[Federal Register Volume 62, Number 193 (Monday, October 6, 1997)]
[Notices]
[Pages 52169-52170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26357]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39139; File No. SR-NASD-97-59]


Self-Regulatory Organizations; Order Granting Temporary Approval 
on an Accelerated Basis of Proposed Rule Change by National Association 
of Securities Dealers, Inc. Relating to the Short Sale Rule

September 26, 1997.
    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 pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 19b-4 \2\ thereunder 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\th. Notice of the proposed rule change, together with the 
substance of the proposal, was published in the Federal Register.\3\ No 
comments on the proposed rule change have been received, to date. This 
order grants temporary approval on an accelerated basis to the proposed 
rule change through January 15, 1998. At the expiration of rule, the 
Commission will consider permanent approval of the proposed rule change 
in unison with the Commission's consideration of the permanent approval 
of the NASD's short sale rule.\4\
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    \1\ 15 U.S.C. 78s(b)(1) (1994).
    \2\ 17 CFR 240.19b-4 (1997).
    \3\ Securities Exchange Act Release No. 38975 (August 26, 1997), 
62 FR 46535 (September 3, 1997) [File No. SR-NASD-97-59].
    \4\ See also companion release Securities Exchange Act Release 
No. 39140. 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 40963 (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.

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[[Page 52170]]

I. Background

    The NASD's short sale rule prohibits member firms from effecting 
short sales \5\ at or below the current inside bid as disseminated by 
Nasdaq whenever that bid is lower than the previous inside bid.\6\ 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\th 
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).
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    \5\ 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)(l).
    \6\ 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 a ``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.
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    Now that all Nasdaq stocks can potentially trade with a \1/16\th 
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\th. 
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\th. There would be no change to the current 
definition for stocks with a spread of \1/16\th or greater. For 
example, if the inside market for ABCD is 10\1/4\-10\5/16\, a legal 
short sale in a down market would have to be effected at a price equal 
to or greater than 10\5/16\ (i.e., \1/16\th 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 of 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\th) for the purpose of 
facilitating the execution of a short sale at a price less than \1/
16\th above the inside bid.

Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that temporary approval on an accelerated 
basis of the NASD's proposed rule change through January 15, 1998, is 
consistent with the Act and the rules and regulations promulgated 
thereunder. Specifically, the Commission finds that the proposed rule 
change is consistent with the provisions of Section 15A(b)(6) of the 
Act.\7\ 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 Commission's temporary approval of the 
short sale rule, the Commission believes that the proposed rule change 
is a reasonable approach to preserve the short sale rule's underlying 
purpose and effect when the inside spread is less than \1/16\th.
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    \7\ 15 U.S.C.Sec. 78o(b)(6) (1994).
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    The Commission also finds good cause for approving on a temporary 
basis the proposed rule change prior to the 30th day after the date of 
publication of notice of filing thereof. The Commission believes that 
it is appropriate to accelerate temporary approval of the proposed rule 
change through January 15, 1998, because accelerated approval will 
allow NASD members, without delay, to effect ``legal'' short sales 
consistent with the underlying purpose and effect of the NASD's short 
sale rule in situations where the inside spread is less than \1/16\th, 
while the NASD and the Commission consider the effect of the short sale 
rule.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, SR-NASD-97-59 be, and hereby is, 
approved on a temporary basis through January 15, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12) (1997).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26357 Filed 10-3-97; 8:45 am]
BILLING CODE 8010-01-M