[16102]
May 21, 2003
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 9-03
SEC RULES COMMITTEE No. 48-03
RE: SEC CONCEPT RELEASE REGARDING THE REGULATION OF NASDAQ-LISTED
SECURITIES
The Securities and Exchange Commission has issued a request for comment on a
petition submitted by the Nasdaq Stock Market concerning the regulation of Nasdaq-listed
securities.1 Specifically, Nasdaq requests that the SEC amend the rules of all markets that trade
Nasdaq-listed securities to establish uniform trading rules; order that the exchanges’ costs of
regulation be aggregated and deducted from the market data revenue collected pursuant to the
Nasdaq Unlisted Trading Privileges Plan ("UTP Plan"); and prohibit the launch or continuation
of Nasdaq trading by any market that fails to protect investors as required under the Securities
Exchange Act of 1934. In addition, the SEC requests comment on whether these same actions
would be appropriate for the regulation and trading of exchange-listed securities. The most
significant aspects of the Release are summarized below.
Comments on the Release are due to the SEC no later than June 19, 2003. We have
scheduled a conference call to discuss the Release and the Institute’s comment letter for
Thursday, May 29 at 4:15 pm Eastern. If you would like to participate on the call, please
contact Monica Carter-Johnson by e-mail at mcarter@ici.org. The dial–in number for the call
will be 877-546-1565 and the passcode will be NASDAQ.
A. Uniform Trading Rules
Nasdaq requests that the SEC act immediately to establish uniform trading rules for all
markets that trade Nasdaq-listed securities and to ensure equal surveillance and enforcement of
those rules. Nasdaq states that it attempted, unsuccessfully, to persuade the other exchanges
that trade Nasdaq stocks to act jointly to adopt uniform market rules and surveillance and
enforcement mechanisms to eliminate regulatory disparities. Nasdaq therefore requests that the
UTP Plan be amended to prohibit certain conduct including any activity that is prohibited by
any provision of the Exchange Act or rule adopted under that Act, market manipulation, illegal
short selling, insider trading, fraud, front running, marking the open or the close, and non-
1 Securities Exchange Act Release No. 47849 (May 14, 2003) (“Release”). The Release can be found on the SEC’s
website at http://www.sec.gov/rules/concept/34-47849.htm. The Nasdaq petition can be found on the SEC’s
website at http://www.sec.gov/rules/petitions/petn4-479.htm.
2
compliance with the limit order display rule and the firm quote rule. Nasdaq requests that the
SEC, at a minimum, add to the rules of all SROs that trade Nasdaq-listed securities, rules
requiring an electronic audit trail identical to the NASD’s OATS Rules and short-sale
restrictions similar to NASD Rule 3350.
The SEC requests comments on several aspects of the proposal to establish uniform
trading rules including, among other things: whether commenters agree with Nasdaq that there
is unequal regulation of trading in Nasdaq securities; whether all exchanges and associations
trading Nasdaq securities should have rules requiring detailed audit trail information, be
required to automate their surveillance and examination of Nasdaq trading on their markets,
and have similar rules to regulate short selling; what other trading rules should be uniform
across all markets; and how the SEC should address any regulatory gaps that can arise when
trading in the same security is fragmented across different SROs.
B. Allocation of Regulatory Costs
Nasdaq requests that the SEC equitably allocate regulatory costs across all markets that
trade Nasdaq-listed securities. Nasdaq believes that the fairest way to allocate these costs is to
aggregate the exchanges’ costs of regulation, which include costs associated with surveillance
and enforcement, and to deduct that amount from the market data revenue collected pursuant
to the Nasdaq UTP Plan. The SEC specifically requests comment on several aspects of the
proposal to reallocate regulatory costs including whether the proceeds from the Nasdaq UTP
Plan should be withheld to pay for regulatory costs and whether other methods of fairly
allocating regulatory costs should be considered.
C. Prohibition of Trading in Nasdaq-Listed Securities
Nasdaq requests that the SEC identify the markets that trade Nasdaq-listed securities
without approved rules, order audit trails, surveillance, and examination programs sufficient to
protect investors. For those markets that in Nasdaq's view do not have adequate regulatory
protections, Nasdaq requests that the SEC exercise its authority to prohibit the launch or
continuation of Nasdaq trading by any market that fails to protect investors as required under
the Exchange Act.
D. Exchange-Listed Securities
The SEC notes that exchange-listed securities may be traded on more than one market
and, therefore, the same regulatory issues raised by Nasdaq could arise. The SEC therefore
requests comment on whether the same regulatory concerns raised by Nasdaq for Nasdaq
securities, such as regulatory fragmentation and arbitrage, exist for exchange-listed stocks.
Specifically, the SEC requests comment on whether commenters believe that there is unequal
regulation of exchange-listed securities among the markets trading such securities; if so,
whether commenters believe that the proposals made by Nasdaq with respect to Nasdaq
securities would address such unequal regulation in the listed markets; and, if not, what other
approaches commenters recommend.
Ari Burstein
Associate Counsel