Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
NASD is proposing to establish on a pilot basis new NASD Rule 4400A, which would give NASD the authority to receive and review complaints against an NASD Market Participant
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. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
On July 24, 2002, the Commission approved SR–NASD 2002–97, which authorizes NASD to operate the ADF on a pilot basis for nine months.
Under the pilot, the ADF provides NASD Market Participants the ability to post quotations in Nasdaq securities and provides all members that participate in the ADF the ability to view quotations and report transactions in Nasdaq securities to the exclusive Securities
The ADF does not provide an order routing capability. Instead, pilot NASD Rule 4300A requires an NASD Market Participant to provide direct electronic access to other NASD Market Participants and to provide to all other NASD members direct electronic access or allow for indirect electronic access to its quotations in the ADF. This rule provides the means for NASD Market Participants and other broker-dealers to access ADF quotes and, among other things, to meet the firm quote and locked-and-crossed quotation requirements.
The proposed rule change would give NASD the authority to receive and review complaints against an NASD Market Participant alleging denial of direct or indirect access required by NASD Rule 4300A. According to NASD, the proposed rule change is not intended to include complaints that allege: (1) A denial of direct or indirect access because of non-payment of fees for access to an NASD Market Participant's quotations that are imposed by the NASD Market Participant in accordance with SEC rules and regulations or otherwise; or (2) a specific instance or group of instances over discrete time periods where an NASD Market Participant is alleged not to have not honored its quotation in accordance with applicable SEC and NASD rules with respect to orders received electronically pursuant to NASD Rule 4300A.
The complainant would be required to file a written complaint with ADF Operations via facsimile, personal delivery, courier, or overnight mail that specifically alleges denial of access to an NASD Market Participant's quotation. The complainant would be required to serve a copy of the complaint by the same means on the opposite party in accordance with NASD Rule 9134(b).
The denial of access complaint would be reviewed by an officer designated by a President of NASD or one its divisions to make a determination on the merits of the complaint. The officer could, at his or her discretion, conduct further investigation before rendering a decision as to whether there had been a denial of access in contravention of NASD Rule 4300A. In the event that the officer determined that there had been a denial of access in contravention of NASD Rule 4300A, he or she would direct the offending party to provide access to ADF quotes and could limit participation in the ADF by such party if it did not comply promptly with the directive to provide access. The directive and any action to limit participation in the ADF would become effective and remain in place during the pendency of any further review or appeal.
The proposed rule change also would provide for a review of this initial determination by a three-member subcommittee consisting of current or former members of NASD's Market Regulation Committee (“MRC”).
The proposal would require the MRC subcommittee to provide written notification of its decision by the close of business the day following its determination. The decision, including affirmation of any directive to provide access or action to limit participation in the ADF rendered by the NASD officer, would be effective upon issuance of the written decision and remain in effect during the pendency of further appeals or other legal proceedings. The MRC subcommittee could not impose any additional sanctions, including monetary fines; its authority would be limited to affirming or reversing the determination of the NASD officer.
The MRC decision would constitute final NASD action, which could be appealed to the Commission. The decision would not prejudice the rights of the parties to subsequently submit the matter to arbitration or another adjudicatory forum as appropriate. Furthermore, the decision would not operate as an estoppel or otherwise bind NASD in any subsequent disciplinary action or other legal proceeding. Amendment No. 1 to the proposed rule change clarifies the scope of the authority granted to NASD and its MRC to review alleged denial of access complaints pursuant to NASD Rule 4300A and limits the remedies that may be imposed as part of the review.
Pursuant to Article XIII, Section 1 of the NASD By-Laws, the Board of Governors is vested with the authority to limit the activities, functions, and operations of members for failure to comply with NASD rules. Section 2 of Article XIII permits the Board of Governors to delegate that authority. In accordance with those provisions, the proposed rule change also would amend the Plan of Allocation and Delegation to Subsidiaries to expressly delegate to the MRC the authority to review denial of access determinations in accordance with the NASD Rule 4000A Series.
If the Commission approves the proposal, NASD would announce the effective date of the new rule in a Notice to Members to be published no later than 60 days following Commission approval. The effective date would be 30 days following publication of the Notice to Members announcing Commission approval.
NASD believes that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) of
NASD does not believe that the proposed rule change, as amended, would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
Written comments were neither solicited nor received.
Within 35 days of the date of publication of this notice in the
A. By order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule change should be disapproved.
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:
• Use the Commission's Internet comment form (
• Send e-mail to
• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609.
All submissions should refer to File Number SR-NASD–2004–159. 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 (
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.