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91-2 Request for Comments From Members, Issuers, and Investors on Nasdaq Short-Sale Rule; Last Date for Comments: March 1, 1991


Senior Management
Legal & Compliance
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The NASD has taken several actions to eliminate short-sale abuses. Notwithstanding these initiatives, an important segment of market participants, including investors and corporate issuers, believe that the Securities and Exchange Commission (SEC) short-sale rule, which prohibits short sales in listed stocks on a down tick, should also apply to Nasdaq securities. The purpose of this notice is to solicit comment on the application of this rule or a comparable concept for short-sale regulation to Nasdaq securities.


Nasdaq issuers and investors are concerned that the absence of a short-sale rule or tick test for Nasdaq stocks permits aggressive short selling to have a negative impact on the price of a security. In the last five years, the NASD has taken a number of steps to eliminate short-sale abuses, including a requirement to mark order tickets long or short and the monthly publication of short interest in Nasdaq stocks.1

While the rules implemented have substantially reduced abusive practices by short sellers in Nasdaq stocks, there continues to be a perception by market participants and corporate issuers that the SEC "tick test" or equivalent restriction of short-selling activity is needed for Nasdaq or specifically Nasdaq National Market (Nasdaq/NMS) securities. The SEC rule, applicable to listed stocks, contains several exemptions, including exemptions for bona fide arbitrage and hedging activity, for specialists and market makers, and for orders executed through automatic execution systems. Market makers that trade listed securities are also bound by the SEC rule.

Consideration of a short-sale rule is responsive to those issuers listed on the Nasdaq market that view a short-sale restriction as a desirable regulatory characteristic of a registered market. Therefore, the NASD Board of Governors is seeking comment from investors, issuers, market makers, and other broker-dealers concerning the desirability of developing a short-sale rule applicable to Nasdaq or Nasdaq/NMS securities. If commenters believe that a short-sale rule is appropriate or necessary for the Nasdaq market, they may wish to comment on how such a rule should operate. For example, two alternatives would be a "tick test" based on the last-sale prices or a "bid test" based on the current inside bid.

Members, Nasdaq issuers, investors, and interested parties are urged to comment on these and any other relevant issues. Questions may be directed to Gene L. Finn, Chief Economist, at (202) 728-8243 or Beth E. Mastro, Assistant General Counsel, at (202) 728-6998.

Written comments should be forwarded to Mr. Lynn Nellius, Office of the Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006. Comments should be received no later than March 1, 1991.

1 Other initiatives include requiring an affirmative determination that a security can be borrowed and delivered before a short sale is effected for customer accounts, requiring that buy-in transactions for customer accounts must be for cash or guaranteed delivery, and successfully petitioning the SEC to adopt Rule 10b-21. The SEC rule states that short sales made between the announcement and offering dates of a secondary offering cannot be covered with purchases made out of the offering. In the fall of 1985, the NASD retained Irving M. Pollack, a former SEC Commissioner and recognized expert in the field of securities regulation, to conduct a comprehensive study of short-selling practices in the Nasdaq market. The Pollack study, published in 1986, recommended that the NASD adopt several of these rules, but it stopped short of recommending a tick test.

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