| Release No. 34-24635 June 23, 1987
|
 Table of Contents
|
I. Summary
The Securities and Exchange Commission ("Commission") is adopting amendments to Rule 11Aa2-1 ("NMS Securities Rule") 1 under the Securities Exchange Act of 1934 ("Act"), 2 which establishes criteria and procedures for designating certain securities ("NMS Securities") as qualified for trading in a national market system ("NMS"). The Commission also is adopting amendments to Rule 11Aa3-1 ("transaction reporting rule") under the Act, 3 which governs the collection and dissemination of transaction information for securities. 4
The amendments replace the existing NMS designation criteria with a standard designating as NMS Securities all over-the-counter ("OTC") or exchange-listed securities for which transactions are reported pursuant to an effective transaction reporting plan approved by the Commission pursuant to Rule 11Aa3-1 under the Act ("reported securities"). 5 The Commission also is amending the transaction reporting rule to require the NASD to designate which NASDAQ securities are subject to transaction reporting. In addition, the Commission is adopting amendments conforming related rules under the Act to the new definition of the term "NMS Security". 6
The Commission today also approves an NASD proposal to incorporate specific eligibility criteria into its transaction reporting plan; 7 because these criteria represent the old Rule 11Aa2-1 Tier 2 standards, together with new corporate governance standards, continuance of OTC transaction reporting should be ensured.
II. Comments
The Commission received comments from the Amex, 8 the NYSE, 9 and the National Security Traders Association. 10
The Amex Letter states that the Commission appropriately is addressing "the concerns associated with the designation solely of OTC securities as NMS Securities." Hence, the Commission is "rectifying public misperception" that until now the NMS has not included all markets. 11
Nevertheless, the Amex remains concerned that NMS stocks traded OTC will not be subject to all of the important regulatory requirements imposed on exchange-listed reported securities. The Amex states, for example, that the short sale rule must apply to OTC trading in NMS Securities and that there should be trade-through protection for bids and offers for such securities (other than OTC bids and offers displayed in CAES, the Computer-Assisted Execution System). The Amex also indicated, however, that the adoption of the proposed amendments to Rules 11Aa2-1 and 11Aa3-1 should not be delayed pending Commission consideration of these issues. 12
The NSTA supports the Commissions proposal, but emphasizes, contrary to the Amexs contention, that all NMS stocks need not be governed by the same set of rules, because there are still two distinct markets--negotiated and auction. Also, the NSTA believes that exchange-listed stocks should not automatically qualify for inclusion in the NMS. Instead, other considerations such as capitalization, corporate governance, assets, and earnings histories should apply.
The NYSE believes that the Commission should rescind the NMS Securities Rule, arguing that the rule no longer is necessary to promote last sale reporting in the OTC market. The NYSE also fears that the rules new structure may confuse or mislead investors by implicitly suggesting that there is no substantive difference between OTC and listed stocks.
The NYSE recognizes that a literal interpretation of Section 11A(a)(2) of the Act, which provides that "the Commission, by rule, shall designate the securities or classes of securities qualified for trading in the national market system," dictates retention of the rule. The NYSE argues, however, that the Congressional mandate does not warrant a rigid interpretation of Section 11A; because the Commission "determined that the NMS Securities Rule is no longer necessary to continue OTC last sale reporting," the Commission also "has the flexibility to carry its determination the final logical step and rescind the rule altogether." 13
The NYSE also does not accept the argument that the NMS Securities Rule should be retained because now that investors have come to associate the term NMS Securities with reported OTC stocks, investors would be confused if reported stocks no longer are called NMS Securities. Instead, the NYSE Letter states, retention of the NMS Securities Rule, which would not acknowledge the differences between the NMS for listed securities and for OTC securities, would set "the stage for unwarranted public confusion and misconception about the nature of these very different markets." 14
III. Discussion
A. The Rule Amendments
The NMS Securities Rule as amended today redefines as an NMS Security any "reported security" as defined in Rule 11Aa3-1, 15 and Rule 11Aa3-1(a)(4) defines as a reported security any listed equity or NASDAQ security for which transaction reports are required 16 to be made on a real-time basis pursuant to a transaction reporting plan.
There are currently three effective transaction reporting plans that have been approved by the Commission pursuant to its transaction reporting rule: the plan administered by the Consolidated Tape Association; the NASDs plan, as amended by the NASD and approved by the Commission today; and the plan filed by the NASD and the Midwest Stock Exchange ("MSE") governing the collection, consolidation and dissemination of quotation and transaction information for NMS Securities listed on an exchange or traded on an exchange pursuant to a grant of unlisted trading privileges. 17
The Commission also is amending its transaction reporting rule to require the submission of reporting plans by the exchanges and the NASD for all listed and NASDAQ securities, respectively, with the exchanges and the NASD specifying in their plans the listed and NASDAQ securities or classes of such securities for which real-time transaction reports are to be made. 18 Both the CTA and NASD plans, as amended, require last sale reporting for the specified groups of "eligible" securities designated in the plans. If either plan were amended to change the securities covered by that plan the Commission only could approve such amendment if it were consistent with the NMS goals set forth in Section 11A and otherwise in furtherance of the purposes of the Act. Accordingly, the Commission believes that a proponent of any change permitting a CTA eligible or a non-listed reported security to cease to be covered by the plan would bear a heavy burden. Specifically, an amendment could be approved only if the Commission finds that the amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act. 19
The Commission also is adopting other conforming amendments. Previously, certain provisions of Commission rules governing short sales 20 and fees 21 were worded to provide exemptions for "NMS Securities." The Commission is amending these provisions to state specifically that the exemptions apply to just NASDAQ/NMS securities. In addition, the Commission is amending the rule governing quotations 22 to conform the wording to amended Rules 11Aa2-1 and 11Aa3-1. 23
The Commission believes that these changes are consistent with the 1975 Amendments to the Act. Although Congress anticipated that NMS designation criteria would relate to the trading characteristics of securities, Congress provided the Commission with maximum flexibility in developing an NMS. The Commission has participated actively in the development of an NMS for 11 years. During this period, it has become clear that the fundamental components of an NMS--market information systems, trading linkages, and market competition--benefit the trading markets of securities with widely varying trading characteristics. For this reason, all Amex and NYSE securities have been included in the consolidated transaction reporting and quotation systems. In addition, essentially all listed securities that are multiply traded have been included in ITS. Similarly, the vast majority of NASDAQ securities that qualified under the Tier 2 standards were designated as NMS Securities and included in the NASDAQ/NMS reporting system. 24
The adopted amendments also accord equal treatment to the OTC securities that previously have been designated as NMS Securities and the listed securities that are reported to the consolidated tape, thereby addressing the concern expressed by some 25 that the NMS Securities Rule was favoring NASDAQ stocks over listed stocks. NMS eligibility for both OTC and listed securities is tied to the transaction reporting rule. The requirements for an effective transaction reporting plan for NASDAQ securities are the same as those for listed securities.
The Commission has considered rescinding the NMS Securities Rule, as the NYSE suggests. The Commission believes, however, that rescinding the Rule would be inappropriate in view of Section 11A(a)(2) of the Act, which requires the Commission, by rule, to "designate the securities or classes of securities qualified for trading in the national market system." The Commission, thus, does not agree with the NYSEs various arguments that despite the literal words of the Act the Commission need not have a designation rule. 26
The amendments to the NMS Securities Rule and the transaction reporting rule also will streamline designation of NMS Securities. The Commission continues to have the NMS Securities Rule that the Act contemplates, and will be able to exercise oversight over which securities are designated as NMS Securities by reviewing the eligibility standards established in the transaction reporting plans filed by the self-regulatory organizations, either individually or jointly. 27 And because NMS designation criteria are established by reference to a transaction reporting plan, the Commission will not have to amend the NMS Securities Rule every time changes in the designation criteria are suggested. Consequently, the NASD can expand the universe of NASDAQ securities reported on a real-time basis by filing with the Commission an amendment to the NASDAQ transaction reporting plan. At the same time, the Commission retains authority to disapprove any proposal that imposes criteria that either inappropriately restrict or expand those securities eligible for last sale reporting and, consequently, NMS designation, or to amend any transaction reporting plan on its own initiative. 28 By removing from the Commissions rules the current NMS designation criteria, the amendments also provide the NASD with flexibility to initiate proposed standards for and encourage the development of OTC trade reporting, with the Commission retaining ultimate control over the standards through its approval and amending authority.
The amendments also allow the NASD to propose last sale reporting eligibility standards that do not incorporate the previous Tier 1 NMS mandatory designation criteria. For example, under the NASDs rule change, which the Commission also is approving today, issuers whose securities had been designated mandatorily as NMS Securities under Tier 1 can elect to opt out of transaction reporting. The Commission believes that granting Tier 1 issuers the option of electing out of transaction reporting is appropriate at this time. Mandatory designation of the most actively traded OTC securities when the NMS Securities Rule was first adopted ensured that the most actively traded NASDAQ securities would be included in a transaction reporting system. The Commission determined this was appropriate because of the benefits to public investors and market efficiency resulting from such reporting. The Commission also recognized the potential that issuers of Tier 1 securities might not voluntarily request designation, because of concerns raised at that time by some market participants that last sale reporting would adversely affect market liquidity in those securities. 29
In the four years since the first OTC securities were designated as NMS Securities, however, it has become generally accepted that OTC last sale reporting provides investors with improved information on executions, enhances market efficiency and liquidity, and increases the public exposure of market information concerning NMS issuers. Because last sale reporting has been widely accepted by investors and the OTC market, 30 the Commission believes that, even without mandatory designation criteria in the NMS Securities Rule, such reporting will continue to spread in the OTC market. 31 The Commission believes, therefore, that there is no longer any need to mandate trade reporting for Tier 1 OTC securities. 32
For the foregoing reasons, the Commission concludes that the amendments to the NMS Securities Rule and the transaction reporting rule will continue OTC transaction reporting, and make designation of NMS Securities more flexible.
IV. Summary of the Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA") pursuant to the Regulatory Flexibility Act ("RFA") 33 regarding the amendments to the NMS Securities Rule and the transaction reporting rule. The FRFA states that the amendments designate as NMS Securities all listed and OTC securities for which transaction reports are required to be made on a real-time basis pursuant to an effective transaction reporting plan. The FRFA also notes that the NASD concurrently is incorporating into its rules and transaction reporting plan the existing NMS designation criteria as well as certain corporate governance requirements. The FRFA states that the amendments should ensure the continued viability of real-time reporting in the OTC market and streamline the NMS designation process. The FRFA also notes that, at the same time, the amendments do not make any additional securities subject to transaction reporting. In the Proposal Release, which summarized the Initial Regulatory Flexibility Analysis, the Commission solicited comment on any possible costs the amendments might have on small entities, and on possible alternatives to the amendments. The Commission received no comments in response to the IRFA.
A copy of the FRFA may be obtained by contacting William M. Harter, Jr., 202/272-2414, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
LIST OF SUBJECTS IN 17 CFR PART 240
Reporting and recordkeeping requirements, securities.
V. Statutory Basis and Text of the Amendments
Pursuant to the Securities Exchange Act of 1934 and particularly Sections 11A, 10, 31 and 23 thereof, 15 U.S.C. §§ 78k-1(a), 78k-3(a), 78j, 78ee, and 78w(a), the Commission is amending §§ 240.11Aa2-1, 240.11Aa3-1, 240.11Ac1-1, 240.10a-1, and 240.31-1 in Chapter II of Title 17 of the Code of Federal Regulations.
TEXT OF AMENDMENTS TO RULES 11Aa2-1, 11Aa3-1, 11Ac1-1, 10a-1, AND 31-1
CHAPTER II, TITLE 17 OF THE CODE OF FEDERAL REGULATIONS IS AMENDED AS FOLLOWS:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for Part 240 continues to read as follows:
Authority: Sec. 23, 48 Stat. 901, as amended (15 U.S.C. 78w).
* * *
Sections 240.11Aa2-1 and 240.11Aa3-1 also issued under Secs. 2, 3, 6, 9, 10, 15, 17, and 23, Pub. L. 78-291, 48 Stat. 881, 882, 885, 889, 891, 895, 897, and 901, as amended by secs. 2, 3, 4, 11, 14, and 18, Pub. L. 94-29, 89 Stat. 97, 104, 121, 137, and 155 (15 U.S.C. 78b, 78c, 78f, 78i, 78j, 78o, 78q, and 78w); sec. 15A, as added by sec. 1, Pub. L. 75-719, 52 Stat. 1070, as amended by sec. 12, Pub. L. 94-29, 89 Stat. 127 (15 U.S.C. 78o-3); sec. 11A, as added by sec. 7, Pub. L. 94-29, 89 Stat. 111 (15 U.S.C. 78k-1).
* * *
Section 240.11Ac1-1 also issued under Sec. 2, 3, 6, 9, 10, 15, 17, and 23, Pub. L. 78-291, 48 Stat. 881, 882, 885, 889, 891, 895, 897 and 901, as amended by secs. 2, 3, 4, 11, 14, and 18, Pub. L. 94-29, 89 Stat. 97, 104, 121, 137, and 155 (15 U.S.C. 78b, 78c, 78f, 78i, 78j, 78o, 78q, and 78w), as amended by Pub. L. No. 94-29 (June 4, 1975); Sec. 1, Pub. L. No. 75-719, 52 Stat. 1070, as amended by sec. 12, Pub. L. No. 94-29, 89 Stat, 127-131 (15 U.S.C. 78o-3, as amended by Pub. L. No. 94-29 (June 4, 1975); sec. 7, Pub. L. No. 94-29, 89 Stat. 111 (15 U.S.C. 78k-1).
* * *
Section 240.10a-1 also issued under secs. 2, 3, 6, 9, 10, 15, 17 and 23, Pub. L. No. 78-291, 48 Stat. 881, 882, 885, 889, 891, 895, 897, and 901, as amended by secs. 2, 3, 4, 11, 14, and 18, Pub. L. No. 94-29, 89 Stat. 97, 104, 121, 137, and 155 (15 U.S.C. 78b, 78c, 78f, 78i, 78j, 78o, 78q, and 78w); sec. 15A, as added by sec. 1, Pub. L. No. 75-719, 52 Stat. 1070, as amended by sec. 12, Pub. L. No. 94-29, 89 Stat. 127, 15 U.S.C. 78o-3); sec. 11A, as added by sec. 7, Pub. L. No. 94-29, 89 Stat. 111 (15 U.S.C. 78k-1).
* * *
Section 240.31-1 also issued under Secs. 2, 3, 23, and 31, Pub. L. 78-291, 48 Stat. 881, 882, 901, and 904, as amended by secs. 2, 3, 18, and 22, 89 Stat. 97, 155, and 162 (15 U.S.C. 78b, 78c, 78w, and 78ee.
2. Section 240.10a-1 is amended by revising paragraph (a)(1)(ii) as follows:
§240.10a-1 Short sales.
(a)(1)(i) * * *
(ii) The provisions of paragraph (a)(1)(i) hereof shall not apply to transactions by any person in NASDAQ securities as defined in §240.11Aa3-1 (Rule 11Aa3-1 under the Act) except for those NASDAQ securities for which transaction reports are collected, processed, and made available pursuant to the plan originally submitted to the Commission pursuant to Rule 17a-15 (subsequently amended and redesignated as Rule 11Aa3-1) under the Act, which plan was declared effective as of May 17, 1974.
* * * * *
3. Section 240.11Aa2-1 is revised as follows:
§240.11Aa2-1 Designation of National Market System Securities.
The term "national market system security" shall mean any reported security as defined in Rule 11Aa3-1.
4. Section 240.11Aa3-1 is amended by revising paragraphs (a)(4), (a)(5), (a)(6), and (b)(1), adding a new (b)(2)(i), redesignating (b)(2)(i)-(b)(2)(vii) as (b)(2)(ii)-(b)(2)(viii), and revising newly redesignated (b)(2)(ii) as follows:
§240.11Aa3-1 Dissemination of transaction reports and last sale data with respect to transactions in reported securities.
(a) * * *
* * * * *
(4) The term "reported security" shall mean any listed equity security or NASDAQ security for which transaction reports are required to be made on a real-time basis pursuant to an effective transaction reporting plan.
(5) The term "listed equity security" shall mean any equity security listed and registered, or admitted to unlisted trading privileges, on a national securities exchange ("exchange").
(6) The term "NASDAQ security" shall mean any registered equity security for which quotation information is disseminated in the National Association of Securities Dealers Automated Quotation system ("NASDAQ").
* * * * *
(b)(1) Every exchange shall file a transaction reporting plan regarding transactions in listed equity and NASDAQ securities executed through its facilities, and every association shall file a transaction reporting plan regarding transactions in listed equity and NASDAQ securities executed by its members otherwise than on an exchange.
(2) * * *
(i) The listed equity and NASDAQ securities or classes of such securities for which transaction reports shall be required by the plan;
(ii) Reporting requirements with respect to transactions in listed equity securities and NASDAQ securities, for any broker or dealer subject to the plan;
* * * * *
5.§240.11Ac1-1 is amended by revising paragraph (a)(16), removing paragraph (a)(19), and redesignating paragraphs (a)(20) and (a)(21) as paragraphs (a)(19) and (a)(20) as follows:
§240.11Ac1-1 Dissemination of quotations for reported securities.
(a) * * *
(16) The term "consolidated system" shall mean the consolidated transaction reporting system for which a plan originally was submitted to the Commission pursuant to Rule 17a-15 (subsequently amended and redesignated as Rule 11Aa3-1) under the Act, which plan was declared effective as of May 17, 1974.
* * * * *
6. Section 240.31-1 is amended by revising paragraph (f) as follows:
§240.31-1 Securities transactions exempt from transaction fees.
* * * * *
(f) Transactions in NASDAQ securities as defined in §240.11Aa3-1 (Rule 11Aa3-1 under the Act) except for those NASDAQ securities for which transaction reports are collected, processed, and made available pursuant to the plan originally submitted to the Commission pursuant to Rule 17a-15 (subsequently amended and redesignated as Rule 11Aa3-1) under the Act, which plan was declared effective as of May 17, 1974. The terms and provisions of this paragraph shall remain effective until May 6, 1988.
By the Commission.
117 CFR §240.11Aa2-1. See Securities Exchange Act Release No. 17549 (February 17, 1981), 46 FR 13992 ("Rule 11Aa2-1 Adoption Release").
215 U.S.C. §§ 78a et seq.
317 CFR §240.11Aa3-1. See Securities Exchange Act Release No. 16589 (February 19, 1980), 45 FR 12377.
4For a detailed discussion of the background of the NMS Securities Rule and the transaction reporting rule, see the Commissions release proposing the rule amendments, Securities Exchange Act Release No. 23817 (November 17, 1986), 51 FR 42856 ("Proposal Release").
5See 17 CFR §240.11Aa3-1. Reported securities include all securities listed on the New York Stock Exchange ("NYSE") and the American Stock Exchange ("Amex"), sole regional exchange listings that substantially meet the Amex or NYSE listing criteria, and OTC securities that meet the eligibility criteria contained in the NASDs Transaction Reporting Plan, as also amended today, concurrently with the Commissions rule amendments. See Securities Exchange Act Release No. 24633 (June 23, 1987) (published elsewhere in this edition of the Federal Register). The NASDs amended eligibility criteria are the old Rule 11Aa2-1 Tier 2 standards with the addition of new corporate governance requirements. Transaction reports for the listed securities from all markets are collected and disseminated pursuant to a transaction reporting plan administered by the Consolidated Tape Association ("CTA"). The CTA members are the American, Boston, Cincinnati, Midwest, New York, Pacific, and Philadelphia Stock Exchanges, and the NASD. Transaction reports for eligible OTC stocks are collected and disseminated through the NASDs electronic interdealer quotation system ("NASDAQ") or by communicating with NASDAQ headquarters, and reported pursuant to the NASD Transaction Reporting Plan.
6The Commission also today withdraws its previous alternative proposal to amend Rule 11Aa2-1. See Securities Exchange Act Release No. 22505 (October 4, 1985), 50 FR 41697.
7See SR-NASD-86-27 and Securities Exchange Act Release Nos. 23818 and 23819 (November 17, 1986).
8Letter from Kenneth R. Leibler, President and Chief Operating Officer, Amex, to Jonathan G. Katz, Secretary, SEC, dated February 10, 1987 ("Amex Letter").
9Letter from James E. Buck, Vice President and Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated February 5, 1987 ("NYSE Letter").
10Letter from Arthur P. Rowsell, Chairman, and John L. Watson III, President, NSTA, to Jonathan G. Katz, Secretary, SEC, dated January 16, 1987. The Commission also received comments on the NASDs corporate governance proposals, see infra note 24.
11Amex Letter, supra note 8, at 1.
12Id. at 2. The Commission solicited comment on imposing additional regulations on OTC/NMS Securities, see Securities Exchange Act Release No. 22127 (June 21, 1985), 50 FR 26584 ("NMS Securities Concept Release"), and continues to consider the comments received in response to that release.
13See NYSE Letter, Appendix at 7, supra note 9. In this connection, the NYSE argues that, with respect to listed stocks, even without the NMS Securities Rule, the Commission through its approval of several NMS plans, such as the CTA, CQ (for consolidated quotations), ITS (Intermarket Trading System) and NASD transaction reporting plans, has discharged effectively its statutory duty to designate securities qualified for trading in the NMS, and that although Section 11A defines "qualified securities" by reference to the Commissions designation, this does not require a special designation rule.
14Id. at 16.
15This is a modification from the proposal, and designed to provide consistency between the definitional provisions of Rules 11Aa2-1 and 11Aa3-1.
16It bears emphasis that the CTA Plan requires last sale reporting for eligible securities in the sense that if the issuer would list its eligible stock on an exchange, last sale reporting would be required. With regard to OTC stocks, the NMS Securities Rule had required reporting for all NMS Tier 1 stocks, but for Tier 2 securities last sale reporting was required only in the sense that if an issuer chose NMS designation, there had to be last sale reports; this continues to be the case for all securities under the amended NASD transaction reporting rule.
17While the MSE/NASD Plan is a separate plan, it uses the eligibility criteria of the NASDs transaction reporting plan, and so does not result in the last sale reporting of securities that would not otherwise be subject to last sale reporting. See Securities Exchange Act Release No. 24407 (April 29, 1987), 52 FR 17349. The Commission also notes that the Options Price Reporting Authority ("OPRA") functions pursuant to Rule 11Aa3-2, 17 CFR §240.11Aa3-2, the rule generally governing national market system plans, and not the transaction reporting rule. Hence, the OPRA Plan would not be affected by the current rule amendments and options would not be designated as National Market System Securities.
18Previously, Rule 17a-15 under the Act, revised and redesignated as Rule 11Aa3-1 in 1980 (see Securities Exchange Act Release No. 16589, February 19, 1980, 45 FR 12377), had required last sale reporting for all listed securities until the Commission allowed the carving out of an exemption for stocks that did not meet the CTA eligibility criteria. See Securities Exchange Act Release No. 10851 (June 13, 1974), 39 Fr 22194. The transaction reporting rule as amended, rather than stating that all listed stocks shall be reported and then permitting exemptions, more directly envisions last sale reporting for the eligible securities under the current CTA and amended NASD plans.
19See Rule 11Aa3-2(c). The proposal has been modified, however, in this respect. The definition of the term "NASDAQ security" in Rule 11Aa3-1 as adopted is changed to include simply a security for which quotations are disseminated in the NASDAQ system. As proposed, Rule 11Aa3-1 would have carried forward the Rule 11Aa2-1 definition that had been modified in 1985 to add certain restrictions designed to accommodate the trading of a limited group of OTC/NMS Securities on regional exchanges. See Securities Exchange Act Release No. 22413 (September 16, 1985), 50 FR 38515. The NASD has included these restrictions in the definition of eligible securities under its amended Transaction Reporting Plan. Furthermore, these limitations on the definition of "NASDAQ security" serve no purpose under amended Rule 11Aa3-1, which requires a plan or plans from exchanges and the NASD regarding both listed equity and NASDAQ securities, with the plans specifying securities for which the exchanges and the NASD will provide real-time last sale reporting. In this connection, the Commission notes, however, that in indicating it was ready to approve unlisted trading privileges ("UTP") for OTC securities, the Commission also indicated that the NASD and the exchanges would have to develop a joint plan for consolidated reporting of quotations and trades in such securities. See Securities Exchange Act Release No. 22412 (September 16, 1985), 50 FR 38640. To avoid duplicative reporting requirements, the Commission also requested the CTA to amend its plan so that OTC securities for which an exchange is granted UTP would not be subject to CTA reporting. See letter from Richard T. Chase, Associate Director, Division of Market Regulation, SEC, to Samuel A. Alward, Chairman, CTA, dated November 20, 1985. The Commission continues to expect that listed regional securities meeting the eligibility requirements of the NASDs amended Transaction Reporting Plan as well as OTC/UTP securities will be reported through the new joint reporting facility, and expects the CTA and CQ Plan participants to amend their plans to avoid duplicative reporting requirements.
The Commission also notes that the NASD Transaction Reporting Plan carries over from Rule 11Aa2-1 the requirement that to be a "NASDAQ Security" a listed security must not be subject to any off-board trading restrictions. The reason for including this restriction in Rule 11Aa2-1 was to ensure that securities listed on or before April 26, 1979, i.e., "covered securities" under Rule 19c-3 under the Act, could not become NMS Securities unless the exchange agreed not to apply its off-board trading restrictions. Securities listed after April 26, 1979, become Rule 19c-3 securities as soon as they become "reported securities," i.e., upon NMS designation, so that this restriction is unnecessary and not applicable as to those securities. This restriction will have the same meaning under the NASDs Transaction Reporting Plan.
20Rule 10a-1, 17 CFR §240.10a-1.
21Rule 31-1, 17 CFR §240.31-1.
22Rule 11Ac1-1, 17 CFR §240.11Ac1-1.
23The Commission has determined not to make a change to the definition of the term Rule 19c-3 security in Rule 11Ac1-1 ("Quote Rule"), as proposed in the Proposal Release. The Commission had considered an amendment that would include in the definition of Rule 19c-3 security only a security "listed" on an exchange. The Quote Rule mandates quotation dissemination for market makers with more than 1% of quarterly volume in any "Rule 19c-3 security." See Rule 11Ac1-1(b). The effect of this proposed change to the definition of Rule 19c-3 securities would have been to exclude from these mandatory quotation dissemination provisions Rule 19c-3 securities traded on an exchange pursuant to unlisted trading privileges. Although the Commission received no comments regarding this issue, it has concluded that the definition of Rule 19c-3 securities should not be amended. Regardless of whether these securities are listed or traded pursuant to UTP, for Quote Rule purposes they should be treated the same because the trading effects are the same irrespective of whether the securities are traded on an exchange pursuant to listing or UTP.
24Over 90% of NMS Securities are Tier 2 issuers who have elected NMS designation. As some commentators pointed out, the addition of corporate governance criteria to the NASDs amended Transaction Reporting Plan may render some current NMS Securities ineligible for last sale reporting and, consequently, NMS designation. In addition, some commentators suggested that eligibility for transaction reporting and hence designation as NMS Securities for those securities that did not have "one-share/one-vote" would be inappropriate. These comments are addressed in the release approving the amendments to the NASDs Transaction Reporting Plan. See Securities Exchange Act Release No. 24633, supra note 5.
25See, e.g., Amex Letter, supra note 8. Exchange commentators raised this question of competition during the NMS Securities Tier 2 expansion rulemaking and the Commission solicited comment on this issue in the NMS Securities Concept Release.
26Section 11A(a)(2) of the Act clearly states that "the Commission, by rule, shall designate...." (emphasis added). Moreover, that section further specifies that "securities or classes of securities so designated hereinafter in this section are referred to as qualified securities.'" (emphasis added). Thus, Sections 11A(c)(1)(E) and (F) which by their terms empower the Commission to assure that "orders for the purchase or sale of qualified securities are handled in a manner consistent with the establishment and operation of a national market system" (emphasis added) and "equal regulation of all markets for qualified securities" (emphasis added), respectively, would be rendered inoperative without a Commission rule designating certain securities as NMS Securities, i.e., "qualified securities." The Commission also does not believe the designation as NMS Securities of certain listed, along with certain OTC, securities, will cause investor confusion; investors appreciate the difference between exchange and OTC markets, and can also appreciate the fact that NMS designation does not eliminate these distinctions but simply acknowledges that all those OTC or listed securities that are reported securities are entitled to NMS designation.
27See supra notes 18 and 19, and accompanying text.
28See Sections 19(b)(2) and 19(c) of the Act, and Rules 19b-4 and 11Aa3-2(b)(2) under the Act.
29See Rule 11Aa2-1 Adoption Release, supra note 1, at 13995-98.
30See supra note 24.
31In this connection, the Commission also notes that the NASDs new corporate governance requirements, see Securities Exchange Act Release No. 24633, supra note 5, do not apply to existing NMS issuers for 18 months.
32Although the NASDs rule change allows issuers to opt out of last sale reporting, it also, at least initially, ensures that all OTC securities currently designated as NMS Securities, including what have been designated as Tier 1 securities, can continue to be reported on a real-time basis.
335 U.S.C. §§ 601-606.
 |