[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36464-36466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40140; File No. SR-NASD-98-26]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Partial Approval to Amendment No. 4 to Proposed 
Rule Change by the National Association of Securities Dealers, Inc. to 
Institute, on a Pilot Basis, New Primary Nasdaq Market Maker Standards 
for Nasdaq National Market Securities

June 26, 1998.

I. Introduction

    On March 19, 1998, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), submitted to 
the Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to: (a) implement, on a pilot basis, new Primary Nasdaq Market 
Maker (``PMM'') standards for all Nasdaq National Market (``NNM'') 
securities; (b) extend the NASD's Short Sale Rule pilot until November 
1, 1998; and (c) extend the suspension of existing PMM standards until 
May 1, 1998. On March 30, 1998, the Commission issued notice of the 
filing and approved, on an accelerated basis, the portions of the 
filing extending the NASD's Short Sale Rule pilot and the suspension of 
existing PMM standards.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 39819 (March 30, 1998) 
63 FR 16841 (April 6, 1998).
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    On April 30, 1998, Nasdaq filed Amendment No. 3 to the proposal,\4\ 
proposing to: (a) extend the comment period by 30 days to May 27, 1998; 
(b) continue to suspend the current PMM standards until July 1, 1998; 
(c) extend the NASD's Short Sale Rule pilot until January 4, 1999; (d) 
change the dates during which the PMM pilot would run to July 1, 1998, 
through January 4, 1999; and (e) amend subparagraph (g) of NASD Rule 
4612 to change the method for determining how market makers that are 
not managers or co-managers in an underwriting syndicate of a secondary 
offering may qualify as PMMs. Also on April 30, 1998, the Commission 
issued notice of Amendment No. 3 and approved, on an accelerated basis, 
Nasdaq's request to continue to suspend the current PMM standards until 
July 1, 1998.\5\ The Commission also extended the comment period for 
the proposed rule change.
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    \4\ See letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division, of Market Regulation (``Division''), SEC, dated April 29, 
1998. Securities Exchange Act Release No. 39819 discussed Amendment 
No. 1 and Amendment No. 2 to the filing, which were filed with the 
Commission on March 25, and 26, 1998, respectively.
    \5\ See Securities Exchange Act Release No. 39936 (April 30, 
1998) 63 FR 25253 (May 7, 1998).
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    On June 24, 1998, Nasdaq filed Amendment No. 4 to the proposal,\6\ 
proposing to: (a) extend the comment period to July 27, 1998; (b) 
continue to suspend the current PMM standards until October 1, 1998; 
and (c) change the dates during which the PMM pilot would run to 
October 1, 1998, until April 1, 1999.
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    \6\ See letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division, SEC, dated June 24, 1998.
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Background

    Presently, NASD Rule 4612 provides that a member registered as a 
Nasdaq market maker pursuant to NASD Rule 4611 may be deemed a PMM if 
that member meets certain threshold standards. The implementation of 
the SEC Order Handling Rules \7\ and what some perceive as a concurrent 
move toward a more order-driven, rather than a quote-driven, market 
raised questions about the continued relevance of those PMM standards. 
As a result, such standards were suspended beginning in early 1997.\8\ 
Currently, all market makers are designated as PMMs.
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    \7\ On August 29, 1996, the Commission promulgated a new rule, 
the Limit Order Display Rule (Exchange Act Rule 11Ac1-4) and adopted 
amendments to the Quote Rule (Exchange Act Rule 11Ac1-1), which 
together are designed to enhance the quality of published quotations 
for securities and promote competition and pricing efficiency in 
U.S. securities markets (collectively, the ``Order Handling 
Rules''). See Securities Exchange Act Release No. 37619A (September 
6, 1996) 61 FR 48290 (September 12, 1996).
    \8\ See Securities Exchange Act Release No. 38294 (February 14, 
1997) 62 FR 8289 (February 24, 1997) (approving temporary suspension 
of PMM standards); Securities Exchange Act Release No. 39198 
(October 3, 1997) 62 FR 53365 (October 14, 1997) (extending 
suspension through April 1, 1998); Securities Exchange Act Release 
No. 39819 (March 30, 1998) 63 FR 16841 (April 6, 1998) (extending 
suspension through May 1, 1998); Securities Exchange Act Release No. 
39936 (April 30, 1998) 63 FR 25253 (May 7, 1998) (extending 
suspension through July 1, 1998).
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    Since February 1997, Nasdaq has worked to develop PMM standards 
that are more meaningful in what may be an increasingly order-driven 
environment and that better identify firms engaged in responsible 
market making activities deserving of the benefits associated with 
being a PMM, such as being exempt from NASD Rule 3350, the NASD's Short 
Sale Rule. The NASD now proposes to extend the current suspension of 
the existing PMM standards and to implement new standards on a pilot 
basis from October 1, 1998, until April 1, 1999. The NASD intends the 
new standards to better evaluate whether a market maker provides 
meaningful liquidity to the market. To determine whether a particular 
market maker is such a provider of liquidity, Nasdaq will analyze that 
market maker's trading activity using a new test.
    For the reasons discussed below, the Commission has determined to 
grant accelerated approval of Nasdaq's request, in Amendment No. 4, to 
continue to suspend the current PMM standards until October 1, 1998. 
Further, given the proposal's complexity and the Commission's desire to 
give the public sufficient time to consider the proposal, the 
Commission has extended the comment period to the proposed rule change, 
as amended, to July 27, 1998.

II. Proposed Rule Change

    As discussed in detail in Securities Exchange Act Release No. 
39819, Nasdaq is proposing a new set of PMM standards. In the current 
filing, Nasdaq would amend the timing of the proposed pilot through 
which the NASD, the SEC, and the public may evaluate those new 
standards.
* * * * *

[[Page 36465]]

    The proposed rule language, as amended, follows. Additions are 
italicized; deletions are bracketed.

Rule 4612

    (a)-(g) No Change
    (h) [The Board of Governors may modify the threshold standards set 
forth in paragraphs (a) and (b) above if it finds that maintenance of 
such standards would result in an adverse impact on a class of 
investors or on Nasdaq.] This rule shall be in effect beginning October 
1, 1998, and remain in effect until April 1, 1999.
* * * * *

III. Discussion

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the extension of the current suspension 
of existing PMM standards until October 1, 1998, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder. Extending the suspension of the current PMM standards to 
accommodate implementing the new pilot is consistent with Section 
15A(b)(6) \9\ of the Exchange Act. Section 15A(b)(6) of the Exchange 
Act requires that the NASD's rules be designed, among other things, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and to promote just and equitable 
principles of trade. The Commission believes that continued suspension 
of the current PMM standards will facilitate Nasdaq's efforts in 
implementing more meaningful PMM standards which should help to enhance 
market liquidity by rewarding those market makers that meet the new 
standards. As a result, continuing the suspension of the current PMM 
standards is consistent with Section 15A(b)(6) of the Exchange Act.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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    In finding that the suspension of the existing PMM standards is 
consistent with the Exchange Act, the Commission reserves judgment on 
the merits of the NASD's Short Sale Rule, any market maker exemptions 
to that rule, and the proposed new PMM standards. The Commission 
recognizes that the Short Sale Rule already has generated significant 
public comment. Such commentary, along with any further comment on the 
interaction of the Short Sale Rule with the proposed new PMM standards, 
will help guide the Commission's evaluation of the Short Sale Rule and 
new PMM standards. During the PMM pilot period, the Commission 
anticipates that the NASD will continue to address the Commission's 
questions and concerns and provide the Commission staff with any 
relevant information about the practical effects and the operation of 
the revised PMM standards and possible interaction between those 
standards and the NASD's Short Sale Rule.
    As proposed, the new PMM standards will become effective October 1, 
1998, when the suspension of the existing PMM standards, under 
Amendment No. 4, expires. Nasdaq notes that currently all market makers 
registered in a security are PMMs due to the suspension of the previous 
PMM standards, and will continue to be so designated on the pilot's 
proposed start date of October 1, 1998. Under the one-month look-back 
provision in the PMM pilot program, Nasdaq will consider the previous 
calendar month and the current month to determine a market maker's 
continued PMM eligibility if the market maker attained PMM status in a 
security during the previous month, but fails to meet the applicable 
thresholds for the current month. To give PMMs the full benefit of the 
one-month look-back period and to allow market makers time to adjust 
their trading activity to the new standards, Nasdaq proposes to 
implement the new standards so that no market maker that is designated 
as a PMM when the pilot begins on October 1, 1998, will lose its PMM 
status--based on a failure to meet the new PMM standards--until 
December 3, 1998. Nasdaq believes, and the Commission agrees, that it 
is fair to give market makers this time to make necessary adjustments 
to their trading activity to help them maintain their PMM designation, 
particularly since PMM standards have been suspended for more than a 
year and the proposed new PMM standards are more stringent than the 
previous standards. The PMM pilot, pursuant to Amendment No. 4, would 
run until April 1, 1999.
    The Commission finds good cause for approving the extension of the 
suspension of existing PMM standards prior to the 30th day after the 
date of publication of notice of the filing in the Federal Register. It 
could be disruptive to market making to reintroduce outdated PMM 
standards for a brief period prior to implementing a new PMM pilot. 
Further, the current PMM standards have been suspended until July 1, 
1998, at which time the old PMM standards--which are not a meaningful 
measure of a market maker's liquidity-providing activity--would be used 
again to determine market makers' PMM status. To ensure continuity in 
the PMM standards and the regulation of short selling activity, to 
maintain orderly markets, and to avoid confusion, it is necessary to 
continue the suspension of the prior PMM standards until the new 
standards are implemented on October 1, 1998.

IV. Solicitation of Comments

    Given the proposal's complexity and the Commission's desire to give 
the public sufficient time to consider the proposal, the Commission 
hereby grants Nasdaq's request to extend the comment period for the 
proposed rule change, as amended, to July 27, 1998. Since making the 
proposal, the NASD has issued reports to all Nasdaq market makers in 
NNM issues to show how those market makers would have performed for 
April and May of 1998 had the proposed PMM standards been in place. The 
NASD also posted on The Nasdaq Trader Web Site \10\ a stock-by-stock 
analysis of what percentage of market makers in each stock would have 
been PMMs under the proposed PMM standards in April and May of 1998. 
The Commission expects such data will allow market participants to 
submit more meaningful comments.
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    \10\ See http://www.nasdaqtrader.com.
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    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. In particular, the 
Commission requests that commenters provide alternative PMM standards, 
explaining why such alternative standards better identify and reward 
market participants who provide meaningful liquidity to the Nasdaq 
market. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, DC 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 such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-98-26 and should be 
submitted by July 27, 1998.

[[Page 36466]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\11\ that the portion of Amendment No. 4 to the proposed 
rule change, SR-NASD-98-26, that extends the suspension of the current 
PMM standards to October 1, 1998, be and hereby is approved on an 
accelerated basis.\12\

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In partially approving the proposal, the Commission has 
considered the approved portion's impact on efficiency, competition, 
and capital formation. Moreover, the pilot program, if fully 
implemented, likely will provide the Commission with data necessary 
to enable it to evaluate the impact of the proposed PMM standards on 
the Nasdaq market and market participants. 15 U.S.C. 78c(f).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17718 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M