[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Rules and Regulations]
[Pages 40732-40733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20053]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-38870; File No. S7-30-95]
RIN 3235-AG66
Order Execution Obligations
AGENCY: Securities and Exchange Commission.
ACTION: Revised compliance dates; exemptive order.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
announcing the final phase-in schedule for compliance with Rules 11Ac1-
1(c)(5) (``ECN Amendment'' of the ``Quote Rule'') and 11Ac1-4 (``Limit
Order Display Rule'') under the Securities Exchange Act of 1934
(``Exchange Act'') and is providing exemptive relief to accommodate the
new schedule. In addition, the Commission is providing temporary
exemptive relief from compliance with the 1% requirement of the Quote
Rule with respect to non-19c-3 securities.
DATES: Effective Date: July 24, 1997. Compliance Dates: The phase-in
schedule with respect to the remaining approximately 5,766 Nasdaq
securities will be as follows: 250 Nasdaq securities on August 4, 1997;
250 Nasdaq securities on August 11, 1997; 850 Nasdaq securities on
September 8, 1997; 850 Nasdaq securities on September 15, 1997; 850
Nasdaq securities on September 22, 1997; 850 Nasdaq securities on
September 29, 1997; 850 Nasdaq securities on October 6, 1997; and the
remaining approximately 930 Nasdaq securities on October 13, 1997.
Concurrently, the Commission is exempting responsible broker and
dealers, electronic communications networks, exchanges and associations
from compliance with the Order Execution Rules, with respect to the
Nasdaq securities that are not phased in under such schedule, until
October 13, 1997. In addition, the Commission is exempting substantial
market makers and specialists from compliance with the 1% requirement
of the Quote Rule with respect to non-Rule 19c-3 securities until
September 30, 1997.
FOR FURTHER INFORMATION CONTACT:
Gail Marshall-Smith, Special Counsel, or David Oestreicher, Special
Counsel, (202) 942-0158, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, NW., Mail Stop 5-1, Washington,
DC 20549.
SUPPLEMENTARY INFORMATION:
Background
On August 28, 1996, The Commission adopted Rule 11Ac1-4, the Limit
Order Display Rule, and amendments to Rule 11AC1-1, the Quote Rule
under the Exchange Act.\1\ The Limit Order Display Rule requires over-
the-counter (``OTC'') market makers and exchange specialists to
publicly display certain customer limit orders. The ECN Amendment of
the Quote Rule requires OTC market makers and specialists to publicly
disseminate the best prices that they enter into an electronic
communications network (``ECN''),\2\ or to comply indirectly with the
ECN Amendment by using an ECN that furnishes the best market maker and
specialist prices therein to the public quotation system (the ``ECN
Display Alternative'').\3\ In addition, the Quote Rule term ``subject
security'' \4\ was amended, thereby requiring OTC market makers and
specialist to publish quotes in any exchange-listed security if their
volume in that security exceeds 1% of the aggregate volume during the
most recent calendar quarter.\5\
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\1\ See Securities Exchange Act Release No. 37619A (September 6,
1996), 61 FR 48290 (September 12, 1996) (``Adopting Release'').
\2\ 17 CFR 240.11Ac1-1(c)(5)(i).
\3\ 17 CFR 240.11Ac1-1(c)(5)(ii).
\4\ 17 CFR 240.11Ac1-1(a)(25).
\5\ 17 CFR 11Ac1-1(c)(1). See Securities Exchange Act Release
No. 38110 (January 2, 1997), 62 FR 1279 (January 9, 1997) which
postponed the effective date of the 1% Rule, with respect to the
amended definition of ``subject security,'' from January 10, 1997,
to April 10, 1997. See also Securities Exchange Act Release No.
38490 (April 9, 1997), 62 FR 18514 (April 16, 1997) which further
postponed the effective date of the definition of ``subject
security'' until July 28, 1997.
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[[Page 40733]]
Discussion
On January 20, 1997, the Order Execution Rules became effective.\6\
The Commission recognized in adopting the Order Execution Rules that
they would result in a significant change in the order handling
practices of OTC market makers. The Commission thereafter chose to
require compliance with the rules over a phased-in period.
Subsequently, the Commission required compliance with the Order
Execution Rules for the Nasdaq securities on a phased-in basis through
July 7, 1997.\7\ The Commission, therefore, provided exemptive relief,
until July 28, 1997, from compliance with the Order Execution Rules
with respect to the Nasdaq securities not phased in under the Order
Execution Rules. To date, compliance is mandatory for all exchange-
traded securities and 700 of the 1,000 most actively traded Nasdaq
securities.
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\6\ See Securities Exchange Act Release Nos. 37619A (September
6, 1996), 37972 (November 22, 1996), 38110 (January 2, 1997), and
38139 (January 8, 1997).
\7\ See Securities Exchange Act Release Nos. 38246 (February 5,
1997) and 38490 (April 9, 1997) outlining previous phase-in
schedules for the Order Execution Rules. The Commission notes that a
broker-dealer's duty of best execution discussed in the Adopting
Release is applicable to all securities and is not based on whether
or not the security has been phased-in under the Limit Order Display
Rule or the ECN Amendment.
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The Commission has been closely monitoring the implementation of
the rules and has found that the implementation appears to be occurring
successfully. The success to date is due, in-part, to affording market
participants time to adapt to the new regulatory requirements.
Moreover, the Commission has provided Nasdaq the time necessary to
upgrade its systems to improve its ability to handle the additional
quotation traffic resulting from the Order Execution Rules.\8\ The
Commission believes it has succeeded in striking a reasonable balance
between the desire to provide the benefits of the Order Execution Rules
to investors and the need to ensure that implementation of the Rules do
not compromise the integrity or capacity of automated systems operated
by Nasdaq, broker-dealers, ECNs, or vendors. Accordingly, the
Commission believes it is appropriate to continue phasing in both the
Limit Order Display Rule and the ECN Amendment for the remaining Nasdaq
securities.\9\
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\8\ The Nasdaq Stock Market made system enhancements in mid-July
which were designed to improve its capacity levels.
\9\ The Commission notes, however, that while ECNs qualifying
for the ECN Display Alternative must publicly display quotes in
Nasdaq securities once those securities are phased in pursuant to
the phase-in schedule, these ECNs may voluntarily begin publicly
displaying quotes in any Nasdaq security beginning August 4, 1997.
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The 700 Nasdaq securities currently in compliance with the Order
Execution Rules account for over 62% of the total share volume on
Nasdaq and over 85% of the total dollar volume. The Commission,
therefore, believes that the remaining Nasdaq securities can be phased
in on a more accelerated schedule.
The new compliance schedule for the remaining, approximately 5,766
Nasdaq securities is as follows: 250 Nasdaq securities on August 4,
1997, of which 150 securities will be selected from the 1,000 most
actively traded Nasdaq securities and 100 securities will be selected
from the remaining Nasdaq securities; \10\ 250 Nasdaq securities on
August 11, 1997, of which 150 securities will be the last of the 1,000
most actively traded Nasdaq securities not already phased-in and 100
securities will be selected from the remaining Nasdaq securities; 850
Nasdaq securities on September 8, 1997; \11\ 850 Nasdaq securities on
September 15, 1997; 850 Nasdaq securities on September 22, 1997; 850
Nasdaq securities on September 29, 1997; 850 Nasdaq securities on
October 6, 1997; and the remaining approximately 930 Nasdaq securities
on October 13, 1997. To accommodate this phase-in schedule and pursuant
to Rule 11Ac1-1(d) \12\ of the Exchange Act, the Commission is
exempting responsible brokers and dealers, electronic communications
networks, exchanges, and associations, until October 13, 1997, from the
requirements of Rule 11Ac1-1(c)(5)(i), the ECN Amendment, with respect
to all Nasdaq securities not phased in as of October 13, 1997. The
Commission is also exempting, pursuant to Rule 11Ac1-4(d) \13\ of the
Exchange Act, responsible brokers and dealers, electronic
communications networks, exchanges, and associations, until October 13,
1997 from the requirements of Rule 11Ac1-4, the Limit Order Display
Rule, with respect to all Nasdaq securities not phased in as of October
13, 1997.
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\10\ The Nasdaq Stock Market will continue to identify which
Nasdaq securities are to be phased in, and will notify market
participants of the specific securities at least a week prior to the
securities being phased-in.
\11\ These 850 securities, as well as the subsequent securities
phased-in under this schedule, will be selected from the remaining
approximately 5,180 Nasdaq securities.
\12\ 17 CFR 240.11Ac1-1(d).
\13\ 17 CFR 240.11Ac1-4(d).
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The Commission has granted this exemptive relief to permit the
continued phase-in and orderly operation of the Order Execution Rules.
Moreover, the Commission believes that a three-week pause after 200 of
the less active Nasdaq securities are phased in will provide an
opportunity to enable broker-dealers to make any necessary operational
adjustments to handle the remaining approximately 5,180 securities.
Accordingly, the Commission finds that the exemptive relief provided
herein to responsible brokers and dealers, electronic communications
networks, exchanges, and associations is consistent with the public
interest, the protection of investors and the removal of impediments to
and perfection of the mechanism of a national market system.
In addition, the Commission, pursuant to Rule 11Ac1-1(d), is
extending the exemptive relief granted to responsible broker dealers
\14\ from the requirements of Rule 11Ac1-1(c)(1), with respect to non-
Rule 19c-3 securities \15\ until the current calendar quarter ends
September 30, 1997.\16\ OTC market makers and specialists, therefore,
responsible for more than 1% of the aggregate trading volume during the
calendar quarter ending September 30, 1997, must, within 10 business
days, commence quoting regular and continuous two-sided markets.
\14\ The term ``responsible broker or dealer'' is defined in
Rule 11Ac1-1(a)(21).
\15\ See 17 CFR 240.19c-3. Exchange Act Rule 19c-3 prohibits the
application of off-board trading restrictions to securities that (1)
were not traded on an exchange before April 26, 1979; or (2) were
traded on an exchange on April 26, 1979, but ceased to be traded on
an exchange for any period of time thereafter. Accordingly,
exchange-traded securities not subject to off-board trading
restrictions are referred to as Rule 19c-3 securities, and exchange-
traded securities subject to off-board trading restrictions are
referred to as non-Rule 19c-3 securities.
\16\ OTC market makers and specialists are currently required to
publish two-sided quotes in Rule 19c-3 securities if their aggregate
trading volume exceeds 1% during the most recent calendar quarter.
This obligation with respect to Rule 19c-3 securities remains
unchanged by this action.
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30(a)(28) and (61).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-20053 Filed 7-29-97; 8:45 am]
BILLING CODE 8010-01-M
