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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. to Allow ECN and ATS Participation on the OTC Bulletin Board

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Information about this document as published in the Federal Register.

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Start Preamble August 22, 2001.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 [2] thereunder, notice is hereby given that on July 12, 2001, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), 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 Nasdaq. 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

Nasdaq is proposing to add new NASD Rule 6540(b) to the NASD Rule 6500 Series, which governs the operation of the OTC Bulletin Board (“OTCBB”). The purpose of the proposed rule change is to permit alternative trading systems (“ATSs”) and electronic communication systems (“ECNs”) to participate in the OTCBB. The text of the proposed rule change is below. Proposed new language is italicized.

* * * * *

6540. Requirements Applicable to Market Makers

(a) No change.

(b) An alternative trading system (ATS), as defined in Regulation ATS, Rule 300(a), or electronic communications network (ECN) as defined in SEC Rule 11Ac1-1(a)(8), shall be eligible to participate in the Service, provided however, that such ATS or ECN is an NASD member and otherwise meets the requirements for participation set forth in the OTC Bulletin Board Rules. Where used in the OTC Bulletin Board Rules, the term “market maker” shall be construed to include a participating ATS or ECN.

(c) No change.

* * * * *

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 IV 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

Nasdaq proposed to permit ATSs and ECNs to post quotes and otherwise participate in the OTCBB. The OTCBB is a quotation service that displays quotes, last-sale prices, and volume Start Printed Page 45349information in over-the-counter (“OTC”) securities. OTC securities are equity securities not listed or traded on Nasdaq or a national securities exchange. OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts, and Direct Participation Programs. Currently, only NASD member firms registered with the NASD as market makers can post quotes for OTC securities on the OTCBB. Nasdaq proposes to broaden participation in the OTCBB by allowing ATSs and ECNs to participate in the OTCBB.

The OTCBB began in 1990 as a pilot program to provide transparency in the OTC equities market.[3] In 1997, the program became permanent.[4] The OTCBB operates pursuant to the NASD Rule 6500 Series. These rules provide, among other things, that all securities quoted on the OTCBB must be sponsored by a participating market maker that registers the security by completing a Form 211, unless an exemption applies. The market maker submits the Form 211 to the NASD OTC Compliance Unit prior to publication of a quote in that security on the OTCBB. Once cleared, Nasdaq Market Data Integrity notifies the market maker that it has been registered in the security and may enter a quote. If the market maker is exempt from Rule 15c2-11 under the Act,[5] the market maker submits a Rule 15c2-11 Exemption Form, which is processed in the same way.

Under proposed Rule 6540(b), an ATS or ECN would be permitted to participate in the OTCBB in the same way that a market maker currently participates. That is, an ATS or ECN that wishes to post a quote in a security on the OTCBB would register the security by completing a Form 211, unless an exemption applies. The ATS or ECN would submit the Form 211 to the NASD OTC Compliance Unit prior to publication of a quote in that security on the OTCBB. Once cleared, Nasdaq Market Data Integrity would notify the ATS or ECN that it has been registered in the security and may enter a quote. If the ATS or ECN is exempt from Rule 15c2-11, the ATS or ECN would submit an alternative form indicating that it is an ATS or ECN and that it is exempt from Rule 15c2-11.

Every OTC security not currently quoted on the OTC Bulletin Board is considered “ineligible” until a Form 211 or Rule 15c2-11 Exemption Form is submitted. Under the current rules and proposed NASD Rule 6540(b), once clearance to quote the security is given, the security is granted “eligible” status. Thereafter, any other market maker that wishes to quote an “eligible” security must also submit a Form 211 or Exemption Form. An alternative method for obtaining approval to quote an “eligible” security and is exempt from Rule 15c2-11. During the “eligible” period, a frequency-of-quotation test is administered. The test must be satisfied before the security is identified as “active.” Once the security is “active,” a market maker, ATS, or ECN need not submit a Form 211 or Exemption Form before quoting in the security. To satisfy the test, the security must have been quoted on the OTCBB on at least 12 business days during the preceding 30 calendar days, with not more than four consecutive business days without quotations. Market makers, ATSs, or ECNs would be permitted to register on-line to quote in a security that has satisfied the test. As long as the security remains “active,” any market maker, ATS, or ECN would be permitted to quote the security without a Form 211 or Exemption Form submission.

Nasdaq has stated that one ATS has expressed interest in participating in the OTCBB, and Nasdaq believes that there may be additional ATSs or ECNs interested in participating in the Service. Proposed NASD Rule 6540(b) would permit such participation.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act.[6] Section 15A(b)(6) requires that the rules of a national securities association, among other things, foster cooperation and coordination with persons engaged in facilitating transactions in securities and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Nasdaq believes that the proposed rule, by enabling ATS and ECN participation in the OTCBB, would broaden participation and increase the transparency and liquidity of the OTCBB.

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

Nasdaq does not believe that the proposed rule change would 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 Nasdaq 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. 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 in 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-2001-44 and should be submitted by September 18, 2001.

Start Signature
Start Printed Page 45350

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[7]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 27975 (May 1, 1990), 55 FR 19123 (May 8, 1990) (approving SR-NASD-88-19); Securities Exchange Act Release No. 27975A (May 30, 1990), 55 FR 23161 (June 6, 1990) (correcting initial approval order).

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4.  See Securities Exchange Act Release No. 38456 (March 31, 1997), 62 FR 16635 (April 7, 1997) (approving SR-NASD-92-7).

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[FR Doc. 01-21668 Filed 8-27-01; 8:45 am]

BILLING CODE 8010-01-M