[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