

[Federal Register: August 7, 2007 (Volume 72, Number 151)]
[Notices]               
[Page 44196-44201]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au07-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56172; File No. SR-NASDAQ-2006-065]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change as Modified by Amendments No. 1, 3, and 
4 Thereto To Reestablish a Quotation and Trading System, The 
PORTAL[supreg] Market, for Securities That Are Designated by Nasdaq as 
PORTAL Securities

July 31, 2007.

I. Introduction

    On December 22, 2006, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to reestablish a quotation and 
trading system, The PORTAL[supreg] Market (``PORTAL'' or the ``PORTAL 
Market''), for securities that are designated by Nasdaq as PORTAL 
securities. The system would allow PORTAL Participants \3\ to trade 
with one another in a closed system. On March 6, 2007, Nasdaq filed 
Amendment No. 1 to the proposed rule change.\4\ On April 3, 2007, 
Nasdaq filed Amendment No. 3 to the proposed rule change. The proposed 
rule change was published for comment in the Federal Register on May 1, 
2007.\5\ The Commission received seven comment letters on the proposal 
from six commenters.\6\ On July 16, 2007, Nasdaq filed Amendment No. 4 
to the proposed rule change.\7\ This order approves the proposed rule 
change, as amended.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Defined infra.
    \4\ Amendment No. 2 was filed and withdrawn on April 3, 2007.
    \5\ See Securities Exchange Act Release No. 55669 (April 25, 
2007), 72 FR 23874 (May 1, 2007) (the ``Notice'').
    \6\ See letters to Nancy M. Morris, Secretary, Commission, from 
NYPPEX, dated May 18, 2007; Lezlee Westine, President and CEO, 
TechNet, dated May 22, 2007; William J. Ginivan, General Counsel, 
Friedman, Billings, Ramsey & Co., Inc. (``FBR''), dated May 22, 2007 
and July 18, 2007; Deborah L. Wince-Smith, President, Council on 
Competitiveness, dated May 25, 2007; and Mary Kuan, Managing 
Director and Assistant General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), dated May 30, 2007. In 
addition, an individual affiliated with Morgan Stanley, John 
McGuire, submitted a general inquiry with respect to the filing via 
e-mail on May 9, 2007.
    \7\ In response to a comment made by SIFMA, in Amendment No. 4, 
Nasdaq amended proposed Rule 6513 (Compliance with Rules and 
Registration Requirements) so that it applies only to PORTAL Dealers 
and PORTAL Brokers. Nasdaq stated that the inclusion of PORTAL 
Qualified Investors (defined infra) in this rule was an error. In 
addition, Nasdaq stated that PORTAL would not be operational for 
debt securities at this time. Once the necessary changes are in 
place, Nasdaq will file a proposed rule change stating when PORTAL 
will be available for debt trading. Finally, Nasdaq removed obsolete 
references in the PORTAL Rules to CINS. This is a technical 
amendment and is not subject to notice and comment.
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II. Description of the Proposal

    The National Association of Securities Dealers, Inc. (``NASD'') 
created the PORTAL Market in 1990,\8\ simultaneously with the SEC's 
adoption of Rule 144A (``Rule 144A'') under the Securities Act of 1933 
(``Securities Act''),\9\ to be a new trading system for the purpose of 
quoting, trading, and reporting trades in securities eligible for 
resale by Qualified Institutional Buyers (``QIBs'') under Rule 
144A.\10\
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    \8\ See Securities Exchange Act Release No. 27956 (April 27, 
1990), 55 FR 18781 (May 4, 1990) (SR-NASD-88-23). The PORTAL Rules 
were subsequently amended. See Securities Exchange Act Release Nos. 
28678 (December 6, 1990), 55 FR 51194 (December 12, 1990) (SR-NASD-
90-50); 33326 (December 13, 1993), 58 FR 66388 (December 20, 1993) 
(SR-NASD-91-5); 34562 (August 19, 1994), 59 FR 44210 (August 26, 
1994) (SR-NASD-94-39); 35083 (December 12, 1994), 59 FR 65104 
(December 16, 1994) (SR-NASD-94-65); 40424 (September 10, 1998), 63 
FR 49623 (September 16, 1998) (SR-NASD-98-68); 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (SR-NASD-99-65); 44042 (March 
6, 2001), 66 FR 14969 (March 14, 2001) (SR-NASD-99-66).
    \9\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933 (April 30, 1990).
    \10\ 17 CFR 230.144A.
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    The PORTAL Market did not develop as anticipated. The Exchange 
believes this is, in part, because PORTAL securities could only be 
traded in the PORTAL Market and the original PORTAL rules imposed trade 
reporting for all transactions in PORTAL securities at a time when 
there were no trade reporting requirements for privately-placed 
securities.\11\ In addition, Nasdaq believes PORTAL did not develop 
because it required use of cumbersome technology for access to the 
PORTAL Market computer system for reporting purposes, which was a 
stand-alone computer system.
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    \11\ Currently, NASD Rule 6732 requires that transactions in 
PORTAL equity securities be reported to the OTC Reporting Facility 
and PORTAL debt securities be reported to the Trade Reporting and 
Compliance Engine Service (``TRACE'').
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    After nearly a decade, NASD filed a proposed rule change to delete 
many features of the PORTAL Market that had become obsolete including 
rules governing the registration of PORTAL Dealers, PORTAL Brokers, and 
PORTAL Qualified Investors and rules that were intended to regulate the 
quotation and

[[Page 44197]]

trade reporting of PORTAL securities between PORTAL participants using 
the PORTAL system.\12\ Following approval of this proposed rule change, 
Nasdaq's primary role in the PORTAL Market became designating 
securities as PORTAL eligible \13\ which made those securities eligible 
for book entry services at The Depository Trust Company (``DTC'').\14\
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    \12\ See Securities Exchange Act Release No. 44042 (March 6, 
2001), 66 FR 14969 (March 14, 2001) (order approving SR-NASD-99-66). 
In this order, the Commission also approved rules replacing NASD's 
trade reporting requirements with a requirement that NASD members 
submit trade reports of secondary market transactions in PORTAL-
designated equity securities through the Automated Confirmation 
Transaction Service (now know as the OTC Reporting Facility) and in 
PORTAL U.S. high-yield debt securities through TRACE.
    \13\ Nasdaq staff historically had responsibility for review of 
PORTAL Market applications to determine the eligibility of 
securities and of PORTAL Participants (including broker-dealers and 
investors). Upon the separation of Nasdaq from the NASD and the 
approval of Nasdaq as a registered national securities exchange 
under Section 6 of the Act, the review functions for PORTAL Market 
eligibility were retained by Nasdaq, and the PORTAL Market rules in 
the NASD Rule 5300 Series became the Nasdaq Rule 6500 Series. See 
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 
3550 (January 23, 2006).
    \14\ Securities Exchange Act Release No. 33327 (December 13, 
1993), 58 FR 67878 (December 22, 1993) (order approving a proposed 
rule change that authorized DTC to make securities sold pursuant to 
Rule 144A depository eligible provided that such securities are 
designated for inclusion in a system of a self-regulatory 
organization (``SRO'') approved by the Commission for the reporting 
of quotation and trade information on Rule 144A transactions).
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Nasdaq's PORTAL Proposal

    Nasdaq has proposed an updated version of the PORTAL Market, which 
would operate as a facility of the Exchange.\15\ The proposed 
amendments to the PORTAL rules would: (i) Establish qualification 
requirements for brokers and dealers that are Nasdaq members, and QIBs 
\16\ that wish to have access to PORTAL; and (ii) implement quotation, 
trade negotiation, and trade reporting functions in the PORTAL Market 
for PORTAL-designated securities. Many of the rules proposed by Nasdaq 
are substantially the same as those approved by the Commission when the 
PORTAL Market was first implemented by NASD in 1990.\17\ The proposed 
PORTAL Market, described in detail in the Notice, is summarized below.
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    \15\ Because the PORTAL Market is a facility of Nasdaq, trades 
done on the PORTAL Market could be considered trades done on a 
national securities exchange and thus would be subject to Section 
12(a) of the Exchange Act. This section provides that it ``shall be 
unlawful for any member, broker or dealer to effect any transaction 
in any security (other than an exempted security) on a national 
securities exchange unless a registration is effective as to such 
security.'' 15 U.S.C. 78l(a). Section 12(b) of the Act provides all 
equity and debt securities must be registered before such securities 
may be traded on a national securities exchange, unless they are 
``exempted securities'' or are otherwise exempt from Exchange Act 
registration requirements. In order to trade unregistered 144A 
securities on the PORTAL Market, Nasdaq requested, and the 
Commission provided, exemptive relief pursuant to Section 36 of the 
Exchange Act from Section 12(a) of the Exchange Act to permit Nasdaq 
members to trade PORTAL-designated securities that are not 
registered under Section 12(b) of the Exchange Act. See note 55, 
infra.
    \16\ The requirements for QIBs are set forth in Rule 144A.
    \17\ See note 8, supra.
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    Security Designation: PORTAL designation is limited to those Rule 
144A securities that are initially sold to QIBs by a broker-dealer 
acting as initial placement agent or initial purchaser. Nasdaq would 
continue to qualify ``restricted securities,'' as that term is defined 
in SEC Rule 144(a)(3),\18\ and securities that are restricted pursuant 
to contract or through the terms of the security, for designation as 
PORTAL securities based on, among other things, the requirements for 
the resale of a security under Rule 144A(d)(3) and (d)(4).\19\ Nasdaq 
would have authority under the PORTAL Rules to suspend or terminate the 
designation of a PORTAL security, thus removing the ability to 
negotiate trades in the security through PORTAL.
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    \18\ 17 CFR 230.144(a)(3).
    \19\ 17 CFR 230.144A(d)(3) and (d)(4). Nasdaq has represented 
that in the future, it will consider allowing Regulation D 
securities to participate in PORTAL so long as PORTAL Market 
Information would continue to be available only to PORTAL 
Participants. See Response to Comments, infra note 29, at 3.
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    Broker-Dealer Access: Nasdaq members that meet the PORTAL 
qualification requirements would be designated as ``PORTAL Dealers,'' 
who could trade as principal, and ``PORTAL Brokers,'' who would act as 
agent for customers. PORTAL Dealers and PORTAL Brokers would be 
permitted to post anonymous one- or two-sided indicative quotations in 
PORTAL securities. In addition, PORTAL Dealers and PORTAL Brokers would 
be permitted to negotiate anonymously and execute trades in PORTAL 
securities.
    QIB Access: An institution that executes a subscriber agreement, 
agrees to comply with the PORTAL rules and meets the $100 million and 
other standards in Rule 144A to be a QIB would be qualified by Nasdaq 
as a ``PORTAL Qualified Investor.'' PORTAL Qualified Investors would be 
permitted to access the PORTAL Market through a password protected 
linkage and view quotations of PORTAL Dealers and PORTAL Brokers, and 
confirm transactions when the PORTAL Qualified Investor uses a PORTAL 
Dealer or PORTAL Broker to execute a trade in PORTAL. PORTAL Qualified 
Investors would not be permitted to enter quotations in the PORTAL 
system or enter orders directly into PORTAL.
    Trade Negotiation/Execution: PORTAL has electronic negotiation 
features that allow PORTAL Dealers and PORTAL Brokers to negotiate both 
openly and anonymously and execute trades in PORTAL securities. All 
quotes in PORTAL would be indicative. PORTAL Qualified Investors would 
not be permitted to participate in negotiations. Once an anonymous 
trade was negotiated in PORTAL, the identity of the counter-parties 
would be revealed to each other for purposes of comparison, 
confirmation, and settlement of the trade.
    Trade Reporting: Trade reports in reportable PORTAL debt and equity 
securities pursuant to NASD Rule 6732 would be forwarded by Nasdaq to 
TRACE and the OTC Reporting Facility, respectively.
    Dissemination of PORTAL Trade Report Information: All trade report 
information for trades negotiated via PORTAL would be disseminated in 
PORTAL to PORTAL Brokers, PORTAL Dealers, and PORTAL Qualified 
Investors (``PORTAL Participants''), but would not include the identity 
of the parties and, in the case of PORTAL debt, would not aggregate or 
otherwise follow the dissemination protocols applicable to debt trades 
reported to TRACE.\20\ PORTAL Participants would be prohibited from 
disclosing any PORTAL Market information, including quotations, 
transactions, and other information \21\ displayed in the PORTAL Market 
(``PORTAL Market Information''), to any party other than another PORTAL 
Participant. Nasdaq would not disseminate PORTAL Market Information to 
the public.
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    \20\ See Notice, 72 FR at 23877. To quote, execute, and view 
trade report information on any Rule 144A investment-grade debt 
security in PORTAL, the security must be qualified as a PORTAL 
security. Trade report information on Rule 144A investment-grade 
debt that is not a PORTAL security cannot be viewed in PORTAL.
    \21\ ``Other information'' may include information such as which 
other PORTAL Participants are in the system, for example.
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    Settlement: Trades in equity securities that have been compared and 
confirmed will be forwarded automatically to an appropriate subsidiary 
of Depository Trust & Clearing Corporation (``DTCC'') for settlement. 
Nasdaq also intends, at a future date, to provide the ability to 
forward all PORTAL trades in debt securities to an appropriate 
subsidiary of DTCC for settlement.
    Regulatory Surveillance: NASD currently provides and would continue

[[Page 44198]]

to provide surveillance of the trade reports in PORTAL securities that 
are submitted through TRACE and the OTC Reporting Facility. Real-time 
surveillance of quoting and trading activity in PORTAL will be 
conducted by Nasdaq's MarketWatch Department.
    SEC Exemptions: Nasdaq has requested exemptions and no-action 
relief so that the PORTAL Market can operate as described in this 
filing.\22\ In summary, Nasdaq requested the following exemptions: Rule 
15c2-11 under the Act to allow broker-dealers to post quotations in 
PORTAL securities without gathering the information required by that 
rule; \23\ Section 12(a) \24\ of the Act which requires securities 
traded on a national securities exchange to be registered, to permit 
Nasdaq members to trade securities that are not registered under 
section 12(b) of the Act; \25\ and staff no-action relief from Section 
12(g) of the Act \26\ to permit foreign private issuers to continue to 
be eligible for the exemption under Rule 12g3-2(b) under the Exchange 
Act.\27\
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    \22\ In connection with its approval of PORTAL in 1990 (see note 
8, supra), the Commission issued similar exemptions. See letter to 
Frank J. Wilson, Executive Vice President and General Counsel, NASD 
(``Wilson''), from Mary E.T. Beach, Associate Director, Division of 
Corporation Finance, Commission, dated January 16, 1990, and letter 
to Wilson from Jonathan G. Katz, Secretary, Commission, dated April 
27, 1990.
    \23\ 17 CFR 240.15c2-11. See letter from Thomas P. Moran, 
Associate General Counsel, Nasdaq, to James A. Brigagliano, 
Assistant Director, Division of Market Regulation, Commission, dated 
June 28, 2007.
    \24\ 15 U.S.C. 78l(a).
    \25\ 15 U.S.C. 78l(a) and 15 U.S.C. 78l(b). See letter to Nancy 
M. Morris, Secretary, Commission, from Thomas P. Moran, Associate 
General Counsel, Nasdaq, dated June 28, 2007.
    \26\ 15 U.S.C. 78l(g).
    \27\ 17 CFR 240.12g3-2(b). See letter to Paul Dudek, Chief 
Counsel, Division of Corporation Finance, Commission, from Thomas P. 
Moran, Associate General Counsel, Nasdaq, dated July 24, 2007.
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III. Comments

    Seven comment letters were received on the proposal. The letters 
from NYPPEX, TechNet, and the Council on Competitiveness expressed 
general support for the proposal.\28\ The letters from SIFMA and FBR 
raised questions and issues discussed below. Nasdaq responded to those 
comments.\29\
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    \28\ Mr. McGuire submitted a one-line, non-substantive e-mail 
regarding the proposal.
    \29\ See letters to Nancy M. Morris, Secretary, Commission, from 
Thomas P. Moran, Associate General Counsel, Nasdaq, dated June 28, 
2007 and July 23, 2007 (``Response to Comments'').
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A. SIFMA

    In its comment letter, SIFMA sought clarification on numerous 
points, including: trade reporting (the scope of information that would 
be reported, who would be responsible for submitting the information, 
and the timing of submission); the information that would be 
disseminated to PORTAL Participants; the role of third-party vendors in 
the dissemination of PORTAL Market Information; the extent to which 
PORTAL Qualified Investors would have direct access to the trading and 
negotiation functionality of PORTAL; and the rationale for limiting 
order size. In its Response to Comments, Nasdaq provided further 
explanation and details regarding these points.\30\
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    \30\ See Response to Comments, supra note 29, at 2-4 and 7-8.
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    SIFMA expressed concern regarding dissemination of PORTAL Market 
Information. SIFMA requested that Nasdaq consider whether dissemination 
of any trade information regarding PORTAL securities is necessary or 
beneficial and whether such dissemination would negatively affect 
liquidity and the willingness of investors to commit capital in 
unregistered securities. Nasdaq responded, in part, that it believes 
dissemination of information to PORTAL Participants is likely to 
increase their ability to make better informed decisions, thereby 
increasing confidence and liquidity in the market for 144A securities.
    SIFMA also suggested that if trade report information is to be 
disseminated to PORTAL Participants, dissemination should follow 
protocols currently applicable to trade report information provided to 
TRACE \31\ and the OTC Reporting Facility to avoid immediately exposing 
``trading patterns and intentions of market participants.'' Nasdaq 
responded that it disagrees and does not believe dissemination of 
transaction information should be restricted based on limits or time 
periods applicable to TRACE or the OTC Reporting Facility, because 
participation in PORTAL is voluntary, and PORTAL Participants know that 
their trades will be immediately disseminated to other PORTAL 
Participants and, if required, reported for regulatory purposes.\32\
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    \31\ SIFMA states that TRACE provides that the volumes for 
investment grade securities are capped at five million, and volumes 
for non-investment grade securities are capped at one million.
    TRACE does not provide information on mortgage- or asset-backed 
securities or collateralized mortgage obligations. See NASD Rule 
6710. NASD Rule 6230 requires that trades be reported with 15 
minutes.
    \32\ Nasdaq stated that it is willing to consider modifying the 
dissemination parameters of PORTAL debt trades in the system to 
follow current TRACE standards where the quantity for individual 
debt trades disseminated is capped at five million for investment-
grade securities, and one million for non-investment grade 
securities. See Response to Comments, supra note 29, at 3.
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    SIFMA also raised concerns with respect to regulatory jurisdiction. 
First, SIFMA encouraged Nasdaq, the NASD, and the SEC to work together 
with respect to PORTAL to avoid overlapping and potentially 
inconsistent regulation. Nasdaq stated it agrees that regulatory 
inconsistencies should be avoided where possible, and noted that the 
proposal is not expected to materially increase any such burdens.
    Next, SIFMA took issue with the requirement that access to the 
system as a PORTAL Broker or PORTAL Dealer is limited to Nasdaq members 
and sought clarification of Nasdaq's scope of authority over PORTAL 
Qualified Investors under proposed Rule 6513 (Compliance with Rules and 
Registration Requirements). Nasdaq noted that since PORTAL is a trading 
facility of the Nasdaq exchange, execution access to its system must be 
limited to Nasdaq members registered as PORTAL Brokers and PORTAL 
Dealers. Nasdaq has limited authority over non-members.
    With regard to SIFMA's request for clarification regarding the 
appropriate scope of Nasdaq's authority over PORTAL Qualified 
Investors, Nasdaq acknowledged that its regulatory authority over those 
participating in PORTAL is limited to PORTAL Brokers and PORTAL 
Dealers, as these would be the only PORTAL Participants that are 
required to be Nasdaq members and thus subject to Nasdaq's regulatory 
jurisdiction. Nasdaq stated that it had included PORTAL Qualified 
Investors in the rule in error. In Amendment No. 4, Nasdaq amended Rule 
6513 to reflect that Nasdaq's authority to discipline a participant for 
failure to comply with any of the rules or requirements applicable to 
the PORTAL Market extends only to PORTAL Brokers and PORTAL Dealers. 
Nasdaq does not have authority to discipline PORTAL Qualified Investors 
that are not Nasdaq members. It can enforce, however, the PORTAL rules 
through its ability to approve, deny, suspend or terminate the 
registration of an investor as a PORTAL Qualified Investor.\33\
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    \33\ See Proposed Rule 6506(c).
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    Finally, SIFMA argued that the subscriber and related agreements 
should be included in the proposal. Nasdaq stated that the SEC does not 
routinely require commercial agreements of an SRO to be filed, and 
Nasdaq believes that nothing in the present proposal should require 
inclusion of these agreements. SIFMA commented that Nasdaq should make 
its exemptive requests public so that its members may review the legal 
analysis

[[Page 44199]]

and policy basis for those requests. Nasdaq declined and noted that it 
is not the general practice of the SEC to seek public comment on 
exemptions, and Nasdaq does not believe that the Commission needs to do 
so for this proposal.

B. FBR

    FBR's comments focused on three areas: The PORTAL Qualified 
Investor concept; accredited investors; and depository eligibility.
    First, FBR argues that limiting participation in the PORTAL Market 
to PORTAL Qualified Investors, and limiting access to PORTAL Market 
Information to those participants, will create a hidden market. FBR 
believes that PORTAL Brokers and PORTAL Dealers should be permitted to 
share PORTAL Market Information with anyone who is eligible to sell 
restricted shares pursuant to Rule 144A, including Accredited Investors 
and all QIBs. FBR states that its inability to share PORTAL Market 
Information with its customers is in conflict with its obligations 
under the securities laws and rules and NASD Rules, to treat customers, 
who are qualified to buy and sell under Rule 144A, fairly.
    Nasdaq responds that nothing in its proposal prevents FBR from 
sharing PORTAL Market Information with its QIB customers so long as 
those customers are qualified as PORTAL Qualified Investors by Nasdaq. 
Nasdaq states that the limitation exists to ensure that Nasdaq has 
reasonable procedures to prevent pricing information from reaching non-
QIBs, given that it is an SRO responsible for enforcing its rules. 
Further, Nasdaq notes that the dissemination by PORTAL Dealers and 
PORTAL Brokers of PORTAL Market quotations and last sale report 
information of other PORTAL Dealers and PORTAL Brokers to investors not 
qualified by Nasdaq could constitute a prohibited general solicitation 
under Rule 144A.
    Nasdaq does, however, agree that restrictions on dissemination of 
PORTAL Market Information could prohibit a PORTAL Dealer from sharing 
its own quote in a PORTAL security with its own customers.\34\ Nasdaq 
stated it would consider how to modify the rules before PORTAL is 
operational so that restrictions on transmission of PORTAL information 
do not apply to a PORTAL Dealer's provision of its proprietary quote 
information to an established customer of that dealer,\35\ however, FBR 
argues that this is not an acceptable modification because it could 
result in a situation in which a PORTAL Broker or PORTAL Dealer is 
permitted to disclose to its customers certain prices that are 
available but are not the best price if the PORTAL Broker or PORTAL 
Dealer is not itself quoting at the best price. Further, FBR notes, the 
modification would not permit disclosure of last sale information. FBR 
believes that such a result would not be in the best interest of 
investors and could violate a broker-dealer's duty of fair dealing and 
subject them to liability under Rule 10b-5 under the Exchange Act.
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    \34\ See Response to Comments, supra note 29, at 10.
    \35\ Id. Any such change must be filed as a proposed rule change 
with the Commission.
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    FBR also believes that Nasdaq's proposed requirement that QIBs be 
approved by Nasdaq in order to have access to PORTAL Market Information 
is a departure from the PORTAL Rules that were approved by the 
Commission when the PORTAL Market was first established.\36\ Nasdaq 
notes that PORTAL will operate under uniform, explicit standards 
governing access and information receipt, and a QIB would incur only 
modest costs to become a PORTAL Qualified Investor if it wants access 
to PORTAL Market Information. Further, Nasdaq points out that the 
original PORTAL Market was intended to be an entirely ``closed'' 
system. Investors were only permitted to execute a transaction in a 
PORTAL security if the investor registered as a PORTAL Qualified 
Investor and then executed the transaction through a PORTAL Dealer or 
PORTAL Broker through the PORTAL system. Therefore, Nasdaq argues, 
there was no need in the original PORTAL system to restrict the 
dissemination of PORTAL Market Information outside of the PORTAL 
Market.
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    \36\ See note 6, supra.
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    Finally, FBR argues that depository eligibility of a security 
should not be premised on PORTAL eligibility. FBR argues that DTC's 
rule requiring Rule 144A securities to be included in an SRO system for 
the reporting of quotation and trade information of resale 
transactions, in order for those securities to be eligible for DTC's 
depository services is unnecessary and could impede competition between 
Nasdaq and alternative trading systems (``ATSs''). Currently, PORTAL is 
the only facility that satisfies the eligibility standard. Nasdaq 
disagrees and points out that nothing in DTC's rules would preclude 
another SRO from establishing and operating a system for quoting, 
trading, and reporting Rule 144A securities and thereby be eligible to 
obtain DTC's depository services on behalf of such securities.

IV. Discussion and Commission Findings

A. Sections 6 and 11A(a)(1) of the Act

    After careful consideration of the proposal, the comment letters, 
and Nasdaq's Response to Comments, the Commission finds that the 
proposed rule change is consistent with the provisions of section 6 of 
the Act,\37\ in general and with section 6(b)(5) of the Act,\38\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest. The PORTAL Market will facilitate the trading of 
Rule 144A securities and will provide a centralized system for the 
display of interest in Rule 144A securities. Rule 144A(d) conditions 
the exemption from registration of securities pursuant to Section 5 of 
the Securities Act \39\ on offering and selling the securities only to 
QIBs. Consequently, Nasdaq structured the PORTAL Market as a closed 
system for trading of Rule 144A securities among QIBs. Nasdaq has 
implemented procedures to qualify QIBs under its rules. In light of 
Nasdaq's procedures as described in the proposed rule change, PORTAL 
Participants may rely on Nasdaq's procedures for establishing a 
reasonable belief that a prospective purchaser is a QIB.\40\
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    \37\ 15 U.S.C. 78f.
    \38\ 15 U.S.C. 78f(b)(5).
    \39\ 15 U.S.C. 77e.
    \40\ If all the conditions in Rule 144A(d) are not met, 
transactions in restricted securities may be deemed distributions 
and persons offering or selling such securities may be deemed 
underwriters within the meaning of Sections 2(a)(11) and 4(1) of the 
Securities Act or a participant in a distribution of securities with 
the meaning of Section 4(3)(C) of the Securities Act. See discussion 
at nn. 9-13, supra.
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    In addition, the Commission believes that the proposed rule change 
is consistent with the goals of section 11A(a)(1) of the Act.\41\ 
Section 11A(a)(1) articulates the Congressional findings and policy 
goals and objectives respecting the development of a national market 
system. Essentially, Congress found that new data processing and 
communication techniques should be applied to improve the efficiency of 
market operations, broaden the distribution of market information, 
enhance opportunities to achieve best execution

[[Page 44200]]

and promote competition among market participants. That provision 
stresses the importance of implementing communication enhancements that 
will advance the efficiency and effectiveness of a securities market in 
servicing the needs of investors. The Commission believes that the 
changes to the PORTAL Market contained in this proposed rule change 
should provide these benefits and help to enhance the efficiency of the 
market for Rule 144A-eligible securities.
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    \41\ 15 U.S.C. 78k-1(a)(1).
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B. Rule 144A Under the Securities Act

    Because Nasdaq has designed the amendments to the PORTAL Market to 
facilitate compliance with Rule 144A, section 6(b)(1) of the Act \42\ 
also requires a determination as to whether it is reasonably designed 
to accomplish this purpose.\43\ The Commission believes that the PORTAL 
system is designed so that participants who comply with its 
requirements will also be in compliance with the requirements of Rule 
144A, assuming they also provide information upon request in compliance 
with Rule 144A(d)(4).
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    \42\ 15 U.S.C. 78f(b)(1).
    \43\ Section 6(b)(1) of the Act requires that Nasdaq, as a 
national securities exchange, be so organized and have the capacity 
to enforce compliance with, among other things, the federal 
securities laws. See 15 U.S.C. 78f(b)(1).
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    Rule 144A is available only to institutional investors meeting the 
definition of QIB in Rule 144A(a)(1). A seller is required to form a 
reasonable belief that a purchaser is a QIB as the term is defined in 
Rule 144A(a)(1). With the exception of broker-dealers, a QIB is 
required to, in the aggregate, own and invest on a discretionary basis 
at least $100 million in securities of non-affiliated issuers. The 
proposed amendments to the PORTAL rules require that any investor 
applying to qualify as a PORTAL Qualified Investor meet the Rule 144A 
standards for QIBs.
    Rule 144A(d)(2) requires that the seller of 144A securities take 
reasonable steps to ensure that the purchaser is aware that the seller 
may rely on Rule 144A. To meet this requirement of Rule 144A, the 
proposed amendments to the PORTAL rules also provide in the designation 
requirements for PORTAL Qualified Investors that applicants sign an 
undertaking in a subscriber agreement that states that they are aware 
that they may purchase a PORTAL security from another QIB who may rely 
on an exemption from the provisions of section 5 of the Securities Act 
\44\ pursuant to Rule 144A.
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    \44\ 15 U.S.C. 77(e).
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    The PORTAL rules also have eligibility requirements for admitting 
securities into PORTAL that parallel the Rule 144A eligibility 
requirements for securities. The PORTAL rules require that the security 
be eligible to be sold pursuant to Rule 144A under the Securities Act. 
The application for designation of a PORTAL security requires the 
submission of specific information to Nasdaq necessary to support the 
applicant's claim that the security meets the requirements of Rule 
144A.
    Furthermore, Rule 144A conditions the availability of the exemption 
on certain information being available to holders and prospective 
purchasers. Rule 144A(d)(4) provides that, with respect to securities 
of an issuer that is not subject to section 13 of the Act,\45\ section 
15(d) of the Act,\46\ exempt from reporting pursuant to Rule 12g3-2(b) 
under the Act,\47\ or a foreign government eligible to register 
securities under Schedule B of the Securities Act, the holder and a 
prospective purchaser designated by the holder must have the right to 
obtain from the issuer, upon request of the holder, and the purchaser 
must have received at or prior to the time of sale, upon such 
purchaser's request to the holder, certain information about the 
issuer. Nasdaq has designed PORTAL to comply with this aspect of Rule 
144A because the PORTAL rules currently require that a security meet 
these Rule 144A requirements and that the issuer undertake to provide 
the information required by Rule 144A(d)(4) where applicable.
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    \45\ 15 U.S.C. 78m.
    \46\ 15 U.S.C. 78o(d).
    \47\ 17 CFR 240.12g3-2(b).
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    PORTAL is designed to be a trading market in restricted securities 
limited to highly sophisticated investors. In adopting Rule 144A, the 
Commission noted that ``[t]he transactions covered by the safe harbor 
are private transactions'' that do not require the protections of 
section 5 of the Securities Act.\48\ The Commission believes that broad 
dissemination of trading information in this limited context is not 
desirable. Nasdaq's restricting the information to PORTAL Qualified 
Investors to allow Nasdaq to prevent PORTAL Market Information from 
reaching non-QIBs in this context is reasonable.
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    \48\ See note 9, supra.
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    In addition to designing the PORTAL rules to facilitate compliance 
with the requirements of Rule 144A, the proposed rule change would 
structure PORTAL to limit the possibility that restricted securities 
enter the U.S. retail market by requiring that PORTAL-designated 
securities be assigned a CUSIP \49\ number that is different than the 
CUSIP number assigned to any securities of the same class that do not 
satisfy the eligibility requirements for PORTAL securities. The 
security explanation protocol employed by Standard & Poor's related to 
the CUSIP number assigned to PORTAL securities specifically 
distinguishes those securities from all other publicly-traded and 
restricted securities by using the words ``Rule 144A'' and ``PORTAL.'' 
For these reasons, the Commission believes that PORTAL, as proposed, is 
reasonably designed to facilitate compliance with Rule 144A, so long as 
there is compliance with the PORTAL rules and procedures.\50\
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    \49\ Committee on Uniform Securities Identification Procedures.
    \50\ The Commission notes that information shall still be 
provided on request, regardless of the exemption for PORTAL 
securities, as applicable, pursuant to Rule 144A(d)(4). Further, 
Rule 6502 authorizes Nasdaq to suspend or terminate a security's 
PORTAL designation if a holder or prospective purchaser did not 
receive information as required by Rule 144A(d)(4).
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C. Exemptions and No-Action Relief Requests

    The Commission has granted Nasdaq exemptions from Rule 15c2-11 
under the Act \51\ to allow brokers and dealers to post quotations in 
PORTAL securities without first gathering information required by that 
rule \52\ and Section 12(a) \53\ of the Act to permit trading of 
securities not registered under section 12(b) \54\ of the Act; \55\ and 
the staff has granted no-action relief with respect to section 12(g) 
\56\ of the Act to permit foreign private issuers to continue to be 
eligible for the exemption under Rule 12g3-2(b) \57\ of the Act.\58\
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    \51\ 17 CFR 240.15c2-11.
    \52\ See letter from James A. Brigagliano, Associate Director, 
Division of Market Regulation, Commission, to Thomas P. Moran, 
Associate General Counsel, Nasdaq, dated July 31, 2007.
    \53\ 15 U.S.C. 78l(a).
    \54\ 15 U.S.C. 78l(b).
    \55\ See Securities Exchange Act Release No. 56176, (July 31, 
2007), Order Granting The NASDAQ Stock Market, LLC's Application for 
an Exemption Pursuant to Section 36 of the Securities Exchange Act 
of 1934 (``Exemption Order'').
    \56\ 15 U.S.C. 78l(g).
    \57\ 17 CFR 240.12g3-2(b).
    \58\ See letter from Paul Dudek, Chief, Office of International 
Corporate Finance, Division of Corporation Finance, Commission, to 
Thomas P. Moran, Associate General Counsel, Nasdaq, dated July 31, 
2007.
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D. Impact on Competition, Efficiency and Capital Formation

    Section 3(f) of the Act requires that the Commission consider 
whether Nasdaq's proposal will promote efficiency, competition, and 
capital

[[Page 44201]]

formation.\59\ The Commission has considered the merits of the issues 
raised by each of the commenters and has concluded that the PORTAL 
rules, as proposed, are consistent with the Act.
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    \59\ 15 U.S.C. 78c(f).
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    The Commission notes that in its response to comments, Nasdaq 
provided SIFMA with additional information regarding the operation of 
the PORTAL Market and believes Nasdaq sufficiently responded to SIFMA's 
comments. The Commission agrees with Nasdaq, in particular, that the 
prompt and complete dissemination of PORTAL Market Information to 
PORTAL Participants should allow PORTAL Participants to better evaluate 
their decisions regarding trading in the PORTAL Market and should 
result in increased investor confidence and liquidity in the PORTAL 
Market. The Commission also notes that if a PORTAL Participant does not 
want its trade information disseminated to other PORTAL Participants, 
there is no requirement that the Participant utilize Nasdaq's system 
for effecting its trade; use of the PORTAL Market is voluntary. 
Furthermore, the Commission agrees that Nasdaq need not make the 
subscriber and related agreements part of this proposal, nor does 
Nasdaq need to make its exemption requests public.
    The Commission does not believe that Nasdaq's proposal is anti-
competitive because of the eligibility standard in DTC's rules. Nasdaq 
does not have any authority with respect to DTC's rules. DTC's rules 
provide that DTC is authorized to make 144A securities eligible for 
deposit, book-entry delivery, and other depository services, provided 
that any such Rule 144A securities are designated for inclusion in a 
system of an SRO approved by the Commission for the reporting of 
quotation and trade information of Rule 144A transactions.\60\ In 
approving the proposed rule change establishing the DTC eligibility 
requirement that Rule 144A securities must be included in an SRO Rule 
144A System, such as the PORTAL Market, the Commission noted a crucial 
feature of any such system would be a requirement that the SRO's 
members report trades involving securities using the system on a 
routine basis to the SRO, along with information that will facilitate 
detection of securities law violations.\61\
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    \60\ See Securities Exchange Act Release No. 33327 (December 13, 
1993); 58 FR 57878 (December 22, 1993) (SR-DTC-90-06).
    \61\ Given the evolution in the market for these securities 
since DTC's rule was adopted, the Commission believes it would be 
reasonable for DTC to review this requirement.
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    The Commission believes that re-establishing the PORTAL Market as a 
quoting and trading system is a reasonable effort by Nasdaq to enhance 
the quality of the Rule 144A market by providing a centralized market 
and information to QIBs, promoting greater efficiency in executions, 
and increasing overall market transparency. While the PORTAL Market 
will provide a system for quoting and trading Rule 144A securities, it 
does not represent an exclusive means for selling or purchasing Rule 
144A securities, nor does it prevent broker-dealers from seeking 
alternative trading venues for such transactions.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\62\ that the proposed rule change (SR-NASDAQ-2006-065), as 
amended, be, and hereby is, approved.
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    \62\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\63\
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    \63\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-15288 Filed 8-6-07; 8:45 am]

BILLING CODE 8010-01-P
