[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Notices]
[Pages 204-206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-00036]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36612; File No. SR-NASD-95-30]


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 Commencement 
of Third Market Trading in Initial Public Offerings of Exchange-Listed 
Securities

December 20, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 19, 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 have been prepared by the self-
regulatory organization. On December 15, 1995, the NASD filed with the 
Commission Amendment No. 1 to the proposal which clarifies the 
operation of the proposed amendment, and requests accelerated 
effectiveness of the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1991).
    \3\ See letter from Joan Conley, Corporate Secretary, NASD, to 
Mark Barracca, Branch Chief, Commission, dated December 15, 1995.
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I. Self-Regulatory Organization's Statement of the Terms and Substance 
of the Proposed Rule Change

    The NASD proposes to amend Section 4 of Schedule G to the NASD By-
Laws to prohibit NASD members from executing over-the-counter 
transactions in an exchange-listed security that is the subject of an 
initial public offering (``IPO security'') until the security has 
opened for trading on the exchange that lists the security.\4\ 
(Additions are in italics; deletions are bracketed.)

    \4\ The Commission notes that the paragraph designation within 
the proposed rule language, as originally filed, has been adjusted 
with the NASD staff's consent, to reflect an outstanding proposal 
currently under review with the Commission. Telephone conversation 
between Tom Gira, Assistant General Counsel, NASD, and Betsy Prout 
Lefler, Senior Counsel, Commission, on December 19, 1995.
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Schedule G

Sec. 1. Definitions

    (a)-(f). No change.
    (g) The term ``over-the-counter transaction'' shall mean a 
transaction in an eligible security effected otherwise than on a 
national securities exchange.
    (h) A security is subject to an ``initial public offering'' if: 
(1) the offering of the security is registered under the Securities 
Act of 1933; and (2) the issuer of the security, immediately prior 
to filing the registration statement with respect to such offering, 
was not subject to the reporting requirements of Section 13 or 15(d) 
of the Securities Exchange Act of 1934.
* * * * *

Sec. 4. Trading Practices

    (a)-(h). No change.
    (i) No member or person associated with a member shall execute 
or cause to be executed, directly or indirectly, an over-the-counter 
transaction in a security subject to an initial public offering 
until such security has first opened for trading on the national 
securities exchange listing the security, as indicated by the 
dissemination of an opening transaction in the security by the 
listing exchange via the Consolidated Tape.

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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in Section A, B, and C below, of the 
most significant aspects of such statements.

[[Page 205]]


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

    The purpose of the proposed rule change is to add new Section 4(i) 
to Schedule G to the NASD By-Laws to provide that, after completion of 
an IPO of an exchange-listed security, NASD members and persons 
associated with NASD members are prohibited from executing over-the-
counter transactions in the security until the exchange listing the 
security has first opened the stock for trading. Under the proposal, a 
stock is deemed to be first opened on the listing exchange when the 
exchange disseminates an opening transaction in the security via the 
Consolidated Tape.
    Although it is common practice that participants in the third 
market refrain from trading an IPO security until the exchange listing 
the IPO opens the stock for trading, the NASD is submitting the instant 
proposal to prohibit trading in the third market until the security is 
first opened for trading on its listing exchange. While the NASD has 
found no evidence that the trading of IPOs in the third market has had 
any detrimental market effect, the NASD believes the proposed limited 
prohibition on the trading of IPOs in the market is a prudent 
precautionary step that is consistent with the orderly distribution and 
pricing of IPO securities.
    Accordingly, 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, 
the NASD believes the proposal will help to promote the fair and 
orderly distribution and pricing of IPO securities, thereby 
facilitating the capital formation process and promoting the protection 
of investors.
    In addition, the NASD believes this proposal is consistent with 
recent rule amendments adopted by the Commission with respect to the 
procedures by which regional exchanges may extend unlisted trading 
privileges (``UTP'') to IPO securities.\5\ In the UTP Approval Order, 
the Commission shortened to one day, yet retained, the time period 
during which regional exchanges are prohibited from granting UTP to IPO 
securities. In adopting these rule changes, the Commission stated that 
it:

    \5\ See Securities Exchange Act Release No. 35637 (April 21, 
1995), 60 FR 20891 (``UTP Approval Order'').
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believes that a one-trading-day delay to precede UTP in listed IPOs 
is appropriated at this time primarily because the Commission is 
concerned that the first day of trading in an IPO on an exchange 
presents special circumstances, including initial pricing, an 
attempt to effectuate an orderly distribution of securities, high 
trading volume, and the resulting potential for high price 
volatility in the securities, that could have a significant effect 
on pricing and distribution of IPOs.\6\

    \6\ UTP Approval Order, supra Note 5, 60 FR at 20894.
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    Accordingly, under the NASD's proposal, even though the third 
market will still be able to trade an IPO security immediately after 
the listing exchange opens the stock for trading, the third market, 
like the regional exchanges, would be precluded from trading the 
securities until the primary market opens the stock for trading. In 
addition, the NASD notes that the Commission did not object to or raise 
concerns with the ability of the third market to trade an IPO on the 
day of the IPO, while the regional exchanges must wait one day before 
trading the issues. Specifically, the Commission stated that it is:

sympathetic to concerns that a one-day delay for exchange extensions 
of UTP will restrict regional exchange trading, while OTC dealers 
will continue to be free to trade the securities upon effective 
registration. The evidence * * *, however, shows that in virtually 
all IPOs studied, OTC market makers trade the securities only in 
extremely small volume, if at all, on the first day of the IPO. The 
Commission believes, therefore, that any competitive advantage to 
OTC market makers is minimal, and is outweighed by the benefit to 
investors and the capital formation process that should be accrued 
by decreasing the risk of price volatility in the IPO securities.\7\

    \7\ Id.
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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

    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 because of the infrequency with which the third 
market is the first market to trade an exchange-listed IPO. 
Specifically, given that the third market is rarely the first market to 
trade an exchange-listed IPO, the NASD believes the proposal will have 
minimal impact on the third market, while serving as a prudent 
precautionary step designed to promote the orderly distribution and 
pricing of IPO securities. In addition, the NASD notes that its 
proposal is consistent with recent rule amendments adopted by the 
Commission in the UTP Approval Order with respect to the procedures by 
which regional exchanges can extend UTP to IPO securities. Accordingly, 
the NASD believes no regulatory purpose would be served by delaying 
approval of the NASD's proposal.

IV. 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 th4e 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 at 
the Commission's Public Reference Room. All submissions should refer to 
File No. SR-NASD-95-30 and should be submitted by January 24, 1996.

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

    The Commission believes the proposed rule change is consistent with 
Section 15A(b)(6) of the Act. The Commission believes the proposal 

[[Page 206]]
should serve to promote just and equitable principles of trade and 
protect investors and the public interest by facilitating the orderly 
distribution and pricing of IPO securities. Specifically, the proposed 
mandatory delay in third market trading of IPO securities should help 
to minimize any potential risk of price volatility that may be 
associated with multiple-market trading of listed IPO securities before 
the listing exchange has provided for the first trade in the security. 
This should benefit investors and the capital formation process by 
decreasing the risk of price volatility in the IPO securities.
    The Commission finds good cause for approving the proposed rule 
change prior the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. The Commission believes that 
accelerated approval of the proposal is appropriate because the 
proposal is an important precautionary measure for the protection of 
investors, yet accelerated approval should have minimal impact on 
market participants because the third market so rarely trades IPOs 
before the listing exchange effects the first trade in the securities.
    It is therefore ordered, pursuant to Section 19(b)(2) \8\ that the 
proposed rule change is hereby approved.

    \8\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1991).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-00036 Filed 1-2-96; 8:45 am]
BILLING CODE 8010-01-M