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. 34-36532; File No. SR-NASD-95-58]

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

November 30, 1995.

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

(``Act''),\1\ notice is hereby given that on November 27, 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 and II 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. Sec. 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 December 1, 1995 to February 1, 1996, the implementation

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

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

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

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

the proposed rule change is as follows (additions are italicized;

deletions are bracketed):

Article III, Section 1

* * * * *

Section 48

(1)(3) Until February 1, 1996 [December 1, 1995], the term

``qualified market maker'' shall mean a registered Nasdaq market

maker that has maintained, without interruption, quotations in the

subject security for the preceding 20 business days.

* * * * *

Beginning February 1, 1996 [December 1, 1995], 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 August 3, 1996 [June

3, 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 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 has been in effect (from September 6, 1994 to September

6, 1995), Nasdaq market makers who maintained 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 were 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 exemptions

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).

\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

[[Page 62520]]

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 be 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 market

maker's proportionate share volume is 10 percent. Therefore, the

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

of overall volume.

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As noted above, the PMM standards were originally scheduled to go

into effect on September 6, 1995. However, because of unforeseen delays

in the programming of the PMM standards, the NASD proposed and the SEC

approved a delay in the effective date of the PMM standards until

December 1, 1995.\5\ With the instant filing, the NASD is proposing a

further delay of the implementation date for the PMM standards.

Specifically, because of recently detected errors in a segment of the

NASD's software used to calculate whether market makers are satisfying

the PMM standards, the NASD is proposing to delay the effective date of

the PMM standards until February 1, 1996.

\5\See Securities Exchange Act Release No. 36171 (Aug. 30,

1995), 60 FR 46651 (Sept. 7, 1995).

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With the proposed delay, a market maker's trading activity during

the month of January 1996 will be evaluated according to the PMM

standards to determine if it can retain its exemption until February

1996. Until January 31, 1996, the 20-day test will continue to be used

to evaluate market makers' eligibility for an exemption from the rule.

Thus, beginning February 1, 1996, a ``P'' indicator will be displayed

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 August 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) assumes

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 NASD 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.

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.

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 February 1, 1996 and that the

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

extended until August 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.\6\

[[Page 62521]]

As discussed below, the Commission believes that delayed implementation

of the PMM standards until February 1, 1996 and limited extension of

the short sales rule until August 3, 1996 (rather than June 3, 1996) is

consistent with the Act and the rules and regulations promulgated

thereunder.\7\

\6\15 U.S.C. Sec. 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).

\7\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 PMM status will avoid

confusion in the marketplace and assure consistency in the application

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

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.

In the Original Approval Order, the Commission stated that

experience with the NASD's short sale rule may demonstrate that some or

all of the elements of the rule require reconsideration. The Commission

notes that this is the NASD's second proposal to extend the operation

of the short sale rule due to technical problems associated with the

implementation of the PMM designation. The Commission is concerned

about the delay in implementing the PMM designation which inhibits the

ability to assess the effects of the short sale rule with the

designation in place and, thus, expects that no further delays will be

necessary.

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, NW., Washington, DC 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 SR-NASD-95-58 and

should be submitted by December 27, 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-95-58 be, and hereby is, approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

\8\17 CFR 200.30-3(a) (12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-29686 Filed 12-5-95; 8:45 am]

BILLING CODE 8010-01-M