[Federal Register Volume 60, Number 173 (Thursday, September 7, 1995)]
[Notices]
[Pages 46651-46653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22105]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36171; File No. SR-NASD-55-35]
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
August 30, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 24, 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, II, and III 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. 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 September 6, 1995 to December 1, 1995, the implementation
date of the Primary Market Maker standards to be used to determine the
eligibility of market makers to an exemption from the NASD's short-sale
rule. The NASD also proposes to extend the termination date for the
pilot period to June 3, 1996 instead of March 5, 1996. The text of the
proposed rule change is as follows (additions are underlined; deletions
are bracketed).
RULES OF FAIR PRACTICE
ARTICLE III
Short Sale Rule
Sec. 48
* * * * *
(1)(3) Until December 1, 1995, t[T]he term ``qualified market maker
[,]'' [for a period of one year after the effective date of this
section,] shall mean a registered Nasdaq market maker that has
maintained, without interruption, quotations in the subject security
for the preceding 20 business days.
* * * * *
For purposes of this subsection, a market maker will be deemed to
have maintained quotations without interruption if the market maker is
registered in the security and has continued publication of quotations
in the security through the Nasdaq system on a continuous basis;
provided however, that if a market maker is granted an excused
withdrawal pursuant to the requirements of Part VI, Schedule D to the
By-Laws, the 20 business day standard will be considered uninterrupted
and will be calculated without regard to the period of the excused
withdrawal. Beginning December 1, 1995, [One year after effectiveness
of this section,] 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 June 3, 1996 [March 6,
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
[[Page 46652]]
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 is in effect (i.e., September 6, 1994 through September
5, 1995), Nasdaq market makers who maintain 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 are 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 exemption
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) (``Original Approval Order'').
\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 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 by 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
has a proportionate share of 10 percent. Therefore, the
proportionate share volume is one-and-a-half times 10, or 15 percent
of overall volume.
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Because of unforeseen delays in the programming of the PMM
standards, however, the NASD is proposing that the effective date of
the PMM standards be delayed until December 1, 1995. With the proposed
delay, a market maker's trading activity during the month of November
will be evaluated according to the PMM standards to determine if it can
retain its exemption for December 1995. Until November 30th, the 20-day
test will continue to be used to evaluate market makers' eligibility
for an exemption from the rule. Thus, after December 1, 1995, a ``P''
indicator will be delayed 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 June 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) assures
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 self-regulatory organization consents, the Commission will:
A. By order approved such propose 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.
[[Page 46653]]
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 December 1, 1995 and that the
expiration of the short sale rule, including the PMM standards, will be
extended until June 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.\5\ As
discussed below, the Commission believes that delayed implementation of
the PMM standards until December 1, 1995 and limited extension of the
short sale rule until June 3, 1996 (rather than March 6, 1996) is
consistent with the Act and the rules and regulations promulgated
thereunder.\6\
\5\ 15 U.S.C. 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),
\6\ 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 PPM status will avoid
confusion in the marketplace and assure consistency in the application
of NASD rules. Moreover, extension of the short sale rule until June 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.
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, 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. 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 in the caption
above and should be submitted by September 28, 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-95-35 be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(12) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22105 Filed 9-6-95; 8:45 am]
BILLING CODE 8010-01-M
