Document ID: SEC-2006-0059-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-01-18T05:00Z

[Federal Register: January 18, 2006 (Volume 71, Number 11)]
[Notices]               
[Page 2966-2969]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja06-86]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53093; File No. SR-NASD-2005-149]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to an Extension of the 
Short Sale Rule and Continued Suspension of Primary Market Maker 
Standards Set Forth in NASD Rule 4612

January 10, 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 December 15, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items

[[Page 2967]]

have been prepared by Nasdaq. On January 6, 2006, Nasdaq filed 
Amendment No. 1 to the proposed rule change.\3\ Nasdaq has filed the 
proposal as a ``non-controversial'' rule change pursuant to Section 
19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ which 
renders it effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Nasdaq made technical changes to the 
text of the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to extend the pilot effectiveness of NASD Rule 3350 
until December 15, 2006. Nasdaq is also seeking to continue the 
suspension of the effectiveness of the Primary Market Maker (``PMM'') 
standards currently set forth in NASD Rule 4162 until December 15, 
2006. In addition, Nasdaq is seeking to extend the pilot effectiveness 
of the penny ($0.01) legal short sale standard contained in paragraph 
(b)(2) of NASD Interpretative Material 3350 (``IM-3350'').
    The text of the proposed rule change, as amended, is available on 
the NASD's Web site (http://www.nasd.com), at the principal office of 

the NASD, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV 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. Purpose
    Background and Description of the NASD's Short Sale Rule. Section 
10(a) of the Act \6\ gives the Commission plenary authority to regulate 
short sales of securities registered on a national securities exchange, 
as needed to protect investors. In 1992, Nasdaq, believing that short 
sale regulation is important to the orderly operation of securities 
markets, proposed a short sale rule for trading of its National Market 
securities that incorporates the protections provided by Rule 10a-1 
under the Act.\7\ On June 29, 1994, the Commission approved the NASD's 
short sale rule (the ``Rule'') applicable to short sales \8\ in Nasdaq 
National Market (``NNM'') securities on an eighteen-month pilot basis 
through March 5, 1996.\9\ The NASD has proposed, and the Commission has 
approved, extensions of NASD Rule 3350 numerous times, most recently, 
until December 15, 2005.\10\
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    \6\ 15 U.S.C. 78j(a).
    \7\ 17 CFR 240.10a-1.
    \8\ A short sale is a sale of a security that the seller does 
not own or any sale that 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 200 of Regulation 
SHO. 17 CFR 242.200.
    \9\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 26212 (July 7, 1994) (SR-NASD-92-12) (``Short Sale Rule 
Approval Order'').
    \10\ See Securities Exchange Act Release No. 50922 (Dec. 22, 
2004), 69 FR 78079 (Dec. 29, 2004) (SR-NASD-2004-187).
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    The Rule employs a ``bid'' test rather than a tick test because 
Nasdaq trades are not currently reported to the tape in chronological 
order. The Rule prohibits short sales at or below the inside bid when 
the current inside bid is below the previous inside bid. Nasdaq 
calculates the inside bid from all market makers in the security and 
disseminates symbols to denote whether the current inside bid is an 
``up-bid'' or a ``down-bid.'' To effect a ``legal'' short sale on a 
down-bid, the short sale must be executed at a price at least $.01 
above the current inside bid. The Rule is in effect from 9:30 a.m. EST 
until 4 p.m. EST each trading day.
    In December of 2002, Nasdaq modified the method it uses to 
calculate the last bid by having it refer to the ``Nasdaq Inside'' 
which is comprised of quotations from all participants in Nasdaq 
execution systems (e.g., SuperMontage), rather than referring to the 
National Best Bid and Offer (``NBBO''). Nasdaq currently calculates and 
applies the Nasdaq-based bid tick indicator to all SuperMontage trades. 
With respect to trades executed outside Nasdaq execution systems and 
reported to Nasdaq, Nasdaq participants have been permitted to 
transition from the NBBO-based bid tick to the Nasdaq-based bid tick, 
provided that each firm select and apply a single bid tick indicator 
for all such trades executed by that firm. That transition has not been 
completed and, as explained below, in light of the Commission's 
adoption of Regulation SHO,\11\ Nasdaq has alerted members that it 
would not be prudent to transition from the NBBO bid tick to the Nasdaq 
bid tick at this time.
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    \11\ See Securities Exchange Act Release No. 50103 (July 28, 
2004), 69 FR 48008 (August 6, 2004) (S7-23-03).
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    Background of the Primary Market Maker Standards. To ensure that 
market maker activities that provide liquidity and continuity to the 
market are not adversely constrained when the short sale rule is 
invoked, NASD Rule 3350 provides an exemption for ``qualified'' market 
makers (i.e., market makers that meet the PMM standards). Presently, 
NASD Rule 4612 provides that a member registered as a market maker 
pursuant to NASD Rule 4611 may be deemed a PMM if that member meets 
certain threshold standards. On February 14, 1997, the PMM standards 
were waived for all NNM securities due to the impacts of the 
Commission's Order Handling Rules and corresponding NASD rule change 
and system modifications on the operation of the four quantitative 
standards.\12\
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    \12\ See Securities Exchange Act Release No. 38294 (February 14, 
1997), 62 FR 8289 (February 24, 1997) (SR-NASD-97-07).
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    Proposal to Extend the Short Sale Rule and Suspend the PMM 
Standards. Nasdaq believes that it is in the best interest of investors 
to extend the short sale regulation pilot program. When the Commission 
approved the NASD's short sale rule on a pilot basis, it made specific 
findings that NASD Rule 3350 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 Nasdaq National Market securities is consistent with 
the Act.'' \13\ In addition, the Commission stated that it ``believes 
that the NASD's short sale bid-test, including the market maker 
exemptions, is a reasonable approach to short sale regulation of Nasdaq 
National Market securities and reflects the realities of its market 
structure.'' \14\ The benefits that the Commission recognized when it 
first approved NASD Rule 3350 applied with equal force today.
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    \13\ See Short Sale Rule Approval Order, supra note 9.
    \14\ Id.
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    Similarly, the concerns that caused the Commission to waive the PMM 
standards in February 1997 continue to exist today. Nasdaq and the 
Commission

[[Page 2968]]

agreed to waive the PMM standards for three reasons that were 
discovered only after the Order Handling Rules were implemented.\15\ 
Through late 1999, Nasdaq worked diligently to address those concerns 
to the Commission's satisfaction, including convening a special 
subcommittee on PMM issues, proposing two different sets of PMM 
standards, and being continuously available and responsive to 
Commission staff to discuss this issue. Despite these efforts, the 
Commission and Nasdaq were unable to establish satisfactory PMM 
standards. Re-instating the PMM standards set forth in NASD Rule 4612 
would be extremely disruptive to the market and harmful to investors.
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    \15\ Implementation of the Order Handling Rules created the 
following three issues: (1) Many market makers voluntarily chose to 
display customer limit orders in their quotes although the Limit 
Order Display Rule does not require it; (2) decrementation for all 
Nasdaq stocks significantly affected market makers' ability to meet 
several of the primary market maker standards; and (3) with the 
inability to meet the existing criteria for a larger number of 
securities, a market maker may be prevented from registering as a 
primary market maker in an initial public offering because it fails 
to meet the 80% primary market maker test contained in NASD Rule 
4612(g)(2)(B).
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    Proposal to Extend Penny Short Sale Standard. On March 2, 2001, the 
Commission approved, on a pilot basis,\16\ Nasdaq's proposal to 
establish a $0.01 above the bid standard for legal short sales in 
Nasdaq National Market securities as part of the Decimals 
Implementation Plan for the Equities and Options Markets. This pilot 
program has been continuously extended since that date.\17\ Nasdaq now 
proposes to extend, through December 15, 2006, that pilot program. 
Extension until December 15, 2006 will allow Nasdaq and the Commission 
to continue to evaluate the impact of the penny short sale pilot. If 
the instant filing is approved, Nasdaq will continue during the pilot 
period to require NASD members seeking to effect ``legal'' short sales 
when the current best (inside) bid displayed by Nasdaq is lower that 
the previous bid, to execute those short sales at a price that is at 
least $0.01 above the current inside bid in that security. Nasdaq 
believes that continuation of this pilot standard appropriately takes 
into account the important investor protections provided by NASD Rule 
3350 and NASD IM-3350 and the ongoing relationship of the valid short 
sale price amount to the minimum quotation increment of the Nasdaq 
market (currently also $0.01).
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    \16\See Securities Exchange Act Release No. 44030 (March 2, 
2001), 66 FR 14235 (March 9, 2001) (SR-NASD-01-09).
    \17\ See Securities Exchange Act Release No. 50922 (Dec. 22, 
2004), 69 FR 78079 (December 29, 2004) (SR-NASD-2004-187).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\18\ in general and with 
Section 15A(b)(6) of the Act,\19\ in particular, in that it is 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. The proposed rule change is 
being made so that the pilot programs, which achieve these goals, may 
continue without interruption.
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    \18\ 15 U.S.C. 78o-3.
    \19\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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, as amended.

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

    Because the forgoing rule change does not: (1) Significantly affect 
the protection of investors or the public interest; (2) impose any 
significant burden on competition; and (3) become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\ Nasdaq will 
implement this rule change immediately.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\22\ 
However, Rule 19b-4(f)(6)(iii) \23\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. Nasdaq has requested that the 
Commission waive the five-day pre-filing notice requirement and the 30-
day pre-operative delay. The Commission is exercising its authority to 
waive the five-day pre-filing requirement and believes that waiver of 
the 30-day pre-operative delay is consistent with the protection of 
investors and in the public interest. Waiving the five-day pre-filing 
requirement and 30-day pre-operative delay will allow the pilot 
programs to continue uninterrupted.\24\
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    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ Id.
    \24\ For the purposes only of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the Act.\25\
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    \25\ The effective date of the original proposed rule change is 
December 15, 2005, and the effective date of Amendment No. 1 is 
January 6, 2006. For purposes of calculating the 60-day period 
within which the Commission may summarily abrogate the proposed rule 
change, as amended, under Section 19(b)(3)(C) of the Act, the 
Commission considers the period to commence on January 6, 2006, the 
date on which Nasdaq submitted Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
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IV. 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-2005-149 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-149. 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

[[Page 2969]]

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, 100 F Street, NE., Washington, DC 20549. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the 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 No. SR-NASD-2005-149 and 
should be submitted on or before February 8, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-435 Filed 1-17-06; 8:45 am]

BILLING CODE 8010-01-P