[Federal Register Volume 64, Number 56 (Wednesday, March 24, 1999)]
[Notices]
[Pages 14293-14294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7155]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41180; File No. SR-NASD-98-94]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc. to Amend
Adjudication Procedures for Clearly Erroneous Transactions
March 17, 1999.
On December 18, 1998, the National Association of Securities
Dealers, Inc., (``NASD'' or ``Association'') through its wholly-owned
subsidiary, NASD Regulation, submitted to the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend adjudication procedures
for clearly erroneous transactions. The Federal Register published the
[[Page 14294]]
proposed rule change for comment on February 3, 1999.\3\ The Commission
received no comments on the proposal. This order approves the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 40992 (Jan. 28, 1999), 64 FR
5846 (Feb. 5, 1999).
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Description of the Proposal
NASD Regulation is proposing to amend NASD Rule 11890 (``Rule'') to
conform the time frame for requesting a clearly erroneous adjudication
for pre-opening transactions to the 30 minute frame that applies trades
that occur after 10:00 a.m. The rule permits The Nasdaq Stock Market,
Inc. (``Nasdaq'') to review erroneous transactions and declare them
void or otherwise modify their terms. In 1998, the Commission approved
changes to the rule to make this process more efficient and fair
(``Amendments'').\4\ NASD Regulation amended the rule to require
members to submit erroneous transaction complaints within 30 minutes of
the transaction. Prior to the amendments, the rule allowed members to
submit these complaints any time during the trading day. The
Association hoped the amendments would preclude firms from waiting
until the end of the day to submit erroneous transaction complaints
after deciding whether the erroneous trade became unprofitable. The
amendments also required that firms give the counterparty to the
erroneous transaction adequate notice of the error within a short
period of time.
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\4\ Exchange Act Release No. 39550 (Jan. 14, 1998), 63 FR 4333
(Jan. 28, 1998) (approving SR-NASD-96-51).
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Because of the high trading volume, however, the NASD intended to
provide additional time to submit adjudication requests for trades
occurring during the first half of each trading day. Specifically, the
NASD intended that members have until 10:30 a.m. to request an
adjudication for trades occurring between the 9:30 a.m. open and 10:00
a.m. The rule, however, currently only applies to trades that occur
before 10:00 a.m., and does not mention trades that occur before the
9:30 a.m. opening. Consequently, a literal reading of the rule accords
additional time to pre-9:30 a.m. transactions as well as those that
occur between 9:30 and 10:00 a.m.
The NASD staff identified this issue when the Commission approved
the amendments, but agreed, in consultation with Commission staff, to
wait and observe the operation of the amended rule. After administering
the amended rule for eight months, the NASD has confirmed its original
belief that this additional time is not necessary for pre-opening
transactions and is inconsistent with the original intent of the
amendments.
In particular, the NASD notes that of the 27 requests for
adjudication involving pre-opening trades received since the
amendments, more than half were submitted by members within 30 minutes
(in several instances within ten minutes) even though some members had
as long as 90 minutes to do so. More importantly, members made
virtually all of these requests (23 of 27) after the market opened and
they had an opportunity to observe the direction of the market. While
the NASD still believes that it is appropriate to provide additional
time to request an adjudication for erroneous trades that occur
following the opening, the NASD believes providing members additional
time for pre-opening transactions is inconsistent with the intent of
the amendments and allows members to abuse the rule.
Discussion
The Commission finds that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities association. In particular, the Commission finds
that the proposed rule change is consistent with Section 15A(b)(6) of
the Act,\5\ which requires that an Association's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and to protect investors and the
public interest.\6\ Specifically, the Commission believes the proposed
rule change promotes fair and efficient resolution of disputes
involving clearly erroneous transactions. The Commission believes that
uncorrected erroneous transactions hinder an investor's ability to rely
on reported transactions as accurately reflecting the current state of
the market. The Commission believes the proposed rule change will
lessen the impact of erroneous transactions on the public by allowing
Nasdaq to more quickly correct erroneous transactions that have been
publicly reported.
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\5\ 15 U.S.C. 78o-3.
\6\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-NASD-98-94) is approved.
\7\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7155 Filed 3-23-99; 8:45 am]
BILLING CODE 8010-01-M
