Joint Industry Plan; Order Approving Amendment No. 2 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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35221; File No. S7-24-89]

Joint Industry Plan; Order Approving Amendment No. 2 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

January 11, 1995.

On January 9, 1995, the National Association of Securities Dealers,

Inc., and the Boston, Chicago, and Philadelphia Stock Exchanges

(collectively, ``Participants'')\1\ submitted to the Commission

Amendment No. 2 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 August 12, 1995. The Commission also is soliciting comment,

among other matters, on whether exchanges should be permitted to extend

UTP to more than 100 OTC securities at any given time.

\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 by 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. 12(f) (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 worked 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 orders serves to meet this Section 12(f)

requirement.

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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 to

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. Thereafter, the

Commission extended the effectiveness of the Plan through January 12,

1995, as requested by the Participants in Amendment No. 1 to the

Plan.\4\ Accordingly, the pilot period commenced on July 12, 1993, and

most recently was scheduled to expire on January 12, 1995.

\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'').

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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 Participants, however, have not

yet come to an agreement concerning revenue sharing for transactions

effected pursuant to the Plan. Proposed Amendment No. 2 to the Plan

extends this negotiation period for an additional seven months.\5\ The

Commission believes it is appropriate to extend the effectiveness of

the pilot program, particularly in light of the reported recent

progress made by the Participants concerning financial matters. At the

same time, however, the Commission expects the Participants to conclude

those negotiations before January 31, 1995, and expects the

Participants to submit to the Commission a proposed amendment to the

Plan concerning finances before February 15, 1995.

\5\In the present filing with the Commission, the NASD states

that the parties have made substantial progress in their

negotiations but have not concluded them and that, in order to

conclude the negotiations and provide sufficient time for approval

by their governing boards and the Commission, the parties believe

that an additional seven months will be required. See letter from T.

Grant Callery, Vice President and General Counsel, NASD, to Jonathan

G. Katz, Secretary, Commission, dated January 9, 1995.

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II. Extension of Certain Exemptive Relief

In conjunction with the Plan, on a temporary basis scheduled to

expire on July 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 August 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 August 12, 1995, but at that time, the Commission

will

[[Page 3887]]

review the exemptive relief in light of any comments received.

\6\The Commission notes that the present filing does not make

clear that the two exemptions were previously scheduled to expire on

July 12, 1995. Nevertheless, the filing requests an ``identical

extension'' of the relevant exemptions along with their request that

the effectiveness of the Plan be extended through August 12, 1995.

Accordingly, this order extends the effectiveness of the relevant

exemptions from July 12, 1995, through August 12, 1995. See id.

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III. Outstanding Issues

In the 1994 Extension Order, the Commission noted several areas of

unresolved issues concerning the Plan.\7\ 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.\8\ To date, the Commission has solicited comment on this

and other matters and has not received evidence that expanding the

number of securities would have a negative effect on the markets or the

protection of investors. Moreover, the Commission recently received a

letter from the Chx requesting that the Commission expand the number of

eligible securities from 100 to 500.\9\

\7\In the 1994 Extension Order, the Commission requested views

on numerous issues presented by the pilot program, and requested

that the Participants submit reports to the Commission on those

issues by September 30, 1994. See Supra note 4. The Commission

received a report from the Philadelphia Stock Exchange as an

attachment to its proposed rule change requesting an extension of

the Phlx's pilot procedures for OTC/UTP. See letter from William W.

Uchimoto, General Counsel, Phlx, to Elizabeth Prout, Division of

Market Regulation, Commission, dated December 21, 1994 (attachment

to File No. SR-PHLX-94-70). The other Participants have not complied

with the Commission order, and must respond to the Commission

request immediately.

\8\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.

\9\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 NNM stocks would be eligible for trading.

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Accordingly, the Commission solicits comment specifically on

whether it is appropriate to permit exchanges to extend UTP to a

maximum of 500 OTC securities for an interim period, and whether all

NNM securities should be available for extensions of UTP if the

Commission determines that permanent approval of the Plan is

appropriate. The Commission preliminarily believes that, after

consideration of comments received, it may be appropriate to expand the

number of eligible securities prior to the Commission's review of other

matters associated with the Plan in August 1995.

The Commission also notes other areas for commenters to address:

(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.

IV. 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 plan amendment that are filed

with the Commission, and all written communications relating to the

proposed plan amendment 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 February

9, 1995.

VI. Conclusion

The Commission finds that proposed Amendment No. 2 to the Plan to

extend the financial negotiation period for an additional seven months

is appropriate and in furtherance of Section 11A of the Act. The

Commission also finds that extensions of the exemptive relief requested

through August 12, 1995, and described above, also is consistent with

the Act and the rules thereunder. Specifically, the Commission believes

that these extensions should serve to provide the Participants with

more time to conclude their financial negotiations and to evaluate the

effects of the pilot program and report their findings to the

Commission. This, in turn, should further the objects of the Act in

general, and specifically those set forth in Section 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 paragraph (c)(2) of Rule 11Aa3-2 thereunder, that Amendment No.

2 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 August 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. 95-1230 Filed 1-18-95; 8:45 am]

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