Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices 46537

7 17 CFR 200.30–3(a)(12) (1997).

1 15 U.S.C. § 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written 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.

People 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 the filing will also be

available for inspection and copying at

the NASD’s principal offices. All

submissions should refer to File No.

SR–NASD–97–59 and should be

submitted by September 24, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.7

[FR Doc. 97–23342 Filed 9–2–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38979; File No. SR–NASD–

97–58]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Requesting Permanent

Approval of the NASD’s Short Sale

Rule

August 26, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 2 thereunder,

notice is hereby given that on August

11, 1997, 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.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to implement

its short sale rule (‘‘Rule’’) on a

permanent basis. The text of the

proposed rule change is as follows.

Additions are italicized; deletions are

bracketed.

* * * * *

NASD Rule 3350

* * * * *

(k)(3)[(A) Until February 1, 1996, 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.

Notwithstanding the 20-day period

specified in this subsection, after an

offering in a stock has been publicly

announced, a registration statement has

been filed, or a merger or acquisition

involving two issues has been

announced, no market maker may

register in the stock as a qualified

market maker unless it meets the

requirements set forth below:

(i) For secondary offerings, the

offering has become effective and the

market maker has been registered in and

maintained quotations without

interruption in the subject security for

40 calendar days;

(ii) For initial public offerings, the

market maker may register in the

offering and immediately become a

qualified market maker; provided

however, that if the market maker

withdraws on an unexcused basis from

the security within the first 20 days of

the offering, it shall not be designated as

a qualified market maker on any

subsequent initial public offerings for

the next 10 business days;

(iii) After a merger or acquisition

involving an exchange of stock has been

publicly announced and not yet

consummated or terminated, a market

maker may immediately register in

either or both of the two affected

securities as a qualified market maker

pursuant to the same-day registration

procedures in Rule 4611; provided,

however, that if the market maker

withdraws on an unexcused basis from

any stock in which it has registered

pursuant to this subsection within 20

days of so registering, it shall not be

designated as a qualified market maker

pursuant to this subparagraph (3) for

any subsequent merger or acquisition

announced within three months

subsequent to such unexcused

withdrawal.

(B) for purposes of this subparagraph

(3), 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 on a

continuous basis; provided however,

that if a market maker is granted an

excused withdrawal pursuant to the

requirements of Rule 4619, the 20

business day standard will be

considered uninterrupted and will be

calculated without regard to the period

of the excused withdrawal. Beginning

February 1, 1996, t]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 Rule 4612.

[(l) This section shall be in effect until

October 1, 1997.]

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 parts of such statements.
46538 Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices

3A 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. To

determine whether a sale is a short sale members

must adhere to the definition of a ‘‘short sale’’

contained in Rule 3b–3 of the Act, which rule is

incorporated into Nasdaq’s Rule by NASD Rule

3350(k)(1).

4Securities Exchange Act Release No. 34277

(June 29, 1994), 59 FR 34885 (July 7, 1994) [File No.

SR–NASD–92–12] (‘‘Short Sale Rule Approval

Order’’). The termination date for the pilot program

for the Rule was subsequently extended through

October 1, 1997. Specifically, the termination date

was extended twice due to delays in the

implementation of the NASD’s Primary Market

Maker Standards. Securities Exchange Act Release

No. 36532 (November 30, 1995), 60 FR 62519

(December 6, 1995) [File No. SR–NASD–95–58]; see

also Securities Exchange Act Release No. 36171

(August 30, 1995), 60 FR 46651 (September 7, 1995)

[File No. SR–NASD–95–35]. The most recent

extension of the pilot program through October 1,

1997, was approved by the SEC to afford the NASD

a better opportunity to examine the effectiveness of

the Rule and the impact of the market maker

exemption from the Rule. Securities Exchange Act

Release No. 37917 (November 1, 1996), 61 FR 57934

(November 8, 1996) [File No. SR–NASD–96–41]. In

this connection, in order to enhance its ability to

examine the impacts of the market maker

exemption, the NASD received SEC approval of its

proposal to require market makers to mark their

ACT reports to denote when they have relied on the

market maker exemption. Securities Exchange Act

Release No. 38240 (February 5, 1997), 62 FR 6290

(February 11, 1997) [File No. SR–NASD–96–52].

5Nasdaq calculates the inside bid or best bid from

all market makers in the security (including bids on

behalf of exchanges trading Nasdaq securities on an

unlisted trading privileges basis) and disseminates

symbols to denote whether the current inside bid

is an ‘‘up bid’’ or a ‘‘down bid.’’ Specifically, an

‘‘up bid’’ is denoted by a green ‘‘up’’ arrow and a

‘‘down bid’’ is denoted by a red ‘‘down’’ arrow. To

effect a ‘‘legal’’ short sale on a down bid, the short

sale must be executed at a price at least a 1⁄16th of

a point above the current inside bid. Conversely, if

the security’s symbol has a green up arrow next to

it, members can effect short sales in the security

without any restrictions.

6Under the PMM Standards, a market maker was

required to satisfy at least two of the following four

criteria each month to be eligible for an exemption

from the Rule: (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 11⁄2 times its

‘‘proportionate’’ volume in the stock. If a PMM did

not satisfy the threshold standards after a particular

review period, the market maker lost its designation

as a PMM (i.e. the ‘‘P’’ next to its market maker

identification was removed). Market makers could

requalify for designation as a PMM by satisfying the

threshold standards in the next review period.

7Securities Exchange Act Release No. 38294

(February 14, 1997), 62 FR 8289 (February 24, 1997)

[File No. SR–NASD–97–07].

8On June 20, 1996, the NASD submitted a rule

filing to the SEC that clarified the applicable PMM

review period for IPOs listed during the last five

business days of a month. Securities Exchange Act

Release No. 37426 (July 11, 1996), 61 FR 37521 [File

SR–NASD–96–25].

9The PMM rule also has provisions applicable to

secondary offerings. Specifically, 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. Managers and comanagers of secondary offerings can register and

immediately become a PMM in an issue prior to the

effective date of the secondary offering, however.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Background and Description of the

NASD’s Short Sale Rule

On June 29, 1994, the SEC approved

the rule applicable to short sales 3 in

Nasdaq National Market (‘‘NNM’’)

securities on an eighteen-month pilot

basis through March 5, 1996.4 The Rule

prohibits member firms from effecting

short sales at or below the current inside

bid as disseminated by Nasdaq

whenever that bid is lower than the

previous inside bid.5 The Rule is in

effect during normal domestic market

hours (9:30 a.m. to 4:00 p.m., Eastern

Time).

i. Market Maker Exemption

In order to ensure that market maker

activities that provide liquidity and

continuity to the market are not

adversely constrained when the Rule is

invoked, the Rule provides an

exemption to ‘‘qualified’’ Nasdaq market

makers. Even if a market maker is able

to avail itself of the qualified market

maker exemption, it can only utilize the

exemption from the Rule for

transactions that are made in connection

with bona fide market making activity.

If a market maker does not satisfy the

requirements for a qualified market

maker, it can remain a market maker in

the Nasdaq system, although it can not

take advantage of the exemption from

the Rule.

Since the rule has been in effect, there

have been three methods used to

determine whether a market maker is

eligible for the market maker exemption.

Specifically, from September 4, 1994

through February 1, 1996, Nasdaq

market makers who maintained a

quotation in a particular NNM security

for 20 consecutive business days

without interruption were exempt from

the Rule for short sales in that security,

provided the short sales were made in

connection with bona fide market

making activity (the ‘‘20-day’’ test).

From February 1, 1996 until the

February 14, 1997, the ‘‘20-day’’ test

was replaced with a four-part

quantitative test known as the Nasdaq

Primary Market Maker (‘‘PMM’’)

Standards.6 On February 14, 1997, the

PMM standards were waived for all

NNM securities due to the effects of the

SEC’s Order Handling Rules and

corresponding NASD rule change and

system modifications on the operation

of the four quantitative standards.7 For

example, among other affects, the

requirement that market makers display

customer limit orders adversely effected

the ability of market makers to satisfy

the ‘‘102% Average Spread Standard.’’

Nasdaq is presently in the process of

formatting revised PMM standards that

focus principally on whether a market

maker is a ‘‘net’’ provider of liquidity.

While all registered market makers are

presently eligible for the market maker

exemption, in the event that Nasdaq

implements revised PMM standards, the

ability of a member firm to achieve and

maintain PMM status in 80 percent of

the NNM issues in which it is registered

can also have the following corollary

effects, as was the case when the PMM

standards were in effect from February

1, 1996 through February 14, 1997.

a. Existing NNM Securities: if a

member firm is a PMM in 80 percent or

more of the securities in which it has

registered, the firm may immediately

become a PMM (i.e., qualified market

maker) in a NNM security by registering

and entering quotations in that issue. If

the member firm is not a PMM in at

least 80 percent of its stocks, it may

become a PMM in that stock if it

registers in the stock as a regular Nasdaq

market maker and satisfies the PMM

qualification standards for the next

review period.

b. Initial Public Offerings (‘‘IPOs’’): if

a member firm has obtained PMM status

in 80 percent or more of the stocks in

which it has registered, the firm may

immediately become a PMM in an IPO

by registering and entering quotations in

the issue. However, if the firm: (1)

Withdraws from the IPO on an

unexcused basis any time during the

calendar month in which the IPO

commenced trading on Nasdaq or (2)

fails to meet the PMM standards for the

month in which the IPO commenced

trading on Nasdaq,8 then the firm is

precluded from becoming a PMM in any

other IPO for ten business days

following the unexcused withdrawal or

failure to meet the PMM standards (‘‘10-

day rule’’).9

c. Merger and Acquisition Situations:

after a merger or acquisition is

announced, a market maker that is a

PMM in one stock may immediately

become a PMM in the other stock by

registering and entering quotations in

that issue.
Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices 46539

10For equity option market makers, an ‘‘exempt

hedge transaction’’ is defined to be a short sale in

a NNM security that was effected to hedge, and in

fact serves to hedge, an existing offsetting options

position or an offsetting options position that was

created in a transaction(s) contemporaneous with

the short sale, provided that when establishing the

short position the options market maker receives, or

is eligible to receive, good faith margin pursuant to

Section 220.12 of Regulation T under the Act. For

index option market makers, an ‘‘exempt hedge

transaction’’ is defined to be a short sale in a NNM

security that was effected to hedge, and in fact

serves to hedge, an existing offsetting stock index

options position or an offsetting stock index options

position that was created in a transaction(s)

contemporaneous with the short sale, provided that:

(1) The security sold short must be a component

security of the index underlying such index option;

(2) the index underlying such offsetting index

options position is a ‘‘qualified stock index’’; and

(3) the dollar value of all exempt short sales effected

to hedge the offsetting stock index options

position(s) does not exceed the aggregate current

index value of the offsetting options position(s).

11A ‘‘qualified options exchange’’ is defined to be

a national securities exchange that has received SEC

approval of its rules and procedures governing: (1)

The designation of options market makers as

qualified options market makers; (2) the

surveillance of its market makers’ utilization of the

exemption; and (3) authorization of the NASD to

withdraw, suspend, or modify the designation of a

qualified options market maker in the event that the

options exchange determines that the qualified

options market maker has failed to comply with the

terms of the exemption and the exchange believes

that such action is warranted in light of the

substantial, willful, or continuing nature of the

violation. All national securities exchanges that

trade standardized options are ‘‘qualified options

exchanges.’’

12An options market maker is a ‘‘qualified

options market maker’’ if it has been appointed as

such by a qualified options exchange.

13A ‘‘qualified stock index’’ is defined to be a

stock index that includes one or more NNM

securities, provided that more than 10% of the

weight of the index is accounted for by NNM

securities. In addition, qualified stock indexes are

reviewed as of the end of each calendar quarter, and

an index would cease to qualify if the value of the

index represented by one or more NNM securities

was less than 8 percent at the end of any

subsequent calendar quarter.

14An ‘‘exempt hedge transaction’’ is a short sale

in a NNM security that was effected to hedge, and

in fact serves to hedge, an existing offsetting

warrant position that was created in a transaction

contemporaneous with the short sale.

15 17 CFR 240.10a–1 (1997).

16 In order to fall within this exemption, the

person effecting the short sale must then own

another security by virtue of which the person is,

or presently will be entitled to acquire an

equivalent number of securities of the same class

of securities sold short, provided the short sale, or

the purchase which such sale offsets is effected for

the bona fide purpose of profiting from a current

difference between the price of the security sold

short and the security owned, and such right of

acquisition was originally attached to or

represented by another security or was issued to all

the holders of any such class of securities of the

issuer.

17 In order to fall within this exemption, the short

sale must be effected for the bona fide purpose of

profiting from a current difference between the

price of such security on a securities market not

within or subject to the jurisdiction of the United

States and a securities market subject to the

jurisdiction of the United States, provided the

person at the time of such sale knows or, by virtue

of information currently received, has reasonable

grounds to believe that an offering enabling a

person to cover such sale is then available to the

person in such foreign securities market and

intends to accept such offer immediately.

18 In 1986, the SEC took a ‘‘no action’’ position

that allows broker-dealers to sell short on a down

tick while liquidating index arbitrage positions

under certain conditions. This no-action position

was clarified in a later SEC Release and the SEC has

proposed to amend Rule 10a–1 to incorporate this

interpretation. Securities Exchange Act Release No.

30772 (June 3, 1992), 57 FR 24415 (June 9, 1992)

[File No. S7–13–92]

19Specifically, the NASD has interpreted its Rule

to provide that any person can sell a foreign

security, or a depositary share or depositary receipt

relating to such a security, on a down bid at the

opening, provided the inside bid is equal to or

above the last reported sale price (adjusted for

current exchange rates and ADR multiples) of the

security in the principal foreign market for that

security.

20Specifically, Interpretation A provides that

bona fide market making activity does not include

activity that is unrelated to market making

functions, such as index arbitrage and risk arbitrage

that is independent from a member’s market making

functions. Similarly, the Interpretation states that

bona fide market making would exclude activity

Continued

ii. Options Market Maker Exemption

In an effort to not constrain the

legitimate hedging needs of options

market makers, the Rule also contains a

limited exception for standardized

options market makers. Specifically,

under the Rule, an NASD member may

execute a short sale for the account of

an equity option market maker or an

index option market maker that would

otherwise be in contravention of the

Rule as long as: (1) The short sale is an

‘‘exempt hedge transaction’’;10 and (2)

the options market maker is registered

with a ‘‘qualified options exchange’’ 11

as a ‘‘qualified options market maker’’ 12

in a stock options class overlying a

NNM security or in an options class

overlying a ‘‘qualified stock index.’’ 13

iii. Warrant Market Maker Exemption

The Rule also contains an exemption

for warrant market makers similar to the

one available for options market makers.

To be eligible for the exemption, a

warrant market maker must be

registered as a market maker in the

warrant and the short sale must be an

‘‘exempt hedge transaction’’ 14 that

results in a fully hedged position.

However, any short sale by a warrant

market maker unrelated to normal

warrant market maker activity, such as

index arbitrage or risk arbitrage that in

either case is independent of a warrant

market maker’s market making

functions, is not considered an ‘‘exempt

hedge transaction.’’

iv. Exemptions Comparable to Those

Contained in Rule 10a–1 Under The Act

The Rule also incorporates seven

exemptions contained in Rule 10a–1

under the Act 15 (‘‘Rule 10a–1’’) that are

relevant to trading on Nasdaq.

Specifically the Rule exempts:

• Sales by a broker-dealer for an

account in which it has no interest and

that is marked long;

• Any sale by a market maker to offset

odd-lot orders of customers;

• Any sale by any person, for an

account in which he has an interest, if

such person owns the security sold and

intends to deliver such securities as

soon as possible without undo

inconvenience or expense;

• Sales by a member to liquidate a

long position which is less than a round

lot, provided the sale does not change

the member’s position by more than one

unit of trading (100 shares);

• Short sales effected by a person in

a special arbitrage account;16

• Short sales effected by a person in

a special international arbitrage

account;17 and

• Short sales by an underwriter or

any member of the distribution

syndicate in connection with the overallotment of securities, or any lay-off

sale by such a person in connection

with a distribution of securities rights

pursuant to Rule 10b–18 under the Act

or a standby underwriting commitment.

The Rules also provides that a

member not currently registered as a

Nasdaq market maker in a security that

has acquired the security while acting in

the capacity of a block positioner shall

be deemed to own such security for the

purposes of the Rule notwithstanding

that such member may not have a net

long position in such security, if and to

the extent that such member’s short

position in such security is subject to

one or more offsetting positions created

in the course of bona fide arbitrage, risk

arbitrage, or bona fide hedge activities.

In addition, the NASD has recognized

that SEC staff interpretations to Rule

10a–1 dealing with liquidation of index

arbitrage positions 18 and an

‘‘international equalizing exemption’’ 19

are equally applicable to the NASD’s

Rule.

v. Interpretations of the NASD’s Short

Sale Rule

In conjunction with the adoption of

the Rule, the NASD also issued three

Interpretations by the NASD Board of

Governors dealing with the Rule.

Interpretation A to the Rule clarifies

some of the factors that will be taken

into consideration when reviewing

market making activity that may not be

deemed to be bona fide market making

activity and, therefore, not exempt from

the Rule’s application.20 Interpretation
46540 Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices

that is related to speculative selling strategies of the

member or investment decisions of the firm and is

disproportionate to the usual market making

patterns or practices of the member in that security.

In addition, the Interpretation provides guidance

with respect to what constitutes bona fide market

making in the context of a merger or acquisition

situation.

21 In light of Nasdaq’s move to minimum quote

increments of a 1⁄16 for Nasdaq stocks priced above

$10 on June 2, 1997, Nasdaq has filed a proposed

rule change (SR–NASD–97–59) with the

Commission to modify the ‘‘legal’’ definition of a

short sale. In sum, the proposed rule change

provides that a ‘‘legal’’ short sale must be effected

at the offer side of the market when the inside

spread for a security is less than a 1⁄16. In other

words, if the inside spread is 1⁄16 or greater, there

will be no change to the current definition of a legal

short sale. For stocks with a spread less than a 1⁄16,

however, a legal short sale must be effected at a

price at or above the inside offer.

22Specifically, the Interpretation contains the

following non-exhaustive list of activities that

would be considered to be manipulative acts and

violations of the rule: (a) In instances where the

current best bid is below the preceding best bid, if

a market maker alone at the inside best bid were

to lower its bid and then raise it to create an ‘‘up

bid’’ for the purpose of facilitating a short sale; (b)

if a market maker with a long stock position were

to raise its bid above the inside bid and then lower

it to create a ‘‘down bid’’ for the purpose of

precluding market participants from selling short;

(c) if a market maker agrees to an arrangement

proposed by a member or a customer whereby the

market maker raises its bid in the Nasdaq system

in order to effect a short sale for the other party and

is protected against any loss on the trade or on any

other executions effected at its new bid price; and

(d) if a market maker entered into an arrangement

with a member or a customer whereby it used its

exemption from the rule to sell short at the bid at

successively lower prices, accumulating a short

position, and subsequently offset those sales

through a transaction at a prearrange price, for the

purpose of avoiding compliance with the rule, and

with the understanding that the market maker

would be guaranteed by the member of customer

against losses on the trades.

23Short Sale Rule Approval Order, supra note 4,

at 34891.

24 Id. at 34892.

25When the NASD’s Rule was first considered by

the Commission, the SEC received 397 comment

letters on the proposal, with 275 comments

opposed to the Rule and 122 comments in favor of

the Rule. Those comment letters opposed to the

Rule argued that: (1) The NASD had failed to

provide sufficient evidence of the need for the Rule

or demonstrate the appropriateness of the Rule

based on a ‘‘bid’’ test instead of ‘‘tick’’ test; (2) the

PMM standards will have negative effects on both

market makers and the Nasdaq market; and (3) the

Rule is inconsistent with the requirements of the

Act.

26Both of the studies prepared by the NASD’s

Economic Research Department have been

submitted to the SEC under separate letter and are

part of this filing.

27The Economic Impact of the Nasdaq Short Sale

Rule, NASD Economic Research Department (July

23, 1996) (‘‘July 1996 Short Sale Study’’).

28Specifically, the July 1996 Short Sale Study

found that only 2.8 percent of short sales by nonexempt short sellers occur at or below the inside

bid in down-bid situations. Because the Rule

prohibits short sales at the bid on down bids, this

figure should theoretically be zero. Reasons why

this figure is 2.8 percent include, among others,

improper alignment of trades and their

corresponding inside quotes, potential reporting

errors and violations of the rule.

B defines a ‘‘legal’’ short sale on a down

bid as one that is executed at a price of

at least a 1⁄16 of a point above the current

inside bid.21 Finally, Interpretation C

clarifies some of the circumstances

under which a member would be

deemed to be in violation of the Rule.22

2. Proposal To Adopt the Short Sale

Rule on a Permanent Basis

When the Commission approved the

Rule on a temporary basis, it made

specific findings that the Rule was

consistent with Sections 11A, 15A(b)(6),

15A(b)(9), and 15A(b)(11) of the Act.

Specifically, the Commission stated

that, ‘‘recognizing the potential for

problems associated with short selling,

the changing expectations of Nasdaq

market participants and the competitive

disparity between the exchange markets

and the OTC market, the Commission

believes that regulation of short selling

of Nasdaq National Market securities is

consistent with the Act.’’23 In addition,

the Commission stated that it ‘‘believes

that the NASD’s short sale bid-test,

including the market maker exemption,

is a reasonable approach to short sale

regulation of Nasdaq National Market

securities and reflects the realities of its

market structure.’’24

Nevertheless, in light of the

Commission’s concerns with adverse

comments made about the Rule and the

Commission’s own concerns with the

structure and impact of the Rule,25 the

Commission determined to approve the

Rule on a temporary basis to afford the

NASD and the SEC an opportunity to

study the effects of the Rule and its

exemptions. In particular, before

considering any NASD proposal to

extend, modify, permanently implement

or terminate the Rule, the Commission

requested that the NASD examine: (1)

The effects of the Rule on the amount

of short selling; (2) the length of time

that the Rule is in effect (i.e., the

duration of down bid situations); (3) the

amount of non-market maker short

selling permitted under the Rule; (4) the

extent of short selling by market makers

exempt from the Rule; (5) whether there

have been any incidents of perceived

‘‘abusive short selling’’; (6) the effects of

the Rule on spreads and volatility; (7)

whether the behavior of bid prices has

been significantly altered by the Rule;

and (8) the effect of permitting short

selling based on a minimum increment

of 1⁄16.

Accordingly, in response to the

Commission’s request and concerns, the

NASD’s Economic Research Department

has prepared two studies on the

economic impact of the Rule that

addresses these issues.26

i. July 1996 Short Sale Study

The first study prepared in July 1996

examined market activity both before

and after implementation of the Rule

and found that the Rule has had its

intended effect of diminishing short

selling at the bid in declining markets,

while still allowing short sales to occur

at prices slightly above the bid in down

bid situations.27 Specifically, among

other things, the July 1996 Short Sale

Study found that:

• The Rule appears to dramatically

reduce the amount of the short selling

on down-bids, without having the

undesirable effect of driving away all

non-exempt short sales on down bids;

• Stocks with large down-bid

percentages (i.e., the average percentage

of time during the trading day that the

Rule is invoked) are not associated with

economically-large reductions in market

quality, as measured by relative

displayed spreads, percent bid range,

and trading activity;

• For stocks with large monthly

increases in short interest,

implementation of the Rule has been

associated with lower bid price

volatility and narrower dollar spreads;

• The Rule does not appear to have

reduced overall sales at the bid by nonexempt sellers (long and short sales

combined). Thus, because short sales at

the bid on down bids by non-exempt

short sellers are prohibited,28 the results

illustrate that short sales at the bid have

been replaced by long sales at the bid

during down-bids for these securities;

• Apparent ‘‘unnatural’’ bid price

movement occurred extremely

infrequently (0.6 percent or fewer of all

bid changes evaluated in the study),

indicating that market makers are not

attempting to move bids to invoke or

deactivate the Rule;

• On a stock-by-stock basis, the

percentage of volume accounted for by

short sales increases as the stock

experiences larger price declines as

opposed to price increases or no price

changes, suggesting that speculative

short selling is more apt to occur when

stock prices are falling; and

• Exempt short sales generally are

executed above the bid, indicating that

market makers are not abusing the

exemption. Specifically, in a down-bid

environment, 7.5 percent of exempt

short sales are executed at or below the

bid, while the comparable figure during

an up-bid environment is 8.7 percent.

Interviews conducted in conjunction

with the July 1996 Short Sale Study also

indicate that the Rule has been effective

in promoting the integrity of the Nasdaq
Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices 46541

29The Nasdaq Stock Market Short Sale Rule:

Analysis of Market Quality Effects and The Market

Maker Exemption, NASD Economic Research

Department (August 7, 1997)(‘‘August 1997 Short

Sale Study’’). As noted above, this Study and the

July 1996 Short Sale Study were provided to the

SEC under separate letter and are part of this rule

filing.

market. Specifically, most market

participants interviewed stated that the

Rule has had the effect of slowing down

the ‘‘piling on’’ of short sales in a

declining market, thereby contributing

to greater market stability. At the same

time, market participants indicated that

the Rule does not unduly constrain

them from effecting short sales in a

declining market, although they say it

does take them longer to execute short

sales in a falling market. Most market

participants interviewed also stated that

the exemptions from the Rule are

warranted and have not been abused. In

particular, most market participants

interviewed reiterated the importance of

retaining the market maker exemption

and stated that there is no need to

change the PMM standards. Similarly,

the American Stock Exchange and the

Chicago Board Options Exchange, the

two largest standardized options

markets in the United States, both stated

that the options market maker

exemption has performed well and that

the exchanges have not detected any

abuses of the exemption by their

members. In sum, the NASD believes

that the market participant interviews

corroborate and provide further support

for the empirical findings made in the

quantitative portion of the July 1996

Short Sale Study. Namely, that the Rule

has been effective in accomplishing

what the NASD intended the Rule to

accomplish (i.e., reducing speculative

short selling at the bid in declining

markets) without causing unnecessary

disruptions elsewhere in the

marketplace.

ii. August 1997 Short Sale Study

In August 1997, the NASD’s

Economic Research Department

prepared another study on the economic

impact of the Rule that reaffirmed the

findings of the July 1996 Short Sale

Study.29 In addition, because market

makers have been required to denote

when they have effected exempt short

sales or short sales on their ACT reports

since April 14, 1997, the August 1997

Short Sale Study also provides a more

detailed and precise analysis of the

extent to which market makers have

utilized the market maker exemption

and the market impact of such exempt

short sales. Specifically, with respect to

the economic impact of the Rule, the

August 1997 Short Sale Study utilized

a variety of regression models to

evaluate whether implementation of the

rule has had any economically

significant impact on four measures of

market quality—quoted spreads,

effective spreads, volatility, and

aggregate quoted depth at the inside

market. In sum, consistent with the July

1996 Short Sale Study, the results of the

regressions demonstrate that

implementation of the Rule has not been

associated with any economically

significant adverse market effects.

The August 1997 Short Sale Study

also sets forth a variety of statistics that

clearly illustrate that market makers are

providers of immediate liquidity that

has a stabilizing effect on the market

and that market makers, in general, have

used the exemption in a manner that is

consistent with and in furtherance of

providing immediate liquidity to the

marketplace. For example, to show that

market makers are net providers of

liquidity, the August 1997 Short Sale

Study found that 52% of market maker

volume was accounted for by purchases

at the bid and sales at the offer; whereas

only 16.7% of market maker volume

was accounted for by sales at the bid

and purchases at the offer. In contrast,

the August 1997 Short Sale Study found

that 49.4% of share volume by nonmarket makers was accounted for by

sales at the bid and purchases at the

offer, whereas only 18.2% of nonmarket maker volume was accounted for

by purchases at the bid or sales at the

offer. Moreover, the August 1997 Short

Sale Study found that a wide majority

of market maker volume was executed

in a market stabilizing manner (i.e.,

purchases during declining markets and

sales during rising markets).

Given that these statistics sufficiently

demonstrate that market makers are net

providers of immediate and stabilizing

liquidity to the marketplace, the August

1997 Short Sale Study then examined

whether the market maker exemption

was being used in a manner consistent

with such stabilizing trading activity. In

this connection, the August 1997 Short

Sale Study found that:

• Only 1.27% of market maker share

volume was effected in reliance on the

market maker exemption;

• In those instances where market

makers were selling short at prices less

than a 1⁄16 above the inside bid during

down markets, the market makers were

also engaging in contemporaneous

purchase transactions. In fact, during

those periods when the market maker

exemption was being heavily utilized,

the August 1997 Short Sale Study found

that the percentage of market maker

volume accounted for by exempt short

sales was less than the percentage of

market maker volume accounted for by

stabilizing purchases prior, during, and

after peak utilization of the exemption.

Thus, as was postulated by the NASD

when it proposed the market maker

exemption, the August 1997 Short Sale

Study shows that market makers have

exhibited trading behavior consistent

with the notion that the exemption is

used as a risk management vehicle to

liquidate their long positions amassed

during declining markets because of

market makers’ liquidity enhancing

purchases a the bid, not a means to

engage in abusive short selling practices

that exacerbate downward price

movements; and

• Because the exemption was

predominantly used during periods

when market makers were also engaging

in stabilizing purchase transactions, the

regression analysis also found that the

use of the exemption was in fact

associated with slight, positive price

movements.

In sum, the August 1997 Short Sale

Study found that market makers have

used the exemption in a manner

consistent with the notion that the

exemption serves to enhance their

ability to supply immediate, stabilizing

liquidity during declining market

conditions.

Thus, the NASD believes experience

with the Rule since its implementation

in September 1994, warrants permanent

approval of the Rule and reaffirms the

statutory findings made by the

Commission when it approved the Rule

on a temporary basis. Specifically, the

NASD believes experience with the Rule

illustrates and substantiates the benefits

to investors and to the integrity of

Nasdaq that the NASD believed would

result from the rule. Namely, that, with

the Rule in place, purchasers of NNM

securities have greater assurance that

they can liquidate their positions in a

declining market without predatory

short sellers exacerbating downward

pressure on stocks and reducing overall

liquidity. In sum, the NASD continues

to believe that the Rule strikes a

reasonable balance between the needs to

prevent abusive short selling and reduce

the exposure of the Nasdaq market to

manipulative and excessive intra-day

volatility, on the one hand, and the need

to not distort the pricing efficiency and

liquidity provided by appropriate short

selling activity on the other.

Based on experience with the Rule,

the NASD also believes the Rule should

be permanently approved in its present

form. Specifically, given the

geographically dispersed nature of

Nasdaq’s competing dealer market

structure, the NASD continues to

believe that it is appropriate for the Rule
46542 Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices

30The NASD’s Rule is commonly referred to as

a ‘‘bid’’ test because it is activated based upon

movements in the inside bid on Nasdaq.

31Rule 10a–1 is commonly referred to as a ‘‘tick’’

test because it is activated based on movements in

the last sale prices of securities.

32See July 1996 Short Sale Study, supra note 27,

at 15–20.

33See id. at 20–21.

34See Securities Exchange Act Release No.

37619A (September 6, 1996), 61 FR 48290

(September 12, 1996) [File No. S7–30–95].

35The NASD also continues to believe that it is

appropriate and consistent with the Act for the Rule

to exempt certain qualified market makers while

Rule 10a–1 does not provide an exemption for

exchange specialists other than the limited

exemption continued in Rule 10a–1(e)(6) for

specialists on regional exchanges. Specifically, the

NASD believes the following differences between

the dealer and auction markets warrant the

retention of the market maker exemption in the

Rule: (1) Exchange specialists have a monopoly

over the securities in which they trade; (2)) dealers

generally do not have an informational advantage

over other dealers; and (3) dealers do not have the

ability to close their markets because of sudden

volatility or an order imbalance.

36Short Sale Rule Approval Order, supra note 4,

at 34891.

37Rule 80A provides that, when the Dow Jones

Industrial Average declines or advances by 50

points or more, all index arbitrage orders to sell or

buy must be executed in market stabilizing manner.

38Securities Exchange Act Release No. 28282

(July 30, 1990), 55 FR 31468, 31472 (August 2,

1990)(order approving File Nos. SR–NYSE–90–5

and 90–11).

39Securities Exchange Act Release No. 29854

(October 24, 1991), 56 FR 55963 (October 30,

19991)(order approving file SR–NYSE–91–

21)(‘‘Rule 80A Approval Order’’).

40 Id. at 55967.

41 Id.

42 Id. at 55967–68.

to be based on a ‘‘bid’’ test 30 instead of

a ‘‘tick’’ test,31 as is the case with Rule

10a–1. When the Rule was first

considered by the Commission in 1994,

the SEC and commentators expressed

concern that structuring the Rule as a

‘‘bid’’ test instead of a ‘‘tick’’ test could

result in the Rule being in effect for

longer periods of time in comparison to

a ‘‘tick’’ test. The SEC also expressed

concern that market makers could

control the amount of short selling by

simply adjusting their bids. Based on

the findings of the July 1996 Short Sale

Study, however, the NASD believes

these concerns are not valid. First, while

the July 1996 Short Sale Study clearly

found that the Rule is having its

intended effect of inhibiting the

execution of non-exempt short sales at

the bid in a declining market, the July

1996 Short Sale Study also found that

market participants are nevertheless

readily able to effect short sales at prices

slightly above ‘‘down’’ bids.32 Similarly,

several market participants interviewed

in conjunction with the preparation of

the July 1996 Short Sale Study stated

that the Rule has not adversely affected

their ability to effect short sales, just

that it takes them longer to effect such

short sales. Second, the July 1996 Short

Sale Study’s finding that apparent

‘‘unnatural’’ quote movements have

occurred very infrequently indicates

that market makers are not adjusting

their quotes to facilitate or constrain

short selling activity.33 Accordingly, the

NASD continues to believe that

structuring the Rule as a ‘‘bid’’ test

rather than a ‘‘tick’’ test is appropriate

given Nasdaq’s competing dealer market

structure. Moreover, the NASD notes

that the SEC’s Limit Order Display Rule

has substantially increased the ability of

non-exempt short sellers to receive

executions at prices at least 1⁄16 of a

point above the inside bid in down bid

situations, thereby minimizing the

impact of the Rule on legitimate short

selling activity.34

In addition, based on the findings

contained in the August 1997 Short Sale

Study that use of the market maker

exemption has been associated with

slight, positive price movements and

that market makers are most often

relying on the exemption during

declining markets when they are

engaging in stabilizing purchase

transactions, the NASD believes that the

market maker exemption should be

retained. Without the exemption, the

NASD believes market makers will be

less able to manage their risk and

provide immediate liquidity to the

marketplace during declining markets,

the very time when liquidity is perhaps

most needed to preserve the integrity of

the Nasdaq market. The NASD also

notes that the July 1996 Short Sale

Study found that the amount of exempt

short selling occurring at or below the

bid is virtually the same in both downbid and up-bid situations and that

market makers do not appear to be

adjusting their quotes to constrain or

facilitate short selling. Accordingly, the

NASD continues to believe that an

exemption from the rule for bona fide

market making activity by market

makers who provide liquidity and

continuity to the market is essential for

the maintenance of fair and orderly

markets on Nasdaq.35

The NASD also notes that retention of

the Rule has significant competitive

implications. Indeed, in the Short Sale

Rule Approval Order, the Commission

stated that it ‘‘recognizes that without a

short sale rule for Nasdaq, the NASD is

competitively disadvantaged. The

exchange markets can and do attract

issuers and investors with the claim that

their markets protect against potential

short selling abuse.’’ 36 Given that

experience with the Rule over the past

two years illustrates that the Rule

provides investors and the marketplace

with protections against predatory short

selling comparable to Rule 10a–1, the

NASD believes the competitive

disadvantages highlighted by the

Commission would become severe if the

Rule were not permanently approved. In

particular, without permanent approval

of the Rule, Nasdaq could potentially

lose issuers to other marketplaces

simply because those markets have a

short sale rule in place, which is very

similar to the NASD’s Rule. Moreover,

aside from these serious competitive

concerns, the NASD believes it should

be allowed to continue to implement its

Rule that affords investors the same

protections against abusive short selling

activity when trading NNM securities

that investors receive when trading

exchange-listed securities by virtue of

Rule 10a–1.

In this connection, even if the

Commission were to conclude that the

Rule has had no impact on market

quality, the NASD believes the

Commission’s approval of New York

Stock Exchange (‘‘NYSE’’) Rule 80A 37

illustrates that the Commission would

still have a sufficient basis to approve

the Rule on a permanent basis. When

NYSE Rule 80A was proposed, the

Commission received considerable

adverse comment to the effect that there

was no causal relationship between

index arbitrage and market volatility

and that activation of the Rule during

turbulent market conditions could have

disastrous effects on related options and

futures markets and actually exacerbate

market volatility. Despite these

comments, the Commission approved

the proposal on a one-year pilot basis

noting that ‘‘the NYSE proposal

represents a modest step, proposed on a

pilot basis, to attempt to address the

issue of market volatility.’’ 38 After the

one year pilot, the NYSE prepared a

report that, in the SEC’s words, found

that ‘‘the standard measures of NYSE

market quality appear largely unaffected

by Rule 80A.’’ Specifically, the NYSE

Report indicated that: (1) Quotes on the

NYSE did not widen after the 50 DJIA

point trigger was reached; and (2) the

imposition of Rule 80A did not have

any negative effect on price continuity

and depth in the market.39 In addition,

in approving Rule 80A on a permanent

basis, the SEC noted that the rule

‘‘represents a modest but useful step by

the NYSE to attempt to address the

issues of market volatility,’’ 40 that the

rule ‘‘ has not been disruptive to the

marketplace’’,41 and that there was a

‘‘lack of evidence of any harmful effects

of Rule 80A.’’ 42 In sum, the SEC

discussion of the statutory basis for
Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices 46543

43 15 U.S.C. § 78o–3(b)(6) (1994).

44 15 U.S.C. § 78o–3(b)(9) (1994).

45 15 U.S.C. § 78o–3(b)(11) (1994).

46 15 U.S.C. § 78k–1 (1994).

47 15 U.S.C. § 78k–1(a)(1)(C) (1994).

48 15 U.S.C. § 78k–1(c)(1)(F) (1994).

49Securities Exchange Act Release No. 37094

(April 11, 1996), International Series Release No.

965, 61 FR 17108, 17126 (April 18, 1996) [File No.

S7–11–96].

50Securities Exchange Act Release No. 38067

(December 20, 1997), International Series Release

No. 1039, 62 FR 520 (January 3, 1997) [File No. S7–

11–96].

approval of NYSE Rule 80A focused in

large part on the fact that Rule 80A did

not have any adverse effects on market

quality on the NYSE and that, as a

result, the NYSE should be given the

latitude to take reasonable steps to

address excessive volatility in its

marketplace. Accordingly, the NASD

believes the SEC should afford the

NASD the same regulatory flexibility

that it afforded the NYSE and permit the

NASD to permanently implement a

short sale rule reasonably designed to

enhance the quality of Nasdaq and

minimize the effects of abusive short

selling practices.

The NASD believes the proposed rule

change is consistent with sections

15A(b)(6),43 15A(b)(9),44 15A(b)(11),45

and 11A of the Act.46 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.

Specifically, the NASD believes the

proposal is consistent with Section

15A(b)(6) of the Act because the

proposal is premised on the same antimanipulation and investor protection

concerns that underlie the SEC’s own

short sale rule, Rule 10a–1. In

particular, as with Rule 10a–1, the

proposal promotes just and equitable

principles of trade by permitting long

sellers access to market prices at any

time, while constraining the execution

of potentially abusive and manipulative

short sales at or below the bid in a

declining market. In addition, as with

Rule 10a–1, the proposal removes

impediments to a free and open market

for long sellers and helps to assure

liquidity at bid prices that might

otherwise be usurped by short sellers.

Lastly, because the immediate

beneficiaries of the proposal are

shareholders of NNM companies, the

proposal is designed to protect investors

and the public interest. At the same

time, given that the proposal does not

constrain short sales in a raising market

or prohibit the execution of short sales

in a declining market above bid prices,

the NASD believes the proposal does

not diminish the important pricing

efficiency and liquidity benefits that

legitimate short selling activity

provides.

Section 15A(b)(9) provides that the

Association’s rules may not impose any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act. While the

proposal does impose compliance

burdens on market participants and

conditions on the execution of short

sales in a declining market, the NASD

believes these burdens and restrictions

are necessary in furtherance of the

protection of investors and the integrity

of the Nasdaq market. The NASD

believes its proposal is consistent with

the Act and that any burdens or

competition resulting from the proposal

do not outweigh the overall benefits to

investors that the proposal provides by

implementing a short sale rule that is

designed; (1) To protect investors and

issuers from predatory short selling

practices; (2) to reduce the exposure of

Nasdaq to manipulation and extreme

intra-day volatility; and (3) to afford

investors in Nasdaq securities the same

protections against abusive short selling

that investors in exchange-listed

securities presently receive.

Section 15A(b)(11) empowers the

NASD to adopt rules governing the form

and content of quotations relating to

securities in the Nasdaq market. Such

rules must be designed to produce fair

and informative quotations, prevent

fictitious and misleading quotations and

promote orderly procedures for

collecting and distributing quotations.

The NASD believes the proposal

prevents misleading quotations and

promotes more orderly quotation

movements, particularly in a declining

market by minimizing the extreme intraday price volatility associated with

abusive short selling activity.

The NASD also believes that the

proposal is consistent with the

significant national market system

objectives contained in Section 11A of

the Act. Specifically, Section

11A(a)(1)(C) 47 provides that it is in the

public interest and appropriate for the

protection of investors and the

maintenance of fair and orderly markets

to assure, among other things, (i) the

economically efficient execution of

securities transactions; (ii) fair

competition among brokers and dealers;

and (iii) the practicality of brokers

executing investors orders in the best

market. The NASD believes all of these

objectives will be advanced by

minimizing the destabilizing influences

of abusive short selling activity.

Similarly, Section 11A(c)(1)(F) 48

assures the equal regulation of all

markets for qualified securities and all

exchange members, brokers, and dealers

effecting transactions in such securities.

The NASD believes its proposal is

consistent with Section 11A(c)(1)(F)

because approval of the proposal would

result in equivalent short sale regulation

in the exchange and Nasdaq markets.

In addition, when the SEC proposed

new Rule 105 of Regulation M (‘‘Rule

105’’), a rule that liberalizes regulatory

requirements formerly contained in

Rule 10b–21 under the Act (‘‘Rule 10b–

21’’) governing short sales in connection

with a secondary offering, the

Commission specifically cited the

NASD’s adoption of a short sale rule as

a factor contributing to the

Commission’s reassessment of whether

Rule 10b–21 should be liberalized.

Specifically, the SEC stated:

Since the adoption of Rule 10b–21, several

additional regulatory measures have been

implemented that may lessen the effects of

short selling in connection with an offering.

These initiatives, which include permitting

passive market making during offerings of

Nasdaq securities and implementing a short

sale rule for the Nasdaq market, may reduce

the need for Rule 105.’’ (Footnote omitted).49

On December 20 1997, the SEC

adopted its proposed change to Rule

10b–21 in the form of Rule 105.50 In its

release adopting Rule 105, the

Commission’s analysis does not indicate

that the Commission revised its initial

belief that implementation of the

NASD’s Rule, among other factors,

lessened the regulatory justification for

some of the provisions of former Rule

10b–21.

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. In fact,

without a short sale rule for the Nasdaq

market, Nasdaq would be adversely

affected in its ability to compete for

listings with exchange markets and

investors on Nasdaq will not be afforded

the same protections against abusive

short selling as investors on exchange

markets. Accordingly, Nasdaq believes

approval of the Rule is necessary to

ensure that Nasdaq and investors on

Nasdaq are not subject to an

impermissible burden on competitors.
46544 Federal Register / Vol. 62, No. 170 / Wednesday, September 3, 1997 / Notices

51 17 CFR 200.30–3(a)(12) (1997).

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.

People 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 the filing will also be

available for inspection and copying at

the NASD’s principal offices. All

submissions should refer to File No.

SR–NASD–97–58 and should be

submitted by September 24, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.51

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23343 Filed 9–2–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38973; File No. SR–PCX–

97–34]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Pacific Exchange, Inc. Relating to the

Addition of Martin Luther King, Jr.’s

Birthday as an Exchange Holiday and

the Renaming of the Decoration Day

Holiday to Memorial Day

August 26, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on August 20, 1997,

the Pacific Exchange, Inc. (‘‘PCX’’ or

‘‘Exchange’’) 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 Exchange. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange seeks to amend

Exchange Rule 4.3 to include Martin

Luther King, Jr.’s Birthday among those

holidays on which it is closed for

business. The Exchange also seeks to

amend Exchange Rule 4.3 to change the

name of the holiday currently

recognized as Decoration Day to its

better known name of Memorial Day.

The text of the proposed rule change

is available at the Office of the

Secretary, the Exchange and at the

Commission.

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

Exchange 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

Exchange 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

1. Purpose

The purpose of this proposed rule

change is to modify the Exchange’s

practice with respect to Exchange

holidays to include Martin Luther King,

Jr.’s Birthday among those holidays on

which the Exchange is not open for

business. In addition, the proposed rule

change will modify the existing rule to

include Memorial Day among the list of

holidays, instead of its less commonly

used name of Decoration Day.

2. Statutory Basis

The Exchange represents that the

proposed rule change is consistent with

Section 6(b) of the Act, in general, and

furthers the objectives of Section 6(b)(5)

of the Act, in particular, in that it is

designed to promote just and equitable

principles of trade, removes

impediments to and perfects the

mechanism of a free and open market

and a national market system, and, in

general, protects investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any inappropriate burden on

competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The Exchange did not solicit or

receive written comments with respect

to the proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change is

concerned solely with the

administration of the Exchange and,

therefore, has become effective pursuant

to Section 19b(3)(A) of the Act and

subparagraph (e) of Rule 19b–4

thereunder. At any time within 60 days

of the filing of the proposed rule change,

the Commission may summarily

abrogate such rule change if it appears

to the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and