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6290 Federal Register / Vol. 62, No. 28 / Tuesday, February 11, 1997 / Notices[Release No. 34–38240; File No. SR–NASD–96–52]Self-Regulatory Organizations;National Association of SecuritiesDealers, Inc.; Order GrantingAccelerated Approval of ProposedRule Change Relating to the Reportingof Short Sale Transactions by MarketMakers Exempt From the NASD’sShort Sale RuleFebruary 5, 1997.I. IntroductionOn December 17, 1996, the NationalAssociation of Securities Dealers, Inc.(‘‘NASD’’ or ‘‘Association’’) filed withthe Securities and ExchangeCommission (‘‘Commission’’ or ‘‘SEC’’)pursuant to Section 19(b)(1) of theSecurities Exchange Act of 1934(‘‘Act’’), 1 and Rule 19b–4 thereunder 2 aproposed rule change to the AutomatedConfirmation Transaction (‘‘ACT’’)Service rules that would require allPrimary Market Makers (‘‘PMM’’) tomark their ACT reports to denote whenthey have relied on the PMM exemptionto NASD’s short sale rule. The proposedrule change was published for commentin Securities Exchange Act Release No.38092 (December 27, 1996), 62 FR 776(January 6, 1997) (‘‘Notice of ProposedRule Change’’). The Commissionreceived no comments on the proposaland is approving the proposed rulechange on an accelerated basis.II. Description of the ProposalOn June 29, 1994, the Commissionapproved the NASD’s short sale rule onan eighteen-month pilot basis throughMarch 5, 1996. 3 The Commissionsubsequently extended the terminationdate through October 1, 1997. 4 TheNASD’s short sale rule prohibitsmember firms from effecting short salesin Nasdaq National Market (‘‘NNM’’)securities at or below the current insidebid as disseminated by Nasdaqwhenever the bid is lower than theprevious bid. 5 The rule provides anexemption from the short sale rule to‘‘qualified’’ Nasdaq market makers whocan use the exemption only inconnection with bona fide marketmaking activity. To be a qualifiedmarket maker, a market maker must1 15 U.S.C. 78s(b)(1).2 17 CFR 240.19b–4.3 See Securities Exchange Act Release No. 34277(June 29, 1994), 59 FR 34885 (July 7, 1994) (‘‘ShortSale Rule Approval Order’’).4 See Securities Exchange Act Release Nos. 36171(August 30, 1995), 60 FR 46651; 36532 (November30, 1995), 60 FR 62519; 37492 (July 29, 1996), 61FR 40693; and 37919 (November 1, 1996), 61 FR57934.5 See NASD Rule 3350.satisfy the Nasdaq PMM standards. 6 If amarket maker is a PMM for a particularstock, there is a ‘‘P’’ indicator next to itsquote in that stock. 7When the Commission approved theNASD’s short-sale rule it also approvedan NASD proposal to require NASDmembers to append a designator to theirACT reports to denote whether theirsale transactions were long sales, shortsales, or exempt short sales. At thattime, however, market makers exemptfrom the short-sale rule were notrequired to append ‘‘sell short’’ or ‘‘sellshort exempt’’ to their ACT reports. 8Accordingly, in order to enhance theNASD’s ability to surveil for potentialabuses of the market maker exemptionand examine and monitor the marketimpacts of the market maker exemption,the NASD’s proposed rule changedeletes the footnote to NASD Rule6130(d)(6), thereby requiring all exemptmarket makers to mark their ACTreports to denote when they have reliedon the market maker exemption.The NASD will establish an effectivedate for the rule change in a Notice-to-Members announcing Commissionapproval of the proposal. The Noticewill be published within thirty days ofCommission approval of the proposaland the effective date of the proposal6 Pursuant to NASD Rule 4612, the PMMstandards require a market maker to satisfy at leasttwo of the following four criteria to be eligible foran exemption from the short sale rule: (1) themarket maker must be at the best bid or best offeras shown on Nasdaq no less than 35 percent of thetime; (2) the market maker must maintain a spreadno greater than 102 percent of the average dealerspread; (3) no more than 50 percent of the marketmaker’s quotation updates may occur without beingaccompanied by a trade execution of at least oneunit of trading; or (4) the market maker executes 1 1 ⁄2times its ‘‘proportionate’’ volume in the stock.Specifically, the proportionate volume test requiresa market maker to account for volume of at least 1 1 ⁄2times its proportionate share of overall volume inthe security for the review period. For example, ifa security has 10 market makers, each marketmaker’s proportionate share volume is 10 percent.Therefore, the proportionate share volume is oneand-a-halftimes 10, or 15 percent of overallvolume. But, see Securities Exchange Act ReleaseNo. 38175 (January 15, 1997) (Commissionapproving NASD rule proposal to waive the PMMqualification standards in conjunction with theadoption of the Commission’s Order ExecutionRules); and File No. SR–NASD–97–07 (January 31,1997) (Proposed rule change to temporarily suspendthe use of the Primary Market Maker qualificationcriteria for all Nasdaq market maker securities forthe remainder of the current pilot period of theNasdaq short sale rule).7 See Securities Exchange Act Release no. 38175(January 15, 1997), stating that the NASD will, uponsuspension of the PMM qualification criteria forNNM securities, deem all registered market makersin such securities PMMs.8 Specifically, the footnote to NASD Rule6130(d)(6) provides that ‘‘[t]he ‘sell short’ and ‘sellshort exempt’ indicators must be entered for allcustomer short sales, including cross transactions,and for short sales effected by members that are notqualified market markers pursuant to Rule 3350.’’will be no longer than three weeks afterthe date of publication of the Notice.III. DiscussionThe Commission believes the NASD’sproposed rule change is consistent withSection 15A(b)(6) of the Act, 9 and thatit will promote efficiency, competition,and capital formation. Section 15A(b)(6)requires that the rules of a nationalsecurities association be designed topromote just and equitable principles oftrade, to foster cooperation andcoordination with person engaged inregulating, clearing, settling, processinginformation with respect to, andfacilitating transactions in securities,and to remove impediments to andperfect the mechanism of a free andopen market. The Commission believesthat requiring exempt market makers tomark their ACT reports to denote whenthey have relied upon the PMMexemption will help to enhance theability of NASD Regulation, Inc. toefficiently monitor whether marketmakers are abusing the exemption. 10Furthermore, the Commission, inapproving the short sale rule on a pilotbasis, requested the NASD to studyvarious aspects of the rule’s effects,including the use of the PMMexemption to the rule. The Commission,therefore, believes that requiring PMMsto append a designator to their ACTreports will assist the NASD inassessing the market impacts of thePMM exemption from the short salerule, as well as facilitate the preparationof a thorough analysis of suchexemption.The NASD requested that theCommission find good cause forapproving the proposed rule changeprior to the thirtieth day after the dateof publication of notice of the filing inthe Federal Register. The Commissionfinds good cause for so approving theproposed rule change becauseaccelerated approval will allow theNASD to begin collecting the necessarydata for a meaningful statistical analysisof the market impact of the PMMexemption from the short sale rule.Furthermore, the Commission believesit is prudent to allow the NASD to beginrequiring PMMs to mark their ACTreports when they have relied on thePMM exemption as soon as possible inorder that the NASD and PMMs willbecome familiar with the use of the ACT9 15 U.S.C. 78o–3(b)(6).10 See footnote 6, supra; and Letter from HowardKramer, Associate Director, Division of MarketRegulation, Commission, to Eugene A. Lopez,Assistant General Counsel, NASD (February 3,1997) (No-action letter regarding suspension of thePrimary Market Maker standards).