[Federal Register Volume 59, Number 73 (Friday, April 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9215]
[[Page Unknown]]
[Federal Register: April 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33899; File No. SR-NASD-94-19]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc., Relating to
Part II, Sections 1, 2, and 3 of Schedule D to the NASD By-Law
April 12, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 6, 1994, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') 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.
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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Below is the text of the proposed rule change. Proposed new
language is italicized
Schedule D to the NASD By-Laws, Part II, Qualification Requirements for
NASDAQ Securities
Sec. 1. Qualification Requirements for Domestic and Canadian Securities
The Association, as operator of the NASDAQ System, is entrusted
with the authority to preserve and strengthen the quality of and public
confidence in its market. The NASDAQ System stands for integrity and
ethical business practices in order to enhance investor confidence,
thereby contributing to the financial health of the economy and
supporting the capital formation process. NASDAQ System issuers, from
new public companies to companies of international stature, by being
included in the NASDAQ System, are publicly recognized as sharing these
important objectives of the NASDAQ System.
The Association, therefore, in addition to applying the enumerated
criteria set forth in Parts II and III hereof, will exercise broad
discretionary authority over the initial and continued inclusion of
securities in the NASDAQ System in order to maintain the quality of and
public confidence in its market. Under such broad discretion and in
addition to its authority under Subsection 3(a) hereof, the Association
may deny initial inclusion or apply additional or more stringent
criteria for the initial or continued inclusion of particular
securities or suspend or terminate the inclusion of particular
securities based on any event, condition, or circumstance which exists
or occurs that makes initial or continued inclusion of the securities
in the NASDAQ System inadvisable or unwarranted in the opinion of the
Association, even though the securities meet all enumerated criteria
for initial or continued inclusion in the NASDAQ System.
[Other provisions of Section 1 remain unchanged]
* * * * *
Sec 2. Qualification Requirements for Non-Canadian Foreign Securities
and American Depository Receipts
The Association, as operator of the NASDAQ System is entrusted with
the authority to preserve and strengthen the quality of and public
confidence in its market. The NASDAQ System stands for integrity and
ethical business practices in order to enhance investor confidence,
thereby contributing to the financial health of the economy and
supporting the capital formation process. NASDAQ System issuers, from
new public companies to companies of international stature, by being
included in the NASDAQ System, are publicly recognized as sharing these
important objectives of the NASDAQ System.
The Association, therefore, in addition to applying the enumerated
criteria set forth in Parts II and III hereof, will exercise broad
discretionary authority over the initial and continued inclusion of
securities in the NASDAQ System in order to maintain the quality of and
public confidence in its market. Under such broad discretion and in
addition to its authority under Subsection 3(a) hereof, the Association
may deny initial inclusion or apply additional or more stringent
criteria for the initial or continued inclusion of particular
securities or suspend or terminate the inclusion of particular
securities based on any event, condition, or circumstance which exists
or occurs that makes initial or continued inclusion of the securities
in the NASDAQ System inadvisable or unwarranted in the opinion of the
Association, even though the securities meet all enumerated criteria
for initial or continued inclusion in the NASDAQ System.
[Other provisions of Section 2 remain unchanged]
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
Proposed Discretionary Authority Regarding Inclusion of Securities in
the Nasdaq System
Background
Prior Rule Filing Proposal
In recent years, the NASD has received an increasing number of
applications for inclusion in the Nasdaq System from companies in which
an officer, director, controlling shareholder, or other person in a
position to influence management decisions has been enjoined, barred or
suspended from participation in the securities industry for
violations(s) of state or federal securities laws, self-regulatory
organizations (``SRO'') rules and regulations, or convicted of any
felony involving the purchase or sale of any security arising out of
such person's participation in the securities or commodities industry.
On a case-by-case basis, the NASD has denied the applications of such
issuers for inclusion in the Nasdaq system pursuant to its authority
under Part II, Subsection 3(a)(3) of Schedule D where the NASD formed a
reasonable belief that enumerated persons connected with the issuer
might engage in additional violative conduct contrary to the interests
of the investing public. In such cases, the NASD's rationale has been
that any adjudicated prior violative conduct raises concerns regarding
the continuing potential for conduct in connection with the operation
of the company or the market for its securities that would be
considered fraudulent and manipulative, contrary to just and equitable
principles of trade, or otherwise raise investor protection concerns.
The NASD has been concerned that such person(s) may seek to continue
their violative conduct in the securities markets through the
management, control or influence of publicly-held company. More
recently, the NASD has had concerns and denied inclusion in the Nasdaq
System if persons in a position of management, control or influence of
an issuer are the subject to pending proceedings for violations of
state or federal securities laws.
As a result of these concerns, the NASD filed with the SEC SR-NASD-
93-32 on June 2, 1993. SR-NASD-93-32 proposed to amend Part II, Section
3(a) to Schedule D by adding new subsection 3(a)(3) to clarify the
NASD's authority, on a case-by-case basis, to either deny inclusion or
apply additional or more stringent criteria for the initial or
continued inclusion of a particular securities, or to suspend or
terminate the inclusion of an otherwise qualified security if any
officer, director, controlling shareholder, or other person in a
position to influence management decisions of the issuer has been: (i)
Barred or suspended from participating in the securities industry by
the SEC or any self-regulatory organization; (ii) permanently enjoined
by order, judgment or decree of any court of competent jurisdiction
from participating in the securities industry, or from engaging in or
continuing any conduct or practice in connection with the purchase or
sale of any security; or (iii) convicted of any felony involving the
purchase or sale of any security arising out of such person's
participation in the securities or commodities industry.\2\ In response
to the SEC's publication for comment of the proposed NASD rule
change,\3\ the SEC received one comment letter submitted by members of
a Task Force of the American Bar Association (``ABA Task Force'') dated
August 30, 1993 (the ``comment letter'').\4\ The comment letter
referenced the criteria in the proposed rule change as ``bad boy
criteria'' and stated:
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\2\The adoption section 21(d)(2) of the Act, as part of the
Remedies Act of 1990, demonstrates congressional concern regarding
the potential abuse that may exist where a company i managed by such
person(s) with a history of adjudicated violative conduct. Section
21(d)(2) authorizes a federal court to bar or suspend an individual
from serving as an officer or director of a public company as a
sanction for securities law violations. Thus, Congress recognized
that individuals may use public companies to manipulate the equity
markets and harm investors.
In the first U.S. District Court decision imposing a sanction
under section 21(d)(2), the Court also required that all seucrities
holdings of the respondents be placed in a voting trust to divest
them of any control of any public company. The Court explicitly
recognized that ownership of a controlling interest in a public
company provides an opportunity for an individual to use a company
as a vehicle for future securities violations. SEC v. Drexel Burnham
Lambert Incorporated, 1993 WL 496837 (S.D.N.Y.) (December 1, 1993).
See, Washington Post, December 2, 1993, at 13, col. #3.
\3\Securities Exchange Act Release 32605 (July 9, 1993), 58 FR
38150 (July 15, 1993).
\4\See, Amendment No. 2 to SR-NASD-93-32 which includes the
NASD's response to all of the comments of the ABA Task Force.
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We generally do not object to specific ``bad boy'' criteria. We
believe, however, that such criteria themselves should be subject to
standards consistent with the NASD's discretionary authority under
existing Subsection 3(a)(3), namely, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade and to protect investors and the public interest.
The ``bad boy'' criteria in proposed Subsection 3(a)(3) standing along
would apply to an unduly broad range of vioaltions, some of which would
not be appropriate bases for denying initial inclusion or suspension or
termination of continued inclusion of the securities of an issuer in
the Nasdaq System.\5\
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\5\Comment letter at 3.
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The comment letter also noted that a number of the ABA members that
reviewed the comment letter in draft form strongly preferred that the
NASD rely solely on the discretionary standards contained in existing
Part II, Section 3(a)(3) of Schedule D to avoid the potential for
``abuse that may derive from the inclusion of specific ``bad boy''
criteria'' in that Section.\6\ In response to the comment letter, the
NASD filed on September 29, 1993, Amendment No. 2 to SR-NASD-93-32. In
this amendment, the NASD noted it had not intended for the criteria to
stand alone without reference to the current requirements set forth in
Part II, Section 3(a)(3) of Schedule D. The text of the proposed rule
change, therefore, was amended to clarify this issue.
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\6\Id. at n. 7.
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Review of Association's Discretionary Authority
The NASD recognized, however, that the ABA Task Force comment
letter raised important questions regarding the scope of the NASD's
discretionary authority over the inclusion of securities in the Nasdaq
System. The NASD, therefore, commenced an additional review of the
scope of its discretionary authority under Part II, Section 3(a)(3) of
Schedule D and under the Act, and also compared such authority to the
rules of the New York Stock Exchange (``NYSE'') and American Stock
Exchange (``AMEX'') providing discretionary authority with respect to
listings on such exchanges.
Section 3(a)(3)--Section 3(a)(3) of Part II to Schedule D
(``Section 3(a)(3)'') provides that the Association may, in accordance
with Article IX of the NASD's Code of Procedure, apply additional or
more stringent criteria for the initial or continued inclusion of
particular securities or suspend or terminate the inclusion of an
otherwise qualified security if the Association deems it necessary to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, or to protect investors and the
public interest.\7\
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\7\Any denial by the Association of initial or continued
inclusion in the Nasdaq System is subject to review by the SEC and
the Courts by request of the aggrieved party.
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The NASD has always believed that Section 3(a)(3) provides broad
discretionary authority in order to allow the Association to fulfill
the statutory policies contained in this Section of Schedule D and in
Section 15A(b)(6) of the Act. The policy goals of Section 3(a)(3) to
Part II of Schedule D are based on the statutory requirements contained
in Section 15A(b)(6) of the Act which requires, in part, that the rules
of the Association be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade
and to protect investors and the public interest. Identical statutory
mandates are imposed on the exchanges pursuant to Section 6(b)(5) of
the Act. Compliance by the NASD and exchanges with these statutory
mandates is central to the concept of self-regulation.
The breadth of the NASD's discretionary authority under Section
3(a)(3) was clearly intended and is necessary to fulfill the regulatory
purpose of this Section to Schedule D and Section 15A(b)(6) of the Act.
Without such broad discretionary authority to make determinations based
on any issuer-related matter, the investor protection and public
interest goals contained in Section 3(a)(3) and Section 15A(b)(6) of
the Act, would be severely compromised. Limitations on the NASD's
authority under Section 3(a)(3) could, in fact, result in circumstances
where the NASD would be prevented from excluding an issuer from the
Nasdaq System even if the Association deemed such action necessary to
protect investors and the public interest.
Tassaway Decision--The importance of the NASD's authority to
exclude, in general, non-complying securities from the Nasdaq System
was addressed by the SEC in In the Matter of Tassaway, Inc.\8\
(``Tassaway''). In Tassaway, the SEC stated:
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\8\Securities Exchange Act Release No. 11291 (Mar. 13, 1975), 45
SEC 706, 6 SEC Docket 427.
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Though exclusion from the system may hurt existing investors,
primary emphasis must be placed on the interests of prospective future
investors. The latter group is entitled to assume that the securities
in the system meet the system's standards.
Hence the presence in NASDAQ of non-complying securities could have
a serious deceptive effect.\9\
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\9\Tassaway 45 SEC 706 at 709. See also, In the Matter of ORS
Automatic, Inc. 48 SEC 490, 493 (1986) wherein the Commission stated
that the policy enunciated in Tassaway with regard to inclusion in
the Nasdaq System is equally applicable to the Nasdaq National
Market segment of the Nasdaq System.
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The Commission in Tassaway also articulated its review standards
regarding the Association's discretionary authority with respect to
inclusion criteria in the Nasdaq System. The Commission stated:
To the extent that discretion enters into the matter--and it very
often does--the discretion in question is the NASD's not ours. Hence,
we are not at liberty to substitute our discretion for that of the
Association.\10\
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\10\Id at 710. In a footnote to this statement, the Commission
stated that the Nasdaq System's rules, like those of the exchanges
do not lend themselves to mechanical and inflexible administration.
The Commission noted that this is an area for ``pragmatic business
judgments based on a kaleidoscopic variety of factors.''
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The above statements in Tassaway were made prior to adoption of
Section 3(a)(3) to Part II of Schedule D, and, therefore, did not
address the NASD's discretion to deny or terminate inclusion in the
Nasdaq System pursuant to Section 3(a)(3) to Part II of Schedule D,
that authorizes the NASD to use discretion to fulfill the investor
protection and public interest standards contained in Section 15A(b)(6)
of the Act. The Association believes, however, that the Commission's
statements in Tassaway are none-the-less valid with respect to the
investor protection, public interest and other policy standards
contained in Section 3(a)(3) of Part II to Schedule D and Section
15A(b)(6) of the Act. Relying on the reasoning of Tassaway, the NASD
believes that prospective future investors are entitled to assume that
the securities in the Nasdaq System are subject to the Association's
broad discretionary authority to deny or terminate inclusion when the
Association deems it necessary to protect the public interest and the
interests of potential future investors and other market participants,
to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts and practices, regardless of whether
the issuer is in compliance with the inclusion criteria of Schedule D.
The Tassaway decision affirms the NASD's long-held position that an
issuer's access to the Nasdaq System is not an incontrovertible right
but a privilege.\11\
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\11\In 1957, the Commission stated that the use of the
facilities of a national securities exchange by an issuer is a
privilege involving important responsibilities under the Act. The
Commission noted that when those responsibilities are abused, the
integrity of the exchange market is vitiated. In the Matter of Great
Sweet Grass Oils Ltd., 37 SEC 683, 698 (1957); aff'd per curiam sub
nom. Great Sweet Oils, Ltd. v. SEC, 256 F.2d 893 (D.C. Cir. 1958);
see also Kroy Oils, Ltd., 37 SEC 683, 698 (1957).
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Section 11A--The investor protection, public interest and other
statutory policies mandated by Section 15A(b)(6) of the Act (which are
embodied in Section 3(a)(3) to Part II of Schedule D) were expanded by
Congress in the Securities Exchange Act Amendments of 1975 (``1975
Amendments'') through the adoption of Section 11a(a)(1)(A) of the Act
(``Section 11A(a)(1)(A)''). As stated in Section 11A(a)(1)(A),
``Congress finds that the securities markets are an important national
asset which must be preserved and strengthened.'' The NASD believes
that Congress thereby acknowledged that there is a general public
interest in strong securities markets that is consistent, yet
identifiably separate from the transaction-related investor protection
and public interest policies previously addressed under Section
15A(b)(6) of the Act. The NASD believes that the Congressional Joint
Statement of the Committee of Conference to the 1975 Amendments
emphasized this distinction when stating:
The securities markets of the United States are indispensable to
the growth and health of this country's and the world's economy. In
order to raise the enormous sums of investment capital that will be
needed in the years ahead and to assure that capital is properly
allocated among competing uses, these markets must continue to operate
fairly and efficiently. The increasing tempo and magnitude of the
changes are occurring in our domestic and international economy make it
clear that the securities markets are due to be tested as never before.
Unless these markets adapt and respond to the demands placed upon them,
there is a danger that America will lose ground as an international
financial center and that the economic, financial and commercial
interests of the Nation will suffer. The rapid attainment of a national
market system as envisaged by this bill is important, therefore, not
simply to provide greater investor protection and bolster investor
confidence but also to assure that the country maintains a strong,
effective and efficient capital arising and capital allocating system
in the years ahead.\12\
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\12\Introduction to the Joint Explanatory Statement of the
Committee of Conference on the amendments of the House to the bill
(S. 249), submitted to the House and Senate. See, Federal Securities
Laws, Legislative History, (1933-1988) Vol. III at 3128.
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In describing the securities markets of the United States as
national assets, Congress envisioned that the NASD and exchanges would
be increasingly responsible for advancing this public interest, as well
as other statutory obligations. Senator Harrison A. Williams, Jr.,
during Senate consideration of the 1975 Amendments, specifically
addressed the increased role of the self-regulatory organizations as
envisioned in the 1975 Amendments when stating:
Self-regulation should be preserved in the securities industry, but
the self-regulatory organizations must display a greater responsiveness
to their statutory obligations and to the need to coordinate their
functions and activities.\13\
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\13\Federal Securities Laws, Legislative History (1933-1988),
Vol. III, Item 159 at 2949.
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In addition, Sections 15A(b)(6) and 6(b)(5) of the Act require that
the rules of the NASD and the exchanges be designed to perfect the
mechanism of a national market system. The rules of the NASD and
exchanges are, therefore, required to further all statutory policies
underlying a national market system, including the Section 11A(a)(1)(A)
policy to preserve and strengthen the securities markets.
As the operator of the second largest securities market in the U.S.
and the world, the NASD believes that the general legislative intent of
the 1975 Amendments and the express findings of Congress set forth in
Section 11A(a)(1)(A) of the Act, expand the investor and public
interest policies contained in Section 15A(b)(6) of the Act and support
the Association's position that it has broad discretionary authority to
make issuer inclusion determinations based on broad concerns regarding
any event, circumstance or condition in order to protect the Nasdaq
System as a national asset.
Discretionary Listing Authority of the National Exchanges
The NASD also compares its discretionary authority under Section
3(a)(3) to Part II of Schedule D to the discretionary authority
contained under comparable rules of the New York Stock Exchange
(``NYSE'') and the American Stock Exchange (``AMEX'') (together, the
``national exchanges''). The reason for this comparison is twofold.
First, as noted above, the investor protection and public interest
mandates imposed on the exchanges pursuant to Section 6(b)(5)\14\ of
the Act are identical to the mandates imposed on the Nasdaq System
pursuant to Section 15A(b)(6) of the Act. The NASD, therefore,
concludes that the discretionary authority to fulfill such identical
statutory mandates should be similar. Second, the Commission also
expressly stated, in Tassaway, that the governing legal standards of
both are the exchanges and the Nasdaq System should be the same. The
Commission stated:
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\14\Section 6(b)(5) provides:
The rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.
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So we think this is a suitable occasion on which to state the
Standards by which we shall be guided when asked to review the NASD's
actions with respect to [the Nasdaq System]. The NASD's role in Nasdaq
is the same as that of the organized exchanges with respect to the
lists of securities traded on them. It follows that the governing legal
standards should also be the same.\15\
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\15\45 SEC 706 at 709.
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Pursuant to the Commission's determination in Tassaway, the NASD
has concluded that the scope of its discretionary authority with
respect to listings in the Nasdaq System can be no less than that of
the national exchanges. The NASD's review of the exchanges' rules is as
follows.
AMEX Discretionary Authority--AMEX rules describe their numerical
initial listing criteria as ``numerical guidelines'' and the exchange
is provided with sole discretion to approve or disapprove a listing
application. The AMEX rule states:
The approval of an application for the listing of securities is a
matter solely within the discretion of the Exchange. To assist
companies interested in applying for listing, the Exchange has
established certain numerical guidelines, outlined below, which will be
considered in evaluating listing eligibility. Other factors which will
also be considered include the nature of a company's business, the
market for its products, the reputation of its management, its
historical record and pattern of growth, its financial integrity, its
demonstrated earning power and its future outlook. The fact that an
applicant may meet the Exchange's numerical guidelines does not
necessarily mean that its application will be approved. On the other
hand, an application may be approved even though the company does not
meet all of the numerical guidelines.\16\
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\16\Part 1, section 101 of the Manual.
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The rules of the AMEX regarding continued listing criteria
(including their corporate governance criteria) are also stated to be
only guidelines that in no way limit or restrict the exchange decision
on continued listing or delisting determinations. The first three
sections of Part 10 of the AMEX Manual regarding Suspension Delisting
provide for such broad discretionary authority.\17\ Section 1001
entitled ``General'' states:
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\17\See, Part 10 entitled `Section and Delisting' of the AMEX
Manual and Specifically Subsections 1001, 1002 and 1003 entitled
`General'; Policies With Respect to Continued listing; and
`Application of Policies' respectively.
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In considering whether a security warrants continued trading and/or
listing on the Exchange, many factors are taken into account, such as
the degree of investor interest in the company, its prospects for
growth, the reputation of its management, the degree of commercial
acceptance of its products, and whether its securities have suitable
characteristics for auction market trading. Thus, any developments
which substantially reduce the size of a company, the nature and scope
of its operations, the value or amount of its securities available for
the market, or the number of holders of its securities, may occasion a
review of continued listing by the Exchange. Moreover, events such as
the sale, destruction, loss or abandonment of a substantial portion of
its business, the inability to continue its business, steps towards
liquidation, or repurchase or redemption of its securities, may also
give rise to such a review.
Section 1002 entitled ``Policies With Respect to Continued
Listing'' first outlines the AMEX's discretionary authority to delist
or suspend, and then outlines the AMEX's policy on when it will
generally consider suspension or removal. This Section states:
The Constitution of the Exchange provides that the Board of
Governors may, in its discretion, at any time, and without notice,
suspend dealings in, or may remove any security from, listing or
unlisted trading privileges. The Exchange, as a matter of policy, will
consider the suspension of trading in, or removal from listing or
unlisted trading of, any security when in the opinion of the Exchange:
(a) the financial condition and/or operating results of the issuer
appear to be unsatisfactory; or
(b) it appears that the extent of public distribution or the
aggregate market value of the security has become so reduced as to make
further dealings on the Exchange inadvisable; or
(c) the issuer has sold or otherwise disposed of its principal
operating assets, or has ceased to be an operating company; or
(d) the issuer has filed to comply with its listing agreements with
the Exchange; or
(e) any other event shall occur or any condition shall exist which
makes further dealings on the Exchange unwarranted.
While the discretionary authority of the AMEX to list or delist is
clearly stated in the first sentence of the above Section 1002, the
AMEX strongly emphasizes its discretionary authority in the
introductory paragraphs to the following Section 1003 entitled,
``Application of Policies.'' Section 1003 begins as follows:
The determination as to whether a security warrants continued
trading on the Exchange is not based on any precise mathematical
formula. Each case is considered on the basis of all relevant facts and
circumstances and in light of the objectives of the Exchanges policies
regarding continued listing (See also Sec. 1004). To assist in the
application of these policies, the Exchange has adopted certain
guidelines, outlined below, under which it will normally give
consideration to suspending dealings in, or removing, a security from
listing or unlisted trading. However, these guidelines in no way limit
or restrict the Exchange in applying its policies regarding continued
listing, and the Exchange may at any time, in view of the circumstances
in each case, suspend dealings in, or remove, a security from listing
or unlisted trading when in its opinion such security is unsuitable for
continued trading on the Exchange. Such action will be taken regardless
of whether the issuer meets or fails to meet any or all of the
guidelines discussed below.
Section 1003 also enumerates numerous quantitative and non-
quantitative guidelines, including corporate governance criteria. These
guidelines include Subsection (e)(iii) that provides that the exchange
will normally consider suspending dealings in, or removing from the
list, a security ``if the company or its management shall engage in
operations which, in the opinion of the exchange, are contrary to the
public interest.''
NYSE Discretionary Authority--Unlike the AMEX's ``guidelines,'' the
NYSE initial and continued listing requirements are described as
``criteria.'' NYSE rules, however, provide the Exchange with broad
discretionary authority to list, suspend or delist securities.
Section 1, Subsection 101 of the NYSE Listed Company Manual
provides initial numerical listing criteria. In addition, the
introductory language of this Section stresses that an NYSE listing
must meet more than just the enumerated listing criteria, it must merit
the recognition of the NYSE. The Rule specifically states:
A listing on the New York Stock Exchange is internationally
recognized as signifying that a publicly owned corporation has achieved
maturity and front-rank status in its industry--in terms of assets,
earnings, and shareholder interests and acceptance. Indeed, the
Exchanges's listing standards are designed to assure that every
domestic or non-U.S. company whose shares are admitted to trading in
the Exchange market merit that recognition.
This introductory language is followed by numerical criteria and
additional language that provides the NYSE with discretionary authority
to ensure that each issuer does ``merit that [international]
recognition.'' The Rule states:
Aside from the minimum numerical standards listed above, other
factors are taken into consideration. The company must be a going
concern or be the successor to a going concern. Although the amount of
assets and earnings and the aggregate market value are considerations,
greater emphasis is placed on such questions as the degree of national
interest in the company, the character of the market for its products,
its relative stability and position in its industry, and whether or not
it is engaged in an expanding industry with prospects for maintaining
its position. The Exchange is also concerned with such matters as
voting rights of shareholders, voting arrangements and pyramiding of
control, and related party transactions. When there is an indication of
a lack of public interest in the securities of a company evidenced, for
example, by low trading volume on another exchange, lack of dealer
interest in the over-the-counter market, unusual geographic
concentration of holders of shares, slow growth in the number of
shareholders, low rate of transfers, etc., higher distribution
standards may apply. In this connection, particular attention will be
directed to the number of holders of from 100 to 1,000 shares and the
total number of shares in this category.
With respect to discretionary authority to delist securities,
Section 802.00 of the NYSE Company Manual provides that the NYSE will
``give consideration to delisting a security of a company'' when the
company falls below certain numerical and corporate governance related
criteria (listed in this Section), or when the NYSE makes certain other
``determinations'' or ``appraisals.'' This NYSE section provides the
NYSE with broad discretionary authority by stating:
The Exchange is not limited by the criteria set forth above.
Rather, it may make an appraisal of, and determine on an individual
basis, the suitability for continued listing of an issuer in the light
of all pertinent facts whenever it deems such action appropriate, even
though a security meets or fails to meet any enumerated criteria. Other
factors which may lead to a company's delisting include:
The failure of a company to make timely, adequate, and
accurate disclosures of information to its shareholders and the
investing public.
Failure to observe good accounting practices in reporting
of earnings and financial position.
Other conduct not in keeping with sound public policy.
Unsatisfactory financial conditions and/or operating
results.
Inability to meet current debt obligations or to
adequately Finance operations.
Abnormally low selling price or volume of trading.
Unwarranted use of company funds for the repurchase of its
equity securities.
Any other event or condition which may exist or occur that
makes further dealings or listing of the securities on the Exchange
inadvisable or unwarranted in the opinion of the Exchange.
Proposed Rule Change
In the NASD's review of the rules of the national exchanges, the
Association noted an important difference between the language
contained in Part II, Section 3(a)(3) of Schedule D and the national
exchanges' more extensive rule language that emphasizes each exchanges'
broad discretionary authority to make determinations over the listing
of securities on their markets. Whereas Section 3(a)(3) of Schedule D
relies on investor protection and public interest rule language set
forth in Section 15A(b)(6) of the Act, the exchange rules expressly
reserve discretionary authority to the respective exchanges without
tracking the identical investor protection and public interest rule
language of Section 6(b)(5) of the Act.
The NASD notes that the AMEX listing rules are emphasized to be
only guidelines and Part I, Section 101 of the AMEX Manual provides
that the approval of an application for listing is a matter solely
within the discretion of the Exchange. In a similar manner, Section
802.00 of the NYSE Company Manual specifically provides the exchange
with discretionary authority to determine the suitability of continued
listing of an issuer in light of all pertinent facts whenever it deems
such action appropriate, even though a security meets or fails to meet
any enumerated criteria. Section 802.00 also provides that a company
may be delisted based on any other event or condition that may exist or
occur that makes dealings or listing of the securities on the NYSE
inadvisable or unwarranted in the opinion of the Exchange. The NYSE
also utilizes its discretionary authority to maintain high non-
quantitative standards for its securities markets by stating, under
Section 1, Subsection 101 of the NYSE Company Manual, that a listing on
its market is internationally recognized and that its rules are
designed to assure that every company admitted to trading on the NYSE
merits such recognition.
The NASD believes that the exchange rules that reserve to the
exchanges discretionary authority over their respective listings, and
the NYSE's merit of international recognition standard, reflect the
interest of the exchanges' in preserving and strengthening the quality
of their markets as a commercial service. The exchanges reservation of
discretionary authority over listings is, therefore, intended to
improve the quality of its commercial service in order to make the
service more attractive to current and future customers (as well as
regulate securities transactions). The NASD believes, therefore, as an
operator of a securities market that is a commercial service, that its
rules should similarly reserve discretionary authority over listings to
the Association for the purpose of preserving and strengthening the
quality of the Nasdaq System to the benefit of its customers, i.e.
present and prospective investors, issuers, brokers, and dealers.
Description of Proposed Rule Change
The NASD has determined that its rule applicable to the Nasdaq
System must clearly and unambiguously reserve discretionary authority
to the Association with respect to the initial or continued inclusion
of particular securities that is comparable to that of the national
exchanges. Such discretionary authority is necessary in order to
preserve and strengthen the Nasdaq System as a national asset. The NASD
also believes that such discretionary authority over inclusion in the
Nasdaq System reflects the natural interest of the NASD, as operator of
the market, in preserving and strengthening the quality of the Nasdaq
System in order to increase the attractiveness of this market to all
customers, i.e. present and prospective investors, issuers and broker/
dealers. In addition, the NASD believes such discretionary authority is
necessary in order to ensure that securities which would otherwise be
subject to the Penny Stock Rules (discussed below) merit this exemption
when entering the Nasdaq System and continue to merit this exemption
thereafter.
The NASD is, therefore, proposing to amend Sections 1 and 2 of Part
II to Schedule D\18\ to add an introduction to each section that states
that: (1) the Association, as operator of the Nasdaq System, is
entrusted with the authority to preserve and strengthen the quality of
and public confidence in its market; (2) the Nasdaq System stands for
integrity and ethical business practices in order to enhance investor
confidence, thereby contributing to the financial health of the
economy, and supporting the capital formation process; and (3) Nasdaq
System issuers, from new public companies to companies of international
stature, by being included in the Nasdaq System, are publicly
recognized as sharing these important objectives of the Nasdaq System.
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\18\The Nasdaq System includes both The Nasdaq SmallCap Market
and Nasdaq National Market. Sections 1 and 2 to Part II of Schedule
D include the qualification requirements for domestic and Canadian
securities and for non-Canadian foreign securities and American
Depositary Receipts, respectively. The qualification requirements in
Sections 1 and 2 of Part II to Schedule D apply to both the Nasdaq
SmallCap Market and the Nasdaq National Market.
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The introduction then sets forth that as a result of the foregoing
policy statement, the Association, in addition to applying the
enumerated criteria set forth in Parts II and III hereof, will exercise
broad discretionary authority over the initial and continued inclusion
of securities in the Nasdaq System in order to maintain the quality of
and public confidence in its market. Under such board discretion and in
addition to its authority under Section 3(a), the introduction states
that the Association may deny initial inclusion or apply additional or
more stringent criteria for the initial or continued inclusion of
particular securities or suspend or terminate the inclusion of
particular securities based on any event, condition, or circumstance
which exists or occurs that makes initial or continued inclusion of the
securities in the Nasdaq System inadvisable or unwarranted in the
opinion of the Association, even though the securities meet all
enumerated criteria for initial or continued inclusion in the Nasdaq
System.\19\
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\19\Simultaneously, with the filing of this proposal, the NASD
is withdrawing SR-NASD-93-32.
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The proposed rule change would provide broad discretionary
authority that is separate and distinct from the authority currently
provided under Section 3(a)(3) of Part II to Schedule D. Section 3(a)3
would not be deleted under the proposed rule change. The NASD would
continue to rely on Section 3(a)(3) when appropriate.
The proposed rule change is a single statement of discretionary
authority in contrast to the rules of the national exchanges which also
include statements of many enumerated factors that may be considered by
each exchange in making a determination as to listing, delisting or
suspension of a security. The NASD does not intend by proposing such a
statement of discretionary authority that the scope of its authority
with respect to listings in the Nasdaq System be narrower than the
scope of authority of the NYSE and AMEX with respect to listings. To
the contrary, the NASD intends, by this proposal, to make clear that
its discretionary authority over listings is no less than that of the
exchanges.
The NASD believes the proposed rule change provides important
guidance to investors, issuers and the general public that the NASD is
authorized pursuant to the Act to make determinations over inclusion in
the Nasdaq System to preserve and strengthen the quality of the Nasdaq
System.
Penny Stock Sales Practice and Disclosure Rules
The NASD believes the proposed rule change will enhance the
Association's ability to oversee the initial and continued inclusion of
securities that are exempted from the Penny Stock Sales Practice and
Disclosure Rules of the Act\20\ (``Penny Stock Rules'') by virtue of
inclusion in the Nasdaq System. The NASD believes that the clarity
provided by the proposed rule change regarding the NASD's discretionary
authority to deny or terminate such securities sends a strong message
to those who would consider evading and abusing these statutory
provisions. Such guidance enhances the continued vigilance required to
ensure that inclusion in the Nasdaq System is not used as a vehicle to
avoid compliance with the Penny Stock Rules by the very persons for
whom compliance is so essential.
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\20\The Penny Stock Sales Practice and Disclosure Rules of the
Act are comprised of Rule 3a51-1 providing definitions of penny
stocks and Rules 15g-1 to 15g-6, 15g-8 and 15g-9. In general, the
Penny Stock Rules have been enacted to require more stringent
regulation of broker/dealers that recommend penny stock transactions
to customers. Under Rule 3a51-1 of the Act, Nasdaq System securities
are excluded from the scope of the Penny Stock Disclosure Rules,
except that Nasdaq SmallCap securities under $5.00 are deemed penny
stocks for purposes of Section 15(b)(6) of the Act.
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In a letter from the Securities and Exchange Commission to the
President of the NASD, the SEC stated:
In providing an exclusion for quotation on the Nasdaq System [from
Rule 15c2-6],\21\ the Commission was relying on the NASD's ability to
screen issuers and to authorize for quotation only legitimate companies
whose quotation on the Nasdaq System would be in the public interest.
The Division is concerned that certain promoters may attempt to
circumvent the requirements of Rule 15c2-6 by seeking Nasdaq
authorization. This situation demands extra caution in authority for
quotation securities that otherwise would be subject to Rule 15c2-6.
Before authorizing one of these securities, the NASD should assure
itself of the bona fides of the company and its past trading
market.\22\
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\21\In August of 1989, the SEC adopted Rule 15c2-6 to address
sales practice abuses in low priced over-the-counter (``OTC'')
securities which, in general, prohibits a broker-dealer from selling
to or effecting the purchase of a ``designated security'' by any
person, unless the broker-dealer has approved the purchaser's
account for such transactions and received from the purchaser a
written agreement to the transaction. The Commission later amended
Rule 15c2-6 and redesignated it as Rule 15g-9 of the Act. In the
amendment, the Commission also conformed the definition of
``designated security'' in Rule 15c2-6 to the definition of ``penny
stock'' in Rule 3a51-1 of the Act, and, with certain exceptions,
replaced the transactional exemption under the rule with the
exemptions contained in Rule 15g-1 of the Act. See, Securities
Exchange Act Release No. 32576 (July 2, 1993), 58 FR 37413 (July 12,
1993).
\22\See, January 10, 1990 letter from the Director, SEC Division
of Market Regulation the President of the NASD.
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The NASD, therefore, believes the proposed rule change is an
indispensable and clear regulatory statement to public customers,
issuers and other market participants that the NASD has the broad
discretionary authority and will use such discretionary authority to
ensure that securities which would otherwise be subject to the Penny
Stock Rules merit this exemption when entering the Nasdaq System and
continue to merit this exemption thereafter.
Proposal To Clarify the NASD Authority To Deny Inclusion of Particular
Issuers in the Nasdaq System Under Part II, Section 3(a) of Schedule D
Part II, Section 3(a) of Schedule D provides the NASD, under
certain circumstances, with authority to apply additional or more
stringent criteria for the initial or continued inclusion of particular
securities or to suspend or terminate the inclusion of a security
otherwise qualified for inclusion in the Nasdaq System. The NASD has
for many years interpreted Part II, Section 3(a) as providing the
Association with the authority to ``deny inclusion'' of a security in
the Nasdaq System. Authority to deny inclusion is inherent in Part II,
Section 3(a) otherwise the NASD would be required to include a security
in the Nasdaq System in order to terminate the security's inclusion,
which procedure was never the intent of the Association.
The NASD has determined that its authority to deny inclusion of
particular securities in the Nasdaq System in compliance with the
enumerated provisions of Part II, Section 3(a) should be expressly
stated. The proposed rule change would, therefore, amend Part II,
Section 3(a) of Schedule D to clarify such authority.
Statutory Authority
The NASD believes that the proposed rule change is in furtherance
with the purposes of Sections 15A(b)(6) and 11A of the Act in that the
proposed rule change provides the Association with discretionary
authority to preserve and strengthen the Nasdaq System as a national
asset.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act which requires that the
rules of a national securities association 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 that the rule change: (1) Clarifies the NASD's
authority to deny inclusion under the criteria under Section 3(a) to
Part II to Schedule D; and (2) establishes the NASD's broad
discretionary authority under Part II, Sections 1 and 2 of Schedule D
to deny initial inclusion or apply additional or more stringent
criteria for the initial or continued inclusion of particular
securities or suspend or terminate the inclusion of particular
securities based on any event, condition, or circumstance which exists
or occurs that makes initial or continued inclusion of the securities
in the Nasdaq System inadvisable or unwarranted in the opinion of the
Association, even though the securities meet all enumerated criteria
for initial or continued inclusion in the Nasdaq System.
The NASD believes that the proposed rule change is in furtherance
of Section 15A(b)(11) of the Act in that clarification of the NASD's
authority to deny inclusion of securities under Section 3(a) to Part II
of Schedule D, and also providing the Association with board discretion
over the initial or continued inclusion of securities in the Nasdaq
System under Sections 1 and 2 to Part II of Schedule D, is intended to
enhance the ability of the NASD to prevent fictitious and misleading
quotations in securities included in the Nasdaq System.
The NASD believes that, with respect to securities that are
designated in the Nasdaq Small Cap Market, the proposed rule change is
in furtherance of the purposes of the Penny Stock Rules adopted under
the Act in that the proposed rule change will provide the NASD with
authority to ensure that securities which would otherwise be subject to
the Penny Stock Rules merit this exemption when entering the Nasdaq
System and continue to merit this exemption thereafter.
The NASD believes that the proposed rule change is consistent with
the purposes of the Act and, to the extent the proposed rule change
imposes any burden on competition, the NASD believes that such burden
on competition is in furtherance of the purposes of the Act is required
by Section 15A(b)(9) of the Act.
(B) Self-Regulatory Organization's Statement on Burden on Competition
Providing broader discretion to the NASD over the inclusion of
securities in the Nasdaq System may result in the denial or termination
of certain securities that would otherwise be eligible for inclusion,
yet such action does not result in an inappropriate competitive
disadvantage to an issuer as there currently exist alternative
electronic markets such as the NASD's OTC Bulletin Board which as of
December 20, 1993 provides not only real time quotations but last sale
trade reporting for companies whose securities are not traded in the
Nasdaq System. Furthermore, the securities of the issuers would
generally be eligible for inclusion on regional stock exchanges.
Moreover, as set forth in Tassaway, the SEC stated that while
exclusion from the Nasdaq System may hurt existing investors, the
primary emphasis must be placed on the interest of prospective
investors and that this latter group is entitled to assume that the
securities in the Nasdaq System meet the system's standards.
The NASD does not believe, therefore, 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 in the
proposed rule change. The SEC published for comment SR-NASD-93-32, a
related proposed rule change,\23\ and received one comment letter from
members of the Task Force on Listing Standards of Self-Regulatory
Organizations of the Federal Regulation of Securities Committee,
Section of Business Law of the American Bar Association (``Task
Force''). On September 29, 1993, the NASD responded to the comment
letter in Amendment No. 2 to SR-NASD-93-32. The NASD believes it
appropriate to respond again to one issue raised in the comment letter
as it remains applicable to the proposed rule change.
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\23\Securities Exchange Act Release No. 32605 (July 9, 1993); 58
FR 38150 (July 15, 1993).
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The Task Force recommended that the securities of issuers already
included in The Nasdaq System should not be suspended or terminated for
``bad boy'' conduct that is known or disclosed prior to the adoption of
the ``bad boy'' criteria contained SR-NASD-93-32 unless there is a
change of control or influence or other meaningful change in
circumstances with respect to such issuers. The Task Force expanded on
this recommendation, in part, by arguing that application of the
proposed rule change to all current Nasdaq issuers would be unfair to
current security holders who relied on the fact that such securities
were included or about to be included in the Nasdaq System. The NASD
has reviewed this comment with respect to the proposed rule change and
has determined that such a limitation on NASD authority would impose an
arbitrary restriction on the NASD's oversight of the Nasdaq System that
could undermine public confidence in the Nasdaq System as a securities
market and be contrary to interests of retail and institutional
investors, issuers, broker/dealers and the public in the Nasdaq System.
Any determination to delist an issuer will be made on a case-by-case
basis in accordance with Article IX of the NASD's Code of Procedure.
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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 in 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 the file number in the caption
above and should be submitted by May 2, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9215 Filed 4-13-94; 9:20 am]
BILLING CODE 8010-01-M
