Joint Industry Plan; Solicitation of Comments and Order Approving Request To Extend Temporary Effectiveness of Plan, Including Temporary Effectiveness of Revised Amendment 9 Thereto, 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. 34-37772; File No. S7-24-89]

Joint Industry Plan; Solicitation of Comments and Order Approving

Request To Extend Temporary Effectiveness of Plan, Including Temporary

Effectiveness of Revised Amendment 9 Thereto, 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

October 1, 1996.

The National Association of Securities Dealers, Inc., on behalf of

itself and the Boston, Chicago, and Philadelphia Stock Exchanges

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

request \2\ to extend through March 30, 1997, operation of a joint

transaction reporting plan (``Plan'') and certain related exemptive

relief for trading of Nasdaq/National Market securities traded on an

exchange on an unlisted or listed basis.\3\ This notice and order

solicits comment on certain related substantive matters identified

below and extends the effectiveness of the Plan and the exemptive

relief discussed below. Temporary approval of the Plan incorporates

temporary approval of Amendment No. 9, as revised, to the Plan relating

to revenue sharing, through March 30, 1997.\4\

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\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. (``Amex''), 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\ See letter from Robert E. Aber, Vice President, General

Counsel and Secretary, Nasdaq, to Mr. Jonathan G. Katz, Secretary,

Commission, dated September 30, 1996.

\3\ Section 12 of the Act generally requires an exchange to

trade only those securities that the exchange lists, except that

Section 12(f) of the Act permits unlisted trading privileges

(``UTP'') under certain circumstances. For example, Section 12(f),

among other things, permits exchanges to trade certain securities

that are traded over-the-counter (``OTC/UTP''), but only pursuant to

a Commission order or rule. The present order fulfills this Section

12(f) requirement. For a more complete discussion of this Section

12(f) requirement, see November 1995 Extension Order, infra note 5,

at n. 2.

\4\ On March 18, 1996, the Commission, solicited comment on a

revenue sharing agreement among the participants. See Securities

Exchange Act Release No. 36985 (March 18, 1996), 61 FR 12122

(``March 18, 1996 Extension Order''). Thereafter, the Participants

submitted certain technical revisions to the revenue sharing

agreement (``revised Amendment 9''). See letter from Robert E. Aber,

Vice President, General Counsel, and Secretary, Nasdaq, to Jonathan

G. Katz, Secretary, Commission, dated September 13, 1996. See also

Securities Exchange Act Release No. 37689, (September 16, 1996),

(notice and order recognizing receipt of revised Amendment No. 9)

(``September 16, 1996 Extension Order'').

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I. Background

The Commission originally approved the Plan on June 26, 1990.\5\

The Plan

[[Page 52981]]

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. Commission

approval of operation of the Plan was previously scheduled to expire

September 30, 1996. Recently, the Commission received certain technical

revisions to Amendment No. 9 to the Plan, which was originally noticed

for comment on March 18, 1996, concerning the proposed revenue sharing

agreement. In order to provide the Commission with an opportunity to

review the revised Amendment No. 9 to the Plan, the Commission extended

temporary approval of the Plan through September 30, 1996. The

Commission received no comment letters on Amendment No. 9 to the Plan,

either as originally proposed or as revised.

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\5\ See Securities Exchange Act Release No. 28146 (June 26,

1990), 55 FR 27917 (``1990 Approval Order''). For a detailed

discussion of the history of UTP in OTC securities, and the events

that led to the present plan and pilot program, See also 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''), Securities Exchange Act Release No. 36102 (August 14,

1995), 60 FR 43626 (``August 1995 Extension Order''), Securities

Exchange Act Release No. 36226 (September 13, 1995), 60 FR 49029

(``September 1995 Extension Order''), Securities Exchange Act

Release No. 36368 (October 13, 1995), 60 FR 54091 (``October 1995

Extension Order''), Securities Exchange Act Release No. 36481

(November 13, 1995), 60 FR 58119 (``November 1995 Extension

Order''), Securities Exchange Act Release No. 36589 (December 13,

1995), 60 FR 65696 (``December 13, 1995 Extension Order''),

Securities Exchange Act Release No. 36650 (December 28, 1995), 60 FR

358 (``December 28, 1995 Extension Order''), Securities Exchange Act

Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6 1996

Extension Order''), March 18, 1996 Extension Order, and September

16, 1996 Extension Order.

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II. Description of the Proposal

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 have now concluded

those negotiations, as evidenced by their submission to the Commission

of revised Amendment No. 9 to the Plan.

Under the Revenue Sharing Plan, Exchange Participants will receive

annual payments in quarterly installments out of total net

distributable operating revenue \6\ based on their percentage of total

Nasdaq volume,\7\ subject to certain specified minimum and maximum

payments for an initial period of four-and-one-half years (``buy-in

period'').\8\ Thereafter, once the ``buy-in'' period elapses with

respect to a particular Exchange Participant, that exchange will

receive annual payments in quarterly installments out of total net

distributable operating revenue proportional to its percentage of total

Nasdaq volume, without regard to any minimum or maximum payment

amounts. Plan Participants would not be eligible to receive revenue

under the Plan until they have established an automated interface with

Nasdaq for the transmission of quotations and transaction information.

Once an Exchange Participant is eligible to receive revenue under the

Revenue Sharing Plan, that Exchange Participant also will be eligible

to receive revenue based on its volume for the preceding twelve-month

period, up to the maximum payment amount discussed below.\9\

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\6\ Revised Amendment No. 9 clarifies that net distributable

operating revenue for any particular calendar year shall be

calculated by adding all revenues from Level 1, Level 2, (non-market

maker revenue only), Nasdaq/NMS/Last Sale, and NQDS, including

revenues from the dissemination of information among Eligible

Securities to foreign marketplaces, and subtracting from such

revenues all operating and administrative expenses of the Processor

in connection with the collection from the Participants, and

consolidation and dissemination to Vendors and Subscribers, of

Quotation Information and Transaction Reports in Eligible

Securities.

\7\ An Exchange Participant's percentage of total Nasdaq volume

will be based on the average of that Exchange's proportion of total

Nasdaq trade volume reported to Nasdaq and disseminated to

securities information vendors, and total Nasdaq share volume

reported to Nasdaq and disseminated to securities information

vendors.

\8\ Revised Amendment No. 9 clarifies that each Participant

becoming a signatory to the Plan after June 26, 1990, shall as a

condition to become a Participant, pay to the other Plan

Participants a proportionate share of the aggregate development

costs previously paid by Plan Participants to the Processor, which

aggregate development costs totaled $439,530, with the result that

each Exchange Participant's share of all development costs is the

same. In this regard, the Commission notes that the Amex, prior to

its withdrawal as a Participant to the Plan, presumably paid a share

of development costs to the Processor. The Commission believes that,

if the Amex rejoins as a participant to the Plan, the Amex would not

be expected to repay any development costs that it has already paid.

The Commission believes, however, that an open issue remains as to

the proper handling of any payments received by the Participants

from a new Participant to the Plan given any contribution to

development costs made by the Amex. Specifically, it is not clear

whether the Amex, either as a non-Participant to the Plan or after

possibly rejoining as a Participant, would be due a proportionate

share of development costs paid by a new Participant to the Plan.

\9\ Because the Chx is the only Exchange Participant that has

implemented and maintained an automated interface with Nasdaq for

the reporting of transaction and quotation information pursuant to

the Plan, the Chx will receive a lump-sum payment of $444,525

payable thirty days after the effective date of the Revenue Sharing

Plan. The Commission notes that this amount is based on the

following payments for previous periods: (1) For the six-month

period ending December 1993, $50,000; (2) for the one-year period

ending December 1994, $100,000; and (3) for the period between

January 1, 1995 and March 5, 1996, $294,525. For the period March 6

to December 31, 1996, the NASD is scheduled to pay the Chx a pro

rate amount of its payment for 1996.

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Specifically, the maximum payment amount for any Exchange

Participant will be an amount based on total net distributable

operating revenue under the Plan for 1995. This maximum payment amount

figure will be calculated and furnished to all Exchange Participants by

the NASD by April 30, 1996. Based on revenue calculations performed by

the NASD in the last quarter of 1995, it is expected that the maximum

payment amount will be somewhere in the range of $820,000 and $880,000,

but this figure could be higher or lower depending on the eventual

revenue for 1995. Over time, this maximum payment amount will be

adjusted upward or downward depending on fluctuations in net operating

revenue relative to revenue in 1995. The minimum payment amount for the

Chx would be $250,000 and likewise would be adjusted upward or downward

depending on fluctuations in net operating revenue relative to revenue

in 1995. The minimum payment for other exchanges becoming eligible to

receive revenue under the Plan would be set relative to the trading

volume of the Exchange Participant with the highest trading volume

among Exchange Participants during the year before the Participant

became eligible to receive revenue under the Plan. The minimum payment

amount to other Exchange Participants also would be adjusted annually

in the same manner as that of the Chx. Accordingly, for a period of

four-and-one-half years, if an Exchange Participant's share of

distributable revenue is less than its minimum payment amount, it would

receive the minimum payment amount; if its share is equal to or greater

than its minimum payment amount but less than its maximum payment

amount, it would receive that share of revenue; and, if its share is

greater than the maximum payment amount, it would receive the maximum

payment amount. The interim plan found in the proposal for the buy-in

period also contains provisions for the pro rata diminution of the

minimum payment amount in the event that an Exchange Participant

becomes eligible or ineligible to receive revenue during a calendar

year. After this initial buy-in period, an Exchange Participant would

receive a relative proportion of net distribution operating revenue

based on its trading volume.\10\ Payment dates are calculated based on

the effective date of this order or, for amounts due after 1996, as of

actual dates specified in revised Amendment No. 9.

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\10\ The Commission notes that the NASD, as discussed in the

March 18, 1996 Extension order, states its strong belief that

Participants should address the fact that, absent an additional

amendment to the Plan, Participants would have the right to receive

revenue for late trade reports. The NASD ``believes it is improper

to reward a market center for transmitting stale transactions that,

at best, have questionable, if any, redeeming economic value to

market participants and, at worse, are potentially disruptive to the

marketplace.'' The NASD also notes the numerous benefits that it

believes would be derived from limiting Participant's revenues to

those associated with timely-reported transactions. The Commission

believes this to be an open matter, and expects the Plan

participants to resolve the NASD's concerns in this regard.

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III. Exemptive Relief

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

expire on September 30, 1996, the Commission

[[Page 52982]]

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.

IV. Comments on the Operation of the Plan

In the January 1995, August 1995, September 1995, October 1995,

November 1995, December 13, 1995, December 28, 1995, March 6, 1996,

March 18, 1996, and September 16, 1996 Extension Orders, the Commission

solicited, among other things, 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 continues to solicit

comment on these matters.

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, N.W., Washington, D.C. 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 October 30, 1996.

VI. Conclusion

The Commission finds that an extension of temporary approval of the

operation of the Plan through March 30, 1997, is appropriate and in

furtherance of Section 11A of the Act as it will provide the

Participants with additional time to make reasonable proposals

concerning: (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. While the

Commission continues to solicit comment on these matters, the

Commission believes that these matters should be addressed directly by

the Participants during the extension period so that issues presented

by these matters will be resolved prior to March 30, 1997.

Concerning incorporation of the revenue sharing agreement within

the present temporary approval of the operation of the Plan, the

Commission believes that it is appropriate and in furtherance of the

Act and the rules thereunder to approve revised Amendment No. 9 to the

Plan. Accordingly, revised Amendment No. 9 to the Plan will be

temporarily approved, as are all other elements of the Plan, through

March 30, 1997. Consequently, any Participants due payments under

revised Amendment No. 9 to the Plan (currently, the Chx) during the

extension period are to be paid in accordance with the agreement within

the time periods described in revised Amendment No. 9 as of this

effective date.

The Commission finds further that extension of the exemptive relief

through March 30, 1997, as described above, also is consistent with the

Act, the Rules thereunder, and specifically with the objectives set

forth in Sections 12(f) and 11A of the Act and in Rules 11Aa3-1 and

11Aa3-2 thereunder.

VII. Conclusion

It is therefore ordered, pursuant to Sections 12(f) and 11A of the

Act and (c)(2) of Rule 11Aa3-2 thereunder, that the Participants'

request to extend the effectiveness of the Joint Transaction Reporting

Plan for Nasdaq/National Market securities traded on an exchange on an

unlisted or listed basis, incorporating revised Amendment No. 9

thereto, and certain exemptive relief, through March 30, 1997, is

approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(29).

Jonathan G. Katz,

Secretary.

[FR Doc. 96-25924 Filed 10-8-96; 8:45 am]

BILLING CODE 8010-01-M