

[Federal Register: November 9, 2006 (Volume 71, Number 217)]
[Notices]               
[Page 65863-65867]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no06-150]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54705; File No. SR-NASD-2005-146]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments 
No. 1 and 2 Thereto To Expand the Scope of IM-2110-2 Relating To 
Trading Ahead of Customer Limit Orders To Apply to All OTC Equity 
Securities

November 3, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 9, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described below 
in Items I, II, and III, which Items have been prepared by NASD. On 
September 26, 2006, NASD filed Amendment No. 1 to the proposed rule 
change,\3\ and on October 19, 2006, NASD filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original rule 
filing in its entirety.
    \4\ Amendment No. 2 replaced and superseded the amended rule 
filing in its entirety.
---------------------------------------------------------------------------

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

    NASD is proposing to expand the scope of its Interpretive Material 
2110-2 relating to trading ahead of customer limit orders to apply to 
all over-the-counter (``OTC'') equity securities. Below is the text of 
the proposed rule change. Proposed new language is in italics; proposed 
deletions are in brackets.

IM-2110-2. Trading Ahead of Customer Limit Order

(a) General Application

    To continue to ensure investor protection and enhance market 
quality, NASD's Board of Governors is issuing an interpretation to NASD 
Rules dealing with member firms' treatment of their customer limit 
orders in NMS stocks and OTC equity [exchange-listed] securities. This 
interpretation, which is applicable from 9:30 a.m. to 6:30 p.m. Eastern 
Time, will require members to

[[Page 65864]]

handle their customer limit orders with all due care so that members do 
not ``trade ahead'' of those limit orders. Thus, members that handle 
customer limit orders, whether received from their own customers or 
from another member, are prohibited from trading at prices equal or 
superior to that of the limit order without executing the limit order. 
In the interests of investor protection, NASD is eliminating the so-
called disclosure ``safe harbor'' previously established for members 
that fully disclosed to their customers the practice of trading ahead 
of a customer limit order by a market-making firm.[dagger] For purposes 
of this interpretation, (1) ``NMS stock'' shall have the meaning set 
forth in SEC Rule 600(b)(47) of Regulation NMS and (2) ``OTC equity 
security'' shall have the meaning set forth in Rule 6610(d).
---------------------------------------------------------------------------

    [dagger] For purposes of the operation of certain [Nasdaq] 
transaction and quotation reporting systems and facilities during 
the period from 4 p.m. to 6:30 p.m. Eastern Time, members may 
generally limit the life of a customer limit order to the period of 
9:30 a.m. to 4 p.m. Eastern Time. If a customer does not formally 
assent (``opt-in'') to processing of the customer's limit order(s) 
during the extended hourse period commencing after the normal close 
of the [Nasdaq] market, limit order proteciton will not apply to 
that customer's order(s).
---------------------------------------------------------------------------

    Rule 2110 states that:
    A member, in the conduct of his business, shall observe high 
standards of commercial honor and just and equitable principles of 
trade.
    Rule 2320, the Best Execution Rule, states that:
    In any transaction for or with a customer, a member and persons 
associated with a member shall use reasonable diligence to ascertain 
the best inter-dealer market for the subject security and buy or sell 
in such a market so that the resultant price to the customer is as 
favorable as possible to the customer under prevailing market 
conditions.
Interpretation
    The following interpretation of Rule 2110 has been approved by the 
Board:
    A member firm that accepts and holds an unexecuted limit order from 
its customer (whether its own customer or a customer of another member) 
in an NMS stock or OTC equity[exchange-listed] security and that 
continues to trade the subject security for its own account at prices 
that would satisfy the customer's limit order, without executing that 
limit order, shall be deemed to have acted in a manner inconsistent 
with just and equitable principles of trade, in violation of Rule 2110, 
provided that a member firm may negotiate specific terms and conditions 
applicable to the acceptance of limit orders only with respect to limit 
orders that are: (a) for customer accounts that meet the definition of 
an ``institutional account'' as that term is defined in Rule 
3110(c)(4); or (b) 10,000 shares or more, unless such orders are less 
than $100,000 in value. In the event that a member trades ahead of an 
unexecuted customer limit order at a price that is better than the 
unexecuted limit order, such member is required to execute the limit 
order at the price received by the member or better. Nothing in this 
interpretation, however, requires members to accept limit orders from 
any customer.
    By rescinding the safe harbor position and adopting this 
interpretation, NASD wishes to emphasize that members may not trade 
ahead of their customer limit orders even if the member had in the past 
fully disclosed the practice to its customers prior to accepting limit 
orders. NASD believes that, pursuant to Rule 2110, members accepting 
and holding unexecuted customer limit orders owe certain duties to 
their customers and the customers of other member firms that may not be 
overcome or cured with disclosure of trading practices that include 
trading ahead of the customer's order. The terms and conditions under 
which institutional account or appropriately sized customer limit 
orders are accepted must be made clear to customers at the time the 
order is accepted by the firm so that trading ahead in the firm's 
market-making capacity does not occur.
    [As outlined in NASD Notice to Members 97-57, the minimum amount of 
price improvement necessary in order for a member to execute an 
incoming order on a proprietary basis when holding an unexecuted limit 
order for a Nasdaq security trading in fractions, and not be required 
to execute the held limit order, is as follows:]
     [If actual spread is greater than \1/16\ of a point, a 
firm must price improve an incoming order by at least a \1/16\. For 
stocks priced under $10 (which are quoted in \1/32\ increments), the 
firm must price improve by at least \1/64\.]
     [If actual spread is the minimum quotation increment, a 
firm must price improve an incoming order by one-half the minimum 
quotation increment.]
    [For Nasdaq securities authorized for trading in decimals pursuant 
to the Decimals Implementation Plan For the Equities and Options 
Markets, t]The minimum amount of price improvement necessary in order 
for a member to execute an incoming order on a proprietary basis [in a 
security trading in decimals] when holding an unexecuted limit order in 
that same security, and not be required to execute the held limit 
order, is as follows:
    (1) For customer limit orders priced greater than or equal to $1.00 
that are at or inside the best inside market [displayed in Nasdaq], the 
minimum amount of price improvement required is $0.01; [and]
    (2) For customer limit orders priced less than $1.00 that are at or 
inside the best inside market, the minimum amount of price improvement 
required is the lesser of $0.01 or one-half (\1/2\) of the current 
inside spread;
    (3) For customer limit orders priced outside the best inside market 
[displayed in Nasdaq], the member must price improve the incoming order 
by executing the incoming order at a price at or inside the best inside 
market for the security; and [at least equal to the next superior 
minimum quotation increment in Nasdaq (currently $0.01)]
    (4) For customer limit orders in securities for which there is no 
published inside market, the minimum amount of price improvement 
required is $0.01.
    NASD also wishes to emphasize that all members accepting customer 
limit orders owe those customers duties of ``best execution'' 
regardless of whether the orders are executed through the member or 
sent to another member for execution. As set out above, the Best 
Execution Rule requires members to use reasonable diligence to 
ascertain the best inter-dealer market for the security and buy or sell 
in such a market so that the price to the customer is as favorable as 
possible under prevailing market conditions. NASD emphasizes that order 
entry firms should continue to monitor routinely the handling of their 
customers' limit orders regarding the quality of the execution 
received.
    (b) through (c) No change.
* * * * *
    6541. [Limit Order Protection] Reserved.
    [(a) Members shall be prohibited from ``trading ahead'' of customer 
limit orders that a member accepts in securities quoted on the OTCBB. 
Members handling customer limit orders, whether received from their own 
customers or from another member, are prohibited from trading at prices 
equal or superior to that of the customer limit order without executing 
the limit order. Members are under no obligation to accept limit orders 
from any customer.]
    [(b) Members may avoid the obligation specified in paragraph (a) 
through the provision of price improvement. If a customer limit order 
is priced at or inside the current inside spread, however, the price 
improvement

[[Page 65865]]

must be for a minimum of the lesser of $0.01 or one-half (\1/2\) of the 
current inside spread. For purposes of this rule, the inside spread 
shall be defined as the difference between the best reasonably 
available bid and offer in the subject security.]
    [(c) Notwithstanding subparagraph (a) of this rule, a member may 
negotiate specific terms and conditions applicable to the acceptance of 
limit orders only with respect to such orders that are:]
    [(1) for customer accounts that meet the definition of an 
``institutional account'' as that term is defined in Rule 3110(c)(4); 
or]
    [(2) for 10,000 shares or more, and greater than $20,000 in value.]
    [(d) Contemporaneous trades]
    [A member that trades through a held limit order must execute such 
limit order contemporaneously, or as soon as practicable, but in no 
case later than five minutes after the member has traded at a price 
more favorable than the customer's price.]
    [(e) Application]
    [(1) This rule shall apply, regardless of whether the subject 
security is additionally quoted in a separate quotation medium.]
    [(2) This rule shall apply from 9:30 a.m. to 4 p.m. Eastern Time.]
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. 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

1. Purpose
    NASD Interpretive Material (IM) 2110-2, Trading Ahead of Customer 
Limit Order (``IM-2110-2'') (commonly referred to as the ``Manning 
Rule'') generally prohibits a NASD member from trading for its own 
account in an exchange-listed security at a price that is equal to or 
better than an unexecuted customer limit order in that security, unless 
the member immediately thereafter executes the customer limit order at 
the price at which it traded for its own account or better. The legal 
underpinnings for the Manning Rule are a member's basic fiduciary 
obligations and the requirement that a member must, in the conduct of 
its business, ``observe high standards of commercial honor and just and 
equitable principles of trade.'' \5\
---------------------------------------------------------------------------

    \5\ See NASD Rule 2110.
---------------------------------------------------------------------------

    IM-2110-2 currently applies to exchange-listed securities,\6\ but 
does not apply to OTC equity securities. NASD Rule 6541, however, 
extends the general principles of the Manning Rule to a subset of OTC 
equity securities, those that are quoted on the OTC Bulletin Board 
(``OTCBB''), but differs from IM-2110-2 in several respects, which are 
described in more detail below.
---------------------------------------------------------------------------

    \6\ On June 30, 2006, the Commission approved SR-NASD-2005-087, 
which amended certain NASD rules to reflect separation of The Nasdaq 
Stock Market, Inc. from NASD upon the operation of the Nasdaq Stock 
Market LLC as a national securities exchange. See Securities 
Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 
10, 2006) (File No. SR-NASD-2005-087). SR-NASD-2005-087 became 
effective on August 1, 2006, the date upon which Nasdaq began 
operation as an exchange for Nasdaq-listed securities. As part of 
SR-NASD-2005-087, the Commission approved amendments to IM-2110-2 to 
reflect Nasdaq's approval and operation as a national securities 
exchange.
    The Commission approved further amendments to IM-2110-2 to 
codify NASD's existing position that IM-2110-2 applies to all 
members, whether acting as a market maker or not. These amendments 
became effective on April 14, 2006. See Securities Exchange Act 
Release No. 53653 (April 14, 2006), 71 FR 20429 (April 20, 2006) 
(File No. SR-NASD-2006-35).
    The Commission also approved the expansion of IM-2110-2, which 
previously applied to Nasdaq securities, to exchange-listed 
securities. See Securities Exchange Act Release No. 52210 (August 4, 
2005), 70 FR 46897 (August 11, 2005) (File No. SR-NASD-2004-089). 
See also NASD Notice to Members 05-64 (October 2005) (announcing 
Commission approval of the amendments to IM-2110-2, which became 
effective on January 2, 2006).
---------------------------------------------------------------------------

    NASD is proposing to expand the scope of IM-2110-2 and any 
interpretive guidance thereunder to include OTC equity securities.\7\ 
NASD believes that customer limit orders in OTC equity securities 
should be subject to the same order handling and customer protection 
requirements under the Manning Rule as exchange-listed securities. 
Given this proposed expansion of IM-2110-2 to OTC equity securities, 
NASD also is proposing to repeal NASD Rule 6541. As noted above, 
although NASD Rule 6541 is substantially similar to the Manning Rule, 
it differs in its application in several ways. NASD believes that these 
distinctions in application no longer make sense and that having 
uniform limit order protection requirements across market sectors is 
appropriate. The most significant differences between IM-2110-2 and 
NASD Rule 6541 and any related proposed changes to IM-2110-2 are 
summarized below.
---------------------------------------------------------------------------

    \7\ NASD states that the term ``OTC equity securities'' does not 
include options. See NASD Rule 6610(d) (defining ``OTC Equity 
Security'' as any non-exchange-listed security and certain exchange-
listed securities that do not otherwise qualify for real-time trade 
reporting).
---------------------------------------------------------------------------

    First, both IM-2110-2 and NASD Rule 6541 provide that a member is 
not deemed to have traded ahead of a customer limit order if the member 
provides a contemporaneous execution of the customer's order. For the 
purposes of IM-2110-2, contemporaneous has been interpreted to require 
execution as soon as possible, but absent reasonable and documented 
justification, within one minute.\8\ In contrast, NASD Rule 6541(d) 
provides a longer maximum time limit of five minutes, within which an 
execution of a customer order will be deemed to be contemporaneous with 
an execution for a member firm's account. The five-minute standard was 
intended to be an outside limit, absent extraordinary circumstances, 
and not a normal practice.\9\ NASD believes that most customer limit 
orders are filled within a period shorter than five minutes following a 
proprietary trade that triggers the obligation, and despite the more 
manual nature of the unlisted market, one minute is not an unreasonably 
short time to fill a customer order.
---------------------------------------------------------------------------

    \8\ See NASD Notices to Members 95-67 (August 1995) and 98-78 
(September 1998).
    \9\ See NASD Notice to Members 01-46 (July 2001).
---------------------------------------------------------------------------

    Second, both IM-2110-2 and NASD Rule 6541 permit members to 
negotiate terms and conditions on the acceptance of certain large-sized 
limit orders. Such terms and conditions would permit the member to 
continue to trade alongside of, or ahead of, the limit order, if the 
customer agrees. NASD Rule 6541 applies a lower threshold requirement 
on the types of orders for which a member can negotiate such terms and 
conditions. Specifically, NASD Rule 6541(c) only requires that an order 
be 10,000 shares or more and greater than $20,000 in value, while IM-
2110-2 requires that an order be 10,000 shares or more and greater than 
$100,000 in value. This lower threshold for OTCBB securities was 
established due to the lower average dollar amount of trades in OTCBB 
securities relative to trades in exchange-listed securities.
    NASD believes the higher value threshold requirement under IM-2110-
2 should be applied to all securities uniformly. The value threshold of 
an order is intended to be an objective criteria upon which an 
assumption can

[[Page 65866]]

be made that the order involves a best-efforts commitment and the 
commitment of substantial capital on the part of the member, and 
therefore, it is appropriate for the member to be able to place terms 
and conditions on the acceptance of that order. As such, NASD believes 
that it is the value and size of the customer order that is of 
significance in making this determination, not the average price of 
securities in a particular market sector.
    Third, IM-2110-2 excludes limit orders that are marketable at the 
time of receipt (marketable limit orders), whereas the requirements 
under NASD Rule 6541 apply to such orders. This exclusion to IM-2110-2 
for marketable limit orders recognizes that marketable limit orders and 
market orders are functionally equivalent and, thus, customers placing 
marketable limit orders should not have an unwarranted advantage over 
market orders. If marketable limit orders were not excluded from the 
Manning Rule, the Rule's operation could have the unintended 
consequence of providing marketable limit orders with execution 
priority over market orders placed at the same time or prior to the 
marketable limit orders (commonly referred to as ``jumping the 
queue'').\10\ As such, consistent with the current application of IM-
2110-2, NASD staff believes that continuing to exclude marketable limit 
orders from the application of the Manning Rule is appropriate.\11\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 41990 (October 7, 
1999), 64 FR 5600 (October 15, 1999) (File No. SR-NASD-99-44).
    \11\ Recently-approved NASD Rule 2111 governs trading ahead of 
marketable limit orders in Nasdaq and exchange-listed securities. 
Although NASD Rule 2111 does not apply to OTC equity securities, it 
is consistent with a member's best execution obligations to execute 
marketable limit orders fully and promptly. NASD Rule 2111 became 
effective on January 9, 2006. See Securities Exchange Act Release 
No. 52226 (August 9, 2005), 70 FR 48219 (August 16, 2005) (File No. 
SR-NASD-2004-045). See also NASD Notice to Members 05-69 (October 
2005).
---------------------------------------------------------------------------

    Fourth, both IM-2110-2 and NASD Rule 6541 apply only during certain 
specified time periods. Specifically, IM-2110-2 is applicable from 9:30 
a.m. to 6:30 p.m. Eastern Time,\12\ whereas NASD Rule 6541 applies only 
during normal market hours of 9:30 a.m. to 4:00 p.m. Eastern Time. This 
difference in application for OTCBB securities was established due to 
the fact that, although the OTCBB service is available from 7:30 a.m. 
to 6:30 p.m., prices on the OTCBB are required to be firm only during 
the normal market hours.\13\ Given that in some OTC equity securities, 
quoting of the security may not exist at a given time, NASD believes 
that linking this requirement to whether quotes in the security are 
required to be firm is not appropriate. As such, NASD believes the time 
period under the Manning Rule should be applied to all securities 
uniformly.
---------------------------------------------------------------------------

    \12\ A member may generally limit the life of a customer limit 
order to the period of 9:30 a.m. to 4 p.m. Eastern Time. If a 
customer does not formally assent to processing of the customer's 
limit order(s) during the extended hours period commencing after the 
normal close of the market, limit order protection will not apply to 
that customer's order. See IM-2110-2 (footnote 1).
    \13\ See NASD Notice to Members 01-46 (July 2001).
---------------------------------------------------------------------------

    Lastly, both IM-2110-2 and NASD Rule 6541 prescribe a minimum level 
of price-improvement that a member must provide to trade ahead of an 
unexecuted customer limit order. Specifically, the price-improvement 
standard currently set forth in IM-2110-2 provides that, where a member 
is holding a customer limit order priced at or inside the best inside 
market displayed in Nasdaq, the member may execute an incoming order on 
a proprietary basis without being obligated to execute the customer 
limit order if the member executes the incoming order at least $0.01 
better than the price of the customer limit order. Further, if the 
customer limit order is priced outside the best inside market displayed 
in Nasdaq, then the member must execute the incoming order at the next 
superior minimum quotation increment permitted by Nasdaq (currently 
$0.01). In contrast, NASD Rule 6541 provides that if the customer limit 
order is priced at or inside the current inside spread,\14\ the price 
improvement is a minimum of the lesser of $0.01 or one-half (1/2) of 
the current inside spread.
---------------------------------------------------------------------------

    \14\ For purposes of NASD Rule 6541, the inside spread is 
defined as the difference between the best reasonably available bid 
and offer in the subject security. The determination of what is 
``reasonably available'' is largely factual and best determined on a 
case-by-case basis. See NASD Notice to Members 01-46 (July 2001).
---------------------------------------------------------------------------

    On June 9, 2005, the Commission adopted Regulation NMS that, among 
other things, established a minimum price variation (``MPV'') standard 
for NMS stocks.\15\ Specifically, Rule 612 of Regulation NMS \16\ 
generally prohibits market participants from accepting, ranking, or 
displaying orders, quotations, or indications of interest in a pricing 
increment smaller than a penny, except for orders, quotations, or 
indications of interest that are priced at less than $1.00 per share. 
If the order, quotation, or indication of interest is priced less than 
$1.00 per share, the minimum pricing increment is $0.0001.
---------------------------------------------------------------------------

    \15\ Given that Regulation NMS only applies to national market 
system (``NMS'') securities and NASD believes that the same 
potential harms associated with sub-penny quoting that exist in NMS 
securities also exist in OTC equity securities, NASD filed a 
proposed rule change that would prohibit members from displaying, 
ranking, or accepting a bid or offer, an order, or an indication of 
interest in any OTC equity securities in any quotation medium priced 
in an increment smaller than $0.01 if such bid or offer, order, or 
indication of interest is priced equal to or greater than $1.00 per 
share. Members also would be prohibited from displaying, ranking, or 
accepting a bid, offer, an order, or an indication of interest in 
any OTC equity security priced in an increment smaller than $0.0001 
if such bid or offer, order, or indication of interest is priced 
equal to or greater than $0.01 per share and less than $1.00 per 
share. See Securities Exchange Act Release Nos. 52280 (August 17, 
2005), 70 FR 49959 (August 25, 2005) (File No. SR-NASD-2005-095); 
and 53024 (December 27, 2005), 71 FR 159 (January 3, 2006) (File No. 
SR-NASD-2005-095).
    \16\ 17 CFR 242.612.
---------------------------------------------------------------------------

    Given the implementation of Rule 612 of Regulation NMS,\17\ NASD is 
proposing to amend the price-improvement provisions in IM-2110-2 to 
revise and make uniform for all equity securities the minimum price-
improvement standards as follows. For customer limit orders priced 
greater than or equal to $1.00 that are at or inside the best inside 
market, the minimum amount of price improvement required would be 
$0.01. For customer limit orders priced less than $1.00 that are at or 
inside the best inside market, the minimum amount of price improvement 
required would be the lesser of $0.01 or one-half (\1/2\) of the 
current inside spread. For customer limit orders priced outside the 
best inside market, the member would be required to execute the 
incoming order at a price at or inside the best inside market for the 
security. Lastly, for customer limit orders in securities for which 
there is no published inside market, the minimum amount of price 
improvement required is $0.01. NASD believes these amendments are 
necessary to support the new pricing formats and to have uniform price 
improvement standards across market sectors.
---------------------------------------------------------------------------

    \17\ The compliance date for Rule 612 of Regulation NMS was 
January 31, 2006. See Securities Exchange Act Release No. 52196 
(August 2, 2005), 70 FR 45529 (August 8, 2005) (File No. S7-10-04) 
(extending the compliance date for Rule 612 of Regulation NMS).
---------------------------------------------------------------------------

    In addition, given that the definition of an ``NMS stock'' 
effectively covers stocks listed on a national securities exchange, 
NASD is proposing to replace the term ``exchange-listed security'' with 
the term ``NMS stock.'' \18\
---------------------------------------------------------------------------

    \18\ The term ``NMS stock'' is defined in Rule 600(b)(47) of 
Regulation NMS as any NMS security other than an option. See 17 CFR 
242.600(b)(47). The term ``NMS security'' is defined in Rule 
600(b)(46) of Regulation NMS as any security or class of securities 
for which transaction reports are collected, processed, and made 
available pursuant to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
listed options. See 17 CFR 242.600(b)(46). As such, the term ``NMS 
stock,'' for purposes of IM-2110-2, would include, among other 
things, exchange traded funds (ETFs).

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

[[Page 65867]]

    Finally, IM-2110-2 currently contains provisions that prescribe the 
minimum level of price-improvement for securities trading in non-
decimalized fractions. Given that equities no longer trade in 
fractions, NASD proposes to delete such fractional references as part 
of this proposed rule change.
    As a result of the proposed changes described above, NASD is 
proposing to apply limit order protection requirements uniformly to all 
equity securities by extending the scope of the Manning Rule to OTC 
equity securities.\19\ In doing so, NASD also is proposing to repeal 
NASD Rule 6541, as those requirements would be subsumed in the proposed 
expansion of the Manning Rule.
---------------------------------------------------------------------------

    \19\ In addition to the differences between IM-2110-2 and NASD 
Rule 6541 described above, the Commission also approved amendments 
to IM-2110-2 that generally require a member that has traded ahead 
of a customer limit order at a price that is more favorable than the 
customer limit order price, to pass along that price improvement to 
the customer limit order. This requirement currently does not apply 
under NASD Rule 6541. See Securities Exchange Act Release No. 52210 
(August 4, 2005), 70 FR 46897 (August 11, 2005) (File No. SR-NASD-
2004-089). See also NASD Notice to Members 05-64 (October 2005).
---------------------------------------------------------------------------

    NASD intends to announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval. In recognition of the technological and 
systems changes the proposed rule change may require, NASD proposed to 
set the effective date at 90 days following publication of the Notice 
to Members announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\20\ which requires, among 
other things, that NASD rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change will 
improve treatment of customer limit orders and promote investor 
protection.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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 by NASD.

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 NASD consents, the Commission will:
    (A) by order approve such proposed rule change, as amended, or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act.
    At the NASD's request, the Commission also is seeking comment on 
whether 90 days from the publication of NASD's Notice to Members 
provides adequate time for implementation of the proposal or whether 
additional implementation time may be needed and the reasons therefor. 
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 SR-NASD-2005-146 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2005-146. 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/sro.shtml
). 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 also will be available for inspection and copying at the 
principal office of NASD. 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. All submissions should refer to File Number 
SR-NASD-2005-146 and should be submitted on or before November 30, 
2006.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
 [FR Doc. E6-18977 Filed 11-8-06; 8:45 am]

BILLING CODE 8011-01-P
