[Federal Register Volume 62, Number 112 (Wednesday, June 11, 1997)]
[Notices]
[Pages 31854-31856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15170]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38715; File No. SR-NASD-97-37]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. in Providing
an Interpretation to NASD Conduct Rule 2110 Regarding Anti-
Intimidation/Coordination Activities of Member Firms and Persons
Associated With Member Firms
June 4, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 7, 1997, the National
Association of Securities Dealers, Inc. (``NASD`` or ``Association;;)
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by NASD Regulation, Inc.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1)(1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing IM-2110-5 to prohibit certain anti-
competitive and coordination conduct of member broker/dealers and
persons associated with member broker/dealers. Below is the text of the
proposed rule change. Proposed new language is in italics.
IM-2110-5. Anti-Intimidation/Coordination
The Board of Governors is issuing this interpretation to codify a
longstanding policy. It is conduct inconsistent with just and equitable
principles of trade for any member or person associated with a member
to coordinate the prices (including quotations), trades, or trade
reports of such member with any other member or person associated with
a member; to direct or request another member to alter a price
(including a quotation); or to engage, directly or indirectly, in any
conduct that threatens, harasses, coerces, intimidates, or otherwise
attempts improperly to influence another member or person associated
with a member. This includes, but is not limited to, any attempt to
influence another member or person associated with a member to adjust
or maintain a price or quotation, whether displayed on any automated
system operated by The Nasdaq Stock
[[Page 31855]]
Market, Inc. (Nasdaq), or otherwise, or refusals to trade or other
conduct that retaliates against or discourages the competitive
activities of another market maker or market participant. Nothing in
this interpretation respecting coordination of quotes, trades, or trade
reports shall be deemed to limit, constrain, or otherwise inhibit the
freedom of a member or person associated with a member to:
(1) Set unilaterally its own bid and ask in any Nasdaq security,
the prices at which it is willing to buy or sell any Nasdaq security,
and the quantity of shares of any Nasdaq security that it is willing to
buy or sell;
(2) Set unilaterally its own dealer spread, quote increment, or
quantity of shares for its quotations (or set any relationship between
or among its dealer spread, inside spread, or the size of any quote
increment) in any Nasdaq security;
(3) Communicate its own bid or ask, or the prices at or the
quantity of shares in which it is willing to buy or sell any Nasdaq
security to any person, for the purpose of exploring the possibility of
a purchase or sale of that security, and to negotiate for or agree to
such purchase or sale;
(4) Communicate its own bid or ask, or the price at or the quantity
of shares in which it is willing to buy or sell any Nasdaq security, to
any person for the purpose of retaining such person as an agent or
subagent for the member or for a customer of the member (or for the
purpose of seeking to be retained as an agent or subagent), and to
negotiate for or agree to such purchase or sale;
(5) Engage in any underwriting (or any syndicate for the
underwriting) of securities to the extent permitted by the federal
securities laws;
(6) Take any unilateral action or make any unilateral decision
regarding the market makers with which it will trade and the terms on
which it will trade unless such action is prohibited by the second and
third sentences of this Interpretation; and
(7) Deliver an order to another member for handling, provided,
however, that the conducted described in (1) through (7) is otherwise
in compliance with all applicable law.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On August 8, 1996, the SEC issued an Order pursuant to Section
19(h)(1) of the Act (``SEC Order''), making certain findings about the
NASD and conduct on the Nasdaq Market, and imposing remedial
sanctions.\2\ Among other findings, the SEC determined that certain
activities of Nasdaq market makers had directly and indirectly impeded
price competition in the Nasdaq market. In addition, the SEC determined
that a number of Nasdaq market makers had coordinated quotations,
trades and trade reports with other Nasdaq market makers for the
purpose of advancing or protecting the market maker's proprietary
trading interests. Based on the SEC's specific findings of certain
anti-competitive behavior of Nasdaq market makers in the Nasdaq Stock
Market, the NASD agreed to certain undertakings. In particular,
Undertaking 11 requires the NASD ``[t]o propose a rule or rule
interpretation for Commission approval which expressly makes unlawful
the coordination by or among market makers of their quotes, trades and
trade reports, and which prohibits retribution or retaliatory conduct
for competitive actions of another market maker or other market
participant.'' Undertaking 12 requires the NASD ``[t]o enforce Article
III, Section 1 of the NASD Rules of Fair Practice (currently NASD
Conduct Rule 2110), with a view to enhancing market maker
competitiveness by: (a) Acting to eliminate anti-competitive or
unlawful enforced or maintained industry pricing conventions, and to
discipline market makers who harass other market makers for narrowing
the displayed quotations in the Nasdaq market, trading not more than
the quantities of securities they are required to trade under the
NASD's rules, or otherwise engaging in competitive conduct; (b) acting
to eliminate coordination between or among market makers or quotes,
trades and trade reports; and (c) acting to eliminate concerted
discrimination and concerted refusals to deal by market makers.''
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\2\ See Securities Exchange Act Release No. 37538 (August 8,
1996), SEC's Order Instituting Public Proceedings Pursuant to
Section 19(h)(1) of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions.
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To comply with NASD Undertaking 11, the NASD has prepared the
following rule interpretation of NASD Conduct Rule 2110 (formerly
Article III, Section 1 of the NASD's Rules of Fair Practice). The NASD
believes that the conduct described in Undertaking 11 already is
proscribed by existing NASD Rule 2110, which requires members to
observe high standards of commercial honor and just and equitable
principles of trade. The conduct described in the interpretation is
fundamentally inconsistent with the obligations of member firms to
their customers and is inimical to the public interest in fair and
efficient securities markets. Although such conduct already is
prohibited, this interpretation is designed to address specifically
certain of the findings contained in the SEC Order and to emphasize the
importance placed by the NASD on the enforcement of the prohibition.
This rule interpretation defines as conduct inconsistent with just
and equitable principles of trade certain conduct by and among members
firms, and sets forth specific exclusions (numbered 1 through 7) which
identify bona fide commercial activities by and among member firms. The
interpretation identifies three general areas of conduct that are
prohibited. The first part of the interpretation prohibits coordinating
activities by member firms involving quotations, prices, trades and
trade reporting. Conduct covered by this prohibition would include, but
not be limited to agreements to report trades late or inaccurately, or
to agree to maintain certain minimum spreads or quote sizes above the
legal minimums.
The second part of the interpretation prohibits ``directing or
requesting'' another member to alter prices or quotations. This would
include situations in which a market maker requests another market
maker to move or adjust its displayed quotations to accommodate the
requesting market maker. This prohibition does not extend to activity,
identified in exclusion number 7, that permits a member to route
customer orders to market makers for handling or a correspondent firm
of the member to ask a market maker to represent an order in the market
maker's quote.
The third part of the interpretation relates to conduct that
threatens, harasses, coerces, intimidates or otherwise attempts
improperly to influence another member in a manner that interferes with
or impedes the forces of competition among member firms in the Nasdaq
Stock Market. This
[[Page 31856]]
part of the prohibition is intended to reach conduct that goes beyond
legitimate bargaining among member firms. This conduct may include,
among other things, refusals to trade, improper systems messages,
trading in odd lots, and other conduct intended to influence a member
to engage in improper market activity or refrain from legitimate market
activity. However, as identified in exclusion number 6, this language
would not prohibit a member from taking unilateral action in selecting
with whom to trade and under what terms, based on legitimate market and
commercial criteria (e.g., credit exposure).
In addition, this interpretation does not prohibit a market maker
from contracting another market maker in a locked or crossed market
situation to attempt to unlock or uncross the market. Moreover, the
overall prohibition applies to primary market as well as secondary
trading activities.
2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act \3\ in that regulating
the conduct of member broker/dealers and persons associated with member
broker/dealers by prohibiting anti-competitive conduct is in
furtherance of the requirements that the Association's rules to promote
just and equitable principles of trade, prevent fraudulent and
manipulative acts and practices, and to protect investors and the
public interest.
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\3\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents,\4\ the Commission
will:
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\4\ The NASD has requested that the Commission find good cause
pursuant to Section 19(b)(2) for approving the proposed rule change
prior to the 30th day after its publication in the Federal Register.
The NASD believes that the conduct described in the proposed rule
change is already proscribed by existing NASD Rule 2110.
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A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by July 2, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15170 Filed 6-10-97; 8:45 am]
BILLING CODE 8010-01-M
