Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by The National Association of Securities Dealers, Inc. to Eliminate Access Market Maker Procedures From Schedule D to the NASD By-Laws

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34217; File No. SR-NASD-94-31]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by The National Association of Securities Dealers, Inc. to

Eliminate Access Market Maker Procedures From Schedule D to the NASD

By-Laws

June 15, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of

1934, 15 U.S.C. 78s(b)(1) (``Act''), notice is hereby given that on May

25, 1994, the National Association of Securities Dealers, Inc.

(``NASD'' or ``Association'') filed with the Securities and Exchange

Commission (``Commission'' or ``SEC'') the proposed rule change as

described in Items I, II, and III below, which Items have been prepared

by the NASD. The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

Pursuant to Section 19(b)(1) of the Act, the NASD hereby files a

proposed rule change to delete Part IX of Schedule D to the NASD By-

Laws which contains procedures for market maker access to The Nasdaq

Stock market (``Nasdaq'') by certain broker-dealers that do not receive

Level 3 Nasdaq Workstation service (``Level 3 service''). Below is the

text of the proposed rule change; deleted language is bracketed.

[Part IX]

[Procedures for Access to the NASDAQ System by Non-NASDAQ Market

Makers]

[These procedures permit a registered NASDAQ market maker, upon

approval by the Corporation, to enter quotations into the NASDAQ System

on behalf of another market maker who does not subscribe to Level 3

NASDAQ Service.]

[A. Definitions]

[1. An ``access market maker'' is a member of the Association who

does not subscribe to Level 3 NASDAQ service, but is or intends to be a

market maker in a security for which quotations are displayed on the

NASDAQ System.]

[2. An ``entering subscriber'' is a registered NASDAQ market maker

who has entered into an arrangement with an access market maker to

enter quotations in the NASDAQ System on behalf of such access market

maker.]

[B. The entering subscriber may enter quotations in the NASDAQ

System on behalf of an access market maker only upon submission and

approval by the Association of the following:]

[1. A fully executed copy of the access arrangement agreement which

shall contain all agreements and conditions concerning the access

arrangement.]

[2. An application for registration as an access market maker for

each security.]

[C. Access market makers and entering subscribers shall be limited

to one access arrangement in each security.]

[D. Quotations displayed by the entering subscriber on behalf of

the access market maker shall be accompanied by the entering

subscriber's market maker identifier and a special symbol designating

that an access arrangement exists. The identity of the access market

maker must be made available by the entering subscriber upon request.]

[E. All transactions resulting from the display of quotations in

the NASDAQ System by the entering subscriber shall be executed by the

entering subscriber and he shall be responsible for the transaction.

Both the entering subscriber and the access market maker shall be

subject to and be responsible for compliance with the provisions of

Schedule D.]

[F. Access market makers shall pay to the Corporation an access fee

of $70 per month for the first security and $52.50 per month for each

additional security which is subject to an approved access

arrangement.]

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

The purpose of the proposed rule change is to eliminate an outmoded

procedure by which certain NASD member firms could participate as

market makers in Nasdaq without procuring the necessary computer

equipment and subscribing to Level 3 service. Currently, Part IX of

Schedule D permits a member firm that does not receive Level 3 service

to qualify as an ``access market maker'' by entering into a suitable

agreement with another firm that is a Level 3 subscriber (``entering

subscriber''). After the NASD's approval of such an arrangement, the

entering subscriber can input two-sided quotations reflecting the

dealer interest of the access market maker. These quotations would be

displayed with the entering subscriber's market maker identifier; a

special indicator would also be displayed to inform other dealers that

an access arrangement existed with respect to the quotations displayed

in the subject security. In this circumstance, the entering subscriber

assumed responsibility for executing trades at the displayed bid and

offer. The entering subscriber and access market maker were jointly

responsible for compliance with the various market maker obligations

set forth in Part V of Schedule D to the NASD By-Laws.

In conjunction with defining the system requirements for Nasdaq's

technology migration, the Nasdaq Stock Market, Inc. (``NSMI'') staff

analyzed the cost and feasibility of providing functionality for access

market makers in the new environment. The staff found that changes in

market making practices in recent years had dramatically reduced the

use of the access market maker arrangement. The staff also found that

no NASD member was currently utilizing this access feature. Given the

absence of interested firms and the lack of any regulatory purpose in

preserving the access market maker feature, it was determined that this

feature did not warrant the expenditure of resources necessary to

provide this functionality in the new environment. The NASD also

believes that it is preferable to limit market maker participation to

Level 3 service subscribers to ensure integrity of its audit trail

file, including the ability to fix responsibility at the source for

every quotation entry and reported transaction.

The NASD believes that this proposed rule is consistent with

Sections 15A(b)(6) and 15A(b)(11) of the Act. Section 15A(b)(6)

requires that the Association's rules be designed to prevent fraudulent

and manipulative acts and practices, to promote just and equitable

principles of trade, to foster cooperation and coordination with

persons engaged in regulating, clearing, and processing information

with respect to, and facilitating transactions in securities. Section

15A(b)(11) authorizes the Association to adopt rules governing the form

and content of quotations disseminated by member firms for the purposes

of providing fair and informative quotations, preventing fictitious or

misleading quotations, and promoting orderly procedures for collecting

and distributing quotation information.

The NASD submits that elimination of the access market maker

feature is fully consistent with the foregoing statutory provisions.

Market makers in Nasdaq securities now will be required to subscribe to

Level III service in order to enter quotations into the Nasdaq system.

This requirements will eliminate an extra step in the quotation process

by which an ``entering subscriber'' may act as an intermediary.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NASD believes that the proposed rule change will not 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, the Commission will:

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, 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 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 file number SR-NASD-94-31 and

should be submitted by July 12, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\1\

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\1\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-15040 Filed 6-20-94; 8:45 am]

BILLING CODE 8010-01-M