[Federal Register Volume 60, Number 173 (Thursday, September 7, 1995)]
[Notices]
[Pages 46651-46653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22105]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36171; File No. SR-NASD-55-35]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Date of 
Implementation of the NASD's Primary Market Maker Standards and the 
Duration of the Pilot Program for the NASD's Short Sale Rule

August 30, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 24, 1995, the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the NASD. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. As discussed below, the 
Commission has also granted accelerated approval of the proposal.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to Section 19(b)(1) of the Act, the NASD is proposing to 
delay, from September 6, 1995 to December 1, 1995, the implementation 
date of the Primary Market Maker standards to be used to determine the 
eligibility of market makers to an exemption from the NASD's short-sale 
rule. The NASD also proposes to extend the termination date for the 
pilot period to June 3, 1996 instead of March 5, 1996. The text of the 
proposed rule change is as follows (additions are underlined; deletions 
are bracketed).
RULES OF FAIR PRACTICE
ARTICLE III
Short Sale Rule
Sec. 48
* * * * *
    (1)(3) Until December 1, 1995, t[T]he term ``qualified market maker 
[,]'' [for a period of one year after the effective date of this 
section,] shall mean a registered Nasdaq market maker that has 
maintained, without interruption, quotations in the subject security 
for the preceding 20 business days.
* * * * *
    For purposes of this subsection, a market maker will be deemed to 
have maintained quotations without interruption if the market maker is 
registered in the security and has continued publication of quotations 
in the security through the Nasdaq system on a continuous basis; 
provided however, that if a market maker is granted an excused 
withdrawal pursuant to the requirements of Part VI, Schedule D to the 
By-Laws, the 20 business day standard will be considered uninterrupted 
and will be calculated without regard to the period of the excused 
withdrawal. Beginning December 1, 1995, [One year after effectiveness 
of this section,] the term ``qualified market maker'' shall mean a 
registered Nasdaq market maker that meets the criteria for a Primary 
Nasdaq Market Maker as set forth in Article III, Section 49 of the 
Rules of Fair Practice.
* * * * *
    (m) This section shall be in effect until June 3, 1996 [March 6, 
1996].

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any 

[[Page 46652]]
comments it received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
The NASD has prepared summaries, set forth in Sections A., B., and C. 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On June 29, 1994, the SEC approved the NASD's short-sale rule 
applicable to short sales in Nasdaq National Market securities on an 
eighteen-month pilot basis through March 5, 1996.\2\ The NASD's short-
sale rule prohibits member firms from effecting short sales at or below 
the current inside bid as disseminated by the Nasdaq system whenever 
that bid is lower than the previous inside bid.\3\ The rule is in 
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m., 
Eastern Time). As approved by the Commission, during the first year 
that the rule is in effect (i.e., September 6, 1994 through September 
5, 1995), Nasdaq market makers who maintain a quotation in a particular 
Nasdaq National Market security for 20 consecutive business days 
without interruption are exempt from the rule for short sales in that 
security, provided that the short sales are made in connection with 
bona fide market making activity (the ``20-day'' test). For the next 
six months of the 18-month pilot period (i.e., September 6, 1995 
through March 5, 1996), the ``20-day'' test for market maker exemption 
from the rule was scheduled to be replaced with a four-part 
quantitative test known as the Primary Market Maker (``PMM'') 
Standards.

    \2\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 34885 (July 7, 1994) (``Original Approval Order'').
    \3\ A short sale is a sale of a security which the seller does 
not own or any sale which is consummated by the delivery of a 
security borrowed by, or for the account of, the seller.
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    Under the PMM standards, to be eligible for an exemption from the 
short-sale rule, a market maker must satisfy at least two of the 
following four criteria: (1) The market maker must be at the best bid 
or best offer as shown on the Nasdaq system no less than 35 percent of 
the time; (2) the market maker must maintain a spread no greater than 
102 percent of the average dealer spread; (3) no more than 50 percent 
of the market maker's quotation updates may occur without being 
accompanied by a trade execution of at least one unit of trading; or 
(4) the market maker executes 1\1/2\ times its ``proportionate'' volume 
in stock.\4\ If a market maker is a PMM for a particular stock, there 
will be a ``P'' indicator next to its quote in that stock. In addition, 
market makers will be able to review their status as PMMs through their 
Nasdaq Workstation. The review period for satisfaction of the PMM 
performance standards is one calendar month. If a PMM has not satisfied 
the threshold standards after a particular review period, the PMM 
designation will be removed commencing on the next business day 
following notice of failure to comply with the standards. Market makers 
may requalify for designation as a PMM by satisfying the threshold 
standards for the next review period.

    \4\ Specifically, the proportionate volume test requires a 
market maker to account for volume of at least one-and-a-half times 
its proportionate share of overall volume in the security for the 
review period. For example, if a security has 10 market makers, each 
has a proportionate share of 10 percent. Therefore, the 
proportionate share volume is one-and-a-half times 10, or 15 percent 
of overall volume.
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    Because of unforeseen delays in the programming of the PMM 
standards, however, the NASD is proposing that the effective date of 
the PMM standards be delayed until December 1, 1995. With the proposed 
delay, a market maker's trading activity during the month of November 
will be evaluated according to the PMM standards to determine if it can 
retain its exemption for December 1995. Until November 30th, the 20-day 
test will continue to be used to evaluate market makers' eligibility 
for an exemption from the rule. Thus, after December 1, 1995, a ``P'' 
indicator will be delayed next to every PMM that is exempt from the 
rule according to the new PMM standards.
    Because implementation of the PMM standards will be delayed under 
the proposal, the NASD is also proposing to extend the pilot period for 
the rule so that there is sufficient time to evaluate the effectiveness 
and impact of the PMM standards and the effectiveness of the short sale 
rule with the PMM standards in place. Specifically, the NASD proposes 
to extend the termination date for the pilot program until June 3, 
1996.
    The NASD believes the proposed rule change is consistent with 
Sections 15A(b)(6) and 11A(c)(1)(F) of the Act. Section 15A(b)(6) 
requires that the rules of a national securities association be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market. Section 11A(c)(1)(F) assures 
equal regulation of all markets for qualified securities and all 
exchange members, brokers, and dealers effecting transactions in such 
securities. Specifically, the NASD believes that continuing the 
operation of the present ``20-day'' test until the PMM standards are in 
place will ensure that the liquidity provided to the market by virtue 
of the market maker exemption will not be diminished. In addition, the 
NASD believes that continuation of the ``20-day'' test until the PMM 
standards are in place would avoid the confusion in the marketplace 
that would result if the market maker exemption were to lapse for two 
months and then be reinstated. Finally, the NASD believes that 
extending the pilot period for the short-sale rule will enhance the 
quality of studies analyzing the effectiveness of the rule and help to 
ensure that future regulatory action taken with respect to the rule is 
based on a greater knowledge and understanding of the rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the proposed rule change will not result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approved such propose rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The NASD has requested, however, that the Commission find good 
cause pursuant to Section 19(b)(2) for approving the proposed rule 
change prior to the 30th day after publication in the Federal Register.

[[Page 46653]]

    As discussed below, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act. Further, the 
Commission finds good cause for approving the proposal prior to the 
30th day after the date of publication of notice of filing in the 
Federal Register. The Commission believes that accelerated approval of 
the proposal is appropriate in that it will permit the NASD to provide 
interested persons adequate notice that implementation of the PMM 
standards will be delayed until December 1, 1995 and that the 
expiration of the short sale rule, including the PMM standards, will be 
extended until June 3, 1996.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    As discussed in the Original Approval Order, the Commission 
believed and continues to believe that the imposition for a limited 
time of a short sale rule and accompanying PMM standards applicable to 
Nasdaq National Market securities is consistent with the requirements 
of Sections 15A(b)(6), 15A(b)(9) and 15A(b)(11) of the Act.\5\ As 
discussed below, the Commission believes that delayed implementation of 
the PMM standards until December 1, 1995 and limited extension of the 
short sale rule until June 3, 1996 (rather than March 6, 1996) is 
consistent with the Act and the rules and regulations promulgated 
thereunder.\6\

    \5\ 15 U.S.C. 78o-3(b) (6), (9) and (11). Section 15A(b)(6) 
requires among other things, that the NASD's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and to protect investors and 
the public interest. 15 U.S.C. Sec. 78o-3(b)(6). Sections 15A(b) (9) 
and (11) require that the NASD's rule be designed not to impose any 
burden on competition not necessary or appropriate in furtherance of 
the Act, id. Sec. 78o-3(b)(9), and to produce fair and informative 
quotations, to prevent fictitious or misleading quotations, and to 
promote orderly procedures for collecting, distributing and 
publishing quotations. Id. Sec. 78o-3(b)(11). In addition, the 
Commission believes that the rule change will further the goals of 
Section 11A in that it will promote efficient and effective market 
operations and economically efficient execution of investor orders 
in the best market and assure fair competition between the exchange 
markets and the OTC market and among brokers and dealers. Id. 
Sec. 78k-1(a)(1)(C),
    \6\ Securities Exchange Act Release No. 34277 (June 29, 1994), 
59 FR 34885 (July 7, 1994).
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    Maintaining the current operation of the short sale rule until the 
NASD has completed and tested the systems necessary to provide market 
participants adequate notice of a market maker's PPM status will avoid 
confusion in the marketplace and assure consistency in the application 
of NASD rules. Moreover, extension of the short sale rule until June 3, 
1996 will maintain the effectiveness of the PMM standards for six 
months, as envisioned by the Commission's Original Approval Order. As 
noted in the Original Approval Order, this will provide the Commission 
and the NASD the opportunity to study the effects of the rule and its 
exemptions and to determine whether these are practicable and necessary 
on an ongoing basis, or whether other alternatives would be more 
appropriate.
V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by September 28, 1995.

VI. Conclusion

    For the reasons stated above, the Commission believes the rule 
change is consistent with the Act and, therefore, has determined to 
approve it.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the rule change SR-NASD-95-35 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) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22105 Filed 9-6-95; 8:45 am]
BILLING CODE 8010-01-M