Document ID: SEC-2006-1317-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-10-10T04:00Z

[Federal Register: October 10, 2006 (Volume 71, Number 195)]
[Notices]               
[Page 59573-59575]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10oc06-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54558; File No. SR-NASD-2006-076]

 
Self-Regulatory Organizations: National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change To Exempt All Securities Included in the 
Nasdaq-100 Index From the Price Test Set Forth in NASD Rule 5100

 October 2, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 15, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. On August 
18, 2006, NASD filed Amendment No. 1 to the proposed rule change.\3\ On 
September 20, 2006, NASD filed Amendment No. 2 to the proposed rule 
change, as amended.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule

[[Page 59574]]

change from interested persons. In addition, the Commission is granting 
accelerated approval of the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which supplemented the original filing, 
NASD modified the scope of the proposed rule change and made certain 
technical and clarifying changes following discussions with 
Commission staff.
    \4\ After discussions with Commission staff, NASD filed 
Amendment No. 2 to modify its discussion of the purpose of the 
proposed rule filing and to make other technical and clarifying rule 
changes. Amendment No. 2 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to exempt all securities included in the Nasdaq-
100 Index from the price test set forth in NASD Rule 5100.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized.
* * * * *
5100. Short Sale Rule
    (a)-(b) No Change.
    (c) The provisions of paragraph (a) shall not apply to:
    (1)-(9) No Change.
    (10) Sales of securities included in the Nasdaq-100 Index.
    (d)-(l) No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item III below. NASD 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. Purpose
(a) Rule Filing History
    On June 15, 2006, NASD, through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Commission proposed rule 
change SR-NASD-2006-076 which proposed to exempt all securities 
included in the Nasdaq-100 Index from the price test set forth in NASD 
Rule 3350(a) (the ``Original Proposal'').
    On June 30, 2006, the Commission approved SR-NASD-2005-087, which 
amended certain NASD rules to reflect the separation of Nasdaq from 
NASD upon the operation of Nasdaq as a national securities exchange.\5\ 
Among other amendments, SR-NASD-2005-087 amended Rule 3350 to renumber 
it as Rule 5100 and apply it uniformly to short sales of over-the-
counter (``OTC'') transactions reported to the Alternative Display 
Facility (``ADF'') or the Trade Reporting Facility (``TRF''). SR-NASD-
2005-087 became effective on August 1, 2006, the date upon which Nasdaq 
began operation as an exchange for Nasdaq-listed securities.
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    \5\ See Securities Exchange Act Release No. 54085 (June 30, 
2006), 71 FR 38910 (July 10, 2006).
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    Given the Commission's approval of SR-NASD-2005-087, NASD assumed 
direct responsibility for all rulemaking functions related to Rule 5100 
(formerly Rule 3350). As such, NASD filed Amendment No. 1 to SR-NASD-
2006-076, which amended the Original Proposal to reflect the 
renumbering of Rule 3350 as Rule 5100 in the proposed rule text, among 
other technical and clarifying changes.
    NASD filed Amendment No. 2 to SR-NASD-2006-076 to revise the basis 
upon which NASD is filing the proposed rule change herein and to make 
additional technical and clarifying changes.
(b) Rationale
    Rule 5100 provides that, with respect to trades reported to the ADF 
or the TRF no member shall effect a short sale in a National Global 
Market (``NGM'') security otherwise than on an exchange at or below the 
current national best (inside) bid when the current national best 
(inside) bid is below the preceding national best (inside) bid.\6\ NASD 
states that the price test contained in Rule 5100 is designed to 
prevent the market price of NGM securities from being manipulated 
downward by unrestricted short selling. In addition, NASD notes that 
all short sales in NGM securities effected otherwise than on an 
exchange must comply with Rule 5100 or qualify for an exception to, or 
exemption from, the rule.
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    \6\ NASD recently amended Rule 5100 to allow members to use, for 
a transitional period ending on November 3, 2006, the Nasdaq 
Exchange best (inside) bid rather than the national best (inside) 
bid for the purposes of the application of the rule. See Exchange 
Act Release No. 54203 (July 25, 2006), 71 FR 43256 (July 31, 2006) 
(SR-NASD-2006-089).
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    On August 21, 2006, The NASDAQ Stock Market LLC (``Nasdaq 
Exchange'') filed proposed rule change SR-NASDAQ-2006-031 to exempt all 
securities included in the Nasdaq-100 Index from Nasdaq Exchange Rule 
3350, which governs short sales in NGM securities executed on or 
reported to the Nasdaq Exchange.\7 \NASD states that NASD is filing the 
proposed rule change, as amended, to create a similar exemption from 
Rule 5100 for securities included in the Nasdaq-100 Index. NASD 
believes that, with respect to securities included in the Nasdaq-100 
Index, short sales in NGM securities executed otherwise than on an 
exchange should be subject to the same exemption as short sales in NGM 
securities executed on or reported to the Nasdaq Exchange. Accordingly, 
NASD states that it is filing the proposed rule change, as amended, to 
amend Rule 5100 to create an exemption for all securities included in 
the Nasdaq-100 Index, consistent with the approved exemption in SR-
NASDAQ-2006-031 for short sales in NGM securities executed on or 
reported to the Nasdaq Exchange.
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    \7\ The SEC approved SR-NASDAQ-2006-031 on September 13, 2006. 
See Securities Exchange Act Release No. 54435 (September 13, 2006), 
71 FR 55042 (September 20, 2006).
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    The effective date of the proposed rule change, as amended, will be 
announced in a Notice to Members.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of the Act,\8\ 
which requires, among other things, that NASD rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. NASD believes that the proposed rule 
change, as amended, will provide a uniform exemption for NGM securities 
included in the Nasdaq-100 Index, consistent with the changes in SR-
NASDAQ-2006-031.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change, as amended, 
will 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

    Written comments on the Original Proposal were solicited by the 
Commission.\9\ As noted above, the Original Proposal was a 
substantially similar rule filing to the proposed rule change, as 
amended, that proposed to exempt all securities in the Nasdaq-100 Index 
from the price test in former NASD Rule 3350. The Original Proposal was 
filed by Nasdaq when it was a subsidiary of NASD and prior to Nasdaq

[[Page 59575]]

commencing operations as a national securities exchange.\10\ The 
Commission did not receive any comment letters in response to the 
Federal Register publication of the Original Proposal.
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    \9\ See Exchange Act Release No. 54010 (June 16, 2006), 71 FR 
35964 (June 22, 2006).
    \10\ See supra note 5.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2006-076 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-076. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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 also will be available for 
inspection and copying at the principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASD-2006-076 
and should be submitted on or before October 31, 2006.

 IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association \11\ and, in particular, the requirements of 
Section 15A of the Act \12\ and the rules and regulations thereunder. 
The Commission finds specifically that the proposed rule change, as 
amended, is consistent with Sections 15A(b)(6) and 15A(b)(9) of the Act 
\13\ in that it is designed to promote just and equitable principles of 
trade, to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, or to regulate by virtue of 
any authority conferred by the Act matters not related to the purposes 
of the Act or the administration of the exchange.
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    \11\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6) and (9).
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    NASD Rule 5100 provides that, with respect to trades reported to 
the ADF or the TRF, no member shall effect a short sale in a NGM 
security otherwise than on an exchange at or below the current national 
best (inside) bid when the current national best (inside) bid is below 
the preceding national best (inside) bid. NASD Rule 5100 is 
inapplicable to National Capital Market securities. The proposed rule 
change, as amended, amends NASD Rule 5100 to exempt from its price test 
securities included in the Nasdaq-100 Index.
    The Commission is currently conducting the Pilot to study and 
evaluate the overall effectiveness and necessity of short sale prices 
tests.\14\ On April 20, 2006, we extended the Pilot in order to 
maintain the status quo for price tests of Pilot securities while we 
complete our analysis of the results of the Pilot and conduct any 
additional rulemaking that we determine may be warranted.\15\ We have 
not reached any conclusions regarding price tests. However, we believe 
that this proposed rule change is consistent with the statute.
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    \14\ See Securities Exchange Act Release No. 50104 (July 28, 
2004), 69 FR 48032 (August 6, 2004) (``First Pilot Order''). The 
Pilot suspended price tests for the following: (1) Short sales in 
the securities identified in Appendix A to the First Pilot Order; 
(2) short sales in the securities included in the Russell 1000 index 
effected between 4:15 p.m. EST and the open of the effective 
transaction reporting plan of the Consolidated Tape Association 
(``consolidated tape'') on the following day; and (3) short sales in 
any security not included in paragraphs (1) and (2) effected in the 
period between the close of the consolidated tape and the open of 
the consolidated tape on the following day.
    \15\ See Order Extending Term of Short Sale Pilot, Release No. 
34-53684 (April 20, 2006), 71 FR 24765 (April 26, 2006).
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    Currently, securities in the Nasdaq-100 Index are subject to a 
price test only if they are traded OTC and reported to a NASD facility. 
NASD's proposed rule change, as amended, would provide a uniform 
exemption for securities included in the Nasdaq-100 Index so that such 
securities would not be subject to a price test in any market.
    NASD has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of notice thereof in the Federal Register. The Commission 
notes that it previously solicited comments on the Original Proposal, a 
substantially similar proposal to the proposed rule change. The 
Original Proposal would have exempted all securities included in the 
Nasdaq-100 Index from the price test in former NASD Rule 3350. The 
Original Proposal was published for comment in the Federal Register on 
June 22, 2006. The Commission received no comments on the Original 
Proposal. Accordingly, the Commission finds good cause exists, 
consistent with Sections 15(A)(b)(6) and 19(b)(2) of the Act,\16\ to 
approve the proposed rule change, as amended, on an accelerated basis, 
prior to the 30th day after the date of publication of the notice of 
filing thereof in the Federal Register
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    \16\ 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-NASDAQ-2006-076), as amended, is 
approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-16644 Filed 10-6-06; 8:45 am]

BILLING CODE 8011-01-P