[Federal Register Volume 62, Number 28 (Tuesday, February 11, 1997)]
[Notices]
[Pages 6290-6291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3326]
[[Page 6290]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38240; File No. SR-NASD-96-52]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule
Change Relating to the Reporting of Short Sale Transactions by Market
Makers Exempt From the NASD's Short Sale Rule
February 5, 1997.
I. Introduction
On December 17, 1996, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``Commission'' or ``SEC'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder \2\ a proposed rule change to the Automated
Confirmation Transaction (``ACT'') Service rules that would require all
Primary Market Makers (``PMM'') to mark their ACT reports to denote
when they have relied on the PMM exemption to NASD's short sale rule.
The proposed rule change was published for comment in Securities
Exchange Act Release No. 38092 (December 27, 1996), 62 FR 776 (January
6, 1997) (``Notice of Proposed Rule Change''). The Commission received
no comments on the proposal and is approving the proposed rule change
on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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II. Description of the Proposal
On June 29, 1994, the Commission approved the NASD's short sale
rule on an eighteen-month pilot basis through March 5, 1996.\3\ The
Commission subsequently extended the termination date through October
1, 1997.\4\ The NASD's short sale rule prohibits member firms from
effecting short sales in Nasdaq National Market (``NNM'') securities at
or below the current inside bid as disseminated by Nasdaq whenever the
bid is lower than the previous bid.\5\ The rule provides an exemption
from the short sale rule to ``qualified'' Nasdaq market makers who can
use the exemption only in connection with bona fide market making
activity. To be a qualified market maker, a market maker must satisfy
the Nasdaq PMM standards.\6\ If a market maker is a PMM for a
particular stock, there is a ``P'' indicator next to its quote in that
stock.\7\
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\3\ See Securities Exchange Act Release No. 34277 (June 29,
1994), 59 FR 34885 (July 7, 1994) (``Short Sale Rule Approval
Order'').
\4\ See Securities Exchange Act Release Nos. 36171 (August 30,
1995), 60 FR 46651; 36532 (November 30, 1995), 60 FR 62519; 37492
(July 29, 1996), 61 FR 40693; and 37919 (November 1, 1996), 61 FR
57934.
\5\ See NASD Rule 3350.
\6\ Pursuant to NASD Rule 4612, the PMM standards require a
market maker to satisfy at least two of the following four criteria
to be eligible for an exemption from the short sale rule: (1) the
market maker must be at the best bid or best offer as shown on
Nasdaq 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 the stock.
Specifically, the proportionate volume test requires a market maker
to account for volume of at least 1\1/2\ 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. But, see Securities Exchange Act Release No.
38175 (January 15, 1997) (Commission approving NASD rule proposal to
waive the PMM qualification standards in conjunction with the
adoption of the Commission's Order Execution Rules); and File No.
SR-NASD-97-07 (January 31, 1997) (Proposed rule change to
temporarily suspend the use of the Primary Market Maker
qualification criteria for all Nasdaq market maker securities for
the remainder of the current pilot period of the Nasdaq short sale
rule).
\7\ See Securities Exchange Act Release no. 38175 (January 15,
1997), stating that the NASD will, upon suspension of the PMM
qualification criteria for NNM securities, deem all registered
market makers in such securities PMMs.
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When the Commission approved the NASD's short-sale rule it also
approved an NASD proposal to require NASD members to append a
designator to their ACT reports to denote whether their sale
transactions were long sales, short sales, or exempt short sales. At
that time, however, market makers exempt from the short-sale rule were
not required to append ``sell short'' or ``sell short exempt'' to their
ACT reports.\8\ Accordingly, in order to enhance the NASD's ability to
surveil for potential abuses of the market maker exemption and examine
and monitor the market impacts of the market maker exemption, the
NASD's proposed rule change deletes the footnote to NASD Rule
6130(d)(6), thereby requiring all exempt market makers to mark their
ACT reports to denote when they have relied on the market maker
exemption.
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\8\ Specifically, the footnote to NASD Rule 6130(d)(6) provides
that ``[t]he `sell short' and `sell short exempt' indicators must be
entered for all customer short sales, including cross transactions,
and for short sales effected by members that are not qualified
market markers pursuant to Rule 3350.''
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The NASD will establish an effective date for the rule change in a
Notice-to-Members announcing Commission approval of the proposal. The
Notice will be published within thirty days of Commission approval of
the proposal and the effective date of the proposal will be no longer
than three weeks after the date of publication of the Notice.
III. Discussion
The Commission believes the NASD's proposed rule change is
consistent with Section 15A(b)(6) of the Act,\9\ and that it will
promote efficiency, competition, and capital formation. Section
15A(b)(6) requires that the rules of a national securities association
be designed to promote just and equitable principles of trade, to
foster cooperation and coordination with person 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. The Commission
believes that requiring exempt market makers to mark their ACT reports
to denote when they have relied upon the PMM exemption will help to
enhance the ability of NASD Regulation, Inc. to efficiently monitor
whether market makers are abusing the exemption.\10\ Furthermore, the
Commission, in approving the short sale rule on a pilot basis,
requested the NASD to study various aspects of the rule's effects,
including the use of the PMM exemption to the rule. The Commission,
therefore, believes that requiring PMMs to append a designator to their
ACT reports will assist the NASD in assessing the market impacts of the
PMM exemption from the short sale rule, as well as facilitate the
preparation of a thorough analysis of such exemption.
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\9\ 15 U.S.C. 78o-3(b)(6).
\10\ See footnote 6, supra; and Letter from Howard Kramer,
Associate Director, Division of Market Regulation, Commission, to
Eugene A. Lopez, Assistant General Counsel, NASD (February 3, 1997)
(No-action letter regarding suspension of the Primary Market Maker
standards).
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The NASD requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of the filing in the Federal Register.
The Commission finds good cause for so approving the proposed rule
change because accelerated approval will allow the NASD to begin
collecting the necessary data for a meaningful statistical analysis of
the market impact of the PMM exemption from the short sale rule.
Furthermore, the Commission believes it is prudent to allow the NASD to
begin requiring PMMs to mark their ACT reports when they have relied on
the PMM exemption as soon as possible in order that the NASD and PMMs
will become familiar with the use of the ACT
[[Page 6291]]
denotation, thereby aiding in efficient data collection.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the NASD, and in particular Section 15A(b)(6).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (File No. SR-NASD-96-52) be and
hereby is approved on an accelerated basis.
\11\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3326 Filed 2-10-97; 8:45 am]
BILLING CODE 8010-01-M