3370 Federal Register / Vol. 63, No. 14 /Thursday, January 22, 1998 / Notices

1 15 U.S.C. § 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

3The NASD has requested permanent approval of

its short sale rule. Securities Exchange Act Release

No. 38979 (Aug. 26, 1997), 62 FR 46537 (Sept. 3,

1997) [File No. SR–NASD–97–58]. In response to its

solicitation of comments on the filing (SR–NASD–

97–58), the Commission has received 352 comment

letters to date, which will be considered in

connection with the Commission’s determination

on SR–NASD–97–58.

4A 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 Act, which rule is

incorporated into Nasdaq’s Rule by NASD Rule

3350(k)(1).

5Securities Exchange Act Release No. 34277

(June 29, 1994), 59 FR 34885 (July 7, 1994) [File No.

SR–NASD–92–12] (‘‘Short Sale Rule Approval

Order’’).

6The Rule was extended on several occasions.

See Securities Exchange Act Release No. 39140

(Sept. 26, 1997), 62 FR 52170 (Oct. 6, 1997) [File

No. SR–NASD–97–65]; Securities Exchange Act

Release No. 37917 (Nov. 1, 1996), 61 FR 57934

(Nov. 8, 1996) [File No. SR–NASD–96–41];

Securities Exchange Act Release No. 36171 (Aug.

30, 1995), 60 FR 46651 (Sept. 7, 1995) [File No. SR–

NASD–95–35]. The most recent extension of the

pilot program through January 15, 1998, was to

allow Nasdaq and the NASD to develop more

meaningful primary market maker standards.

7Nasdaq calculates the inside bid or best bid from

all market makers in the security (including bids on

behalf of 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.’’ Specifically, an

‘‘up bid’’ is denoted by a green ‘‘up’’ arrow and a

‘‘down bid’’ is denoted by a red ‘‘down’’ arrow. To

effect a ‘‘legal’’ short sale on a down bid, the short

sale must be executed at a price at least a 1/16th

of a point above the current inside bid. Conversely,

if the security’s symbol has a green ‘‘up’’ arrow next

to it, members can effect short sales in the security

without any restrictions.

8Under 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 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

requalify for designation as a PMM by satisfying the

threshold standards in the next review period.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–1424 Filed 1–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39551; File No. SR–NASD–

97–94]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Extending the Pilot Program of the

NASD’s Short Sale Rule and the

Amendment to the Definition of

‘‘Legal’’ Short Sale

January 14, 1998.

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

Securities Exchange Act of 1934

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

notice is hereby given that on December

23, 1997, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) 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 NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons and to

grant accelerated approval of the

proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to extend

until April 15, 1998, the pilot program

of the NASD’s short sale rule (‘‘Rule’’)

and the recently-approved amendment

to the definition of ‘‘legal’’ short sale.3

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

* * * * *

NASD Rule 3350

(1) This section shall be in effect until

April 15, 1998 [January 15, 1998].

* * * * *

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 V below. Nasdaq 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 and Description of the

NASD’s Short Sale Rule

On June 29, 1994, the SEC approved

the rule applicable to short sales 4 in

Nasdaq National Market (‘‘NNM’’)

securities on an eighteen-month pilot

basis through March 5, 1996.5 The

termination date for the pilot program

for the Rule was subsequently extended

until January 15, 1998.6

The Rule prohibits member firms

from effecting short sales at or below the

current inside bid as disseminated by

Nasdaq whenever that bid is lower than

the previous inside bid.7 The Rule is in

effect during normal domestic market

hours (9:30 a.m. to 4:00 p.m., Eastern

Time). To ensure that market maker

activities that provide liquidity and

continuity to the market are not

adversely constrained when the Rule is

invoked, the Rule provides an

exemption to ‘‘qualified’’ Nasdaq market

makers (i.e., those market makers that

meet the Primary Market Maker

(‘‘PMM’’) standards). Even if a market

maker is able to avail itself of the

qualified market maker exemption, it

can only utilize the exemption from the

Rule for transactions that are made in

connection with bona fide market

making activity. If a market maker does

not satisfy the requirements to be a

qualified market maker, it can remain a

market maker in the Nasdaq system,

although it can not take advantage of the

exemption from the Rule.

Since the Rule has been in effect,

there have been three methods used to

determine whether a market maker is

eligible for the market maker exemption.

Specifically, from September 4, 1994

through February 1, 1996, Nasdaq

market makers who maintained a

quotation in a particular NNM security

for 20 consecutive business days

without interruption were exempt from

the Rule for short sales in that security,

provided that short sales were made in

connection with bona fide market

making activity (the ‘‘20-day’’ test).

From February 1, 1996 until February

14, 1997, the ‘‘20-day’’ test was replaced

with a four-part quantitative test known

as the Nasdaq PMM Standards. 8 On

February 14, 1997, the PMM standards

were waived for all NNM securities due

to the effects of the SEC’s Order

Handling Rules and corresponding

NASD rule change and system

modifications on the operation of the
Federal Register / Vol. 63, No. 14 /Thursday, January 22, 1998 / Notices 3371

9Securities Exchange Act Release No. 38294

(February 14, 1997), 62 FR 8289 (February 24, 1997)

[File No. SR–NASD–97–07]. On October 3, 1997,

the waiver of PMMs was extended until April 1,

1998. Securities Exchange Act Release No. 39198

(Oct. 3, 1997), 62 FR 53365 (Oct. 14, 1997) [SR–

NASD–97–3].

10NASD Rule 3350(c)(2)–(8). The Rule also

provides that a member not currently registered as

a Nasdaq market maker in a security 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 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.

11Short Sale Rule Approval Order, supra note 5,

at 34891.

12 Id. at 34892.

13When the NASD’s Rule was first considered by

the Commission, the SEC received 397 comment

letters on the proposal, with 275 comments

opposed to the Rule and 122 comments in favor of

the Rule. Those commenters opposed to the Rule

argued that: (1) the NASD had failed to provide

sufficient evidence of the need for the Rule or

demonstrate the appropriateness of the Rule based

on a ‘‘bid’’ test instead of ‘‘tick’’ test; (2) the PMM

standards will have negative effects on both market

makers and the Nasdaq market; and (3) the Rule is

inconsistent with the requirements of the Act.

14 In particular, before considering any NASD

proposal to extend, modify, permanently

implement or terminate the Rule, the Commission

requested that the NASD examine: (1) the effects of

the Rule on the amount of short selling; (2) the

length of time that the Rule is in effect (i.e., the

duration of down bid situations); (3) the amount of

non-market maker short selling permitted under the

Rule; (4) the extent of short selling by market

makers exempt from the Rule; (5) whether there

have been any incidents of perceived ‘‘abusive short

selling’’; (6) the effects of the Rule on spreads and

volatility; (7) whether the behavior of bid prices has

been significantly altered by the Rule; and (8) the

effect of permitting short selling based on a

minimum increment of 1⁄16th.

15 In July 1996, the NASD’s Economic Analysis

Department completed a study on the economic

impact of the Rule, which concluded that the Rule

has had no adverse impact on the market. The

Economic Impact of the Nasdaq Short Sale Rule,

NASD Economic Research Department (July 23,

1996) (‘‘July 1996 Short Sale Study’’). In the same

month, NASD submitted a proposal to adopt the

Rule on a permanent basis. Securities Exchange Act

Release No. 37942 (July 29, 1996), 61 FR 40693

(Aug. 5, 1996) [SR–NASD–96–30]. Because the

NASD believed additional quantitative analysis was

necessary to evaluate the effects of the Rule, the

NASD withdrew this rule filing. In August 1997, the

NASD’s Economic Analysis Department completed

a second study on the economic impact of the Rule,

which further concluded that the Rule has had no

adverse impact on the market. The Nasdaq Stock

Market Short Sale Rule: Analysis of Market Quality

Effects and The Market Maker Exemption, NASD

Economic Research Department (August 7, 1997)

(‘‘August 1997, Short Sale Study’’).

16Securities Exchange Act Release No. 38979

(Aug. 26, 1997), 62 FR 46537) (Sept. 3, 1997) [File

No. SR–NASD–97–58].

17Securities Exchange Act Release No. 38975

(Aug. 26, 1997), 62 FR 46535 (Sept. 3, 1997) [File

No. SR–NASD–97–59].

18See Securities Exchange Act Release No. 39140

(Sept. 26, 1997), 62 FR 52170 (Oct. 6, 1997) [File

No. SR–NASD–97–65].

19Securities Exchange Act Release No. 39139

(Sept. 26, 1997), 62 FR 52169 (Oct. 6, 1997) [File

No. SR–NASD–97–59]. The amendment provides

that a ‘‘legal’’ short sale can be effected on a down

bid: at a price of 1⁄16th above the bid when the

inside spread is 1⁄16th or greater; or at a price equal

to or greater than the offer price when the inside

spread is less than 1⁄16th.

four quantitative standards.9 For

example, among other effects, the

requirement that market makers display

customer limit orders adversely affected

the ability of market makers to satisfy

the ‘‘102% Average Spread Standard.’’

Furthermore, in an effort to not

constrain the legitimate hedging needs

of options market makers, the 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.

The Rule also incorporates seven

exemptions contained in Rule 10a–1

under the Act (‘‘Rule 10a-1’’) that are

relevant to trading on Nasdaq.10

2. Proposal to Extend the Short Sale

Rule

When the Commission approved the

Rule on a temporary basis, it made

specific findings that the Rule was

consistent with Sections 11A, 15A(b)(6),

15A(b)(9), and 15A(b)(11) of the Act.

Specifically, 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 NNM securities is consistent with the

Act.’’ 11 In addition, the Commission

stated that it ‘‘believes that the NASD’s

short sale bid-test, including the market

maker exemption, is a reasonable

approach to short sale regulation of

Nasdaq National Market securities and

reflects the realities of its market

structure.’’ 12 However, in light of the

Commission’s concerns with adverse

comments made about the Rule and the

Commission’s own concerns with the

structure and impact of the Rule,13 the

Commission determined to approve the

Rule on a temporary basis to afford the

NASD and the SEC an opportunity

study the effects of the Rule and its

exemptions.14 To address these

concerns, in July 1996 and in August

1997, the NASD’s Economic Research

Department prepared two separate

studies on the economic impact of the

Rule, which concluded, among other

things, that the Rule had no adverse

impact on the market.15 Accordingly, on

August 8, 1997, the NASD submitted a

proposed rule change that requested

permanent approval of the Rule.16

Additionally, on August 14, 1997, the

NASD and Nasdaq submitted a

proposed rule change to amend the

definition of ‘‘legal’’ short sale in the

Rule.17

On September 26, 1997, the

Commission approved an extension of

the Rule until January 15, 1998, to allow

Nasdaq, to develop, and receive the

required board approval for, more

meaningful PMM standards.18 On the

same day, the Commission also

approved on a temporary basis until

January 15, 1998, the proposed

amendment to the definition of ‘‘legal’’

short sale.19 During its September 1997

meeting, the Nasdaq Board of Directors

approved revised PMM standards,

which were forwarded to, and approved

by, the NASD Board of Governors at its

October 9, 1997 meeting.

The NASD has had ongoing

discussions with Commission staff

regarding the PMM standards. In light of

the foregoing, the NASD and Nasdaq are

requesting an extension of the Rule until

April 15, 1998. The extension of time

also will allow the NASD and Nasdaq to

provide Commission staff with

additional information about the

practical effects and the operation of the

revised PMM standards, and to explore

other options to PMM standards, such

as a customer facilitation exemption for

market makers. The NASD and Nasdaq

also are requesting an extension to April

15, 1998, of the amendment to the

definition of ‘‘legal’’ short sale, which

previously was approved on a

temporary basis until January 15, 1998.

The NASD believes the proposed rule

change is consistent with Section

25A(b)(6) of the Act because the Rule is

premised on the same anti-manipulation

and investor protection concerns that

underlie the SEC’s own short sale rule,

Rule 10a–1 under the Act. In particular,

as with Rule 10a–1, the NASD believes

its Rule promotes just and equitable

principles of trade by permitting long

sellers access to market prices at any

time, while constraining the execution

of potentially abusive and manipulative

short sales at or below the bid in a

declining market. In addition, as with

Rule 10a–1, Nasdaq believes its Rule

removes impediments to a free and open

market for long sellers and helps to

assure liquidity at bid prices that might

otherwise be usurped by short sellers.

Lastly, because the immediate

beneficiaries of the Rule are

shareholders of NNM companies,

Nasdaq believes its Rule is designed to

protect investors and the public interest.

At the same time, given that the Rule

does not constrain short sales in a

raising market or prohibit the execution
3372 Federal Register / Vol. 63, No. 14 /Thursday, January 22, 1998 / Notices

20 17 CFR 200.30–3(a)(12)(1997).

of short sales in a declining market

above bid prices, Nasdaq believes the

Rule does not diminish the important

pricing efficiency and liquidity benefits

that legitimate short selling activity

provides.

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

Comments were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The NASD requests that its proposal

to extend the effectiveness of the Rule

and the amendment to the definition of

a ‘‘legal’’ short sale until April 15, 1998,

be approved on an accelerated basis

prior to January 15, 1998.

IV. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Commission finds that the

NASD’s proposed rule change seeking to

extend the pilot of the Rule and the

amendment to the definition of ‘‘legal’’

short sale through April 15, 1998, is

consistent with the Act and the rules

and regulations promulgated

thereunder. Specifically, the

Commission finds that the proposed

rule change is consistent with Section

15A(b)(6) of the Act which requires that

the NASD rules be designed, among

other things, to facilitate securities

transactions and to protect investors and

the public interest. The Commission

believes that the proposed rule change

is consistent with the Act because

extension of the pilot and the

amendment to the definition of a ‘‘legal’’

short sale for a short period of time will

allow the Commission and the NASD to

consider the potential problems

associated with short selling, the

changing expectations of Nasdaq market

participants and the potential for

competitive disparity between the

exchange markets and the over-thecounter market. This extension also will

afford the NASD time to submit to the

Commission revised PMM standards

and will allow the Commission to

review on a contemporaneous basis

these two integrally related rules (i.e.,

the short sale and PMM rules). Once the

NASD develops reasonable PMM

standards, the Commission will be in a

better position to evaluate the need for

a short sale rule as well as the

appropriateness of an exemption for

PMMs.

The Commission also finds good

cause for approving the proposed rule

change prior to the 30th day after the

date of publication of notice of filing

thereof. The Commission believes that it

is appropriate to approve on an

accelerated basis the extension of the

pilot program of the Rule and the

amendment to the definition of ‘‘legal’’

short sale through April 15, 1998,

because it will ensure the continuous

operation of the Rule and the

amendment to the definition of ‘‘legal’’

short sale, while the NASD addresses

the Commission’s questions and

concerns, provides Commission staff

with additional information about the

practical effects and the operation of the

revised PMM standards, and explores

other options to PMM standards, such

as a customer facilitation exemption for

market makers.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

People making whiten 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 in

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the NASD’s principal offices. All

submissions should refer to File No.

SR–NASD–97–94 and should be

submitted by February 11, 1998.

It is therefore ordered, pursuant to

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

proposed rule change, SR–NASD–97–94

be, and hereby is approved through

April 15, 1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–1422 Filed 1–21–98; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Region VIII Advisory Council Meeting;

Public Meeting

The U.S. Small Business

Administration Regional VIII Advisory

Council located in the geographical area

of Salt Lake City, Utah, will hold a

public meeting at 9:00 a.m. on

Wednesday, February 18, 1998, at the

Salt Lake Area Chamber of Commerce,

Media Room, at 175 East 400 South,

Suite 600, Salt Lake City, to discuss

such matters as may be presented by

members, staff of the U.S. Small

Business Administration, or others

present.

For further information, write or call Stan

Nakano, District Director, U.S. Small

Business, 125 South State Street, Salt Lake

City, Utah 84138, (801) 524–5804.

Eugene Carlson,

Associate Administrator, Office of

Communication & Public Liaision.

[FR Doc. 98–1410 Filed 1–21–98; 8:45 am]

BILLING CODE 8025–01–M

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Reports, Forms and Recordkeeping

Requirements Agency Information

Collection Activity Under OMB Review

AGENCY: Office of the Secretary, DOT.

ACTION: Notice and request for

comments.

SUMMARY: In compliance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3501 et seq.), this notice

announces that the Information

Collection (ICR) abstracted below has

been forwarded to the Office of

Management and Budget (OMB) for

review and comment. The ICR describes

the nature of the information collection

and its expected burden. The Federal

Register Notice with a 60-day comment

period soliciting comments on the

following collection of information was

published on October 30, 1997 [62 FR

58858].

DATES: Comments must be submitted on

or before February 23, 1998.

FOR FURTHER INFORMATION CONTACT:

Judith Street, ABC–100; Federal

Aviation Administration; 800

Independence Avenue, S.W.;