Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Pacific Stock Exchange, Inc. Relating to Short Sales of Nasdaq/NM Securities of Companies Involved in Mergers or Acquisitions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34970; File No. SR-PSE-94-23]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 Thereto by the Pacific Stock Exchange, Inc.

Relating to Short Sales of Nasdaq/NM Securities of Companies Involved

in Mergers or Acquisitions

November 14, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on August 18, 1994, the

Pacific Stock Exchange (``PSE'' or ``Exchange'') filed with the

Securities and Exchange Commission (``Commission'') the proposed rule

change as described in Items I, II, and III below, which Items have

been prepared by the self-regulatory organization. On October 14, 1994,

the Exchange filed Amendment No. 1 to the proposed rule change.\2\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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

\2\In Amendment No. 1, the PSE adds the requirement that the

merger or acquisition must be ``publicly announced'' to qualify as

an exempt hedge transaction in an ``M&A'' security. See letter from

Michael D. Pierson, Senior Attorney, Market Regulation, PSE, to

Francois Mazur, Attorney, Office of Market Supervision, Commission,

dated October 13, 1994 (``Amendment No. 1'').

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The PSE proposes to amend its Rule 4.19 concerning the designation

of certain short sales of Nasdaq National Market securities (``NM

securities'') by market makers as exempt from the NASD's bid test

rule.\3\

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\3\See NASD Manual, Rules of Fair Practice, Article III, Section

48 (``NASD Rules'').

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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 self-regulatory organization

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 qualified in Item IV below. The self-regulatory organization

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

The purpose of the proposed rule change is to permit PSE options

market makers to designate as bid test exempt under PSE Rule 4.19

certain short sales of the stock of a company that is involved in a

merger or acquisition with the issuer of a stock underlying an option

that has been designated as a ``designated Nasdaq/NM security''

pursuant to PSE Rule 4.19(c)(2)(B)(ii). To qualify as bid test exempt

under this proposal, the short sales of the company stock involved in

the merger or acquisition must serve to hedge a position in an option

overlying the designated NM security, where the option position was or

will be established in the course of bona fide market making activity.

This proposal recognizes that when a designated NM security becomes

involved in a merger or acquisition, PSE market makers may need to

hedge positions in options on the designated NM security by buying or

selling shares of stock of the other company involved in the merger or

acquisition, whether or not the other company's stock has listed

overlying options, Indeed, where there are no options on that stock,

buying or selling the stock itself may at times be the only feasible

way for a market maker to hedge positions in options on the designated

NM security, given the risk arbitrage relationship that is likely to

exist between the two stocks. The proposed rule change will facilitate

hedging by options market makers in this circumstance by allowing them

to sell short shares of the ``other'' company involved in the merger

for hedging purposes, and to designate those short sales as bid test

exempt. The PSE believes that its proposal will enhance the ability of

PSE market makers to perform their market making functions, thereby

contributing to the liquidity of the market for options, as well as the

market for the stocks of both companies. This proposed rule change,

like the current Rule 4.19,\4\ is intended to operate in coordination

with an exemption from the bid test provided for in the NASD Rules.

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\4\See File No. SR-PSE-94-16 (pending).

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The PSE believes that because the proposed rule change will enhance

the ability of market makers to perform their market making activities,

thereby contributing to the depth and liquidity of the options market,

it will serve in furtherance of the objectives of Section 6(b)(5) of

the Act to promote just and equitable principles of trade and to

protect investors and promote the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will

impose 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 proposed rule change were neither solicited

nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(a) By order approve such proposed rule change, or

(b) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

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, 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 Section, 450 Fifth Street, N.W,

Washington, D.C. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to File No.

SR-PSE-94-23 and should be submitted by December 12, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\5\

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\5\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-28676 Filed 11-18-94; 8:45 am]

BILLING CODE 8010-01-M