

[Federal Register: October 11, 2005 (Volume 70, Number 195)]
[Notices]               
[Page 59097-59099]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11oc05-74]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52559; File No. 10-131]

 
The Nasdaq Stock Market Inc., Notice of Filing of Amendment Nos. 
4 and 5 to Its Application for Registration as a National Securities 
Exchange Under Section 6 of the Securities Exchange Act of 1934

October 4, 2005.
    On August 15, 2005, The Nasdaq Stock Market Inc. (``Nasdaq'') 
submitted to the Securities and Exchange Commission (``SEC'' or 
``Commission'') Amendment No. 4 \1\ to its application for registration 
as a national securities exchange (``Form 1'') under Section 6 \2\ of 
the Securities Exchange Act of 1934 (``Exchange Act''). Nasdaq's 
Amendment No. 4 supersedes and replaces Nasdaq's original filing and 
intervening amendments. On September 23, 2005, Nasdaq filed Amendment 
No. 5 to its Form 1.\3\ The Commission is publishing this notice to 
solicit comments on Nasdaq's Form 1 as amended by Amendment Nos. 4 and 
5. \4\
---------------------------------------------------------------------------

    \1\ See Letter to Robert L.D. Colby, Deputy Director, Division 
of Market Regulation (``Division''), SEC, from Edward S. Knight, 
Executive Vice President and General Counsel, Nasdaq, dated August 
15, 2005 (``Amendment No. 4'').
    \2\ 15 U.S.C. 78(f).
    \3\ See Letter to Robert L.D. Colby, Deputy Director, Division, 
SEC, from Edward S. Knight, Executive Vice President and General 
Counsel, Nasdaq, dated September 23, 2005 (``Amendment No. 5''). In 
Amendment No. 5, Nasdaq corrected typographical errors that were 
submitted in Amendment No. 4.
    \4\ Complete copies of Nasdaq's Amendment Nos. 4 and 5 to its 
Form 1 are available in the Commission's Public Reference Room, File 
No. 10-131. Portions of Nasdaq's Form 1 as amended by Amendment Nos. 
4 and 5, including Nasdaq's rules, are available on the Commission's 
Internet Web site (http://www.sec.gov).

---------------------------------------------------------------------------

I. Background

    Nasdaq originally submitted its Form 1 on March 15, 2001, which the 
Commission published for comment in the Federal Register on June 13, 
2001.\5\ Nasdaq subsequently amended its Form 1 three times.\6\ In 
response to Nasdaq's Form 1 and its amendments, the Commission has 
received 82 comment letters.\7\
---------------------------------------------------------------------------

    \5\ See Exchange Act Release No. 44396 (June 7, 2001), 66 FR 
31952 (``Original Notice''). The Commission extended the comment 
period for Nasdaq's Original Notice for 30 days. See Exchange Act 
Release No. 44625 (July 31, 2001), 66 FR 41056 (August 6, 2001).
    \6\ See Letters from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Annette Nazareth, Director, 
Division, SEC, dated November 13, 2001 (``Amendment No. 1''); 
Jonathan G. Katz, Secretary, SEC, dated December 5, 2001 
(``Amendment No. 2''); and Annette Nazareth, Director, Division, 
SEC, dated January 8, 2002 (``Amendment No. 3'').
    \7\ The comment letters are available in the Commission's Public 
Reference Room and some of these comment letters are available on 
the Commission's Internet Web site (http://www.sec.gov).

---------------------------------------------------------------------------

    Nasdaq currently is exempt from the definition of an ``exchange'' 
under Rule 3a1-1 because it is operated by the National Association of 
Securities Dealers, Inc. (``NASD'').\8\ In order for NASD to relinquish 
regulatory control of Nasdaq, Nasdaq must register as a national 
securities exchange.\9\ Accordingly, Nasdaq has filed a completely new 
Form 1, including all of

[[Page 59098]]

the required exhibits, to register as a national securities exchange.
---------------------------------------------------------------------------

    \8\ Pursuant to Rule 3a1-1, an organization, association, or 
group of persons shall be exempt from the definition of ``exchange'' 
if it is operated by a national securities association. Unless 
another exemption from the definition of ``exchange'' applies, such 
organization, association, or group of persons that otherwise meets 
the definition of an ``exchange'' must register as such with the 
Commission. 17 CFR 240.3a1-1.
    \9\ For a complete description of NASD's current ownership in 
Nasdaq see Exhibit K to the Form 1.
---------------------------------------------------------------------------

II. Nasdaq's Amended Exchange Registration

    Nasdaq filed Amendment No. 4 to, among other things, address 
concerns raised by its original application.\10\ Specifically, 
Amendment No. 4 would limit the ambit of Nasdaq's proposed exchange to 
those transactions that occur in the Nasdaq Market Center, formerly 
known as SuperMontage, and Brut.\11\ Nasdaq also has proposed that all 
transactions on the Nasdaq Market Center be executed in price/time 
priority.\12\ Trades that are executed in the internal systems of NASD 
members would be reported under NASD rules to NASD's Alternative 
Display Facility (``ADF'') or a proposed new NASD facility. This new 
facility would be jointly owned by Nasdaq and NASD but would be a 
facility of NASD and thus would be subject to NASD's exclusive 
regulatory control.\13\
---------------------------------------------------------------------------

    \10\ In December 2004, Nasdaq filed with the Commission a 
proposed rule change to amend the rules that govern how executions 
occur in the Nasdaq Market Center to eliminate the rules that permit 
executions to occur outside of price/time priority. See Exchange Act 
Release No. 50845 (December 13, 2004), 69 FR 76022 (December 20, 
2004) (``December Proposal''). Specifically, Nasdaq proposed to 
eliminate the execution algorithm that requires orders to be 
internalized in the Nasdaq Market Center, the Directed Order 
process, and the use of preferenced orders. The Commission published 
this proposal and Nasdaq has asked the Commission to consider 
approval of this proposal in connection with its application to 
register as a national securities exchange. Subsequent to the 
December Proposal, Nasdaq filed another proposed rule change to 
eliminate immediately the Directed Order Process, which the 
Commission approved on July 28, 2005. See Exchange Act Release No. 
52148, 70 FR 44711 (August 3, 2005). These changes to the rules that 
govern the execution of orders in the Nasdaq Market Center are 
reflected in Amendment No. 4. In addition, the Over-the-Counter 
Bulletin Board is no longer part of Nasdaq's exchange application 
and will remain with NASD. See NASD Proposal, infra note 13.
    \11\ Nasdaq acquired Brut in September 2004 and the rules 
governing the execution of transactions on Brut were approved by the 
Commission in March 2005. See Exchange Act Release No. 51326 (March 
7, 2005), 70 FR 12521 (March 14, 2005). Nasdaq has included the 
rules governing transactions executed in the Brut system as part of 
Amendment No. 4 to its Form 1. The Commission notes that Nasdaq has 
entered into an agreement to purchase Instinet, which will result in 
Nasdaq's ownership of Inet. This transaction has not closed and 
thus, Nasdaq has not submitted the rules governing the operation of 
Inet with this latest amendment.
    \12\ See December Proposal, supra note 10.
    \13\ See Exchange Act Release No. 52049 (July 15, 2005), 70 FR 
42398 (July 22, 2005) (``NASD Proposal'').
---------------------------------------------------------------------------

    Nasdaq proposes to require its members to comply with NASD's Order 
Audit Trail (``OATS'') requirements. To do so, Nasdaq has carried over 
certain OATS rules into its own rulebook and has incorporated by 
reference other NASD OATS requirements.\14\ In addition, Nasdaq members 
would be required to append an identifier to all orders entered into 
Nasdaq for purposes of tracking the order in OATS.\15\ Because Nasdaq 
will require its members to report order information to OATS, Nasdaq 
will have access to certain OATS data for regulatory purposes. The 
Commission requests comment on the extent to which Nasdaq should be 
able to use OATS data for non-regulatory purposes. The Commission 
further requests comment on whether Nasdaq should have access to OATS 
data regarding: (1) all orders its members receive, including those 
orders that are routed to markets other than Nasdaq; and (2) reports of 
executions by its members that are reported to the new NASD trade 
reporting facility.\16\
---------------------------------------------------------------------------

    \14\ See proposed Nasdaq Rule 6950 Series.
    \15\ See proposed Nasdaq Rule 6954(c). NASD has proposed a 
corresponding change to its OATS rules. See NASD Proposal, supra 
note 13.
    \16\ See NASD Proposal, supra note 13.
---------------------------------------------------------------------------

    To oversee the performance of its regulatory obligations, Nasdaq 
has proposed to create a fully-independent committee of the exchange's 
Board of Directors, the Regulatory Oversight Committee (``ROC'').\17\ 
This committee will consist of three Public Directors that satisfy the 
definition ``independent director'' set forth in proposed Nasdaq Rule 
4200. The ROC would, among other things, be responsible for monitoring 
the adequacy and effectiveness of Nasdaq's regulatory program. In 
addition, the ROC would oversee the Chief Regulatory Officer (``CRO'') 
by periodically meeting with the CRO in executive session to consider 
regulatory issues. The ROC also would be informed about the 
compensation of the CRO, and his promotion or termination (including 
reasons). Finally, the regulatory budget would be presented to the ROC 
so that its members may monitor the adequacy of resources available for 
Nasdaq's regulatory program.
---------------------------------------------------------------------------

    \17\ See proposed Article III, Section 5(e) of the Nasdaq 
Exchange By-Laws.
---------------------------------------------------------------------------

    Nasdaq proposes that its CRO have general supervision of the 
regulation of the exchange, including overseeing the proposed 
exchange's surveillance, examination, and enforcement functions, and 
administering a regulatory services agreement.\18\ The CRO would be an 
executive vice president or senior vice president that reports to the 
Chief Executive Officer, and could also serve as Nasdaq's General 
Counsel.
---------------------------------------------------------------------------

    \18\ See proposed Article IV, Section 7 of the Nasdaq Exchange 
By-Laws.
---------------------------------------------------------------------------

    The Commission requests comment on whether Nasdaq's proposed 
regulatory structure, including the ROC and CRO, is consistent with 
Section 6(b)(1) of the Exchange Act,\19\ which requires an exchange to 
be so organized and have the capacity to carry out the purposes of the 
Exchange Act and comply, and enforce compliance by its members and 
persons associated with its members, with the Exchange Act, the rules 
thereunder, and the exchange's rules. Specifically, does Nasdaq's 
proposed structure insulate its regulatory function from its market and 
other commercial operations so that it may carry out its regulatory 
obligations under the Exchange Act?
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Form 1 provides detailed information about Nasdaq and how it 
proposes to satisfy the requirements of the Exchange Act. The 
Commission shall grant such registration if it finds that the 
requirements of the Exchange Act and the rules and regulations 
thereunder with respect to Nasdaq are satisfied.\20\ In addition to the 
issues discussed above, there are a number of implications to Nasdaq's 
separation from NASD and its application to register and operate as an 
exchange. For example, while Section 10(a) of the Exchange Act \21\ 
does not apply to the trading of Nasdaq stocks, if the Commission 
approves Nasdaq's registration as an exchange, Section 10(a) will apply 
to such trading, absent an exemption. In addition, if Nasdaq becomes an 
exchange, its members would be subject to Section 11 of the Exchange 
Act.\22\ Moreover, Nasdaq must demonstrate that it can satisfy its 
obligations under Section 11A of the Exchange Act.\23\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(a).
    \21\ 15 U.S.C. 78j(a).
    \22\ 15 U.S.C. 78k.
    \23\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    Nasdaq's application to register as a national securities exchange 
also has implications for NASD, which, as a national securities 
association, will continue to be required to collect bids, offers, 
quotation sizes and transaction reports from those entities that wish 
to trade listed securities, including Nasdaq securities, otherwise than 
on a national securities exchange.\24\ Under Section 15A of the 
Exchange Act, NASD must have a quotation reporting facility for non-
Nasdaq exchange-listed securities.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 242.602(a)(1)(ii), Rule 242.601.
    \25\ 15 U.S.C. 78o-3.

---------------------------------------------------------------------------

[[Page 59099]]

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Nasdaq's 
Amendment Nos. 4 and 5 to its Form 1 are consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number 10-131 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number 10-131. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/other.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to Nasdaq's Form 1 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. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. The Commission 
requests that commenters focus on issues raised in Nasdaq's Form 1, 
File No. 10-131, when submitting comments on this notice. All 
submissions should refer to File Number 10-131 and should be submitted 
on or before November 10, 2005.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-20314 Filed 10-7-05; 8:45 am]

BILLING CODE 8010-01-P
