[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Notices]
[Pages 62519-62521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29686]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36532; File No. SR-NASD-95-58]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to the Date of
Implementation of the NASD's Primary Market Maker Standards and the
Duration of the Pilot Program for the NASD's Short Sale Rule
November 30, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 27, 1995, 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 and II 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. As discussed below, the
Commission has also granted accelerated approval of the proposal.
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to Section 19(b)(1) of the Act, the NASD is proposing to
delay, from December 1, 1995 to February 1, 1996, the implementation
date of the Primary Market Maker standards to be used to determine the
eligibility of market makers for an exemption from the NASD's short-
sale rule. The NASD also proposes to extend the termination date for
the pilot period to August 3, 1996 instead of June 3, 1996. The text of
the proposed rule change is as follows (additions are italicized;
deletions are bracketed):
Article III, Section 1
* * * * *
Section 48
(1)(3) Until February 1, 1996 [December 1, 1995], the term
``qualified market maker'' shall mean a registered Nasdaq market
maker that has maintained, without interruption, quotations in the
subject security for the preceding 20 business days.
* * * * *
Beginning February 1, 1996 [December 1, 1995], the term
``qualified market maker'' shall mean a registered Nasdaq market
maker that meets the criteria for a Primary Nasdaq Market Maker as
set forth in Article III, Section 49 of the Rules of Fair Practice.
* * * * *
(m) This section shall be in effect until August 3, 1996 [June
3, 1996].
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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
On June 29, 1994, the SEC approved the NASD's short-sale rule
applicable to short sales in Nasdaq National Market securities on an
eighteen-month pilot basis through March 5, 1996.\2\ The NASD's short-
sale rule prohibits member firms from effecting short sales at or below
the current inside bid as disseminated by the Nasdaq system whenever
that bid is lower than the previous inside bid.\3\ The rule is in
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m.,
Eastern Time). As approved by the Commission, during the first year
that the rule has been in effect (from September 6, 1994 to September
6, 1995), Nasdaq market makers who maintained a quotation in a
particular Nasdaq National Market security for 20 consecutive business
days without interruption are exempt from the rule for short sales in
that security, provided that the short sales were made in connection
with bona fide market making activity (``the 20-day'' test). For the
next six months of the 18-month pilot period (i.e., September 6, 1995
through March 5, 1996), the ``20-day'' test for market maker exemptions
from the rule was scheduled to be replaced with a four-part
quantitative test known as the ``Primary Market Maker (PMM)
Standards.''
\2\See Securities Exchange Act Release No. 34277 (June 29,
1994), 59 FR 34885 (July 7, 1994).
\3\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.
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Under the PMM Standards, to be eligible for an exemption from the
short-sale rule, a market maker must satisfy at least two of the
following four criteria: (1) The market maker must be at the best bid
or best offer as shown on the Nasdaq
[[Page 62520]]
system no less than 35 percent of the time; (2) the market maker must
maintain a spread no greater than 102 percent of the average dealer
spread; (3) no more than 50 percent of the market maker's quotation
updates may occur without being accompanied by a trade execution of at
least one unit of trading; or (4) the market maker executes 1\1/2\
times its ``proportionate'' volume in stock.\4\ If a market maker is a
PMM for a particular stock, there will be a ``P'' indicator next to its
quote in that stock. In addition, market makers will be able to review
their status as PMMs through their Nasdaq Workstation. The review
period for satisfaction of the PMM performance standards is one
calendar month. If a PMM has not satisfied the threshold standards
after a particular review period, the PMM designation will be removed
commencing on the next business day following notice of failure to
comply with the standards. Market makers may requalify for designation
as a PMM be satisfying the threshold standards for the next review
period.
\4\Specifically, the proportionate volume test requires a market
maker to account for volume of at least one-and-a-half times its
proportionate share of overall volume in the security for the review
period. For example, if a security has 10 market makers, each market
maker's proportionate share volume is 10 percent. Therefore, the
proportionate share volume is one-and-a-half times 10, or 15 percent
of overall volume.
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As noted above, the PMM standards were originally scheduled to go
into effect on September 6, 1995. However, because of unforeseen delays
in the programming of the PMM standards, the NASD proposed and the SEC
approved a delay in the effective date of the PMM standards until
December 1, 1995.\5\ With the instant filing, the NASD is proposing a
further delay of the implementation date for the PMM standards.
Specifically, because of recently detected errors in a segment of the
NASD's software used to calculate whether market makers are satisfying
the PMM standards, the NASD is proposing to delay the effective date of
the PMM standards until February 1, 1996.
\5\See Securities Exchange Act Release No. 36171 (Aug. 30,
1995), 60 FR 46651 (Sept. 7, 1995).
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With the proposed delay, a market maker's trading activity during
the month of January 1996 will be evaluated according to the PMM
standards to determine if it can retain its exemption until February
1996. Until January 31, 1996, the 20-day test will continue to be used
to evaluate market makers' eligibility for an exemption from the rule.
Thus, beginning February 1, 1996, a ``P'' indicator will be displayed
next to every PMM that is exempt from the rule according to the new PMM
standards.
Because implementation of the PMM standards will be delayed under
the proposal, the NASD is also proposing to extend the pilot period for
the rule so that there is sufficient time to evaluate the effectiveness
and impact of the PMM standards and the effectiveness of the short sale
rule with the PMM standards in place. Specifically, the NASD proposes
to extend the termination date for the pilot program until August 3,
1996.
The NASD believes the proposed rule change is consistent with
Sections 15A(b)(6) and 11A(c)(1)(F) of the Act. 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. Section 11A(c)(1)(F) assumes
equal regulation of all markets for qualified securities and all
exchange members, brokers, and dealers effecting transactions in such
securities. Specifically, the NASD believes that continuing the
operation of the present ``20-day'' test until the PMM standards are in
place will ensure that the liquidity provided to the market by virtue
of the market maker exemption will not be diminished. In addition, the
NASD believes that continuation of the ``20-day'' test until the PMM
standards are in place would avoid the confusion in the marketplace
that would result if the market maker exemption were to lapse for two
months and then be reinstated. Finally, the NASD believes that
extending the pilot period for the short-sale rule will enhance the
quality of studies analyzing the effectiveness of the rule and help to
ensure that future regulatory action taken with respect to the rule is
based on a greater knowledge and understanding of the rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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
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.
The NASD has requested, however, that the Commission find good cause
pursuant to Section 19(b)(2) for approving the proposed rule change
prior to the 30th day after publication in the Federal Register.
As discussed below, the Commission finds that the proposed rule
change is consistent with the requirements of the Act. Further, the
Commission finds good cause for approving the proposal prior to the
30th day after the date of publication of notice of filing in the
Federal Register. The Commission believes that accelerated approval of
the proposal is appropriate in that it will permit the NASD to provide
interested persons adequate notice that implementation of the PMM
standards will be delayed until February 1, 1996 and that the
expiration of the short sale rule, including the PMM standards, will be
extended until August 3, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
As discussed in the Original Approval Order, the Commission
believed and continues to believe that the imposition for a limited
time of a short sale rule and accompanying PMM standards applicable to
Nasdaq National Market securities is consistent with the requirements
of Sections 15A(b) (6), 15A(b) (9) and 15A(b) (11) of the Act.\6\
[[Page 62521]]
As discussed below, the Commission believes that delayed implementation
of the PMM standards until February 1, 1996 and limited extension of
the short sales rule until August 3, 1996 (rather than June 3, 1996) is
consistent with the Act and the rules and regulations promulgated
thereunder.\7\
\6\15 U.S.C. Sec. 78o-3(b)(6), (9) and (11). Section 15A(b) (6)
requires, among other things, that the NASD's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and to protect investors and
the public interest. 15 U.S.C. Sec. 78o-3(b) (6). Sections 15A(b)
(9) and (11) require that the NASD's rule be designed not to impose
any burden on competition not necessary or appropriate in
furtherance of the Act, id. Sec. 78o-3(b) (9), and to produce fair
and informative quotations, to prevent fictitious or misleading
quotations, and to promote orderly procedures for collecting,
distributing and publishing quotations. Id. Sec. 78o-3(b) (11). In
addition, the Commission believes that the rule change will further
the goals of Section 11A in that it will promote efficient and
effective market operations and economically efficient execution of
investor orders in the best market and assure fair competition
between the exchange markets and the OTC market and among brokers
and dealers. Id. Sec. 78k-1(a) (1) (C).
\7\Securities Exchange Act Release No. 34277 (June 29, 1994), 59
FR 34885 (July 7, 1994).
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Maintaining the current operation of the short sale rule until the
NASD has completed and tested the systems necessary to provide market
participants adequate notice of a market maker's PMM status will avoid
confusion in the marketplace and assure consistency in the application
of NASD rules. Moreover, extension of the short sale rule until August
3, 1996 will maintain the effectiveness of the PMM standards for six
months, as envisioned by the Commission's Original Approval Order. As
noted in the Original Approval Order, this will provide the Commission
and the NASD the opportunity to study the effects of the rule and its
exemptions and to determine whether these are practicable and necessary
on an ongoing basis, or whether other alternatives would be more
appropriate.
In the Original Approval Order, the Commission stated that
experience with the NASD's short sale rule may demonstrate that some or
all of the elements of the rule require reconsideration. The Commission
notes that this is the NASD's second proposal to extend the operation
of the short sale rule due to technical problems associated with the
implementation of the PMM designation. The Commission is concerned
about the delay in implementing the PMM designation which inhibits the
ability to assess the effects of the short sale rule with the
designation in place and, thus, expects that no further delays will be
necessary.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., 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 the file number SR-NASD-95-58 and
should be submitted by December 27, 1995.
VI. Conclusion
For the reasons stated above, the Commission believes the rule
change is consistent with the Act and, therefore, has determined to
approve it.
It is therefore ordered, pursuant to Section 19(b) (2) of the Act,
that the rule change SR-NASD-95-58 be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
\8\17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29686 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-M
