Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Date of Implementation of the NASD's Primary Market Maker Standards and the Duration of the Pilot Program for the NASD's Short Sale Rule

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36171; File No. SR-NASD-55-35]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the National

Association of Securities Dealers, Inc. Relating to the Date of

Implementation of the NASD's Primary Market Maker Standards and the

Duration of the Pilot Program for the NASD's Short Sale Rule

August 30, 1995.

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

(``Act''),\1\ notice is hereby given that on August 24, 1995, the

National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the NASD.

The Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons. As discussed below, the

Commission has also granted accelerated approval of the proposal.

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

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

of the Proposed Rule Change

Pursuant to Section 19(b)(1) of the Act, the NASD is proposing to

delay, from September 6, 1995 to December 1, 1995, the implementation

date of the Primary Market Maker standards to be used to determine the

eligibility of market makers to an exemption from the NASD's short-sale

rule. The NASD also proposes to extend the termination date for the

pilot period to June 3, 1996 instead of March 5, 1996. The text of the

proposed rule change is as follows (additions are underlined; deletions

are bracketed).

RULES OF FAIR PRACTICE

ARTICLE III

Short Sale Rule

Sec. 48

* * * * *

(1)(3) Until December 1, 1995, t[T]he term ``qualified market maker

[,]'' [for a period of one year after the effective date of this

section,] shall mean a registered Nasdaq market maker that has

maintained, without interruption, quotations in the subject security

for the preceding 20 business days.

* * * * *

For purposes of this subsection, a market maker will be deemed to

have maintained quotations without interruption if the market maker is

registered in the security and has continued publication of quotations

in the security through the Nasdaq system on a continuous basis;

provided however, that if a market maker is granted an excused

withdrawal pursuant to the requirements of Part VI, Schedule D to the

By-Laws, the 20 business day standard will be considered uninterrupted

and will be calculated without regard to the period of the excused

withdrawal. Beginning December 1, 1995, [One year after effectiveness

of this section,] the term ``qualified market maker'' shall mean a

registered Nasdaq market maker that meets the criteria for a Primary

Nasdaq Market Maker as set forth in Article III, Section 49 of the

Rules of Fair Practice.

* * * * *

(m) This section shall be in effect until June 3, 1996 [March 6,

1996].

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 NASD included statements

concerning the purpose of and basis for the proposed rule change and

discussed any

[[Page 46652]]

comments it received on the proposed rule change. The text of these

statements may be examined at the places specified in Item IV below.

The 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

On June 29, 1994, the SEC approved the NASD's short-sale rule

applicable to short sales in Nasdaq National Market securities on an

eighteen-month pilot basis through March 5, 1996.\2\ The NASD's short-

sale rule prohibits member firms from effecting short sales at or below

the current inside bid as disseminated by the Nasdaq system whenever

that bid is lower than the previous inside bid.\3\ The rule is in

effect during normal domestic market hours (9:30 a.m. to 4:00 p.m.,

Eastern Time). As approved by the Commission, during the first year

that the rule is in effect (i.e., September 6, 1994 through September

5, 1995), Nasdaq market makers who maintain a quotation in a particular

Nasdaq National Market security for 20 consecutive business days

without interruption are exempt from the rule for short sales in that

security, provided that the short sales are made in connection with

bona fide market making activity (the ``20-day'' test). For the next

six months of the 18-month pilot period (i.e., September 6, 1995

through March 5, 1996), the ``20-day'' test for market maker exemption

from the rule was scheduled to be replaced with a four-part

quantitative test known as the Primary Market Maker (``PMM'')

Standards.

\2\ See Securities Exchange Act Release No. 34277 (June 29,

1994), 59 FR 34885 (July 7, 1994) (``Original Approval Order'').

\3\ A short sale is a 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.

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Under the PMM standards, to be eligible for an exemption from the

short-sale rule, a market maker must satisfy at least two of the

following four criteria: (1) The market maker must be at the best bid

or best offer as shown on the Nasdaq system no less than 35 percent of

the time; (2) the market maker must maintain a spread no greater than

102 percent of the average dealer spread; (3) no more than 50 percent

of the market maker's quotation updates may occur without being

accompanied by a trade execution of at least one unit of trading; or

(4) the market maker executes 1\1/2\ times its ``proportionate'' volume

in stock.\4\ If a market maker is a PMM for a particular stock, there

will be a ``P'' indicator next to its quote in that stock. In addition,

market makers will be able to review their status as PMMs through their

Nasdaq Workstation. The review period for satisfaction of the PMM

performance standards is one calendar month. If a PMM has not satisfied

the threshold standards after a particular review period, the PMM

designation will be removed commencing on the next business day

following notice of failure to comply with the standards. Market makers

may requalify for designation as a PMM by satisfying the threshold

standards for the next review period.

\4\ Specifically, the proportionate volume test requires a

market maker to account for volume of at least one-and-a-half times

its proportionate share of overall volume in the security for the

review period. For example, if a security has 10 market makers, each

has a proportionate share of 10 percent. Therefore, the

proportionate share volume is one-and-a-half times 10, or 15 percent

of overall volume.

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Because of unforeseen delays in the programming of the PMM

standards, however, the NASD is proposing that the effective date of

the PMM standards be delayed until December 1, 1995. With the proposed

delay, a market maker's trading activity during the month of November

will be evaluated according to the PMM standards to determine if it can

retain its exemption for December 1995. Until November 30th, the 20-day

test will continue to be used to evaluate market makers' eligibility

for an exemption from the rule. Thus, after December 1, 1995, a ``P''

indicator will be delayed next to every PMM that is exempt from the

rule according to the new PMM standards.

Because implementation of the PMM standards will be delayed under

the proposal, the NASD is also proposing to extend the pilot period for

the rule so that there is sufficient time to evaluate the effectiveness

and impact of the PMM standards and the effectiveness of the short sale

rule with the PMM standards in place. Specifically, the NASD proposes

to extend the termination date for the pilot program until June 3,

1996.

The NASD believes the proposed rule change is consistent with

Sections 15A(b)(6) and 11A(c)(1)(F) of the Act. Section 15A(b)(6)

requires that the rules of a national securities association be

designed to prevent fraudulent and manipulative acts and practices, 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, and to remove impediments to and perfect

the mechanism of a free and open market. Section 11A(c)(1)(F) assures

equal regulation of all markets for qualified securities and all

exchange members, brokers, and dealers effecting transactions in such

securities. Specifically, the NASD believes that continuing the

operation of the present ``20-day'' test until the PMM standards are in

place will ensure that the liquidity provided to the market by virtue

of the market maker exemption will not be diminished. In addition, the

NASD believes that continuation of the ``20-day'' test until the PMM

standards are in place would avoid the confusion in the marketplace

that would result if the market maker exemption were to lapse for two

months and then be reinstated. Finally, the NASD believes that

extending the pilot period for the short-sale rule will enhance the

quality of studies analyzing the effectiveness of the rule and help to

ensure that future regulatory action taken with respect to the rule is

based on a greater knowledge and understanding of the rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NASD 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.

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

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 approved such propose rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

The NASD has requested, however, that the Commission find good

cause pursuant to Section 19(b)(2) for approving the proposed rule

change prior to the 30th day after publication in the Federal Register.

[[Page 46653]]

As discussed below, the Commission finds that the proposed rule

change is consistent with the requirements of the Act. Further, the

Commission finds good cause for approving the proposal prior to the

30th day after the date of publication of notice of filing in the

Federal Register. The Commission believes that accelerated approval of

the proposal is appropriate in that it will permit the NASD to provide

interested persons adequate notice that implementation of the PMM

standards will be delayed until December 1, 1995 and that the

expiration of the short sale rule, including the PMM standards, will be

extended until June 3, 1996.

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

Proposed Rule Change

As discussed in the Original Approval Order, the Commission

believed and continues to believe that the imposition for a limited

time of a short sale rule and accompanying PMM standards applicable to

Nasdaq National Market securities is consistent with the requirements

of Sections 15A(b)(6), 15A(b)(9) and 15A(b)(11) of the Act.\5\ As

discussed below, the Commission believes that delayed implementation of

the PMM standards until December 1, 1995 and limited extension of the

short sale rule until June 3, 1996 (rather than March 6, 1996) is

consistent with the Act and the rules and regulations promulgated

thereunder.\6\

\5\ 15 U.S.C. 78o-3(b) (6), (9) and (11). Section 15A(b)(6)

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, and to protect investors and

the public interest. 15 U.S.C. Sec. 78o-3(b)(6). Sections 15A(b) (9)

and (11) require that the NASD's rule be designed not to impose any

burden on competition not necessary or appropriate in furtherance of

the Act, id. Sec. 78o-3(b)(9), and to produce fair and informative

quotations, to prevent fictitious or misleading quotations, and to

promote orderly procedures for collecting, distributing and

publishing quotations. Id. Sec. 78o-3(b)(11). In addition, the

Commission believes that the rule change will further the goals of

Section 11A in that it will promote efficient and effective market

operations and economically efficient execution of investor orders

in the best market and assure fair competition between the exchange

markets and the OTC market and among brokers and dealers. Id.

Sec. 78k-1(a)(1)(C),

\6\ Securities Exchange Act Release No. 34277 (June 29, 1994),

59 FR 34885 (July 7, 1994).

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Maintaining the current operation of the short sale rule until the

NASD has completed and tested the systems necessary to provide market

participants adequate notice of a market maker's PPM status will avoid

confusion in the marketplace and assure consistency in the application

of NASD rules. Moreover, extension of the short sale rule until June 3,

1996 will maintain the effectiveness of the PMM standards for six

months, as envisioned by the Commission's Original Approval Order. As

noted in the Original Approval Order, this will provide the Commission

and the NASD the opportunity to study the effects of the rule and its

exemptions and to determine whether these are practicable and necessary

on an ongoing basis, or whether other alternatives would be more

appropriate.

V. 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. Sec. 552, will be available for inspection and copying in

the Commission's Public Reference Room. Copies of such filing will also

be available for inspection and copying at the principal office of the

NASD. All submissions should refer to the file number in the caption

above and should be submitted by September 28, 1995.

VI. Conclusion

For the reasons stated above, the Commission believes the rule

change is consistent with the Act and, therefore, has determined to

approve it.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the rule change SR-NASD-95-35 be, and hereby is, approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

\7\ 17 CFR 200.30-3(a)(12) (1989).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-22105 Filed 9-6-95; 8:45 am]

BILLING CODE 8010-01-M