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

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