[Federal Register Volume 69, Number 116 (Thursday, June 17, 2004)]
[Notices]
[Pages 33969-33971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13636]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49833; File No. SR-NASD-2004-056]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. Relating to Short-
Sale ACT Reporting Requirements

June 8, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 31, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On May 21, 
2004, Nasdaq filed Amendment No. 1 on behalf of the NASD.\3\ Nasdaq has 
designated this proposal as a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule pursuant to Section 19(b)(3)(A) of the 
Act,\4\ and Rule 19b-4(f)(1)\5\ thereunder, which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Mary M. Dunbar, Vice-President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated May 20, 
2004 (``Amendment No. 1'').
    \4\ 15 U.S.C 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing with the Commission a proposed rule change to 
clarify that members are required to indicate on their Automated 
Confirmation Transaction (``ACT'') Service reports whether a sale is a 
short sale or short sale exempt transaction for all securities, 
including exchange-listed, SmallCap, OTC Bulletin Board and OTC equity 
securities.
    The text of the proposed rule change is below. Proposed new 
language is underlined.
* * * * *

IM 6130. Trade Reporting of Short Sales

    The NASD's short sale rule (Short Sale Rule or Rule 3350) generally 
prohibits members from effecting short sales in NNM securities at or 
below the inside bid when the current inside bid is below the previous 
inside bid. Rule 6130(d)(6) requires that members indicate on ACT 
reports whether a transaction is a short sale or a short sale exempt 
transaction (``ACT short sale reporting requirements''). Rule 6130 
explicitly requires members to file ACT reports not just for NNM 
securities transactions, but for other securities transactions, 
including transactions in exchange-listed, SmallCap, convertible debt, 
OTC Bulletin Board, and OTC equity securities. Thus, all short sale 
transactions in these securities reported to ACT must carry a ``short 
sale'' indicator (or a ``short sale exempt'' indicator if it is a short 
sale transaction in an NNM or exchange-listed security that qualifies 
for an exemption from Rule 3350 or SEC Rule 10a-1).
* * * * *

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

[[Page 33970]]

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 1992, the NASD, believing that short sale regulation is 
important to the orderly operation of securities markets, proposed a 
short sale rule for trading of Nasdaq National Market (``NNM'') 
securities that incorporates the protections provided by Rule 10a-1 of 
the Act.\6\ On June 29, 1994, the Commission approved the NASD's short 
sale rule applicable to short sales \7\ in NNM securities on an 
eighteen-month pilot basis through March 5, 1996 (the ``Short Sale 
Rule'').\8\ The NASD and the Commission have extended NASD Rule 3350 
numerous times, most recently, until June 15, 2004.
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    \6\ 17 CFR 240.10a-1.
    \7\ A short sale is a sale of a security that the seller does 
not own or any sale that 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 Rule 3b-3 of the Act, 
which is incorporated into NASD's short sale rule by NASD Rule 
3350(k)(1).
    \8\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 34885 (July 7, 1994) (``Short Sale Rule Approval 
Order'').
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    As part of the Short Sale Rule, the NASD also amended NASD Rule 
6130(d)(6) (previously ACT Rule (d)(4)(F)) to require that members 
include in ACT information regarding whether a sale is a short sale or 
short sale exempt (``short sale ACT reporting requirements''). Nasdaq 
believes that, because the Short Sale Rule applies only to NNM 
securities, and earlier guidance was issued relating specifically to 
short sale ACT reporting requirements for NNM securities,\9\ some 
members may have been confused as to the types of securities that are 
subject to the short sale ACT reporting requirements. Through this 
filing, Nasdaq is clarifying that, as required by the text of the rule, 
the short sale ACT reporting requirements apply to transactions in all 
securities reported to ACT, including exchange-listed, SmallCap, OTC 
Bulletin Board and OTC equity securities. Nasdaq is submitting this 
filing to eliminate any ambiguity and make clear that members are 
required to annotate whether a sale is a short sale or short sale 
exempt, as applicable, pursuant to NASD Rule 6130(d)(4) for all ACT 
reports.
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    \9\ See ACT Notice 94-1 (August 22, 1994).
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    The proposed interpretation will become effective immediately upon 
filing, but Nasdaq will allow firms a 60-day period to re-program their 
systems to comply with the interpretation. Nasdaq believes that a 60-
day period is necessary and reasonable in light of any confusion that 
may have existed to date. Within 10 days after filing this proposal, 
Nasdaq will publish a Notice to Members describing firms' obligations 
under IM 6130. The publication of that Notice to Members will trigger 
the start of the 60-day period.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including Section 15A(b)(6) \10\ of the Act, which requires, 
among other things, that a registered national securities association's 
rules be designed 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 mechanisms of a free and open market and a national market 
system, and to protect investors and the public interest. Nasdaq 
believes the proposed rule change is consistent with the Act in that it 
clarifies short sale reporting requirements and promotes compliance 
with and regulation of short sale requirements.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(i) \11\ of the Act, and subparagraph (f)(1) of Rule 19b-4 
thereunder,\12\ because it is concerned solely with the interpretation 
of the meaning, administration or enforcement of an existing NASD rule.
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    \11\ 15 U.S.C 78s(b)(3)(A)(i).
    \12\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\13\
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    \13\ For purposes of determining the effective date of the 
filing and calculating the 60-day abrogation date, the Commission 
considers the period to commence on May 21, 2004, the date Nasdaq 
filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-056 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-056. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW.,

[[Page 33971]]

Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the NASD. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASD-2004-056 and should be 
submitted on or before July 8, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13636 Filed 6-16-04; 8:45 am]
BILLING CODE 8010-01-P