[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Notices]
[Pages 62519-62521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29686]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36532; File No. SR-NASD-95-58]


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

November 30, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 27, 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 and II 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. Sec. 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 December 1, 1995 to February 1, 1996, the implementation 
date of the Primary Market Maker standards to be used to determine the 
eligibility of market makers for an exemption from the NASD's short-
sale rule. The NASD also proposes to extend the termination date for 
the pilot period to August 3, 1996 instead of June 3, 1996. The text of 
the proposed rule change is as follows (additions are italicized; 
deletions are bracketed):

Article III, Section 1

* * * * *
Section 48

    (1)(3) Until February 1, 1996 [December 1, 1995], the term 
``qualified market maker'' shall mean a registered Nasdaq market 
maker that has maintained, without interruption, quotations in the 
subject security for the preceding 20 business days.
* * * * *
    Beginning February 1, 1996 [December 1, 1995], 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 August 3, 1996 [June 
3, 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 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 has been in effect (from September 6, 1994 to September 
6, 1995), Nasdaq market makers who maintained 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 were 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 exemptions 
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).
    \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 

[[Page 62520]]
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 be 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 market 
maker's proportionate share volume is 10 percent. Therefore, the 
proportionate share volume is one-and-a-half times 10, or 15 percent 
of overall volume.
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    As noted above, the PMM standards were originally scheduled to go 
into effect on September 6, 1995. However, because of unforeseen delays 
in the programming of the PMM standards, the NASD proposed and the SEC 
approved a delay in the effective date of the PMM standards until 
December 1, 1995.\5\ With the instant filing, the NASD is proposing a 
further delay of the implementation date for the PMM standards. 
Specifically, because of recently detected errors in a segment of the 
NASD's software used to calculate whether market makers are satisfying 
the PMM standards, the NASD is proposing to delay the effective date of 
the PMM standards until February 1, 1996.

    \5\See Securities Exchange Act Release No. 36171 (Aug. 30, 
1995), 60 FR 46651 (Sept. 7, 1995).
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    With the proposed delay, a market maker's trading activity during 
the month of January 1996 will be evaluated according to the PMM 
standards to determine if it can retain its exemption until February 
1996. Until January 31, 1996, the 20-day test will continue to be used 
to evaluate market makers' eligibility for an exemption from the rule. 
Thus, beginning February 1, 1996, a ``P'' indicator will be displayed 
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 August 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) assumes 
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 NASD consents, the Commission will:
    A. By order approve such proposed 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.
    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 February 1, 1996 and that the 
expiration of the short sale rule, including the PMM standards, will be 
extended until August 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.\6\ 

[[Page 62521]]
As discussed below, the Commission believes that delayed implementation 
of the PMM standards until February 1, 1996 and limited extension of 
the short sales rule until August 3, 1996 (rather than June 3, 1996) is 
consistent with the Act and the rules and regulations promulgated 
thereunder.\7\

    \6\15 U.S.C. Sec. 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).
    \7\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 PMM status will avoid 
confusion in the marketplace and assure consistency in the application 
of NASD rules. Moreover, extension of the short sale rule until August 
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.
    In the Original Approval Order, the Commission stated that 
experience with the NASD's short sale rule may demonstrate that some or 
all of the elements of the rule require reconsideration. The Commission 
notes that this is the NASD's second proposal to extend the operation 
of the short sale rule due to technical problems associated with the 
implementation of the PMM designation. The Commission is concerned 
about the delay in implementing the PMM designation which inhibits the 
ability to assess the effects of the short sale rule with the 
designation in place and, thus, expects that no further delays will be 
necessary.

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, 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 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 SR-NASD-95-58 and 
should be submitted by December 27, 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-95-58 be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29686 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-M