59478 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices

5 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4

3See letter from Jeffrey S. Davis, Assistant

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Division of Market Regulation,

Commission dated September 20, 2000. The current

suspension and extension would expire on

September 30, 2000. See Securities Exchange Act

Release No. 42219 (December 9, 1999), 64 FR 70753

(December 17, 1999).

4 15 U.S.C. 78j(a).

5 17 CFR 240.10a–1.

6A 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 Exchange Act, which

is incorporated into Nasdaq’s short sale rule by

NASD Rule 3350(k)(1).

7See Securities Exchange Act Release No. 34277

(June 29, 1994), 59 FR 34885 (July 7, 1994) (‘‘Short

Sale Rule Approval Order’’).

8See supra, note 3.

9See NASD Rule 3350(c)(2)–(8). The Rule also

provides that a member not currently registered as

a Nasdaq market maker in a security, and 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 Short Sale 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 under

the Exchange Act dealing with the liquidation of

index arbitrage positions and an ‘‘international

equalizing exemptions’’ are equally applicable to

the NASD’s short sale rule. See NASD Rule 3350(f).

provisions of 5 U.S.C. 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 Amex. All

submissions should refer to file number

SR–Amex–00–43 and should be

submitted by October 26, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–25594 Filed 10–04–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43368; File No. SR–NASD–

98–26]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to Amendment

No. 9 to a Proposed Rule Change by

the National Association of Securities

Dealers, Inc. To Institute, on a Pilot

Basis, New Primary Nasdaq Market

Maker Standards for Nasdaq National

Market Securities

September 27, 2000.

On September 20, 2000, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, the Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’),

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Exchange Act’’) 1 and Rule

19b–4 thereunder,2 a proposed rule

change to: (1) Continue to suspend the

current PMM standards until June 30,

2001; and (2) extend the NASD’s Short

Sale Rule pilot until June 30, 2001

(‘‘Amendment No. 9’’).3

Amendment No. 9 to the proposed

rule change, SR–NASD–96–28, is

described in Items I and II below, which

Items have been prepared by the NASD.

The Commission is publishing this

notice and order to solicit comments on

Amendment No. 9 from interested

persons and to approve the amendment

on an accelerated basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

In the current amendment, Nasdaq is

proposing to extend the Short Sale Rule

pilot and the suspension of the existing

PMM standards from September 30,

2000 until June 30, 2001. The proposed

rule language, as amended, follows.

Additions are italicized; deletions are

bracketed.

NASD Rule 3350

(a)–(k) No Changes.

(l) This Rule shall be in effect until

[September 30, 2000] June 30, 2001.

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 III 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

(1) Background on the NASD’s Short

Sale Rule

Section 10(a) of the Exchange Act 4

gives the Commission plenary authority

to regulate short sales of securities

registered on a national securities

exchange, as needed to protect

investors. Although the Commission has

regulated short sales since 1938, that

regulation has been limited to short

sales of exchange-listed securities. In

1992, Nasdaq, believing that short-sale

regulation is important to the orderly

operation of securities markets,

proposed a short sale rule for trading of

its National Market securities that

incorporates the protections provided

by Rule 10a–1 of the Exchange Act.5 On

June 29, 1994, the Commission

approved the NASD’s short sale rule,

Rule 3350 (‘‘Short Sale Rule’’),

applicable to short sales 6 in Nasdaq

National Market (‘‘NNM’’) securities on

an eighteen-month pilot basis through

March 5, 1996.7 The NASD and the

Commission have extended NASD Rule

3350 numerous times, most recently,

until September 30, 2000.8

Nasdaq’s short-sale rule employs a

‘‘bid’’ test rather than a tick test because

Nasdaq trades are not necessarily

reported to the tape in chronological

order. Nasdaq’s short sale rule prohibits

short-sales at or below the inside bid

when the current inside bid is below the

previous inside bid. Nasdaq calculates

the inside bid from all market makers in

the security (including bids on

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.’’ To effect a ‘‘legal’’ shortsale on a down-bid, the short-sale must

be executed at a price at least 1⁄16th

above the current inside bid. The rule is

in effect from 9:30 a.m. E.T. until 4 p.m.

E.T. each trading day.

To reduce the compliance burdens on

its members, Nasdaq’s short sale rule

also incorporates seven exemptions

contained in Rule 10a–1 under the

Exchange Act that are relevant to

trading on Nasdaq.9 In addition, in an

effort to not constrain the legitimate

hedging needs of options market

markers, the NASD’s short sale rule

contains a limited exception for

standardized options market makers.

The Rule also contains an exemption for

warrant market makers similar to the

one available for options market makers.

(2) Background on the NASD’s Primary

Market Maker Standards

To ensure that market maker activities

that provide liquidity and continuity to

the market are not adversely constrained

when the short sale rule is involved,

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices 59479

10See Short Sale Rule Approval Order, Supra

note 7.

11 Id. Under 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 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 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 re-qualify for designation as a PMM

by satisfying the threshold standards in the next

review period.

12See Securities Exchange Act Release Nos.

38294 (February 14, 1997), 62 FR 8289 (February

24, 1997) (order granting temporary accelerated

approval of suspension of PMM standards until

October 1, 1997; File No. SR–NASD–97–07); 39198

(October 3, 1997), 62 FR 53365 (October 14, 1997)

(order granting temporary accelerated approval of

continuing suspension until April 1, 1998; File No.

SR–NASD–97–73); 39819 (March 30, 1998), 63 FR

16841 (April 6, 1998) (order granting temporary

accelerated approval of continuing suspension until

May 1, 1998; File No. SR–NASD–98–26); 39936

(April 30, 1998), 63 FR 25253 (May 7, 1998) (order

granting temporary accelerated approval of

continuing suspension until July 1, 1998;

Amendment No. 3 to File No. SR–NASD–98–26);

40140 (June 26, 1998), 63 FR 36464 (July 6, 1998)

(order granting temporary accelerated approval of

continuing suspension until October 1, 1998;

Amendment No. 4 to File No. SR–NASD–98–26);

40485 (September 25, 1998), 63 FR 52780 (October

1, 1998) (order granting temporary accelerated

approval of continuing suspension until March 31,

1999; Amendment No. 5 to File No. SR–NASD–98–

26); 41195 (March 19, 1999), 64 FR 14778 (March

26, 1999) (order granting temporary accelerated

approval of continuing suspension until June 30,

1999; Amendment No. 6 to File No. SR–NASD–98–

26); 41568 (June 28, 1999), 64 FR 36416 (July 6,

1999) (order granting temporary accelerated

approval of continuing suspension until December

31, 1999; Amendment No. 7 to File No. SR–NASD–

98–26); 42219 (December 9, 1999), 64 FR 70753

(December 17, 1999) (order granting temporary

accelerated approval of continuing suspension until

September 30, 2000; Amendment No. 8 to File No.

SR–NASD–98–26).

13See Securities Exchange Act Release 39819

(March 30, 1998), 63 FR 16841 (April 6, 1998).

14See letter from John F. Malitzis, Assistant

General Counsel, Nasdaq, to Richard Strasser,

Assistant Director, Division of Market Regulation,

Commission, dated September 27, 1999.

15See Short Sale Rule Approval Order, supra note

8.

16 Id.

17Nasdaq stated at the time that it believed the

implementation of the Order Handling Rules

created the following three issues: (1) Many market

makers voluntarily chose to display customer limit

orders in their quotes although the Limit Order

Display Rule does not yet require it; (2) SOES

decrementation for all Nasdaq stocks significantly

affected market makers’ ability to meet several of

the primary market maker standards; and (3) with

the inability to meet the existing criteria for a larger

number of securities, a market maker may be

prevented from registering as a primary market

maker in an initial public offering because it fails

to meet the 80% primary market maker test

contained in Rule 4612(g)(2)(B). See Securities

Exchange Act Release No. 38294 (February 14,

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

NASD Rule 3350(c)(1) provides an

exemption for ‘‘qualified’’ Nasdaq

market makers) i.e., market makers that

meet the PMM standards). Presently,

NASD Rule 4612 provides that a

member registered as a Nasdaq market

maker pursuant to NASD Rule 4611 may

be deemed a PMM if that member meets

certain threshold standards.

Since NASD Rule 3350 has been in

effect, there have been two methods

used to determine whether a market

maker is eligible for the PMM

exemption. Specifically, from

September 4, 1994 through February 1,

1996, Nasdaq market makers that

maintained a quotation in a particular

NNM security for 20 consecutive

business days without interruption were

exempt from Rule 3350 for short sales

in that security, provided the short sales

were made in connection with bona fide

market making activity (‘‘the 20-day’’

test).10 From February 1, 1996 until the

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

was replaced with a four-part

quantitative test known as the PMM

standards.11

Beginning on February 14, 1997, the

PMM standards were suspended for all

NNM securities due to the impact of the

SEC’s Order Handling Rules, and

corresponding NASD rule change and

system modifications on the operation

of the four quantitative standards.12 For

example, the requirement that market

makers display customer limit orders

adversely affected the ability of market

makers to satisfy the ‘‘102% Average

Spread Standard.’’ Since that time all

market makers have been designated as

PMMs.

In March 1998, Nasdaq proposed

PMM standards that received

substantially negative comments.13 In

light of those comments, Nasdaq staff

convened an advisory subcommittee to

develop new PMM standards

(‘‘Subcommittee’’) in August 1998. The

Subcommittee met nine times and

formulated new PMM standards. On

December 9, 1998, the NASD/Nasdaq

staff met with the Commission staff and

the Subcommittee to receive informal

feedback on the new PMM standards. At

the conclusion of the meeting,

Commission staff noted the progress

made by the Subcommittee and

requested time to digest and more

carefully analyze the proposed new

PMM standards.

On July 29, 1999, members of the

Nasdaq staff conducted a conference

call with members of the Commission

staff to receive feedback on the PMM

standards that Nasdaq presented at the

December 9, 1998 meeting. During the

meeting, the Commission staff suggested

that Nasdaq modify several of the

proposed standards and analyze the

impact of those modifications on the

primary market maker determination.

On September 27, 1999, Nasdaq

reported that the NASD Economic

Research staff had analyzed data based

on the Commission’s suggested

revisions, and concluded that the

Commission’s modified standards

produced unfavorable results.14

The Commission notes that it has

separately proposed amendments to

Rule 10a–1 under the Exchange Act,

which applies to exchanges. Nasdaq has

announced that it is considering

registering as an exchange.

(3) Current Amendment

Nasdaq believes that it is in the best

interest of investors to extend the short

sale regulation pilot program. In the

Short Sale Approval Order, 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.’’ 15 In addition, the Commission

stated that it ‘‘believes that the NASD’s

short sale bid-test, including the market

maker exemptions, is a reasonable

approach to short sale regulation of

Nasdaq National Market securities and

reflects the realities of its market

structure.’’ 16 Nasdaq believes the

benefits that the Commission recognized

when it first approved NASD Rule 3350

apply to equal force today.

Similarly, Nasdaq believes the

concerns that caused the Commission to

waive the PMM standards in February

1997 continue to exist today. Nasdaq

and the Commission agreed to waive the

PMM standards to avoid frustrating

operation of the Commission’s Order

Handling Rules, in light of market

factors that were not apparent at the

time the Order Handling Rules were

implemented.17 Nasdaq has worked to

address those concerns to the

Commission’s satisfaction, including

convening a special subcommittee on

PMM issues, proposing two different

sets of PMM standards, and being

continuously available and responsive

to Commission staff to discuss this

issue. Despite these efforts, the

Commission and Nasdaq have been

unable to establish satisfactory PMM

standards. Nasdaq believes that reVerDate 11<MAY>2000 15:34 Oct 04, 2000 Jkt 194001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 E:\FR\FM\05OCN1.SGM pfrm02 PsN: 05OCN1
59480 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices

18See Securities Exchange Act Release No. 42037

(October 20, 1999), 64 FR 57996 (October 28, 1999).

19 15 U.S.C. 78o–3(b)(6).

20 15 U.S.C. 78s(b)(2).

21 In approving Amendment No. 9, the

Commission has considered its impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

22 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

instating the PMM standards set forth in

NASD Rule 4612 would be extremely

disruptive to the market and harmful to

investors.

Nasdaq also notes that the

Commission has signaled to the

securities industry that it is considering

fundamental changes to Rule 10a–1 of

the Exchange Act that could impact the

manner in which Nasdaq and the other

markets regulate short sales. On October

20, 1999, the Commission issued a

Concept Release on Short Sales in

which it sought comment on, among

other things, revising the definition of

short sale, extending short sale

regulation to non-exchange listed

securities, and eliminating short sale

regulation altogether.18 Nasdaq believes

it would be inappropriate for Nasdaq to

dramatically alter its regulation of short

sales while the Commission is

considering fundamentally changing

Rule 10a–1 of the Exchange Act.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

9, including whether the proposed

Amendment is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609.

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 such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–98–26 and should be

submitted by October 26, 2000.

IV. Commission’s Findings and Order

Granting Accelerated Approval of the

Amendment

After careful consideration, the

Commission finds, for the reasons set

forth below, that the extension of the

Short Sale Rule pilot and the

suspension of the existing PMM

standards until June 30, 2001 is

consistent with the requirements of the

Act and the rules and regulations

thereunder. In particular, the extension

is consistent with Section 15A(b)(6) 19 of

the Act, which requires that the NASD’s

rules be designed, among other things,

to remove impediments to and perfect

the mechanism of a free and open

market and a national market system

and to promote just and equitable

principles of trade.

The Commission finds that

continuation of the Short Sale Rule pilot

and the continued suspension of the

current PMM standards will maintain

the status quo while the Commission

considering amending Rule 10a–1 under

the Exchange Act.

The Commission finds good cause for

approving the extension of the Short

Sale Rule pilot and the suspension of

existing PMM standards prior to the

30th day after the date of publication of

notice of the filing in the Federal

Register. It could be disruptive to the

Nasdaq market and confusing to market

participants to reintroduce the previous

PMM standards while new PMM

standards are being developed, and

while the Commission is considering

amending Rule 10a–1 under the

Exchange Act.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,20 that

Amendment No. 9 to the proposed rule

change, SR–NASD–98–26, which

extends the NASD Short Sale Rule pilot

and the suspension of the current PMM

standards to June 30, 2001, is approved

on an accelerated basis.21

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–25591 Filed 10–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43383; File No. SR–NASD–

00–48]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. To Require an Issuer To

Publicly Disclose the Receipt of a

Delisting Notice for Failure To Comply

With the Continued Listing Standards

of The Nasdaq Stock Market

September 28, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on August

10, 2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its wholly owned subsidiary,

The Nasdaq Stock Market, Inc.

(‘‘Nasdaq’’), filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by Nasdaq. 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

Nasdaq proposes to require issuers to

publicly disclose the receipt of a

delisting notice for failure to comply

with Nasdaq’s continued listing

requirements. Below is the text of the

proposed rule change. Proposed new

language is in italics. Proposed

deletions are in brackets.

Rule 4120. Trading Halts

(a) Authority to Initiate Trading Halts.

In circumstances in which Nasdaq

deems it necessary to protect investors

and the public interest, Nasdaq may,

pursuant to the procedures set forth in

paragraph (b):

(1)–(4) No change.

(5) Halt trading in a security listed on

Nasdaq when Nasdaq requests from the

issuer information relating to:

(i) No change;

(ii) The issuer’s ability to meet Nasdaq

listing qualification requirements, as set

forth in the Rule 4300 , [and] 4400, and

4800 Series; or

(iii) No change.

(b) No change.