Self-Regulatory Organizations; Order Approving Proposed Rule Change by the National Association of Securities Dealers, Inc. to Amend Adjudication Procedures for Clearly Erroneous Transactions

[Federal Register Volume 64, Number 56 (Wednesday, March 24, 1999)]
[Notices]
[Pages 14293-14294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7155]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41180; File No. SR-NASD-98-94]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. to Amend 
Adjudication Procedures for Clearly Erroneous Transactions

March 17, 1999.
    On December 18, 1998, the National Association of Securities 
Dealers, Inc., (``NASD'' or ``Association'') through its wholly-owned 
subsidiary, NASD Regulation, submitted to the Securities and Exchange 
Commission (``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 amend adjudication procedures 
for clearly erroneous transactions. The Federal Register published the

[[Page 14294]]

proposed rule change for comment on February 3, 1999.\3\ The Commission 
received no comments on the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 40992 (Jan. 28, 1999), 64 FR 
5846 (Feb. 5, 1999).
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Description of the Proposal

    NASD Regulation is proposing to amend NASD Rule 11890 (``Rule'') to 
conform the time frame for requesting a clearly erroneous adjudication 
for pre-opening transactions to the 30 minute frame that applies trades 
that occur after 10:00 a.m. The rule permits The Nasdaq Stock Market, 
Inc. (``Nasdaq'') to review erroneous transactions and declare them 
void or otherwise modify their terms. In 1998, the Commission approved 
changes to the rule to make this process more efficient and fair 
(``Amendments'').\4\ NASD Regulation amended the rule to require 
members to submit erroneous transaction complaints within 30 minutes of 
the transaction. Prior to the amendments, the rule allowed members to 
submit these complaints any time during the trading day. The 
Association hoped the amendments would preclude firms from waiting 
until the end of the day to submit erroneous transaction complaints 
after deciding whether the erroneous trade became unprofitable. The 
amendments also required that firms give the counterparty to the 
erroneous transaction adequate notice of the error within a short 
period of time.
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    \4\ Exchange Act Release No. 39550 (Jan. 14, 1998), 63 FR 4333 
(Jan. 28, 1998) (approving SR-NASD-96-51).
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    Because of the high trading volume, however, the NASD intended to 
provide additional time to submit adjudication requests for trades 
occurring during the first half of each trading day. Specifically, the 
NASD intended that members have until 10:30 a.m. to request an 
adjudication for trades occurring between the 9:30 a.m. open and 10:00 
a.m. The rule, however, currently only applies to trades that occur 
before 10:00 a.m., and does not mention trades that occur before the 
9:30 a.m. opening. Consequently, a literal reading of the rule accords 
additional time to pre-9:30 a.m. transactions as well as those that 
occur between 9:30 and 10:00 a.m.
    The NASD staff identified this issue when the Commission approved 
the amendments, but agreed, in consultation with Commission staff, to 
wait and observe the operation of the amended rule. After administering 
the amended rule for eight months, the NASD has confirmed its original 
belief that this additional time is not necessary for pre-opening 
transactions and is inconsistent with the original intent of the 
amendments.
    In particular, the NASD notes that of the 27 requests for 
adjudication involving pre-opening trades received since the 
amendments, more than half were submitted by members within 30 minutes 
(in several instances within ten minutes) even though some members had 
as long as 90 minutes to do so. More importantly, members made 
virtually all of these requests (23 of 27) after the market opened and 
they had an opportunity to observe the direction of the market. While 
the NASD still believes that it is appropriate to provide additional 
time to request an adjudication for erroneous trades that occur 
following the opening, the NASD believes providing members additional 
time for pre-opening transactions is inconsistent with the intent of 
the amendments and allows members to abuse the rule.

Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities association. In particular, the Commission finds 
that the proposed rule change is consistent with Section 15A(b)(6) of 
the Act,\5\ which requires that an Association's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.\6\ Specifically, the Commission believes the proposed 
rule change promotes fair and efficient resolution of disputes 
involving clearly erroneous transactions. The Commission believes that 
uncorrected erroneous transactions hinder an investor's ability to rely 
on reported transactions as accurately reflecting the current state of 
the market. The Commission believes the proposed rule change will 
lessen the impact of erroneous transactions on the public by allowing 
Nasdaq to more quickly correct erroneous transactions that have been 
publicly reported.
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    \5\ 15 U.S.C. 78o-3.
    \6\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-NASD-98-94) is approved.

    \7\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7155 Filed 3-23-99; 8:45 am]
BILLING CODE 8010-01-M