[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)]
[Notices]
[Pages 64084-64086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30355]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36563; File No. SR-NASD-95-57]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change Relating to Policy Statement on Market 
Closings

December 7, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 22, 1995, the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``Commission'') 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.

    \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

    The NASD proposes to amend its Policy Statement on Market Closings 
(``Statement'' or ``Policy Statement''), adopted pursuant to Article 
VII, Section 3 of the NASD By-Laws, to: (1) extend the expiration date 
of the Statement to December 31, 1997; and (2) reflect regulatory 
developments since the Statement was first adopted in 1988. The amended 
Statement is as follows (additions are italicized; deletions are 
bracketed):
NASD Board of Governors Policy Statement on Market Closing
September 20, 1988

Amended [insert date] 1995

    In 1988, [T] the Board of Governors of the National Association of 
Securities Dealers, Inc. [has] carefully considered the numerous 
proposals resulting from the October 1987 market break including the 
Report of the NASD Committee on the Quality of Markets and the 
``circuit breaker'' proposal recommended by the President's Working 
Group on Financial Markets. The Working Group proposal recommend[s]ed 
that all U.S. markets for equity and equity-related products, i.e., 
stocks, individual stock options, and stock index options and futures, 
halt trading for [one hour] certain specified periods if the Dow Jones 
Industrial Average [(``DJIA'')] decline[s]d 250 points or 400 points 
from its previous day's closing level [ and for two hours if the DJIA 
declines 400 points]. The proposal also recommend[s]ed specific 
reopening procedures and consistent index futures price limit 
requirements. Subsequently, the major securities exchanges adopted the 
recommendations of the Working Group as trading halt rules, with 
uniform criteria established for the coordinated implementation of 
trading halts across all equity and equity-related markets in the event 
of extraordinary market movements. The exchanges have, from time-to-
time, considered amendments to such rules.
    Having reviewed the [se numerous] original proposal[s] of the 
Working Group, the trading halt rules adopted by the major securities 
exchanges and any modifications thereto, the Board of Governors [has 
adopted] reaffirms the position that is set forth below in this 
Statement of Policy.
    The Board notes that while progress has been made by the markets in 
areas involving systems capacity, margin requirements and information 
sharing, a 

[[Page 64085]]
number of recommendations from the various proposals unfortunately have 
not yet been either fully considered or actively pursued. The Board 
believes that market closings are not the answer to the potential 
danger of precipitous declines in market prices and that it is more 
important to aggressively pursue other initiatives. Among these are:
    1. Congress should vest regulatory authority for all equity 
derivative instruments in the Securities and Exchange Commission.
    2. Congress should give the Securities and Exchange Commission 
authority to oversee the establishment of initial or maintenance margin 
requirements by self-regulatory organizations for all equity 
instruments. Relative margin levels for equities and equity derivative 
instruments should be consistent across all market places.
    3. The activities of clearing and settlement systems should be 
coordinated across market places to reduce financial risk for all 
participants. Clearing and settlement facilities for all equity 
derivative instruments should be unified or linked as in the options 
and securities markets.
    4. An intermarket self-regulatory coordinating policy group (with 
subgroups) composed of persons at the senior management level of all 
self-regulatory organizations should be established to plan, 
communicate and coordinate with each other in the surveillance, 
financial, operational and technology areas and, acting with federal 
regulators, to formulate contingency plans for market emergencies.
    5. To the extent that legislation is needed to accomplish any of 
these objectives, Congress should be urged by all securities industry 
organizations to act promptly.
    We believe implementation of these recommendations would provide a 
more permanent and appropriate response to the events of October 1987 
than would market closings based upon arbitrary formulae. They should 
be adopted expeditiously. Because sufficient progress on all of these 
matters has not yet occurred, the Board recognizes the need to consider 
the Working Group's proposal on ``circuit breakers'' and the trading 
halt rules adopted by the major securities exchanges as an interim 
step.
    The Board strongly believes that the Nation's securities markets 
should remain open and operating during normal market hours whenever 
possible. The Board is opposed in principle to the implementation of 
``circuit breakers'' that mandate market closings on the basis of 
arbitrary formulae. The Board supports the [current] practice whereby 
individual market determine, after coordination with other markets and 
federal regulators, whether to close based on the character of a 
particular emergency situation.
    The Board of Governors acknowledges that the risks imposed on any 
single market remaining open while all other U.S. markets have halted 
trading because of extraordinary price movements could be unacceptable. 
The Board therefore has determined that, at times when other major 
securities markets initiate market-wide trading halts in response to 
extraordinary market conditions, the NASD will, upon request from the 
Securities and Exchange Commission, act to halt domestic trading in all 
securities quoted in [the NASDAQ system] The Nasdaq Stock Market and 
domestic trading in equity or equity-related securities in the over-
the-counter market.
    This Policy Statement on Market Closings shall be effective until 
December 31, [1995] 1997 unless modified or extended prior thereto by 
the Board of Governors.

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

    The Policy Statement is adopted as a stated policy of the NASD 
under Article VII, Section 3 of the NASD By-Laws, which provides the 
Association with the authority, acting through a designated committee 
of the NASD Board of Governors, to take appropriate action in the event 
of an emergency or extraordinary market conditions. Article VII, 
Section 3 was adopted by the NASD as a result of the events of October 
1987, and the provision was enacted to enable the NASD to respond to 
future crises with a maximum degree of flexibility, providing properly 
tailored responses to varying situations.\2\ As originally approved, 
the Statement was to expire December 31, 1989, unless modified or 
extended prior thereto by the NASD Board of Governors.\3\ The 
expiration date of the Policy Statement has previously been extended a 
number of times.\4\

    \2\ Specifically, in its release approving Article VII, Section 
3 of the NASD By-Laws, the Commission stated that ``the Commission 
believes the proposal provides the NASD with the flexibility to deal 
with extraordinary market conditions such as existed in October 
1987.'' See Securities Exchange Act Release No. 26072 (September 12, 
1988), 53 FR 36143.
    \3\ Securities Exchange Release No. 26198 (October 19, 1988), 53 
FR 41673.
    \4\ Securities Exchange Act Release Nos. 27370 (October 23, 
1989), 54 FR 43881 (approving File No. SR-NASD-89-46, extending 
expiration date through December 31, 1990); 28694 (December 12, 
1990), 55 FR 52119 (approving File No. SR-NASD-90-60, extending 
expiration date through December 31, 1991); 30113 (December 20, 
1991), 56 FR 67341 (File No. SR-NASD-91-70, extending expiration 
date through January 31, 1992); 30304 (January 29, 1992), 57 FR 4658 
(approving File No. SR-NASD-92-02, extending expiration date through 
December 31, 1993); 33292 (December 6, 1993), 58 FR 65214 (approving 
File No. SR-NASD-93-70, extending expiration date through December 
31, 1994); and 35133 (December 21, 1994), 59 FR 67361 (approving 
File No. SR-NASD-94-63, extending expiration date through December 
31, 1995).
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    Other groups, including the President's Working Group on Financial 
Markets (the ``Working Group''), have proposed more specific, formulaic 
responses to the events of October 1987. One such proposal is the 
Working Group's proposal for ``circuit breakers.'' The Commission 
requested the NASD to express its views on that proposal and the Policy 
Statement was adopted in response to that request.
    It should be noted that the Policy Statement expresses the views of 
the NASD Board of Governors as of November 16, 1995 concerning progress 
made on the numerous proposals emanating from the October 1987 crisis. 
From time to time, the Board will review progress made on the 
recommendations set forth in the Statement as well as other 
developments as they may occur. The views of the Board may change and 
the NASD may modify or amplify the Statement accordingly.
    It also should be noted that the Policy Statement sets forth the 
NASD's proposed response to a specific set of circumstances. The 
Statement does not in any way preclude the NASD from taking any other 
action that may be appropriate under other circumstances.
    The NASD proposes to extend the expiration date of the Policy 
Statement two years until December 31, 1997. The NASD also proposes to 
make several minor modifications to the Policy Statement to reflect 
regulatory developments since the Statement was 

[[Page 64086]]
adopted in 1988. Given the growth of U.S. equity markets since 1988, 
however, the NASD increasingly is concerned that circuit breakers may 
be activated based on smaller percentage moves in the Dow Jones 
Industrial Average (``DJIA'').\5\ Accordingly, it is the intention of 
the NASD to reevaluate whether the 250- and 400-point thresholds 
contained in the circuit breakers are appropriate. Nevertheless, the 
NASD believes it is appropriate at this time to extend the 
effectiveness of the Policy Statement.

    \5\ Specifically, when the 250- and 400-point circuit breakers 
were implemented in October 1988, a 250-point move in the DJIA was 
approximately 11.7 percent of the Index and a 400-point move was 
approximately 18.7 percent of the Index. However, given the 
expansion and growth of U.S. equity markets since 1988, 250- and 
400-point movements in the NASD now represent a much smaller 
percentage move in the Index. Specifically, with the NASD at 5,000, 
a 250-point move represents 5 percent of the Index and a 400-point 
move represents 8 percent of the Index.
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    The NASD believes the proposed rule change is consistent with 
Section 15A(b)(6) 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, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. Specifically, by extending 
the effectiveness of the Policy Statement, market participants will be 
afforded a reasonable opportunity to assess and rationally react to 
extreme market conditions. In addition, extension of the Policy 
Statement will help to ensure that circuit breakers are coordinated 
across all equity and equity-related markets.

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

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

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

    Written comments were neither solicited nor received.

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

    The NASD requests that the Commission find good cause to accelerate 
the effectiveness of the proposed rule change pursuant to Section 
19(b)(2) of the Act so that the effectiveness of the Policy Statement 
can continue uninterrupted. The NASD notes that its other proposals to 
extend the Statement have been subject to the full notice and comment 
period and that the Commission has received no adverse comments on the 
Statement. Accordingly, because the NASD believes that there are no 
changes to the Policy Statement that would necessitate the solicitation 
of public comment prior to Commission approval, because no adverse 
comments have been received in response to prior extensions of the 
Statement, and because the Policy will otherwise expire on December 31, 
1995, the NASD requests that the Commission accelerate the 
effectiveness of the proposed rule change prior to the 30th day after 
its publication in the Federal Register.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD, and, in particular, the requirements 
of Section 15A and the rules and regulations thereunder. Since the 
Commission approved the NASD's proposal in 1988, the Dow Jones 
Industrial Average has not experienced a one day market decline that 
would trigger a market halt. Nevertheless, the Commission continues to 
believe that circuit breaker procedures are desirable to deal with 
potential strains that may develop during periods of extreme market 
volatility, and accordingly, the Commission believes that the pilot 
program should be extended. The Commission also believes that circuit 
breakers represent a reasonable means to retard a rapid one day market 
decline that could have a destabilizing effect on the nation's 
financial markets and participants in these markets. Finally, the 
Commission believes that the proposed changes to the Policy Statement 
are minor and not of a nature to affect its operation.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register because there are no 
material changes being made to the current provisions, which originally 
were subject to the full notice and comment procedures, and accelerated 
approval would enable Policy Statement to continue uninterrupted. The 
Commission believes, therefore, that granting accelerated approval of 
the proposed rule change is appropriate and consistent with Sections 
15A and 19(b) of the Act.\6\

    \6\ The Commission reaffirms its request that the NASD implement 
its Policy Statement by implementing a trading halt as quickly as 
practicable whenever the New York Stock Exchange and other equity 
markets have suspended trading. See Securities Exchange Act Release 
No. 27370, supra note 4.
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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 submissions, 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 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 January 3, 1996.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-NASD-95-57) is hereby 
approved until December 31, 1997.

    \7\ 17 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30355 Filed 12-12-95; 8:45 am]
BILLING CODE 8010-01-M