[Federal Register Volume 62, Number 28 (Tuesday, February 11, 1997)]
[Notices]
[Pages 6290-6291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3326]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38240; File No. SR-NASD-96-52]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule 
Change Relating to the Reporting of Short Sale Transactions by Market 
Makers Exempt From the NASD's Short Sale Rule

February 5, 1997.

I. Introduction

    On December 17, 1996, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 
19b-4 thereunder \2\ a proposed rule change to the Automated 
Confirmation Transaction (``ACT'') Service rules that would require all 
Primary Market Makers (``PMM'') to mark their ACT reports to denote 
when they have relied on the PMM exemption to NASD's short sale rule. 
The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38092 (December 27, 1996), 62 FR 776 (January 
6, 1997) (``Notice of Proposed Rule Change''). The Commission received 
no comments on the proposal and is approving the proposed rule change 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Description of the Proposal

    On June 29, 1994, the Commission approved the NASD's short sale 
rule on an eighteen-month pilot basis through March 5, 1996.\3\ The 
Commission subsequently extended the termination date through October 
1, 1997.\4\ The NASD's short sale rule prohibits member firms from 
effecting short sales in Nasdaq National Market (``NNM'') securities at 
or below the current inside bid as disseminated by Nasdaq whenever the 
bid is lower than the previous bid.\5\ The rule provides an exemption 
from the short sale rule to ``qualified'' Nasdaq market makers who can 
use the exemption only in connection with bona fide market making 
activity. To be a qualified market maker, a market maker must satisfy 
the Nasdaq PMM standards.\6\ If a market maker is a PMM for a 
particular stock, there is a ``P'' indicator next to its quote in that 
stock.\7\
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    \3\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 34885 (July 7, 1994) (``Short Sale Rule Approval 
Order'').
    \4\ See Securities Exchange Act Release Nos. 36171 (August 30, 
1995), 60 FR 46651; 36532 (November 30, 1995), 60 FR 62519; 37492 
(July 29, 1996), 61 FR 40693; and 37919 (November 1, 1996), 61 FR 
57934.
    \5\ See NASD Rule 3350.
    \6\ Pursuant to NASD Rule 4612, the PMM standards require a 
market maker to satisfy at least two of the following four criteria 
to be eligible for an exemption from the short sale 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 1\1/2\ times its ``proportionate'' volume in the stock. 
Specifically, the proportionate volume test requires a market maker 
to account for volume of at least 1\1/2\ times its proportionate 
share of overall volume in the security for the review period. For 
example, if a security has 10 market makers, each market maker's 
proportionate share volume is 10 percent. Therefore, the 
proportionate share volume is one-and-a-half times 10, or 15 percent 
of overall volume. But, see Securities Exchange Act Release No. 
38175 (January 15, 1997) (Commission approving NASD rule proposal to 
waive the PMM qualification standards in conjunction with the 
adoption of the Commission's Order Execution Rules); and File No. 
SR-NASD-97-07 (January 31, 1997) (Proposed rule change to 
temporarily suspend the use of the Primary Market Maker 
qualification criteria for all Nasdaq market maker securities for 
the remainder of the current pilot period of the Nasdaq short sale 
rule).
    \7\ See Securities Exchange Act Release no. 38175 (January 15, 
1997), stating that the NASD will, upon suspension of the PMM 
qualification criteria for NNM securities, deem all registered 
market makers in such securities PMMs.
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    When the Commission approved the NASD's short-sale rule it also 
approved an NASD proposal to require NASD members to append a 
designator to their ACT reports to denote whether their sale 
transactions were long sales, short sales, or exempt short sales. At 
that time, however, market makers exempt from the short-sale rule were 
not required to append ``sell short'' or ``sell short exempt'' to their 
ACT reports.\8\ Accordingly, in order to enhance the NASD's ability to 
surveil for potential abuses of the market maker exemption and examine 
and monitor the market impacts of the market maker exemption, the 
NASD's proposed rule change deletes the footnote to NASD Rule 
6130(d)(6), thereby requiring all exempt market makers to mark their 
ACT reports to denote when they have relied on the market maker 
exemption.
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    \8\ Specifically, the footnote to NASD Rule 6130(d)(6) provides 
that ``[t]he `sell short' and `sell short exempt' indicators must be 
entered for all customer short sales, including cross transactions, 
and for short sales effected by members that are not qualified 
market markers pursuant to Rule 3350.''
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    The NASD will establish an effective date for the rule change in a 
Notice-to-Members announcing Commission approval of the proposal. The 
Notice will be published within thirty days of Commission approval of 
the proposal and the effective date of the proposal will be no longer 
than three weeks after the date of publication of the Notice.

III. Discussion

    The Commission believes the NASD's proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\9\ and that it will 
promote efficiency, competition, and capital formation. Section 
15A(b)(6) requires that the rules of a national securities association 
be designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with person 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. The Commission 
believes that requiring exempt market makers to mark their ACT reports 
to denote when they have relied upon the PMM exemption will help to 
enhance the ability of NASD Regulation, Inc. to efficiently monitor 
whether market makers are abusing the exemption.\10\ Furthermore, the 
Commission, in approving the short sale rule on a pilot basis, 
requested the NASD to study various aspects of the rule's effects, 
including the use of the PMM exemption to the rule. The Commission, 
therefore, believes that requiring PMMs to append a designator to their 
ACT reports will assist the NASD in assessing the market impacts of the 
PMM exemption from the short sale rule, as well as facilitate the 
preparation of a thorough analysis of such exemption.
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ See footnote 6, supra; and Letter from Howard Kramer, 
Associate Director, Division of Market Regulation, Commission, to 
Eugene A. Lopez, Assistant General Counsel, NASD (February 3, 1997) 
(No-action letter regarding suspension of the Primary Market Maker 
standards).
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    The NASD requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing in the Federal Register. 
The Commission finds good cause for so approving the proposed rule 
change because accelerated approval will allow the NASD to begin 
collecting the necessary data for a meaningful statistical analysis of 
the market impact of the PMM exemption from the short sale rule. 
Furthermore, the Commission believes it is prudent to allow the NASD to 
begin requiring PMMs to mark their ACT reports when they have relied on 
the PMM exemption as soon as possible in order that the NASD and PMMs 
will become familiar with the use of the ACT

[[Page 6291]]

denotation, thereby aiding in efficient data collection.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to the NASD, and in particular Section 15A(b)(6).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-NASD-96-52) be and 
hereby is approved on an accelerated basis.

    \11\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3326 Filed 2-10-97; 8:45 am]
BILLING CODE 8010-01-M