Federal Register / Vol. 60, No. 12 / Thursday, January 19, 1995 / Notices 3887

7 In the 1994 Extension Order, the Commission

requested views on numerous issues presented by

the pilot program, and requested that the

Participants submit reports to the Commission on

those issues by September 30, 1994. See Supra note

4. The Commission received a report from the

Philadelphia Stock Exchange as an attachment to its

proposed rule change requesting an extension of the

Phlx’s pilot procedures for OTC/UTP. See letter

from William W. Uchimoto, General Counsel, Phlx,

to Elizabeth Prout, Division of Market Regulation,

Commission, dated December 21, 1994 (attachment

to File No. SR–PHLX–94–70). The other

Participants have not complied with the

Commission order, and must respond to the

Commission request immediately.

8Prior to 1985, the Commission generally did not

permit exchanges to extend UTP to OTC securities.

In 1985, the Commission determined that it would

be appropriate to permit exchanges, on a temporary

basis and subject to certain limitations, to extend

UTP up to a maximum of 25 OTC securities. These

limitations included the requirement that the NASD

and exchanges seeking to extend UTP to OTC

securities enter into a plan for consolidated

transaction and quotation dissemination. See

Securities Exchange Act Release No. 22412

(September 16, 1985), 50 FR 38640. In 1986, the

Midwest Stock Exchange (currently the Chicago

Stock Exchange, or ‘‘Chx’’) entered into an interim

plan which subsequently was superseded by the

Plan currently operating on a pilot basis. In 1990,

the Commission expanded the maximum number of

eligible securities to 100. See 1990 Approval Order,

supra note 3.

9See letter from George T. Simon, Foley &

Lardner, to Katherine England, Assistant Director,

Commission, dated January 9, 1995. This letter also

concludes that, when the Plan is finally approved,

all NNM stocks would be eligible for trading.

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1993).

3 In Amendment No. 1, the CBOE adds the

requirement that for a short sale in a Nasdaq/NM

security involved in an M&A to qualify as an

exempt hedge transaction pursuant to the current

proposal, the M&A must be publicly announced.

See letter from Michael L. Meyer, Schiff Hardin &

Waite, to Francois Mazur, Attorney, Division of

Market Regulation (‘‘Division’’), Commission, dated

September 29, 1994 (‘‘CBOE Amendment No. 1’’).

4 In Amendment No. 1, the PSE adds the

requirement that for a short sale in a Nasdag/NM

Continued

review the exemptive relief in light of

any comments received.

III. Outstanding Issues

In the 1994 Extension Order, the

Commission noted several areas of

unresolved issues concerning the Plan.7

These issues include, among other

matters, whether the Commission

should continue to limit the number of

OTC securities that may be traded on

exchanges pursuant to UTP. Currently,

exchanges may extend UTP up to a

maximum of 100 securities.8 To date,

the Commission has solicited comment

on this and other matters and has not

received evidence that expanding the

number of securities would have a

negative effect on the markets or the

protection of investors. Moreover, the

Commission recently received a letter

from the Chx requesting that the

Commission expand the number of

eligible securities from 100 to 500.9

Accordingly, the Commission solicits

comment specifically on whether it is

appropriate to permit exchanges to

extend UTP to a maximum of 500 OTC

securities for an interim period, and

whether all NNM securities should be

available for extensions of UTP if the

Commission determines that permanent

approval of the Plan is appropriate. The

Commission preliminarily believes that,

after consideration of comments

received, it may be appropriate to

expand the number of eligible securities

prior to the Commission’s review of

other matters associated with the Plan

in August 1995.

The Commission also notes other

areas for commenters to address: (1)

Whether the BBO calculation for the

relevant securities should be based on

price and time only (as currently is the

case) or if the calculation should

include size of the quoted bid or offer;

and (2) whether there is a need for an

intermarket linkage for order routing

and execution and an accompanying

trade-through rule.

IV. Solicitation of Comment

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 plan

amendment that are filed with the

Commission, and all written

communications relating to the

proposed plan amendment 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. All submissions should refer to

File No. S7–24–89 and should be

submitted by February 9, 1995.

VI. Conclusion

The Commission finds that proposed

Amendment No. 2 to the Plan to extend

the financial negotiation period for an

additional seven months is appropriate

and in furtherance of Section 11A of the

Act. The Commission also finds that

extensions of the exemptive relief

requested through August 12, 1995, and

described above, also is consistent with

the Act and the rules thereunder.

Specifically, the Commission believes

that these extensions should serve to

provide the Participants with more time

to conclude their financial negotiations

and to evaluate the effects of the pilot

program and report their findings to the

Commission. This, in turn, should

further the objects of the Act in general,

and specifically those set forth in

Section 12(f) and 11A of the Act and in

Rules 11Aa3–1 and 11Aa3–2

thereunder.

It is therefore ordered, pursuant to

Sections 12(f) and 11A of the Act and

paragraph (c)(2) of Rule 11Aa3–2

thereunder, that Amendment No. 2 to

the Joint Transaction Reporting Plan for

Nasdaq/National Market securities

traded on an exchange on an unlisted or

listed basis is hereby approved, and

trading pursuant to the Plan is hereby

approved on a temporary basis through

August 12, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(29).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–1230 Filed 1–18–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35211; File Nos. SR–Amex–

94–12, SR–CBOE–94–27; and SR–PSE–94–

23]

Self-Regulatory Organizations; Order

Approving Proposed Rule Changes by

the American Stock Exchange, Inc., the

Chicago Board Option Exchange, Inc.,

and Pacific Stock Exchange, Inc.;

Relating to Short Sales of Nasdaq/NM

Securities of Companies Involved in a

Merger or Acquisition

January 10, 1995.

I. Introduction

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

Securities Exchange Act of 1934

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

on October 14, 1994, the American

Stock Exchange, Inc. (‘‘Amex’’), on

August 4, 1994, the Chicago board

Options Exchange, Inc. (‘‘CBOE’’), and

on August 8, 1994, the Pacific Stock

Exchange, Inc. (‘‘PSE’’), respectively

(each individually referred to herein as

an ‘‘Exchange’’ and two or more

collectively referred to as ‘‘Exchange’’),

submitted to the Securities and

Exchange Commission (‘‘Commission’’)

proposed rule changes relating to

extending the market maker exemption

from the NASD’s short sale rule to

Nasdaq National Market (‘‘Nasdaq/NM’’

or ‘‘NM’’) securities involved in merger

and acquisition (‘‘NSA’’) transactions.

On September 29, 1994, the CBOE filed

Amendment No. 1 to its proposal,3 and

on October 14, 1994, the PSE filed

Amendment No. 1 to its proposal.4 The
3888 Federal Register / Vol. 60, No. 12 / Thursday, January 19, 1995 / Notices

security involved in an M&A to qualify as an

exempt hedge transaction pursuant to the current

proposal, the M&A must be publicly announced.

See letter from Michael D. Pierson, Senior Attorney,

Market Regulation, PSE, to Francois Nazur,

Attorney, Division, Commission (‘‘PSE Amendment

No. 1’’). The Commission notes that the Amex

proposal, as originally proposed requires the M&A

to be publicly announced.

5See Securities Exchange Act Release Nos. 34971

(November 14, 1994), 59 FR 60027 (Amex); 34972

(November 14, 1994), 59 FR 60028 (CBOE); and

34970 (November 14, 1994), 59 FR 60029 (PSE).

6Securities Exchange Act Release No. 34632

(September 2, 1994), 59 FR 46999 (approving

proposals by the Amex, CBOE, New York Stock

Exchange, Inc., PSE, and Philadelphia Stock

Exchange, Inc.).

7The NASD bid test rule prohibits broker-dealers

from effecting short sales, for themselves or their

customers, at or below the ‘‘bid’’ when the current

‘‘inside’’ or best bid is below the previous inside

bid. NASD Rules of Fair Practice (‘‘NASD Rules’’),

Art. III, Section 48. See Securities Exchange Act.

Release No. 34277 (June 6, 1994), 59 FR 34885

(amending the NASD Rules to add the short sale

rule).

8For purposes of this order, a ‘‘market Maker’’ is

a Market Maker as referred to in the CBOE and PSE

Rules, and a Specialist or Registered Options Trader

as referred to in the Amex Rules.

9An ‘‘exempt hedge transaction’’ is a short sale

in an NM security effected to hedge, and which in

fact serves to hedge, an existing offsetting options

positions or an offsetting contemporaraneous with

the short sale. See Amex Rule 957(d)(2)(b)(ii), CBOE

Rule 15.10(c)(2)(iii)(A), and Rule 4.19(c)(2)(B)(9).

10See Securities Exchange Act Release No. 34277,

supra note 6. The Commission approved the

NASD’s short sale rule on an eighteen month

temporary basis, effective September 6, 1994,

through March 5, 1996. Id.

11See Securities Exchange Act Release No. 34277,

supra note 7. The NASD short sale rule states that

once an M&A has been two affected securities may

immediately reguister as a qualified market maker

in the other M&A security. See NASD Rules, Article

III, 48(1)(3)(iii). Consequently, such a market maker

may relay on the market maker exemption for short

sales of the other M&A security.

12Proposed Rule 957(d)(2)(b)(iv); Proposed CBOE

Rule 15.10(a)(2)(ii)(D); and Proposed PSE Rule

4.19(c)(2)(B)(iv). A ‘‘designated NM security’’ is an

NM security which the market maker has

designated as qualifying for the bid test exemption.

See e.q., CBOE Rule 15.10(c)(2)(B).

13 15 U.S.C. 78f(b)(5) (1988).

14Securities Exchange Act Release No. 34277,

supra note 7.

15See supra note 9.

16 15 U.S.C. 78s(b)(2) (1982).

17Amex Rule 957, CBOE Rule 15.10, and PSE

Rule 4.19.

18 17 CFR 200.30–3(a)(12) (1993).

Amex, CBOE, and PSE proposals were

each published for comment in the

Federal Register on November 21,

1994.5 No comments were received on

the proposed rule changes. This order

approves the Exchanges’ proposals, as

amended.

II. Description of Proposals

The Commission recently approved

proposals submitted by the options

exchange concerning a market maker

exemption 6 to the NASD bid test rule 7

applicable to short sales to NM

securities traded through Nasdaq. The

purposes of the market maker

exemption is to allow options market

makers 8 to hedge their options

positions by buying or selling (including

selling short) shares of underlying stock

or underlying component stocks

contained in stock indexes; such short

sales are referred to as ‘‘exempt hedge

transactions.’’ 9 The Exchange’

proposals were approved on a

temporary basis to remain in effect

concurrently with the NASD’s bid test

rule pilot program.10

Currently, the NASDA provides an

exemption from the short sale bid test

for risk arbitragers (and other NASD

members) who take positions in the

stocks involved in M&G transactions.11

Consequently, the Exchange desire to

amend their respective rules to extend

the market maker exemption from the

bid test rule to certain short sales of the

stock of a company that is involved in

a publicly announced M&A with a

company whose stock is a designated

Nasdaq/NM security.12

III. Discussion

The Commission believes that the

Exchanges’ proposed rule changes are

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to national

securities exchanges. In particular, the

Commission believes the Exchanges’

proposals are consistent with the

requirements of Section 6(b)(5) of the

Act 13 in that they are designed to

remove impediments to, and perfect the

mechanism of, a free and open market,

and to protect investors and the public

interest.

The Commission approved the

NASD’s short sale rule proposal on June

29, 1994,14 and in so doing stated that

the short sale rule, together with the

market maker exemption, is a

reasonable approach to regulating short

sales of Nasdaq/NM securities. The

Commission believes that the

Exchanges’ proposals are consistent

with the NASD’s bid test rule and

address the limitations established by

the NASD concerning the applicability

of the market maker exemption.

Specifically, the Exchanges’ proposals

are designed to extend the market maker

exemption to the stock of a company

that is involved in a publicly announced

M&A with a company whose stock is

designated Nasdaq/NM security. The

Commission believes that when a

designated Nasdaq/NM security

becomes involved in an M&A, options

market makers may need to hedge

positions in options overlying such a

designated Nasdaq/NM security by

buying or selling the securities of the

other company involved in the M&A,

whether or not the other company’s

stock has listed overlying options.

Indeed, where there are no options on

the other company’s stock, buying or

selling that company’s stock at times

may be the only feasible way for a

market maker to hedge positions in

options on the designated Nasdaq/NM

security, given the risk arbitrage

relationship that is likely to exist

between the two stocks. Therefore, the

Commission believes that by allowing

market makers to sell short, for hedging

purposes, shares of a company that is

involved in an M&A with a company

whose stock is a designated Nasdaq/NM

security, and to designate such sales as

bid test exempt, the Exchanges’

proposals will enhance the ability of

their market makers perform their

market making functions, thereby

contributing to the liquidity of the

market for options, as well as to the

liquidity of the market for the stocks of

both companies.

The Commission notes that the

proposed extension of the market maker

exemption from the short sale rule is

limited to publicly announced M&As.

Moreover, market makers may avail

themselves of the M&A extension to the

exemption only when the short sales are

made to hedge existing or prospective

positions in options on a security of

another company involved in the M&A,

the options positions are or will be in

a class of options for which the market

maker is registered and are or will be an

‘‘exempt hedge transaction’’ as defined

in the Exchanges’ rules.15

IV Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,16 that the

Amex, CBOE, and PSE proposed rule

changes (SR–Amex–94–42, SR–CBOE–

94–27, and SR–PSE–94–23,

respectively), as amended, are approved

on a temporary basis, to remain in effect

so long as their respective rules

regarding the market maker

exemption 17 to the NASD’s bid test rule

remain in effect.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–1281 Filed 1–18–95; 8:45 am]

BILLING CODE 8010–01–M1