[Federal Register Volume 69, Number 164 (Wednesday, August 25, 2004)]
[Notices]
[Pages 52319-52321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1918]



[[Page 52319]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50217; File No. SR-NASD-2004-092]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment 1 Thereto by the 
National Association of Securities Dealers, Inc. Relating to Extension 
of Short Sale Rule and Continued Suspension of Primary Market Maker 
Standards Set Forth in Rule 4612

August 18, 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 June 14, 2004, The National Association of Securities Dealers, Inc., 
through its subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq'') 
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 Nasdaq. On July 21, 2004, 
Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ The 
proposed rule change, as amended, was filed by Nasdaq as a non-
controversial filing, under Rule 19b-4(f)(6) of the Act.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change 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 Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine England, Assistant Director, 
Division of Market Regulation, Commission, dated July 21, 2004 
(``Amendment No. 1''). Amendment No. 1 notes the name change from 
``Nasdaq National Market Execution System'' to ``Nasdaq Market 
Center.''
    \4\ 17 CFR 240.19b-4(f)(6). For purposes of determining the 
effective date and calculating the sixty-day period within which the 
Commission may summarily abrogate the proposed rule change under 
section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on July 21, 2004, the date Nasdaq filed Amendment No. 1. 
See 15 U.S.C. 78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Nasdaq Stock Market, Inc. (``Nasdaq'') is proposing to extend 
the pilot effectiveness of Rule 3350 until December 15, 2004. Nasdaq is 
also seeking to continue the suspension of the effectiveness of the 
Primary Market Maker (``PMM'') standards currently set forth in Rule 
4162 until December 15, 2004. If not extended, these pilot programs 
would expire on June 15, 2004. In addition, Nasdaq is seeking to extend 
the pilot effectiveness of the penny ($0.01) legal short sale standard 
contained in paragraph (b)(2) of Interpretative Material 3350 (``IM-
3350'') until December 15, 2004. If not extended, this pilot program 
would expire on June 30, 2004.
    The text of the proposed rule change is as follows. Additions are 
underlined; deletions are bracketed.\5\
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    \5\ The proposed rule change is marked to show changes from the 
rule as it appears in the electronic NASD Manual available at 
www.nasd.com.
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* * * * *
NASD Rule 3350 Short Sale Rule
    (a)(1) No Change.
    (2) With respect to trades executed on or reported to Nasdaq, 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 displayed in the Nasdaq Market Center 
[National Market Execution System] when the current best (inside) bid 
is below the preceding best (inside) bid in the security.
    (b)-(k) No Change.
    (l) This section shall be in effect until [June 15, 2004] December 
15, 2004.
IM-3350 Short Sale Rule
    (a) No Change.
    (b)(1) No Change.
    (2) With respect to trades executed on or reported to Nasdaq, 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 displayed in the 
Nasdaq Market Center [National Market Execution System] when the 
current best (inside) bid is below the preceding best (inside) bid in 
the security. Nasdaq 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 $0.01 above 
the current inside bid when the current inside spread is $0.01 or 
greater. The last sale report for such a trade would, therefore, be 
above the inside bid by at least $0.01.
    (c) No Change.
* * * * *

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 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-C 
below, of the most significant aspects of such statements.

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

1. Purpose
Background and Description of the NASD's Short Sale Rule
    Section 10(a) of the Act gives the Commission plenary authority to 
regulate short sales of securities registered on a national securities 
exchange, as needed to protect investors. In 1992, Nasdaq, believing 
that short-sale regulation is important to the orderly operation of 
securities markets, proposed a short sale rule for trading of its 
National Market securities that incorporates the protections provided 
by SEC Rule 10a-1. On June 29, 1994, the SEC approved the NASD's short 
sale rule (the ``Rule'') applicable to short sales \6\ in Nasdaq 
National Market (``NNM'') securities on an eighteen-month pilot basis 
through March 5, 1996.\7\ The NASD and the Commission have extended 
Rule 3350 numerous times, most recently, until June 15, 2004.
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    \6\ 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 200 of Regulation 
SHO, which is incorporated into Nasdaq's short sale rule by Rule 
3350(k)(1).
    \7\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 26212 (July 7, 1994) (``Short Sale Rule Approval 
Order'').
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    The Rule employs a ``bid'' test rather than a tick test because 
Nasdaq trades are not necessarily reported to the tape in chronological 
order. The Rule prohibits short sales at or below the inside bid when 
the current inside bid is below the previous inside bid. Nasdaq 
calculates the inside bid from all market makers in the security and 
disseminates symbols to denote whether the current inside bid is an 
``up-bid'' or a ``down-bid.'' To effect a ``legal'' short sale on a 
down-bid, the short sale must be executed at a price at least $.01 
above the current inside bid. The Rule is in effect from 9:30 a.m. 
until 4 p.m. each trading day.
    In December of 2002, Nasdaq modified the method it uses to 
calculate the last bid by having it refer to the ``Nasdaq Inside'' 
which is comprised of quotations from all participants in Nasdaq Market 
Center execution systems, rather than referring to the National Best 
Bid and Offer (``NBBO''). Nasdaq currently calculates and applies the 
Nasdaq-based bid tick indicator to

[[Page 52320]]

all trades executed by the Nasdaq Market Center. With respect to trades 
executed outside Nasdaq Market Center execution systems and reported to 
Nasdaq, Nasdaq participants have been permitted to transition from the 
NBBO-based bid tick to the Nasdaq-based bid tick, provided that each 
firm select and apply a single bid tick indicator for all such trades 
executed by that firm. That transition has not been completed and, as 
explained below, in light of the Commission's adoption of Regulation 
SHO, Nasdaq has alerted members that it would not be prudent to 
transition from the NBBO bid tick to the Nasdaq bid tick at this time.
Background of the Primary Market Maker Standards
    To ensure that market maker activities that provide liquidity and 
continuity to the market are not adversely constrained when the short 
sale rule is invoked, Rule 3350 provides an exemption for ``qualified'' 
market makers (i.e., market makers that meet the PMM standards). 
Presently, Rule 4612 provides that a member registered as a market 
maker pursuant to Rule 4611 may be deemed a PMM if that member meets 
certain threshold standards. On February 14, 1997, the PMM standards 
were waived for all NNM securities due to the impact of the SEC's Order 
Handling Rules and corresponding NASD rule change and system 
modifications on the operation of the four quantitative standards.\8\
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    \8\ See Securities Exchange Act Release No. 38294 (February 17, 
1997), 62 FR 8289 (February 24, 1997).
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Proposal To Extend the Short Sale Rule and Suspend the PMM Standards
    Nasdaq believes that it is in the best interest of investors to 
extend the short sale regulation pilot program. When the Commission 
approved the NASD's short sale rule on a pilot basis, it made specific 
findings that the Rule was consistent with sections 11A, 15A(b)(6), 
15A(b)(9), and 15A(b)(11) of the Act. Specifically, the Commission 
stated that, ``recognizing the potential for problems associated with 
short selling, the changing expectations of Nasdaq market participants 
and the competitive disparity between the exchange markets and the OTC 
market, the Commission believes that regulation of short selling of 
Nasdaq National Market securities is consistent with the Act.'' \9\ In 
addition, the Commission stated that it ``believes that the NASD's 
short sale bid-test, including the market maker exemptions, is a 
reasonable approach to short sale regulation of Nasdaq National Market 
securities and reflects the realities of its market structure.'' \10\ 
The benefits that the Commission recognized when it first approved Rule 
3350 apply with equal force today.
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    \9\ See Short Sale Rule Approval Order, supra note 7.
    \10\ Id.
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    Similarly, the concerns that caused the Commission to waive the PMM 
standards in February 1997 continue to exist today. Nasdaq and the 
Commission agreed to waive the PMM standards for three reasons that 
were discovered only after the Order Handling Rules were 
implemented.\11\ Through late 1999, Nasdaq represents that it worked 
diligently to address those concerns to the Commission's satisfaction, 
including convening a special subcommittee on PMM issues, proposing two 
different sets of PMM standards, and being continuously available and 
responsive to Commission staff to discuss this issue. Despite these 
efforts, the Commission and Nasdaq were unable to establish 
satisfactory PMM standards. At the request of Commission staff, Nasdaq 
has begun developing PMM standards suitable to today's rapidly changing 
marketplace. Reinstating the PMM standards set forth in Rule 4612 would 
be extremely disruptive to the market and harmful to investors.
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    \11\ Implementation of the Order Handling Rules created the 
following three issues: (1) Many market makers voluntarily chose to 
display customer limit orders in their quotes although the Limit 
Order Display Rule does not yet require it; (2) SOES decrementation 
for all Nasdaq stocks significantly affected market makers' ability 
to meet several of the primary market maker standards; and (3) with 
the inability to meet the existing criteria for a larger number of 
securities, a market maker may be prevented from registering as a 
primary market maker in an initial public offering because it fails 
to meet the 80% primary market maker test contained in Rule 
4612(g)(2)(B). Refer to Rule 11Ac1-4 of the Act for a further 
reading of the Limit Order Display Rule. 17 CRF 240.11Ac1-4.
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Proposal To Extend Penny Short Sale Standard
    On March 2, 2001, the Commission approved, on a pilot basis,\12\ 
Nasdaq's proposal to establish a $0.01 above the bid standard for legal 
short sales in Nasdaq National Market securities as part of the 
Decimals Implementation Plan for the Equities and Options Markets. This 
pilot program has been continuously extended since that date and is 
currently set to expire on June 30, 2004.\13\ Nasdaq now proposes to 
extend, through December 15, 2004, that pilot program. Extension until 
December 15, 2004 will allow the Nasdaq and the Commission to continue 
to evaluate the impact of the penny short sale pilot. If the instant 
filing is approved, Nasdaq will continue during the pilot period to 
require NASD members seeking to effect ``legal'' short sales when the 
current best (inside) bid displayed by Nasdaq is lower that the 
previous bid, to execute those short sales at a price that is at least 
$0.01 above the current inside bid in that security. Nasdaq believes 
that continuation of this pilot standard appropriately takes into 
account the important investor protections provided by Rule 3350 and 
IM-3350 and the ongoing relationship of the valid short sale price 
amount to the minimum quotation increment of the Nasdaq market 
(currently also $0.01).
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    \12\ See Securities Exchange Act Release No. 44030 (March 2, 
2001), 66 FR 14235 (March 9, 2001).
    \13\ See Securities Exchange Act Release No. 47970 (June 3, 
2003), 68 FR 34689 (June 10, 2003).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\14\ in general and with 
section 15A(b)(6) of the Act,\15\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \14\ 15 U.S.C. 78o-3.
    \15\ 15 U.S.C. 78o-3(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will not 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

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change, as amended, has been filed by Nasdaq 
pursuant to section 19(b)(3)(A) of the Act \16\ and subparagraph (f)(6) 
of Rule 19b-4 thereunder.\17\ Nasdaq has designated the proposed rule 
change as one that: (i) Does not significantly affect the protection of 
investors or the public interest; (ii) does not impose any significant 
burden on competition; and (iii) does not become operative for 30 days 
from the date on which it was filed, or such shorter time as the 
Commission may designate. Therefore, the foregoing rule change, as 
amended,

[[Page 52321]]

has become effective pursuant to section 19(b)(3)(A) of the Act \18\ 
and Rule 19b-4(f)(6) thereunder.\19\ Nasdaq requests that the 
Commission waive both the 5-day notice and 30-day pre-operative 
requirements contained in Rule 19b-4(f)(6)(iii).\20\ Nasdaq believes 
good cause exists to grant such waivers because of the importance of 
short sale regulation to the protection of investors and the fact that 
the pilot programs will each expire if not extended. Nasdaq will 
implement this rule change immediately.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ See supra note 16.
    \19\ See supra note 17.
    \20\ Under subparagraph (f)(6)(iii) of Rule 19b-4, the proposal 
may not become operative for 30 days after the date of its filing, 
or such shorter time as the Commission may designate if consistent 
with the protection of investors and the public interest, and the 
self-regulatory organization must file notice of its intent to file 
the proposed rule change at least five business days beforehand. 17 
CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 5-day notice and 30-day 
pre-operative delay is consistent with the protection of investors and 
the public interest. The Commission believes that accelerating the 
operative date does not raise any new regulatory issues, significantly 
affect the protection of investors or the public interest, or impose 
any significant burden on competition. For these reasons, the 
Commission designates the proposed rule change as effective and 
operative immediately.
    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.

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-2004-092 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-2004-092. 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., 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-2004-092 and 
should be submitted on or before September 15, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-1918 Filed 8-24-04; 8:45 am]
BILLING CODE 8010-01-P