[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27093-27094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12888]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38611; File No. SR-NASD-97-30]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to an Amendment to the NASD's Rule Governing the Eligibility of Members 
To Become Primary Market Makers in Issues Subject to a Secondary 
Offering

May 12, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), and the National Association of 
Securities Dealers, Inc.'s (``NASD'' or ``Association'') Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries, notice 
is hereby given that on April 24, 1997,\1\ the Nasdaq Stock Market, 
Inc. (``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ The NASD filed an amendment (``Amendment No. 1'') clarifying 
footnote 3 to say that a firm is not precluded from being a manager 
or co-manager of a secondary offering if it is not a PMM in 80% or 
more of the stocks in which it makes a market. See Letter from 
Thomas R. Gira, Associate General Counsel, the Nasdaq Stock Market, 
Inc., to Katherine England, Assistant Director, Office of Market 
Supervision, Division of Market Regulation, Commission, dated May 7, 
1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 4612(g) to permit a member who 
is a manager or co-manager of a secondary offering to be eligible to 
become a Primary Nasdaq Market Maker (``PMM'') in that issue prior to 
the effective date of the secondary offering regardless of whether the 
member was a registered market maker in the stock before the 
announcement of the secondary offering. The proposed amendment to Rule 
4612(g) would only apply to members that are a PMM in 80% or more of 
the securities in which they are registered. (Additions are 
italicized.)
* * * * *
NASD Rule 4612
    (a)-(g) (1) No change.
    (g)(2) Notwithstanding paragraph (g)(1) above, after an offering in 
a stock has been publicly announced or a registration statement has 
been filed, no market maker may register in the stock as a Primary 
Nasdaq Market Maker unless it meets the requirements set forth below:
    (A) For secondary offerings:
    (i) The secondary offering has become effective and the market 
maker has satisfied the qualification criteria in the time period 
between registering in the security and the offering become effective; 
provided, however, that if the member is a manager or co-manager of the 
underwriting syndicate for the secondary offering and it is a PMM in 
80% or more of the Nasdaq National Market securities in which it is 
registered, the member is eligible to become a PMM in the issue prior 
to the effective date of the secondary offering regardless of whether 
the member was a registered market maker in the stock before the 
announcement of the secondary offering; or
    (ii) The market maker has satisfied the qualification criteria for 
40 calendar days.
    (g)(2)(B)-(h) No change
* * * * *

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

    In its filing with the Commission, Nasdaq 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. Nasdaq 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

    Presently, NASD Rule 4612(g)(2)(A) provides that unless a market 
maker is registered in a security prior to the time a secondary 
offering in that stock has been publicly announced or a registration 
statement has beef filed, it cannot become a Primary Market Maker 
(``PMM'') in the stock unless: (1) The secondary offering has become 
effective and the market maker has satisfied the PMM standards between 
the time the market maker registered in the security and the time the 
offering became effective or (2) the market maker has satisfied the PMM 
standards for 40 calendar days (``Secondary Offering PMM Delay 
Rule'').\2\ This aspect of the PMM standards, which is unaffected by 
the waiver, until October 1, 1997, of the four quantitative PMM 
standards contained in NASD Rule 4612 (a) and (b), was first adopted 
because the time period after secondary offerings have been announced 
is sensitive to short selling pressure. Specifically, in these 
situations, the stock of the issuer is currently being traded and the 
``overhang'' on the market of the new stock coming into the market from 
the offering makes the security particularly susceptible to 
manipulative short selling. The result of such short selling can 
adversely impact the capitalization of the issuer, particularly smaller 
issuers, whose securities often have less liquid secondary markets. 
Thus, Nasdaq has been and continues to be concerned with dealers 
entering the market after secondary offerings have been announced in 
order to take advantage of the market maker exemption from the short 
sale rule.
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    \2\ The PMM standards are used to determine the eligibility of 
market makers to an exemption from the NASD's short-sale rule. 
Previously, a market maker was required to satisfy at least two of 
the following four quantitative standards to be a PMM: (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. See 
NASD Rule 4612 (a) and (b). Because of changes to market maker 
quotation and trading activity since implementation of the SEC's 
Order Handling Rules, the Commission approved an NASD proposal to 
waive the PMM standards until October 1, 1997, to afford Nasdaq an 
opportunity to develop new PMM standards. See Securities Exchange 
Act Release No. 38294 (February 14, 1997), 62 FR 8289.
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    There have been instances where managers and co-managers of 
secondary offerings that have not previously been registered in the 
issue have been precluded from becoming a PMM in the issue prior to the 
effective date of the secondary offering, however. Accordingly, because 
of the inherent commitment of managers and co-managers to the issues 
that they underwrite as well as the additional liquidity that these 
members can provide, Nasdaq believes it would be appropriate for 
managers and co-

[[Page 27094]]

 managers of secondary offerings to be eligible to register as PMMs in 
such issues before the secondary offering is effective. The proposed 
amendment to Rule 4612(g) would only apply to members that are a PMM in 
80% or more of the securities in which they are registered, however
    Nasdaq 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 permitting 
managers and co-managers of secondary offerings who did not previously 
make a market in such issues to become PMMs in such issues prior to the 
effective date of the secondary offering, Nasdaq believes the proposed 
rule change will enhance market liquidity, facilitate greater 
competition among market makers, and promote the capital formation 
process. At the same time, given the inherent commitment of managers 
and co-managers to the stocks they underwrite, along with the 
requirement that such firms be a PMM in 80% or more of stocks in which 
they are registered under the proposal,\3\ Nasdaq does not believe the 
proposal will compromise the regulatory purposes underlying the 
``Secondary Offering PMM Delay Rule.''
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    \3\ Of course, a firm is not precluded from being a manager or 
co-manager of a secondary offering if it is not a PMM in 80% or more 
of the stocks in which it makes a market.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, N.W., Washington, D.C. 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 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 file number SR-NASD-97-30 and 
should be submitted by June 6, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. (17 CFR 200.30-3(a)(1) (1989)).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12888 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M