Document ID: SEC-2006-0176-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-02-10T05:00Z

[Federal Register: February 10, 2006 (Volume 71, Number 28)]
[Notices]               
[Page 7101-7103]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe06-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53224; File No. SR-NASD-2005-112]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Amendments to Rule 3360 To Expand Short Interest Reporting to OTC 
Equity Securities

February 3, 2006.

I. Introduction

    On September 20, 2005, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Rule 3360 to expand 
short interest reporting requirements to over-the-counter (``OTC'') 
equity securities.\3\ The proposed rule change was published for 
comment in the Federal Register on November 3, 2005.\4\ The Commission 
received seven comment letters on the proposal.\5\ The NASD filed a 
response to the comment letters on January 20, 2006.\6\ This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``OTC equity securities'' means any equity 
securities that are neither included in the Nasdaq Stock Market nor 
traded on a national securities exchange.
    \4\ See Securities Exchange Act Release No. 52679 (Oct. 26, 
2005), 70 FR 66875 (Nov. 3, 2005) (the ``Proposing Release'').
    \5\ See e-mail from Greg Hogberg to enforcement@sec.gov, dated 
December 30, 2005 (attaching letter from Dr. Jim DeCosta to Jonathan 
G. Katz, Secretary, SEC, dated November 24, 2005); e-mail from 
Donald L. Smith to rule-comments@sec.gov, dated December 16, 2005; 
letter from Dr. Jim DeCosta to Jonathan G. Katz, Secretary, SEC, 
dated November 24, 2005 (``DeCosta''); e-mail from Paul Vuksich to 
rule-comments@sec.gov, dated November 22, 2005 (``Vuksich''); e-mail 

from David Patch to rule-comments@sec.gov, dated November 17, 2005 
(``Patch''); e-mail from Daniel Opdyke to rule-comments@sec.gov, 
dated November 10, 2005; e-mail from Chris Meredith to 
rule-comments@sec.gov, dated November 1, 2005 (``Meredith'').

    \6\ See letter from Andrea D. Orr, Assistant General Counsel, 
NASD, to Nancy M. Morris, Secretary, SEC, dated January 20, 2006.
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II. Description of the Proposal

    The proposal would amend Rule 3360, Short-Interest Reporting, to 
require that members maintain and report on a monthly basis total short 
positions in OTC equity securities in all customer and proprietary firm 
accounts.\7\ Currently, Rule 3360(a) requires members to maintain a 
record of total short positions \8\ in all customer and proprietary 
firm accounts in Nasdaq securities (and listed securities if not 
reported to another self-regulatory organization (``SRO'')) and 
requires members to report such information to the NASD on a monthly 
basis. The NASD believes that expanding the monthly short interest 
reporting requirements to OTC equity securities will increase the 
information available to public investors and other interested parties 
related to trading in OTC equity securities. Accordingly, the NASD

[[Page 7102]]

proposes to amend Rule 3360(a) to require that members maintain and 
report to the NASD short sale positions for OTC equity securities. For 
purposes of the proposed rule change, OTC equity securities would be 
defined as any equity security that is not listed on The Nasdaq Stock 
Market or a national securities exchange.
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    \7\ Non-self-clearing broker-dealers generally are considered to 
have satisfied their reporting requirement by making appropriate 
arrangements with their respective clearing organizations. See NASD 
Notice to Members 03-08 (Jan. 2003).
    \8\ Rule 3360(b) provides that short positions required to be 
reported under the rule are those resulting from short sales as the 
term is defined in Rule 200 of Regulation SHO under the Act 
(``Regulation SHO''), with limited exceptions. Rule 200 of 
Regulation SHO provides, in part, the following: ``The term `short 
sale' shall mean any 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.'' 17 CFR 242.200(a).
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    The NASD will announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval. In the proposed rule change, the NASD 
stated that in recognition of the technological and systems changes the 
proposed rule change may require, the effective date for the proposed 
rule change will be 90 days following publication of the NASD's Notice 
to Members announcing Commission approval.\9\
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    \9\ See 70 FR at 66876.
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    In the Proposing Release,\10\ the Commission specifically requested 
comment regarding whether the implementation period for the proposed 
rule change could be shorter.\11\ The Commission did not receive any 
comments regarding this specific request for comment. Thus, the 
Commission has determined not to request that the NASD shorten the 
implementation period.
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    \10\ See supra note 4.
    \11\ 70 FR at 66876.
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III. Summary of Comments

    The Commission received seven comment letters on the proposal.\12\ 
The commenters generally supported the proposal. Some commenters, 
however, recommended additional changes to the proposed rule and to 
other rules relating to short selling. The following is a summary of 
the major concerns the commenters raised.
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    \12\ See supra note 5.
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    Two commenters questioned the exceptions to the short interest 
reporting requirements contained in current Rule 3360 and in the 
proposed rule change.\13\ Both current Rule 3360 and the proposed rule 
change provide that NASD members must report short interest positions 
that result from ``short sales,'' as that term is defined in Rule 200 
of Regulation SHO,\14\ with the exception of positions that meet the 
requirements of subsections (e)(1), (6), (7), (8) and (10) of Rule 10a-
1 under the Act.\15\
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    \13\ See Patch at 1; Meredith at 1.
    \14\ See 17 CFR 242.200(a).
    \15\ See NASD Rule 3360(b); supra note 4. Rule 10a-1 provides 
that, subject to certain exceptions, a short sale in an exchange-
registered security may be effected only pursuant to the price test 
restrictions contained in Rule 10a-1. Subsection (e) of Rule 10a-1 
contains exceptions to the price test restrictions. The exceptions 
in Rule 10a-1(e) were designed to permit certain types of trading 
activities that were intended to benefit the markets or that were 
believed to carry little risk of the kind of manipulative or 
destabilizing trading that the rule was designed to address. See 
Securities Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 
62972 (Nov. 6, 2003). Subsection (e)(1) of Rule 10a-1 permits short 
sales to be effected without regard to the price test restrictions 
in the rule if the seller owns the security sold and intends to 
deliver such security as soon as possible without undue 
inconvenience or expense. See 17 CFR 240.10a-1(e)(1). Subsection 
(e)(6) of Rule 10a-1 contains an exception for certain sales of a 
security effected with the approval of an exchange which are 
necessary to equalize the price of such security with the current 
price of such security on another national securities exchange, 
which is the principal exchange market. See 17 CFR 240.10a-1(e)(6). 
Subsection (e)(7) of Rule 10a-1 contains an exception for certain 
bona fide domestic arbitrage transactions. See 17 CFR 240.10a-
1(e)(7). Subsection (e)(8) of Rule 10a-1 contains an exception for 
certain international domestic arbitrage transactions. See 17 CFR 
240.10a-1(e)(8). Subsection (e)(10) of Rule 10a-1 generally excepts 
sales of securities by underwriters or syndicate members 
participating in a distribution in connection with an over-
allotment, and any lay-off sales by such a person in connection with 
a distribution of securities through rights or a standby 
underwriting commitment. See 17 CFR 240.10a-1(e)(10).
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    The commenters recommended that the exceptions be eliminated from 
the proposed rule change and all short interest positions be reported 
and publicly disseminated.\16\ One commenter argued that all short 
interest positions should be disclosed to the investing public so that 
investors have an understanding of exactly how much supply is actually 
in the system because the short interest position affects the overall 
valuation of a security.\17\
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    \16\ See Patch at 1; Meredith at 1.
    \17\ See Patch at 1.
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    One commenter proposed amendments to Rule 3360 that would require 
issuers to cause their transfer agents to report long and short 
interest positions to the NASD at the close of each trading day.\18\ 
This commenter's recommendation would also require transfer agents on 
behalf of issuers to report certain share information to the NASD at 
the close of each trading day, such as authorized shares, total shares 
outstanding, and shares held in street name.\19\
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    \18\ See Vuksich at 1.
    \19\ See id.
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    Some commenters asserted that further action in the short selling 
area is necessary, in particular to address naked short selling abuses 
and what they believe to be certain loopholes in Regulation SHO.\20\ 
Other commenters raised concerns regarding hedge fund regulation, the 
National Securities Clearing Corporation's Continuous Net Settlement 
System and the Depository Trust & Clearing Corporation's stock loan 
program.\21\
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    \20\ See e.g., DeCosta.
    \21\ See e.g., Meredith at 1; DeCosta at 2-8.
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IV. NASD's Response

    In its response letter,\22\ the NASD stated that it believed that 
all the comments were outside the scope of its rule filing because the 
proposed rule change is limited to expanding the current short interest 
reporting requirements to OTC equity securities.\23\ The NASD stated in 
its letter that because the changes recommended by the commenters were 
not germane to the proposal, were beyond the purview of the NASD, or 
related to amendments to another SRO's rules or SEC rules, the NASD was 
not responding to those recommendations specifically in its response 
letter.\24\ In addition, the NASD stated that it would review and 
analyze these recommendations in the same manner in which it would 
consider any requests for rulemaking, and, based on such review and 
analysis, would determine whether further action on these 
recommendations is appropriate.\25\
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    \22\ See supra note 6.
    \23\ Id. at 3.
    \24\ Id.
    \25\ Id.
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    With respect to comments regarding the exceptions to short interest 
reporting contained in current NASD Rule 3360 and the proposed rule 
change, the Commission urges the NASD to conduct an in-depth review of 
the exceptions to short interest reporting to determine whether future 
rulemaking regarding the exceptions is appropriate.

V. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of Section 15A of the Act \26\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\27\ which requires, among other things, 
that the NASD's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, remove impediments to a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest.\28\
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    \26\ 15 U.S.C. 78o-3.
    \27\ 15 U.S.C. 78o-3(b)(6).
    \28\ In approving this proposed rule change the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).

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[[Page 7103]]

    The Commission believes that expanding short interest reporting to 
OTC equity securities will protect investors and the public interest by 
requiring NASD members to increase the information available to 
investors and other interested parties related to trading in OTC equity 
securities.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASD-2005-112) be, and it 
hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
Nancy M. Morris,
Secretary.
[FR Doc. E6-1842 Filed 2-9-06; 8:45 am]

BILLING CODE 8010-01-P