[Federal Register Volume 63, Number 88 (Thursday, May 7, 1998)]
[Notices]
[Pages 25253-25255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12142]
[[Page 25253]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39936; File No. SR-NASD-98-26]
Self-Regulatory Organization; Notice of Filing and Order Granting
Accelerated Partial Approval to Amendment No. 3 to Proposed Rule
Changes by the National Association of Securities Dealers, Inc. to
Institute, on a Pilot Basis, New Primary Nasdaq Market Maker Standards
for Nasdaq National Market Securities
April 30, 1998.
I. Introduction
On March 19, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly-owned subsidiary
The Nasdaq Stock Market, Inc. (``Nasdaq''), submitted to the Securities
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 196-4 thereunder,\2\ proposed rule changes to: (a)
Implement, on a pilot basis, new Primary Nasdaq Market Maker (``PMM'')
standards for all Nasdaq National Market (``NNM'') securities; (b)
extend the NASD's Short Sale Rule pilot until November 1, 1998; and (c)
extend the suspension of existing PMM standards until May 1, 1998. On
March 30, 1998, the Commission issued notice of the filing and
approved, on an accelerated basis, the portions of the filing extending
the NASD's Short Sale Rule pilot and the suspension of existing PMM
standards.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Exchange Act Release No. 39819 (March 30, 1998) 63 FR 16841
(April 6, 1998).
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On April 29, 1998, Nasdaq filed Amendment No. 3 to the proposal,\4\
proposing to: (a) Extend the comment period by 30 days to May 27, 1998;
(b) continue to suspend the current PMM standards until July 1, 1998;
(c) extend the NASD's Short Sale Rule pilot until January 4, 1999; (d)
change the dates during which the PMM pilot will run to July 1, 1998,
through January 4, 1999. Nasdaq also is proposing to amend subparagraph
(g) of NASD Rule 4612 to change the method for determining how market
makers that are not managers or co-managers in an underwriting
syndicate of a secondary offering may qualify as PMMs. Nasdaq has
requested accelerated approval of the suspension of the current PMM
standards.
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\4\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, Nasdaq, to Richard Strasser, Assistant Director,
Division of Market Regulation, SEC, dated April 29, 1998. Exchange
Act Release No. 39819 discussed Amendment No. 1 and Amendment No. 2
to the filing, which were filed with the Commission on March 25 and
26, 1998, respectively.
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Background
Present, NASD Rule 4612 provides that a member registered as a
Nasdaq market maker pursuant to NASD Rule 4611 may be deemed a PMM if
that member meets certain threshold standards. The implementation of
new Order Execution Rules \5\ and the concurrent move towards a more
order-driven, rather than a quote-driven, market raised questions about
the continued relevance of those PMM standards. As a result, such
standards were suspended beginning in early 1997.\6\ Currently, all
market makers are designated as PMMS.
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\5\ On August 29, 1996, the Commission promulgated a new rule,
the Limit Order Display Rule (Exchange Act Rule 11Ac1-4) and adopted
amendments to the Quote Rule (Exchange Act Rule 11Ac1-1), which
together are designated to enhance the quality of published
quotations for securities and promote competition and pricing
efficiency in U.S. securities markets (collectively, the ``Order
Execution Rules''). See Securities Exchange Act Release No. 37619A
(September 6, 1996) 61 FR 48290 (September 12, 1996) (``Order
Execution Rules Adopting Release'').
\6\ See Exchange Act Release No. 38294 (February 14, 1997) 62 FR
8289 (February 24, 1997) (approving temporary suspension of PMM
standards); Exchange Act Release No. 39198 (October 3, 1997) 62 FR
53365 (October 14, 1997) (extending suspension through April 1,
1998); Exchange Act Release No. 39819 (March 30, 1998) 63 FR 16841
(April 6, 1998) (extending suspension through May 1, 1998).
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Since February 1997, Nasdaq has worked to develop PMM standards
that are more meaningful in an increasingly order-driven environment
and that better identify firms engaged in responsible market making
activities deserving of the benefits associated with begin a PMM, such
as being exempt from NASD Rule 3350, the NASD's short sale rule. The
NASD now proposes to suspend the existing PMM standards and to
implement new standards on a pilot basis from July 1, 1998, until
January 4, 1999. The NASD intends the new standards to better evaluate
whether a market maker providers meaningful liquidity to the market. To
determine whether a particular market maker is such a provider
liquidity, Nasdaq will analyze that market maker's trading activity
using a new test.
For the reasons discussed below, the Commission has determined to
grant accelerated approval of Nasdaq's request to continue to suspend
the current PMM standards until July 1, 1998, as requested in Amendment
No. 3. Further, given the proposal's complexity and the Commission's
desire to give the public sufficient time to consider the proposal, the
Commission has extended the comment period for the proposed rule
changes, as amended, to May 27, 1998.
II. Proposed Rule Changes
As discussed in detail in Exchange Act Release No. 39819, Nasdaq is
proposing a new set of PMM standards. In the current filing, Nasdaq is
proposing an adjustment to the PMM standards with respect to markets
that are not managers or co-managers in an underwriting syndicate of a
secondary offering. In particular, Nasdaq proposes to amend
subparagraph (g)(2) of NASD Rule 4612 to change the method for
determining how market makers that are not managers or co-managers in
an underwriting syndicate of a secondary offering may qualify as PMMs.
Under the previous rule, a market maker could become a PMM after the
secondary offering had been announced or a registration statement had
been filed with the Commission if the market maker was registered in
the security and satisfied the PMM standards for 40 days or until the
registration became effective, whichever occurred first. Thus, for
secondary offerings the rule contained a variable ``review period,''
during which a market maker was required to meet PMM standards. Due to
technological constraints and the fact that PMM calculations under the
proposed rule are more complex than they were under the previous rule,
Nasdaq, in developing the PMM pilot, has been unable to build a system
that is able to make the PMM calculation using a variable review
period. Additionally, it has become clear that the existing rule for
secondary public offerings may be rendered less meaningful because PMM
status under the proposed new standards is determined by comparing and
examining market makers' share volume and number of trades during
definite time periods. Thus, introducing a variable time period could
have consequences that were not foreseen when the new standards were
crafted.
Nasdaq recognizes, however, that market makers should be held to a
more stringent standard before they may trade secondary offerings as
PMMs. Accordingly, Nasdaq proposes to amend NASD Rule 4612 so that a
market maker that wishes to register and become a PMM in a secondary
offering will have to fulfill the following two conditions. First, the
market maker must register and become a market maker in a security for
40 days or until the registration becomes effective, whichever occurs
first. Second, at the time the registration becomes effective or 40
days passes, the market maker
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must be a PMM in 80% or more of the Nasdaq National Market securities
in which it is registered (``80% Firm''). This proposal provides a
meaningful measure as to whether a market maker should be a PMM after a
secondary offering has been announced because it will require market
makers to register and be in a stock for a meaningful time period
(which may be as long as 40 days) and to be an 80% Firm before it may
qualify as a PMM. Furthermore, Nasdaq notes that this approach is in
line with the provisions of NASD rule 4612 regarding initial
registration situations and initial public offerings (``IPO'').
Nasdaq also proposes to amend subparagraph (g)(2)(B) of NASD rule
4612, to clarify the timing for the imposition of a 10 day prohibition
from participating in an IPO (``Over 10 Day Penalty''). This amendment
would codify an interpretation of subparagraph (g)(2)(B) of NASD Rule
4612, that was announced in a For Your Information included in the June
1996 edition of the NASD's Notice to Members. Specifically, the
amendment would clarify that if a PMM in an IPO withdraws on an
unexcused basis in the first review period, the 10 Day Penalty will
commence on the next business day after the unexcused withdrawal.
Additionally, if a PMM in an IPO fails to meet the applicable PMM
thresholds during the first review period, the 10 Day Penalty will
begin on the day the market loses its PMM designation (the third
business day of a month).
* * * * *
The proposed rule language follows. Additions are italicized;
deletions are bracketed.
Rule 4612
(a)-(f) No Change
(g) In registration situations:
(1) No Change
(2) Notwithstanding paragraph (g)(1) above, after an offering in a
stock has been publicly announced or a registration statement has been
filed with the Securities and Exchange Commission, no market maker may
register in the stock as a Primary Nasdaq Market Maker unless it meets
the requirements set forth below:
(A) For secondary offerings[:
(i)], the secondary offering has become effective [and the market
maker has satisfied the qualification criteria in the time period
between registering in the security and the offering becoming
effective] or 40 days have elapsed since the market maker registered in
the security (whichever occurs first), and at such time, the market
maker is a Primary Nasdaq Market Maker in 80% or more of the Nasdaq
National Market Maker securities in which it is registered; provided,
however, that if the member is a manager or co-manager of the
underwriting syndicate for the secondary offering and it is a [PMM]
Primary Nasdaq Market Maker in 80% or more of the Nasdaq National
Market securities in which it is registered, the member is eligible to
become a [PMM] Primary Nasdaq Market Maker in the issue prior to the
effective date of the secondary offering regardless of whether the
member was a registered market maker in the stock before the
announcement of the secondary offering[; or
(ii) the market maker has satisfied the qualification criteria for
40 calendar days].
(BN) For initial public offerings (IPOs):
(i) the market maker may register in the offering and immediately
become a Primary Nasdaq Market Maker if it is a Primary Nasdaq Market
Maker in 80% of the securities in which it has registered; provided
however, that if[, at the end of the first review period,] the Primary
Nasdaq Market Maker has withdrawn on an unexcused basis from the
security at any time during the first review period or has not
satisfied the [qualification criteria] applicable thresholds at the end
of the first review period, it shall not be afforded a Primary Nasdaq
Market Maker designation on any subsequent initial public offerings for
the next 10 business days following the unexcused withdrawal or the
next 10 business days following the day on which the Primary Nasdaq
Market Maker is notified that it failed to satisfy the applicable
thresholds for the first review period (as applicable); or
(ii) No Change.
(C) No Change.
(3) No Change
(h) [The Board of Governors may modify the threshold standards set
forth in paragraphs (a) and (b) above if it finds that maintenance of
such standards would result in an adverse impact on a class of
investors or on Nasdaq.] This rule shall be in effect beginning July 1,
1998, and remain in effect until January 4, 1999.
* * * * *
NASD Rule 3350
(a)-(k) No Changes
(1) This Rule shall be in effect until [November 1, 1998] January
4, 1999.
* * * * *
III. Discussion
After careful consideration, the Commission has concluded, for the
reasons set forth below, that the extension of the current suspensions
of existing PMM standards through July 1, 1998, is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder. As the Commission discussed in its previous order relating
to the PMM pilot,\7\ extending the suspension of the current PMM
standards to accommodate implementing the new pilot is consistent with
Section 15A(b)(6) \8\ of the Exchange Act. Section 15A(b)(6) of the
Exchange Act requires that the NASD's rules be designed, among other
things, to prevent fraudulent and manipulative acts and practices and
to promote just and equitable principles of trade. The Commission
believes that continued suspension of the current PMM standards will
facilitate Nasdaq's efforts in implementing more meaningful PMM
standards which should help to enhance market liquidity by rewarding
those market makers that meet the new standards. As a result,
continuing the suspension of the current PMM standards is consistent
with Section 15A(b)(6) of the Exchange Act.
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\7\ See Exchange Act Release No. 39819 (March 30, 1998) 63 FR
16841 (April 6, 1998) (extending suspension through May 1, 1998).
\8\ 15 U.S.C. 78o-3(b)(6).
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In finding that the suspension of the existing PMM standards is
consistent with the Exchange Act, the Commission reserves judgment on
the merits of the Short Sale Rule, any market maker exemptions to that
rule and the proposed new PMM standards. The Commission recognizes that
the current Short Sale Rule already has generated significant public
comment. Such commentary, along with any further comment on the
interaction of the Short Sale Rule with the proposed new PPM standards,
will help guide the Commission's evaluation of the Short Sale Rule and
new PMM standards. During the PMM pilot period, the Commission
anticipates that the NASD will continue to address the Commission's
questions and concerns and provide the Commission staff with any
relevant information about the practical effects and the operation of
the revised PMM standards and possible interaction between those
standards and the NASD's Short Sale Rule.
As proposed, the new PMM standards will become effectively July 1,
1998, when the suspension of the existing PMM standards, under
Amendment No. 3, expires. Nasdaq notes that currently all market makers
registered in a security are PMMs due to the suspension of the previous
PMM standards, and will continue to be so
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designed on the pilot's proposed start date of July 1, 1998. Under the
one-month look-back provision in the PMM pilot program, Nasdaq will
consider the previous calendar month and the current month to determine
a market maker's continued PMM eligibility if the market maker attained
PMM status in a security during the previous month, but fails to meet
the applicable thresholds for the current month. Nasdaq recognizes that
once the pilot begins on July 1, 1998, PMMs will not have the ability
to avail themselves of the one-month look-back provision because there
will be no meaningful trading to analyze prior to July 1, 1998. Thus,
to give PMMs the full benefit of the one-month look-back period and to
allow market makers time to adjust their trading activity to the new
standards, Nasdaq proposes to implement the new standards so that no
market maker that is designated as a PMM when the pilot begins on July
1, 1998, will lose its PMM status--based on a failure to meet the new
PMM standards--until September 3, 1998. Nasdaq believes, and the
Commission agrees, that it is fair to give market makers this time to
make necessary adjustments to their trading activity to help them
maintain their PMM designation, particularly since PMM standards have
been suspended for more than a year and the new PMM standards are more
stringent than the previous standards. The PMM pilot, pursuant to
Amendment No. 3, would run until January 4, 1999.
The Commission finds good cause for approving the extension of the
suspension of existing PMM standards prior to the 30th day after the
date of publication of notice of filing thereof. It could be disruptive
to market making to reintroduce outdated PMM standards for a brief
period prior to implementing a new PMM pilot. Further, the current PMM
standards have been suspended until May 1, 1998, at which time the old
PMM standards--which are not a meaningful measure of a market maker's
liquidity-providing activity--would be used again to determine market
makers' PMM status. To ensure continuity in the PMM standards and the
regulation of short selling activity, to maintain orderly markets, and
to avoid confusion, it is necessary to continue the suspension of the
prior PMM standards until the new standards are implemented on July 1,
1998.
IV. Solicitation of Comments
Given the proposal's complexity and the Commission's desire to give
the public sufficient time to consider the proposal, the Commission
hereby grants Nasdaq's request to extend the comment period for the
proposed rule changes, as amended, to May 27, 1998. Interested persons
are invited to submit written data, views, and arguments concerning the
foregoing, including whether the proposed rule changes are consistent
with the Exchange Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, DC 20549. Copies of the
submissions, 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 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 File No. SR-NASD-98-26 and should be
submitted by May 27, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\9\ that Amendment No. 3 to the proposed rule change, SR-
NASD-98-26, which extends, on an accelerated basis, the suspension of
the current PMM standards to July 1, 1998, be and hereby is
approved.\10\
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\9\ 15 U.S.C. 78s(b)(2).
\10\ In approving the proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. The proposal likely will provide the Commission with data
necessary to enable it to evaluate the impact of the proposed PMM
standards on the Nasdaq market and market participants. 15 U.S.C.
78c(f).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-12142 Filed 5-6-98; 8:45 am]
BILLING CODE 8010-01-M