[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46535-46537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23342]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38975; File No. SR-NASD-97-59]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Short Sale Rule

August 26, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 14, 1997, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') 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 the NASD. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1)(1994).
    \2\ 17 CFR 240.19b-4(1997).

---------------------------------------------------------------------------

[[Page 46536]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Rule IM-3350 to provide that a 
``legal'' short sale must be effected at a price equal to or greater 
than the offer price when the inside spread is less than \1/16\. Below 
is the text of the proposed rule change. Proposed new language is in 
italics; proposed deletions are in brackets.

IM-3350 Short Sale Rule

    (a) No Change.
    (b)(1) Rule 3350 requires that no member shall effect a short sale 
for the account of a customer or for its own account in a Nasdaq 
National Market security at or below the current best (inside) bid when 
the current best (inside) bid as displayed by The Nasdaq Stock Market 
is below the preceding best (inside) bid in the security. The 
Association has determined that in order to effect a ``legal'' short 
sale when the current best bid is lower than the preceding best bid the 
short sale must be executed at a price of at least \1/16\ point above 
the current inside bid when the current inside spread is \1/16\ point 
or greater. The last sale report for such a trade would, therefore, be 
above the inside bid by at least \1/16\ of a point. If the current 
spread is less than \1/16\ of a point, however, the short sale must be 
executed at a price equal to or greater than the current inside offer 
price.
    (2) Moreover, the Association believes that requiring short sales 
to be a minimum increment of \1/16\ point above the bid when the 
current spread is \1/16\ or greater and equal to or greater than the 
offer when the current spread is less than \1/16\ ensures that 
transactions are not effected at prices inconsistent with the 
underlying purpose of the Rule. It would be inconsistent with Rule 3350 
for a member or customer to cause the inside spread for an issue to 
narrow when the current best bid is lower than the preceding best bid 
(e.g., lowering its offer to create an inside spread less than \1/16\) 
for the purpose of facilitating the execution of a short sale at a 
price less than \1/16\ above the inside bid.

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 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 parts of such statements.

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

    The NASD's short sale rule \3\ prohibits member firms from 
effecting short sales \4\ at or below the current bid as disseminated 
by Nasdaq whenever that bid is lower than the previous inside bid.\5\ 
The rule currently provides that a short sale is a ``legal'' short sale 
in a ``down'' bid situation if it is effected at a price at least \1/
16\ above the inside bid (``Minimum Increment Rule''). The Minimum 
Increment Rule was implemented to ensure that short sales were not 
effected at prices so close to the inside bid during down markets that 
the short sales were inconsistent with the underlying purposes of the 
short sale rule (i.e. to prohibit market destabilizing and abusive 
short sales in declining markets).
---------------------------------------------------------------------------

    \3\ The short sale rule was originally adopted in June of 1994 
for Nasdaq National Market securities on a pilot basis with a 
termination date of March 5, 1996. Securities Exchange Act Release 
No. 34277 (June 29, 1994), 59 FR 34885 (July 7, 1994) [File No. SR-
NASD-92-12]. The pilot was subsequently extended through October 1, 
1997. Securities Exchange Act Release No. 37917 (November 1, 1996), 
61 FR 57934 (November 8, 1996) [File No. SR-NASD-96-41]; See also 
Securities Exchange Act Release No. 36171 (August 30, 1995), 60 FR 
46651 (September 7, 1995) [File No. SR-NASD-95-35]; Securities 
Exchange Act Release No. 37492 (July 29, 1996), 61 FR 40693 (August 
5, 1996) [File No. SR-NASD-96-30]; Securities Exchange Act Release 
No. 37917 (November 1, 1996), 61 FR 57934 (November 8, 1996) [File 
No. SR-NASD-96-41]. On August 8, 1997, the NASD submitted a proposed 
rule change (SR-NASD-97-58) to the Commission to implement the short 
sale rule on a permanent basis.
    \4\ A short sale is 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 Securities Exchange Act 
Rule 3b-3, 17 CFR 240.3b-3, which rule is incorporated into Nasdaq's 
short sale rule as NASD Rule 3350(k)(1).
    \5\ Nasdaq calculates the inside bid or 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 and ``down bid'' is denoted by a red 
``down'' arrow. Accordingly, absent an exemption from the rule, a 
member cannot effect a short sale at or below the inside bid for a 
security in its proprietary account or a customer's account if there 
is a red arrow next to the security's symbol on the screen.
---------------------------------------------------------------------------

    Now that all Nasdaq stocks can potentially trade with a \1/16\ 
spread or less, due to, among other things, the new SEC Order Handling 
Rules, and in light of the movement toward smaller minimum quotation 
variations generally, consideration was given to modifying the Minimum 
Increment Rule for stocks with an inside spread less than \1/16\.
    Accordingly, the NASD is proposing an amendment to the Minimum 
Increment Rule to provide that a ``legal'' short sale must be effected 
at a price equal to or greater than the offer price when the inside 
spread is less than \1/16\. There would be no change to the current 
definition for stocks with a spread of \1/16\ or greater. For example, 
if the inside market for ABCD is 10\1/14\-10\5/16\, a legal short sale 
in a down market would have to be effected at a price to or greater 
than 10\5/16\ (i.e., \1/16\ above the current inside bid). However, if 
the inside market is 5\1/32\-5\2/32\, a legal short sale in a down 
market could be effected at a price equal to the inside offer 5\2/32\.
    In addition, to help ensure that market participants do not adjust 
their quotations to circumvent the short sale rule, the NASD is 
proposing an amendment to the Minimum Increment Rule to provide that a 
market maker or customer could not bring about or cause the inside 
spread for a stock to narrow in a declining market (e.g., lowering its 
offer to create an inside spread less than \1/16\) for the purpose of 
facilitating the execution of a short sale at a price less than \1/16\ 
above the inside bid.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act.\6\ 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, and to remove impediments to and perfect 
the mechanism of a free and open market. Given the existence of the 
short sale rule, the proposed rule change is necessary to preserve the 
short sale rule's underlying purpose and effect when the inside spread 
is less than \1/16\.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. Sec. 78o(b)(6) (1994).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

[[Page 46537]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written 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. People 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room. Copies of the filing will also 
be available for inspection and copying at the NASD's principal 
offices. All submissions should refer to File No. SR-NASD-97-59 and 
should be submitted by September 24, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12) (1997).
---------------------------------------------------------------------------

[FR Doc. 97-23342 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M