

[Federal Register: June 22, 2006 (Volume 71, Number 120)]
[Notices]               
[Page 35964-35966]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jn06-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54010; File No. SR-NASD-2006-076]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. To Exempt All Securities 
Included in the NASDAQ 100 Index From the Price Test Set Forth in NASD 
Rule 3350(a)

June 16, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 15, 2006, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 substantially by Nasdaq. 
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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq has submitted a proposed rule change to exempt all 
securities included in the NASDAQ 100 Index from the price test set 
forth in NASD Rule 3350(a). The text of the proposed rule change is 
below. Proposed new language is underlined; proposed deletions are in 
brackets.

3350 Short Sales
    (a)-(b) No Change.
    (c)(1)-(9) No Change.
    (10) Sales of securities included in the Nasdaq 100 Index.
    (d)-(k) No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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

1. Purpose
    Nasdaq is proposing to amend Rule 3350(c) to create an exemption 
from the short sale rule for securities included in the Nasdaq 100 
Index.
    The NASDAQ 100 Index. First introduced in 1985, the NASDAQ-100 
Index was created to track the performance of the largest non-financial 
companies listed on The NASDAQ Stock Market. Nasdaq states that the 
NASDAQ-100 Index Tracking Stock, also known as ``QQQ'', is the most 
actively traded ETF and the most actively traded listed equity security 
in the U.S. by average daily share trading volume. As of the end of the 
fourth quarter of 2005, QQQ traded an average of 90.4 million shares 
per day. Nasdaq notes that QQQ has grown significantly since its 
inception: From $14.5 million in assets at the start to $20.3 billion 
in assets as of December 31, 2005, and from 300,000 total shares 
outstanding to 501.95 million at the end of the fourth quarter of 2005.
    In addition to the QQQ, Nasdaq states that nearly 150 licensees 
have contracted with Nasdaq to use the NASDAQ-100 and other Nasdaq 
indices as benchmarks for the issuing and trading of their global 
financial products. These third-party underwritten products, such as 
equity-linked notes, index warrants, certificates of deposits, 
leveraged products and basket securities, were sold in 32 countries and 
amounted to $157.05 billion in underlying notional value as of December 
31, 2005.6 A total of 33 domestic and international mutual funds use 
this barometer index as a benchmark as well.
    Nasdaq states that, as a result, the Nasdaq 100 stocks are highly 
liquid. For the month of April 2006, the average daily volume for that 
group of securities was over 880 million shares. The average daily 
volume of an individual Nasdaq 100 security was over 8.8 million shares 
and the mean daily trading value of those securities was over 3.4 
million shares.
    The Regulation SHO Pilot. On June 23, 2004, Commission approved new 
and amended short sale regulations in Regulation SHO under the 
Securities Exchange Act of 1934 (the ``Act''). On July 28, 2004, the 
Commission issued an order creating a one year Pilot (``Pilot'') 
suspending the provisions of Rule 10a-1(a) under the Act and any short 
sale price test of any exchange or national securities association for 
short sales of certain securities. The Pilot was created pursuant to 
Rule 202T of Regulation SHO, which established procedures to allow the 
Commission to temporarily suspend short sale price tests so that the 
Commission could study the effectiveness of short sale price tests. On 
April 20, 2006, the Commission issued an order extending the 
termination date of the Pilot to August 6, 2007, the date on which 
temporary Rule 202T expires.
    The Pilot exempted a selected list of securities from short sale 
price test restrictions of SEC Rule 10a-1 and the rules of self 
regulatory organizations, including NASD Rule 3350. Nasdaq notes that, 
of the roughly 1000 such securities, roughly 47 percent are listed

[[Page 35965]]

on Nasdaq and, of those, 24 currently are included in the Nasdaq 100 
Index.
    Rationale for Proposed Exemption. Nasdaq states that, first, the 
proposed exemption is consistent with the goals of short sale 
regulation because the stocks included in the Nasdaq 100 Index are 
highly liquid and not implicated by the objectives of the short sale 
rule. Congressional and Commission objectives included allowing 
relatively unrestricted short selling in an advancing market, 
preventing short selling at successively lower prices; and preventing 
short sellers from accelerating a declining market by exhausting all 
remaining bids at one price level. Nasdaq states that, given the highly 
liquid nature of securities listed in the Nasdaq 100 Index, the 
proposed exemption poses no risk to investors.
    Nasdaq states that this conclusion is supported by the results of 
the Reg SHO Pilot to date. Numerous academics have used the 
implementation of Reg SHO as a natural experiment to study the affects 
of price-test exemptions on various measures of market quality and 
trading behavior. Nasdaq states that a recurring finding among these 
studies is that there is no indication that the pilot increased short-
sale volume or volatility, decreased returns, or sacrificed market 
efficiency. Nasdaq believes that the results also show that bid-test 
rules had little-to-no affect on market quality or trading behavior for 
Nasdaq pilot stocks. Nasdaq states that this finding is consistent with 
the ability of short-sellers to circumvent Nasdaq's bid-test rule by 
routing orders to markets without short-sale restrictions.
    Given the highly liquid nature of Nasdaq 100 securities and the 
absence of a material impact from the removal of price-based short sale 
restrictions on 24 of those securities, Nasdaq believes it would 
benefit investors to exempt the remaining stocks in the Nasdaq 100 
Index. As described above, the Nasdaq 100 Index serves as the basis for 
billions of dollars of assets and trading in the basket of securities 
that make up the index. Nasdaq believes that the disparity of 
regulatory treatment between Nasdaq 100 securities that are included in 
the Pilot and those that are not is inefficient and potentially harmful 
to investors.
    Nasdaq believes that the proposed exemption will also remove the 
disparity in short sale regulation that currently exists between 
markets. As opposed to the NASD, which has voluntarily adopted a short 
sale rule for Nasdaq securities, several exchanges that trade Nasdaq 
securities do so with no short sale regulation, encouraging market 
participants to route short sale orders to their markets to avoid any 
regulatory restriction. As a result, the level of regulatory protection 
an investor receives depends almost entirely on the market to which the 
investor's order is routed. Nasdaq believes that this disparity harms 
customers on all markets by forcing traders to choose between bypassing 
limit orders posted on Nasdaq, delaying executing those orders, or 
declining to execute. Nasdaq states that the proposed exemption is 
designed to help to alleviate these issues.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\3\ in general, and with 
Section 15A(b)(5) of the Act,\4\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \3\ 15 U.S.C. 78o-3.
    \4\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written 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 approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    Nasdaq has requested that this proposal be approved on an 
accelerated basis. Nasdaq asserts that, given the current disparity 
between short sale regulation on Nasdaq and the lack of short sale 
regulation on NYSE/Arca and the National Stock Exchange, there is no 
basis to conclude that this proposal will generate legitimate 
controversy. Nasdaq also states that these are highly active and liquid 
securities that do not present any of the risks commonly understood as 
the underpinning for short sale regulation.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2006-076 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-076. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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, 100 F Street, 
NE., Washington, DC 20549-1090. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

[[Page 35966]]

    All submissions should refer to File Number SR-NASD-2006-076 and 
should be submitted on or before July 13, 2006.

    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).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-9852 Filed 6-21-06; 8:45 am]

BILLING CODE 8010-01-P
