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BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50484; File No. SR-CBOE-2003-33] Self-Regulatory Organizations; Order Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Inc., and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 2, 3 and 4 Relating to Non-Member Market Maker Transaction Fees October 1, 2004. I. Introduction On July 30, 2003, the Chicago Board Options Exchange, Inc.

(“CBOE” or “Exchange”) 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 increase the transaction fee for non-member market fees by $0.02 per contract. On November 13, 2003, CBOE filed Amendment No. 1 to the proposed rule change via facsimile. 3 The proposed rule change, as amended, was published in the **Federal Register** for notice and comment on November 28, 2003. 4 The Commission received one comment on the proposal. 5 On March 5, 2004, CBOE filed Amendment No. 2 to the proposed rule change. 6 On April 22, 2004, CBOE filed Amendment No. 3 to the proposed rule change. 7 On August 20, 2004, CBOE filed Amendment No. 4 to the proposed rule change. 8 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* letter from Christopher R.

Hill, Attorney II, Office of Enforcement, Legal Department, CBOE, to Leah Mesfin, Special Counsel, Division of Market Regulation (“Division”), Commission, dated November 13, 2003 (“Amendment No. 1”). In Amendment No. 1, CBOE revised its statement of the purpose of the proposed rule change to modify its argument in support of the proposal. 4 *See* Securities Exchange Act Release No. 48815 (November 20, 2003), 68 FR 66908. 5 *See* letter from Michael J. Simon, Senior Vice President and Secretary, International Stock Exchange, Inc.

(“ISE”), to Jonathan G. Katz, Secretary, Commission, dated December 19, 2003. 6 *See* letter from Christopher R. Hill, Attorney II, Office of Enforcement, Legal Department, CBOE, to Nancy Sanow, Assistant Director, Division, Commission, dated March 5, 2004 (“Amendment No. 2”). In Amendment No. 2, CBOE replaced the rule text to more clearly indicate the changes to be made to the Exchange's Fee Schedule. 7 *See* letter from Christopher R. Hill, Attorney II, Office of Enforcement, Legal Department, CBOE, to Nancy Sanow, Assistant Director, Division, Commission, dated April 21, 2004 (“Amendment No. 3”).

In Amendment No. 3, CBOE revised the rule text to clarify that the proposed fee increase would not apply to Linkage orders. 8 *See* letter from Jaime Galvin, Attorney, Legal Division, CBOE, to Jennifer Colihan, Special Counsel, Division, Commission, dated August 19, 2004 (“Amendment No. 4”). In Amendment No. 4, CBOE replaced the rule text to reflect recent changes made to the Exchange's Fee Schedule. This order approves the proposed rule change as modified by Amendment No. 1.

In addition, the Commission is approving on an accelerated basis, and is soliciting comments on, Amendments No. 2, 3 and 4 to the proposed rule change. II. Description The Exchange is proposing to change its Fee Schedule to increase transaction fees for orders originating from non-member market makers by $0.02 per contract. In its proposed rule change, CBOE explained that currently the Exchange charges transaction fees for orders executed on behalf of non-member market makers that are equal to member market maker and member firm rates for equity and QQQ options and equal to customer rates for index products.

CBOE represented that its members have complained that such equivalence of fees is unfair to Exchange members who pay a variety of additional fees through their membership in the Exchange to help offset the Exchange's expenses. Therefore, CBOE explained that it is proposing to increase transaction fees charged to non-member market makers in order to more fairly assess Exchange costs among the individuals and organizations who avail themselves of the Exchange's trading facilities.

In addition, CBOE has represented that because it does not permit non-members to enter orders on the Exchange, it would not assess directly any such fees upon non-members and that the $0.02 increase would not apply to Linkage orders. III. Summary of Comments and CBOE's Response The Commission received one comment letter on the proposal rule change in opposition to the proposal. 9 The ISE opposed the proposed rule change on several grounds. 9 *See supra* footnote 5. First, the ISE argued that the CBOE failed to explain sufficiently how the proposed rule change is consistent with Sections 6(b)(4) 10 and 6(b)(5) 11 of the Act.

The ISE rejected the Exchange's rationale that CBOE members' complaints that uniform fees for all non-customer executions is unfair to Exchange members, who pay a variety of additional fees through their membership to help offset CBOE's systems expenses, as sufficient justification for the proposal. The ISE also argued that even if the issue of fairness in sharing the costs for use of CBOE's systems justified a fee increase, such a fee increase should be imposed on all non-members (including non-member broker-dealers), and not just on non-member market makers.

According to the ISE, the Exchange's failure to justify why the fee would be levied on only one subset of non-members, instead of on all non-members, undermines CBOE's argument that it is simply responding to member complaints about the fairness of fees. 10 Section 6(b)(4) of the Act requires that “the rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.” 15 U.S.C. 78f(b)(4). 11 Section 6(b)(5) of the Act prohibits “unfair discrimination between customers, issuers, brokers, or dealers.” 15 U.S.C. 78f(b)(5).

In response to these comments, the CBOE emphasized that Section 6(b)(4) the Act only requires an exchange to provide for an “equitable allocation” of fees among its members and issuers and other persons using its facilities. 12 The CBOE stated that the Act's use of the term “equitable” does not necessarily mean “equal,” but rather “fair.” This understanding is confirmed, the CBOE argued, by the fact that Section 6(b)(5) of the Act prohibits only “unfair” discrimination, not all discrimination.

The CBOE argued that the proposed $0.02 per contract fee for non-member market makers to help offset Exchange expenses is an equitable allocation of fees because its members already pay a variety of other fees as members of the Exchange to help meet the Exchange's expenses. 12 *See* letter from Joanne Moffic-Silver, General Counsel, CBOE, to Jonathan G. Katz, Secretary, Commission, dated February 27, 2004 (“CBOE Letter”). The ISE also asserted that the proposed rule change is anti-competitive because it could act as a disincentive for non-member market makers to send order flow to the CBOE and thus could hinder the price-discovery process.

The ISE noted that, while the proposal exempts Linkage transactions from the $0.02 increase, the Linkage Plan states that market makers “should send Principal Orders through Linkage on a limited basis and not as a primary aspect of their business.” Further, the ISE stated that the Linkage Plan imposes a strict mathematical limit on the number of Principal Orders that a market maker can send through the Linkage. Thus, the ISE argued, Linkage would not offer an adequate routing alternative for non-member market makers to send Principal Orders to CBOE.

In response to this argument, the CBOE noted that, like other self-regulatory organizations, it needs the ability to spread its operating costs fairly among the parties using its facilities and stated that the ISE overlooks this fact. The CBOE noted that this concern requires it to strike a balance in setting fees on member and non-member market maker transactions. The Exchange stated that the proposed differential between member and non-member market maker fees could not be so small as to incent current CBOE market-makers to abandon their memberships and simply send in their orders as non-members to avoid member dues and fees, as well as market making and regulatory requirements that apply to members.

Simultaneously, CBOE conceded that the differential in fees could not be so great as to give non-member market makers a disincentive to routing their orders to CBOE. Thus, CBOE contended that the $0.02 fee differential strikes a fair and reasonable balance between these two competing concerns. The CBOE also rejected the ISE's contention that the fee increase would impede inter-market price discovery because, in the CBOE's view, the proposal would expressly exempt Linkage orders from the fee change and because the proposed differential in member and non-member fees is small.

CBOE stated that any effect that a fee increase would impose on price discovery is a function of the degree of any proposed price differential. CBOE argued that it has proposed a reasonably small differential in order to achieve its objective of more equitably assessing its costs without negating inter-market price discovery. Finally, the ISE objected to the proposed rule change because it believed that its approval by the Commission would prompt other exchanges to file similar proposals with the Commission.

As a result, the ISE argued, market makers would increasingly have disincentives to send order flow to other exchanges, which could lead to decreasing market efficiency and harming price discovery. In response to this concern, CBOE suggested that the current highly competitive market for order flow among the various options exchanges would discipline exchanges to keep their transaction fee proposals within reasonable limits. IV. Discussion and Commission Findings Under Section 19(b)(2) of the Act, 13 the Commission must approve the CBOE's proposed rule change if it finds that the proposed rule change is consistent with the requirements of the Act and the rules thereunder applicable to a national securities exchange.

If the Commission is unable to make that finding, it must institute proceedings to consider whether to disapprove the proposed rule change. 13 15 U.S.C. 78s(b)(2). The statutory requirements relevant to such a determination generally are found in Section 6(b) of the Act. 14 That statutory section sets forth the purposes or objectives that the rules of a national securities exchange should be designed to achieve. Those purposes or objectives, which take the form of positive goals, such as to protect investors and the public interest, or prohibitions, such as to not permit unfair discrimination among customers, issuers, brokers or dealers or to not permit any unnecessary or inappropriate burden on competition, are stated as broad and elastic concepts.

They afford the Commission considerable discretion to use its judgment and knowledge in determining whether a proposed rule change complies with the requirements of the Act. 15 Furthermore, the subsections of Section 6(b) of the Act must be read with reference to one another and to other applicable provisions of the Act and the rules thereunder. 16 Within this framework, the Commission must weigh and balance the proposed rule change, assess the views and arguments of commenters, and make predictive judgments about the consequences of approving the proposed rule. 17 14 15 U.S.C. 78f(b). 15 *See Bradford National Clearing Corp.* v. *Securities and Exchange Commission,* 590 F.2d 1085 (D.C.

Cir. 1978). 16 *See* Securities Exchange Act Release No. 37273 (June 4, 1996), 61 FR 29438 (June 10, 1996). 17 *Id.* After careful consideration of the proposed rule change, the comment letter received, and the Exchange's response to the comment letter, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission finds that the proposal is consistent with the requirements of Section 6(b)(4) of the Act, 18 which states that the rules of the exchange must provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and with the requirements of Section 6(b)(5) of the Act, 19 which, among other things, states that the rules of the exchange must not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

In addition, the Commission finds that the proposal is consistent with the requirements of Section 6(b)(8) of the Act, 20 which states that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 18 15 U.S.C. 78f(b)(4). 19 15 U.S.C. 78f(b)(5). 20 15 U.S.C. 78f(b)(8). The Commission notes that whether a proposed fee can be considered an equitable allocation of a reasonable fee among members and issuers and others using its facilities would depend on the facts and circumstances of the proposal.

In evaluating such a proposal, the Commission necessarily would consider and weigh all of the relevant factors. These factors may include, among others, the amount of the fee and whether the fee is an increase or decrease, the classes of persons subject to the fee, the basis for any distinctions in classes of persons subject to the fee, the potential impact on competition, and the impact of any disparate treatment on the goals of the Act. Taking into account these factors, the Commission believes that the proposed fee satisfies the requirements of Section 6(b)(4) of the Act because, while the fee distinguishes between member and non-member market makers, as well as non-member broker-dealers and non-member market makers, it does not do so in a manner that imposes a significant cost burden on the non-member market makers who send their orders to CBOE.

The ISE claims that the Exchange's proposal does not provide for an equitable allocation of reasonable fees among members and, further, does not provide sufficient justification for charging member and non-member market makers disparate fees. The Commission agrees with the position stated in the CBOE Letter, namely, that the Act does not require that members, issuers, and others to pay the same fees for use of an exchange's facilities, but that the fees assessed these categories of users must be equitably allocated, *i.e.* , that they be allocated in a fair manner.

Accordingly, the Commission finds that the $0.02 per contract differential for non-member market makers is consistent with Section 6(b)(4) of the Act. In addition, the ISE takes issue with the fact that the fee differential would be applied to a subset of non-member users of the CBOE's facilities and not to all non-member broker-dealers. Under Section 6(b)(5) of the Act, the rules of the Exchange must not be designed to permit unfair discrimination between brokers, dealers and customers.

The Commission notes that the Act does not require that the Exchange's rules be designed to prohibit all discrimination, but rather they must not permit unfair discrimination. In the Commission's view, the $0.02 per contract fee differential for non-member market makers is reasonable under the circumstances and it is not unfairly discriminatory for the Exchange to charge non-member market makers a nominally higher fee than other non-members who submit orders to the Exchange. Accordingly, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act.

The ISE further argues that the proposed rule change is anti-competitive because it would act as a disincentive for non-member market makers to send order flow to the Exchange in an attempt to further the price discovery process. Thus, the ISE raises the issue whether the fee differential satisfies the requirement of Section 6(b)(8) of the Act that it not impose any burden on competition that is not necessary or appropriate in furtherance of the Act's purposes. The Commission does not believe that the proposed fee imposes an unnecessary or inappropriate burden on competition.

Fair competition among the options markets must take into account all of the relevant facts and circumstances, including the fact that they are organizations composed of members. It is important to note that membership carries with it certain duties, responsibilities, and costs not applicable to non-members. Thus, in the circumstances of this filing, it is not inconsistent with fair competition for the CBOE to charge non-member market makers a reasonable fee when utilizing systems whose development has been financed by CBOE members.

Moreover, because access to CBOE's facilities would not be more restrictive under the proposed rule change and because non-member market makers can submit orders via the Linkage system, the Commission does not believe that the proposal would harm the depth and liquidity of the options market. 21 The Commission notes that the depth and liquidity of any particular option is dependent on numerous variables, including the degree of buying and selling activity in the underlying security.

In addition, the degree to which an options exchange captures order flow in a particular option is dependent on various factors, such as the narrowness of spreads and the speed of execution. The Commission, however, does not dispute that if such a fee were too large it possibly could deter some non-member market makers from sending order flow to the Exchange, which, in turn, ultimately could have an adverse effect on competition. As the CBOE Letter pointed out, however, the Exchange has an incentive to assure that any differential in fees not be so large as to discourage non-member market makers from sending orders to the Exchange.

The Commission believes that, in this case, the fee differential is consistent with Section 6(b)(8) of the Act. 21 The Commission does not intend the approval of this proposal to establish a precedent that would permit the Exchange to make distinctions in the treatment of orders on its floor or through its electronic facilities as a means to discriminate unfairly against its competitors. Orders for the account of non-member market makers must continue to be treated in the same way as other orders.

For example, the proposal would not affect the way non-member market maker orders are routed or the priority they are given. Finally, the ISE posits that approval of the proposed rule changed would have “cascading negative effects,” because other exchanges likely would submit proposed rule changes that impose higher fees on non-member market makers and because, in the ISE's view, differential treatment of non-member market makers across exchanges ultimately could decrease market efficiency and harm the price discovery process.

The Commission agrees that the current system whereby each exchange charges the same transaction fees for member and non-member market makers is easy and practical to administer both for the Commission, when it determines whether those fees are consistent with the Act, and for the exchanges, when they assess those fees on users of their facilities. As noted above, however, the Commission believes that the Act does not require identical treatment for each class or subclass of users of an exchange's facilities, but rather mandates fair treatment, assuming that a proposed fee differential does not raise other issues under the Act.

If any other exchange files a similar fee proposal with the Commission, it would have to be analyzed based on its own set of facts and circumstances. Nevertheless, the Commission intends to monitor whether the CBOE's proposed fee differential for non-member market makers has any adverse consequences for the options markets. V. Amendments No. 2, 3 and 4 The Commission finds good cause for approving Amendments No. 2, 3 and 4 prior to the thirtieth day after the date of publication of notice thereof in the **Federal Register** .

In Amendments No. 2, 3 and 4, the Exchange, respectively, set forth the rule text of the complete Fee Schedule relating to transaction costs, clarified the treatment of Linkage orders in the rule text of the Fee Schedule, and updated the rule text of the Fee Schedule to reflect recent revisions. 22 In the Commission's view, these amendments were not significant and did not affect the substance of the proposed rule change. Therefore, the Commission finds that granting accelerated approval to Amendments No. 2, 3 and 4 is appropriate and consistent with Section 19(b)(2) of the Act. 23 22 *See* Securities Exchange Act Release No. 50175 (August 10, 2004), 69 FR 51129 (August 17, 2004). 23 15 U.S.C. 78s(b)(2).

VI. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendments No. 2, 3 and 4, including whether it is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form *(http://www.sec.gov/rules/sro.shtml);* or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-CBOE-2003-33 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-CBOE-2003-33. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site *(http://www.sec.gov/rules/sro.shtml).* Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549.

Copies of such filing also will be available for inspection and copying at the principal office of CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2003-33 and should be submitted on or before October 29, 2004. VII. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 24 that the proposed rule change (SR-CBOE-2003-33), as amended by Amendment No. 1, be, and it hereby is, approved, and that Amendments No. 2, 3 and 4 to the proposed rule change be, and hereby are, approved on an accelerated basis. 24 *Id.* For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 25 Margaret H.

McFarland, Deputy Secretary. 25 17 CFR 200.30-3(a)(12). Exhibit A New text is *italicized* ; deleted text is in [brackets]. Chicago Board Options Exchange, Inc. Fee Schedule—August 1, 2004 1. *OPTION TRANSACTION FEES (1)(3)(4)(7)* Per Contract *EQUITY OPTIONS (13):* I. CUSTOMER $.00 *MARKET-MAKER

(MM)(standard rate)(10)* .22 *II. MEMBER FIRM PROPRIETARY:*

(11)• FACILITATION OF CUSTOMER ORDER .20 • NON-FACILITATION ORDER .24 IV. BROKER-DEALER .25 *V. NON-MEMBER MARKET MAKER [(8)]* .[24] *26* VI. DESIGNATED PRIMARY MARKET-MAKER

(10).12 VII. ELECTRONIC DPM (e-DPM)

(14).25 VIII. LINKAGE ORDERS

(8).24 *QQQ OPTIONS:* I. CUSTOMER $.00 II. MARKET-MAKER

(MM)AND DPM (standard rate)(10) .24 III. MEMBER FIRM PROPRIETARY:

(11)• FACILITATION OF CUSTOMER ORDER .20 • NON-FACILITATION ORDER .24 IV. BROKER-DEALER .25 V. NON-MEMBER MARKET MAKER [(8)] .[24] *26* VI. LINKAGE ORDERS

(8).24 *INDEX OPTIONS* (includes Dow Jones DIAMONDS, OEF and other ETF index options): I. CUSTOMER (2): • S&P 100, PREMIUM > or = $1 .35 • S&P 100, PREMIUM <$1 .20 • MNX (MINI-NASDAQ 100) .20 • OTHER INDEXES, PREMIUM > OR = $1 .45 • OTHER INDEXES, PREMIUM <$1 .25 II. MARKET-MAKER AND DPM—EXCLUDING DOW JONES PRODUCTS

(10).24 MARKET-MAKER—DOW JONES PRODUCTS

(10).34 III. MEMBER FIRM PROPRIETARY:

(11)• FACILITATION OF CUSTOMER ORDER .20 • NON-FACILITATION ORDER .24 IV. BROKER-DEALER, EXCLUDING MINI-NASDAQ 100

(MNX)Index Customer Rates • BROKER-DEALER—MNX, PREMIUM > or = $1 .45 • BROKER-DEALER—MNX, PREMIUM <$1 .25 V. NON-MEMBER MARKET MAKER [(8)]: • S&P 100 (including OEF), PREMIUM > or = $1 .[35] *37* • S&P 100 (including OEF), PREMIUM <$1 .[20] *22* • OTHER INDEXES, PREMIUM > or = $1 .[45] *47* • OTHER INDEXES, PREMIUM <$1 .[25] *27* VI. MNX DPM SUPPLEMENTAL TRANSACTION FEE .25 VII. RUT DPM and MARKET MAKER LICENSE FEE (Russell 2000 cash settled index)

(12).40 *VIII. LINKAGE ORDERS (8):* • *S&P 100 (OEF), PREMIUM > or = $1* *.35* • *S&P 100 (OEF), PREMIUM <$1* *.20* • *OTHER INDEXES, PREMIUM > or = $1* *.45* • *OTHER INDEXES, PREMIUM <$1* *.25* 2. *MARKET-MAKER, e-DPM & DPM MARKETING FEE* (in option classes in which a DPM has been appointed)(6) .40 3. *FLOOR BROKERAGE FEE (1)(5):* • EQUITY & QQQ CUSTOMER ORDER .00 • ALL OTHER EQUITY, QQQ AND INDEX OPTIONS

(8).04 • CROSSED ORDERS .02 4. *RAES ACCESS FEE (RETAIL AUTOMATIC EXECUTION SYSTEM) (1)(4):* INDEX CUSTOMER TRANSACTIONS .25 • DOW JONES, ASSESSED ON THE FIRST 25 CONTRACTS ONLY NON-CUSTOMER TRANSACTIONS (ORIGIN CODE OTHER THAN “C”)(8)(9) .30 *Notes:*

(1)Per contract side, including FLEX options. Transaction Fees are also applicable to orders processed via CBOEdirect.

(2)Please see item 18 for details of the Customer Large Trade Discounts for the period 7/1/03-12/31/04.

(3)Member transaction fee policies and rebate programs are described in the last section.

(4)Transaction and RAES fees are charged to the CBOE executing firm on the input record.

(5)Charged to executing broker. DPMs are assessed for agency and “book” executions (non-cust. orders). Market-Maker and DPM floor brokerage fees are eligible for the Prospective Fee Reduction Program, as described in Section 19. To be eligible for the discounted “crossed” rate, the executing broker acronym, executing firm number and order ID data must be the same on both the buy and sell side of an order.

(6)The Marketing Fee will be assessed only on transactions of Market-Makers, e-DPMs and DPMs resulting from customer orders from payment accepting firms with which the DPM has agreed to pay for that firm's order flow, and with respect to orders from customers that are for 200 contracts or less.

(7)Cabinet trades are not assessed transaction fees. Only index options are assessed a cabinet fee of $.10 per contract side.

(8)[Includes,] *Linkage order fees in effect* on a pilot basis until July 31, 2005, [orders from members of other exchanges executing Linkage transactions,] except for Satisfaction Orders, which are not assessed Exchanges fees per Linkage rules. *The floor brokerage fee for “all other equity, QQQ and index options” and the RAES access fee for non-customer transactions also apply to linkage orders.*

(9)Effective 10/1/03, non-customer equity options RAES orders entered from the trading floor will not be assessed the RAES access fee.

(10)Eligible for the Prospective Fee Reduction Program as described in Section 19.

(11)Please see Section 20 for details of the Member Firm Proprietary and Firm Facilitation Fees Cap.

(12)The RUT License Transaction Fee applies to all RUT contracts traded by the DPM and other Market-Makers. The RUT DPM shall be assessed for any shortfall between the proceeds of the RUT License Fee and the Exchange's license obligation to Russell.

(13)Market-Maker, firm and broker-dealer transaction fees are capped at 2,000 per dividend spread transaction, defined as any trade done to achieve a dividend arbitrage between any two deep-in-the-money options. To qualify a transaction for the cap, a rebate request with supporting documentation must be submitted to the Exchange.

(14)Effective October 1, 2004, DPMs and e-DPMs may elect to pay a fixed annual fee of $1.75 million instead of being assessed transaction fees on a per contract basis for their DPM and e-DPM transactions only in all equity option classes. The fixed fee does not cover any floor brokerage fees. DPMs electing to pay the fixed fee will neither be charged CBOE transaction fees for CBOE transactions related to such outgoing P/A orders, nor will they receive the credit back for such fees as set forth in Section 21 of this Fee Schedule. However, pursuant to the second phase of linkage fee set forth in Section 21 of this Fee Schedule, all CBOE DPMs, including those electing the fixed annual fee, who pay transaction fees at other exchanges to execute P/A orders there, will receive a credit of up to 50% of CBOE DPM transaction charges for each such order (currently up to $.06 per contract, with the total of such credits not to exceed the total amount of inbound linkage transaction fees received by CBOE) to help offset the transaction fees of other exchanges that CBOE DPMs incur in filling P/A orders at those exchanges. Remainder of Fee Schedule: Unchanged. [FR Doc. E4-2536 Filed 10-7-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50485; File No. SR-NASD-2003-201] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval of Proposed Rule Change, and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 to the Proposed Rule Change, To Amend Schedule A of the NASD By-Laws To Adjust the Trading Activity Fee Rate, and To Add TRACE-Eligible and Municipal Securities as Covered Securities October 1, 2004. I. Introduction On December 30, 2003, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “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 Schedule A of the NASD By-Laws to adjust the Trading Activity Fee (“TAF”) rate for covered equity securities, and to assess the TAF on corporate debt securities that, under the Trade Reporting and Compliance Engine (“TRACE”) rules, are defined as “TRACE-eligible securities” and municipal securities subject to the Municipal Securities Rulemaking Board (“MSRB”) reporting requirements. The proposed rule change was published for notice and comment in the **Federal Register** on January 28, 2004. 3 The Commission received 15 comment letters on the proposal. 4 On May 20, 2004, NASD filed a response to comments, and simultaneously amended the proposal. 5 The NASD provided additional information in a letter dated September 30, 2004 to clarify its response to comments on certain issues. 6 This order approves the proposed rule change, and provides notice of filing and grants accelerated approval of Amendment No. 1. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 49114 (January 22, 2004), 69 FR 4194. 4 *See* letters from Paige W. Pierce, Chief Operating Officer, RW Smith & Associates, Inc. (“Smith”) dated February 11, 2004; Richard F. Chapdelaine, Chairman of the Board, Chapdelaine Corporate Securities, & Co. (“CCS”) dated February 12, 2004; Michael Rafferty, Rafferty Capital Markets, LLC (“Rafferty”) dated February 17, 2004; Robert Beck, Principal, Municipal Securities, Edward D. Jones & Co., LP (“Edward Jones”) dated February 17, 2004; Thomas S. Vales, Chief Executive Officer, TheMuniCenter (“TMC”) dated February 18, 2004; Samuel C. Doyle, Executive Vice President, Kirkpatrick, Pettis, Smith, Polian, Inc. (“Kirkpatrick”) dated February 17, 2004; Craig M. Overlander, Senior Managing Director, Bear, Stearns & Co. (“Bear Stearns”) dated February 17, 2004; Richard F. Chapdelaine, Chairman, and August J. Hoerrner, President, Chapdelaine & Co. (“Chapdelaine”) dated February 16, 2004; Mary McDermott-Holland, Chairman of the Board, and John C. Giesea, President and CEO, Security Traders Association (“STA”), dated February 19, 2004; Pamela M. Miller, Senior Vice President, Associated Bond Brokers, Inc. (“ABBI”) dated February 17, 2004; Robert Wolf, Managing Director, Global Head of Fixed Income, and Ray Ormerod, Executive Director, UBS Securities LLC (“UBS”) dated February 18, 2004; O. Gene Hurst, Esq., Counsel for Wolfe & Hurst Bond Brokers, Inc. (“Hurst”) dated February 20, 2004; Lynnette K. Hotchkiss, Senior Vice President and Associate General Counsel, and Michele C. David, Vice President and Assistant General Counsel, The Bond Market Association (“BMA”) dated February 17, 2004; Kimberly Unger, Executive director, The Security Traders Association of New York, Inc. (“STANY”) dated February 18, 2004; all of which were addressed to Jonathan G. Katz, Secretary, Commission. On June 16, 2004, George Miller and Lynnette Hotchkiss of The Bond Market Association submitted a memorandum to Annette Nazareth, Director, Division of Market Regulation, SEC. The Commission considers this memorandum to be a comment letter. The Smith letter appears to be a template created by The Board Market Association. To the extent that the letter raised issues in an affirmative manner, the Commission considered the issues. 5 *See* May 19, 2004 letter from Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, to Katherine A. England, Assistant Director, Division of Market Regulation, SEC, and attachments (“Amendment No. 1” or “NASD Response Letter”). In Amendment No. 1, NASD responded to the comments, and modified the proposal to clarify that the TAF will be assessed only on “TRACE-eligible securities” where the transaction also is a “reportable TRACE transaction,” as those terms are defined in NASD Rule 6210. Additionally, because debt securities that are issued pursuant to Section 4(2) of the Securities Act of 1933 and re-sold pursuant to Rule 144A in secondary market transactions are “reportable TRACE transactions,” NASD clarified that these debt transactions are subject to the TAF. 6 *See* letter from Kathleen O'Mara, Associate General Counsel, NASD, to Katherine A. England, Assistant Director, Division of Market Regulation, Commission, dated September 30, 2004 (“NASD Response Letter 2”). II. Summary of Comments The Commission received 15 comment letters on the proposed rule change. 7 Two commenters support the reduction in TAF rates; the other commenters oppose the proposed rule change for varying reasons. 8 The following is a summary of the major concerns that the commenters raised. 7 *See* footnote, 4, *supra* . 8 One commenter expresed support for the proposed reduction in TAF rates, stating that the reduction “makes progress toward rebalancing the burden of the TAF currently placed on lower priced securities.” STANY at 2. Another commenter expressed support for the NASD's proposal to revise the TAF rates, but expressed no opinion about the portion of the proposal that would assess the TAF on TRACE-eligible securities and municipal securities. STA at 2. • *Imposition of the TAF is Inappropriate Because NASD Has not Provided Evidence to Justify the TAF, and NASD Already Imposes Fees Pursuant to its TRACE Fee Structure on the Same Transactions* Several commenters believe the imposition of the TAF is unfair because NASD already imposes and collects fees under its TRACE fee structure on the same transactions. 9 These commenters believe the NASD should not be allowed to impose additional fees on these transactions, and express disapproval that NASD has not provided justification for charging a second fee. 10 They want NASD to provide justification for the TAF, and they specifically question what services the original fees have been used to support, the costs associated with those programs, the amount of overall revenue the NASD expects to collect from the TAF, and the additional costs to be supported by the TAF. 11 Similarly, several commenters believe NASD has not provided evidence to justify the imposition of a new fee. 12 9 *See, e.g.,* CCS at 2; Rafferty at 2; Bear Stearns at 1; UBS at 1; BMA at 4. Additionally, some commenters expressed disapproval of the proposal because they believe there is “no necessity for any additional fees to be imposed upon the municipal securities industry” and because fees assessed by self-regulatory organizations (“SROs”) should be coordinated across all such organizations with overlapping jurisdictions. *See e.g.,* Hurst at 1, BMA at 5, Bear Stearns at 1. 10 *See* CCS at 2. 11 *See e.g.,* Rafferty at 2. 12 *See* CCS at 2 (“* * * the industry has not received any evidence from the NASD that this fee is warranted.”); Bear Stearns at 1 (“NASD's proposing release does not provide enough information regarding its regulatory costs and overall fees to evaluate the proposal to ensure that it complies with the legal requirements for imposing fees and other charges.”) Chapdelaine at 2 (“* * * where is the NASD's justification for charging members dealing in municipal securities a TAF at the same rate it proposes to charge dealers in other fixed income markets?”); UBS at 1 (the NASD does not provide adequate information “to support a determination that the Debt TAF would result in an ‘equitable allocation of reasonable dues’ and otherwise satisfy the requirements of the Securities Exchange Act of 1934 * * *”); BMA at 2, 3 (“* * * the NASD has not provided the industry information that would establish a reasonable nexus between the regulatory costs it seeks to fund and the Debt TAF”); STANY at 2 (“We are unaware of any accounting done by the NASD, which shows revenue generated by transactions or the relationship between the ‘taxed’ transaction and the cost of regulation associated with those transactions.”). • *NASD Should Create an Exception for Intermediaries To Avoid Duplication of Fees and “Double Taxation”* Some commenters express disapproval of the proposal because they believe it will result in duplication of fees, also referred to as “double taxation.” 13 For example, one commenter explains that it “acts as an intermediary, brokering transactions on an undisclosed basis for corporate and government products.” As a result, each of this commenter's trades results in two reportable events, resulting in two fees. Under the NASD's proposal, the TAF would be collected twice on what, according to the commenter, is the same transaction. The commenter notes that in addition to having such transaction “taxed” twice (once as a TRACE security and once by the TAF), two different parties are paying the same fees on the same transactions. 14 To prevent this from occurring, the commenter suggests that the NASD create an exemption for those members acting as intermediary to ensure there is no duplication of fees. 15 13 *See* CCS at 3; Rafferty at 2-3; TMC at 1 (stating that TheMuniCenter, an alternative trading system, “will endure double transaction costs versus traditional players.”); Chapdelaine at 3; ABBI at 1 (“Presumably, the NASD would treat this agency function for debt securities in the same manner as equity transactions and exempt broker's brokers from the proposed rule; however this subject is not addressed in the proposal.”; BMA at 4 (“* * * NASD should be required to establish that adding the Debt TAF on top of these existing fees does not result, in effect, in the ‘double taxation’ of Covered Debt Securities.”; Edward Jones at 2-3 (“* * * NASD's proposal does not preclude the imposition of two charges on a transaction involving a sale by a customer to the Firm followed by the sale to another customer from the Firm's inventory.”). 14 CCS at 3. 15 *Id.* • *The TAF Is Improper Because MSRB Fees Adequately Allocate Costs to Municipal Finance Activity* Similarly, several commenters believe the TAF is inappropriate because existing fees imposed by the MSRB already allocate costs to municipal finance activity. 16 The commenters object to the NASD imposing additional fees on municipal securities because the MSRB currently “assesses transaction and other fees on municipal securities” and one commenter believes “a portion of such fees are remitted to the NASD to help defray the NASD's costs in enforcing MSRB rules.” 17 Another commenter states that “rulemaking and policymaking are regulatory functions delegated to the MSRB” and therefore the NASD cannot properly impose a fee on members dealing in municipal securities “at the same rate it proposes to charge dealers in other fixed income markets” when it has less regulatory responsibility with respect to municipal securities. 18 16 *See e.g.,* Edward Jones at 2; Kirkpatrick at 1; Chapdelaine at 2; BMA at 4. 17 Kirkpatrick at 1. 18 Chapdelaine at 2. *See also,* generally, BMA at 4. • *TAF May Have a Disparate Impact on Certain Firms and Investors, and Dealer-Banks Will Have an Unfair Competitive Advantage Because the TAF Will Not Be Imposed On Those Entities* Several commenters claim the proposal will negatively affect retail-oriented firms and investors because the proposed cap reduces the effective fee per bond for larger transactions. 19 Claiming the fee structure imposes a greater burden on retail firms and targets small transactions, the commenters argue that NASD has not adequately explained how the proposed structure for the TAF does not impose an unfair burden on competition or discriminate between market participants. 20 Additionally, commenters note that dealer-banks that deal in municipal securities are subject to MSRB rules but are not NASD members and therefore are not subject to NASD jurisdiction. As such, the TAF cannot be imposed on those entities. The commenters claim this would give those entities an unfair competitive advantage over NASD members dealing in municipal securities. 21 19 BMA at 5; Edward Jones at 2 (* * * a cap of $0.75 per trade would be applied uniformly to a firm effecting 1,000 trades of 10,000 bonds each and to a firm effecting 100 trades of 100,000 bonds each, thus resulting in fees to the firm doing the ‘smaller’ business that are 10 times larger than those charged to a firm doing the same amount of overall activity but with institutional clients.”); ABBI at 2 (“The rule, as proposed, would seem to unfairly target smaller * * * transactions as the maximum fee is $.75 per trade * * *. We do not understand the rationale for this rate”). 20 BMA at 5. 21 Chapdelaine at 2; BMA at 5. Once commenter also believes the proposal would not apply equally to similar types of securities, noting that corporate debt securities that have a maturity of one year or less at issuance are not ‘TRACE-eligible’ and would not be subject to the TAF. *Id.* The proposal contains no comparable exclusion for short-term municipal securities, even though municipal securities with a stated maturity of nine months or less are excluded from MSRB transaction assessments. *Id.* • *The NASD's Proposal Lacks Clarity in How the TAF Will Be Implemented* Some commenters believe the proposal has not adequately addressed certain practical issues regarding how the TAF will be implemented. For example, one commenter believes the proposal is unclear “whether and to what extent current NASD guidance regarding the TAF for equity securities would or should apply to Covered Debt Securities.” 22 Additionally, the commenter believes the proposal is ambiguous as to whether compliance will require member firms to track transactions in covered debt securities differently than what is used for transaction reporting purposes. 23 22 UBS at 1-2. 23 *Id. See also* BMA at 2, 6-9. III. NASD's Response to Comments In response to the commenters' contention that

(i)the proposed rule change does not contain sufficient financial information for the Commission to determine if the proposal meets the statutory standard delineated in Section 15A(b)(5), 24 which requires that the rules of an association provide for the equitable allocation of reasonable dues, fees, and other charges,” and

(ii)that there is no nexus between the TAF and the regulatory costs it seeks to fund, the NASD states the proposal extends NASD's pricing structure to TRACE-eligible securities and municipal securities, areas “over which NASD exercises primary examination and enforcement authority and responsibility.” 25 NASD maintains that such authority provides a direct nexus to the areas to which NASD proposes to extend the TAF. 26 24 15 U.S.C. 78o-3(b)(5). 25 NASD Response Letter at 3. 26 *Id.* NASD further states it “need not specify costs and revenues on a product-by-product basis to demonstrate that the fee is consistent with Section 15A(b)(5) of the Act. *Id.* Regarding the commenters' concerns that

(i)the proposed rule change would result in duplicative fees, and that it fails to consider existing regulatory fees and coordinate fees across all SROs that have overlapping jurisdiction;

(ii)the MSRB provides rulemaking and policy functions for municipal securities, and the fees that the MSRB already assesses should be used to fund all regulation; and

(iii)TRACE transaction fees currently include charges intended to recover costs incurred in the oversight of the corporate debt market, making the extension of the TAF to include TRACE-eligible securities unnecessary, NASD asserts that such concerns are misguided. NASD notes that it is responsible for enforcing MSRB rules with respect to its members, 27 which responsibility includes the supervision and regulation of member activities in municipal securities through examinations, financial monitoring, and disciplinary actions. 28 Given these responsibilities, NASD argues it must directly fund its regulatory costs, for it receives no portion of the fees that the MSRB collects from the entities subject to its rules. 29 Additionally, NASD states that “regulatory costs currently funded by the TRACE fee structure are not funded by any other fees or assessments of NASD.” 30 NASD represents that extending the TAF to corporate and municipal debt will not change this scenario, and consequently, “NASD will not charge duplicative member regulatory fees on TRACE-eligible securities.” 31 27 MSRB rules govern transactions in municipal securities. Municipal securities dealers are regulated by either the Commission and the NASD or the bank regulators. *See* Sections 3(a)(34) and 15B of the Act. 15 U.S.C. 78c(a)(34) and 15 U.S.C. 78o-4. 28 NASD Response Letter at 4. 29 NASD Response Letter at 4. NASD Response Letter 2 at 1-2 (“NASD is simply seeking to incorporate into its member regulatory pricing structure, a new transaction-based TAF to recover its member regulatory costs for, among other things, enforcing MSRB rules (including supervising and regulating its members' activities in municipal securities through examinations, financial monitoring, and, as appropriate, disciplinary actions).”). 30 NAS Response Letter at 4. 31 *Id. See also* NASD Response Letter 2 at 2 (“TRACE fees are used to fund the operation of the reporting system, development costs for the system, market operations, and market regulations * * *. TAF fees, however, are used to fund general member regulatory costs such as rulemaking (other than MSRM rulemaking), policy, examinations, processing membership applications, financial monitoring, and enforcement activity.”). The NASD considers these latter functions member regulation, which is distinct from its market regulation function. NASD notes that several commenters express concern that the TAF

(i)will be assessed on multiple parties to a single transaction,

(i)does not address competitive issues, and

(i)will have a disparate impact on retail-oriented firms. 32 In response, NASD readily acknowledges that two TAF fees will be assessed under certain circumstances. NASD states that this approach is consistent with how NASD assesses fees on covered equity securities, and states “interactions with customers are a primary driver of member regulatory costs.” 33 Because NASD devised the TAF to focus on a member firm's individual trading activity, with the TAF being one component in NASD's program to recover its regulatory costs, NASD acknowledges that member firms that engage regularly in transactions with customers will be assessed in accordance with trading activity and “in conformity with NASD's member regulatory costs.” 34 Additionally, the NASD acknowledges that the proposed rule change may result in assessing higher aggregate fees on certain retail activity that occurs in numerous smaller trades, rather than if the same volume of activity occurred in a lesser number of larger trades. However, the NASD states that retail trades “drive member regulatory costs as much as, if not more than, institutional trades,” resulting in higher member regulatory costs due to the higher number of transactions. 35 As a result, the NASD believes it has proposed fees that are fairly allocated among its membership and are “reflective of NASD's regulatory functions, efforts, and costs.” 36 Regarding the commenters' assertion that the TAF will result in disparities between fees imposed on bank municipal securities dealers that are not NASD members, NASD states it cannot “comment on the manner in which banking regulators assess their regulated institutions for the costs of oversight” and that “the TAF serves to recover NASD's costs of member regulatory services in conformity with NASD's statutory obligations.” 37 32 NASD Response Letter at 5-7. 33 NASD Response Letter at 5; NASD Response Letter 2 at 2. 34 NASD Response Letter at 5. 35 *Id.* at 7; NASD Response Letter 2 at 2 (“For example, the member regulatory costs related to 10,000 small retail bond trades is much greater than the member regulatory costs associated with one large bond trade.”) 36 NASD Response Letter at 5. 37 *Id.* at 5. Finally, in response to commenters' concerns that the TAF should be assessed only on TRACE-eligible securities subject to TRACE reporting requirements, NASD amended the proposed rule change to clarify that the TAF will apply to “TRACE-eligible securities” where the transaction also is a “reportable TRACE transaction,” as those terms are defined in NASD Rule 6210. 38 Also, because debt securities issued pursuant to Section 4(2) of the Securities Act of 1933 and re-sold pursuant to Rule 144A in secondary market transactions are “reportable TRACE transactions,” NASD further amended the proposed rule change to clarify that such debt transactions are subject to the TAF. 39 38 *Id.* at 8. 39 *Id.* IV. Discussion and Commission Findings The Commission has reviewed carefully the proposed rule change, the comment letters, and the NASD Response Letters, and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association 40 and, in particular, the requirements of Section 15A(b)(5) of the Act. 41 Section 15A(b)(5) requires, among other things, that the rules of a national securities association provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls. The Commission finds that the proposal to adjust the rate for covered equity securities, reduce the maximum per-trade charge on covered equity securities, and assess the TAF on certain corporate debt and municipal securities is consistent with Section 15A(b)(5) of the Act, in that the proposal is reasonably designed to recover NASD costs related to regulation and oversight of its members. 40 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 41 15 U.S.C.78o-3(b)(5). On May 30, 2003, the Commission approved SR-NASD-2002-148, a proposed rule change that eliminated the NASD's Regulatory Fee and instituted a TAF, which proposal was part of the NASD's plan to redesign its regulatory pricing structure to better align its fees with NASD's functions, efforts, and costs. 42 At that time, the Commission found that the TAF was consistent with Section 15A(b)(5) of the Act, and also indicated that, although the NASD then excluded debt, mutual funds, and variable annuities from the scope of the TAF, the NASD should consider ways to better allocate regulatory costs to encompass activity in all of the areas over which the NASD exercises oversight. 43 The Commission need not revisit the issue of whether the imposition of a TAF is consistent with the Act. The issue before the Commission is whether it is proper for the NASD to extend the TAF to include the types of securities described in the instant proposed rule change. For the reasons described herein, the Commission finds that such extension is consistent with the Act in general, and consistent with Section 15A(b)(5) in particular. 42 *See* Securities Exchange Act Release No. 47946 (May 30, 2003, 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148) (approval order); *see also* NASD Response Letter at 2. NASD represents that the new pricing structure is revenue neutral to NASD. 43 *See* Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148) (approval order). The Commission is satisfied that NASD has established a sufficient nexus between the proposed TAF extension to corporate debt securities that, under TRACE rules, are defined as “TRACE-eligible securities” and on municipal securities subject to MSRB reporting requirements, and the regulatory costs NASD seeks to fund with TAF-generated revenue. NASD, in its capacity as a national securities association, exercises primary examination and enforcement authority and responsibility. Additionally, NASD is charged with enforcing compliance with MSRB rules by its members, which responsibility includes review of NASD member activities in municipal securities through examinations and disciplinary actions. Because NASD does not receive any portion of fees that the MSRB collects from its members, NASD must fund its own regulatory costs. Furthermore, extension of the TAF to include corporate and municipal debt will not alter the fact that regulatory costs funded by the TRACE fee structure are not funded by any other NASD-imposed fees. Therefore, the Commission believes it is reasonable for NASD to extend the TAF to encompass corporate and municipal debt as described in the proposal. The Commission recognizes that the proposed rule change will, under certain circumstances, require payment of two TAFs. The Commission believes this is reasonable, however, because the transactions described by the commenters are two separate transactions and interactions with customers are the primary driver of the NASD's regulatory costs. 44 44 NASD Response Letter at 5. With regard to the commenters' assertions that the proposal will adversely affect retail-oriented firms, and that the TAF will penalize firms that engage in small transactions as opposed to those that engage in large, institutional transactions, the Commission believes that NASD has devised a cap that is reasonable, given that NASD represents that retail trades typically drive NASD's member regulatory costs, and that such costs do not increase exponentially as the number of shares and bonds increase. The Commission is satisfied that the cap is consistent with the standards delineated in Section 15A(b)(5) of the Act. 45 The Commission expects that the NASD will continue to monitor this aspect of the proposal to ensure that the imposition of the cap results in a TAF that remains consistent with the Act. 45 15 U.S.C. 78o-3(b)(5). Regarding the commenters' assertion that the proposal lacks information on how the TAF will be implemented, the Commission believes NASD has adequately addressed this concern by stating that it expects to apply the TAF to equity and debt securities as consistently as possible, and offering to consider any information relevant to this issue before issuing a Notice to Members with respect to debt. The Commission finds good cause to approve Amendment No. 1 before the 30th day after the date of publication of notice of filing thereof in the **Federal Register** . The NASD filed Amendment No. 1 in response to comments it received after the publication of the notice of filing of the proposed rule change. 46 Because Amendment No. 1 is responsive to the commenters' concerns and because it does not present any novel issues, the Commission finds good cause for accelerating approval of Amendment No. 1. 46 *See* footnote 5, *supra.* V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-NASD-2003-201 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. All submissions should refer to File No. SR-NASD-2003-201. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to file number SR-NASD-2003-201 and should be submitted on or before October 29, 2004. VI. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act, 47 that the proposed rule change (SR-NASD-2003-201) be, and it hereby is, approved, and that Amendment No. 1 be, and it hereby is, approved on an accelerated basis. 47 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 48 48 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2533 Filed 10-7-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No.34-50483; File No. SR-NASD-2004-118] Self-Regulatory Organizations; Order Granting Approval of Proposed Rule Change by National Association of Securities Dealers, Inc. To Introduce an Extranet Access Fee for Extranet Providers To Provide Direct Access Services for Nasdaq Market Data Feeds October 1, 2004. I. Introduction On August 4, 2004, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with 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 introduce an access fee to be charged to extranet providers to furnish direct access services for Nasdaq market data feeds. The proposed rule change was published for notice and comment in the **Federal Register** on September 1, 2004. 3 The Commission received two comment letters on the proposed rule change, both supporting the proposal. 4 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 50262 (August 25, 2004), 69 FR 53480. 4 *See* letter from Scott Feier, Vice President, Fidelity Investments, to Jonathan G. Katz, Secretary, Commission, dated September 1, 2004; and letter from P. Howard Edelstein, President and CEO, Radianz Americas Inc., to Jonathan G. Katz, Secretary, Commission, dated September 22, 2004. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association, 5 and, in particular, the requirements of Section 15A(b)(5) of the Act. 6 The Commission believes that the proposed rule change will result in the equitable allocation of a reasonable fee among extranet service providers furnishing direct access services for Nasdaq market data feeds. The Commission notes that Nasdaq plans to use the proposed fee to support Nasdaq's costs associated with establishing and maintaining multiple extranet connections, the costs for republishing, increased network monitoring and maintenance costs, and new administrative and operational costs. 5 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 6 15 U.S.C. 78 *o* -3(b)(5). It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NASD-2004-118) be, and hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 7 7 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2535 Filed 10-7-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50465; File No. SR-OCC-2003-09] Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Relating to Minimum Net Capital Requirements for Appointed Clearing Members September 29, 2004. I. Introduction On August 22, 2003, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-OCC-2003-09 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”). 1 Notice of the proposal was published in the **Federal Register** on April 1, 2004. 2 No comment letters were received. On September 28, 2004, OCC filed Amendment No. 1 to the proposed rule change. For the reasons discussed below, the Commission is granting approval of the proposed rule change. 1 15 U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 49478, (March 25, 2004), 69 FR 17258. II. Description The proposed rule change specifies minimum net capital requirements for Appointed Clearing Members, which are OCC clearing members that facilitate stock settlement for other clearing members. OCC's by-laws define an “underlying security” with respect to physically settled stock options and stock futures to mean the security or other asset that OCC is obligated to sell or purchase upon exercise or maturity of the contract. Normally, underlying securities are delivered and paid for through the facilities of the National Securities Clearing Corporation (“NSCC”), and clearing members that are eligible to clear and carry stock options and stock futures contracts must be NSCC participants except as otherwise provided in OCC's rules. OCC's by-laws and rules permit a clearing member (“Appointing Clearing Member”) that is not an NSCC member to appoint another clearing member (“Appointed Clearing Member”) that is an NSCC member to deliver and to receive underlying securities and to effect payment on their behalf through the facilities of NSCC. In connection with providing stock settlement services, an Appointed Clearing Member may be subject to increased risk. As a result, OCC has determined that Appointed Clearing Members should be required to maintain a specified minimum amount of net capital in order to perform such services. Therefore, OCC is implementing new Rule 309A that will apply to Appointed Clearing Members the minimum net capital standards that currently are applied to Managing Clearing Members in facilities management arrangements in Rule 309. This minimum net capital standard will require every Appointed Clearing Member to maintain net capital of not less than the greater of

(i)the minimum net capital required under the provisions of OCC Rule 302 or

(ii)the sum of

(A)$4,000,000 plus

(B)$200,000 times the number of Appointing Clearing Members in excess of four on whose behalf the Appointed Clearing Member effects settlements. 3 3 As originally filed the dollar amounts in

(A)and

(B)were $2,000,000 and $100,000. This was the subject of the amendment filed on September 28, 2004. III. Discussion Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible. 4 The Commission agrees with OCC that Appointed Clearing Members take on additional financial risk when they provide settlement services for Appointing Clearing Members. By increasing the minimum net capital requirement for Appointed Clearing Members, the proposed rule change is designed to provide OCC with additional assurances of Appointed Clearing Members' financial responsibility which should help OCC to better protect itself and its members from any additional risk posed by Appointed Clearing Members. Accordingly, the proposed rule change is designed to assure the safeguarding of securities and funds which are in OCC's custody or control or for which it is responsible. 4 15 U.S.C. 78q-1(b)(3)(F). OCC has requested that the Commission approve this proposed rule change prior to the thirtieth day after publication of notice of the filing. Because OCC's amendment

(1)changed only the dollar amount of required capital and not the substance of the proposed rule change,

(2)followed up on what OCC had stated it was going to do in its filing increasing the net capital requirement for Managing Clearing Members, 5

(3)made the calculation of the net capital requirements for Appointed Clearing Members and Managing Clearing Members consistent, and

(4)will help OCC to protect itself and its members from any additional risk posed by Appointing Clearing Members, the Commission finds good cause for approving the proposed rule change prior to the thirtieth day after publication of notice. 5 Securities Exchange Act Release No. 49843 (June 9, 2004), 69 FR 13744 (June 18, 2004) [File No. SR-OCC-2003-11]. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml)* or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-OCC-2004-11 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-OCC-2004-09. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml).* Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC's Web site at *http://www.optionsclearing.com* . All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC-2004-09 and should be submitted on or before October 29, 2004. V. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder. It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-OCC-2003-09) be and hereby is approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 6 6 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2534 Filed 10-7-04; 8:45 am] BILLING CODE 8010-01-P DEPARTMENT OF STATE [Public Notice 4856] Bureau of Nonproliferation; Determination on Export-Import Bank Support for U.S. Exports to Libya AGENCY: Bureau of Nonproliferation, Department of State. ACTION: Notice. SUMMARY: Pursuant to section 2(b)(4) of the Export-Import Bank Act of 1945, as amended, the President has determined and certified to Congress that it is in the national interest for the Export-Import Bank to guarantee, insure, or extend credit, or participate in the extension of credit in support of United States exports to Libya. EFFECTIVE DATE: November 13, 2004. FOR FURTHER INFORMATION CONTACT: Caroline R. Russell, Office of Regional Affairs, Bureau of Nonproliferation, Department of State ((202) 647-9786). SUPPLEMENTARY INFORMATION: In accordance with section 2(b)(4) of the Export-Import Bank Act of 1945, as amended, the Department of State determined that Libya has materially violated a safeguards agreement with the International Atomic Energy Agency (IAEA). This determination is based on the extensive Libyan nuclear activities conducted outside safeguards detailed in the IAEA Director General's February 20, 2004 report to the IAEA Board of Governors. It is also supported by the decision of the IAEA Board that Libya's failure to meet the requirements of its safeguards agreement “constituted noncompliance” pursuant to Article XII.C. of the IAEA statute. As a result of this determination, under section 2(b)(4) of the Export Import Bank Act of 1945, the Board of Directors of the Export Import Bank is prohibited from giving “approval to guarantee, insure, or extend credit, or participate in the extension of credit in support of United States exports” to Libya. The President has determined and certified to Congress pursuant to section 2(b)(4) that “it is in the national interest” to waive the restrictions in the law and allow the Export-Import Bank to support United States exports to Libya. This Presidential determination removes this impediment to Export-Import Bank support for United States exports to Libya beginning November 13, 2004 (45 days after the date the President's determination and certification was submitted to Congress). The Export-Import Bank should be consulted about other legal provisions that may continue to restrict Export-Import Bank support for United States exports to Libya. Dated: September 29, 2004. Susan F. Burk, Acting Assistant Secretary of State for Nonproliferation, Department of State. [FR Doc. 04-22736 Filed 10-7-04; 8:45 am]

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