[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37521-37523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18171]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37426; File No. SR-NASD-96-25]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. (``NASD'' or ``Association'') Relating to the
Application of the Primary Nasdaq Market Maker Rule to Initial Public
Offerings
July 11, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 21, 1996, the
National Association of Securities Dealers (``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 self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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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 NASD Rule 4612,\2\ the NASD's Primary
Nasdaq Market Maker Standards Rule (``PMM Rule''), to clarify and
codify NASD interpretations with respect to the application of the PMM
Rule to initial public offerings (``IPOs''). A more detailed
explanation and description of these interpretations will also be
provided in a Special Notice-to-Members to be issued contemporaneously
with the submission of this filing. Proposed new language is
italicized:
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\2\ Prior to the revision of the NASD Manual, Rule 4612 was
Section 49 of the NASD Rules of Fair Practice.
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NASD Rule 4612 Primary Nasdaq Market Maker Standards
* * * * *
(g)(2) * * *
(B) For initial public offerings (IPOs):
(i) the market maker may register in the offering and immediately
become a
[[Page 37522]]
Primary Nasdaq Market Maker if it is a Primary Nasdaq Market Maker in
80% of the securities in which it has registered; provided, however,
that if, at the end of the first review period, the Primary Nasdaq
Market Maker has withdrawn on an unexcused basis from the security or
has not satisfied the qualification criteria, it shall not be afforded
a Primary Nasdaq Market Maker designation on any subsequent initial
public offerings for the next 10 business days; or
(ii) the market maker registers in the stock as a regular Nasdaq
market maker and satisfies the qualification criteria for the next
review period.
(C) For purposes of subparagraph (B)(i) above:
(i) an issue ceases to be an IPO once it has traded on Nasdaq for
five (5) business days; and
(ii) the applicable first review period for IPOs that come to
market during the last five (5) business days of a month is the
calendar month after the month in which the IPO commenced trading on
Nasdaq.
* * * * *
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 and Special Notice-to-Members 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
1. Purpose
On June 29, 1994, the SEC approved the NASD's short-sale rule
applicable to short sales \3\ in the Nasdaq National Market
(``NNM'').\4\ The rule, which has been approved by the Commission on a
pilot basis through August 3, 1996,\5\ 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.\6\
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\3\ The term ``short sale'' refers to 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. To determine whether a sale is a short sale, members must
adhere to the definition of a ``short sale'' contained in SEC Rule
3b-3, which rule is incorporated into Nasdaq's short sale rule by
NASD Rule 3350(k)(1).
\4\ See Securities Exchange Act Release No. 34277 (Jun. 29,
1994), 59 FR 34885 (July 7, 1994) (order approving File No. SR-NASD-
92-12).
\5\ See Securities Exchange Act Release No. 36532 (Nov. 30,
1995), 60 FR 62519 (Dec. 6, 1995) (order approving File No. SR-NASD-
95-58).
\6\ Nasdaq calculates the inside bid and the best bid from all
market makers in the security (including bids on behalf of exchanges
trading Nasdaq securities on an unlisted trading privileges basis),
and disseminates symbols to denote whether the current inside bid is
an ``up bid'' or a ``down bid.'' Specifically, an ``up bid'' is
denoted by a green ``up'' arrow symbol and a ``down bid'' is denoted
by a red ``down'' arrow symbol. Accordingly, absent an exemption
from the rule, a member can not effect a short sale at or below the
inside bid in a security in its proprietary account or an account of
a customer if there is a red arrow next to the security's symbol on
the screen. In order to effect a ``legal'' short sale on a down bid,
the short sale must be executed at a price at least a \1/16\ of a
point above the current inside bid. Conversely, if the security's
symbol has a green up arrow next to it, members can effect short
sales in the security without any restrictions. The rule is in
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m.,
Eastern Standard Time).
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In order to ensure that market maker activities that provide
liquidity and continuity to the market are not adversely constrained
when the short sale rule is invoked, the rule provides an exemption to
``qualified'' Nasdaq market makers. Even if a market maker is able to
avail itself of the qualified market maker exemption, it can only
utilize the exemption from the short sale rule for transactions that
are made in connection with bona fide market making activity. If a
market maker does not satisfy the requirements for a qualified market
maker, it can remain a market maker in the Nasdaq system, however, it
can not take advantage of the exemption from the rule.
From February 1, 1996 to August 3, 1996, a ``qualified'' Nasdaq
market maker is defined to be a market maker that satisfies the
criteria for a PMM found in NASD Rule 4612.\7\ To qualify as a PMM,
market makers must satisfy at least two of the following three
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; or (3) no more than 50 pernet of the market
maker's quotation updates may occur without being accompanied by a
trade execution of at least one unit of trading. If, however, the
market maker satisfies only one of the criteria, the market maker may
still qualify as a PMM if the market maker executes 1\1/2\ times its
``proportionate'' volume in the stock.\8\ If a market maker is a PMM, a
``P'' indicator is displayed next to its market maker identification to
denote that it is a PMM.\9\
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\7\ Before the PMM standards went into effect, a ``qualified
market maker'' was defined to be a market maker that had entered
quotations in the relevant security on an uninterrupted basis for
the preceding 20 business days, the so-called ``20-day test.''
\8\ For example, if there are 10 market makers in a stock, each
dealer's proportionate share volume would be 10 percent; therefore,
1\1/2\ times proportionate share volume would mean 15 percent of
overall volume.
\9\ 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 Primary Market Maker by
satisfying the threshold standards for the next review period.
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With respect to initial public offerings, the PMM Rule provides
that if a member firm has obtained PMM status in 80 percent or more of
the stocks in which it has registered (``80 Percent Firm''), the firm
may immediately become a PMM in an IPO by registering and entering
quotations in the issue.\10\ However, if the firm: (1) withdraws from
the IPO on an unexcused basis any time during the calendar month in
which the IPO commenced trading on Nasdaq or (2) fails to meet the PMM
standards for the month in which the IPO commenced trading on Nasdaq,
then the entire firm is precluded from becoming a PMM in any other IPO
for ten business days following unexcused withdrawal or failure to meet
the PMM standards (``10-day penalty rule'').\11\
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\10\ The PMM rule also has provisions applicable to secondary
offerings and merger and acquisition situations. See subparagraphs
(g)(2)(A) and (g)(3) of NASD Rule 4612.
\11\ If a market maker were to register in an IPO as a non-PMM
despite the fact that its firm met the 80 Percent Test, then the
ten-day penalty rule would not be activated if the market maker were
to withdraw from the IPO on an unexcused basis or fail to meet the
PMM standards for the issue. Since Nasdaq automatically appends a
PMM designation to an ``80 Percent Firm'' when it registers in an
IPO, it is incumbent upon the firm to notify Nasdaq Market
Operations when it wishes to trade as a non-PMM in an IPO before it
begins quoting the issue.
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The purpose of the instant rule filing is to amend the PMM Rule to
implement and codify two recent NASD interpretations concerning the
operation of the PMM Rule in IPO situations. The first amendment
reflects that a newly-listed Nasdaq issue ceases to be an IPO once it
has traded on Nasdaq for five business days. Thus, if an ``80 Percent
Firm'' registered in a stock on the sixth business day after the issue
was first listed on Nasdaq and thereafter withdrew from the stock on an
unexcused basis during the calendar month in which the issue commenced
trading on Nasdaq, the firm would not be subject to the ``10-day
penalty
[[Page 37523]]
rule.'' \12\ The second amendment provides that the applicable first
PMM review period for IPOs that come to market during the last five
business days of a month is the calendar month after the month in which
the IPO commenced trading on Nasdaq. Thus, if an IPO comes to market on
the last day of a month, the applicable PMM review period would be the
next full calendar month, not the single day on which the issue was
first listed on Nasdaq. The NASD believes this amendment is appropriate
because it avoids situations where NASD members may be potentially
subject to the ``ten-day penalty rule'' based on just a few days of
trading activity.
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\12\ The market maker, however, would be subject to the 20 day
penalty rule. See NASD Rule 4730.
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2. Statutory Basis
The NASD believes the proposed rule change is consistent with
Section 15A(b)(6) of the Act.\13\ 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 proposed rule change will help to ensure the fair and
efficient operation and administration of the PMM Rule. The NASD also
believes the proposed rule change will help to ensure that NASD members
understand the operation of the PMM Rule.
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\13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose 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
The Association has neither solicited nor received written comments
on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change constitutes a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule and, therefore, has become effective
pursuant to Section 19(b)(3)(A) of the Act \14\ and subparagraph (e) of
Rule 19b-4 thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4.
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At any time within sixty days of the filing of such proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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 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. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing also will be
available for inspection and copying at the principal office of the
National Association of Securities Dealers, Inc. All submissions should
refer to File No. SR-NASD-96-25 and should be submitted by August 8,
1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18171 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M