[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36464-36466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17718]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40140; File No. SR-NASD-98-26]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Partial Approval to Amendment No. 4 to Proposed
Rule Change by the National Association of Securities Dealers, Inc. to
Institute, on a Pilot Basis, New Primary Nasdaq Market Maker Standards
for Nasdaq National Market Securities
June 26, 1998.
I. Introduction
On March 19, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly-owned
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), submitted to
the Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to: (a) implement, on a pilot basis, new Primary Nasdaq Market
Maker (``PMM'') standards for all Nasdaq National Market (``NNM'')
securities; (b) extend the NASD's Short Sale Rule pilot until November
1, 1998; and (c) extend the suspension of existing PMM standards until
May 1, 1998. On March 30, 1998, the Commission issued notice of the
filing and approved, on an accelerated basis, the portions of the
filing extending the NASD's Short Sale Rule pilot and the suspension of
existing PMM standards.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 39819 (March 30, 1998)
63 FR 16841 (April 6, 1998).
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On April 30, 1998, Nasdaq filed Amendment No. 3 to the proposal,\4\
proposing to: (a) extend the comment period by 30 days to May 27, 1998;
(b) continue to suspend the current PMM standards until July 1, 1998;
(c) extend the NASD's Short Sale Rule pilot until January 4, 1999; (d)
change the dates during which the PMM pilot would run to July 1, 1998,
through January 4, 1999; and (e) amend subparagraph (g) of NASD Rule
4612 to change the method for determining how market makers that are
not managers or co-managers in an underwriting syndicate of a secondary
offering may qualify as PMMs. Also on April 30, 1998, the Commission
issued notice of Amendment No. 3 and approved, on an accelerated basis,
Nasdaq's request to continue to suspend the current PMM standards until
July 1, 1998.\5\ The Commission also extended the comment period for
the proposed rule change.
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\4\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, Nasdaq, to Richard Strasser, Assistant Director,
Division, of Market Regulation (``Division''), SEC, dated April 29,
1998. Securities Exchange Act Release No. 39819 discussed Amendment
No. 1 and Amendment No. 2 to the filing, which were filed with the
Commission on March 25, and 26, 1998, respectively.
\5\ See Securities Exchange Act Release No. 39936 (April 30,
1998) 63 FR 25253 (May 7, 1998).
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On June 24, 1998, Nasdaq filed Amendment No. 4 to the proposal,\6\
proposing to: (a) extend the comment period to July 27, 1998; (b)
continue to suspend the current PMM standards until October 1, 1998;
and (c) change the dates during which the PMM pilot would run to
October 1, 1998, until April 1, 1999.
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\6\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, Nasdaq, to Richard Strasser, Assistant Director,
Division, SEC, dated June 24, 1998.
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Background
Presently, NASD Rule 4612 provides that a member registered as a
Nasdaq market maker pursuant to NASD Rule 4611 may be deemed a PMM if
that member meets certain threshold standards. The implementation of
the SEC Order Handling Rules \7\ and what some perceive as a concurrent
move toward a more order-driven, rather than a quote-driven, market
raised questions about the continued relevance of those PMM standards.
As a result, such standards were suspended beginning in early 1997.\8\
Currently, all market makers are designated as PMMs.
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\7\ On August 29, 1996, the Commission promulgated a new rule,
the Limit Order Display Rule (Exchange Act Rule 11Ac1-4) and adopted
amendments to the Quote Rule (Exchange Act Rule 11Ac1-1), which
together are designed to enhance the quality of published quotations
for securities and promote competition and pricing efficiency in
U.S. securities markets (collectively, the ``Order Handling
Rules''). See Securities Exchange Act Release No. 37619A (September
6, 1996) 61 FR 48290 (September 12, 1996).
\8\ See Securities Exchange Act Release No. 38294 (February 14,
1997) 62 FR 8289 (February 24, 1997) (approving temporary suspension
of PMM standards); Securities Exchange Act Release No. 39198
(October 3, 1997) 62 FR 53365 (October 14, 1997) (extending
suspension through April 1, 1998); Securities Exchange Act Release
No. 39819 (March 30, 1998) 63 FR 16841 (April 6, 1998) (extending
suspension through May 1, 1998); Securities Exchange Act Release No.
39936 (April 30, 1998) 63 FR 25253 (May 7, 1998) (extending
suspension through July 1, 1998).
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Since February 1997, Nasdaq has worked to develop PMM standards
that are more meaningful in what may be an increasingly order-driven
environment and that better identify firms engaged in responsible
market making activities deserving of the benefits associated with
being a PMM, such as being exempt from NASD Rule 3350, the NASD's Short
Sale Rule. The NASD now proposes to extend the current suspension of
the existing PMM standards and to implement new standards on a pilot
basis from October 1, 1998, until April 1, 1999. The NASD intends the
new standards to better evaluate whether a market maker provides
meaningful liquidity to the market. To determine whether a particular
market maker is such a provider of liquidity, Nasdaq will analyze that
market maker's trading activity using a new test.
For the reasons discussed below, the Commission has determined to
grant accelerated approval of Nasdaq's request, in Amendment No. 4, to
continue to suspend the current PMM standards until October 1, 1998.
Further, given the proposal's complexity and the Commission's desire to
give the public sufficient time to consider the proposal, the
Commission has extended the comment period to the proposed rule change,
as amended, to July 27, 1998.
II. Proposed Rule Change
As discussed in detail in Securities Exchange Act Release No.
39819, Nasdaq is proposing a new set of PMM standards. In the current
filing, Nasdaq would amend the timing of the proposed pilot through
which the NASD, the SEC, and the public may evaluate those new
standards.
* * * * *
[[Page 36465]]
The proposed rule language, as amended, follows. Additions are
italicized; deletions are bracketed.
Rule 4612
(a)-(g) No Change
(h) [The Board of Governors may modify the threshold standards set
forth in paragraphs (a) and (b) above if it finds that maintenance of
such standards would result in an adverse impact on a class of
investors or on Nasdaq.] This rule shall be in effect beginning October
1, 1998, and remain in effect until April 1, 1999.
* * * * *
III. Discussion
After careful consideration, the Commission has concluded, for the
reasons set forth below, that the extension of the current suspension
of existing PMM standards until October 1, 1998, is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder. Extending the suspension of the current PMM standards to
accommodate implementing the new pilot is consistent with Section
15A(b)(6) \9\ of the Exchange Act. Section 15A(b)(6) of the Exchange
Act requires that the NASD's rules be designed, among other things, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and to promote just and equitable
principles of trade. The Commission believes that continued suspension
of the current PMM standards will facilitate Nasdaq's efforts in
implementing more meaningful PMM standards which should help to enhance
market liquidity by rewarding those market makers that meet the new
standards. As a result, continuing the suspension of the current PMM
standards is consistent with Section 15A(b)(6) of the Exchange Act.
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\9\ 15 U.S.C. 78o-3(b)(6).
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In finding that the suspension of the existing PMM standards is
consistent with the Exchange Act, the Commission reserves judgment on
the merits of the NASD's Short Sale Rule, any market maker exemptions
to that rule, and the proposed new PMM standards. The Commission
recognizes that the Short Sale Rule already has generated significant
public comment. Such commentary, along with any further comment on the
interaction of the Short Sale Rule with the proposed new PMM standards,
will help guide the Commission's evaluation of the Short Sale Rule and
new PMM standards. During the PMM pilot period, the Commission
anticipates that the NASD will continue to address the Commission's
questions and concerns and provide the Commission staff with any
relevant information about the practical effects and the operation of
the revised PMM standards and possible interaction between those
standards and the NASD's Short Sale Rule.
As proposed, the new PMM standards will become effective October 1,
1998, when the suspension of the existing PMM standards, under
Amendment No. 4, expires. Nasdaq notes that currently all market makers
registered in a security are PMMs due to the suspension of the previous
PMM standards, and will continue to be so designated on the pilot's
proposed start date of October 1, 1998. Under the one-month look-back
provision in the PMM pilot program, Nasdaq will consider the previous
calendar month and the current month to determine a market maker's
continued PMM eligibility if the market maker attained PMM status in a
security during the previous month, but fails to meet the applicable
thresholds for the current month. To give PMMs the full benefit of the
one-month look-back period and to allow market makers time to adjust
their trading activity to the new standards, Nasdaq proposes to
implement the new standards so that no market maker that is designated
as a PMM when the pilot begins on October 1, 1998, will lose its PMM
status--based on a failure to meet the new PMM standards--until
December 3, 1998. Nasdaq believes, and the Commission agrees, that it
is fair to give market makers this time to make necessary adjustments
to their trading activity to help them maintain their PMM designation,
particularly since PMM standards have been suspended for more than a
year and the proposed new PMM standards are more stringent than the
previous standards. The PMM pilot, pursuant to Amendment No. 4, would
run until April 1, 1999.
The Commission finds good cause for approving the extension of the
suspension of existing PMM standards prior to the 30th day after the
date of publication of notice of the filing in the Federal Register. It
could be disruptive to market making to reintroduce outdated PMM
standards for a brief period prior to implementing a new PMM pilot.
Further, the current PMM standards have been suspended until July 1,
1998, at which time the old PMM standards--which are not a meaningful
measure of a market maker's liquidity-providing activity--would be used
again to determine market makers' PMM status. To ensure continuity in
the PMM standards and the regulation of short selling activity, to
maintain orderly markets, and to avoid confusion, it is necessary to
continue the suspension of the prior PMM standards until the new
standards are implemented on October 1, 1998.
IV. Solicitation of Comments
Given the proposal's complexity and the Commission's desire to give
the public sufficient time to consider the proposal, the Commission
hereby grants Nasdaq's request to extend the comment period for the
proposed rule change, as amended, to July 27, 1998. Since making the
proposal, the NASD has issued reports to all Nasdaq market makers in
NNM issues to show how those market makers would have performed for
April and May of 1998 had the proposed PMM standards been in place. The
NASD also posted on The Nasdaq Trader Web Site \10\ a stock-by-stock
analysis of what percentage of market makers in each stock would have
been PMMs under the proposed PMM standards in April and May of 1998.
The Commission expects such data will allow market participants to
submit more meaningful comments.
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\10\ See http://www.nasdaqtrader.com.
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Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. In particular, the
Commission requests that commenters provide alternative PMM standards,
explaining why such alternative standards better identify and reward
market participants who provide meaningful liquidity to the Nasdaq
market. Persons making written submissions should file six copies
thereof with the Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., 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 File No. SR-NASD-98-26 and should be
submitted by July 27, 1998.
[[Page 36466]]
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\11\ that the portion of Amendment No. 4 to the proposed
rule change, SR-NASD-98-26, that extends the suspension of the current
PMM standards to October 1, 1998, be and hereby is approved on an
accelerated basis.\12\
\11\ 15 U.S.C. 78s(b)(2).
\12\ In partially approving the proposal, the Commission has
considered the approved portion's impact on efficiency, competition,
and capital formation. Moreover, the pilot program, if fully
implemented, likely will provide the Commission with data necessary
to enable it to evaluate the impact of the proposed PMM standards on
the Nasdaq market and market participants. 15 U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17718 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M
