[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34723-34724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16915]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38756; File No. SR-NASD-97-30]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes 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

June 23, 1997.
    On April 24, 1997, the Nasdaq Stock Market, Inc. (``Nasdaq''), a 
wholly owned subsidiary of the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC'') a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 19b-4 thereunder. \2\ The rule change 
amends 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. Notice of the proposed rule change, together with 
the substance of the proposal, was provided by issuance of a Commission 
release and by publication in the Federal Register.\3\ No comment 
letters were received. The Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 38611 (May 12, 1997), 62 
FR 27093 (May 16, 1997).
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I. Description of Rule Change

    The NASD and Nasdaq evaluated the current rules governing its 
members' eligibility to become a PMM and determined, as explained 
below, to amend NASD Rule 4612(g). As amended, Rule 4612(g) would 
permit a member who is a manager or co-manager of a secondary offering 
to be eligible to become a 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.\4\ The 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.\5\
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    \4\ See SR-NASD-97-31, Securities Exchange Act Release No. 38757 
(June 23, 1997), amending NASD Rule 4611(d) to permit managers and 
co-managers of an underwriting syndicate participating in a 
secondary offering of a security listed and traded on Nasdaq to 
register as a market maker in such issue on a same-day basis on the 
day of the secondary offering.
    \5\ The NASD filed an amendment (``Amendment No. 1'') to clarify 
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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    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 been filed, it cannot become a 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'').\6\ This aspect of the PMM 
standards was first adopted because the time period after secondary 
offerings have been announced is sensitive to short selling 
pressure.\7\ 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 is 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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    \6\ 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 (February 24, 
1997).
    \7\ These requirements are unaffected by the waiver, until 
October 1, 1997, of the four quantitative PMM standards contained in 
NASD Rule 4612 (a) and (b).
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    There have been instances, however, 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. The NASD is aware of numerous 
instances in which this has occurred after an issuer has changed its 
investment bankers. When this happens, the issuer's new investment 
banker often erects an informational barrier between its employees who 
are working on the secondary offering and its employees who make 
markets in Nasdaq stocks. This is done to reduce the changes that 
insider trading, or other misuse of the information received from the 
issues, will occur. Consequently, the firm's employees who make markets 
in Nasdaq stocks normally do not learn of the secondary offering until 
just prior to the announcement or effective date of the secondary 
offering. This is usually not enough time for the firm to qualify as a 
PMM under the standards set forth in NASD Rule 4612(g).
    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-managers of secondary offerings to be 
eligible to register as PMMs in such issues before the secondary 
offering is effective. The amendment to Rule 4612(g), however, would 
only apply to members that are a PMM in 80% or more of the securities 
in which they are registered.

II. Discussion

    The Commission finds the proposed rule change is consistent with 
Section 15A(b)(6) and the Act.\8\ 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

[[Page 34724]]

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, the Commission finds the proposed rule 
change will enhance market liquidity, facilitate greater competition 
among market makers, and promote the capital formation process. At the 
same time, the requirement that such firms be a PMM in 80% or more of 
stocks in which they are registered ensures that managers and co-
managers availing themselves of this opportunity can begin making 
markets efficiently and effectively as soon as they become PMMs in the 
issue.\9\ Consequently, the Commission finds that the proposal will not 
compromise the regulatory purposes underlying the ``Secondary Offering 
PMM Delay Rule.''
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    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 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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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-97-30) be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16915 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M