[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34723-34724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16915]
[[Page 34723]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38756; File No. SR-NASD-97-30]
Self-Regulatory Organizations; Order Approving Proposed Rule
Changes 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
June 23, 1997.
On April 24, 1997, the Nasdaq Stock Market, Inc. (``Nasdaq''), a
wholly owned subsidiary of the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), filed with the Securities
and Exchange Commission (``Commission'' or ``SEC'') a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'') \1\ and Rule 19b-4 thereunder. \2\ The rule change
amends 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. Notice of the proposed rule change, together with
the substance of the proposal, was provided by issuance of a Commission
release and by publication in the Federal Register.\3\ No comment
letters were received. The Commission is approving the proposed rule
change.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 38611 (May 12, 1997), 62
FR 27093 (May 16, 1997).
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I. Description of Rule Change
The NASD and Nasdaq evaluated the current rules governing its
members' eligibility to become a PMM and determined, as explained
below, to amend NASD Rule 4612(g). As amended, Rule 4612(g) would
permit a member who is a manager or co-manager of a secondary offering
to be eligible to become a 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.\4\ The 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.\5\
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\4\ See SR-NASD-97-31, Securities Exchange Act Release No. 38757
(June 23, 1997), amending NASD Rule 4611(d) to permit managers and
co-managers of an underwriting syndicate participating in a
secondary offering of a security listed and traded on Nasdaq to
register as a market maker in such issue on a same-day basis on the
day of the secondary offering.
\5\ The NASD filed an amendment (``Amendment No. 1'') to clarify
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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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 been filed, it cannot become a 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'').\6\ This aspect of the PMM
standards was first adopted because the time period after secondary
offerings have been announced is sensitive to short selling
pressure.\7\ 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 is 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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\6\ 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 (February 24,
1997).
\7\ These requirements are unaffected by the waiver, until
October 1, 1997, of the four quantitative PMM standards contained in
NASD Rule 4612 (a) and (b).
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There have been instances, however, 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. The NASD is aware of numerous
instances in which this has occurred after an issuer has changed its
investment bankers. When this happens, the issuer's new investment
banker often erects an informational barrier between its employees who
are working on the secondary offering and its employees who make
markets in Nasdaq stocks. This is done to reduce the changes that
insider trading, or other misuse of the information received from the
issues, will occur. Consequently, the firm's employees who make markets
in Nasdaq stocks normally do not learn of the secondary offering until
just prior to the announcement or effective date of the secondary
offering. This is usually not enough time for the firm to qualify as a
PMM under the standards set forth in NASD Rule 4612(g).
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-managers of secondary offerings to be
eligible to register as PMMs in such issues before the secondary
offering is effective. The amendment to Rule 4612(g), however, would
only apply to members that are a PMM in 80% or more of the securities
in which they are registered.
II. Discussion
The Commission finds the proposed rule change is consistent with
Section 15A(b)(6) and the Act.\8\ 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
[[Page 34724]]
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, the Commission finds the proposed rule
change will enhance market liquidity, facilitate greater competition
among market makers, and promote the capital formation process. At the
same time, the requirement that such firms be a PMM in 80% or more of
stocks in which they are registered ensures that managers and co-
managers availing themselves of this opportunity can begin making
markets efficiently and effectively as soon as they become PMMs in the
issue.\9\ Consequently, the Commission finds that the proposal will not
compromise the regulatory purposes underlying the ``Secondary Offering
PMM Delay Rule.''
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\8\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\9\ 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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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NASD-97-30) be, and hereby is,
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16915 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M
