[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Notices]
[Pages 43626-43628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20698]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36102; File No. S7-24-89]
Joint Industry Plan; Solicitation of Comments and Order Approving
Amendment No. 3 to Reporting Plan for Nasdaq/National Market Securities
Traded on an Exchange on an Unlisted or Listed Basis, Submitted by the
National Association of Securities Dealers, Inc., and the Boston,
Chicago and Philadelphia Stock Exchanges
August 14, 1995.
On August 10, 1995, the National Association of Securities Dealers,
Inc., and the Boston, Chicago, and Philadelphia Stock Exchanges
(collectively, ``Participants'') \1\ submitted to the Commission
proposed Amendment No. 3 to a joint transaction reporting plan
(``Plan'') for Nasdaq/National Market securities traded on an exchange
on an unlisted or listed basis.\2\ The Commission is approving the
proposed amendment to the Plan and trading pursuant to the Plan on a
temporary basis to expire on September 12, 1995. The Commission also is
expanding the number of eligible securities that may be traded by an
exchange Participant pursuant to the Plan from 100 to 500 Nasdaq/
National Market securities.
\1\ The signatories to the Plan, i.e., the National Association
of Securities Dealers, Inc. (``NASD''), and the Chicago Stock
Exchange, Inc. (``Chx'') (previously, the Midwest Stock Exchange,
Inc.), Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston
Stock Exchange, Inc. (``BSE''), are the ``Participants.'' The BSE,
however, joined the Plan as a ``Limited Participant,'' and reports
quotation information and transaction reports only in Nasdaq/
National Market (previously referred to as ``Nasdaq/NMS'')
securities listed on the BSE. Originally, the American Stock
Exchange, Inc., was a Participant to the Plan, but did not trade
securities pursuant to the Plan, and withdrew from participation in
the Plan in August 1994.
\2\ The Commission notes that Section 12(f) of the Act describes
the circumstances under which an exchange may trade a security that
is not listed on the exchange, i.e., by extending unlisted trading
privileges (``UTP'') to the security. Section 12(f) was amended on
October 22, 1994, 15 U.S.C. 78l (1991) (as amended 1994). Prior to
the amendment, section 12(f) required exchanges to apply to the
Commission before extending UTP to any security. In order to approve
an exchange UTP application for a registered security not listed on
any exchange (``OTC/UTP''), Section 12(f) required the Commission to
determine that various criteria had been met concerning fair and
orderly markets, the protection of investors, and certain national
market initiatives. These requirements operated in conjunction with
the Plan currently under review. The recent amendment to Section
12(f), among other matters, removes the application requirement and
permits OTC/UTP only pursuant to a Commission order or rule. The
order or rule is to be issued or promulgated under essentially the
same standards that previously applied to Commission review of UTP
applications. The present order fulfills these Section 12(f)
requirements.
[[Page 43627]]
I. Extension of the Pilot Program
The Commission originally approved the Plan on June 26, 1990.\3\
The Plan governs the collection, consolidation and dissemination of
quotation and transaction information for Nasdaq/National Market
securities listed on an exchange or traded on an exchange pursuant UTP.
The Commission originally approved trading pursuant to the Plan on a
one-year pilot basis, with the pilot period to commence when
transaction reporting pursuant to the Plan commenced. Consequently, the
pilot period commenced on July 12, 1993. As requested by the
Participants in Amendment Nos. 1 and 2 to the Plan, the Commission has
extended the effectiveness of the Plan twice. Accordingly, the
effectiveness of the Plan was scheduled to expire on August 12,
1995.\4\
\3\ See Securities Exchange Act Release No. 28146 (June 26,
1990), 55 FR 27917 (``1990 Approval Order''). For a detailed
discussion of history of UTP in OTC securities, and the events that
led to the present plan and pilot program, see 1994 Extension Order,
infra note 4.
\4\ See Securities Exchange Act Release No. 34371 (July 13,
1994), 59 FR 37103 (``1994 Extension Order''). See also Securities
Exchange Act Release No. 35221, (January 11, 1995), 60 FR 3886
(``January 1995 Extension Order'').
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As originally approved by the Commission, the Plan required the
Participants to complete their negotiations regarding revenue sharing
during the one-year pilot period. The January 1995 Extension Order
approved the effectiveness of the Plan through August 12, 1995, but
also stated that the Commission expected the Participants to conclude
their financial negotiations before January 31, 1995.\5\ To date, the
Participants have not completed their financial negotiations.
\5\ See January 1995 Extension Order, id, at n. 6.
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Proposed Amendment No. 3 to the Plan would extend the effectiveness
and the negotiation period for an additional month through September
12, 1995. The Commission believes it is appropriate to extend the
effectiveness of the pilot program for an additional month in order to
continue the pilot program in place while the Commission awaits the
Participants' filing of a proposed Plan amendment concerning revenue
sharing pursuant to the Plan. The Commission also is directing the
Participants to submit the filing to the Commission on or before August
31, 1995.
II. Extension of Certain Exemptive Relief
In conjunction with the Plan, on a temporary basis scheduled to
expire on August 12, 1995, the Commission granted an exemption from
Rule 11Ac1-2 under the Act regarding the calculated best bid and offer
(``BBO''), and granted the BSE an exemption from the provision of Rule
11Aa3-1 under the Act that requires transaction reporting plans to
include market identifiers for transaction reports and last sale data.
At the request of the Participants, this order extends these exemptions
through September 12, 1995, provided that the Plan continues in effect
through that date pursuant to a Commission order.\6\ The Commission
continues to believe that exemptive relief from these provisions is
appropriate through September 12, 1995, but at that time, the
Commission will review the exemptive relief in light of any comments
received.
\6\ In the January 1995 Extension order, the Commission extended
these exemptions from July 12, 1995, through August 12, 1995.
Pursuant to a request made by letter attached to the present filing,
this order further extends the effectiveness of the relevant
exemptions from August 12, 1995, through September 12, 1995. See
letter from Robert E. Abner, NASD, to Jonathan Katz, Commission,
dated August 10, 1995.
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III. Expansion of the Number of Eligible Securities
In our 1994 and January 1995 Extension Orders, the Commission noted
several unresolved issues concerning the Plan. These issues include,
among other matters, whether the Commission should continue to limit
the number of OTC securities that may be traded on exchanges pursuant
to UTP. Currently, exchanges may extend UTP up to a maximum of 100
securities.\7\
\7\ Prior to 1985, the Commission generally did not permit
exchanges to extend UTP to OTC securities. In 1985, the Commission
determined that it would be appropriate to permit exchanges, on a
temporary basis and subject to certain limitations, to extend UTP up
to a maximum of 25 OTC securities. These limitations included the
requirement that the NASD and exchanges seeking to extend UTP to OTC
securities enter into a plan for consolidated transaction and
quotation dissemination. See Securities Exchange Act Release No.
22412 (September 16, 1985), 50 FR 38640. In 1986, the Midwest Stock
Exchange (currently the Chicago Stock Exchange, or ``Chx'') entered
into an interim plan which subsequently was superseded by the Plan
currently operating on a pilot basis. In 1990, the Commission
expanded the maximum number of eligible securities to 100. See 1990
Approval Order, supra note 3.
Prior to the Commission's January 1995 Extension Order, the
Commission received a letter from the Chx requesting that the
Commission expand the number of eligible securities from 100 to 500.\8\
In the January 1995 Extension Order, the Commission solicited comment
specifically on whether it would be appropriate to permit exchanges to
extend UTP to a maximum of 500 OTC securities for an interim period,
and whether all NMS securities \9\ should be available for extensions
of UTP if the Commission determines that permanent approval of the Plan
is appropriate.
\8\ See letter from George T. Simon, Foley & Lardner, to
Katherine England, Assistant Director, Commission, dated January 9,
1995. This letter also concludes that, when the Plan is finally
approved, all NMS stocks would be eligible for trading.
\9\ National market system, or ``NMS,'' securities are defined
in Rule 11Aa2-1 under the Act.
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Thereafter, the Commission received three comment letters on the
100-security limitation, two in favor of expanding the number of
eligible securities,\10\ and one opposed to the expansion.\11\ One
commenter favored the expansion of securities available for exchange
trading because the commenter believes the new automated capabilities
developed by the exchanges will add liquidity and depth to the
markets.\12\ Another commenter, one of the two specialist firms
currently trading under the Joint OTC/UTP Plan, supports expanding the
number of eligible securities to 500 because the expansion would
enhance the firm's ability to market its services, thereby allowing the
exchanges to be more competitive with the larger OTC wholesale
dealers.\13\
\10\ See letter from William A. Lupien, Chairman, Mitchum, Jones
& Templeton, Inc., to Secretary, Commission, dated February 21, 1995
(``Mitchum, Jones & Templeton letter''), and letter from Jack A.
Dempsey, Senior Vice President, Dempsey & Company, to Mr. Jonathan
G. Katz, Secretary, Commission, dated February 21, 1995 (``Dempsey
letter'').
\11\ See letter from Richard G. Ketchum, Executive Vice
President & Chief Operating Officer, NASD, to Mr. Jonathan G. Katz,
Secretary, Commission, dated February 21, 1995 (``NASD letter'').
The NASD letter was submitted to the Commission with an attached
statistical report to the Commission that provides data concerning
exchange and NASD volume in OTC/UTP, and certain quotation
information for securities that are quoted pursuant to the Plan.
\12\ See Mitchum, Jones & Templeton letter, supra note 9.
\13\ See Dempsey letter, supra note 9.
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The commenter opposed to the expansion believes that, viewed in
isolation, the proposed expansion would be consistent with the Act.\14\
The commenter believes, however, that the expansion would be
inconsistent with elements of Section 11A(a)(1)(C) of the Act
concerning competition \15\ because of the continued existence of
exchange off-board trading restrictions, limitations on the eligibility
of securities to be traded in the Intermarket Trading System, and New
York Stock Exchange delisting rules, all of which
[[Page 43628]]
the commenter believes to be anti-competitive.
\14\ See NASD letter, supra note 10.
\15\ Section 11A(a)(1)(C) requires the Commission, among other
matters, to promote fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets.
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While the Commission does not necessarily find any of the above
comments on this topic persuasive, the Commission believes that it is
appropriate at this time to expand the number of Nasdaq/National Market
securities an exchange Participant may trade. The Commission has not
received evidence that expanding the number of securities would have a
negative effect on the markets or the protection of investors. Due to
the lack of comments concerning the previous effects of OTC/UTP trading
on the quality of the affected markets and on investors, the Commission
believes this limited expansion from 100 to 500 Nasdaq/National market
securities provides a prudent approach that will enable the
Participants and the Commission to gain useful, instructive experience
concerning operation of the Joint OTC/UTP Plan and on its competitive
effects.
IV. Outstanding Concerns
In the January 1995 Extension Order, the Commission also solicited
comment on: (1) Whether the BBO calculation for the relevant securities
should be based on price and time only (as currently is the case) or if
the calculation should include size of the quoted bid or offer; and (2)
whether there is a need for an intermarket linkage for order routing
and execution and an accompanying trade-through rule.
The Commission received two comments in support of including size
in the BBO calculation.\16\ These commenters explain that, without
including size in the BBO calculation, the BBO does not provide an
accurate representation of the depth of the BBO.
\16\ See Mitchum, Jones & Templeton letter and Dempsey letter,
supra note 9.
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The Commission requests further comment on the question of whether
size should be included in the BBO. The Commission notes that the
comments raised address more whether all inside bid and offer size
should be aggregated, thereby displaying the true depth of the bid and
offer, than whether size should be included in the BBO calculation. It
is not clear whether the commenters actually recommend that aggregation
of BBO size as the appropriate result, as compared to inclusion of size
in the BBO calculation. For this reason, the Commission continues to
solicit comment on whether the BBO calculation should include size, and
why the greater size bid (offer) or the first-in-time bid (offer)
should be displayed as best.
The Commission received one comment on the need for an intermarket
linkage for order routing and execution and an accompanying trade-
through rule.\17\ The commenter believes that a linkage similar to that
of the Intermarket Trading System would greatly enhance the
effectiveness of the OTC/UTP program, and would give exchanges a great
chance at improving the UTP marketplace for all investors. The
Commission continues to solicit comment on the need for such a linkage,
and also on whether any existing electronic trading system or systems,
which may include those currently sponsored by one or more of the
Participants to the Plan, could be used to gain the same or similar
benefits for investors.
\17\ See Dempsey letter, supra note 9. The Commission notes that
the Dempsey letter also comments on the practice of internalization.
The Commission did not solicit comment on internalization with
respect to the Plan, and the Commission believes that
internalization is not under review in the present notice and order.
That topic, therefore, is not included in the present analysis.
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V. Solicitation of Comment
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 NW., Washington, DC 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 at the
Commission's Public Reference Room. All submissions should refer to
File No. S7-24-89 and should be submitted by September 12, 1995.
VI. Conclusion
The Commission finds that proposed Amendment No. 3 to the Plan to
extend the financial negotiation period for an additional month is
appropriate and in furtherance of Section 11A of the Act. The
Commission finds further that extensions of the exemptive relief
requested through September 12, 1995, as described above, also is
consistent with the Act and the Rules thereunder. The Commission also
finds that it is consistent with Section 11A of the Act to expand the
number of Nasdaq/National Market securities that each exchange
participant may trade from 100 to 500 securities. Specifically, the
Commission believes that these extensions and the expansions should
serve to provide the Participants with more time to conclude their
financial negotiations and with more information to evaluate the
effects of and proposed course of action for the pilot program. This,
in turn, should further the objects of the Act in general, and
specifically those set forth in Sections 12(f) and 11A of the Act and
in Rules 11Aa3-1 and 11Aa3-2 thereunder.
It is therefore ordered, pursuant to Sections 12(f) and 11A of the
Act and (c)(2) of Rule 11Aa3-2 thereunder, that Amendment No. 3 to the
Joint Transaction Reporting Plan for Nasdaq/National Market securities
traded on an exchange on an unlisted or listed basis is hereby
approved, and trading pursuant to the Plan is hereby approved on a
temporary basis through September 12, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20698 Filed 8-21-95; 8:45 am]
BILLING CODE 8010-01-M
