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3550 Federal Register / Vol. 71, No.

14 / Monday, January 23, 2006 / Notices

SECURITIES AND EXCHANGE two subsidiaries. Nasdaq requested that Nasdaq’s original proposal raised
COMMISSION the Commission grant registration as a significant regulatory concerns. As
national securities exchange to one of its originally proposed, Nasdaq’s exchange
[Release No. 34–53128; File No. 10–131]
proposed subsidiaries—The Nasdaq would have expanded what has
In the Matter of the Application of the Stock Market LLC (‘‘Nasdaq Exchange’’ traditionally been recognized as an
Nasdaq Stock Market LLC for or ‘‘Exchange’’).8 The Commission exchange. In particular, commenters
Registration as a National Securities published notice of Amendment Nos. 4 noted that Nasdaq’s original application
Exchange; Findings, Opinion, and and 5 on October 11, 2005.9 In response proposed to operate an exchange
Order of the Commission to the October 2005 Notice, the without intra-market priority rules.13
Commission received 15 comment Intra-market priority rules require
January 13, 2006. letters.10 On December 13, 2005, Nasdaq orders in the same securities directed to
submitted a response to comment letters an exchange to interact with each other.
I. Introduction received on Amendment Nos. 4 and 5.11 By contrast, Nasdaq had proposed to
On March 15, 2001, The Nasdaq Stock On January 13, 2006, Nasdaq submitted permit members to report transactions
Market, Inc. (‘‘Nasdaq’’), a subsidiary of Amendment No. 6 to its Form 1.12 on the Nasdaq exchange without
the National Association of Securities providing price protection to orders
Dealers, Inc. (‘‘NASD’’), submitted to the 8 The other subsidiary of Nasdaq would be The displayed in Nasdaq. Commenters
Securities and Exchange Commission Trade Reporting Facility LLC, which would operate argued that if the Commission approved
the proposed NASD Trade Reporting Facility
(‘‘Commission’’) a Form 1 application (‘‘TRF’’), which the NASD submitted to the
these rules, it would have to reverse its
(‘‘Form 1’’) under the Securities Commission for approval. See Exchange Act longstanding position that exchanges
Exchange Act of 1934 (‘‘Exchange Act’’), Release No. 52049 (July 15, 2005), 70 FR 42398 have a central limit order book with
seeking registration as a national (July 22, 2005) (‘‘NASD Proposal’’). As described in priority over dealer trades on the
the NASD Proposal, the TRF would be available to
securities exchange pursuant to section NASD members for the reporting of trades executed exchange, and permit other exchanges
6 of the Exchange Act.1 Notice of the in the internal systems of NASD members. to adopt similar rules.14 Commenters
application was published for comment 9 See Exchange Act Release No. 52559 (October 4, also took issue with Nasdaq’s broad
in the Federal Register on June 13, 2005), 70 FR 59097 (‘‘October 2005 Notice’’). definition of what it proposed to be a
Complete copies of Nasdaq’s Amendment Nos. 4
2001.2 On November 13, 2001, and 5 to its Form 1 are available in the
December 5, 2001, and January 8, 2002, Commission’s Public Reference Room, File No. 10– Nasdaq Exchange to reflect the NASD rule changes
filed and approved by the Commission since
Nasdaq submitted Amendment Nos. 1,3 131. Portions of Nasdaq’s Form 1, as amended by
Nasdaq filed Amendment No. 4, including, for
2,4 and 3,5 respectively, to its Form 1. Amendment Nos. 4 and 5, including the Nasdaq
Exchange’s proposed rules, are available on the example, the rules that govern executions on the
The Commission received 82 comment Commission’s Internet Web site (http:// INET system and Rule 2111, which would prohibit
letters in response to the Original Notice Nasdaq Exchange members and persons associated
with Nasdaq Exchange members from trading ahead
and Amendment Nos. 1, 2, and 3. 10 See letters from Steven I. Weissman, P.A.,
of a customer’s market order. See Exchange Act
On August 15, 2005, and September dated October 9, 2005 and December 18, 2005
Release No. 52226 (August 9, 2005), 70 FR 48219
(‘‘Weissman Letters’’); Brad Smith et al.,
23, 2005, Nasdaq submitted International Association of Small Broker Dealers
(August 16, 2005). See Nasdaq Exchange Rule 4950
Amendment Nos. 4 6 and 5 7 Series. See Exchange Act Release No. 52902
and Advisors, received October 12, 2005 (‘‘SBDA
(December 7, 2005), 70 FR 73810 (December 13,
respectively, to its Form 1. In Letter’’); Representative Ginny Brown-Waite et al.,
2005) (‘‘INET Order’’). In addition, in Amendment
Amendment Nos. 4 and 5, Nasdaq House Financial Services Committee, Members of
No. 6, Nasdaq proposes: (1) A new Rule 4305,
Congress, dated October 31, 2005 (‘‘House Financial
proposed, among other things, a new Services Committee Letter’’); Michael J. Simon,
which is a transitional listing rule for securities
corporate structure whereby Nasdaq included on Nasdaq, as a facility of the NASD, the
International Securities Exchange, Inc., dated day prior to the Nasdaq Exchange commencing
would become a holding company with November 3, 2005 (‘‘ISE Letter’’); Carolyn operations as a national securities exchange; (2) a
McCarthy, Member of Congress, dated November 3, new Rule 4720 that sets forth the timing on
1 15 2005 (‘‘Carolyn McCarthy Letter’’); James T. Brett, consolidating the Nasdaq Exchange’s three trading
U.S.C. 78f.
2 See
Managing Director, J.P. Morgan Securities, Inc., systems; (3) a new Rule 4121, regarding trading
Exchange Act Release No. 44396 (June 7, dated November 4, 2005 (‘‘J.P. Morgan Letter’’);
2001), 66 FR 31952 (‘‘Original Notice’’). The halts; (4) amendments to Exchange By-Law Article
Michael Santucci, President, Kimberly Unger, III, section 5(e) to clarify the responsibilities of the
Commission extended the comment period for the Executive Director, and Stephen J. Nelson, Co-Chair
Original Notice for 30 days. See Exchange Act Regulatory Oversight Committee; (5) a new Rule
STANY Trading Issues Committee, The Security 0150 requiring the Nasdaq Exchange to contract out
Release No. 44625 (July 31, 2001), 66 FR 41056 Traders Association of New York, Inc., dated
(August 6, 2001). those regulatory functions subject to the Regulatory
November 8, 2005 (‘‘STANY Letter’’); Vito Fossella, Contract, supra notes 107—112 and accompanying
3 See letter to Annette Nazareth, Director,
Member of Congress, dated November 8, 2005 text, to the NASD, an affiliate of NASD, or an
Division of Market Regulation (‘‘Division’’), (‘‘Vito Fossella Letter’’); Jeffrey W. Rubin, Partner, independent self-regulatory organization, unless
Commission, from Edward S. Knight, Executive Hogan & Hartson L.L.P., dated November 9, 2005 Nasdaq Exchange obtains prior Commission
Vice President and General Counsel, Nasdaq, dated (‘‘Nissan Letter’’); Senator Chuck Hagel et al., approval to do otherwise; and (6) to amend Rules
November 13, 2001 (‘‘Amendment No. 1’’). United States Senate, dated November 9, 2005
4 See letter to Jonathan G. Katz, Secretary,
1002(e) and 1014(a)(15) to require that members
(‘‘Senator Chuck Hagel et al. Letter’’); Kevin J.P. maintain membership in another registered
Commission, from Edward S. Knight, Executive O’Hara, Chief Administrative Officer and General securities association that is not registered solely
Vice President and General Counsel, Nasdaq, dated Counsel, Archipelago Holdings, Inc., dated under section 15A(k) of the Exchange Act or
December 5, 2001 (‘‘Amendment No. 2’’). November 10, 2005 (‘‘Arca Letter’’); Mary Yeager, another registered exchange that is not registered
5 See letter to Annette Nazareth, Director, Assistant Secretary, New York Stock Exchange, Inc., solely under section 6(g) of the Exchange Act.
Division, Commission, from Edward S. Knight, dated November 10, 2005 (‘‘NYSE Letter’’); Kim 13 See letters from Cameron Smith, General
Executive Vice President and General Counsel, Bang, Bloomberg L.P., dated November 17, 2005 Counsel, The Island ECN, Inc., dated August 26,
Nasdaq, dated January 8, 2002 (‘‘Amendment No. (‘‘Bloomberg Letter’’); and James A. Duncan, 2001 (‘‘Island Letter’’); Jeffrey T. Brown, Vice
3’’). Chairman, and John C. Giesea, President/CEO, President, Regulation and General Counsel,
6 See letter to Robert L.D. Colby, Deputy Director, Security Traders Association, dated November 17, Cincinnati Stock Exchange, dated August 28, 2001
Division, Commission, from Edward S. Knight, 2005 (‘‘STA Letter’’). (‘‘CSE Letter’’); James E. Buck, Senior Vice
Executive Vice President and General Counsel, 11 See letter to Jonathan G. Katz, Secretary,
President, New York Stock Exchange, dated August
Nasdaq, dated August 15, 2005 (‘‘Amendment No. Commission, from Edward S. Knight, Executive 27, 2001 (‘‘NYSE August 2001 Letter’’); and Darla
4’’). Amendment No. 4 supersedes and replaces the Vice President and General Counsel, Nasdaq, dated C. Stuckey, Corporate Secretary, New York Stock
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Original Notice and Amendment Nos. 1, 2, and 3. December 13, 2005 (‘‘Nasdaq Response Letter’’). Exchange, dated February 14, 2002 (‘‘NYSE
7 See letter to Robert L.D. Colby, Deputy Director, 12 See letter to Robert L.D. Colby, Acting Director, February 2002 Letter’’).
Division, Commission, from Edward S. Knight, Division, Commission, from Edward S. Knight, 14 See CSE Letter and Island Letter, supra note 13;

Executive Vice President and General Counsel, Nasdaq Exchange, dated January 13, 2006 and letter from Edward J. Joyce, President, Chief
Nasdaq, dated September 23, 2005 (‘‘Amendment (‘‘Amendment No. 6’’). Amendment No. 6, among Operating Officer, Chicago Board Options
No. 5’’). other things, revises the proposed rules of the Exchange, dated August 27, 2001 (‘‘CBOE Letter’’).

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Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices 3551

‘‘Nasdaq transaction.’’15 In particular, II. Statutory Standards Exchange Act. Finally, the Commission
Nasdaq proposed to include as a Under sections 6(b) and 19(a) of the finds that the proposed rules of the
‘‘Nasdaq transaction’’ certain Exchange Act,20 the Commission shall Nasdaq Exchange do not impose any
transactions reported to Nasdaq that by order grant a registration as a burden on competition not necessary or
were executed otherwise than by using national securities exchange if it finds appropriate in furtherance of the
the systems of the Nasdaq exchange. In that the exchange is so organized and purposes of the Exchange Act.23
addition, Nasdaq members not required has the capacity to carry out the III. Discussion
to report such transactions to Nasdaq purposes of the Exchange Act and can
would be permitted to do so. A number comply, and can enforce compliance by A. Corporate Structure
of commenters expressed significant its members and persons associated Prior to 2000, Nasdaq was a wholly-
concern about Nasdaq’s proposal to with its members, with the provisions of owned subsidiary of the NASD. In 2000,
permit Nasdaq members to report, to the the Exchange Act, the rules and the NASD began restructuring its
Nasdaq exchange, trades that had regulations thereunder, and the rules of relationship with Nasdaq. As the result
always been considered over-the- the exchange. The rules of the exchange, of a two-phase private placement of
counter (‘‘OTC’’) market trades.16 among other things, must be adequate to Nasdaq shares, a public offering
Nasdaq proposes in Amendment Nos. insure fair dealing and to protect completed in January 2005, and other
4 and 5 to address these concerns by investors, and may not impose any dispositions by the NASD of Nasdaq
limiting Nasdaq Exchange transactions burden on competition not necessary or shares, the NASD’s ownership interest
to only those trades that are executed in appropriate in furtherance of the in Nasdaq has been reduced to about
the Exchange’s systems and to amend its purposes of the Exchange Act. 26%.24 Notwithstanding its minority
Exchange systems to require executions As discussed in greater detail below, ownership interest in Nasdaq, the NASD
to occur pursuant to price priority rules. the Commission finds that Nasdaq’s has retained control of Nasdaq through
Trades that are executed otherwise than application for exchange registration its ownership of one outstanding share
on the Nasdaq Exchange or any other meets the requirements of the Exchange of Series D preferred stock, which gives
national securities exchange would Act and the rules and regulations the NASD the right to cast one vote
continue to be reported to the NASD thereunder. Further, the Commission more than one-half of all votes entitled
either to its Alternative Display Facility finds that the proposed rules of the to be cast at an election by all holders
(‘‘ADF’’) or its proposed TRF.17 Nasdaq Exchange as proposed in of capital stock of Nasdaq. This share of
In response to the October 2005 Amendment Nos. 4 and 5 21 and further Series D preferred stock allows the
Notice, the Commission received several amended by Amendment No. 6 22 are NASD to continue to retain control over
comments in support of Nasdaq’s consistent with section 6 of the Nasdaq.25 The Series D preferred share
amended application to register the Exchange Act in that, among other will expire when Nasdaq ceases to
Nasdaq Exchange as a national things, they are designed to: (1) Assure operate pursuant to the NASD’s Plan of
securities exchange.18 Specific concerns fair representation of an exchange’s Allocation and Delegation of Functions
raised by other commenters are members in the selection of its directors by the NASD to Subsidiaries
discussed below.19 and administration of its affairs and (‘‘Delegation Plan’’).
15 See CSE Letter, Island Letter, NYSE August
provide that, among other things, one or As noted above, Nasdaq proposes to
2001 Letter, and NYSE February 2002 Letter, supra more directors shall be representative of convert to a holding company (‘‘Nasdaq
note 13; and letters from George W. Mann, Jr., investors and not be associated with the Holding Company’’),26 which would
Senior Vice President and General Counsel, Boston exchange, or with a broker or dealer; (2) have two subsidiaries: (1) The Nasdaq
Stock Exchange, dated July 20, 2001; Sol Reicher, prevent fraudulent and manipulative Exchange; and (2) The Trade Reporting
Co-Chairman, Amex Specialists Associations, John
Hawkey, Chairman, Amex Floor Brokers acts and practices, promote just and Facility LLC, which would operate the
Association, and Ross Moore, Chairman, Amex equitable principles of trade, foster proposed new NASD TRF. Nasdaq filed
Options Market Maker Association, writing on cooperation and coordination with its corporate documents for the
behalf of The Member Associations of the American proposed Nasdaq Holding Company and
Stock Exchange, dated July 30, 2001 (‘‘Member
persons engaged in regulating, clearing,
Associations of the American Stock Exchange settling, processing information with proposed Exchange. According to
Letter’’); Stuart J. Kaswell, Senior Vice President respect to, and facilitating transactions Nasdaq, it plans to transfer all or
and General Counsel, Securities Industry in securities, remove impediments to
Association, dated August 30, 2001 (representing 23 15 U.S.C. 78f(b)(8).
the interests of some of its members) (‘‘SIA Letter’’);
and perfect the mechanisms of a free
24 As of December 6, 2005, the NASD had
Douglas M. Atkin, President, Chief Executive and open market and a national market
beneficial ownership of 22,138,996 shares of the
Officer, Instinet, dated August 28, 2001 (‘‘Instinet system; and (3) protect investors and the common stock of Nasdaq. This includes 17,590,968
Letter’’); Kevin M. Foley, Bloomberg L.P. and public interest. The Commission also shares of common stock underlying warrants and
Bloomberg Tradebook LLC, dated August 28, 2001 4,548,028 shares of common stock held by the
(‘‘Bloomberg 2001 Letter’’); and Meyer S. Frucher,
believes that the rules of the Nasdaq
NASD. Of the 17,590,968 shares underlying
Chairman and Chief Executive Officer, Philadelphia Exchange are consistent with 11A of the warrants, 6,849,849 of the shares of common stock
Stock Exchange, dated September 4, 2001 and underlying warrants have been exercised by the
February 25, 2002 (‘‘Phlx Letters’’). Counter Bulletin Board. See SBDA Letter, supra holders of such warrants. The NASD, however,
16 See NYSE August 2001 Letter and NYSE note 10. In response, Nasdaq noted that the issue retains the right to vote these shares pursuant to a
February 2002 Letter, supra note 13; and Instinet of the NASD’s regulatory responsibility over the voting trust agreement. Upon approval of the
Letter, Member Associations of the American Stock Over-the-Counter Bulletin Board has already been application to register the Nasdaq Exchange as a
Exchange Letter, Phlx Letters, SIA Letter, supra addressed by the Commission. See Nasdaq national securities exchange, the NASD’s beneficial
note 15. Response Letter, supra note 11. Another commenter ownership of shares underlying the exercised
17 See NASD Proposal, supra note 8. alleged that Nasdaq violated Section 17(b) of the warrants will terminate. See Amendment No. 4,
18 See Carolyn McCarthy Letter, House Financial Securities Act of 1933 by allegedly ‘‘touting’’ Exhibit K, supra note 6.
Services Committee Letter, ISE Letter, J.P. Morgan Nasdaq-listed companies. See Weissman Letters, 25 See Exchange Act Release No. 53022

Letter, NYSE Letter (with proviso), Senator Chuck supra note 10. Nasdaq responded by noting that this (December 23, 2005), 70 FR 77433 (December 30,
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Hagel et al. Letter, STA Letter, STANY Letter, Vito issue is currently in litigation. See Nasdaq Response 2005). In this filing, Nasdaq replaced a Preferred B
Fossella Letter, supra note 10. Letter, supra note 11. share that had provided the NASD with control
20 15 U.S.C. 78f(b) and 78s(a).
19 The Commission received two comments not over Nasdaq with the Preferred D share.
21 See Amendment No. 4 and Amendment No. 5,
directly related to the Nasdaq Exchange’s 26 Current Nasdaq shareholders will receive

registration. One commenter voiced concern about supra notes 6 and 7. shares in the holding company, making it the
the NASD’s responsibility over the Over-the- 22 See Amendment No. 6, supra note 12. publicly-traded company.

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3552 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

substantially all of its assets and Incorporation and By-Laws be Specifically, no person who beneficially
liabilities to the subsidiaries of the submitted to the Board of Directors of owns shares of common stock, preferred
Nasdaq Holding Company. the Nasdaq Exchange (‘‘Exchange stock, or notes in excess of five percent
Board’’), and, if the Exchange Board of the securities generally entitled to
1. Self-Regulatory Function of the
determines that such amendment is vote may vote the shares in excess of
Exchange; Relationship between Nasdaq
required to be filed with the five percent.38 This five percent voting
Holding Company and the Nasdaq
Commission pursuant to section 19(b) of limitation does not apply, however, to
Exchange; Jurisdiction Over Nasdaq
the Exchange Act, such change shall not the NASD or its affiliates until such
Holding Company
be effective until filed with, or filed time as the NASD beneficially owns five
Although Nasdaq Holding Company with and approved by, the percent or less of Nasdaq’s outstanding
will not itself carry out regulatory Commission.33 The Commission stock or notes. In addition, the Nasdaq
functions, its activities with respect to believes that these provisions are Holding Company Board may approve
the operation of the Exchange must be consistent with the Exchange Act.34 exemptions from the five percent voting
consistent with, and not interfere with, The Commission also believes that limitation for any person that is not a
the Exchange’s self-regulatory under section 20(a) of the Exchange broker-dealer, an affiliate of a broker-
obligations. The proposed Nasdaq Act 35 any person with a controlling dealer, or a person subject to a statutory
Holding Company corporate documents interest in the Nasdaq Holding disqualification under section 3(a)(39)
include certain provisions that are Company would be jointly and severally of the Exchange Act.39 Any such
designed to maintain the independence liable with and to the same extent that exemption from the five percent voting
of the Nasdaq Exchange’s self-regulatory Nasdaq Holding Company is liable limitation would not be effective until
function from the Nasdaq Holding under any provision of the Exchange approved by the Commission pursuant
Company, enable the Exchange to Act, unless the controlling person acted to section 19 of the Exchange Act.40
operate in a manner that complies with in good faith and did not directly or The Nasdaq Exchange’s proposed
the federal securities laws, including the indirectly induce the act or acts rules also prohibit Exchange members
objectives of sections 6(b) and 19(g) of constituting the violation or cause of and persons associated with Exchange
the Exchange Act, and facilitate the action. In addition, section 20(e) of the members from beneficially owning more
ability of the Exchange and the Exchange Act 36 creates aiding and than 20 percent of the then-outstanding
Commission to fulfill their regulatory abetting liability for any person who voting securities of the Nasdaq Holding
and oversight obligations under the knowingly provides substantial Company.41 Members that trade on an
Exchange Act.27 For example, the assistance to another person in violation exchange traditionally have ownership
Nasdaq Holding Company submitted to of any provision of the Exchange Act or interests in such exchange. As the
the Commission’s jurisdiction with rule thereunder. Further, section 21C of Commission has noted in the past,
respect to activities relating to the the Exchange Act 37 authorizes the however, a member’s interest in an
Nasdaq Exchange,28 and agreed to exchange could become so large as to
Commission to enter a cease-and-desist
provide the Commission with access to order against any person who has been cast doubt on whether the exchange can
its books and records.29 Nasdaq Holding ‘‘a cause of’’ a violation of any provision fairly and objectively exercise its self-
Company also agreed to keep of the Exchange Act through an act or regulatory responsibilities with respect
confidential non-public information omission that the person knew or to that member.42 A member that is a
relating to the self-regulatory function 30 should have known would contribute to controlling shareholder of an exchange
of the Exchange and not to use such the violation. might be tempted to exercise that
information for any non-regulatory controlling influence by directing the
purpose.31 In addition, the board of 2. Changes in Control of the Nasdaq exchange to refrain from, or the
directors of the Nasdaq Holding Exchange; Ownership and Voting exchange may hesitate to, diligently
Company, as well as its officers, Limitations monitor and surveil the member’s
employees, and agents are required to The Nasdaq Holding Company’s conduct or diligently enforce its rules
give due regard to the preservation of Restated Certificate of Incorporation and the Federal securities laws with
the independence of the Exchange’s imposes limits on direct and indirect respect to conduct by the member that
self-regulatory function.32 Finally, the changes in control, which are designed violates such provisions.
Nasdaq Holding Company By-Laws to prevent any shareholder from The Commission believes that these
require that any changes to the Nasdaq exercising undue control over the ownership and voting restrictions are
Holding Company Certificate of operation of the Exchange and to ensure consistent with the Exchange Act. These
that the Exchange and the Commission ownership limitations should minimize
27 See Nasdaq Holding Company By-Laws Article
are able to carry out their regulatory the potential that a person could
XI, section 11.3; Article XII, sections 12.1, 12.2,
12.3, 12.4, and 12.5. obligations under the Exchange Act. improperly interfere with or restrict the
28 See Nasdaq Holding Company By-Laws Article ability of the Commission or the
XII, section 12.3. 33 See Nasdaq Holding Company Restated
29 See Nasdaq Holding Company By-Laws Article Certificate of Incorporation Article Eighth.B. and 38 See Nasdaq Holding Company Restated

XII, section 12.1(b). Nasdaq Holding Company By-Laws Article XI, Certificate of Incorporation Article Fourth.C.
30 This requirement to keep confidential non- section 11.3. 39 15 U.S.C. 78c(a)(39). See Nasdaq Holding
34 The Commission notes that it is in the process Company Restated Certificate of Incorporation
public information relating to the self-regulatory
function shall not limit the Commission’s ability to of reviewing issues related to new ownership Article Fourth.C.6.
access and examine such information or limit the structures of SROs and has proposed rules relating 40 See Nasdaq Holding Company By-Laws Article

ability of directors, officers, or employees of the to the governance and ownership of SROs, XII, Section 12.5.
Nasdaq Holding Company from disclosing such including limiting the restrictions on ownership 41 See Nasdaq Exchange Rule 2130.
information to the Commission. See Nasdaq and voting to members of an SRO or a facility of
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42 See Exchange Act Release Nos. 51149

Holding Company By-Laws Article XII, section an SRO. See Exchange Act Release No. 50699 (February 8, 2005), 70 FR 7531 (February 14, 2005)
12.1(b). (November 18, 2004), 69 FR 71126 (December 18, (SR–CHX–2004–26); 49718 (May 17, 2004), 69 FR
31 See Nasdaq Holding Company By-Laws Article 2004). 29611 (May 24, 2004) (SR–PCX–2004–08); 49098
35 15 U.S.C. 78t(a).
XII, section 12.1(b). (January 16, 2004), 69 FR 3974 (January 27, 2004)
32 See Nasdaq Holding Company By-Laws Article 36 15 U.S.C. 78t(e).
(SR–Phlx–2003–73); and 49067 (January 13, 2004),
XII, section 12.1(a). 37 15 U.S.C. 78u–3. 69 FR 2761 (January 20, 2004) (SR–BSE–2003–19).

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Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices 3553

Exchange to effectively carry out their • The Exchange Board will include at the Nasdaq Exchange.51 These
regulatory oversight responsibilities least one issuer representative (or at candidates, together with those
under the Exchange Act. least two if the Exchange Board consists nominated by the Member Nominating
of ten or more members); 48 and Committee, will then be presented to
3. The Nasdaq Exchange
• Up to two officers of the Nasdaq Exchange members for election.52 The
Nasdaq has applied to the Exchange (‘‘Staff Directors’’) may be Nominating Committee will nominate
Commission to register its wholly- elected to the Exchange Board.49 candidates for all other vacant or new
owned subsidiary, the Nasdaq On December 14, 2005, Nasdaq Director positions on the Exchange
Exchange, as a national securities Holding Company elected the initial Board, the Nasdaq Listing and Hearing
exchange. As part of its exchange directors of the Exchange Board Review Council, and the Nasdaq Review
application, Nasdaq has filed the pursuant to the Exchange LLC Council.
proposed Nasdaq Exchange Limited Agreement.50 The initial Exchange The Commission believes that the
Liability Company Agreement Board is the current Board of Directors requirement in the Exchange By-Laws
(‘‘Exchange LLC Agreement’’) and of the Nasdaq Holding Company who that twenty percent of the directors be
Exchange By-Laws. In these documents, were elected pursuant to the procedures ‘‘Member Representative Directors’’ and
among other things, Nasdaq establishes set forth in the current Nasdaq By-Laws. the means by which they are elected by
the composition of the Exchange Board The initial Exchange Board is balanced: members provides for the fair
and the Exchange committees. the number of Non-Industry Directors representation of members in the
a. The Nasdaq Exchange Board of exceeds the number of Industry selection of directors and the
Directors Directors and there are four Public administration of the Exchange
The Exchange Board will be the Directors and four issuer consistent with the requirement in
governing body of the Nasdaq Exchange representatives. These Directors were section 6(b)(3) of the Exchange Act.53
and possess all of the powers necessary selected by the Nasdaq Nominating This requirement helps to ensure that
for the management of the business and Committee, and elected by a majority members have a voice in the use of self-
affairs of the Nasdaq Exchange and the vote of the Board of Governors of the regulatory authority, and that an
execution of its responsibilities as an NASD, which includes representatives exchange is administered in a way that
SRO. Under the Exchange By-Laws: of NASD members. No Nasdaq is equitable to all those who trade on its
• Twenty percent of the directors on Exchange members participated in the market or through its facilities.
the Exchange Board will be ‘‘Member selection of directors for the initial The Commission has previously
Representative Directors;’’ 43 board because the Exchange does not stated its belief that the inclusion of
• The number of ‘‘Non-Industry yet have members. In light of these public, non-industry representatives on
Directors’’ 44 will equal or exceed the circumstances, and Nasdaq’s exchange oversight bodies is critical to
sum of the number of ‘‘Industry representation that it expects to elect a an exchange’s ability to protect the
Directors’’ 45 and ‘‘Member new Exchange Board at the same time public interest.54 Further, public
Representative Directors;’’ 46 the Nasdaq Holding Company holds its representatives help to ensure that no
• The Exchange Board will include at annual meeting in Spring 2006, the single group of market participants has
least one ‘‘Public Director;’’ 47 Commission believes that the initial the ability to systematically
Exchange Board is consistent with the disadvantage other market participants
43 See Exchange LLC Agreement, Section 9(a).
Exchange Act. through the exchange governance
‘‘Member Representative Director’’ means a Director For subsequent boards, the Exchange process. The Commission believes that
‘‘who has been elected or appointed after having public directors can provide unique,
been nominated by the Member Nominating Board will appoint a Nominating
Committee or by a Nasdaq [Exchange] Member Committee and a Member Nominating unbiased perspectives, which should
* * *.’’ See Exchange By-Laws Article I(q). Committee. The Member Nominating enhance the ability of the Exchange
44 ‘‘Non-Industry Director’’ means a ‘‘Director
Committee will nominate candidates for Board to address issues in a non-
(excluding Staff Directors) who is (i) a Public
each Member Representative Director discriminatory fashion and foster the
Director; (ii) an officer or employee of an issuer of integrity of the Nasdaq Exchange. The
securities listed on the national securities exchange position on the Exchange Board, as well
operated by the [Exchange]; or (iii) any other as nominate candidates for appointment Commission believes that the Nasdaq
individual who would not be an Industry Director.’’ by the Exchange Board for each vacant Exchange Board satisfies the
See Exchange By-Laws Article I(v).
or new position on a committee that is requirements in section 6(b)(3) of the
45 Generally, an ‘‘Industry Director’’ is, among
to be filled with a Member Exchange Act,55 which requires that one
other things, a Director that is or has been an officer,
director, employee, or owner of a broker-dealer. In Representative under the Exchange By- or more directors be representative of
addition, persons who have a consulting or Laws. Additional candidates may be issuers and investors and not be
employment relationship with the Exchange, its added to the list of candidates for the associated with a member of the
affiliates, or the NASD are considered ‘‘Industry.’’ exchange, or with a broker or dealer.56
See Exchange By-Laws Article I(l). Member Representative Director
46 See Exchange By-Laws Article III, section 2(a). positions if a Nasdaq Exchange Member 51 See Exchange By-Laws Article II, section 1(c).
47 See id. Nasdaq proposes that the Audit submits a timely and duly executed 52 See Exchange By-Laws Article II.
Committee would include at least two Public written nomination to the Secretary of 53 15 U.S.C. 78f(b)(3).
Directors and the Regulatory Oversight Committee
54 See Regulation of Exchanges and Alternative
(‘‘ROC’’) would include at least three Public
48 See Exchange By-Laws Article III, section 2(a). Trading Systems, Exchange Act Release No. 40760
Directors. Accordingly, the Exchange Board would
also have to include at least three Public Directors. 49 These Staff Directors will be considered (December 8, 1998), 63 FR 70844 (December 22,
See Exchange By-Laws Article III, section 5(e) and ‘‘neutral’’ and not as either Industry or Non- 1998) (‘‘Regulation ATS Release’’).
(d). ‘‘Public Director’’ means a ‘‘Director who has Industry Directors. See Exchange By-Laws Article 55 15 U.S.C. 78f(b)(3).

no material business relationship with a broker or I(l). See also Exchange Act Release No. 44280 (May 56 See also In the Matter of National Association
8, 2001), 66 FR 26892 (May 15, 2001) (SR–NASD–
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dealer, the [Exchange] or its affiliates, or the of Securities Dealers, Inc., Order Instituting Public
NASD.’’ See Exchange By-Laws Article I(y). Public 2001–06) (approving amendment to NASD By-Laws Proceedings Pursuant to section 19(h)(1) of the
Directors that serve on the ROC must also satisfy to allow for the treatment of staff Governors as Securities Exchange Act of 1934, Making Findings
independence requirements applicable to Nasdaq ‘‘neutral’’ for purposes of Industry/Non-Industry and Imposing Remedial Sanctions, Exchange Act
Exchange issuers set forth in Exchange Rule 4200. balancing on the NASD Board of Governors). Release No. 37538 (August 8, 1996), Administrative
See Nasdaq Exchange By-Laws Article III, section 50 See Exchange LLC Agreement, section 9 and Proceeding File No. 3–9056 (‘‘1996 Settlement
5(e). Schedule C. Continued

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3554 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

b. The Nasdaq Exchange Committees Regulation Committee,71 the NRC,72 the the NASD rules, however, the Nasdaq
In the Exchange By-Laws, the Nasdaq Management Compensation Committee, Exchange’s proposed rules require a
Exchange has proposed to establish and the Audit Committee.73 Each of broker-dealer to be a member of at least
several committees. Specifically, the these committees is compositionally one other SRO before applying for
Exchange has proposed to establish the balanced as they each must be membership in the Exchange and to
following committees that would be composed of at least 50 percent Non- remain a member of another SRO.77
composed solely of directors: An Industry members. The Commission Current NASD members will be able
Executive Committee,57 a Finance believes that these committees’ to apply through an expedited process
Committee,58 a Management compositional balance is consistent to become a Nasdaq Exchange member,
Compensation Committee,59 an Audit with the 1996 Settlement Order. and to register with the Exchange all of
Committee,60 and a ROC.61 In addition, their associated persons whose
B. Regulation of the Nasdaq Exchange registrations were approved with the
the Exchange has proposed to establish
these other committees that are not As a prerequisite for the NASD, by submitting a Waive-in
required to be composed solely of Commission’s approval of an exchange’s Membership Application Form and a
directors: a Nasdaq Listing and Hearing application for registration, an exchange Membership Agreement.78 All of the
Review Committee,62 a Nasdaq Review must be organized and have the capacity firm’s associated persons who are
Council (‘‘NRC’’),63 a Nominating to carry out the purposes of the registered in categories recognized by
Committee,64 a Member Nominating Exchange Act.74 Specifically, an Exchange rules would become
Committee,65 a Quality of Markets exchange must be able to enforce registered persons of a Nasdaq Exchange
Committee,66 a Market Operations compliance by its members, and persons member firm.
associated with its members, with the Broker-dealers that are not members
Review Committee,67 an Arbitration and
federal securities laws and the rules of of the NASD and new broker-dealers
Mediation Committee,68 and a Market
the exchange.75 that are not yet members of another SRO
Regulation Committee.69 The
may apply for membership in the
Commission believes that the 1. Membership Nasdaq Exchange and comply with the
Exchange’s proposed committees should
Nasdaq proposes that the criteria for Exchange Rule 1010 Series. Firms that
enable it to carry out its responsibilities
under the Exchange Act. membership in the Nasdaq Exchange be apply to become both NASD and
The Exchange has proposed that the substantially the same as the criteria Exchange members simultaneously may
composition of certain committees be currently applicable to firms applying file one full membership application
consistent with the 1996 Settlement for membership in the NASD.76 Unlike with the NASD in compliance with the
Order. These committees include the NASD Rule 1010 Series.79 New broker-
Nominating Committee, the Quality of 5(e)(ii). The Arbitration and Mediation Committee dealers that wish to become members of
may be maintained on the Exchange’s behalf by a the Nasdaq Exchange and an SRO other
Markets Committee, the Arbitration and regulatory services provider (e.g., the NASD). See
Mediation Committee,70 the Market Exchange By-Laws Article III, section 5(e). (‘‘The
than the NASD must submit a complete
Board shall appoint an Arbitration and Mediation application form with all of the
Order’’). Simultaneously with issuing this Order, Committee, or shall cause the [Exchange] to enter information required of new applicants
the Commission also published a Report pursuant into an agreement with a self-regulatory in Exchange Rule 1013(a)(2).80 The
to section 21(a) of the Exchange Act regarding the organization that provides regulatory services
pursuant to which such self-regulatory organization
Nasdaq Exchange will consider the
NASD and the Nasdaq market. See Report and
Appendix to Report Pursuant to section 21(a) of the shall appoint an Arbitration and Mediation application for membership in the
Securities Exchange Act of 1934 Regarding the Committee on the Company’s behalf.’’). In the event Exchange after its membership in the
NASD and The Nasdaq Stock Market (August 8, that a regulatory services provider appoints an other SRO has been approved.
1996). As a subsidiary of the NASD, Nasdaq is Arbitration and Mediation Committee on the
Nasdaq Exchange’s behalf, it must comply with the
The Exchange has contracted with
currently bound by the 1996 Settlement Order
settling an enforcement action against the NASD. In compositional and other requirements set forth in NASD Regulation (‘‘NASDR’’), the
conjunction with the Nasdaq Exchange’s the Exchange By-Laws with respect to such NASD’s wholly-owned subsidiary, to
application to register as an exchange, Nasdaq committee. which the NASD has delegated the
71 The Market Regulation Committee is the
submitted a letter to the Commission affirming that performance of certain of its regulatory
the Nasdaq Exchange will comply with the 1996 successor to the Market Surveillance Committee.
Settlement Order except as specified. See letter to See Exchange Act Release Nos. 38545 (April 24, obligations,81 to perform certain
Robert L.D. Colby, Deputy Director, Division, 1997), 62 FR 25226 (May 8, 1997); and 38908
Commission, from Edward S. Knight, Executive (August 7, 1997), 62 FR 43385 (August 13, 1997). and Rule 1010 series. In Amendment No. 6, Nasdaq
Vice President and General Counsel, Nasdaq, dated 72 The Nasdaq Exchange will not maintain a updated proposed Nasdaq Exchange Rule IM–1000–
January 11, 2006. Consistent with the 1996 National Business Conduct Committee. Its appellate 2 to reflect a proposed rule change, which clarified
Settlement Order, the Exchange Board structure has level disciplinary body, the NRC, however, is the scope of the relief provided to registered
at least fifty percent independent public and non- composed of a majority of Non-Industry Directors representatives called into active military duty. See
industry membership. consistent with the 1996 Settlement Order. See Exchange Act Release No. 52980 (December 19,
57 See Exchange By-Laws Article III, section 5(a). Exchange By-Laws Article VI, section 2. The NRC 2005), 70 FR 76477 (December 27, 2005).
58 See Exchange By-Laws Article III, section 5(b). will be appointed by the Exchange Board and will, 77 See Nasdaq Exchange Rules 1002(e) and

59 See Exchange By-Laws Article III, section 5(c). among other things, preside over appeals or reviews 1014(a)(15). In Amendment No. 6, Nasdaq amended
60 See Exchange By-Laws Article III, section 5(d). of disciplinary proceedings, statutory these rules to amend Rules 1002(e) and 1014(a)(15)
61 See Exchange By-Laws Article III, section 5(e). disqualification proceedings, and membership to require that members maintain membership in
62 See Exchange By-Laws Article V.
proceedings. See Exchange By-Laws Article VI, another registered securities association that is not
63 See Exchange By-Laws Article VI.
section 1. registered solely under section 15A(k) of the
73 Consistent with the 1996 Settlement Order, the Exchange Act or another registered exchange that is
64 See Exchange By-Laws Article III, section 6(b).
Audit Committee is composed of a majority of Non- not registered solely under section 6(g) of the
65 Id.
Industry Directors and is chaired by a Public Exchange Act. See supra note 12. NASD
66 See Exchange By-Laws Article III, section 6(c). membership is required, in particular, for
Director. See Exchange By-Laws Article III, section
67 See Exchange By-Laws Article III, section 6(d). 5(d). applicants that will transact business with the
68 See Exchange By-Laws Article III, section 6(e). 74 See section 6(b)(1) of the Exchange Act; 15 public. See also section 15(b)(8) of the Exchange
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69 See Exchange By-Laws Article III, section 6(f). U.S.C. 78f(b)(1). Act and Rule 15b9–1 thereunder. 15 U.S.C.
70 The Exchange By-Laws provide that the 75 Id. See also section 19(g) of the Exchange Act; 78o(b)(8); 17 CFR 240.15b9–1.
78 See Nasdaq Exchange Rule 1013(a)(6)(C).
Arbitration and Mediation Committee shall consist 15 U.S.C. 78s(g).
79 See Nasdaq Exchange Rule 1013(a)(6)(A).
of no fewer than 10 and no more than 25 members, 76 See Nasdaq Exchange Rule 1010 Series. The
80 See Nasdaq Exchange Rule 1013(a)(6)(B).
and shall have at least 50 percent Non-Industry Nasdaq Exchange’s proposed membership By-Laws
members. See Exchange By-Laws Article III, section and rules essentially mirror the NASD’s By-Laws 81 See Delegation Plan.

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Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices 3555

regulatory functions on its behalf (the fingerprints, to be submitted to the adequacy and effectiveness of the
‘‘Regulatory Contract’’).82 Under the Attorney General of the United States Exchange’s regulatory program,
Regulatory Contract, NASDR will for identification and appropriate assessing the Exchange’s regulatory
perform certain membership functions processing. Exchange Act Rule 17f– performance, assisting the Exchange
for the Nasdaq Exchange. Specifically, 2(c) 91 permits a national securities Board in reviewing the Exchange’s
NASDR will accept and review all exchange to file a fingerprint plan with regulatory plan and the overall
applications for membership in the the Commission that will facilitate the effectiveness of the Exchange’s
Exchange, and receive and process submission of fingerprints to the regulatory functions.96
membership applications through the Attorney General. Because the The ROC would also meet with the
Central Registration Depository (‘‘CRD’’) Exchange’s rules contemplate that the Chief Regulatory Officer (‘‘CRO’’) in
system pursuant to the Exchange’s Exchange will facilitate the submission executive session at regularly scheduled
membership rules.83 NASDR will of fingerprints to the Attorney General meetings and at any time upon request
evaluate the applications and make on behalf of its members as permitted by of the CRO or any member of the ROC.97
recommendations to the Exchange about Exchange Act Rule 17f–2(c), as a The ROC would also be informed about
whether they should be approved or condition to the operation of the Nasdaq the CRO’s compensation, promotion, or
denied. The Nasdaq Exchange will make Exchange, a fingerprint plan must be termination (including reasons).98
the ultimate decision on whether to filed by the Nasdaq Exchange under Finally, the regulatory budget would be
accept a broker-dealer as a member.84 Exchange Act Rule 17f–2 and declared presented to the ROC so that its
Appeals of staff denials of effective by the Commission. members may inquire as to the
membership will be heard by the NRC.85 The Commission finds that the adequacy of resources available for the
Decisions of this committee will be Nasdaq Exchange’s membership rules Nasdaq Exchange’s regulatory
final, but may be called for review by are consistent with section 6 of the program.99
the Exchange Board.86 This process is Exchange Act,92 specifically section Nasdaq proposes that its CRO have
consistent with the current process by 6(b)(2) of the Exchange Act,93 which general supervision of the regulatory
which the NASD Board of Directors may requires that a national securities operations of the Exchange, including
call for review membership decisions exchange have rules that provide that overseeing surveillance, examination,
made by the NASD’s National any registered broker or dealer may and enforcement functions.100 The CRO
Adjudicatory Council. become a member and any person may also would administer any regulatory
The Nasdaq Exchange also proposes become associated with an exchange services agreement with another SRO to
to require that all broker-dealer member. The Commission notes that which the Nasdaq Exchange is a
applicants include an original Nasdaq pursuant to section 6(c) of the Exchange party.101 The CRO would be an
Exchange-approved fingerprint card for Act, an exchange must deny Executive Vice President or Senior Vice
each associated person of the applicant membership to non-registered broker-
President that reports directly to the
subject to section 17(f)(2) of the dealers and registered broker-dealers
Chief Executive Officer.102 The CRO
Exchange Act and Rule 17f–2 that do not satisfy certain standards,
may also serve as the Nasdaq
thereunder 87 for whom a fingerprint such as financial responsibility or
Exchange’s General Counsel.103
card has not been filed with another operational capacity. As a registered
In addition, the Nasdaq Exchange has
SRO.88 The Nasdaq Exchange’s rules exchange, the Nasdaq Exchange must
created an independent regulatory
also permit the Exchange to make the independently determine if an applicant
satisfies the standards set forth in the department, Nasdaq Regulation, for the
registration of a person effective purpose of functionally separating its
pending receipt of a fingerprint card.89 Exchange Act, regardless of whether an
applicant is a member of another SRO.94 regulatory functions from its business
Section 17(f)(2) of the Exchange Act and lines. Nasdaq Regulation will carry out
Rule 17f–2(a) thereunder 90 states that 2. Regulatory Independence—the Chief many of the Nasdaq Exchange’s
every member of a national securities Regulatory Officer and Regulatory regulatory functions, including
exchange shall require that each of its Oversight Committee administering its membership and
partners, directors, officers and disciplinary rules.104
Nasdaq proposes to create an
employees be fingerprinted, and shall Exchange Board committee, the ROC,
submit such fingerprints, or cause the that would be composed of independent 96 See Exchange By-Laws Article III, section 5(e).
97 See Exchange By-Laws Article IV,section 7.
82 The Nasdaq Exchange and NASDR have
directors. The ROC would consist of
98 See Exchange By-Laws Article III, section 5(e).
requested confidential treatment for their three members, each of whom must be 99 Id.
contractual agreement pursuant to section 24(b)(2) a Public Director and ‘‘independent 100 See Exchange By-Laws Article IV, section 7.
of the Exchange Act and Rule 24b–2 thereunder. 15 director’’ as defined by Nasdaq 101 Id.
U.S.C. 78x(b)(2); and 17 CFR 240.24b–2. Nasdaq has Exchange Rule 4200.95 The ROC would 102 Id.
represented to the Commission that it will assign
the Regulatory Contract to the Nasdaq Exchange.
be responsible for monitoring the 103 Id.

83 See Nasdaq Exchange Rule 1013. See also 104 See Exchange Rules 1011(c) and 9120(w). See
91 17 CFR 240.17f–2(c).
Exchange By-Laws Article VI, Section 2. also Report of Investigation Pursuant to section
84 In Amendment No. 6, Nasdaq proposed to 92 15 U.S.C. 78f. The Commission notes that it is 21(a) of the Securities Exchange Act of 1934
modify Nasdaq Exchange Rule 3230(h) to reflect an not approving the Nasdaq NTS Access Order Form Regarding the Nasdaq Stock Market Inc., as
NASD proposed rule change relating to reporting and Nasdaq Services Agreement. Overseen By Its Parent, The National Association of
requirements for members that are clearing firms.
93 15 U.S.C. 78f(b)(2). Securities Dealers, Inc., Exchange Act Release No.
See Exchange Act Release No. 52352 (August 26, 94 In response to the Original Notice, the 51163 (February 9, 2005). The Commission issued
2005), 70 FR 52460 (September 2, 2005). Securities Industry Association submitted a this report as a result of an investigation that
85 See Nasdaq Exchange Rule 1015. See also comment noting that the Nasdaq Exchange should uncovered a regulatory failure between the NASD
Exchange By-Laws Article VI, Section 2. be clear about its membership application process and Nasdaq. In this report, the Commission stated
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86 See Nasdaq Exchange Rules 1015(j)(3) and and the process for the registration of associated that ‘‘[i]n carrying out their regulatory
persons of Nasdaq Exchange members. See SIA responsibilities, SROs must ensure that they
87 15 U.S.C. 78q(f)(2); and 17 CFR 240.17f–2.
Letter, supra note 15. effectively manage the inherent conflicts between
95 Nasdaq Exchange Rule 4200(a)(15) sets forth their role as a market and their role as a regulator.’’
88 See Nasdaq Exchange Rule 1013(a)(2)(B).
the director independence listing standards Id. In response, the NASD and Nasdaq took several
89 See Nasdaq Exchange Rule 1140(c)(2).
applicable to Nasdaq-listed issuers. See also remedial steps, including the creation of the Nasdaq
90 15 U.S.C. 78q(f)(2); and 17 CFR 240.17f–2(a). Amendment No. 6, supra note 12. Regulation.

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3556 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

In the October 2005 Notice, the Commission believes that it is Exchange’s behalf. In performing these
Commission requested comment on consistent with the Exchange Act and functions, however, NASDR may
whether the Nasdaq Exchange’s the public interest to allow the nonetheless bear liability, in appropriate
proposed regulatory structure, including Exchange to contract with NASDR to circumstances, for causing or aiding and
the ROC and CRO, insulate its perform membership, disciplinary, and abetting the failure of the Exchange to
regulatory functions from its market and enforcement functions. Membership, perform its regulatory functions.113
other commercial interests so that it discipline, and enforcement are Accordingly, although NASDR will not
could carry out its regulatory fundamental elements to a regulatory act on its own behalf under its SRO
obligations. In response, the program, and constitute core self- responsibilities in carrying out these
Commission received two comment regulatory functions. It is essential to regulatory services for the Nasdaq
letters.105 Both commenters supported the public interest and the protection of Exchange, NASDR also may have
the Exchange’s proposed regulatory investors that these functions are carried secondary liability if, for example, the
structure. out in an exemplary manner, and the Commission finds that the contracted
The Commission believes that, in this Commission believes that NASDR has functions are being performed so
context, the Exchange’s proposal is the expertise and experience to perform inadequately as to cause a violation of
consistent with the statutory these functions on behalf of the Nasdaq the Federal securities laws by the
requirements. In addition, the Exchange.111 Nasdaq Exchange.
Commission believes that the Nasdaq At the same time, the Commission
Exchange’s proposal is consistent with believes that, unless relieved by the 4. Rule 17d–2 Agreements
the 1996 Settlement Order.106 Commission of its responsibility,112 the Section 19(g)(1) of the Exchange
Nasdaq Exchange bears the Act114 requires every SRO to examine
3. The Regulatory Contract its members and persons associated
responsibility for self-regulatory
Although the Exchange will be an conduct and primary liability for self- with its members and to enforce
SRO with all of the attendant regulatory regulatory failures, not the SRO retained compliance with the federal securities
obligations under the Exchange Act, it to perform regulatory functions on the laws and the SRO’s own rules, unless
has entered into the Regulatory Contract the SRO is relieved of this responsibility
with NASDR, under which NASDR will 29, 2004), 69 FR 47962 (August 6, 2004) (‘‘Amex pursuant to section 17(d) of the
perform certain regulatory functions on Order’’). Exchange Act.115 Section 17(d) was
111 In response to the Original Notice, some
its behalf.107 Notwithstanding the intended, in part, to eliminate
commenters raised general concerns over the ability
Regulatory Contract, the Exchange will of NASDR to be a fair and impartial regulator of the
unnecessary multiple examinations and
retain ultimate legal responsibility for Nasdaq Exchange given the historical relationship regulatory duplication with respect to
the regulation of its members and its between Nasdaq and NASDR and the fact that the members of more than one SRO
market. This contract is intended to Nasdaq Exchange is a ‘‘customer’’ of the NASD’s for (‘‘common members’’). Rule 17d–2 of
regulatory services. See Instinet Letter; Member
reflect the current relationship that Associations of the American Stock Exchange the Exchange Act116 permits SROs to
Nasdaq and NASDR have and Letter; and SIA Letter, supra note 15; and letters propose joint plans allocating regulatory
accordingly, NASDR will be performing from William O’Brien, Senior Vice President & responsibilities concerning common
for the Nasdaq Exchange the same General Counsel, The Brut ECN, L.L.C., dated July members. These agreements, which
30, 2001; and W. Hardy Callcott, Senior Vice
regulatory functions it currently President and General Counsel, Charles Schwab, must be filed with and approved by the
performs for Nasdaq as a facility of the dated August 30, 2001. Other commenters, Commission, generally cover such
NASD. however, believed that exchange status for Nasdaq regulatory functions as personnel
In addition to performing certain would permit the NASD to provide regulatory registration, branch office examinations,
membership functions for the Nasdaq services without the perception or potential for a
conflict of interest. See letters from Robert M. Funk, and sales practices. Commission
Exchange,108 NASDR will perform Executive Director, American Shareholders approval of a 17d–2 plan relieves the
certain disciplinary and enforcement Association, dated July 17, 2001; Grover G. specified SRO of those regulatory
functions for the Exchange. Generally, Norquist, President, Americans for Tax Reform, responsibilities allocated by the plan to
dated July 17, 2001; Congressman Patrick J. Tiberi,
NASDR will investigate members, issue Ohio, dated July 20, 2001; Congressman Steven C. another SRO. Many existing SROs have
complaints, and conduct hearings LaTourette, Ohio, dated July 25, 2001; Congressman entered into such agreements.117
pursuant to the Exchange’s rules. E. Clay Shaw, Florida, dated July 25, 2001; Senator Nasdaq has represented to the
Appeals of disciplinary hearings, Richard J. Durbin, Illinois, dated July 27, 2001; Commission that the Nasdaq Exchange
Barry S. Porter, Chairman, The Nasdaq Stock
however, will be handled by the Market Issuer Affairs Committee and 22
NRC.109 representatives of the Nasdaq Issuer Affairs
113 For example, if failings by NASDR have the

The Commission has previously Committee, dated August 8, 2001; Glenn R. Oxner, effect of leaving the Exchange in violation of any
aspect of the Exchange’s self-regulatory obligations,
stated that it would consider whether it Executive Vice President, Scott & Stringfellow, Inc.,
the Exchange would bear direct liability for the
would be consistent with the public dated August 14, 2001; Congressional Delegation
from Maryland, including Constance A. Morella, violation, while NASDR may bear liability for
interest for an exchange to contract with Roscoe Bartlett, Wayne Gilchrest, and Robert L. causing or aiding and abetting the violation.
another SRO to perform certain Ehrlich, Jr., dated August 15, 2001; Congressman
114 15 U.S.C. 78s(g)(1).
115 15 U.S.C. 78q(d).
regulatory functions.110 In this case, the Charles A. Gonzalez, Texas, dated August 21, 2001;
Congressman Chip Pickering, Mississippi, dated 116 17 CFR 240.17d–2.

105 ISE August 21, 2001; Congressman Jerry Weller, Illinois, 117 See, e.g., Exchange Act Release Nos. 13326
Letter and STA Letter, supra note 10.
106 See
letters dated August 23, 2001 and August 31, 2001; (Mar. 3, 1977), 42 FR 13878 (Mar. 14, 1977) (NYSE/
1996 Settlement Order, supra note 56. Mathew Ng, Assistant General Counsel & Assistant
107 In Amendment No. 6, Nasdaq proposed Rule
Amex); 13536 (May 12, 1977), 42 FR 26264 (May
Secretary, Oracle Corporation, dated August 29, 23, 1977) (NYSE/BSE); 14152 (Nov. 9, 1977), 42 FR
0150, which provides that the regulatory functions 2001; Congressional Delegation from Connecticut, 59339 (Nov. 16, 1977) (NYSE/CSE); 13535 (May 12,
performed by NASD will continue to be performed including Nancy Johnson, James Maloney and 1977), 42 FR 26269 (May 23, 1977) (NYSE/CHX);
by NASD, an affiliate of NASD, or an independent Christopher Shays, dated September 18, 2001; and 13531 (May 12, 1977), 42 FR 26273 (May 23, 1977)
self-regulatory organization, unless Nasdaq Congressman Mark Foley, Florida, dated September
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(NYSE/PSE); 14093 (Oct. 25, 1977), 42 FR 57199

Exchange obtains prior Commission approval to do 21, 2001. (Nov. 1, 1977) (NYSE/Phlx); 15191 (Sep. 26, 1978),
otherwise. 112 See section 17(d)(1) of the Exchange Act and 43 FR 46093 (Oct. 5, 1978) (NASD/BSE, CSE, CHX
108 See supra text accompanying note 82.
Rule 17d–2 thereunder. 15 U.S.C. 78q(d)(1); and 17 and PSE); 16858 (May 30, 1980), 45 FR 37927 (June
109 See Exchange By-Laws Article VI, section 1.
CFR 240.17d–2. See also infra notes 114–117 and 5, 1980) (NASD/BSE, CSE, CHX and PSE); and
110 See, e.g., Regulation ATS Release, supra note accompanying text. The Commission is not 42815 (May 23, 2000), 65 FR 34762 (May 31, 2000)
54. See also Exchange Act Release No. 50122 (July approving the Regulatory Contract. (NASD/ISE).

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and the NASD intend to file a Rule 17d– 5. Discipline and Oversight of Members functions, or operations, fining or
2 agreement with the Commission As a prerequisite for the Commission censuring members, or suspending or
covering common members of the approval of an exchange’s application barring a person from being associated
Nasdaq Exchange and the NASD. The for registration, an exchange must be with a member.125 The Nasdaq
Nasdaq Exchange represented that this organized and have the capacity to carry Exchange’s rules also provide for the
agreement would allocate to the NASD out the purposes of the Exchange Act. imposition of fines for minor rule
regulatory responsibility, with respect to Specifically, an exchange must be able violations in lieu of commencing
common members, the following: to enforce compliance by its members disciplinary proceedings.126
(1) The NASD will receive and and persons associated with its Accordingly, as a condition to the
process in the CRD applications, members with Federal securities laws operation of the Nasdaq Exchange, a
reports, information, filings, fingerprint and the rules of the exchange.119 As Minor Rule Violation Plan (‘‘MRVP’’)
cards, and notices generally relating to noted above, pursuant to the Regulatory filed by the Nasdaq Exchange under
the status of an associated person of a Contract, NASDR will perform many of Exchange Act Rule 19d–1(c)(2) must be
common member, and registration as a the initial disciplinary processes on declared effective by the
principle or representative of any type, behalf of the Exchange.120 For example, Commission.127
or any other type of employee of a NASDR will investigate claims of The Nasdaq Exchange will operate
common member required to register or securities laws violations, issue MarketWatch, a real-time surveillance
pass a qualification examination under complaints, and conduct hearings department.128 MarketWatch will
the Nasdaq Exchange rules. pursuant to Nasdaq Exchange rules.121 perform this real-time intraday
(2) The NASD will receive and Appeals from disciplinary decisions surveillance over all Nasdaq Exchange-
process notices, filings, or registrations will be heard by the NRC. Thereafter, listed companies and all Nasdaq
for the branch offices of common the NRC may affirm, reverse, or
Exchange market participants. More
members of the Nasdaq Exchange and otherwise modify the decision of the
specifically, MarketWatch will oversee
the NASD, including notices, filings, or Hearing Panel, and must submit a
the complete and timely disclosure of
registrations to designate offices of proposed written decision to the
Nasdaq Exchange issuers’ material
supervisory jurisdiction. Exchange Board, which will become
information to determine if a trading
(3) The NASD will examine common final unless the matter is called for
review by any Director.122 After review, halt is necessary to maintain an orderly
members of the Nasdaq Exchange and market for the release of material news.
the NASD for compliance with Federal the Exchange Board may affirm, reverse,
modify, and increase or reduce any In addition, MarketWatch, through its
securities laws, rules and regulations, automated detection system, will
and rules of the Nasdaq Exchange that sanction, or impose any other fitting
sanction.123 monitor the trading activity of each
have been certified by the Nasdaq security and will generate a price and
Exchange as identical or substantially The Nasdaq Exchange’s By-Laws and
rules provide that it has disciplinary volume alert to aid in the assessment of
similar to the NASD rules. unusual market activity. MarketWatch
jurisdiction over its members so that it
(4) The NASD will investigate can enforce its members’ compliance will also coordinate and execute the
common members of the Nasdaq with its rules and the Federal securities release of initial public offerings;
Exchange and the NASD for apparent laws.124 The Exchange’s rules also administer market participants’ excused
violations of Federal securities laws, permit it to sanction members for withdrawals and passive market making
rules or regulations, or Nasdaq violations of its rules and violations of requests; and handle the clearly
Exchange rules that has been certified the Federal securities laws by, among
by the Nasdaq Exchange as identical or other things, expelling or suspending 125 See Nasdaq Exchange Rule 8300.
substantially identical to an NASD rule. members, limiting members’ activities, 126 See Nasdaq Exchange Rule 9216 and IM–9216.
(5) The NASD will enforce Minor Nasdaq Exchange rule violations include, for
example, failing to file timely reports of short
compliance with Federal securities 119 15 U.S.C. 78f(b)(1). positions, failure to timely submit amendments to
laws, rules and regulations, and rules of 120 In response to the Original Notice, the Forms BD or U–4, failing to submit trading data as
the Nasdaq Exchange that have been Securities Industry Association submitted a requested, or failing to have a principal approve
comment generally supporting this arrangement for advertisements or sales literature prior to its use.
certified by Nasdaq as identical or the regulation of Nasdaq Exchange members. See See Nasdaq Exchange Rule IM–9216. In
substantially similar to the NASD rules. SIA Letter, supra note 15. Amendment No. 6, Nasdaq updated proposed
121 NASDR will appoint Hearing Panels pursuant
Because the Nasdaq Exchange Nasdaq Exchange Rule IM–9216 to reflect a NASD
to Nasdaq Exchange rules. In Amendment No. 6, proposed rule change, which expanded the list of
anticipates entering into this 17d–2 Nasdaq proposed a new transitional rule, violations appropriate for disposition as minor rule
agreement, it has not made provisions to 9231(b)(1)(D), allowing persons who served on the violations. See Exchange Act Release No. 52294
fulfill the regulatory obligations that NASD National Adjudicatory Council, or a (August 18, 2005), 70 FR 49700 (August 24, 2005).
would be undertaken by the NASD disciplinary subcommittee thereof, prior to the date The Commission finds that this proposed rule
that Nasdaq commenced operating as a national change is consistent with section 6(b)(5), (b)(6) and
under this agreement with respect to securities exchange to sit on Hearing Panels. The (b)(7) of the Exchange Act for the same reasons that
common members of the Nasdaq Commission believes that proposed Nasdaq the Commission approved these rule changes under
Exchange and the NASD. Accordingly, Exchange Rule 9231(b)(1)(D) is consistent with the section 15A(b)(6), (b)(7) and (b)(8).
the Commission is conditioning the Exchange Act. Allowing persons who previously 127 17 CFR 240.19d–1(c)(2).
served on the NASD National Adjudicatory
operation of the Nasdaq Exchange on Council, or a disciplinary subcommittee thereof, to
128 See Amendment No. 5, Exhibit E, supra note

approval by the Commission of a 17d– 7. Nasdaq currently operates MarketWatch pursuant

act as Panelists in the Nasdaq Exchange to the Delegation Plan, and MarketWatch will
2 agreement between the Nasdaq disciplinary hearings will facilitate a seamless continue to operate in the same manner upon the
Exchange and the NASD that allocates transition from the current NASD disciplinary Nasdaq Exchange’s operation as an exchange. In
process to the Nasdaq Exchange disciplinary
the above specified matters to the
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Amendment No. 6, Nasdaq proposed to add Nasdaq

process. Exchange Rule 4121, which provided that, in
NASD.118 122 Nasdaq Exchange Rules 9349 and 9351(a).
accordance with the standing request of the
123 Nasdaq Exchange Rule 9351.
Commissions, the Nasdaq Exchange would halt
118 Alternatively, the Nasdaq Exchange could 124 See generally Nasdaq Exchange By-Laws domestic trading if other major securities markets
demonstrate that it has the ability to fulfill its Article IX; Nasdaq Exchange Rule Series, 0100, initiated market-wide trading halts in response to
regulatory obligations. 1000, 9000. extraordinary market conditions.

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3558 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

erroneous trade adjudication process.129 should have access to OATS data regulatory purposes, unless the NASD
If MarketWatch observes any activity regarding: (1) All orders its members makes available such OATS data to
that may involve a violation of receive, including those orders that are other market participants on the same
Commission or Nasdaq Exchange rules, routed to markets other than the terms as it is provided to the Nasdaq
MarketWatch will immediately refer the Exchange; and (2) reports of executions Exchange.
activity to NASDR’s Market Regulation by its members that are reported to the
Department for further investigation and new TRF. C. Trading System
potential disciplinary action.130 The Commission received two 1. Trading Rules
The Commission finds that the comment letters addressing these
Nasdaq Exchange’s By-Laws and rules issues.133 One commenter stated that it In Amendment No. 4, Nasdaq
concerning its disciplinary and was its understanding that the Nasdaq proposed that only trades executed on
oversight programs are consistent with Exchange’s sole use of OATS the Nasdaq Exchange systems would be
the requirements of sections 6(b)(6) and information would be for regulatory considered exchange trades. Currently,
6(b)(7) 131 of the Exchange Act in that purposes and if that understanding were the Nasdaq systems that would be the
they provide fair procedures for the incorrect, it objects to the Exchange’s Exchange’s systems are the Nasdaq
disciplining of members and persons access to such information for non- Market Center, formerly known as
associated with members. The regulatory purposes.134 A second SuperMontage, Brut, and INET.137
Commission further finds that the rules commenter argued that the Nasdaq The Nasdaq Exchange’s proposed
of the Exchange provide it with the Exchange should not have access to Nasdaq Market Center rules require
ability to comply, and with the OATS data regarding orders and price priority.138 The rules, with limited
authority to enforce compliance by its executions by its members that are exceptions, also require time priority.139
members and persons associated with executed off the Exchange and that the Accordingly, the Nasdaq Exchange’s
its members, with the provisions of the Exchange should not be permitted to proposed Nasdaq Market Center rules
Exchange Act, the rules and regulations use OATS data for non-regulatory differ from current NASD rules
thereunder, and the rules of the Nasdaq purposes.135 This commenter, however, governing the Nasdaq Market Center as
Exchange.132 said that if the Exchange is permitted to follows:
6. Order Audit Trail System use OATS data for non-regulatory
purposes, access to such data for non- (1) The Exchange’s rules do not
Under the Nasdaq Exchange rules, regulatory purposes should be granted include the priority rule that first
Nasdaq Exchange members will be to other markets or any other person executes an incoming order against the
required to comply with the NASD’s who requests the data.136 submitting member’s own interest
Order Audit Trail System (‘‘OATS’’) The Commission shares commenters’ reflected in the Nasdaq Market Center at
requirements. Because Exchange concerns about the use by the Nasdaq
members will report order information Exchange of OATS information for non- 137 Nasdaq acquired Brut in September 2004 and

to OATS pursuant to the Nasdaq regulatory purposes, particularly since it

the rules governing the execution of transactions on
Exchange rules, the Exchange will have Brut were approved by the Commission in March
includes information about members’ 2005. Brut is a price/time priority system. See
the right of access to OATS data for trading activities on competitors of the Exchange Act Release No. 51326 (March 7, 2005),
regulatory purposes. In the October Exchange. The Nasdaq Exchange’s 70 FR 12521 (March 14, 2005) (‘‘Brut Order’’). In
2005 Notice, the Commission OATS rules would require Exchange
addition, on December 8, 2005, Nasdaq purchased
specifically requested comment on the INET ECN, and the rules governing the trading on
members to report, on a daily basis, INET were approved by the Commission in
extent to which the Nasdaq Exchange extensive information with respect to December 2005. See INET Order, supra note 12. In
should be able to use OATS data for the handling of orders for Nasdaq Amendment No. 6, Nasdaq proposed to add Nasdaq
non-regulatory purposes and whether it securities, including when all or
Exchange Rules 4950 et seq., governing the
operation of INET, including its rules requiring
129 In Amendment No. 6, Nasdaq proposed to
portions of orders are executed on orders to be executed in price/time priority.
modify Nasdaq Exchange Rule 11890(b) to reflect a markets other than the Nasdaq 138 In Amendment No. 6, Nasdaq proposed to add

proposed rule change approved by the Commission Exchange. A member’s failure to two order types that are consistent with its priority
rules and were previously approved by the
for the NASD. The proposed rule change clarified provide this information could give rise Commission for the NASD: proactive limit orders
the time frames under which an officer of the NASD to disciplinary action by the Exchange
must initiate action to declare a transaction null and reverse pegged orders. See respectively,
and void. See Exchange Act Release No. 52508 pursuant to its authority as a self- Exchange Act Release Nos. 52511 (September 27,
(September 26, 2005), 70 FR 57346 (September 30, regulatory organization under the 2005), 70 FR 57636 (October 3, 2005) (relating to
2005). proactive limit orders) and 52449 (September 15,
Exchange Act. Because this information 2005), 70 FR 55647 (September 22, 2005) (relating
130 The INET ECN currently operates as a facility

of the NASD. See infra note 137 and accompanying

is obtained from members through the to reverse pegged orders).
text. Nasdaq represents that until September 30, exercise of the Exchange’s regulatory 139 Because ERISA may restrict the ability of a

2006, INET will report its trading activity to the powers, the Commission does not Nasdaq Quoting Market Participant or Order Entry
National Stock Exchange (‘‘NSX’’). As a result, believe it should be used for non- Firm that is trading for a managed account,
surveillance and disciplinary actions are currently pursuant to Exchange rules, these members may
handled by INET and NSX. Trading activity on append an anti-internalization qualifier (‘‘AIQ’’) to
133 See Bloomberg Letter and STA Letter, supra
INET will become subject to Nasdaq Exchange Rule its quote or order to prevent an order from trading
11890 on or before February 6, 2006, and clearly note 10. with the entering firms’ own trading interest.
134 See STA Letter, supra note 10.
erroneous matters will be administered by In addition, Nasdaq Market Center Participants
MarketWatch pursuant to the same rules and 135 See Bloomberg Letter, supra note 10.
may submit ‘‘Auto-Ex Orders,’’ which would only
processes as trading activity through The Nasdaq 136 See Bloomberg Letter, supra note 10. Nasdaq trade with the quotes and orders of automatic
Market Center and Brut. INET will cease reporting responded to commenters’ concerns by reaffirming execution participants that do not charge a separate
its trading activity to NSX at or prior to the end of its commitment not to use OATS data for quote-access fee. An Auto-Ex Order would cancel
September 2006, when Nasdaq’s trading systems are commercial purposes. Nasdaq, however, believes instead of locking or trading through the price of
integrated onto a single platform. See infra note 144
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that its use of OATS data by Nasdaq’s Department an order-delivery or quote-access fee charging
and accompanying text. At that time, Nasdaq of Economic Research to study public policy issues, participant’s quote or order. Order delivery and
MarketWatch will assume the same functions for such as sub-penny trading and decimalization, does quote-access charging participants would not retain
INET trading as for the Nasdaq Market Center and not constitute a commercial use of the data. The time priority over the quotes and orders of
Brut. Commission believes that any non-regulatory use of automatic execution participants that do not charge
131 15 U.S.C. 78f(b)(6) and (7).
the data would have a commercial benefit. See a separate quote-access fee when such quotes and
132 15 U.S.C. 78f(b)(1). Nasdaq Response Letter, supra note 11. orders trade with Auto-Ex Orders.

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Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices 3559

the best price, irrespective of whether priority, which may not be available account to assist in the maintenance,
the member has time priority; 140 and when an exchange’s orders are directed insofar as reasonably practicable, of fair
(2) The Exchange’s rules do not among multiple trading facilities. and orderly markets.151 In addition,
permit preferenced orders by members, Nasdaq’s operation of three trading Nasdaq Market Makers and ITS/CAES
which permit trades to occur outside of facilities is due to recent acquisitions by Market Makers, among other things,
time priority.141 Nasdaq. Nasdaq has represented that it must maintain continuous two-sided
In addition to the Nasdaq Market is in the process of combining these quotes, that are firm, with a minimum
Center, Nasdaq currently owns and three trading systems into one system, quotation increment of $0.01. The
operates two other trading systems—the which Nasdaq proposes to complete by Commission believes that these
Brut Facility 142 and the INET September 30, 2006.146 Both Brut and requirements are consistent with the
Facility.143 Nasdaq proposes to integrate INET were operating as alternative Exchange Act because they should help
its three execution systems into a single trading systems prior to Nasdaq’s to ensure that Nasdaq Market Makers
trading platform with an integrated acquisition, and are important trading and ITS/CAES Market Makers perform
quote/order book operated in markets with participants that rely on their obligations in a manner that
accordance with a unified price priority their continuing availability. The promotes just and equitable principles
execution algorithm prior to the end of Commission believes that it is in the of trade.
September 2006.144 Nasdaq has also public interest for Brut and INET to be
4. Section 11 of the Exchange Act
represented that upon completion of available while Nasdaq is integrating
this systems integration there will be a them together with its Nasdaq Market Section 11(a)(1) of the Exchange
single integrated book where all orders Center and, thus, for this limited period Act 152 prohibits a member of a national
interact with each other. If the Nasdaq of time it is consistent with the securities exchange from effecting
Exchange satisfies each of the Exchange Act for the Nasdaq Exchange transactions on that exchange for its
conditions required for it to begin to operate as many as three separate own account, the account of an
operating as an exchange set forth in trading system until September 30, associated person, or an account over
this Order prior to completing 2006.147 which it or its associated person
integration of the three systems, the exercises discretion (collectively,
2. Trade Reporting Facility ‘‘covered accounts’’) unless an
Nasdaq Exchange may temporarily
operate as many as three separate In a separate filing with the exception applies. Rule 11a2–2(T) 153
trading facilities, each of which trades Commission, the NASD proposes to under the Exchange Act, known as the
establish a new Trade Reporting Facility ‘‘effect versus execute’’ rule, provides
the same securities, but do not fully
to provide NASD members with a exchange members with an exemption
interact with each other.145
mechanism for reporting transactions in from the section 11(a)(1) prohibition.
The Commission believes that it is
all exchange-listed securities executed Rule 11a2–2(T) permits an exchange
beneficial for orders in the same
otherwise than on an exchange.148 In member, subject to certain conditions,
securities directed to an exchange to
commenting on Nasdaq’s application for to effect transactions for covered
interact with each other. Such
exchange registration, several accounts by arranging for an unaffiliated
interaction promotes efficient exchange
commenters criticized this NASD member to execute the transactions on
trading and protects investors by
proposal.149 These commenters the exchange. To comply with Rule
assuring that orders are executed
contend, among other things, that 11a2–2(T)’s conditions, a member (i)
pursuant to a single set of priority rules must transmit the order from off the
that are consistently and fairly applied. because of the affiliation between the
Nasdaq Exchange and the limited exchange floor; (ii) may not participate
For example, consolidating the limit in the execution of the transaction once
orders received by an exchange within liability company that will operate the
TRF, the Trade Reporting Facility would it has been transmitted to the member
a single trading facility affords an performing the execution; 154 (iii) may
opportunity for such orders to be not really be a facility of the NASD, but
instead would be a facility of the not be affiliated with the executing
executed in accordance with price member; and (iv) with respect to an
Nasdaq Exchange. At such time as the
140 See Commission considers the TRF account over which the member has
NASD Rule 4710(b)(1)(B)(ii)(a).
141 Currently, NASD rules permit the use of proposal, it will take these comments investment discretion, neither the
preferenced orders, which permit NASD members into account. member nor its associated person may
to direct orders to a particular contra party for retain any compensation in connection
execution. If the contra party is at the best price, 3. Market Maker Obligations with effecting the transaction except as
the system executes the order against the provided in the Rule.
preferenced party, irrespective of whether the Nasdaq Exchange members may
preferenced party has time priority. See NASD Rule register as Nasdaq Market Makers or In a letter to the Commission,155
4701(aa). ITS/CAES Market Makers.150 As market Nasdaq requested that the Commission
142 See Brut Order, supra note 137.
makers, these members must engage in concur with Nasdaq’s conclusion that
143 See INET Order, supra note 137.
a course of dealings for their own Nasdaq Exchange members that enter
144 See Amendment No. 6, Nasdaq Exchange Rule
orders into Nasdaq Market Center, Brut,
4720. 146 See and INET (collectively ‘‘Nasdaq
145 As of the date of this Order, the Nasdaq INET Nasdaq Exchange Rule 4720.
147 Pursuant to the Brut Order and the INET
Facility is a wholly-separate platform that posts its
top-of-file quotes through the facilities of the Order, Brut and INET are subject to all NASD rules 151 See Amendment No. 6, supra note 12 and

National Stock Exchange (‘‘NSX’’). Nasdaq and Brut applicable to their broker-dealer activities, Nasdaq Exchange Rules 4613 and 5221.
are partially integrated. Brut displays its entire book including those requiring participation in market 152 15 U.S.C. 78k(a)(1).

in the Nasdaq Market Center. Accordingly, all surveillance and audit trail programs conducted by 153 17 CFR 240.11a2–2(T).

quotes and orders resident in the Nasdaq Market the NASD and Nasdaq. Similarly, Brut and INET 154 The member may, however, participate in
will be subject to all applicable Nasdaq Exchange clearing and settling the transaction.
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Center, including Brut’s entire depth of the book,

interact with incoming orders based on the Nasdaq broker-dealer rules as of the operation date of the 155 See letter to Nancy Morris, Secretary,

Market Center’s order execution algorithm. Orders Exchange. Commission, and Elizabeth King, Associate
148 See NASD Proposal, supra note 8.
sent directly to the Brut system, however, do not Director, Division, Commission, from Edward S.
149 See Arca Letter and NYSE Letter, supra note
interact with quotes and orders resident in the Knight, Executive Vice President and General
Nasdaq Market Center; they interact solely with 10. Counsel, Nasdaq, dated January 12, 2006 (‘‘Nasdaq
quotes and orders displayed in Brut. 150 See Nasdaq Exchange Rules 4611 and 5220. 11(a) Letter’’).

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3560 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

Execution Systems’’) satisfy the member’s order is determined solely by over short sales 162 of securities
requirements of Exchange Act Rule what orders, bids, or offers are present registered on a national securities
11a2–2(T). For reasons set forth below, in the system at the time the member exchange as necessary or appropriate in
the Commission believes that Nasdaq submits the order. Accordingly, the the public interest or for the protection
Exchange members entering orders into Commission believes that a Nasdaq of investors. The Commission adopted
the Nasdaq Execution Systems would Exchange member does not participate Rule 10a–1 in 1938 in order to restrict
satisfy the conditions of the Rule. in the execution of an order submitted short selling in a declining market.163
The Rule’s first condition is that into the Nasdaq Execution Systems. Paragraph (a) of Rule 10a–1 generally
orders for covered accounts be Third, Rule 11a2–2(T) requires that covers short sales in securities
transmitted from off the exchange floor. the order be executed by an exchange registered on, or admitted to unlisted
The Nasdaq Execution Systems receive member who is unaffiliated with the trading privileges on, a national
orders electronically through remote member initiating the order. The securities exchange if trades of the
terminals or computer-to-computer Commission has stated that the securities are reported pursuant to an
interfaces. In the context of other requirement is satisfied when ‘‘effective transaction reporting plan’’
automated trading systems, the automated exchange facilities, such as and information as to such trades is
Commission has found that the off-floor the Nasdaq Execution Systems, are made available in accordance with such
transmission requirement is met if a used.158 plan on a real-time basis to vendors of
covered account order is transmitted Fourth, in the case of a transaction market transaction information.164
from a remote location directly to an effected for an account with respect to Paragraph (b) applies to short sales on
exchange’s floor by electronic means.156 which the initiating member or an national exchanges in securities that are
Since the Nasdaq Execution Systems associated person thereof exercises not covered by paragraph (a).
receive orders electronically through investment discretion, neither the Rule 10a–1(a)(1) provides that, subject
remote terminals or computer-to- initiating member nor any associated to certain exceptions, an exchange-
computer interfaces, the Commission person thereof may retain any registered security may only be sold
believes that the Nasdaq Execution compensation in connection with short: (1) At a price above the price at
Systems satisfy the off-floor effecting the transaction, unless the which the immediately preceding sale
transmission requirement. person authorized to transact business was effected (plus tick), or (2) at the last
Second, the rule requires that the for the account has expressly provided sale price if it is higher than the last
member not participate in the execution otherwise by written contract referring different price (zero-plus tick).
of its order. Nasdaq represented that at to section 11(a) of the Exchange Act and Conversely, short sales are not
no time following the submission of an Rule 11a2–2(T).159 Nasdaq represented permitted on minus ticks or zero-minus
order is a member able to acquire that Nasdaq Exchange members trading ticks, subject to narrow exceptions. The
control or influence over the result or for covered accounts over which they operation of these provisions is
timing of an order’s execution.157 exercise investment discretion must commonly described as the ‘‘tick test.’’
According to Nasdaq, the execution of a comply with this condition in order to
rely on the rule’s exemption.160 162 A ‘‘short sale’’ is defined in Rule 200(a) of

156 See, e.g., Exchange Act Release Nos. 49068 Regulation SHO as ‘‘any sale of a security which the
(January 13, 2004), 69 FR 2775 (January 20, 2004) 5. Short Sale Rule seller does not own or any sale which is
(order approving the Boston Options Exchange as consummated by the delivery of a security
a. Background borrowed by, or for the account of, the seller.’’ 17
an options trading facility of the Boston Stock
Exchange); 44983 (October 25, 2001), 66 FR 55225 Section 10(a) of the Exchange Act 161 CFR 242.200(a).
(November 1, 2001) (order approving Archipelago 163 See Exchange Act Release No. 1548 (January
gives the Commission plenary authority
Exchange (‘‘ArcaEx’’) as electronic trading facility 24, 1938), 3 FR 213 (January 26, 1938). In addition
of the Pacific Exchange (‘‘PCX’’) (’’ArcaEx Order’’)); to section 10(a) of the Exchange Act, and Rule 10a–
158 In considering the operation of automated
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) 1 thereunder, Regulation SHO, which became
(regarding NYSE’s Off-Hours Trading Facility); execution systems operated by an exchange, the effective on September 7, 2004, also governs the
15533 (January 29, 1979), 44 FR 6084 (January 31, Commission noted that while there is no regulation of short sales. See Exchange Act Release
1979) (regarding the American Stock Exchange independent executing exchange member, the No. 50103 (July 28, 2004), 69 FR 48008 (August 6,
(‘‘Amex’’) Post Execution Reporting System, the execution of an order is automatic once it has been 2004) (‘‘Adopting Release’’). Regulation SHO
Amex Switching System, the Intermarket Trading transmitted into the systems. Because the design of adopted the following provisions: (i) Rule 200—
System, the Multiple Dealer Trading Facility of the these systems ensures that members do not possess Definitions and Marking Requirements; (ii) Rule
Cincinnati Stock Exchange, the PCX any special or unique trading advantages in 202T—Pilot Program; and (iii) Rule 203—Locate
Communications and Execution System, and the handling their orders after transmitting them to the and Delivery Requirements. Pursuant to the terms
Philadelphia Stock Exchange’s (‘‘Phlx’’) Automated exchange, the Commission has stated that of Regulation SHO, the Commission approved an
Communications and Execution System (‘‘1979 executions obtained through these systems satisfy order establishing a one-year pilot program (‘‘Pilot
Release’’)); and 14563 (March 14, 1978), 43 FR the independent execution requirement of Rule Program’’) suspending the provisions of Rule 10a–
11542 (March 17, 1978) (regarding the NYSE’s 11a2–2(T). See 1979 Release, supra note 156. 1(a) under the Exchange Act and any short sale
159 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, price test of any exchange or national securities
Designated Order Turnaround System (‘‘1978
Release’’)). Rule 11a2–2(T)(d) requires a member or associated association for short sales of certain securities for
157 See Nasdaq 11(a) Letter, supra note 155. The person authorized by written contract to retain certain time periods. See Exchange Act Release No.
member may only cancel or modify the order, or compensation, in connection with effecting 50104 (July 28, 2004), 69 FR 48032 (August 6,
modify the instructions for executing the order, but transactions for covered accounts over which such 2004). The Commission decided to defer
only from off the Exchange floor. Id. The member or associated person thereof exercises consideration of proposed Rule 201, which would
Commission has stated that the non-participation investment discretion, to furnish at least annually have replaced the current ‘‘tick’’ test of Rule 10a–
requirement is satisfied under such circumstances to the person authorized to transact business for the 1(a) with a new uniform bid test. See Exchange Act
so long as such modifications or cancellations are account a statement setting forth the total amount Release No. 48709 (October 28, 2003), 68 FR 62972
also transmitted from off the floor. See Exchange of compensation retained by the member in (November 6, 2003) (‘‘Proposing Release’’). The
Act Release No. 14563 (March 14, 1978), 43 FR connection with effecting transactions for the Commission will consider any further action on the
11542 (March 17, 1978) (stating that the ‘‘non- account during the period covered by the statement. price test after the completion of the Pilot Program.
participation requirement does not prevent See 17 CFR 240.11a2–2(T)(d). See also 1978 Therefore, Rule 10a–1’s tick test currently applies
Release, supra note 156 (stating ‘‘[t]he contractual to short sales of securities registered on, or admitted
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initiating members from canceling of modifying

orders (or the instructions pursuant to which the and disclosure requirements are designed to assure to unlisted trading privileges on, a national
initiating member wishes orders to be executed) that accounts electing to permit transaction-related securities exchange.
after the orders have been transmitted to the compensation do so only after deciding that such 164 Rule 10a–1 uses the term ‘‘effective

executing member, provided that any such arrangements are suitable to their interests’’). transaction reporting plan’’ as defined in Rule 600
160 See Nasdaq 11(a) Letter, supra note 155.
instructions are also transmitted from off the of Regulation NMS under the Exchange Act, 17 CFR
floor’’). 161 15 U.S.C. 78j(a). 242.600. 17 CFR 240.10a–1(a)(1)(i).

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b. Nasdaq Securities and instead adopted Rule 202T of qualified market makers in connection
Current short sale regulations apply Regulation SHO.171 Rule 202T is a with bona fide market making.177
different price tests to securities trading temporary rule that excludes designated Nasdaq represents that its requested
in different markets. Rule 10a–1’s ‘‘tick securities from the operation of the exemption would serve the public
test,’’ which is based on the sale price ‘‘tick’’ test of Rule 10a–1(a) and any interest and protect investors by
reported pursuant to an effective short sale price test rule of any exchange enabling Nasdaq to continue regulating
transaction reporting plan, applies to or national securities association for a short sales under Nasdaq Rule 3350 as
short sales of securities registered on, or designated period of time.172 The it does today under NASD Rule 3350.178
admitted to unlisted trading privileges Commission believes that conducting a In addition, Nasdaq represents, among
on, a national securities exchange. In Pilot Program pursuant to Rule 202T of other things, that (i) its short sale rule
1994, the Commission granted Regulation SHO is an important would continue to prohibit the same
temporary approval to the NASD to component of evaluating the overall conduct as Commission Rule 10a–1; (ii)
apply its own short sale rule to Nasdaq effectiveness of price test restrictions on Nasdaq would continue to vigorously
National Market securities on a pilot short sales.173 The empirical data and effectively enforce those
basis.165 Specifically, NASD Rule 3350 obtained from the Pilot Program will prohibitions; and (iii) it is imperative
prohibits short sales at or below the help the Commission assess whether it that Nasdaq preserve its current
current best (inside) bid when the is necessary or appropriate to amend, or structure to the greatest extent possible
current best (inside) bid is below the possibly remove, the short sale price to avoid needless confusion during
previous best (inside) bid in a security. tests for some population of Nasdaq’s transition to exchange
Once Nasdaq operates as an exchange, securities.174 The Commission will status.179
consider any further action on the Commenters generally supported the
Nasdaq National Market securities and
adoption of a price test after the Commission granting an exemption to
Nasdaq Capital Market securities 166 will
completion of the Pilot Program. In Nasdaq from Rule 10a–1 to allow the
be exchange-registered securities
order to promote efficient regulation Nasdaq Exchange to apply its own bid
reported pursuant to an effective
and to avoid unnecessarily burdening test once it becomes a national
transaction reporting plan and therefore
markets with the imposition of costs securities exchange.180 One commenter
subject to Rule 10a–1.167
In the Regulation SHO Proposing associated with implementing a price in particular noted that it is important
Release,168 the Commission considered test that may be temporary, the for Nasdaq to retain the NASD short sale
Nasdaq’s request for an exemption from Commission believes that, as discussed rule when it becomes an exchange for
Rule 10a–1 in conjunction with its below, it is necessary and appropriate in the following reasons, among others: (i)
exchange registration to allow Nasdaq to the public interest and consistent with Because depriving market makers of the
apply Rule 3350 to Nasdaq exchange- the protection of investors to maintain market maker exception would
listed securities, as well as other market the status quo for the price test to apply significantly hinder their ability to
developments 169 in proposing a to short sales in Nasdaq National Market quickly adjust inventory risk positions;
uniform bid test using the consolidated securities, and to continue to not apply and (ii) because options market makers
best bid as the reference point for to short sales in Nasdaq Capital Market and block facilitators widely use the
permissible short sales.170 After securities. NASD short sale rule’s options hedge
considering comments to the Regulation exceptions as a risk management tool,
c. Request for exemption from Rule 10a– the unavailability of the NASD short
SHO Proposing Release regarding the 1
proposed uniform bid test, the sale rule’s exception may result in less
Commission decided to defer Nasdaq has requested 175 an
consideration of a new uniform bid test exemption from Rule 10a–1 to continue 177 Nasdaq’s request states that, unlike exchange

regulating short sales of Nasdaq specialists, dealers in Nasdaq securities have no

National Market securities under the bid monopoly-like position in the securities they trade,
165 See Exchange Act Release No. 34277 (June 29,
nor do they have an inherent informational
1994), 59 FR 34885 (July 7, 1994). The NASD’s test of Nasdaq Exchange Rule 3350.176 advantage over any other dealer. Additionally, they
short sale rule was originally approved on an Nasdaq has also requested an exemption have no ability to close their market because of
eighteen-month pilot basis. The NASD has from Rule 10a–1 for Nasdaq Capital sudden volatility or an order imbalance. Given
proposed and the Commission has approved, these differences, it believes that treating market
extensions of NASD Rule 3350 several times, most
Market securities, as current NASD Rule
makers and exchange specialists identically is not
recently, until December 15, 2006. See Exchange 3350 is inapplicable to such securities. appropriate. See letter to James A. Brigagliano,
Act Release No. 53093 (January 10, 2006). In The requested exemption would Division, Commission, from Edward S. Knight,
Amendment No. 6, Nasdaq proposed to modify therefore allow Nasdaq Capital Market Executive Vice President and General Counsel,
Nasdaq Exchange Rules 3350(k)(2) and 3350(l) to Nasdaq, dated January 4, 2006. Allowing Nasdaq to
reflect the changes made to NASD Rule 3350. securities to continue to trade without
maintain the market maker exemption would also
166 Nasdaq Capital Market securities were being subject to a price test. Nasdaq be consistent with the CBOE’s position expressed
formerly known as ‘‘Nasdaq SmallCap Market proposes to continue all current in its comment letter. The CBOE stated that there
securities.’’ See Exchange Act Release No. 52489 exemptions to NASD Rule 3350 in its is a critical need to maintain an exemption for
(September 21, 2005), 70 FR 56948 (September 29, options market makers until, at a minimum, the
Rule 3350, including the exemption for
Commission makes a final determination
167 Nasdaq plans to request relief from the concerning the future framework and provision of
171 17 CFR 242.202T.
registration requirements of section 12(b) of the Rule 10a–1. See CBOE Letter, supra note 14.
172 See Exchange Act Release No. 50104 (July 28,
Exchange Act for certain issuers who are currently 178 See Short Sale Letter, supra note 175.
exempt grandfathered foreign private issuers (Rule 2004), 69 FR 48032 (August 6, 2004). See also 179 Id.
12g3–2(b) of the Exchange Act) and insurance Exchange Act Release No. 50747 (November 29, 180 See letter from Thomas N. McManus,
companies (section 12(g)(2)(G) of the Exchange 2004), 69 FR 70480 (December 6, 2004).
Executive Director and Counsel, Morgan Stanley
Act). If granted, such securities would trade on 173 See Exchange Act Release No. 50104 (July 28,
Dean Witter, dated September 4, 2001 (‘‘Morgan
Nasdaq even though they would not be registered 2004), 69 FR 48032 (August 6, 2004). Stanley Letter’’). See also SIA Letter, supra note 15;
pursuant to section 12(b) of the Exchange Act. 174 Id.
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and letters from Robert M. Funk, Executive

However, such securities would remain subject to 175 See letter to James A. Brigagliano, Division,
Director, American Shareholders Association, dated
Nasdaq Exchange Rule 3350. Commission, from Edward S. Knight, Executive July 17, 2001; Grover G. Norquist, President,
168 See Exchange Act Release No. 48709 (October
Vice President and General Counsel, Nasdaq, dated Americans for Tax Reform, dated July 17, 2001;
28, 2003), 68 FR 62972 (November 6, 2003). January 4, 2006 (‘‘Short Sale Letter’’). Congressman Patrick J. Tiberi, Ohio, dated July 20,
169 68 FR at 62979. 176 The Nasdaq Exchange’s short sale rule is 2001; and Congressman Jerry Weller, Illinois, dated
170 Id. identical to the NASD’s short sale rule. August 23, 2001 and August 31, 2001.

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3562 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

willingness to commit capital to from Rule 10a–1 to permit the Nasdaq (1) The Nasdaq Exchange is required
customer orders.181 Exchange to apply Nasdaq Exchange to surveil member firms in order to
A few commenters, on the other hand, Rule 3350 to short sales in Nasdaq monitor whether firms claiming the
believed that Nasdaq should not be National Market securities occurring on bona fide market maker exception in
granted an exemption from Rule 10a–1, the Nasdaq Exchange and to allow Nasdaq Exchange Rule 3350 are engaged
noting, among other things, that from a Nasdaq Capital Market securities to be in bona fide market making activity; and
regulatory, fairness and competitive exempt from the application of the tick (2) The Nasdaq Exchange will issue a
perspective, Nasdaq should be required test.186 The exemptions from Rule 10a– Notice to Members or other appropriate
to comply with all Commission rules 1 will expire upon termination of the communication to its members to
applicable to a national securities Pilot Program or at such other time the provide further clarification to Nasdaq
exchange, including the Commission’s Commission determines that such market makers regarding what activity
short sale rule.182 One commenter, in exemptions are no longer necessary or would not be deemed ‘‘bona fide market
particular, stated that the Commission appropriate in the public interest or making activity’’ for purposes of
should either propose amendments to consistent with the protection of claiming the exception to Nasdaq
Rule 10a–1 to apply to all exchanges investors.187 Exchange Rule 3350’s bid test.
equally, including Nasdaq, or require Because Nasdaq proposes to continue D. Section 11A of the Exchange Act
Nasdaq to amend its proposed rules to to maintain the exemption from its Rule
be consistent with the short sale 3350 for qualified market makers in Section 11A of the Exchange Act and
regulatory regime applied to all other connection with bona fide market the rules thereunder form the basis of
exchanges.183 making, the exemptions from Rule 10a– our national market system and impose
1 are subject to the following requirements on exchanges to
d. Response implement its objectives. Specifically,
conditions: 188
The Commission appreciates the national securities exchanges are
concerns expressed by such comments received on the Nasdaq Exchange
required, under Rule 601 of Regulation
commenters; however, as discussed Application. See SIA Letter, supra note 15. NMS,189 to file transaction reporting
above, the Commission believes that it 186 As exchange-registered securities reported plans regarding transactions in listed
is important to maintain the status quo pursuant to an effective transaction reporting plan, equity and Nasdaq securities that are
of short sale regulation during the Pilot Rule 10a–1 applies to Nasdaq securities, as defined executed on its facilities. Currently
in Rule 600 of Regulation NMS, wherever they are
Program in order to avoid unnecessarily traded. See 17 CFR 240.10a–1(a)(1)(i). Therefore, registered exchanges satisfy this
burdening the markets. Moreover, it is short sales in Nasdaq securities effected on any requirement by participating in the
important to maintain the integrity of national securities exchange that trades Nasdaq Consolidated Transaction Association
the data obtained by the Commission securities on a unlisted trading privileges (‘‘UTP’’) Plan (‘‘CTA Plan’’), for listed equities
basis or in the OTC market are subject to Rule 10a–
during this period on the impact of 1 unless exempted. It may be appropriate for the
and the Joint Self-Regulatory
short selling in the absence of a price Nasdaq short sale rule to apply uniformly to all Organization Plan Governing the
test. This data will, among other things, Nasdaq National Market securities, wherever they Collection, Consolidation and
assist in (i) determining the extent to are traded. 15 U.S.C. 78mm(a)(1). The Commission Dissemination of Quotation and
is therefore prepared to consider an appropriate
which a price test is necessary to further exemptive request from Rule 10a–1 for any
Transaction Information for Nasdaq-
the objectives of short sale regulation; exchange trading Nasdaq National Market securities Listed Securities Traded on Exchanges
(ii) the effects of relatively unrestricted UTP to apply an analogue of Nasdaq Exchange Rule on an Unlisted Trading Privileges Basis
short selling on market volatility, price 3350, so that short sales in Nasdaq National Market (‘‘Nasdaq UTP Plan’’) for Nasdaq
securities would be treated consistently whether
efficiency, and liquidity; and (iii) they occurred on Nasdaq or in another venue.
securities.190 Before the Nasdaq
whether a short sale price test should be Likewise, the Commission is prepared to consider Exchange can begin operating as an
removed, in part or in whole, for some an appropriate exemption from Rule 10a–1 for any exchange, it must join these plans as a
or all securities, or if retained, should be exchange trading Nasdaq Capital Market securities participant in its own right. Currently,
UTP so that such securities would be exempt from the transactions executed in Nasdaq
applied to additional securities. Investor the tick test wherever traded. This would be
protection will be enhanced because the consistent with at least one commenter’s position trading facilities are reported to these
Commission’s determination with that if Nasdaq is granted an exemption from Rule plans as OTC trades pursuant to the
respect to the short sale price test will 10a–1, other registered exchanges must equally be NASD’s participation in the plans. The
granted such an exemption. See CSE Letter, supra NASD’s continued participation in these
be based on sound empirical data note 13.
obtained from the Pilot Program. 187 The Pilot Program is currently scheduled to
plans is necessary for it to fulfill its
Based upon the representations and end on April 28, 2006. See Exchange Act Release obligations under section 11A of the
facts Nasdaq has presented in its request No. 50747 (November 29, 2004), 69 FR 70480 Exchange Act and Rules 601 and 603.
for exemption, as discussed above, and (December 6, 2004). However, the Commission may National securities exchanges are
from time to time approve further orders affecting required, under Rule 602 of Regulation
as necessary and appropriate in the the Pilot Program, including extension of the
public interest and consistent with the duration of the Pilot Program. NMS,191 to collect bids, offers, quotation
protection of investors, in particular the 188 This exemption from Rule 10a–1 is strictly sizes and aggregate quotation sizes from
necessity and importance of limited to the application of Rule 10a–1 to those members who are responsible
maintaining the status quo during the transactions in Nasdaq securities. The exemption broker or dealers. National securities
does not affect any other provisions of the Federal
Pilot Program, pursuant to section 36 of securities laws, and is subject to modification or
the Exchange Act,184 the Commission revocation at any time the Commission determines any other applicable provisions of the federal
securities laws must rest with those relying on the
hereby grants a temporary exemption 185 that such action is necessary or appropriate in
relief granted herein.
furtherance of the purposes of the Federal securities
189 17 CFR 242.601.
181 See laws. Further, this exemption is subject to
Morgan Stanley Letter, supra note 180. 190 These plans also satisfy the requirement in
182 See
modification or revocation should the Commission
NYSE August 2001 Letter, supra note 13. Rule 603 that national securities exchanges and
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amend Rule 10a–1 in such a manner as to render

See also CSE Letter, supra note 13; SIA Letter, the exemption unnecessary or in conflict with any national securities associations act jointly pursuant
supra note 15. adopted amendments. In addition, Nasdaq is to an effective national market system plan to
183 See CSE Letter, supra note 13.
directed to the anti-fraud and anti-manipulation disseminate consolidated information, including a
184 15 U.S.C. 78mm(a)(1). national best bid and offer, and quotations for and
provisions of the Federal securities laws, including
185 Granting a temporary exemption to Nasdaq sections 9(a) and 10(b) of the Exchange Act, and transactions in NMS stocks. See 17 CFR 242.603.
from Rule 10a–1 is consistent with certain Rule 10b–5 thereunder. Responsibility for these and 191 17 CFR 242.602.

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Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices 3563

exchanges must then make this by which the NASD and its members means currently available to the NASD
information available to vendors at all comply with obligations under the ITS to fulfill these statutory and regulatory
times when the exchange is open for Plan. Accordingly, the NASD must have obligations is through NASD facilities
trading. The current exchanges satisfy the means to satisfy these obligations owned by Nasdaq. Accordingly, the
this requirement by participating in the prior to completing the spin-off of its Commission believes that, until the
Consolidated Quotation System Plan subsidiary as an independent national NASD has alternative means to satisfy
(‘‘CQ Plan’’) for listed equity securities securities exchange. For this reason, the these obligations, it cannot complete its
and the Nasdaq UTP Plan for Nasdaq Commission is conditioning the separation from Nasdaq and Nasdaq
securities. Before the Nasdaq Exchange operation of the Nasdaq Exchange, cannot cease to operate as a facility of
can begin operating as an exchange it which will automatically terminate the the NASD. For this reason, the
also must join the CQ Plan as a NASD’s control of Nasdaq,196 on the Commission is conditioning the
participant in its own right. As with NASD representing to the Commission operation of the Nasdaq Exchange,
transaction reports, quotations posted in that control of Nasdaq through the which will automatically terminate the
Nasdaq trading facilities are currently Preferred D share is no longer necessary. NASD’s control of Nasdaq,200 on the
provided to the CQ Plan and Nasdaq To provide access to quotes and NASD representing to the Commission
UTP Plan pursuant to the NASD’s orders in non-Nasdaq exchange-listed that control of Nasdaq through the
participation in the plans. The NASD securities displayed on the Nasdaq Preferred D share is no longer necessary.
must remain a member of these plans Exchange, the Nasdaq Exchange must In the Original Notice, the
for OTC quotations in exchange-listed become a member of the ITS Plan prior Commission noted that the registration
and Nasdaq securities so that it can to its operation as a national securities of the Nasdaq Exchange has
continue to fulfill its obligations under exchange for trading such securities. implications for the NASD and its
sections 15A(b)(11) 192 and 11A of the Although required participation in the ability to satisfy its statutory and
Exchange Act and Rules 602 and 603. ITS Plan is of limited duration,197 the regulatory obligations.201 The
An integral part of our national Commission believes that it is necessary Commission further stated that the
market system is the means by which until the full implementation of Rule NASD must have an operational
quotations are accessible across the 611 that the Nasdaq Exchange join the quotation and transaction reporting
competing exchanges and the NASD.193 ITS Plan to ensure that the facility upon the registration of the
Currently, the registered exchanges and Commission’s policy of protecting limit Nasdaq Exchange. The Commission
the NASD are linked for the purpose of orders and providing price protection received comments on the Original
accessing quotations in exchange-listed across markets is maintained. Further, Notice and Amendment Nos. 1, 2, and
securities via the Intermarket Trading the Nasdaq Exchange participation in 3 that raised significant concerns about
System (‘‘ITS’’). The ITS Plan contains the ITS Plan should ensure that how the NASD would continue to
the rules pursuant to which its regulatory requirements are consistent satisfy its statutory and regulatory
participants interact and contains the across the markets for exchange-listed obligations.202 In particular, one
current trade-through rule.194 Currently, securities.198 Nasdaq has proposed to commenter expressed concern about
the NASD is a member of the ITS Plan adopt ITS rules that are similar to the Nasdaq’s registration as an exchange
and as a participant complies with, and current NASD ITS Rules. The because it ‘‘will eliminate the only non-
enforces compliance by its members, Commission notes that the Nasdaq exchange facilities that exist for trading
with the terms of the ITS Plan.195 Exchange may have to amend its ITS NMS securities.’’ 203 Therefore, this
Accordingly, most OTC transactions in rules to reflect its participation in the commenter believed that the
non-Nasdaq exchange-listed securities ITS Plan. Any changes to its rules to Commission should withhold approval
regulated by the NASD are subject to the implement its participation in the ITS of Nasdaq’s exchange registration until
requirements of the ITS Plan. The NASD Plan must be filed with and approved a viable NASD quotation display and
plans to remain a member of the ITS by the Commission prior to its trade reporting facility is in place
Plan for the purpose of providing access commencement of operations as a because, without such a facility, market
to OTC quotations communicated by its national securities exchange. makers and electronic communication
members through NASD facilities and to The NASD currently fulfills its networks would essentially be
provide its members access to obligations under Rules 602 and 603, mandated to become a member of the
exchanges’ quotations. The NASD’s the CTA Plan, CQ Plan, Nasdaq UTP Nasdaq Exchange to meet their
Nasdaq facility currently is the means Plan, and section 15A(b)(11) of the regulatory obligations. Similarly,
Exchange Act 199 through NASD another commenter noted that for
several decades, Nasdaq has been the
192 15 U.S.C. 78o–3(b)(11). facilities that are owned by the NASD’s
193 See section 11A(a)(1)(D) of the Exchange Act; arm of the NASD through which broker-
subsidiary, Nasdaq. The NASD also
15 U.S.C. 78k–1(a)(1)(D). In this section, Congress dealers satisfy their regulatory
found that the ‘‘[t]he linking of all markets for
operates the ADF for collecting
obligations for OTC transactions in NMS
qualified securities through communications and quotations and trade reports in Nasdaq
stocks. This commenter believed that
data processing facilities will foster efficiency, securities but not exchange-listed
enhance competition, increase the information Nasdaq’s exchange application could
securities. With respect to non-Nasdaq
available to brokers, dealers, and investors, not be reconciled with the requirements
facilitate the offsetting of investors’ orders, and
exchange-listed securities, the only
of the Exchange Act until after the
contribute to best execution of such orders.’’
194 In June 2005, the Commission adopted 196 See supra note 25 and accompanying text. NASD has in place operational facilities
197 See supra note 194.
Regulation NMS, which included the new Rule 611
200 See supra note 25 and accompanying text.
that will supersede the trade-through rule found in 198 See section 11A(a)(1)(ii) of the Exchange Act;
201 See Original Notice, supra note 2.
the ITS Plan. Rule 611 requires a trading center to 15 U.S.C. 78k–1(a)(1)(ii).
establish, maintain and enforce written policies and 202 See e.g., Bloomberg 2001 Letter, Instinet
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199 15 U.S.C. 78o–3(b)(11). Section 15A(b)(11)

procedures that are reasonably designed to prevent requires the rules of the NASD to include Letter, Phlx Letters, SIA Letter, supra note 15; and
trade-throughs of protected quotations in NMS provisions governing the form and content of letters from Barry S. Porter, Chairman, The Nasdaq
stocks. Rule 611 became effective on August 29, quotations relating to securities sold OTC that may Stock Market Issuer Affairs Committee, dated
2005; compliance with this rule shall begin starting be distributed or published by any NASD member August 8, 2001; and Senator Zell Miller, U.S.
on June 29, 2006. 17 CFR 242.611. or person associated with such member, and the Senate, dated August 16, 2001.
195 17 CFR 242.608(c). persons to whom such quotations may be supplied. 203 See SIA Letter, supra note 15.

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3564 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

to permit OTC trading to continue to security pursuant to section 12(b) by that these rules are consistent with the
flourish in the U.S.204 submitting to the Nasdaq Exchange a requirements of the Exchange Act
The Commission agrees with these listing application that provides certain because they would enable current
commenters and is conditioning the required information.209 The Exchange Nasdaq securities to continue trading
operation of the Nasdaq Exchange upon will review the listing application and, once the Nasdaq Exchange begins
the ability of the NASD to satisfy its if the listing application is approved, operations as a national securities
statutory and regulatory obligations. The will certify to the Commission that it exchange thus providing a continuous
Commission does not believe that it has approved the security for listing and market for investors for these securities.
would be consistent with the Exchange registration.210 Registration of the
Act to allow the NASD to separate from security will become effective thirty 3. Corporate Governance Standards
the facilities by which it satisfies its days after the receipt of such In 2003, the Commission approved a
regulatory obligations without having certification by the Commission or proposal to revise the NASD rules by
alterative means to do what the within a shorter period of time as the adding new corporate governance
Exchange Act and the rules thereunder Commission may determine.211 Once standards for listed issuers, as contained
require. Accordingly, the Nasdaq registration is effective the security is in NASD Rules 4200 and 4350.215 These
Exchange may not begin operating as a eligible for listing on the Nasdaq changes, which were applied to Nasdaq-
national securities exchange and cease Exchange.212 listed issuers through the NASD as a
to operate as a facility of the NASD until national securities association,
NASD has the means to fulfill its 2. Initial and Continuing Listing
Standards established enhanced requirements for
regulatory obligations. audit committees of Nasdaq-listed
Finally, national securities exchanges Nasdaq proposes that its initial and issuers, as mandated by the Sarbanes-
must make available certain order continuing listing standards be largely Oxley Act of 2002.216 In addition, these
execution information pursuant to Rule the same as current NASD listing changes established new requirements
605 of Regulation NMS.205 Current rules.213 Nasdaq also proposes a relating to the independence of the
exchanges have standardized the transitional listing rule that would listed issuer’s board of directors and key
required disclosure mechanisms by automatically qualify for initial listing board committees and required issuers
participating in the Order Execution any security trading on the Nasdaq to adopt codes of conduct for directors,
Quality Disclosure Plan.206 The Nasdaq facility of the NASD on the day prior to officers and employees. The corporate
Exchange must join this plan before it the Nasdaq Exchange’s first day of governance listing standards proposed
begins operations as an exchange. operation as an independent for the Nasdaq Exchange are the same as
exchange.214 The Commission believes those previously approved by the
E. Listing Requirements
Commission for the NASD pursuant to
1. Registration Under Section 12(b) of whether to register under section 12(b). In its
section 10A(m) of the Exchange Act and
the Exchange Act response to this comment, Nasdaq stated that it
expects to submit a formal request to the Rule 10A–3 and pursuant to section
Once the Nasdaq Exchange begins Commission pursuant to which Nasdaq will seek a 15A(b)(6) of the Exchange Act.217
operations as a national securities three-year exemption period for issuers such as
exchange, a security will be considered 209 15 U.S.C. 78l(b); Nasdaq Exchange Rules
215 See Exchange Act Release No. 48745

for listing on the Nasdaq Exchange only (November 4, 2003), 68 FR 64154 (November 12,
4310(b) and 4320(b).
2003) (approving changes to the corporate
if such security is registered pursuant to 210 See Nasdaq Exchange Rules 4310(b), 4320(b),
governance listing standards of the Nasdaq Stock
section 12(b) of the Exchange Act 207 or and 4410(b); 15 U.S.C. 78l(d). Market, Inc. and the NYSE).
211 15 U.S.C. 78l(d).
such security is subject to an 212 See Nasdaq Exchange Rules 4310(b), 4320(b),
216 The Sarbanes Oxley Act, Public Law 107–204,

exemption.208 An issuer may register a 116 Stat. 745 (2002), established, among other
and 4410(b); 15 U.S.C. 78l(d). provisions, section 10A(m) of the Exchange Act, 15
213 In Amendment No. 6, Nasdaq proposed to
204 See
U.S.C. 78j–1(m), which relates to standards for
Instinet Letter, supra note 15. modify their listing standards to reflect proposed audit committees. Rule 10A–3 under the Exchange
205 17 CFR 242.605. rule changes approved by the Commission for the Act, which was adopted pursuant to section 10A(m)
206 See Exchange Act Release No. 44177 (April 12, NASD as follows: SR–NASD–2004–125 clarifies and of the Exchange Act, directed each national
2001), 66 FR 19814 (April 17, 2001). increases the transparency of the procedures securities exchange and national securities
207 15 U.S.C. 78l(b). Nasdaq has notified associated with denying companies initial or association to prohibit the listing of any security of
Commission staff of its intent to request appropriate continued listing on Nasdaq, see Exchange Act an issuer that is not in compliance with the audit
regulatory relief to facilitate the efficient Release No. 52342 (August 26, 2005), 70 FR 52456 committee requirements specified in the Rule. 17
registration of its issuers’ securities under section (September 2, 2005); SR–NASD–2005–153 amends CFR 240.10A–3.
the procedures for review of listing determinations
12(b) of the Exchange Act. The Commission expects 217 15 U.S.C. 78f(b)(5). Subsequent to the
to allow for electronic delivery of documents, see
that any such process would include a notice by Commission’s approval of changes to the corporate
Exchange Act Release No. 53067 (January 6, 2006);
Nasdaq to the general public and an appropriate governance listing standards for Nasdaq-listed
SR–NASD–2004–162 establishes a fee and notice
notice to issuers, and an opportunity for issuers to issuers, the NASD refined those standards. See
requirements for substitution listing events for all
opt out of the process. Nasdaq issuers, except dual listed companies, see Exchange Act Release Nos. 49060 (January 12,
208 15 U.S.C. 78l(c); Nasdaq Exchange Rules 2004), 69 FR 2954 (January 21, 2004); 49901 (June
Exchange Act Release No. 52712 (November 1,
4310(a) and 4320(a). Certain issuers currently listed 2005), 70 FR 67511 (November 7, 2005); SR–NASD– 22, 2004), 69 FR 38944 (June 29, 2004); 49903 (June
on Nasdaq are not required to register under section 2005–136 permits Nasdaq to issue public reprimand 22, 2004), 69 FR 38941 (June 29, 2004); 50573
12(g) of the Exchange Act because of exemptions letters to listed companies for certain rule violations (October 20, 2004), 69 FR 62493 (October 26, 2004);
provided to foreign private issuers, Rule 12(g)3– when a determination is made that delisting is not 51221 (February 17, 2005), 70 FR 9122 (February
2(b), and insurance companies, section 12(g)(2)(G). an appropriate sanction, see Exchange Act Release 24, 2005); and 51420 (March 23, 2005), 70 FR 15968
These issuers, however, are not similarly exempt No. 52899 (December 6, 2005), 70 FR 74392 (March 29, 2005). In Amendment No. 6, Nasdaq
from section 12(b) of the Exchange Act. The (December 15, 2005); and SR–NASD–2005–082 proposed to modify Nasdaq Exchange Rule 4350(k)
Commission received one comment letter submitted clarifies the listing standards applicable to to reflect a proposed rule change approved by the
on behalf of Nissan Motor Co., Ltd., whose shares companies in bankruptcy proceedings, see Commission for the NASD. This proposed rule
(in the form of American Depositary Shares) are Exchange Act Release No. 52603 (October 13, 2005), change requires each listed issuer to be audited by
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listed on Nasdaq but are exempt from registration 70 FR 61163 (October 20, 2005). The Commission an independent accountant that is registered as a
under section 12(g). See Nissan Letter, supra note finds that these changes are consistent with section public accounting firm with the Public Company
10. Nissan requests that its current exemption from 6(b)(5) of the Exchange Act for the same reasons Accounting Oversight Board. See Exchange Act
registration be continued, or alternatively that it that the Commission approved them under section Release No. 52896 (December 6, 2005), 70 FR 74074
and other similarly situated foreign private issuers 15A(b)(6) of the Exchange Act. (December 14, 2005). The Commission finds that
be given a transition period after Nasdaq begins 214 See Amendment No. 6, supra note 12 and this proposed rule change is consistent with section
operating as an exchange within which to evaluate Nasdaq Exchange Rule 4305. 6(b)(5) of the Exchange Act for the same reasons

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The Commission finds that the exchange that extends unlisted trading with its proposal to incorporate NASD
proposed corporate governance listing privileges to securities to have in effect rules by reference, Nasdaq requested,
standards contained in the Nasdaq a rule or rules providing for transactions pursuant to Rule 240.0–12,223 an
Exchange’s proposed rules are in the class or type of security to which exemption under section 36 of the
consistent with section 6(b)(5) of the the exchange extends unlisted trading Exchange Act from the rule filing
Exchange Act and satisfy the privileges.220 The Commission notes requirements of section 19(b) of the
requirements of the section 10A(m) of that the Nasdaq Exchange does not have Exchange Act for changes to those
the Exchange Act and Rule 10A–3 in effect rules that comply with Rule Nasdaq Exchange rules that are effected
thereunder. The Commission believes 12f–5 for all exchange-listed securities solely by virtue of a change to a cross-
that the Nasdaq Exchange’s corporate currently quoted on the Nasdaq facility referenced NASD rule.224 Nasdaq
governance listing standards are of the NASD.221 Accordingly, to proposes to incorporate by reference
designed to promote independent and continue trading such securities, the categories of rules (rather than
objective review and oversight of the Nasdaq Exchange would have to file a individual rules within a category) that
accounting and auditing practices of proposed rule change with the are not trading rules. In addition, the
listed issuers and to enhance audit Commission and obtain Commission Nasdaq Exchange agrees to provide
committee independence, authority, and approval of such rules. written notice to its members whenever
responsibility by implementing the a proposed rule change to an NASD rule
IV. Exemption From Section 19(b) of the
standards set forth in Rule 10A–3. that is incorporated by reference is
Exchange Act With Regard to NASD
Moreover, in the Commission’s view, proposed.
Rules Incorporated by Reference Using its authority under section 36 of
the listing standards should help
safeguard the interests of shareholders Nasdaq proposes to incorporate by the Exchange Act, the Commission
and foster greater transparency, reference many NASD rules as Exchange previously exempted certain SROs from
accountability, and objectivity in the rules. Thus, for certain Exchange rules, the requirement to file proposed rule
oversight by, and the decision making Exchange members will comply with an changes under section 19(b) of the
processes of, the boards and key board Exchange rule by complying with the Exchange Act.225 Each such exempt
committees of Nasdaq-listed issuers. NASD rule referenced.222 In connection SRO agreed to be governed by the
The Nasdaq Exchange’s listing incorporated rules, as amended from
standards also should help promote
220 17 CFR 240.12f–5. See also Exchange Act
time to time, but is not required to file
Release No. 35737 (April 21, 1995), 60 FR 20891 a separate proposed rule change with
compliance with high standards of (April 28, 1995) (adopting Rule 12f–5).
conduct by the issuers’ directors, 221 For example, the Nasdaq Exchange does not the Commission each time the SRO
management, and personnel. have rules that comply with Rule 12f–5 for certain whose rules are incorporated by
exchange-traded funds whose holdings are reference seeks to modify its rules.
F. Unlisted Trading Privileges primarily unregistered foreign securities (such as In addition, each SRO incorporated by
those formerly known as World Equity Benchmark
Rule 602 of Regulation NMS requires Shares or WEBS), exchange-traded funds whose
reference only regulatory rules (i.e.,
the NASD to collect, process and make holdings are concentrated in a few securities, margin, suitability, arbitration), not
available to vendors the best bid, best exchange-traded funds that provide a leveraged trading rules, and incorporated by
performance (such as xtraShares Trust Ultra Funds reference whole categories of rules (i.e.,
offer, and quotation sizes in NMS and Short Funds), and certain commodity or foreign
securities 218 communicated off an currency based derivative securities (such as
did not ‘‘cherry-pick’’ certain individual
exchange by members acting in the streetTracks Gold Shares (GLD), iShares Comex rules within a category). Each exempt
capacity of an OTC market maker. The Gold Trust Shares (IAU), and Euro Currency Shares SRO had reasonable procedures in place
(FXE)). to provide written notice to its members
NASD satisfies this obligation today 222 Nasdaq proposed to incorporate by reference

through its operation of the Nasdaq each time a change is proposed to the
the following NASD rules: Article IV, Section 8 of
the NASD By-Laws; IM–1000– 1032; 1120; 2111; incorporated rules of another SRO in
facility though which NASD members
IM–2110–2; 2210; IM–2210–1; 2211; 2212; 2240; order to provide its members with
quote and report trades in exchange- 2250; 2260; IM–2260; 2270; 2310; IM–2310–2; IM– notice of a proposed rule change that
listed securities. In offering this quote 2310–3; 2330; IM–2330; 2340; 2341; 2360; 2361; affects their interests, so that they would
and trade reporting facility for 2370; 2430; 2510; 2520; 2810; 2830; 3010; IM–3010;
3011; 3012; 3013; IM–3013; 3020; 3030; 3040; 3050; have an opportunity to comment on it.
exchange-listed securities, the NASD The Commission is granting Nasdaq’s
3060; 3070; 3080; IM–3110; 3120; 3130; IM–3130;
does not have rules that comply, in all 3150; 3510; 6953; 6954; 6955; 6957; the 10000 request for exemption, pursuant to
respects, to section 12(f) of the Exchange series; 11860; and 11870. In Amendment No. 6, section 36 of the Exchange Act, from the
Act and Rule 12f–5 thereunder because Nasdaq proposed that the Nasdaq Exchange
rule filing requirements of section 19(b)
those provisions apply only to incorporate by reference recent amendments to the
‘‘Manning Rule,’’ NASD IM–2110–2, and NASD of the Exchange Act with respect to the
exchanges.219 Rule 2111, to reflect proposed rule changes rules that the Nasdaq Exchange
Once registered as an exchange, the approved by the Commission for the NASD. The proposes to incorporate by reference.
Nasdaq Exchange will be permitted by amendments to NASD IM–2110–2 prohibit a
section 12(f) of the Exchange Act to Nasdaq Exchange member from trading for its own
account in a Nasdaq or exchange-listed security at 68120 (November 9, 2005). The Commission finds
extend unlisted trading privileges to a price that is better than an unexecuted customer that these proposed rule changes are consistent
securities listed and registered on other limit order in that security, unless the Nasdaq with Section 6(b)(5) of the Exchange Act for the
exchanges, subject to Commission rules. Exchange member immediately executes the same reasons that the Commission approved these
customer limit order at the price at which the rule changes under section 15A(b)(6).
Exchange Act Rule 12f–5 requires an 223 See 17 CFR 240.0–12.
Nasdaq Exchange member traded for its own
224 See letter to Nancy Morris, Secretary,
account or better. See Exchange Act Release No.
that the Commission approved this rule change 52210 (August 4, 2005), 70 FR 46897 (August 11, Commission, from Edward S. Knight, Executive
under section 15A(b)(6). 2005). NASD Rule 2111 extends the Manning Rule Vice President and General Counsel, Nasdaq, dated
218 An NMS security is any security for which January 13, 2006. This letter supersedes and
to customer market orders. See Exchange Act
transaction reports are collected, processed, and replaces prior similar exemptive requests. See
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Release No. 52226 (August 9, 2005), 70 FR 48219

made available pursuant to an effective transaction (August 16, 2005). In addition, as a result of these letters to Jonathan G. Katz, Secretary, Commission,
reporting plan, or an effective national market proposed rule changes, in Amendment No. 6 from Edward S. Knight, Executive Vice President
system plan for reporting transactions in listed Nasdaq proposed to delete certain provisions of and General Counsel, Nasdaq, dated December 8,
options. 17 CFR 242.600(b)(46). Rule 6440(f) to reflect an NASD proposed rule 2005 and May 6, 2002.
219 See also section 15A(b)(11) of the Exchange change approved by the Commission. See Exchange 225 See Exchange Act Release No. 49260 (February

Act. Act Release No. 52722 (November 2, 2005), 70 FR 17, 2004), 69 FR 8500 (February 24, 2004).

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3566 Federal Register / Vol. 71, No. 14 / Monday, January 23, 2006 / Notices

This exemption is conditioned upon the it independently has the ability fulfill listing on Amex and from registration
Nasdaq Exchange providing written all of its regulatory obligations. under Section 12(b) of the Act,3 and
notice to its members whenever the By the Commission (Chairman Cox and shall not affect its obligation to be
NASD proposes to change a rule that the Commissioners Glassman, Atkins, Campos, registered under Section 12(g) of the
Nasdaq Exchange has incorporated by and Nazareth). Act.4
reference. The Commission believes that Nancy M. Morris, Any interested person may, on or
this exemption will promote more Secretary. before February 9, 2006, comment on
efficient use of Commission and SRO [FR Doc. E6–664 Filed 1–20–06; 8:45 am] the facts bearing upon whether the
resources by avoiding duplicative rule application has been made in
filings based on simultaneous changes accordance with the rules of Amex, and
to identical rule text sought by more what terms, if any, should be imposed
than one SRO. Consequently, the SECURITIES AND EXCHANGE by the Commission for the protection of
Commission grants Nasdaq’s exemption COMMISSION investors. All comment letters may be
request for the Nasdaq Exchange. submitted by either of the following
[File No. 1–31993]
V. Conclusion methods:
It is ordered that the application of Issuer Delisting; Notice of Application Electronic Comments
the Nasdaq Stock Market LLC for of Sterling Construction Company, Inc.
registration as a national securities To Withdraw Its Common Stock, $.01 • Use the Commission’s Internet
exchange be, and hereby is, granted. Par Value, From Listing and comment form (
It is further ordered that operation of Registration on the American Stock rules/delist.shtml); or
the Nasdaq Exchange is conditioned on Exchange LLC • Send an e-mail to rule-
the satisfaction of the requirements Please include the
January 13, 2006.
below. File Number 1–31993 or;
A. Participation in National Market On January 9, 2006, Sterling
System Plans. The Nasdaq Exchange Construction Company Inc., a Delaware Paper Comments
must join the CTA Plan, the CQ Plan, corporation (‘‘Issuer’’), filed an
the Nasdaq UTP Plan, the ITS Plan, and application with the Securities and • Send paper comments in triplicate
the Order Execution Quality Disclosure Exchange Commission (‘‘Commission’’), to Nancy M. Morris, Secretary,
Plan. pursuant to Section 12(d) of the Securities and Exchange Commission,
B. The NASD’s Ability to Fulfill its Securities Exchange Act of 1934 100 F Street, NE., Washington, DC
Statutory and Regulatory Obligations. (‘‘Act’’) 1 and Rule 12d2–2(d) 20549–9303.
The NASD must represent to the thereunder,2 to withdraw its common
stock, $.01 par value (‘‘Security’’), from All submissions should refer to File
Commission that control of Nasdaq Number 1–31993. This file number
through the Preferred D share is no listing and registration on the American
Stock Exchange LLC (‘‘Amex’’). should be included on the subject line
longer necessary because the NASD can if e-mail is used. To help us process and
fulfill through other means its On November 15, 2005, the Board of
Directors (‘‘Board’’) of the Issuer review your comments more efficiently,
obligations with respect to non-Nasdaq please use only one method. The
exchange listed securities under Section authorized management to apply to list
the Security on the Nasdaq National Commission will post all comments on
15A(b)(11) of the Exchange Act, Rules the Commission’s Internet Web site
602 and 603 of Regulation NMS, and the Market (‘‘Nasdaq’’) and upon approval
of such listing to withdraw the Security (
national market system plans in which Comments are also available for public
the NASD participates. from listing and registration on Amex.
The Issuer stated in its application that inspection and copying in the
C. Intermarket Surveillance Group. Commission’s Public Reference Room.
The Exchange must join the Intermarket it decided to transfer the listing of the
Security from Amex to Nasdaq because All comments received will be posted
Surveillance Group. without change; we do not edit personal
D. Minor Rule Violation Plan. A it believes that Nasdaq will provide
greater exposure of the Security to identifying information from
MRVP filed by the Nasdaq Exchange submissions. You should submit only
under Exchange Act Rule 19d–1(c)(2) investors, especially as more of the
members of the Issuer’s peer group of information that you wish to make
must be declared effective by the available publicly.
Commission.226 construction companies have a Nasdaq
E. Fingerprint Plan. A fingerprint plan listing rather than an exchange listing. The Commission, based on the
filed by the Nasdaq Exchange under The Issuer stated that on January 4, information submitted to it, will issue
Exchange Act Rule 17f–2 must be 2006, Nasdaq approved its application an order granting the application after
declared effective by the to list the Security on Nasdaq. The the date mentioned above, unless the
Commission.227 Issuer expects the Security to trade on Commission determines to order a
F. 17d–2 Agreement. An agreement Nasdaq on or about January 20, 2006. hearing on the matter.
pursuant to Exchange Act Rule 17d– The Issuer stated in its application For the Commission, by the Division of
2 228 between the NASD and the Nasdaq that it has met the requirements of Market Regulation, pursuant to delegated
Exchange that allocates to the NASD Amex Rule 18 by complying with all authority.5
regulatory responsibility for those applicable laws in effect in the State of
Nancy M. Morris,
matters specified above 229 must be Delaware, in which it is incorporated,
and provided written notice of Secretary.
approved by the Commission, or the
withdrawal to Amex. [FR Doc. E6–679 Filed 1–20–06; 8:45 am]
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Nasdaq Exchange must demonstrate that

The Issuer’s application relates solely BILLING CODE 8010–01–P
226 17 CFR 240.19d–1(c)(2). to withdrawal of the Security from
227 17 CFR 240.17f–2(c). 3 15 U.S.C. 781(b).
228 17 CFR 240.17d–2. 1 15 U.S.C. 78l(d). 4 15 U.S.C. 781(g).
229 See supra text accompanying notes 114–117. 2 17 CFR 240.12d2–2(d). 5 17 CFR 200.30–3(a)(1).

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