Federal Register / Vol. 62, No. 193 / Monday, October 6, 1997 / Notices 52169

1 15 U.S.C. 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

3Securities Exchange Act Release No. 38975

(August 26, 1997), 62 FR 46535 (September 3, 1997)

[File No. SR–NASD–97–59].

4See also companion release Securities Exchange

Act Release No. 39140. The short sale rule was

originally adopted in June of 1994 for Nasdaq

National Market securities on a pilot basis with a

termination date of March 5, 1996. Securities

Exchange Act Release No.34277 (June 29, 1994), 59

FR 34885 (July 7, 1994) [File No. SR–NASD–92–12].

The pilot was subsequently extended through

Continued

overpay for securities. Salomon argues

that it is unlikely that it would be able

to exercise any adverse influence over

the Trusts with respect to purchases of

Treasuries because Treasuries do not

vary in quality and are traded in one of

the most liquid markets in the world.

Treasuries are available through both

primary and secondary dealers, making

the Treasury market very competitive.

In addition, market prices on Treasuries

can be confirmed on a number of

commercially available information

screens. Salomon argues that because it

is one of a limited number of primary

dealers in Treasuries, it will be able to

offer the Trusts prompt execution of

their Treasury purchases at very

competitive prices.

4. Salomon states that it is only

seeking relief from section 17(a) with

respect to the initial purchase of the

Treasuries and not with respect to an

ongoing course of business.

Consequently, investors will know

before they purchase a Trust’s Securities

the Treasuries that will be owned by the

Trust and the amount of the cash

payments that will be provided

periodically by the Treasuries to the

Trust and distributed to Holders.

Salomon also asserts that whatever risk

there is of overpricing the Treasuries

will be borne by the counterparties and

not by the Holders because the cost of

the Treasuries will be calculated into

the amount paid on the Contracts.

Salomon argues that, for this reason, the

counterparties will have a strong

incentive to monitor the price paid for

the Treasuries, because any

overpayment could result in a reduction

in the amount that they would be paid

on the Contracts.

5. Salomon believes that the terms of

the proposed transaction are reasonable

and fair and do not involve

overreaching on the part of any person,

that the proposed transaction is

consistent with the policy of each of the

Trusts, and that the requested

exemption is appropriate in the public

interest and consistent with the

protection of investors and purposes

fairly intended by the policies and

provisions of the Act.

Applicant’s Condition

Salomon agrees that the order

granting the requested relief will be

subject to the following conditions:

1. Any investment company owning

voting stock of any Trust in excess of

the limits imposed by section 12(d)(1) of

the Act will be required by the Trust’s

charter documents to vote its Trust

shares in proportion to the vote of all

other Holders.

2. The trustees of each Trust,

including a majority of the trustees who

are not interested persons of the Trust,

(i) will adopt procedures that are

reasonably designed to provide that the

conditions set forth below have been

complied with; (ii) will make and

approve such changes as deemed

necessary; and (iii) will determine that

the transactions made pursuant to the

order were effected in compliance with

such procedures.

3. The Trusts (i) will maintain and

preserve in an easily accessible place a

written copy of the procedures (and any

modifications to such procedures), and

(ii) will maintain and preserve for the

longer of (a) the life of the Trusts and

(b) six years following the purchase of

any Treasuries, the first two years in an

easily accessible place, a written record

of all Treasuries purchased, whether or

not from Salomon, setting forth a

description of the Treasuries purchased,

the identity of the seller, the terms of

the purchase, and the information or

materials upon which the

determinations described below were

made.

4. The Treasuries to be purchased by

each Trust will be sufficient to provide

payments to Holders of Securities that

are consistent with the investment

objectives and policies of the Trust as

recited in the Trust’s registration

statement and will be consistent with

the interests of the Trusts and the

Holders of its Securities.

5. The terms of the transactions will

be reasonable and fair to the Holders of

the Securities issued by each Trust and

will not involve overreaching of the

Trust or the Holders of Securities of the

Trust on the part of any person

concerned.

6. The fee, spread, or other

remuneration to be received by Salomon

will be reasonable and fair compared to

the fee, spread, or other remuneration

received by dealers in connection with

comparable transactions at such time,

and will comply with section 17(e)(2)(C)

of the Act.

7. Before any Treasuries are

purchased by the Trust, the Trust must

obtain such available market

information as it deems necessary to

determine that the price to be paid for,

and the terms of, the transaction is at

least as favorable as that available from

other sources. This will include the

Trust obtaining and documenting the

competitive indications with respect to

the specific proposed transaction from

two other independent government

securities dealers. Competitive

quotation information must include

price and settlement terms. These

dealers must be those who, in the

experience of the Trust’s trustees, have

demonstrated the consistent ability to

provide professional execution of

Treasury transactions at competitive

market prices. They also must be those

who are in a position to quote favorable

prices.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–26399 Filed 10–3–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39139; File No. SR–NASD–

97–59]

Self-Regulatory Organizations; Order

Granting Temporary Approval on an

Accelerated Basis of Proposed Rule

Change by National Association of

Securities Dealers, Inc. Relating to the

Short Sale Rule

September 26, 1997.

On August 14, 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 pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 2 thereunder to amend Rule IM–

3350 to provide that a ‘‘legal’’ short sale

must be effected at a price equal to or

greater than the offer price when the

inside spread is less than 1⁄16th. Notice

of the proposed rule change, together

with the substance of the proposal, was

published in the Federal Register.3 No

comments on the proposed rule change

have been received, to date. This order

grants temporary approval on an

accelerated basis to the proposed rule

change through January 15, 1998. At the

expiration of rule, the Commission will

consider permanent approval of the

proposed rule change in unison with the

Commission’s consideration of the

permanent approval of the NASD’s short

sale rule.4
52170 Federal Register / Vol. 62, No. 193 / Monday, October 6, 1997 / Notices

October 1, 1997. Securities Exchange Act Release

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

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

See also Securities Exchange Act Release No. 36171

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

[File No. SR–NASD–95–35]; Securities Exchange

Act Release No. 37492 (July 29, 1996), 61 FR 40963

(August 5, 1996) [File No. SR–NASD–96–30];

Securities Exchange Act Release No. 37917

(November 1, 1996), 61 FR 57934 (November 8,

1996) (File No. SR–NASD–96–41]. On August 8,

1997, the NASD submitted a proposed rule change

(SR–NASD–97–58) to the Commission to

implement the short sale rule on a permanent basis.

5A 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 Securities Exchange Act Rule 3b–3, 17

CFR 240.3b–3, which rule is incorporated into

Nasdaq’s short sale rule as NASD Rule 3350(k)(l).

6Nasdaq 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.

Accordingly, absent an exemption from the rule, a

member cannot effect a short sale at or below the

inside bid for a security in its proprietary account

or a customer’s account if there is a red arrow next

to the security’s symbol on the screen. 7 15 U.S.C.§ 78o(b)(6) (1994).

8 17 CFR 200.30–3(a)(12) (1997).

1 15 U.S.C. § 78s(b)(1)(1994).

2 17 CFR 240.19b–4 (1997).

I. Background

The NASD’s short sale rule prohibits

member firms from effecting short

sales 5 at or below the current inside bid

as disseminated by Nasdaq whenever

that bid is lower than the previous

inside bid.6 The rule currently provides

that a short sale is a ‘‘legal’’ short sale

in a ‘‘down’’ bid situation if it is effected

at a price at least 1⁄16th above the inside

bid (‘‘Minimum Increment Rule’’). The

Minimum Increment Rule was

implemented to ensure that short sales

were not effected at prices so close to

the inside bid during down markets that

the short sales were inconsistent with

the underlying purposes of the short

sale rule (i.e. to prohibit market

destabilizing and abusive short sales in

declining markets).

Now that all Nasdaq stocks can

potentially trade with a 1⁄16th spread or

less, due to, among other things, the

new SEC Order Handling Rules, and in

light of the movement toward smaller

minimum quotation variations

generally, consideration was given to

modifying the Minimum Increment Rule

for stocks with an inside spread less

than 1⁄16th. Accordingly, the NASD is

proposing an amendment to the

Minimum Increment Rule to provide

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

at a price equal to or greater than the

offer price when the inside spread is

less than 1⁄16th. There would be no

change to the current definition for

stocks with a spread of 1⁄16th or greater.

For example, if the inside market for

ABCD is 101⁄4–105⁄16, a legal short sale

in a down market would have to be

effected at a price equal to or greater

than 105⁄16 (i.e., 1⁄16th above the current

inside bid). However, if the inside

market is 51⁄32–52⁄32, a legal short sale in

a down market could be effected at a

price equal to the inside offer of 52⁄32.

In addition, to help ensure that

market participants do not adjust their

quotations to circumvent the short sale

rule, the NASD is proposing an

amendment to the Minimum Increment

Rule to provide that a market maker or

customer could not bring about or cause

the inside spread for a stock to narrow

in a declining market (e.g., lowering its

offer to create an inside spread less than

1⁄16th) for the purpose of facilitating the

execution of a short sale at a price less

than 1⁄16th above the inside bid.

Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that temporary

approval on an accelerated basis of the

NASD’s proposed rule change through

January 15, 1998, is consistent with the

Act and the rules and regulations

promulgated thereunder. Specifically,

the Commission finds that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) of the

Act.7 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. Given the Commission’s

temporary approval of the short sale

rule, the Commission believes that the

proposed rule change is a reasonable

approach to preserve the short sale

rule’s underlying purpose and effect

when the inside spread is less than

1⁄16th.

The Commission also finds good

cause for approving on a temporary

basis the proposed rule change prior to

the 30th day after the date of

publication of notice of filing thereof.

The Commission believes that it is

appropriate to accelerate temporary

approval of the proposed rule change

through January 15, 1998, because

accelerated approval will allow NASD

members, without delay, to effect

‘‘legal’’ short sales consistent with the

underlying purpose and effect of the

NASD’s short sale rule in situations

where the inside spread is less than

1⁄16th, while the NASD and the

Commission consider the effect of the

short sale rule.

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change, SR–NASD–97–59

be, and hereby is, approved on a

temporary basis through January 15,

1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–26357 Filed 10–3–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39140; File No. SR–NASD–

97–65]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Extending the Pilot Program of the

NASD’s Short Sale Rule

September 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

September 4, 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 and to

grant accelerated approval of the

proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to amend

Rule 3350 to extend the pilot program

of the NASD’s short sale rule from

October 1, 1997 until January 15, 1998.

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

* * * * *