[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27093-27094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12888]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38611; File No. SR-NASD-97-30]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to an Amendment to the NASD's Rule Governing the Eligibility of Members
To Become Primary Market Makers in Issues Subject to a Secondary
Offering
May 12, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), and the National Association of
Securities Dealers, Inc.'s (``NASD'' or ``Association'') Plan of
Allocation and Delegation of Functions by NASD to Subsidiaries, notice
is hereby given that on April 24, 1997,\1\ 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.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ The NASD filed an amendment (``Amendment No. 1'') clarifying
footnote 3 to say that a firm is not precluded from being a manager
or co-manager of a secondary offering if it is not a PMM in 80% or
more of the stocks in which it makes a market. See Letter from
Thomas R. Gira, Associate General Counsel, the Nasdaq Stock Market,
Inc., to Katherine England, Assistant Director, Office of Market
Supervision, Division of Market Regulation, Commission, dated May 7,
1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to amend NASD Rule 4612(g) to permit a member who
is a manager or co-manager of a secondary offering to be eligible to
become a Primary Nasdaq Market Maker (``PMM'') in that issue prior to
the effective date of the secondary offering regardless of whether the
member was a registered market maker in the stock before the
announcement of the secondary offering. The proposed amendment to Rule
4612(g) would only apply to members that are a PMM in 80% or more of
the securities in which they are registered. (Additions are
italicized.)
* * * * *
NASD Rule 4612
(a)-(g) (1) No change.
(g)(2) Notwithstanding paragraph (g)(1) above, after an offering in
a stock has been publicly announced or a registration statement has
been filed, no market maker may register in the stock as a Primary
Nasdaq Market Maker unless it meets the requirements set forth below:
(A) For secondary offerings:
(i) The secondary offering has become effective and the market
maker has satisfied the qualification criteria in the time period
between registering in the security and the offering become effective;
provided, however, that if the member is a manager or co-manager of the
underwriting syndicate for the secondary offering and it is a PMM in
80% or more of the Nasdaq National Market securities in which it is
registered, the member is eligible to become a PMM in the issue prior
to the effective date of the secondary offering regardless of whether
the member was a registered market maker in the stock before the
announcement of the secondary offering; or
(ii) The market maker has satisfied the qualification criteria for
40 calendar days.
(g)(2)(B)-(h) 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 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
Statutory Basis for, the Proposed Rule Change
Presently, NASD Rule 4612(g)(2)(A) provides that unless a market
maker is registered in a security prior to the time a secondary
offering in that stock has been publicly announced or a registration
statement has beef filed, it cannot become a Primary Market Maker
(``PMM'') in the stock unless: (1) The secondary offering has become
effective and the market maker has satisfied the PMM standards between
the time the market maker registered in the security and the time the
offering became effective or (2) the market maker has satisfied the PMM
standards for 40 calendar days (``Secondary Offering PMM Delay
Rule'').\2\ This aspect of the PMM standards, which is unaffected by
the waiver, until October 1, 1997, of the four quantitative PMM
standards contained in NASD Rule 4612 (a) and (b), was first adopted
because the time period after secondary offerings have been announced
is sensitive to short selling pressure. Specifically, in these
situations, the stock of the issuer is currently being traded and the
``overhang'' on the market of the new stock coming into the market from
the offering makes the security particularly susceptible to
manipulative short selling. The result of such short selling can
adversely impact the capitalization of the issuer, particularly smaller
issuers, whose securities often have less liquid secondary markets.
Thus, Nasdaq has been and continues to be concerned with dealers
entering the market after secondary offerings have been announced in
order to take advantage of the market maker exemption from the short
sale rule.
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\2\ The PMM standards are used to determine the eligibility of
market makers to an exemption from the NASD's short-sale rule.
Previously, a market maker was required to satisfy at least two of
the following four quantitative standards to be a PMM: (1) The
market maker must be at the best bid or best offer as shown on
Nasdaq 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 the stock. See
NASD Rule 4612 (a) and (b). Because of changes to market maker
quotation and trading activity since implementation of the SEC's
Order Handling Rules, the Commission approved an NASD proposal to
waive the PMM standards until October 1, 1997, to afford Nasdaq an
opportunity to develop new PMM standards. See Securities Exchange
Act Release No. 38294 (February 14, 1997), 62 FR 8289.
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There have been instances where managers and co-managers of
secondary offerings that have not previously been registered in the
issue have been precluded from becoming a PMM in the issue prior to the
effective date of the secondary offering, however. Accordingly, because
of the inherent commitment of managers and co-managers to the issues
that they underwrite as well as the additional liquidity that these
members can provide, Nasdaq believes it would be appropriate for
managers and co-
[[Page 27094]]
managers of secondary offerings to be eligible to register as PMMs in
such issues before the secondary offering is effective. The proposed
amendment to Rule 4612(g) would only apply to members that are a PMM in
80% or more of the securities in which they are registered, however
Nasdaq believes the proposed rule change is consistent with Section
15A(b)(6) 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, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and in general to
protect investors and the public interest. Specifically, by permitting
managers and co-managers of secondary offerings who did not previously
make a market in such issues to become PMMs in such issues prior to the
effective date of the secondary offering, Nasdaq believes the proposed
rule change will enhance market liquidity, facilitate greater
competition among market makers, and promote the capital formation
process. At the same time, given the inherent commitment of managers
and co-managers to the stocks they underwrite, along with the
requirement that such firms be a PMM in 80% or more of stocks in which
they are registered under the proposal,\3\ Nasdaq does not believe the
proposal will compromise the regulatory purposes underlying the
``Secondary Offering PMM Delay Rule.''
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\3\ Of course, a firm is not precluded from being a manager or
co-manager of a secondary offering if it is not a PMM in 80% or more
of the stocks in which it makes a market.
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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
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.
IV. 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, N.W., Washington, D.C. 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. 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 number SR-NASD-97-30 and
should be submitted by June 6, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. (17 CFR 200.30-3(a)(1) (1989)).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12888 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M
