Notice to Members 05-33

Short Sales in Pilot Securities and Order-Marking Requirements under SEC Regulation SHO

NASD, in conjunction with The Nasdaq Stock Market, Inc. (NASDAQ),is issuing this Notice to Members(NTM) to advise member firms and other interested parties of certain actions and issues surrounding the adoption of Regulation SHO by the Securities and Exchange Commission (SEC). First, on January 3, 2005 and April 15, 2005, the staff of the SEC Division of Market Regulation issued two No-Action Letters granting relief from the order-marking requirements under Regulation SHO in certain circumstances. In this regard, NASDAQ has established a "masking" process, as described in the SEC's April 15,2005, No-Action Letter. Second, NASD wishes to remind members using their own proprietary or vendor order management systems to accept and execute short sales in Regulation SHO pilot securities that such members are responsible for making appropriate system changes to ensure proper handling of pilot securities. In this regard, NASD is encouraging such members to review and test their systems to ensure readiness for the May 2, 2005, Regulation SHO pilot order effective date. Finally, with respect to Order Audit Trail System(OATS) requirements, members also may mark their OATS report consistent with the SEC's order-marking relief.

Questions regarding this Notice may be directed to the Office of General Counsel, Regulatory Policy and Oversight, NASD, at (202)728-8071; the Legal Section, Market Regulation, NASD, at (240) 386-5126; or the Office of General Counsel, The Nasdaq Stock Market, Inc., at (301) 978-8400.