with Rule 11Ac1-5 under the Act.[3] Nasdaq will file a separate proposed rule change outlining the fee schedule for the ReSource SM Service.

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 III 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

On November 17, 2000, the Commission adopted Rules 11Ac1-5 [4] and 11Ac1-6 [5] under the Act.[6] Generally, the Rules seek to improve the ability of public investors to evaluate how their orders are handled after being submitted to a broker-dealer for execution. Rule 11Ac1-5 (the “Rule”) requires “market centers” that trade national market system securities to prepare and make publicly available standardized, monthly reports containing statistical information concerning the handling and execution of their “covered orders.” [7] A “market center” under the Rule is defined as “any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association.” [8] To facilitate cross-market comparisons, the Rule establishes and defines uniform measures of execution quality, including effective spread, rate of price improvement and disimprovement, fill rate, and execution speed.

Nasdaq proposes to offer a new voluntary service—Nasdaq ReSource SM—to assist NASD member market centers in meeting their reporting obligations under Rule 11Ac1-5. Nasdaq plans to collect, compile, and web-host the reports required by the Rule. These reports will be referred to as Execution Quality Reports (or “XQ Reports SM”) and will be made available on a free, publicly accessible web site. Through certain existing systems, members already provide Nasdaq with a portion of the data required to complete XQ Reports SM. In order to ensure complete XQ Reports SM, however, firms will be required to submit additional data to Nasdaq for certain categories of orders. Member firms will be required to provide an electronic file containing execution and cancellation information for orders routed to Nasdaq execution systems, orders routed to ECNs, orders routed to non-NASD members, and certain orders executed as riskless principal, depending on which method the subscriber chooses to report riskless principal transactions.[9]

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with Section 11A(a)(1)(C) of the Act, which provides, in relevant part, that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure: (1) Economically efficient execution of securities transactions; (2) fair competition among brokers and dealers; (3) the availability to brokers, dealers and investors of information with respect to quotations and transactions in securities; (4) the practicability of brokers executing investors' orders in the best market; and (5) an opportunity for investors orders to be executed without the participation of a dealer.[10] In adopting Rule 11Ac1-5, the Commission stated that the Rules would help further these important national market system objectives. Nasdaq represents that many market centers, however, do not have the necessary systems in place to collect and disseminate the required statistical information. Moreover, developing such systems and allocating firm personnel necessary to produce internally the reports required by the Rule may be a significant burden on some firms and may not be completed by the applicable compliance dates. Nasdaq believes that the ReSource SM Service will enable NASD member market centers to comply with Rule 11Ac1-5 in a more cost-effective and timely manner. By facilitating compliance with Rule 11Ac1-5 by NASD members that are market centers, the ReSource SM Service would serve to advance the purposes of Section 11A(a)(1)(C).

In addition, Nasdaq believes that the proposed rule change is consistent with Section 15A(b)(6) of the Act.[11] Section 15A(b)(6) requires the NASD's rules, among other things, to protect investors and the public interest. As described above, the Nasdaq ReSource SM Service is designed to assist NASD members in complying with SEC Rule 11Ac1-5, and the rule is designed to improve the ability of public investors to evaluate how broker-dealers are handling their orders. Nasdaq believes that by providing the service to members, it will both facilitate the Commission's goals and fulfill its own obligations to protect investors and the public interest.

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

Nasdaq 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.Start Printed Page 23291

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Nasdaq did not solicit or receive written comments on 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to File No. SR-NASD-2001-29 and should be submitted by May 29, 2001.

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

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.[12] In particular, the proposed rule change is consistent with the requirements of Section 15A(b)(6) [13] of the Act in that it is designed to foster cooperation and coordination with persons engaged in processing information with respect to 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.

In addition, the proposed rule change is consistent with Section 11A(a)(1)(C) of the Act,[14] which provides that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities. In adopting Rule 11Ac1-5, the Commission stated that the Rules would help further this and other national market system objectives.[15] Many market centers may not have the necessary systems in place to collect and disseminate the statistical information required by the Rule. Moreover, developing such systems and allocating firm personnel necessary to produce internally the reports required by the rule may be a significant burden on some firms and may not be completed by the applicable compliance dates.[16] The Commission anticipated that self-regulatory organizations might choose to provide services to assist their members in complying with the Rule.[17] The ReSourceSM Service could enable many NASD member market centers to comply with Rule 11Acl-5 in a more cost-effect and timely manner.

Pursuant to Seciton 19(b)(2),[18] the Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. Accelerated approval of the ReSourceSM Service will give subscribing firms an alternative means to comply with Rule 11Ac1-5 and allow sufficient time for market centers to develop and test their systems. Members must begin this process as soon as possible to ensure that they are prepared to comply with the Rule on August 1, 2001. Nasdaq states that many NASD members have inquired as to whether Nasdaq will offer such a service. Nasdaq believes that members may be hesitant to subscribe to the Service due to concern the ReSourceSM Service may not be approved or approved too late to enable members to comply with Rule 11Ac1-5. Moreover, a prospective subscriber of Nasdaq's ReSourceSM Service may be hesitant to commit resources to programming and testing systems for ReSourceSM if there is a possibility that approval will be delayed. Accelerated approval will eliminate uncertainty regarding the ReSourceSM Service.

Accelerated approval of the ReSourceSM Service also will facilitate Nasdaq's ability to develop and test systems. Nasdaq represents that based on conversations with members, it has developed an estimate of the number of firms that are likely to subscribe and the resources required to provide the ReSourceSM Service. However, Nasdaq cannot confirm its estimates until it confirms the number of subscribers, which practically can be accomplished only when a subscriber pays for the ReSourceSM service. In addition, the cost of the ReSourceSM Service will be an important factor that potential subscribers will consider in determining whether to subscribe. Accelerated approval of the ReSourceSM service will enable Nasdaq to finalize their fee schedule sooner.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[19] that the proposed rule change, SR-NASD-2001-29 is approved on an accelerated basis.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[20]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

6.  See Securities Exchange Act Release No. 43590 (November 17, 2000), 65 FR 75414 (“Adopting Release”).

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7.  The Rule defines “covered order” as any market order or any limit order (including immediate-or-cancel orders) received by a market center during regular trading hours at a time when a consolidated best bid and offer is being disseminated, and, if executed, is executed during regular trading hours. Excluded from the definition of “covered order” is any order for which the customer requests special handling for execution, including, but not limited to, orders to be executed at a market opening or closing price, orders submitted with stop prices, orders to be executed only at their full size, orders to be executed on a particular type of tick or bid, orders submitted on a “not held” basis, orders for other than regular settlement, and orders to be executed at prices unrelated to the market price at the time of execution. 17 CFR 240.11Ac1-5(a)(8).

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9.  See NASD Rule 4632(d)(B) and NASD Notice to Members 00-79.

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10.  15 U.S.C. 78k-1(a)(1)(C).

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12.  In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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14.  15 U.S.C. 78k-1(a)(1)(C).

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15.  See supra note 6.

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16.  The initial compliance date for the reporting of listed securities under Rule 11Acl-5 was May 1, 2001. The Commission has temporarily exempted (until July 31, 2001) all orders in Nasdaq securities. Letter from Annette L. Nazareth, Director, Division of Market Regulation, SEC, to Stuart J. Kaswell, Senior Vice President and General Counsel, Securities Industry Association, dated April 12, 2001.

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17.  See supra note 6.

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[FR Doc. 01-11518 Filed 5-7-01; 8:45 am]

BILLING CODE 8010-01-M