[Federal Register Volume 65, Number 104 (Tuesday, May 30, 2000)]
[Notices]
[Pages 34518-34520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13417]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42806; File No. SR-NASD-99-33]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment Nos. 1 and 2 Relating to the Establishment of Trade and Quote 
Halt Authority for the National Association of Securities Dealers, 
Inc.'s Over-the-Counter Bulletin Board Service

May 22, 2000.

I. Introduction

    On July 14, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq'') submitted to the 
Securities and Exchange Commission (``SEC'' or ``Commission'') pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to establish 
trade and quote halt authority for the NASD's over-the-counter Bulletin 
Board Service (``OTCBB'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change, including Amendment Nos. 1 and 2, was 
published for comment in the Federal Register on January 25, 2000.\3\ 
No comments were received on the proposal. This order approves the 
proposal.
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    \3\ See Securities Exchange Act Release No. 42345 (January 18, 
2000), 65 FR 4002.
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II. Description of the Proposal

    The OTCBB is an NASD system which, pursuant to delegated authority, 
Nasdaq is responsible for operating. In the proposed rule change, the 
NASD and Nasdaq propose to expand Nasdaq's authority so that Nasdaq may 
impose quotation and trading halts in OTCBB securities when: (1) The 
OTCBB security or the securities underlying the OTCBB American 
Depository Receipt (``ADR'') is dually listed or registered and a 
foreign regulatory authority or market halts trading in the security; 
(2) the OTCBB security is a derivative or component of a security 
listed on Nasdaq, a domestic exchange, or foreign exchange/market 
(e.g., a convertible security or warrant) and Nasdaq, the exchange, or 
foreign exchange/market halts trading in the underlying security; or 
(3) the OTCBB issues does not timely provide the NASD with information 
required by Rule 10b-17 under the Act.\4\
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    \4\ 17 CFR 240.10b-17. For a description of the rule, see text 
accompanying notes 12 and 13 infra.
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    Currently, NASD Rule 4120 authorizes Nasdaq to impose trading halts 
in Nasdaq-listed securities and securities listed on a national 
securities exchange and traded in the third market. There are, however, 
no rules that grant Nasdaq authority to impose trading or quotation 
halts in OTCBB securities, Additionally, unlike the Nasdaq market, 
there is no listing agreement between Nasdaq and OTCBB issuers, and 
thus Nasdaq does not have the ability to compel such issuers to 
disclose information to Nasdaq. Accordingly, it is difficult for Nasdaq 
to unilaterally impose trade and quote halts in an OTCBB security 
because, in most cases, information from the issuer is necessary before 
the NASD can assess the situation and determine if a halt and/or 
resumption of trading is appropriate.\5\ In light of the foregoing, the 
NASD and Nasdaq are proposing to vest Nasdaq with trade and quote halt 
authority as described below.
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    \5\ Under Section 12(k) of the Act, the Commission may impose 
trading suspensions in the U.S. securities markets. See 15 U.S.C. 
781(k). Additionally, NASD Rule 3340 prohibits members from trading 
any security as to which a trading suspension is in effect. When the 
Commission suspends trading in an OTCBB security, Nasdaq announces 
the trading ban via the NEWS frame on the Nasdaq Workstation II and 
prohibits trading and quotations on the OTCBB.
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    Foreign Regulatory Authority Halts. First, the NASD and Nasdaq are 
proposing to impose trading and quotation halts in OTCBB eligible 
securities \6\ when a foreign market or regulatory authority has 
imposed a trade halt in the security in its open market for regulatory 
reasons. This authority would permit Nasdaq to impose a trade and 
quotation halt on an OTCBB security or OTCBB ADRs when a foreign market 
on which the OTCBB security is also traded, or a regulatory authority 
that has oversight authority for the OTCBB security, halts trading in 
the security or the security underlying the ADR for ``regulatory'' 
reasons. (Nasdaq currently has similar trading-halt authority for 
Nasdaq-listed securities.) \7\ Under the proposal, upon receipt of 
information from a foreign securities market on which the OTCBB 
security or the security underlying the OTCBB ADR is listed or 
registered or from a regulatory authority overseeing such issuer, 
exchange, or market, Nasdaq's Stockwatch section will evaluate the 
information (generally, a trade-halt order issued by the foreign market 
or regulatory authority) and determine whether a trade and quotation 
halt in the OTCBB security is appropriate. Nasdaq will impose such a 
halt only when the foreign market or regulatory authority has imposed 
its halt because of potential fraudulent conduct or other public 
interest concerns. Nasdaq will not impose a halt if the foreign 
entity's halt is based on the dissemination of material news, an 
issuer's failure to meet regulatory filing requirements imposed by a 
foreign market or regulatory authority, or for operational reasons 
(e.g., order imbalance in the foreign market). \8\
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    \6\ NASD Rules 6530 and 6540 impose certain regulatory filing 
requirements for securities to be included in the OTCBB.
    \7\ See NASD Rule 4120(a)(4).
    \8\ The NASD and Nasdaq do not proposed to halt for material 
news because Nasdaq does not have a formal listing agreement with 
OTCBB issuers, and thus cannot compel the full disclosure and 
dissemination of material news. The NASD and Nasdaq do not propose 
to halt trading if an issuer fails to meet filing or disclosure 
requirements imposed by a foreign regulatory authority or market, 
because Nasdaq would, in essence, be importing filing obligations of 
a foreign regulatory authority on OTCBB issuers when such 
requirements may not currently exist in the United States for such 
issuers. Lastly, the NASD and Nasdaq are not proposing to halt 
trading based on a foreign exchange's operational halt, such as an 
order imbalance, because Nasdaq generally does not halt for 
operational reasons.
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    For this and the proposed halts described below, an OTCBB halt 
would be lifted if Nasdaq determines that the basis of the halt no 
longer exists or upon the passage of five trading days, which ever 
occurs first. \9\ If quoting and trading

[[Page 34519]]

in a security stock is halted for five or more consecutive business 
days and then the halt is lifted, at the time the halt is lifted, 
market makers will be required to fulfill their obligation under Rule 
15c2-11 under the Act prior to initiating a priced or unpriced 
quotation in the security. \10\ Nasdaq will notify market participants 
and the public of halts through the NASD Regulation and Nasdaq Websites 
(e.g., OTCBB.com, Nasdaqtrader.com, NASDR.com), as well as the Nasdaq 
NEWS frame on the Nasdaq Workstation II.
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    \9\ Of course, if an issuer failed to meet the eligibility 
requirements contained in NASD Rules 6530 and 6540, the security 
would be removed from the OTCBB.
    \10\ That is, the Nasdaq directs all members to cease quoting a 
security for five or more consecutive business days, pursuant to 
NASD Rule 6740 and Rule 15c2-11, members will be required a file a 
Form 211 prior to the resumption of quotations in the OTCBB. See 17 
CFR 240.15c-11. The Commission issued for comment a reproposal of 
amendments to Rule 15c2-11. See Securities Exchange Act Release No. 
41110 (February 25, 1999), 64 FR 11124 (March 8, 1999). The NASD and 
Nasdaq will monitor developments regarding Rule 15c2-11 and plan to 
make any necessary changes to conform the rules proposed in this 
filing with and changes to Rules 15c2-11.
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    Halts in Derivative Securities. Nasdaq currently has the authority 
to halt trading in a Nasdaq-listed derivative security when a national 
securities exchange or Nasdaq halts trading in the underlying equity 
security that is listed on the exchange or Nasdaq.\11\ Halt authority 
only extends to derivatives listed on Nasdaq, and does not extend to 
derivatives quoted in the OTCBB. Thus, for example, Nasdaq or an 
exchange may halt trading in a security, but trading may continue in 
the OTCBB derivative security. Since the trading price of the OTCBB 
derivative is dependent on the price of the underlying listed security, 
it is difficult to accurately price the derivative security when there 
is no current pricing information on the underlying security. Such 
difficulty in pricing may lead to disorderly markets and investor 
confusion. Accordingly, the NASD and Nasdaq are proposing to halt 
trading and quotations in OTCBB securities when the OTCBB security is a 
derivative or component of a security listed on a domestic exchange, 
foreign market/exchange, or Nasdaq and the exchange or foreign market/
exchange or Nasdaq imposes a trading halt in the underlying listed 
security.
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    \11\ See NASD Rule 4120(a)(3)(ii).
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    OTCBB Halts for Failure to Comply with Rule 10b-17 under the Act. 
Finally, the NASD and Nasdaq are proposing to halt quotations and 
trading in an OTCBB security if the issuer fails to comply with the 
requirements of Rule 10B-17 under the Act regarding Untimely 
Announcements of Record Dates.\12\ Rule 10b-17 requires issuers to give 
the NASD, in a timely fashion, information relating to: (1) A dividend 
or other distribution in cash or in kind; (2) a stock split or reverse 
split; and (3) a rights or other subscription offering. Under Rule 10b-
17, the issuer is required to provide this information to the NASD no 
later than 10 prior to the record date or, in case of a rights 
subscription or other offering if such 10 days advance notice is not 
practical, on or before the record date.\13\
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    \12\ See 17 CFR 240.10b-17.
    \13\ Id.
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    For both Nasdaq-listed and OTCBB securities, Nasdaq publishes the 
record date of the action and the ex-date in its ``Daily List'' on the 
Nasdaq Websites. This provides information to broker-dealers, clearing 
agencies, and the public regarding the record date and settlement date 
of such trades. For Nasdaq-listed securities, if an issuer does not 
provide the information in a timely manner, Nasdaq may request the Rule 
10b-17 information from the issuer and halt trading pending receipt of 
such information.\14\ Nasdaq may then issue a Uniform Practice Code 
(``UPC'') notice informing members of the status of the record date and 
underlying event in order to clarify any confusion in the marketplace 
regarding the price or settlement of these trades.
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    \14\ See NASD Rule 4120(a)(5).
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    While OTCBB issuers are also required to give the NASD information 
required by Rule 10b-17 in a timely manner, Nasdaq does not currently 
have the authority to institute a trading halt in an OTCBB security 
when this information has not been timely provided. Under the proposed 
rule change, the NASD and Nasdaq will have the authority to halt 
trading and quotations in an OTCBB security when the issuer fails to 
give the NASD notice of the inforamtion specified in Rule 10b-17.
    Finally, the NASD and Nasdaq are proposing to amend the Plan Of 
Allocation And Delegation Of Functions by NASD To Subsidiaries to 
clarify that the Stockwatch section of Nasdaq would have authority to 
effectuate OTCBB halts.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association. 
In particular, the Commission believes that the proposed rule is 
consistent with the requirements of Sections 11A(c)(1)(A),\15\ 
11A(c)(1)(B),\16\ 15A(b)(6) \17\ and 15A(b)(11) \18\ of the Act.
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    \15\ 15 U.S.C. 78k-1(c)(1)(A).
    \16\ 15 U.S.C. 78k-1(c)(1)(B).
    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 15 U.S.C. 78o-3(b)(11).
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    The Commission believes that the proposed rule change is consistent 
with the goals expressed in Sections 11A(c)(1)(A) \19\ and 11A(c)(1)(B) 
\20\ of the Act, which give the Commission the authority to promulgate 
rules designed to prevent the use, distribution or publication of 
fraudulent, deceptive, or manipulative information with respect to 
quotations, and to assure that those responsible for disseminating 
securities information obtain such information on fair and reasonable 
terms. The Commission believes that allowing Nasdaq to halt quotation 
and trading in OTCBB securities when there is a threat that quotations 
may be inaccurate because of fraudulent conduct discovered by foreign 
regulatory authorities, will further the goals of those sections. The 
Commission finds that the proposed rule will help prevent the 
dissemination of quotations that are based on fraudulent information 
and will help ensure that quotes in the OTCBB are accurate.
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    \19\ 15 U.S.C. 78k-1(c)(1)(A).
    \20\ 15 U.S.C. 78k-1(c)(1)(B).
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    Further, the Commission finds the proposed rule is consistent with 
the Section 15A(b)(6) \21\ requirements 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 addition, the Commission finds the proposed rule is 
consistent with Section 15A(b)(11),\22\ which requires that the rules 
of the association be designed to produce fair and informative 
quotations, to prevent fictitious or misleading quotations, and to 
promote orderly procedures for collecting, distributing, and publishing 
quotations.
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    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ 15 U.S.C. 78o-3(b)(11).
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    Proposed Rule 6545 will enhance Nasdaq's authority to initiate 
trade and quotation halts in OTCBB securities based on regulatory halts 
imposed by foreign securities exchanges or foreign regulatory 
authorities. The Rule will allow Nasdaq to halt trading and quotations 
in OTCBB securities when a foreign securities exchange or foreign 
regulatory authority has imposed a halt because of potential fraudulent 
conduct or other public interest concerns. The Commission believes that 
granting

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Nasdaq this authority will help prevent fraudulent practices and 
protect investors in accordance with Section 15A(b)(6) of the Act.\23\ 
Moreover, this authority will help ensure that Nasdaq disseminates fair 
and accurate quotes, and that the dissemination of quotes is done in an 
orderly manner pursuant to the requirements of Section 15A(b)(11) of 
the Act.\24\
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    \23\ 15 U.S.C. 78o-3(b)(6).
    \24\ 15 U.S.C. 78o-3(b)(11).
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    The Commission believes the proposed rule will benefit investors 
because it will grant Nasdaq the authority to halt trading and 
quotations in OTCBB securities when the OTCBB security is a derivative 
or component of a security listed on a domestic exchange, foreign 
exchange or Nasdaq and the domestic exchange, foreign exchange or 
Nasdaq imposes a trading halt in the underlying listed security. This 
will help assure accurate pricing of OTCBB derivatives and components, 
as the price of these securities is derived from the price of the 
underlying security. Market makers will be unable to quote or trade an 
OTCBB derivative or component when no accurate pricing information on 
the underlying security is available.
    In addition, without this rule in place, the purpose of a trade 
halt in the underlying security could be frustrated. For example, if 
Nasdaq imposed a trade halt on a Nasdaq security in order to allow for 
dissemination of material news regarding the issuer, but quoting and 
trading of a derivative of that security continued on the OTCBB, the 
goal of the original halt would not be fully accomplished. Rather, 
before the material news could be fully absorbed by the public, trading 
based on incomplete or inaccurate information would take place. The 
NASD's new rule will prevent this.
    Finally, the proposed rule will authorize Nasdaq to halt trading in 
an OTCBB security when there is a failure to timely provide the NASD 
with information mandated by Rule 10b-17 under the Act, which if not 
timely disseminated could have an impact on the pricing and trading of 
OTCBB issues. Thus, the Commission finds that the proposed rule is 
designed to protect investors and to produce fair and informative 
quotations, prevent fictitious or misleading quotations and to promote 
orderly procedures for collecting, distributing, and publishing 
quotations.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to the NASD and, in particular, 
Sections 15A(b)(6) and 15(b)(11).\25\
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    \25\ In approving this rule proposal, the Commission notes that 
it has also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\26\ that the proposed rule change (SR-NASD-99-33) be, and hereby is, 
approved.
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    \26\ 15 U.S.C. 78s(b)(2)

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13417 Filed 5-26-00; 8:45 am]
BILLING CODE 8010-01-M