Proposed New Rule Regarding Business Conduct of Members; Last Voting Date: February 3, 1989
*These are suggested departments only. Others may be appropriate for your firm.
IMPORTANT MAIL VOTE
Members are invited to vote on a proposed new Section 44 to Article III of the NASD Rules of Fair Practice that would prevent a firm that withdraws or is removed as a market maker in a NASDAQ security from continuing market-making activity in that security in the over-the-counter market during any period that the member is ineligible to re-enter NASDAQ as a market maker.
The text of the proposed rule follows this notice.
BACKGROUND AND ANALYSIS
On June 9, 1988, the SEC approved amendments to the Rules of Practice and Procedures for the Small Order Execution System (SOES Rules) and to Schedule D to the NASD By-Laws. The amended rules, in part, require that a market maker in a NASDAQ National Market System (NASDAQ/NMS) security also be registered as a market maker in SOES with respect to that security. In addition, the amended SOES Rules impose a penalty of 20 business days for unexcused withdrawal from market making in any NASDAQ security. As noted in the SEC's order approving the SOES amendments, the amendments are "designed to improve the accuracy of quotations displayed through the NASDAQ System, and to enhance the liquidity of the over-the-counter (OTC) market by increasing the level of participation of NASDAQ market makers in SOES."1
The NASD believes that the public-policy purpose behind the adoption of the SOES amendments in June 1988 would be undermined if firms could readily withdraw from making a market in a NASDAQ security and transfer their market-making activity to the non-NASDAQ OTC market during the 20-business-day penalty period.
The proposed amendment prohibits firms that make a market in a NASDAQ security from transferring their market-making activity in that NASDAQ security to the non-NASDAQ OTC market during any period in which the firm is ineligible to re-enter the NASDAQ System as a market maker.
The NASD Board of Governors believes that the proposed rule amendment helps to preserve the viability of the SOES system because market makers will not be able to avoid the 20-business-day penalty provision by transferring their market-making activity to the OTC market during that time. Thus, the Board believes that the proposed amendments are necessary and appropriate and recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than February 3, 1989.
Questions concerning this notice may be directed to Eneida Rosa, Assistant General Counsel, NASD Office of General Counsel, at (202) 728-8284.
PROPOSED AMENDMENT TO ARTICLE III, RULES OF FAIR PRACTICE
(Note: New language is underlined.)
Business Conduct of Members
A member that has withdrawn from participation in the NASDAQ System as a market maker in any NASDAQ security pursuant to the provisions of Part VI, Section 8 of Schedule D to the NASD By-Laws shall not act as a market maker in that security in the over-the-counter market during any period that the member is ineligible to re-enter NASDAQ as a market maker.
1 File No. SR-NASD-88-1, Securities Exchange Act Release No. 25791 (June 9,1988).