[Federal Register Volume 63, Number 88 (Thursday, May 7, 1998)]
[Notices]
[Pages 25253-25255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12142]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39936; File No. SR-NASD-98-26]


Self-Regulatory Organization; Notice of Filing and Order Granting 
Accelerated Partial Approval to Amendment No. 3 to Proposed Rule 
Changes 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

April 30, 1998.

I. Introduction

    On March 19, 1998, 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 196-4 thereunder,\2\ proposed rule changes to: (a) 
Implement, on a pilot basis, new Primary Nasdaq Market Maker (``PMM'') 
standards for all Nasdaq National Market (``NNM'') securities; (b) 
extend the NASD's Short Sale Rule pilot until November 1, 1998; and (c) 
extend the suspension of existing PMM standards until May 1, 1998. On 
March 30, 1998, the Commission issued notice of the filing and 
approved, on an accelerated basis, the portions of the filing extending 
the NASD's Short Sale Rule pilot and the suspension of existing PMM 
standards.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 39819 (March 30, 1998) 63 FR 16841 
(April 6, 1998).
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    On April 29, 1998, Nasdaq filed Amendment No. 3 to the proposal,\4\ 
proposing to: (a) Extend the comment period by 30 days to May 27, 1998; 
(b) continue to suspend the current PMM standards until July 1, 1998; 
(c) extend the NASD's Short Sale Rule pilot until January 4, 1999; (d) 
change the dates during which the PMM pilot will run to July 1, 1998, 
through January 4, 1999. Nasdaq also is proposing to amend subparagraph 
(g) of NASD Rule 4612 to change the method for determining how market 
makers that are not managers or co-managers in an underwriting 
syndicate of a secondary offering may qualify as PMMs. Nasdaq has 
requested accelerated approval of the suspension of the current PMM 
standards.
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    \4\ See letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division of Market Regulation, SEC, dated April 29, 1998. Exchange 
Act Release No. 39819 discussed Amendment No. 1 and Amendment No. 2 
to the filing, which were filed with the Commission on March 25 and 
26, 1998, respectively.
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Background

    Present, 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. The implementation of 
new Order Execution Rules \5\ and the concurrent move towards a more 
order-driven, rather than a quote-driven, market raised questions about 
the continued relevance of those PMM standards. As a result, such 
standards were suspended beginning in early 1997.\6\ Currently, all 
market makers are designated as PMMS.
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    \5\ On August 29, 1996, the Commission promulgated a new rule, 
the Limit Order Display Rule (Exchange Act Rule 11Ac1-4) and adopted 
amendments to the Quote Rule (Exchange Act Rule 11Ac1-1), which 
together are designated to enhance the quality of published 
quotations for securities and promote competition and pricing 
efficiency in U.S. securities markets (collectively, the ``Order 
Execution Rules''). See Securities Exchange Act Release No. 37619A 
(September 6, 1996) 61 FR 48290 (September 12, 1996) (``Order 
Execution Rules Adopting Release'').
    \6\ See Exchange Act Release No. 38294 (February 14, 1997) 62 FR 
8289 (February 24, 1997) (approving temporary suspension of PMM 
standards); Exchange Act Release No. 39198 (October 3, 1997) 62 FR 
53365 (October 14, 1997) (extending suspension through April 1, 
1998); Exchange Act Release No. 39819 (March 30, 1998) 63 FR 16841 
(April 6, 1998) (extending suspension through May 1, 1998).
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    Since February 1997, Nasdaq has worked to develop PMM standards 
that are more meaningful in an increasingly order-driven environment 
and that better identify firms engaged in responsible market making 
activities deserving of the benefits associated with begin a PMM, such 
as being exempt from NASD Rule 3350, the NASD's short sale rule. The 
NASD now proposes to suspend the existing PMM standards and to 
implement new standards on a pilot basis from July 1, 1998, until 
January 4, 1999. The NASD intends the new standards to better evaluate 
whether a market maker providers meaningful liquidity to the market. To 
determine whether a particular market maker is such a provider 
liquidity, Nasdaq will analyze that market maker's trading activity 
using a new test.
    For the reasons discussed below, the Commission has determined to 
grant accelerated approval of Nasdaq's request to continue to suspend 
the current PMM standards until July 1, 1998, as requested in Amendment 
No. 3. Further, given the proposal's complexity and the Commission's 
desire to give the public sufficient time to consider the proposal, the 
Commission has extended the comment period for the proposed rule 
changes, as amended, to May 27, 1998.

II. Proposed Rule Changes

    As discussed in detail in Exchange Act Release No. 39819, Nasdaq is 
proposing a new set of PMM standards. In the current filing, Nasdaq is 
proposing an adjustment to the PMM standards with respect to markets 
that are not managers or co-managers in an underwriting syndicate of a 
secondary offering. In particular, Nasdaq proposes to amend 
subparagraph (g)(2) of NASD Rule 4612 to change the method for 
determining how market makers that are not managers or co-managers in 
an underwriting syndicate of a secondary offering may qualify as PMMs. 
Under the previous rule, a market maker could become a PMM after the 
secondary offering had been announced or a registration statement had 
been filed with the Commission if the market maker was registered in 
the security and satisfied the PMM standards for 40 days or until the 
registration became effective, whichever occurred first. Thus, for 
secondary offerings the rule contained a variable ``review period,'' 
during which a market maker was required to meet PMM standards. Due to 
technological constraints and the fact that PMM calculations under the 
proposed rule are more complex than they were under the previous rule, 
Nasdaq, in developing the PMM pilot, has been unable to build a system 
that is able to make the PMM calculation using a variable review 
period. Additionally, it has become clear that the existing rule for 
secondary public offerings may be rendered less meaningful because PMM 
status under the proposed new standards is determined by comparing and 
examining market makers' share volume and number of trades during 
definite time periods. Thus, introducing a variable time period could 
have consequences that were not foreseen when the new standards were 
crafted.
    Nasdaq recognizes, however, that market makers should be held to a 
more stringent standard before they may trade secondary offerings as 
PMMs. Accordingly, Nasdaq proposes to amend NASD Rule 4612 so that a 
market maker that wishes to register and become a PMM in a secondary 
offering will have to fulfill the following two conditions. First, the 
market maker must register and become a market maker in a security for 
40 days or until the registration becomes effective, whichever occurs 
first. Second, at the time the registration becomes effective or 40 
days passes, the market maker

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must be a PMM in 80% or more of the Nasdaq National Market securities 
in which it is registered (``80% Firm''). This proposal provides a 
meaningful measure as to whether a market maker should be a PMM after a 
secondary offering has been announced because it will require market 
makers to register and be in a stock for a meaningful time period 
(which may be as long as 40 days) and to be an 80% Firm before it may 
qualify as a PMM. Furthermore, Nasdaq notes that this approach is in 
line with the provisions of NASD rule 4612 regarding initial 
registration situations and initial public offerings (``IPO'').
    Nasdaq also proposes to amend subparagraph (g)(2)(B) of NASD rule 
4612, to clarify the timing for the imposition of a 10 day prohibition 
from participating in an IPO (``Over 10 Day Penalty''). This amendment 
would codify an interpretation of subparagraph (g)(2)(B) of NASD Rule 
4612, that was announced in a For Your Information included in the June 
1996 edition of the NASD's Notice to Members. Specifically, the 
amendment would clarify that if a PMM in an IPO withdraws on an 
unexcused basis in the first review period, the 10 Day Penalty will 
commence on the next business day after the unexcused withdrawal. 
Additionally, if a PMM in an IPO fails to meet the applicable PMM 
thresholds during the first review period, the 10 Day Penalty will 
begin on the day the market loses its PMM designation (the third 
business day of a month).
* * * * *
    The proposed rule language follows. Additions are italicized; 
deletions are bracketed.

Rule 4612

    (a)-(f) No Change
    (g) In registration situations:
    (1) No Change
    (2) Notwithstanding paragraph (g)(1) above, after an offering in a 
stock has been publicly announced or a registration statement has been 
filed with the Securities and Exchange Commission, no market maker may 
register in the stock as a Primary Nasdaq Market Maker unless it meets 
the requirements set forth below:
    (A) For secondary offerings[:
    (i)], the secondary offering has become effective [and the market 
maker has satisfied the qualification criteria in the time period 
between registering in the security and the offering becoming 
effective] or 40 days have elapsed since the market maker registered in 
the security (whichever occurs first), and at such time, the market 
maker is a Primary Nasdaq Market Maker in 80% or more of the Nasdaq 
National Market Maker securities in which it is registered; provided, 
however, that if the member is a manager or co-manager of the 
underwriting syndicate for the secondary offering and it is a [PMM] 
Primary Nasdaq Market Maker in 80% or more of the Nasdaq National 
Market securities in which it is registered, the member is eligible to 
become a [PMM] Primary Nasdaq Market Maker in the issue prior to the 
effective date of the secondary offering regardless of whether the 
member was a registered market maker in the stock before the 
announcement of the secondary offering[; or
    (ii) the market maker has satisfied the qualification criteria for 
40 calendar days].
    (BN) For initial public offerings (IPOs):
    (i) the market maker may register in the offering and immediately 
become a Primary Nasdaq Market Maker if it is a Primary Nasdaq Market 
Maker in 80% of the securities in which it has registered; provided 
however, that if[, at the end of the first review period,] the Primary 
Nasdaq Market Maker has withdrawn on an unexcused basis from the 
security at any time during the first review period or has not 
satisfied the [qualification criteria] applicable thresholds at the end 
of the first review period, it shall not be afforded a Primary Nasdaq 
Market Maker designation on any subsequent initial public offerings for 
the next 10 business days following the unexcused withdrawal or the 
next 10 business days following the day on which the Primary Nasdaq 
Market Maker is notified that it failed to satisfy the applicable 
thresholds for the first review period (as applicable); or
    (ii) No Change.
    (C) No Change.
    (3) No Change
    (h) [The Board of Governors may modify the threshold standards set 
forth in paragraphs (a) and (b) above if it finds that maintenance of 
such standards would result in an adverse impact on a class of 
investors or on Nasdaq.] This rule shall be in effect beginning July 1, 
1998, and remain in effect until January 4, 1999.
* * * * *

NASD Rule 3350

    (a)-(k) No Changes
    (1) This Rule shall be in effect until [November 1, 1998] January 
4, 1999.
* * * * *

III. Discussion

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the extension of the current suspensions 
of existing PMM standards through July 1, 1998, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder. As the Commission discussed in its previous order relating 
to the PMM pilot,\7\ extending the suspension of the current PMM 
standards to accommodate implementing the new pilot is consistent with 
Section 15A(b)(6) \8\ of the Exchange Act. Section 15A(b)(6) of the 
Exchange Act requires that the NASD's rules be designed, among other 
things, to prevent fraudulent and manipulative acts and practices and 
to promote just and equitable principles of trade. The Commission 
believes that continued suspension of the current PMM standards will 
facilitate Nasdaq's efforts in implementing more meaningful PMM 
standards which should help to enhance market liquidity by rewarding 
those market makers that meet the new standards. As a result, 
continuing the suspension of the current PMM standards is consistent 
with Section 15A(b)(6) of the Exchange Act.
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    \7\ See Exchange Act Release No. 39819 (March 30, 1998) 63 FR 
16841 (April 6, 1998) (extending suspension through May 1, 1998).
    \8\ 15 U.S.C. 78o-3(b)(6).
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    In finding that the suspension of the existing PMM standards is 
consistent with the Exchange Act, the Commission reserves judgment on 
the merits of the Short Sale Rule, any market maker exemptions to that 
rule and the proposed new PMM standards. The Commission recognizes that 
the current Short Sale Rule already has generated significant public 
comment. Such commentary, along with any further comment on the 
interaction of the Short Sale Rule with the proposed new PPM standards, 
will help guide the Commission's evaluation of the Short Sale Rule and 
new PMM standards. During the PMM pilot period, the Commission 
anticipates that the NASD will continue to address the Commission's 
questions and concerns and provide the Commission staff with any 
relevant information about the practical effects and the operation of 
the revised PMM standards and possible interaction between those 
standards and the NASD's Short Sale Rule.
    As proposed, the new PMM standards will become effectively July 1, 
1998, when the suspension of the existing PMM standards, under 
Amendment No. 3, expires. Nasdaq notes that currently all market makers 
registered in a security are PMMs due to the suspension of the previous 
PMM standards, and will continue to be so

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designed on the pilot's proposed start date of July 1, 1998. Under the 
one-month look-back provision in the PMM pilot program, Nasdaq will 
consider the previous calendar month and the current month to determine 
a market maker's continued PMM eligibility if the market maker attained 
PMM status in a security during the previous month, but fails to meet 
the applicable thresholds for the current month. Nasdaq recognizes that 
once the pilot begins on July 1, 1998, PMMs will not have the ability 
to avail themselves of the one-month look-back provision because there 
will be no meaningful trading to analyze prior to July 1, 1998. Thus, 
to give PMMs the full benefit of the one-month look-back period and to 
allow market makers time to adjust their trading activity to the new 
standards, Nasdaq proposes to implement the new standards so that no 
market maker that is designated as a PMM when the pilot begins on July 
1, 1998, will lose its PMM status--based on a failure to meet the new 
PMM standards--until September 3, 1998. Nasdaq believes, and the 
Commission agrees, that it is fair to give market makers this time to 
make necessary adjustments to their trading activity to help them 
maintain their PMM designation, particularly since PMM standards have 
been suspended for more than a year and the new PMM standards are more 
stringent than the previous standards. The PMM pilot, pursuant to 
Amendment No. 3, would run until January 4, 1999.
    The Commission finds good cause for approving the extension of the 
suspension of existing PMM standards prior to the 30th day after the 
date of publication of notice of filing thereof. It could be disruptive 
to market making to reintroduce outdated PMM standards for a brief 
period prior to implementing a new PMM pilot. Further, the current PMM 
standards have been suspended until May 1, 1998, at which time the old 
PMM standards--which are not a meaningful measure of a market maker's 
liquidity-providing activity--would be used again to determine market 
makers' PMM status. To ensure continuity in the PMM standards and the 
regulation of short selling activity, to maintain orderly markets, and 
to avoid confusion, it is necessary to continue the suspension of the 
prior PMM standards until the new standards are implemented on July 1, 
1998.

IV. Solicitation of Comments

    Given the proposal's complexity and the Commission's desire to give 
the public sufficient time to consider the proposal, the Commission 
hereby grants Nasdaq's request to extend the comment period for the 
proposed rule changes, as amended, to May 27, 1998. Interested persons 
are invited to submit written data, views, and arguments concerning the 
foregoing, including whether the proposed rule changes are consistent 
with the Exchange Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, DC 20549. Copies of the 
submissions, 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 May 27, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\9\ that Amendment No. 3 to the proposed rule change, SR-
NASD-98-26, which extends, on an accelerated basis, the suspension of 
the current PMM standards to July 1, 1998, be and hereby is 
approved.\10\
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ In approving the proposal, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation. The proposal likely will provide the Commission with data 
necessary to enable it to evaluate the impact of the proposed PMM 
standards on the Nasdaq market and market participants. 15 U.S.C. 
78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-12142 Filed 5-6-98; 8:45 am]
BILLING CODE 8010-01-M