SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 202, 240, 242 and 249 [Release No. 34-41297; File No. S7-12-98] RIN 3235-AH41 Regulation of Alternative Trading Systems; Technical Amendment AGENCY: Securities and Exchange Commission ACTION: Final Rule; Technical Amendment and Revised Compliance Date SUMMARY: The Securities and Exchange Commission is modifying the compliance dates for Rule 301(b)(3) and making a technical change to Rule 202.3. These and other rules and rule amendments relate to the regulation of alternative trading systems and exchanges and were published on December 22, 1998 (63 FR 70844). The effective date for the other rules and amendments published in 63 FR 70844 remains April 21, 1999, except for the effective date for §§ 242.301(b)(5)(i)(D) and (E) and §§ 242.301(b)(6)(i)(D) and (E), which remains April 1, 2000. DATES: Effective Date: April 21, 1999 for amendment to § 202.3 Compliance Date: The compliance date for § 242.301(b)(3) shall be revised as follows: Alternative trading systems must comply with § 242.301(b)(3) with respect to the 50 securities listed in Schedule A by August 23, 1999; with respect to the securities listed on Schedules A and B by September 28, 1999; with respect to the securities listed on Schedules A, B and C by April 25, 2000; and with respect to all securities by June 20, 2000. FOR FURTHER INFORMATION CONTACT: Elizabeth King, Senior Special Counsel, at (202) 942-0140, Constance Kiggins, Special Counsel, at (202) 942-0059, and Kevin Ehrlich, Attorney, at (202) 942- 0778, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1001. SUPPLEMENTARY INFORMATION: I. Background On December 8, 1998, the Securities and Exchange Commission (“Commission„) adopted new rules and rule amendments to allow alternative trading systems to choose whether to register as national securities exchanges, or to register as broker-dealers and comply with additional requirements under Regulation ATS, depending on their activities and trading volume.<1> The effective date for most of these new rules and rule amendments is April 21, 1999. The Commission stated in the adopting release that, prior to April 21, 1999, it would publish a list of those securities with respect to which alternative trading systems must comply with Rule 301(b)(3) on April 21, 1999 and those securities with respect to which alternative trading systems must comply with Rule 301(b)(3) on August 30, 1999. Rule 301(b)(3) requires an alternative trading system to provide to a national securities exchange or national securities association, for inclusion in the public quotation system, the prices and sizes of its best priced buy and sell orders, that are displayed to more than one person, in each covered security in which the alternative trading system represents 5% or more of the total trading volume.<2> 1 II. Delay of the Compliance Dates for Rule 301(b)(3) One major alternative trading system has indicated that it will be unable to comply with the requirements of Rule 301(b)(3) by the original compliance dates without putting the operation of its system at serious risk of failure. The operational failure of a major alternative trading system could interfere with the markets as a whole. Accordingly, the Commission believes it necessary to adjust the compliance dates for Rule 301(b)(3) as follows: August 23, 1999: Compliance with Rule 301(b)(3) with respect to the 50 Nasdaq securities listed on Schedule A, attached in the appendix. September 28, 1999: Compliance with Rule 301(b)(3) for the 50% of Nasdaq securities listed on Schedules A and B, attached in the appendix. April 25, 2000: Compliance with Rule 301(b)(3) for the 75% of Nasdaq securities listed on Schedules A, B, and C, attached in the appendix. June 20, 2000: Compliance with Rule 301(b)(3) for all Nasdaq securities. Schedules A, B, and C were created by ranking all covered securities traded on Nasdaq by their January 1999 volume, and including an equal number of securities from each decile. Some securities that were not traded on Nasdaq in January 1999 may commence trading on Nasdaq subsequently. Alternative trading systems may wait until June 20, 2000 to comply with Rule 301(b)(3) with respect to these securities. All other effective dates for the rules and rule amendments adopted last December remain the same. The Commission encourages those alternative trading systems that are able to comply with Rule 301(b)(3) on April 21, 1999 to do so. Alternative trading systems are reminded that Rule 301(b)(3) only requires alternative trading systems to “provide to a national securities exchange or national securities association„ their best priced orders in covered securities in which they represent 5% or more of all trading volume.<3> Accordingly, in the absence of a mechanism for publicly displaying those alternative trading systems’ orders in exchange-listed securities, alternative trading systems will not be violating Rule 301(b)(3) if alternative trading systems’ best priced orders in those securities in which they trade 5% or more of the volume are not publicly displayed. When a mechanism is developed to display alternative trading systems’ orders in exchange-listed securities, Rule 301(b)(3) requires them to cooperate in linking with the market or markets providing that mechanism. Under Section 553(d) of the Administrative Procedure Act,<4> publication of a substantive rule not less than 30 days before its effective date is required except as otherwise provided by the agency for good cause. Because the change extends compliance dates, the Commission finds that there is good cause for doing so. III. Rule of Practice 202.3 On December 8, 1998, the Commission adopted changes to Rule of Practice 202.3(b)(2) regarding the processing of exchanges’ applications for registration as national securities exchanges or exemption from registration based on such exchanges’ limited volume of transactions. These amendments require the Commission to grant registration or institute proceedings to determine whether registration should be denied within 90 days of the date of filing of an application. Section 19(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act„), however, requires the Commission to grant an exchange’s application for registration as a national securities exchange, or institute proceedings to determine whether registration should be denied, within 90 days of the date of publishing notice of the exchange’s filing of such application. Consequently, the Commission is making a technical correction to Rule 202.3(b)(2) to conform to the time periods in the statute. The Commission finds, in accordance with Section 553(b)(3)(A) of the Administrative Procedure Act,<5> that the amendment to Rule 202.3 relates solely to agency organization, procedures, or practice, and does not relate to a substantive rule. Accordingly, notice and opportunity for public comment are unnecessary, and publication of the amendment 30 days before its effective date of April 21, 1999 is also unnecessary. IV. Findings Section 23(a)(2) of the Exchange Act<6> requires the Commission to consider the anti-competitive effects of any rules it adopts, and to balance these effects against the benefits that further the purposes of the Exchange Act. Further, Section 2 of the Securities Act of 1933<7> and Section 3 of the Exchange Act,<8> as amended by the recently enacted National Securities Markets Improvements Act of 1996,<9> provide that whenever the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission also shall consider, in addition to the protection of investors, whether the act will promote efficiency, competition, and capital formation. Because the amendments take steps to assure the fair and orderly activities of the national securities markets and make a conforming correction to a procedural rule, they do not have any anti- competitive effects and they serve to promote efficiency, competition, and capital formation, and are therefore in the public interest. List of Subjects in 17 CFR Part 202 Administrative practice and procedure, Securities Text of Amendment For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows: Part 202 -- INFORMAL AND OTHER PROCEDURES 1. The authority citation for Part 202 continues to read in part as follows: Authority: 15 U.S.C. 77s, 77t, 78d-1, 78u, 78w, 78ll(d), 79r, 79t, 77sss, 77uuu, 80a-37, 80a-41, 80b-9, and 80b-11, unless otherwise noted. ***** 2. The last sentence of paragraph (b)(2) of § 202.3 is revised to read as follows: § 202.3 Processing of Filings. ***** (b) *** (2) *** Within 90 days of the date of publication of a notice of the filing of an application for registration as a national securities exchange, or exemption from registration by reason of such exchanges’ limited volume of transactions (or within such longer period as to which the applicant 2 consents), the Commission shall by order grant registration, or institute proceedings to determine whether registration should be denied as provided in § 240.19(a)(1) of this chapter. By the Commission. Jonathan G. Katz Secretary Dated: April 16, 1999 **ENDNOTES** <1>: Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998). <2>: 17 CFR 242.301(b)(3). For purposes of Regulation ATS, a “covered security„ includes all exchange-listed, Nasdaq NM securities, and Nasdsaq SmallCap securities, other than debt and convertible securities. See Rule 11Ac1-1(a)(6), 17 CFR 240.11Ac1-1(a)(6); Rule 300(g), 17 CFR 242.300(g). <3>: 17 CFR 242.301(b)(3). <4>: 5 U.S.C. 553(d). <5>: 5 U.S.C. 553(B)(3)(A). <6>: 15 U.S.C. 78w(a)(2). <7>: 15 U.S.C. 77b. <8>: 15 U.S.C. 78c. <9>: Pub. L. No. 104-290, 106, 110 Stat. 3416 (1996). 3