[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59610-59613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29467]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40606; File No. SR-NASD-98-51]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to the Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Microcap
Initiatives-Amendments to NASD Rules 6530 and 6540
October 27, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on July 20, 1998, the National Association of
Securities Dealers, Inc. (``NASD'' or ``Association''), through its
wholly-owned subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the NASD. On October
7, 1998, the NASD filed with the Commission Amendment No. 1 to the
proposal.\3\ 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.
\3\ Letter from Robert E. Aber, General Counsel, Nasdaq, to
Katherine A. England, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated October 7, 1998
(``Amendment No. 1''). The substance of Amendment No. 1 is
incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Association is proposing amendments to NASD Rules 6530 and 6540
to limit quotations on the OTC Bulletin Board (``OTCBB'')
to the securities of issuers that are current in their reports filed
with the SEC or other regulatory authority, and to prohibit a member
from quoting a security on the OTCBB unless the issuer has made current
filings, respectively. Proposed new language is in italics; proposed
deletions are in [brackets].
* * * * *
6530. OTCBB Eligible Securities
A Member shall be permitted to quote the [The] following categories
of securities [shall be eligible for quotation] in the Service:
(a) any domestic equity security that satisfies the requirements of
paragraph (1) and either paragraph (2) or (3) or (4) below;
(1) the security is not listed on The Nasdaq Stock Market
(``Nasdaq'') or a registered national securities exchange in the U.S.,
except that an equity security [securities that are] shall be
considered eligible if it:
(A[1]) is listed on one or more regional stock exchanges, and
(B[2]) [do] does not qualify for disseminating of transactions
reports via the facilities of the Consolidated Tape [shall be
considered eligible.]; and
(2) the issuer of the security is required to file reports pursuant
to Section 13 or 15(d) of the Act or the security is described in
Section 12(g)(2)(B) of the Act, and, subject to a thirty calendar day
grace period, the issuer of the security is current in its reporting
obligations, or
(3) the security is described in Section 12(g)(2)(G) of the Act
and, subject to a sixty calendar day grace period, the issuer or the
security is current in its reporting obligations, or
(4) the issuer of the security is a bank or savings association
that is not required to file reports with the Commission pursuant to
Section 13 or 15(d) of the Act and, subject to a sixty calendar day
grace period, the issuer of the security is current with all required
filings with its appropriate Federal banking agency or State bank
supervisor (as defined in 12 U.S.C. 1813).
(b) any foreign equity security or American Depositary Receipt
(ADR) that meets all of the following criteria:
(1) [prior to April 1, 1998, is not listed on Nasdaq or a
registered national securities exchange in the U.S., except that a
foreign equity security or ADR shall be considered eligible if it is:
(A) listed on one or more regional stock exchanges, and
(B) does not qualify for dessimination of transaction reports via
the facilities of the Consolidated Tape.
(2) after March 31, 1998,] the security is registered with the
Securities and Exchange Commission pursuant to Section 12 of the
[Securities Exchange Act] Act [of 1934] and the issuer of the security
is current in its reporting obligating; or the security satisfies the
requirements of paragraph (a)(2) or (3) or (4) above; and
(2) the security is not listed on Nasdaq or a registered national
securities exchange in the U.S., except that a foreign equity security
or ADR shall [be considered eligible] meet this subparagraph (2) \4\ if
it is:
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\4\ The proposed rule text was changed from ``subparagraph (3)''
to ``subparagraph (2)'' to correct the internal cross-reference.
Telephone conversation between Sara Nelson Bloom, Associate General
Counsel, Nasdaq, and Robert B. Long, Attorney, Division Commission,
on October 28, 1998.
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(A) listed on one or more regional stock exchanges, and
(B) does not qualify for dissemination of transaction reports via
the facilities the Consolidated Tape.
(c) any equity security that [is] meets the following criteria:
(1) the security is undergoing delisting from either the New York
Stock Exchange, Inc. (NYSE) or the American Stock Exchange, Inc. (AMEX)
for non-compliance with maintenance-of-listing standards; and
(2) the security is subject to a trading suspension imposed by the
NYSE or
[[Page 59611]]
AMEX preceding the actual delisting; and
(3) the security satisfies the requirements of paragraph (a)(2) or
(3) or (4) above.
(d) any Direct [District] Participation Program as defined in Rule
6910 that is not listed on Nasdaq or a registered national securities
exchange in the U.S. and that satisfies the requirements of paragraph
(a)(2) or (3) or (4) above.
(e) Paragraphs (a)(2) and (3) and (4) above will not apply with
respect to any domestic equity security quoted in the Service on the
effective date of this rule change until six months after that date.
* * * * *
Rule 6540. Requirements Applicable to Market Makers
(a) No change.
(b) No change.
(1) Permissible Quotation Entries: no change.
(2) Impermissible Quotation Entries.
(A) No member or person associated with a member shall enter into
the Service a priced bid and/or offer, an unpriced indication of
interest (including ``bid wanted'' or ``offer wanted'' indications), or
a bid or offer accompanied by a modifier to reflect unsolicited
customer interest in any security that does not satisfy the
requirements of Rule 6530.
(B) No member or person associated with a member shall enter into
the Service a priced bid and/or offer, an unpriced indication of
interest (including ``bid wanted'' or ``offer wanted'' indications), or
a bid or offer accompanied by a modifier to reflect unsolicited
customer interest in any security of an issuer that does not make
filing with the Securities and Exchange Commission through the
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system
(or in paper format, if specifically permitted by Commission Rules)
unless the member:
(i) notifies the Association of the issuer of the security's
schedule for the filing of all periodic reports or financial reports
required pursuant to the Act or regulatory authority, respectively, and
the identity of the regulatory authority with which such reports are
filed, or ensures that such notice is provided; and
(ii) provides to the Association the issuer's periodic reports
required pursuant to the Act, or the issuer's financial reports
required by regulatory authority, prior to the expiration of the grace
period described in Rule 6530(a)(3), or ensures that the required
periodic reports are provided to the Association within that time
period.
(3) [(2)] Voluntary Termination of Registration
No change.
(4) [(3)] More Than One Trading Location
No change.
(5) [(4)] Clearance and Settlement
No change.
(c) Compliance With Market Maker Requirements
Failure of a member or a person associated with a member to comply
with this Rule may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of
trade, in violation of Rule 2110.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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. The NASD 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
The NASD has actively studied the OTC market in an effort to
address abuses in the trading and sales of thinly traded, thinly
capitalized (microcap) securities. These securities are not listed on
Nasdaq or any exchange and trade on the OTCBB, in the ``pink sheets''
published by the National Quotation Bureau, Inc. (``Pink Sheets''), and
in other quotation media where there are no listing requirements. With
respect to its examination of the OTCBB in particular, the NASD noted
the lack of reliable and current financial information about the
issuers, and the perception by the public that the OTCBB is similar to
a highly regulated market, such as the registered exchanges or
Nasdaq.\5\
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\5\ In addition, the NASD has filed a proposed rule change
through its subsidiary, NASD Regulation, to require a member to
review current financial statements and other business information
about the issuer of a security that is not listed on Nasdaq or a
national securities exchange before that member could recommend a
transaction to a customer in the security and to provide certain
disclosure information on the trade confirmation for all customer
transactions (solicited and unsolicited) in such securities. See SR-
NASD-98-50.
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The OTCBB provides a real-time quotation medium that NASD member
firms can use to enter, update, and retrieve quotation information
(including unpriced indications of interest) for equity securities
trade over-the-counter that are neither listed on Nasdaq nor on a
primary national securities exchange. Eligible securities include
national, regional, and foreign equity issues, warrants, units. Direct
Participation Programs (``DPPs''),\6\ and American Depositary Receipts
(``ADRs'')\7\ not listed on any other U.S. national securities market
or exchange. Unlike Nasdaq or registered exchanges where individual
companies apply for listing on the market--and must meet and maintain
strict listing standards--there are no listing standards for the OTCBB,
and there currently is no requirement that issuers of securities on the
OTCBB make current, publicly-available reports with the SEC or other
regulator. In fact, over half of the companies that are currently
quoted on the OTCBB are not subject to any public reporting
requirements.
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\6\ DPPs are securities offerings that permit investors to
directly participate in the cash flow and tax consequences of the
underlying investments. DPPs provide for the ``flow through'' of tax
results. Thus, gains and losses are taxed to the investor not the
issuer of the security.
\7\ ADRs are receipts for shares of foreign corporations that
are held by U.S. banks and bought and sold in the U.S. by investors,
without utilizing overseas markets.
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The proposed rule change was developed in an effort to balance the
benefits that the transparency of the OTCBB provides with the public
need for information about the issuers being quoted. The NASD is
concerned that where there is no public information available regarding
a security, the broad-based automated display of quotations in that
security creates an unjustified perception of reliability. While the
NASD realizes that the new rule may result in the lack of real-time
quotations for those securities that become ineligible for the OTCBB,
it believe that this loss is outweighed by the benefit to investors who
would, under the proposed rule, have access to information about the
companies in which they may invest. In addition, transactions in
securities ineligible for the OTCBB would still be subject to real-time
last sale trade reporting. These reports are publicly disseminated
through market data vendors on a real-time basis.
Amendment to Rule 6530
This proposed amendment to rule 6530 would limit quotations on the
OTCBB to the securities of issuers that make current filings pursuant
to
[[Page 59612]]
Sections 13 \8\ and 15(d) of the Act,\9\ securities of depository
institutions that are not required to make filings under the Act, but
file publicly-available reports with their appropriate regulatory
agencies, registered closed-end investment companies, and insurance
companies that are exempt from registration under Section 12(g)(2)(G)
of the Act.\10\
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\8\ 15 U.S.C. 78m.
\9\ 15 U.S.C. 78o-(d).
\10\ 15 U.S.C. 78(g)(2)(G).
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To remain eligible for quotation on the OTCBB, as issuer must
remain current in its filings with the SEC or applicable regulatory
authority. A member would be required to inform the NASD of the
issuer's reporting schedule. Based upon that schedule, the NASD will
affix a modifier on the security's symbol if the NASD has not received
information that the report was timely filed.\11\ The addition of the
modifier to the symbol, as well as any changes to the symbol necessary
to accommodate the modifier, will be publicly reported on the OTCBB
Daily List, which is available to market makers and investors through
the OTCBB web site as http://www.otcbb.com. Once an issuer is
delinquent in filing a required report (e.g., Form 10-K, Form 10-Q,
Form 20-F, Insurance Company Annual Statement, or call report), a
security of the issuer may continue to be quoted on the OTCBB for a 30
or 60 calendar day grace period from the due date of the report,
depending on the type of issuer. After the grace period, quotations in
the security of the delinquent issuer would not be permitted on the
OTCBB.
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\11\ It is contemplated that the modifier will be affixed one to
two days after the report is due.
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Filings for most OTCBB issuers are available through the SEC's
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'')
system.\12\ Foreign issuers are generally permitted to file in paper
format and copies of these filings are available from the Commission.
Exchange Act filings of banks and thrifts are available upon filing
from the financial institution's primary bank regulatory agency. The
grace period for these issuers is 30 days. In the case of banks and
thrifts that are not required to make Exchange Act filings, members can
obtain call report information from the National Information Center of
Banking Information website (http://www.ffiec.gov/nic) or the Federal
Deposit Insurance Corporation's website (http://www.fdic.gov). Call
reports are filed 30 days after the end of each calendar quarter and
are available to the public within 15 days of filing. Insurance
companies file annual statements with the National Association of
Insurance Commissioners (``NAIC'') by March 1 of each year. This
information is released to the public by NAIC by April 1. Because of
the delay in the availability of call reports and insurance company
annual statements, the proposed rule permits a 60 calendar day grace
period for the quotation of securities of these companies after the
deadline for the issuer to submit a report to the appropriate
regulator.
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\12\ EDGAR is the SEC system for the receipt, acceptance, and
review of documents submitted in electronic format.
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Amendment to Rule 6540
This proposed amendment to Rule 6540 would prohibit member firms
from quoting an issuer's security if the issuer has not made current
reports with the SEC or the appropriate regulatory authority. Members
must also provide such reports to the NASD, although the reports may be
provided by any market maker in the security. The NASD is exploring
ways to reduce the burden of this requirement for members, particularly
with respect to issuers who are EDGAR filers. As discussed above, the
NASD will affix a modifier to the security's symbol if the NASD has not
received information that the report was timely filed. This indication
will provide members with notice that the NASD has not received
information that the issuer's report was timely filed. Once the NASD
provides this notice, the member will have the opportunity to acquire
the necessary report and provide it to the NASD before the end of the
grace period.
Phase-In
The new requirements will be immediately effective upon approval of
the rule for securities not previously quoted on the OTCBB. Securities
quoted on the OTCBB on the date the rule becomes effective will be
afforded at least six months to comply with the new requirements.
Specifically, and in order to accommodate the resource demands that may
be placed upon the SEC when certain issuers elect to file current
public reports, the new requirements will be applied in a month-by-
month staggered manner for a period from six to eighteen months from
the date the rule is approved. The NASD will apply the new rule to
approximately the same number of issuers for each month during that
period in order to evenly distribute the SEC's anticipated work load.
The delayed effectiveness of the rule should also enable market makers,
investors, and issuers to take appropriate action. It should be noted
that for issuers who file a Form 10 or Form 10SB with the SEC to
register under Section 12(g) of the Exchange Act,\13\ all SEC comments,
if any, must be cleared with the SEC before securities can be quoted on
the OTCBB.
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\13\ 15 U.S.C. 78l(G).
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2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) \14\ of the Act, which requires,
among other things, that the Association's rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. In addition, Section 15A(b)(11) \15\ of the
Act requires that the rules of a registered national securities
association be designed to produce fair and informative quotations,
prevent fictitious or misleading quotations and to promote orderly
procedures for collecting, distributing, and publishing quotations. The
NASD believes the proposed rule change, which will address actual and
potential fraud in the quotation and trading of non-listed securities
and the investor perception that the OTCBB is equivalent to Nasdaq or
exchange markets in terms of standards, regulatory structure and
oversight, will accordingly protect investors and the public interest.
Further, the NASD believes limiting the OTCBB to companies that provide
public information will prevent fictitious and misleading quotations.
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\14\ 15 U.S.C. 78o-3(b)(6).
\15\ 15 U.S.C. 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in NASD Notice
to Members 98-14 (``Notice'' or ``NTM'') in January, 1998. A total of
44 comments were received in response to the Notice.
Of the 44 responses received, 18 responses (or 41%) were from
broker/dealer firms or registered persons and the balance of 26
comments (or 59%) were from individual investors, issuers, various
state agencies, trade associations, and other interested parties. In
providing comments, a majority of commenters expressed a
[[Page 59613]]
position (i.e., approval or disapproval) regarding each specific
proposal. Other commenters did not provide a stated position on each
proposal, but identified particular issues with certain proposals and
provided written comment.
Twenty-two commenters opposed the proposal, 19 commenters supported
it, and three did not take a definitive position. Those commenters who
disapproved of the proposed changes generally believed that the changes
would decrease transparency and liquidity and would increase the
regulatory burden that small issuers face. One commenter opined that
the annual cost to an issuer to comply with the Exchange Act reporting
requirements would be $150,000.
Those commenters supporting the proposed changes generally felt the
changes will help eliminate fraud by providing investors with reliable
information. These commenters thought the deterrence of fraud and
increased availability of information outweighed the increase burden on
companies.
Commenters indicated that the rule as proposed in the Notice should
be modified to recognize issuers filing under Section 15(d) of the
Exchange Act.\16\ A commenter encouraged the NASD to accept reports
filed with regulatory agencies outside of the Exchange Act, such as
call reports filed by financial institutions. The rule as published in
the Notice would have permitted members to maintain quotes in a
security in which an issuer is delinquent in its reports with the SEC
or regulatory authorities for a period of ten days. Other commenters
supported an expansion of the grace period for filing a report with the
SEC to 30 days after its due date.
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\16\ 15 U.S.C. 78o-(d).
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After the public comment process, the staff recommended and the
Boards of the NASD and Nasdaq approved the following modifications to
the proposed rules. As to NASD Rule 6530, the proposed delinquency
grace period was expanded from ten days to thirty days for issuers
filing Exchange Act forms and to sixty days for insurance companies and
financial institutions that do not file Exchange Act forms. This
extended grace period is consistent with the proposed review period in
the SEC's Rule 15c2-11 proposal.\17\ Further, in the original Notice,
the staff solicited comment on whether certain non-Exchange Act
depository institutions that provide publicly-available financial
reports to banking regulators should be eligible for quotation on the
OTCBB. Based on the comments received, the nature of the issuers, the
independent oversight of banking regulators, and the SEC's position
that reports filed with federal or state bank supervisory agencies
contain information analogous to Exchange Act reports,\18\ the proposed
rule allows securities of these issuers to be quoted on the OTCBB if
the issuer provides timely reports to the appropriate Federal banking
agency or State bank supervisor and the information is publicly
available. Finally, consistent with comments received, the proposed
rule includes securities of issuers who are currently filing reports
with the SEC pursuant to Section 15(d) of the Act as eligible
securities for the OTCBB. An issuer becomes subject to Section 15(d) as
a result of registering securities under the Securities Act of 1933
(``Securities Act'') and is thereby required to make timely filings
with the SEC such as Forms 10-K, 10-Q, and 8-K or 20-F for at least a
year following the Securities Act registration.\19\
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\17\ Exchange Act Release No. 39670 (February 17, 1998), 63 FR
9661 (February 25, 1998).
\18\ Id. 9667-68.
\19\ In addition to its requirements under Section 15(d), an
issuer may voluntarily register under Section 12(g) or be required
to register under Section 12(g) if it has 500 or more shareholders
of record and total assets of more than $10 million. Under both
scenarios, the issuer's securities would continue to qualify as
eligible securities for purposes of the OTCBB Rules if the issuer
maintains current filings with the SEC.
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The staff and the NASD and Nasdaq Boards considered commenters'
objection that the proposed rule would decrease transparency for
securities no longer eligible for the OTCBB. However, this objection
was outweighed by the benefit of ensuring that there was publicly-
available information regarding issuers that are afforded the
visibility and credibility of the OTCBB. In this regard, the NASD
considered that in granting permanent approval to the OTCBB, the SEC
noted: ``As a general matter, transparency benefits the markets.
However, in the context of the inclusion of unregistered foreign
securities on the OTCBB, the benefits may be outweighed by the
potential harm from including unregistered securities on a visible U.S.
market operated by a self-regulatory organization.'' \20\ The SEC also
noted that ``the OTCBB may be inconsistent with the full disclosure
goals of the securities laws in allowing a regulated public marketplace
for unregistered securities.'' \21\ While these comments were made in
the context of unregistered foreign securities, the NASD believes that
the same concerns exist with respect to domestic securities for which
no public information is available.
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\20\ Exchange Act Release No. 38456 (March 31, 1997), 62 FR
16635 at 16638 (April 7, 1997).
\21\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in 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 the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549. 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 at 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 SR-NASD-98-51 and should be
submitted by November 25, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29467 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M
