Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices 11245

6 17 U.S.C. § 78s(B)(2) (1988).

7 17 CFR 200.30–3(a)(12) (1996).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

a requirement under the Corporate

Financing Rule for members to obtain

an Underwriting Activity Report will

prevent fraudulent and manipulative

acts and practices, promote just and

equitable principals of trade, and

protect investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

(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. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 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 such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to the file

number in the caption above and should

be submitted by April 1, 1997.

IV. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Commission finds that the

NASD’s proposal is consistent with the

Act and the rules and regulations

thereunder applicable to a registered

national securities association.

Specifically, the provisions of Section

15A(b)(2) of the Act which requires that

an association enforce compliance with

Securities Exchange Act Rules in

addition to the rules of the association.

The Commission believes that the

NASD proposal will enforce and

facilitate compliance by NASD members

with the requirements of Regulation M,

SEC Rules 100 through 105.

In addition, the Commission finds

that the NASD’s proposal is consistent

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

of the Act which requires, in part, that

an association have rules that are

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, and in general, to protect

investors. The Commission believes that

the NASD’s proposal is consistent with

Section 15A(b)(6) of that Act in that the

amendments to the Nasdaq and OTCBB

Rules, in addition to the establishment

of a requirement for members to an

Underwriting Activity Report, provide a

regulatory framework that will assist

members in complying with the

obligations under Regulation M. The

Commission, therefore, finds good cause

for approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,6 that the

proposed rule change and Amendment

No. 1 (SR–NASD–97–15) be and hereby

is approved. The proposed rule change

is effective March 4, 1997, with the

exception of the provisions Rule 4623

and Rule 5460 that implement the

notification requirements adopted under

Regulation M with respect to penalty

bids and syndicate covering transactions

that will become effective on the date

that the notification requirements under

SEC Rule 104 become effective.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–5979 Filed 3–10–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38354; File No. SR–NASD–

97–13)

February 28, 1997.

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Elimination of the

NASD’s Excess Spread Rule

Applicable to Market Maker Quotations

in Nasdaq SmallCap Securities

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 February

24, 1997, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) 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 the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons and to grant

accelerated approval to the proposed

rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD proposes to amend NASD

Rule 4613(d) to exclude market maker

quotations in Nasdaq SmallCap

securities from coverage under the Rule.

As a result, Rule 4613(d) will apply only

to quoted spreads by registered market

makers in Nasdaq National Market

securities. The text of the proposed rule

change is as follows [new text is

italicized; deleted text is bracketed]:

* * * * *

NASD Rule 4613 Character of

Quotations

(d) Reasonably Competitive

Quotations

A registered market maker in a

Nasdaq National Market security [listed

on The Nasdaq Stock Market] will be

withdrawn as a registered market maker

and precluded from re-registering as a

market maker in such issue for 20

business days if its average spread in the

security over the course of any full

calendar month exceeds 150 percent of

the average of all dealer spreads in such

issue for the month. This subparagraph

shall not apply to market makers in

Nasdaq SmallCap securities.

(1) If a registered market maker has

not satisfied the average spread

requirement set forth in this

subparagraph (d) for a particular Nasdaq

National Market security, its registration

in such issue shall be withdrawn

commencing on the next business day

following the business day on which the

market maker was sent notice of its

failure to comply with the requirement.

A market maker may request

reconsideration of the withdrawal

notification. Requests for

reconsideration will be reviewed by the

Market Operations Review Committee,

whose decisions are final and binding

on the members. A request for
11246 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices

3See Securities Exchange Act Release No. 38180

(Jan. 16, 1997), 62 FR 3725 (Jan. 24, 1997) (order

approving File No. SR–NASD–96–50).

4Previously, Rule 4613(d) provided that

registered market makers in Nasdaq securities could

not enter quotations that exceeded 125 percent of

the average of the three narrowest market maker

spreads in that issue (‘‘125 percent test’’), provided,

however, that the maximum allowable spread shall

never be less than 1⁄4 of a point (‘‘125% Excess

Spread Rule’’).

5The SEC found in its 21(a) Report on the NASD

and Nasdaq that ‘‘the interdependence of quotes

mandated by the rule may deter market makers

from narrowing their dealer spreads, because, once

the spread is tightened, the rule in some instances

precludes a market maker from widening the spread

to earlier levels.’’ See Appendix to Report Pursuant

to Section 21(a) of the Securities Exchange Act of

1934 Regarding the NASD and The Nasdaq Stock

Market (‘‘21(a) Report’’) SEC, Aug. 8, 1996, at p. 98.

As a result, the SEC found that the excess spread

rule creates an economic incentive for market

makers to discourage one another from narrowing

their quotes, thereby interfering with the ‘‘free flow

of prices in the market and imped[ing] attempts by

the market to reach the optimal competitive

spread.’’ Id. at p. 99 Accordingly, the SEC requested

that the NASD ‘‘modify the rule to eliminate its

undesirable effects, or to repeal it. Id.

6The Commission has stated that ‘‘[a]lthough the

amended excess spread rule may reduce some of

the anticompetitive concerns outlined in the 21(a)

Report, the Commission believes that the

amendment . . . may not completely satisfy the

NASD’s obligations under the Commission’s Order

with regard to the excess spread rule. Release No.

34–38180, supra note 3. Specifically, it may not

remove completely the anticompetitive incentives

for market makers to refrain from narrowing quotes

because the market makers’ quotation obligation

continues to be dependent to some extent upon

quotations of other market makers in the stock.’’ Id.

7Market makers in Nasdaq National Market

securities are able to assess whether they are

satisfying the 150% Excess Spread Rule on a daily

basis through use of the ‘‘Primary Market Maker

(PMM) Window’’ of Nasdaq Workstation II.

Specifically, while the PMM standards are used to

determine the eligibility of market makers to an

exemption from the NASD’s short-sale rule,

Nasdaq’s programs that enable market makers to

monitor their performance under the ‘‘average

spread’’ component of the PMM standards also can

be used by market makers to evaluate whether they

have satisfied the requirements of the 150% Excess

Spread Rule.

reconsideration shall not operate as a

stay of the withdrawal or toll the twenty

business day period noted in

subparagraph (d) above.

(2)–(3) No change.

* * * * *

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. Purpose

On January 16, 1997, the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) approved modifications

to NASD Rule 4613(d) on a temporary

basis through July 1, 1997.3 Specifically,

Rule 4613(d), which is commonly

known as the NASD’s ‘‘excess spread

rule,’’ presently provides that registered

market makers in securities listed on

The Nasdaq Stock Market (‘‘Nasdaq’’)

shall be precluded from being a

registered market maker in that issue for

20 business days if its average spread in

the security over the course of any full

calendar month exceeds 150 percent of

the average of all dealer spreads in such

issue for the month (‘‘150% Excess

Spread Rule’’).4

As noted in the NASD’s filing seeking

approval of the 150% Excess Spread

Rule on a temporary basis, the Rule is

designed to help ameliorate the adverse

consequences the 125% Excess Spread

Rule may have had on the

competitiveness and independence of

quotations displayed on the Nasdaq

market.5 At the same time, the NASD

and Nasdaq believe the 150% Excess

Spread Rule strikes a reasonable balance

between the need to eliminate any

constraints that the 125% Excess Spread

Rule may have placed on firms to adjust

their quotations and the need to avoid

fostering a market environment where

registered market makers can maintain

inordinately wide spreads and still

receive the benefits of being a market

maker, such as affirmative

determination exemptions and

preferential margin treatment.

Nevertheless, while Nasdaq and the

NASD believe the 150% Excess Spread

Rule will help to ensure that market

makers maintain at least a minimal level

of commitment to their issues, Nasdaq

and the NASD believe it is prudent to

not impose the Rule on a permanent

basis until there is a substantial basis to

conclude that the 150% Excess Spread

Rule has not contributed to or fostered

the same unintended consequences

created by the former 125% Excess

Spread Rule, such as the

interdependence of market maker quote

movements and the exacerbation of

locked and crossed market situations.

Accordingly, the SEC approved the

NASD’s proposal to implement the

150% Excess Spread Rule on a pilot

basis through July 1, 1997. During the

pilot period, Nasdaq and the NASD will

analyze market maker quotation

behavior to determine whether the

150% Excess Spread Rule has met its

dual objectives of removing constraints

on market maker quotation movements

and ensuring some minimal level of

commitment by market makers to their

issues. Throughout the pilot period,

Nasdaq and the NASD also will

proactively explore whether there are

other alternative means to achieve these

objectives without reliance on a

quotation-based evaluation criteria.6

The NASD and Nasdaq are proposing

to exclude market maker quotations in

Nasdaq SmallCap securities from

coverage under NASD Rule 4613(d).

This is because, unlike with Nasdaq

National Market securities, Nasdaq does

not presently calculate and display

through the Nasdaq system the average

spread of all market makers in Nasdaq

SmallCap securities or a comparison of

the size of an individual market maker’s

quoted spread in a Nasdaq SmallCap

security relative to the average spread of

all market makers in Nasdaq SmallCap

securities.7 Thus, Nasdaq does not

presently provide market makers in

SmallCap securities with any indication

as to whether they are satisfying the

requirements of the 150% Excess

Spread Rule.

Accordingly, given the pilot nature of

the 150% Excess Spread Rule and the

length of time necessary to make system

modifications to provide market makers

in Nasdaq SmallCap securities with the

ability to assess whether they are

satisfying Rule 4613(d), the NASD and

Nasdaq propose to eliminate market

maker quotations in Nasdaq SmallCap

securities from coverage under the

150% Excess Spread Rule. By excluding

market maker quotations in Nasdaq

SmallCap securities from the Rule, the

NASD and Nasdaq will not be

subjecting market makers in these

securities to a performance requirement

that market makers are incapable of

monitoring. This is particularly

important since failure to satisfy the

requirement of the Rule results in the

loss of registered market maker status

for a period of 20 business days. In

addition, for those Nasdaq National

Market securities that have trading

attributes similar to Nasdaq SmallCap

securities, elimination of the 150%

Excess Spread Rule for SmallCap

securities will create a ‘‘control group’’

that will afford Nasdaq a better

opportunity to evaluate the effects of the

150% Excess Spread Rule. The NASD

and Nasdaq anticipate, however, that

market makers in Nasdaq SmallCap

securities will be subject to the same
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices 11247

8See infra note 7 and accompanying text.

9Because the 150% Excess Spread Rule evaluates

a market maker’s spread over a full calendar month,

February 1997 was the first month in which market

maker spreads were evaluated pursuant to NASD

Rule 4613(d). Accordingly, March 1997 will be the

first month in which market makers will be subject

to the mandatory market maker withdrawals for 20

business days for noncompliance with the Rule.

10See Release 34–38180, supra note 3 and Order

Instituting Public Proceedings Pursuant to Section

19(h)(1) of the Securities Exchange Act of 1934,

Making Findings and Imposing Remedial Sanctions,

Securities Exchange Act Release No. 37538 (Aug. 8,

1996).

11 15 U.S.C. 78s(b)(2) (1988).

12 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

excess spread requirements, if any, as

market makers in the Nasdaq National

Market securities beyond July 1, 1997.

2. Statutory Basis

The NASD and Nasdaq believe that

the proposed rule change is consistent

with Section 15A(b)(6) of the Act.

Among other things, 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, to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system and in general to protect

investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD believes that the proposed

rule change will not result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. § 552, will be

available for inspection and copying at

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–97–13 and should be

submitted by [insert date 21 days from

date of publication].

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

After careful review, the Commission

finds, for the reasons set forth below,

that the NASD’s proposal is consistent

with the requirements of Section 15A of

the Act and the rules and regulations

thereunder applicable to the NASD and,

in particular, Section 15A(b)(6).

The Commission believes that it is

reasonable for the NASD to remove

application of the 150% Excess Spread

Rule to market maker quotations in

Nasdaq SmallCap securities because it is

difficult for market makers to monitor

their compliance with that Rule. This

stems from Nasdaq’s inability to

calculate and display through the

system the average spread of all market

makers in Nasdaq SmallCap securities

or a comparison of the size of an

individual market maker’s quoted

spread in a Nasdaq SmallCap security

relative to the average spread of all

market makers in Nasdaq SmallCap

securities.

The NASD also points out that

application of NASD Rule 4613(d) may

impose artificial constraints on market

makers’ quote movements.8 According

to the NASD, market makers may be less

apt to adjust their quotes in response to

market activity for fear that they will

violate the rule and be subject to

mandatory withdrawal for 20 business

days. The Commission agrees that this

is a possibility and prefers to eliminate

the potential restraint on market maker

quote movements to foster market maker

competition, protect the price discovery

process and preserve the integrity of

quotations in Nasdaq SmallCap

securities in furtherance of the

objectives of Section 15A(b)(6). While

the Commission approves removal of

the applicability of the NASD’s excess

spread rule to market maker quotations

in Nasdaq SmallCap securities,

however, it expects the NASD to

develop other means of stimulating and

measuring sound market making

performance for all Nasdaq stocks.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication in the Federal Register.

By accelerating the effectiveness of the

proposed rule change, market makers in

Nasdaq SmallCap securities will not be

subject to mandatory market maker

registration withdrawals for 20 business

days for noncompliance with the 150%

Excess Spread Rule.9 The Commission

reiterates that the NASD should study

alternative methods that would enhance

market making performance while

completely fulfilling the NASD’s

obligation regarding the excess spread

rule before the August 8, 1997 deadline

contained in the Commission’s Order.10

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,11 that the

proposed rule change (SR–NASD–97–

13) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–5983 Filed 3–10–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38364; File No. SR–PSE–

97–06]

March 4, 1997.

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Pacific Stock Exchange Incorporated

Relating to Changing the Corporate

Name From Pacific Stock Exchange

Incorporated to Pacific Exchange

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 February

27, 1997, the Pacific Stock Exchange

Incorporated (‘‘PSE’’ 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 is proposing to amend

its Article I, Section 1 of the