34518 Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices

25 15 U.S.C. 78f(b)(2).

26 Id.

27 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42345

(January 18, 2000), 65 FR 4002.

4 17 CFR 240.10b–17. For a description of the

rule, see text accompanying notes 12 and 13 infra.

5Under 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.

6NASD Rules 6530 and 6540 impose certain

regulatory filing requirements for securities to be

included in the OTCBB.

7See NASD Rule 4120(a)(4).

8The 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.

9Of course, if an issuer failed to meet the

eligibility requirements contained in NASD Rules

alter the original proposal, which was

subject to a full notice and comment

period, and addresses the issues raised

by commenters, the Commission finds

that granting accelerated approval to

Amendment No. 1 is consistent with

Section 19(b)(2) of the Act.25

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,26 that the

proposed rule change (SR–ISE–00–01),

including Amendment No. 1, is

approved, and that PMM five contract

preference proposal contained in

Amendment No. 1 is approved as a oneyear pilot to expire on May 22, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13414 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

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’’).

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.

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

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.

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

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

Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices 34519

6530 and 6540, the security would be removed from

the OTCBB.

10That 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.

11See NASD Rule 4120(a)(3)(ii).

12See 17 CFR 240.10b–17.

13 Id.

14See NASD Rule 4120(a)(5).

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).

19 15 U.S.C. 78k–1(c)(1)(A).

20 15 U.S.C. 78k–1(c)(1)(B).

21 15 U.S.C. 78o–3(b)(6).

22 15 U.S.C. 78o–3(b)(11).

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.

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.

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

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 brokerdealers, 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.

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.

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.

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.

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

34520 Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices

23 15 U.S.C. 78o–3(b)(6).

24 15 U.S.C. 78o–3(b)(11).

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).

26 15 U.S.C. 78s(b)(2)

27 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.19b–4(f)(6).

4 17 CFR 240.19b–4

5See Securities Exchange Act Release No. 40058

(June 2, 1998), 63 FR 31543 (June 9, 1998).

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

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

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13417 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42805; File No. SR–PHLX–

00–10]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc. To

Reduce the Value of the Over-theCounter Prime Index (‘‘OTX’’)

May 22, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder, 2

notice is hereby given that on March 31,

2000, the Philadelphia Stock Exchange,

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by the Exchange. The

proposed rule change has been filed by

the Phlx as a ‘‘non-controversial’’ rule

change under Rule 19b–4(f)(6) 3 of the

Act. The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx, pursuant to Rule 19b–4 of

the Act,4 proposes to reduce the value

of its Over-The-Counter prime Index

(‘‘Index’’) option (‘‘OTX’’) to one-fourth

its present value by quadrupling the

base market divisor used to calculate the

Index. In addition, the position and

exercise limits applicable to OTX will

be quadrupled until the last expiration

then trading. The Index is a price

weighted, A.M. settled index composed

of fifteen stocks which are considered to

be the ‘‘most active’’ stocks traded on

the Nasdaq market.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Phlx 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. Phlx 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 purpose of this proposed rule

change, as discussed more fully below,

is to attract additional liquidity to OTX.

a. Background. The Exchange began

trading OTX in 1998.5 As of March 21,

2000, the index value was 714 and the

near-month in-the-money call premium

was $57.75 per contract. The Exchange

proposes to conduct a ‘‘four-for-one

split’’of the Index, such that the value

would be reduced to one-quarter of the

current value. The number of OTX

contracts will be quadrupled, such that

for each OTX contract currently held,

the holder would receive four contracts

at the reduced value with a strike price

one quarter of the original strike price.

For instance, the holder of an OTX 800

call will receive four OTX 200 calls. In

addition to the strike price being

reduced by one-quarter, the position

and exercise limits applicable to OTX

will be quadrupled, from 25,000

contracts to 100,000 contracts until the

last expiration then trading. The result

would be an index value of 178.50 and

a near-month at-the-money call

premium of $14.44. This procedure is

similar to the one employed respecting

equity options where the underlying

security is subject to a four-for-one stock

split. The trading symbol will remain as

OTX.

In conjunction with the split, the

Exchange will list strike prices

surrounding the new, lower index