[Federal Register Volume 60, Number 146 (Monday, July 31, 1995)]
[Notices]
[Pages 39035-39037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18706]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36019; File No. SR-NYSE-95-16]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving and Notice of Filing and Order Granting Accelerated 
Approval of Amendment to a Proposed Rule Change Relating to the Options 
Market Maker Exemption From the NASD Short Sale Bid Test for Certain 
Merger and Acquisition Securities

July 24, 1995.

I. Introduction

    On April 21, 1995, the New York Stock Exchange, Inc. (``NYSE'' or 

[[Page 39036]]
    ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to extend the market maker exemption from the 
NASD's bid test rule to Nasdaq National Market (``Nasdaq/NM'' or 
``NM'') securities involved in merger and acquisition (``M&A'') 
transactions. The proposed rule change was published for comment and 
appeared in the Federal Register on May 10, 1995.\3\ On May 31, 1995, 
the NYSE filed Amendment No. 1 to its proposal.\4\ This order approves 
the proposal, as amended.

    \1\ 15 U.S.C. 78s(b)(1)(1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 35672 (May 4, 1995), 
60 FR 24942.
    \4\ In Amendment No. 1, the Exchange modifies its proposal to 
clarify that to qualify as an exempt hedge transaction, a short sale 
in an M&A security must in fact serve to hedge a market maker's 
position. In addition, Amendment No. 1 includes a revised Exhibit 1 
that incorporates certain non-substantive language inadvertently 
omitted from the original filing. Letter from James E. Buck, Senior 
Vice President and Secretary, NYSE, to Francois Mazur, Staff 
Attorney, Division of Market Regulation, Commission, dated May 26, 
1995 (``Amendment No. 1'').
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II. Description of the Proposal

    In November 1994, the Commission approved proposals submitted by 
the options exchanges concerning a market maker exemption \5\ to the 
NASD bid test rule \6\ applicable to short sales of NM securities 
traded through Nasdaq. The Exchanges' proposals were approved on a 
temporary basis to remain in effect concurrently with the NASD's bid 
test rule pilot program.\7\

    \5\ Securities Exchange Act Release No. 34632 (September 2, 
1994), 59 FR 46999 (approving proposals by the American Stock 
Exchange, Inc. (``Amex''), Chicago Board Options Exchange, Inc. 
(``CBOE''), NYSE, Pacific Stock Exchange, Inc., and Philadelphia 
Stock Exchange, Inc.).
    \6\ The NASD bid test rule prohibits broker-dealers from 
effecting short sales, for themselves or their customers, at or 
below the ``bid'' when the current ``inside'' or best bid is below 
the previous inside bid. NASD Rules of Fair Practice (``NASD 
Rules''), Art. III, Sec. 48. See Securities Exchange Act Release No. 
34277 (June 6, 1994), 59 FR 34885 (amending the NASD Rules to add 
the short sale rule). The NASD bid test rule is also referred to as 
the ``short sale rule.''
    \7\ See Securities Exchange Act Release No. 34632, supra note 5. 
The Commission approved the NASD's short sale rule on an eighteen 
month temporary basis, effective September 6, 1994, through March 5, 
1996. Id.
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    The NYSE's market maker exemption from the NASD short sale rule is 
codified as Rule 759A. NYSE Rule 759A allows each exchange options 
specialist and Competitive Options Trader (``COT'') to rely on the 
NASD's options market maker exemption to effect short sales in Nasdaq/
NM securities at or below the best bid when the displayed bid is below 
the preceding best bid if the short sale qualifies as an ``exempt hedge 
transaction.'' \8\ The NYSE now proposes to expand the definition of 
``exempt hedge transaction'' to include certain short sales in M&A 
securities, defined as the securities of a company that is a party (or 
a prospective party) to a publicly announced M&A with an issuer of a 
Nasdaq/NM security that underlies an Exchange-listed option.\9\ 
Specifically, exempt hedge transactions would include short sales in 
M&A securities effected by a qualified Exchange options market maker to 
hedge, and which in fact serves to hedge, an existing or prospective 
position\10\ in an Exchange-listed option overlying an NM security of 
another company that is a party to the M&A.\11\ Thus, with respect to 
an Exchange options specialist, the exemption would apply to short 
sales of a company that is a party to an M&A with a company whose 
Nasdaq/NM security underlies a speciality stock option; with respect to 
a COT, the exemption would apply to short sales of a company that is a 
party to an M&A with a company whose Nasdaq/NM security underlies an 
Exchange-listed stock option.

    \8\ The NYSE currently defines an ``exempt hedge transaction,'' 
in relevant part, as a short sale in an NM security effected to 
hedge, and which in fact serves to hedge, an existing offsetting 
options position or an offsetting options position that was created 
in one or more transactions contemporaneous with the short sale. See 
NYSE Rule 759A(a)(i).
    \9\ Proposed NYSE Rule 759A(a)(ii).
    \10\ A ``prospective position'' refers to a position that might 
be created as the result of specific, communicated indications of 
interest that the specialist or COT has initiated prior to the hedge 
transaction.
    \11\ The NASD provides an exemption from the bid test rule for 
risk arbitragers (and other NASD members) who take positions in 
stocks involved in M&A transactions. See Securities Exchange Act 
Release No. 34277, supra note 6. The NASD short sale rule states 
that once an M&A has been publicly announced, a qualified market 
maker in one of the two affected securities may immediately register 
as a qualified market maker in the other M&A security. See NASD 
Rules, Article III, Sec. 48(1)(3)(iii). Consequently, such a market 
maker may rely on the market maker exemption for short sales of the 
other M&A security.
    Recently, the Amex, CBOE, and PSE amended their respective rules 
to extend the market maker exemption from the bid test rule to 
certain short sales of the stock of a company that is involved in a 
publicly announced M&A with a company whose stock is a designated 
Nasdaq/NM security. Securities Exchange Act Release No. 35211 
(January 10, 1995), 60 FR 3887. A ``designated NM security'' is an 
NY security which the market maker has designated as qualifying for 
the bid test exemption. See e.g., CBOE Rule 15.10(c)(2)(B).
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    Finally, the Exchange's proposal effects certain minor technical 
changes to the wording of its Rule 759A.

III. Discussion

    The Commission believes that the Exchange's proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to national securities exchanges. In 
particular, the Commission believes the Exchange's proposal is 
consistent with the requirements of Section 6(b)(5) of the Act \12\ in 
that it is designed to remove impediments to, and perfect the mechanism 
of, a free and open market, and to protect investors and the public 
interest.

    \12\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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    The Commission approved the NASD's short sale rule on a temporary 
basis on June 29, 1994.\13\ In so doing, the Commission stated that the 
short sale rule, together with the market maker exemption, is a 
reasonable approach to regulating short sales of Nasdaq/NM securities. 
The Commission believes that the Exchange's proposal is consistent with 
the NASD's bid test rule and addresses the limitations established by 
the NASD concerning the applicability of the market maker exemption.

    \13\ Securities Exchange Act Release No. 34277, supra note 6.
    Specifically, the Exchange's proposal is designed to extend the 
market maker exemption to the stock of a company that is involved in a 
publicly announced M&A with a company whose stock is designated Nasdaq/
NM security. The Commission believes that when a designated Nasdaq/NM 
security becomes involved in an M&A, options specialists and COTs may 
need to hedge positions in options overlying such a designated Nasdaq/
NM security by buying or selling the securities of the other company 
involved in the M&A, whether or not the other company's stock has 
listed overlying options. Indeed, where there are no options on the 
other company's stock, buying or selling that company's stock at times 
may be the only feasible way for an options specialist or COT to hedge 
positions in options on the designated Nasdaq/NM security, given the 
risk arbitrage relationship that is likely to exist between the two 
stocks. Therefore, the Commission believes that by allowing options 
specialists and COTs to sell short, for hedging purposes, shares of a 
company that is involved in an M&A with a company whose stock is a 
designated Nasdaq/NM security, and by designating such sales as bid 
test exempt, the Exchange's proposal will enhance the ability of its 
options specialists and COTs to perform their market making functions, 
thereby 

[[Page 39037]]
contributing to the liquidity of the market for options, as well as the 
liquidity of the market for the stocks of both companies.
    The Commission notes that the proposed extension of the market 
maker exemption from the short sale rule is limited to publicly 
announced M&As. Moreover, the Exchange's options specialists and COTs 
may avail themselves of the M&A extension to the exemption only if the 
short sales are made to hedge existing or prospective positions in 
Exchange-listed options on a security of another company involved in 
the M&A, and the short sales are or will be ``exempt hedge 
transactions'' as defined by the Exchange.\14\

    \14\ See supra note 8.
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    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Amendment No. 1 states that to qualify 
as an exempt hedge transaction, a short sale in a Nasdaq/NM security 
must in fact serve to hedge an overlying options position. Amendment 
No. 1 also includes certain non-substantive language inadvertently 
omitted from the original filing.
    The Commission believes that these changes serve to clarify the 
Exchange's proposal and make it consistent with the provisions of the 
other Exchanges relating to the market maker short sale exemption for 
certain M&A securities. Accordingly, the Commission believes the 
Amendment raises no new or unique regulatory issues. Therefore, the 
Commission believes it is consistent with Sections 6(b)(5) and 19(b)(2) 
of the Act \15\ to approve Amendment No. 1 to the proposal on an 
accelerated basis.

    \15\ 15 U.S.C. 78f(b)(5) and 78s(b)(2) (1988).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. 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. Sec. 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 will also be available 
for inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-95-16 and should be 
submitted by August 21, 1995.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-NYSE-95-16), as 
amended, is approved.

    \16\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18706 Filed 7-28-95; 8:45 am]
BILLING CODE 8010-01-M