Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 / Notices 25253

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

2 17 CFR 240.19b–4.

3Exchange Act Release No. 39819 (March 30,

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

4See 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.

5On 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’’).

6See 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).

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

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.

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 orderdriven, 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.

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
25254 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 / Notices

7See 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).

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.

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
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 / Notices 25255

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).

11 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3The Exchange also submitted a technical

amendment to the proposed rule change to correct

typographical errors in the original filing. See Letter

from Michael D. Pierson, Senior Attorney,

Regulatory Policy, Exchange, to Jeffrey Schwartz,

Special Counsel, Division of Market Regulation,

Commission, dated April 28, 1998.

designed on the pilot’s proposed start

date of July 1, 1998. Under the onemonth 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 onemonth 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 onemonth 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

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Jonathan G. Katz,

Secretary.

[FR Doc. 98–12142 Filed 5–6–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39934; File No. SR–PCX–

98–20]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Pacific Exchange, Inc. To Discontinue

the Exchange’s SCOR Marketplace

April 30, 1998.

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

Securities Exchange Act of 1934

(‘‘Exchange Act’’) 1 and Rule 19b–4

thereunder,2 notice is hereby given that

on April 16, 1998, the Pacific Exchange,

Inc. (‘‘PCX’’ 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.3

The Exchange has designated this

proposal as one that does not

significantly affect the protection of

investors or the public interest, does not

impose any significant burden on

competition, and by its terms does not

become operative for 30 days after the

date of the filing. In addition, the

Exchange gave the Commission written

notice of its intent to file the proposed

rule change, along with a brief

description and text of the proposed

rule change, at least five business days

prior to the date of filing of the

proposed rule change. As a result, the

proposal is effective upon filing under

Exchange Act Section 19(b)(3)(A)(iii)

and Rule 19b–4(e)(6) thereunder. 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

discontinue its Small Corporate Offering

Registration (‘‘SCOR’’) Marketplace and

to remove its rules on the SCOR

Marketplace from the Rules of the

Exchange. The text of the proposed rule

change is attached as Exhibit A.