20410 Federal Register / Vol. 72, No. 78 / Tuesday, April 24, 2007 / Rules and Regulations 

1As of July 1, 2006, the National Market System 

of The NASDAQ Stock Market LLC is known as the 

Nasdaq Global Market. See Securities Exchange Act 

Release Nos. 53799 (May 12, 2006), 71 FR 29195 

(May 19, 2006) and 54071 (June 29, 2006), 71 FR 

38922 (July 10, 2006). 

2See National Securities Markets Improvement 

Act of 1996, Pub. L. No. 104–290, 110 Stat. 3416 

(October 11, 1996). 

3 15 U.S.C. 77r(a). 

4 15 U.S.C. 77r(b)(1)(A) and (B). In addition, 

securities of the same issuer that are equal in 

seniority or senior to a security listed on a Named 

Market or national securities exchange designated 

by the Commission as having substantially similar 

listing standards to a Named Market are covered 

securities for purposes of Section 18 of the 

Securities Act. 15 U.S.C. 77r(b)(1)(C). 

5Securities Exchange Act Release No. 39542 

(January 13, 1998), 63 FR 3032 (January 21, 1998) 

(determining that the listing standards of the 

Chicago Board Options Exchange, Incorporated 

(‘‘CBOE’’), Tier 1 of the Pacific Exchange, Inc. 

(‘‘PCX’’) (now known as NYSE Arca, Inc.), and Tier 

1 of the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’) 

were substantially similar to those of the Named 

Markets and that securities listed pursuant to those 

standards would be deemed covered securities for 

purposes of Section 18 of the Securities Act). In 

2004, the Commission amended Rule 146(b) to 

designate options listed on the International 

Securities Exchange, Inc. (‘‘ISE’’) (now known as 

the International Securities Exchange, LLC) as 

covered securities for purposes of Section 18(b) of 

the Securities Act. 

6 17 CFR 230.146(b). 

7The Nasdaq Capital Market was previously 

named the Nasdaq SmallCap Market. 

8See letter from Edward S. Knight, Executive 

Vice President and General Counsel, Nasdaq, to 

Nancy M. Morris, Secretary, Commission, dated 

March 1, 2006 (File No. 4—513) (‘‘Nasdaq 

Petition’’). 

9Securities Act Release No. 8754 (November 16, 

2006), 71 FR 67762 (November 22, 2006) 

(‘‘Proposing Release’’). 

10See letter to Nancy M. Morris, Secretary, 

Commission, from Alan M. Parness, Vice Chair, 

State Regulation of Securities Committee of the 

American Bar Association Section of Business Law 

(‘‘ABA Committee’’), dated April 3, 2006 (‘‘ABA 

Committee April 3rd Letter’’); letter to Nancy M. 

Morris, Secretary, Commission, from Patricia D. 

Struck, The North American Securities 

Administrators Association (‘‘NASAA’’) President 

and Wisconsin Securities Administrator, dated 

March 29, 2006 (‘‘NASAA March 29th Letter’’); 

electronic mail to Robert L.D. Colby, Acting 

Director, Division, Commission, from Randall 

Schumann, Legal Counsel, Wisconsin DFI-Division 

of Securities, NASAA Corporation Finance Section 

Member, dated June 1, 2006; letter to Nancy M. 

Morris, Secretary, Commission, from Alan M. 

Parness, Vice Chair, ABA Committee, dated 

December 20, 2006 (‘‘ABA Committee December 

20th Letter’’); letter to Nancy M. Morris, Secretary, 

Commission, from Joseph P. Borg, NASAA 

President and Director, Alabama Securities 

Commission, dated December 21, 2006 (‘‘NASAA 

December 21st Letter’’); letter to Nancy M. Morris, 

Secretary, Commission, from Joseph P. Borg, 

NASAA President and Director, Alabama Securities 

Commission, dated December 21, 2006 (‘‘NASAA 

Supplemental Letter’’); and letter to Nancy M. 

Morris, Secretary, Commission, from Phillip B. 

Kennedy, Esq., Gaeta & Eveson, P.A., dated 

December 19, 2006 (‘‘Kennedy Letter’’). In addition, 

the Commission’s Advisory Committee on Smaller 

Public Companies recommended on April 23, 2006 

that the Commission make NCM stocks ‘‘covered 

securities.’’ SEC Advisory Committee on Smaller 

Public Companies, Final Report, at 97–100 (2006). 

11See Securities Exchange Act Release Nos. 

54378 (August 28, 2006) (‘‘Nasdaq Proposed Rule 

Change’’), 71 FR 52351 (September 5, 2006). 

12Securities Exchange Act Release No. 55642 

(April 18, 2007) (‘‘NCM Listing Standard 

Amendments’’). 

13 15 U.S.C. 77r(b)(1). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 230 

[Release No. 33–8791; File No. S7–18–06] 

RIN 3235–AJ73 

Covered Securities Pursuant to 

Section 18 of the Securities Act of 1933 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

is adopting an amendment to a rule 

under Section 18 of the Securities Act 

of 1933 (‘‘Securities Act’’) to designate 

securities listed, or authorized for 

listing, on the Nasdaq Capital Market 

tier of The NASDAQ Stock Market LLC 

(‘‘Nasdaq’’) as covered securities for 

purposes of Section 18 of the Securities 

Act. Covered securities under Section 

18 of the Securities Act are exempt from 

State law registration requirements. The 

Commission also is making a correction 

to the rule text to conform it to the 

language of Section 18 of the Securities 

Act. 

DATES: Effective Date: May 24, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Heather Seidel, Assistant Director, (202) 

551–5608, Hong-anh Tran, Special 

Counsel, (202) 551–5637, or Michou 

Nguyen, Special Counsel, (202) 551– 

5634, Division of Market Regulation 

(‘‘Division’’), Commission, 100 F Street, 

NE., Washington, DC 20549–6628. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

In 1996, Congress amended Section 

18 of the Securities Act to exempt from 

state registration requirements securities 

listed, or authorized for listing, on the 

New York Stock Exchange LLC 

(‘‘NYSE’’), the American Stock 

Exchange LLC (‘‘Amex’’), or the 

National Market System of The 

NASDAQ Stock Market LLC (‘‘Nasdaq/ 

NGM’’) 1 (collectively, the ‘‘Named 

Markets’’), or any national securities 

exchange designated by the Commission 

to have substantially similar listing 

standards to those markets.2 More 

specifically, Section 18(a) of the 

Securities Act provides that ‘‘no law, 

rule, regulation, or order, or other 

administrative action of any State * * * 

requiring, or with respect to, registration 

or qualification of securities * * * shall 

directly or indirectly apply to a security 

that—(A) is a covered security.’’ 3

Covered securities are defined in 

Section 18(b)(1) of the Securities Act to 

include those securities listed, or 

authorized for listing, on the Named 

Markets, or securities listed, or 

authorized for listing, on a national 

securities exchange (or tier or segment 

thereof) that has listing standards that 

the Commission determines by rule are 

‘‘substantially similar’’ to the Named 

Markets.4

Pursuant to Section 18(b)(1)(B) of the 

Securities Act, the Commission adopted 

Rule 146.5 Rule 146(b) lists those 

national securities exchanges, or 

segments or tiers thereof, that the 

Commission has determined to have 

listing standards substantially similar to 

those of the Named Markets and thus 

securities listed on such exchanges are 

deemed covered securities.6

Nasdaq has petitioned the 

Commission to amend Rule 146(b) to 

determine that its listing standards for 

securities listed on the Nasdaq Capital 

Market (‘‘NCM’’) 7 are substantially 

similar to those of the Named Markets 

and, accordingly, that securities listed 

pursuant to such listing standards are 

covered securities for purposes of 

Section 18(b) of the Securities Act.8

On November 22, 2006, the 

Commission issued a release proposing 

to amend Rule 146(b) to designate 

securities listed on the NCM as covered 

securities for purposes of Section 18(a) 

of the Securities Act.9 The Commission 

received seven comment letters, all 

expressing overall support for the 

Nasdaq Petition.10 In connection with 

its petition, Nasdaq filed a proposed 

rule change to amend its quantitative 

listing standards for NCM securities to 

make its NCM listing standards 

substantially similar to the Named 

Markets.11 On April 18, 2007, the 

Commission approved this proposed 

rule change.12

Based on the approved changes to the 

NCM listing standards and after careful 

comparison, the Commission concludes 

that the listing standards of the NCM are 

substantially similar to the listing 

standards of the Named Markets. 

Accordingly, the Commission today is 

amending Rule 146(b) to designate 

securities listed, or authorized for 

listing, on the NCM as covered 

securities under Section 18(b)(1) of the 

Securities Act.13 Amending Rule 146(b) 

to include securities listed, or 

authorized for listing, on the NCM as 

covered securities will exempt those 

securities from state registration 


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14 15 U.S.C. 77r(a). 

15 15 U.S.C. 77r(b)(1)(A). 

16This approach is consistent with the approach 

that the Commission has previously taken. See 

Securities Act Release Nos. 7422 (June 9, 1997), 62 

FR 32705 (June 17, 1997) and 7494 (January 13, 

1998), 63 FR 3032 (January 21, 1998). 

17Securities Act Release No. 7422, supra note 16. 

18See NCM Listing Standard Amendments, 

supra, note 12. 

19Such qualitative listing standards relate to, 

among other things, the number of independent 

directors required, conflicts of interest, composition 

of the audit committee, executive compensation, 

shareholder meeting requirements, voting rights, 

quorum, code of conduct, proxies, shareholder 

approval of certain corporate actions, and the 

annual and interim reports requirements. See 

Nasdaq Rule 4350. 

20See NCM Listing Standard Amendments, 

supra, note 12. 

21See generally Sections 1001 through 1006 of 

the Amex Company Guide. 

22See Section 1003(a) of the Amex Company 

Guide. Amex also will consider delisting if: (i) An 

issuer has sold or otherwise disposed of its 

principal operating assets or has ceased to be an 

operating company or has discontinued a 

substantial portion of its operations or business; (ii) 

if substantial liquidation of the issuer has been 

made; or (iii) if advice has been received, deemed 

by the Exchange to be authoritative, that the 

security is without value, or in the case of a 

common stock, such stock has been selling for a 

substantial period of time at a low price. See 

Section 1003(c) and (f)(v) of the Amex Company 

Guide. 

23Nasdaq Rule 4310(c)(2)(B)(i)–(iii). 

24Nasdaq Rule 4310(c)(4). Amex will consider 

delisting if the price per share is ‘‘low.’’ See Amex 

Rule 1003(f)(v). 

25Nasdaq Rule 4310(c)(7)(A). Amex will consider 

delisting the common stock of an issuer if the 

aggregate market value of such publicly held shares 

is less than $1 million for more than 90 consecutive 

days, the number of publicly held shares is less 

than 200,000 shares, or the number of its public 

stockholders is less than 300. See Section 1003(b) 

of the Amex Company Guide. 

26As noted above, the Commission has 

interpreted the substantially similar standard to 

require listing standards at least as comprehensive 

as those of the Named Markets, and differences in 

language or approach of the listing standards are 

not dispositive. 

requirements as set forth under Section 

18(a) of the Securities Act.14

II. Amendment to Rule 146(b) to 

Include Nasdaq NCM Securities 

Under Section 18(b)(1)(B) of the 

Securities Act,15 the Commission has 

the authority to compare the listing 

standards of a petitioner with those of 

the NYSE, Amex, or Nasdaq/NGM. The 

Commission initially compared 

Nasdaq’s listing standards for all NCM 

securities with only one of the Named 

Markets. If the listing standards in a 

particular category did not meet the 

standards of that market, the 

Commission compared the petitioner’s 

standards to the other two Named 

Markets.16 In addition, the Commission 

interpreted the ‘‘substantially similar’’

standard to require listing standards at 

least as comprehensive as those of the 

Named Markets.17 If a petitioner’s 

listing standards are higher than the 

Named Markets, then the Commission 

still determined that the petitioner’s 

listing standards are substantially 

similar to the Named Markets. Finally, 

the Commission notes that differences 

in language or approach would not 

necessarily lead to a determination that 

the listing standards of the petitioner are 

not substantially similar to those of a 

Named Market. 

The Commission has reviewed the 

NCM’s listing standards, as amended,18

and, for the reasons discussed below, 

believes that the standards are 

substantially similar to those of the 

Named Markets. Accordingly, the 

Commission is amending Rule 146(b) to 

include securities listed, or authorized 

for listing, on the NCM. Because the 

Commission believes Nasdaq’s 

qualitative listing standards for NCM 

securities are identical to the qualitative 

listing standards for Nasdaq/NGM 

securities,19 the discussion below 

focuses on the NCM quantitative listing 

standards. 

A. Common Stock 

As discussed in the Proposing 

Release, the Commission preliminarily 

believed that some, but not all, of the 

requirements in Nasdaq’s then-existing 

quantitative initial listing standards for 

common stock listing on the NCM were 

substantially similar to those of Amex’s 

common stock listing standards. The 

NCM Listing Standard Amendments 

modify those NCM initial listing 

standards for common stock to require 

an issuer to have: 

• Shareholder’s equity of $4 million 

and net income from continuing 

operations of $750,000 in the most 

recently completed fiscal year or in two 

of the last three most recently 

completed fiscal years, and a market 

value of publicly held shares of $5 

million; 

• Shareholder’s equity of $4 million, 

a market value of listed securities of $50 

million, and a market value of publicly 

held shares of $15 million; or 

• Shareholder’s equity of $5 million, 

a two-year operating history, and a 

market value of publicly held shares of 

$15 million.20

In light of these rule changes, the 

Commission finds the NCM initial 

listing standards for common stock to be 

substantially similar to those of Amex. 

The Commission finds that the 

continued listing requirements for 

common stock listed on the NCM, while 

not identical, are substantially similar to 

those of Amex. Amex’s delisting criteria 

are triggered by poor financial condition 

or operating results of the issuer.21

Specifically, Amex will consider 

delisting an equity issue if: (i) 

Stockholders’ equity is less than $2 

million and such issuer has sustained 

losses from continuing operations and/ 

or net losses in two of its three most 

recent fiscal years; (ii) stockholders’

equity is less than $4 million and such 

issuer has sustained losses from 

continuing operations and/or net losses 

in three of its four most recent fiscal 

years; (iii) stockholders’ equity is less 

than $6 million if such issuer has 

sustained losses from continuing 

operations and/or net losses in its five 

most recent fiscal years; or (iv) the 

issuer has sustained losses which are so 

substantial in relation to its overall 

operations or its existing financial 

resources, or its financial condition has 

become so impaired that it appears 

questionable, in the opinion of the 

Exchange, as to whether such company 

will be able to continue operations and/ 

or meet its obligations as they mature.22

Although Nasdaq’s NCM does not 

have the same continued listing 

requirements, Nasdaq also looks at the 

financial condition and operating 

results of the issuer. Specifically, for 

continued listing, Nasdaq requires an 

issuer to have shareholder’s equity of at 

least $2.5 million, market value of listed 

securities of at least $35 million, or net 

income of $500,000 from continuing 

operations in the past fiscal year or two 

out of its three past fiscal years.23

Further, Nasdaq requires that the listed 

issue have a minimum bid price for 

continued listing of $1 per share.24 In 

addition, for continued listing, Nasdaq 

requires an issuer to have a minimum of 

500,000 publicly held shares with a 

market value of at least $1 million.25

The Commission finds that the 

maintenance criteria for common stock 

listed on Amex and on the NCM are 

substantially similar.26

B. Secondary Classes of Common Stocks 

Only Nasdaq has listing standards for 

the trading of a secondary class of 

common stock. A secondary class of 

common stock is a class of common 

stock of an issuer that has another class 

of common stock listed on an exchange. 

The Commission compared the NCM 

listing standards for secondary classes 

of common stock and preferred stocks 

with the listing standards of the Nasdaq/ 

NGM. 

As discussed in the Proposing 

Release, the Commission preliminarily 

believed that with respect to the number 


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27Both Nasdaq NCM and NGM require 100 round 

lot holders. See NASD Rules 4310(c)(6)(B) and 

4420(k)(4). Nasdaq/NGM also requires 100 round 

lot holders for continued listing. Although the NCM 

requirements previously did not explicitly require 

a continuing number of round lot holders, the NCM 

Listing Standard Amendments clarified that the 100 

round lot holders requirement also will apply as a 

continued listing requirement for the NCM 

preferred and secondary classes of common stock 

standards. See NCM Listing Standard Amendments, 

supra note 12. 

28While the NCM bid price requirement for 

initial listing is $4 and the Nasdaq/NGM 

requirement is $5, the Commission believes that 

these standards are substantially similar. Both NGM 

and NCM require a $1 bid price for continued 

listing. See Nasdaq Rules 4310(c)(4), 4420(k)(3), and 

4450(h)(3). 

29Both Nasdaq NCM and NGM require 200,000 

publicly held shares for initial listing, and 100,000 

publicly held shares for continued listing. See 

Nasdaq Rules 4310(c)(7)(B), 4420(k)(1), and 

4450(h)(1). 

30The Commission notes that these requirements 

apply to instances when the common stock or 

common stock equivalent security of the issuer is 

listed on Nasdaq/NGM, NCM, Global Select Market 

(‘‘GSM’’) (the GSM is a segment of the NGM, see 

Securities Exchange Act Release Nos. 53799 and 

54071, supra note 1), or another national securities 

exchange. If the common stock or common stock 

equivalent is not listed on one of these markets then 

the security must meet the common stock listing 

requirements for the relevant market (either 

Nasdaq/NGM or NCM). See generally NASD Rules 

4310(c)(6)(B) and 4420(k). 

31See Proposing Release, supra note 9, at notes 

43–44 and accompanying text. 

32See NCM Listing Standard Amendments, supra 

note 12. 

33 Id. 

34See generally Nasdaq Rule 4310(c)(5) and 

Sections 104 and 1003 of the Amex Company 

Guide. 

35See NCM Listing Standard Amendments, supra 

note 12. 

36See Nasdaq Rule 4310(c)(5)(B). 

37 Id. 

38See Section 1003(b)(iv) of the Amex Company 

Guide. Section 1003(e) of the Amex Company 

Guide states that convertible bonds will be 

reviewed when the underlying security is delisted 

and will be delisted when the underlying security 

is no longer the subject of real-time reporting in the 

United States. The Commission does not believe 

that this is material because although Nasdaq does 

not have an identical rule, it does have the 

discretion to delist beyond its standards. 

39See NCM Listing Standard Amendments, supra 

note 12. 

40 Id. 

41See Nasdaq Rule 4450(d). 

42See generally Nasdaq Rule 4310(c)(9)(C). 

of round lot holders,27 bid price,28 and 

number of publicly held shares 29

requirements,30 Nasdaq’s initial and 

continued listing requirements for 

secondary classes of common stock and 

preferred stocks listing on the NCM 

were substantially similar to the listing 

standards for the Nasdaq/NGM. The 

Commission did not, however, believe 

that the initial continued listing 

requirements for market value of 

publicly held shares for NCM were 

substantially similar to Nasdaq/NGM 

standards.31

In the NCM Listing Standard 

Amendments, Nasdaq increased the 

NCM listing standards for both preferred 

and secondary classes of common stock 

for the market value of publicly held 

shares to $3.5 million for initial listing 

and $1 million for continued listing.32

Nasdaq also increased its initial and 

continued NCM listing rules for 

secondary classes of common stock and 

preferred stock to require that the 

common stock or common stock 

equivalent of the issuer either be listed 

on Nasdaq or be a covered security as 

defined in Rule 146(b).33 In light of 

these revisions to the NCM’s initial and 

continued listing standards for 

secondary classes of common stock and 

preferred stocks, the Commission finds 

that the NCM’s rules for initial and 

continued listing for secondary classes 

of common stock and preferred stock are 

substantially similar to Nasdaq/NGM’s 

rules. 

C. Convertible Debt 

The Commission has compared the 

NCM listing standards for convertible 

debt to Amex’s listing standards for 

debt.34 In the NCM Listing Standards 

Amendments, Nasdaq added a debt 

rating requirement similar to a 

requirement in Amex’s listing 

standards.35 Specifically, Nasdaq 

requires that for the initial listing of 

convertible debt, one of the following 

conditions must be met: (i) The issuer 

of the debt security must also have an 

equity security listed on the Amex, 

NYSE, or Nasdaq; (ii) an issuer of equity 

security listed on the Amex, NYSE, or 

Nasdaq, directly or indirectly owns a 

majority interest in, or is under common 

control with, the issuer of the debt 

security; (iii) an issuer of equity security 

listed on the Amex, NYSE, or Nasdaq 

has guaranteed the debt security; (iv) a 

nationally recognized securities rating 

organization (an ‘‘NRSRO’’) has 

assigned a current rating to the debt 

security that is no lower than an S&P 

Corporation ‘‘B’’ rating or equivalent 

rating by another NRSRO; or (v) if no 

NRSRO has assigned a rating to the 

issue, an NRSRO has currently assigned 

an investment grade rating to an 

immediately senior issue or a rating that 

is no lower than an S&P Corporation 

‘‘B’’ rating, or an equivalent rating by 

another NRSRO, to a pari passu or 

junior issue.36 The Listing Standards 

Amendment also requires that current 

sale information be available in the 

United States for the underlying 

security into which a convertible debt 

issue is convertible. Accordingly, the 

Commission finds that the NCM’s listing 

standards for convertible debt are 

substantially similar to those of Amex. 

The Commission also finds that the 

continued listing requirements for 

convertible debt securities listed on the 

NCM are substantially similar to Amex’s 

requirements. The NCM listing 

standards require that the principal 

amount outstanding be maintained at $5 

million.37 Amex generally will delist a 

bond if the aggregate market value or the 

principal amount of the bond publicly 

held is less than $400,000, or if the 

issuer is not able to meet its obligations 

on the listed debt.38 Although not 

identical, the Commission believes that 

both standards are designed to ensure 

the continued liquidity of the debt 

security, and thus are substantially 

similar. 

D. Warrants 

The Commission compared Nasdaq’s 

NCM listing standards for warrants to 

the Nasdaq/NGM standards. In the 

Proposing Release, the Commission 

stated that it preliminarily believed that 

the NCM standards were not 

substantially similar to the Nasdaq/ 

NGM standards. The NCM Listing 

Standard Amendments, however, 

increased the required number of 

warrants that must be outstanding for 

initial listing on the NCM from 100,000 

to 400,000.39 Though not identical, the 

Commission believes this initial listing 

requirement is substantially similar to 

Nasdaq/NGM requirements that there be 

450,000 warrants outstanding for initial 

listing. The NCM Listing Standard 

Amendments also added a requirement 

for initial and continued listing that the 

security underlying the warrant be 

listed on Nasdaq or be a covered 

security as described in Section 18(b).40

The Commission believes this 

requirement is substantially similar to 

the Nasdaq/NGM standard that requires 

that, for continued listing, the common 

stock of the issuer must continue to be 

listed on the Nasdaq/NGM.41 In light of 

the changes made by the NCM Listing 

Standard Amendments, the Commission 

finds the NCM’s listing standards for 

warrants are substantially similar to 

those of Nasdaq/NGM. 

E. Index Warrants 

Index warrants traded on the NCM, 

must meet the same initial and 

continuing listing standards as index 

warrants traded on the Nasdaq/NGM 

market.42 Therefore, the Commission 

finds that the listing standards for index 

warrants traded on the NCM are 

substantially similar to the standards 

applicable to index warrants traded on 

the Nasdaq/NGM market. 


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43A unit is a type of security consisting of two 

or more different types of securities (e.g., a 

combination of common stocks and warrants). See 

Securities Exchange Act Release No. 48464 

(September 9, 2003), 68 FR 54250 (September 16, 

2003). 

44See generally Section 101(g) of the Amex 

Company Guide and Nasdaq Rules 4310(c)(10) and 

4420(h)(1)(a)–(c). 

45See NCM Listing Standard Amendments, supra 

note 12. 

46See ABA Committee April 3rd Letter; ABA 

Committee December 20th Letter; and NASAA 

Supplemental Letter, supra note 10. 

47The Administrative Procedure Act (‘‘APA’’) 

generally requires an agency to publish notice of a 

proposed rulemaking in the Federal Register. The 

APA’s notice and comment requirement does not 

apply, however, if the agency ‘‘for good cause finds 

* * * that notice and public procedure are 

impracticable, unnecessary, or contrary to the 

public interest.’’ Sec. 5. U.S.C. Section 553(b)(3)(B). 

The Commission finds good cause to include the 

language ‘‘authorized for listing’’ to the rule because 

prior notice is unnecessary. The change does not 

alter the substance of the rule and incorporates 

language from the statute. 

48See Kennedy Letter, supra note 10. 

49See Securities Exchange Act Release Nos. 

53799 and 54071, supra note 1. 

50See Securities Exchange Act Release No. 53615 

(April 7, 2006), 71 FR 19226 (April 13, 2006). 

51 In the Proposing Release, the Nasdaq Global 

Market and the Nasdaq Capital Market were 

inadvertently referred to as the Nasdaq National 

Global Market and the Nasdaq National Capital 

Market. Those typographical errors are corrected in 

this adopting release. 

52 15 U.S.C. 77r(b)(1)(B). 

F. Units 

The NCM, Amex, and Nasdaq/NGM 

all evaluate the initial and continued 

listing of a unit by looking to its 

components.43 If all of the components 

of a unit individually meet the 

standards for listing, then the unit 

would meet the standards for listing.44

In light of the NCM Listing Standard 

Amendments, which increase the listing 

requirements for the different categories 

of securities discussed above that could 

make up the components of a unit, the 

Commission finds that the NCM listing 

standards for units are substantially 

similar to both Amex and Nasdaq/NGM 

listing standards.45

III. Other Changes to Rule 146(b) 

A. Clarifying Changes in Response to 

Comments 

In response to comments received 

from the ABA Committee and NASAA, 

the Commission is making a minor 

amendment to Rule 146(b) to include 

securities ‘‘authorized for listing’’ on a 

market named in Rule 146(b). 

NASAA and the ABA Committee 

expressed concern regarding a 

discrepancy between the language of 

Section 18 under the Securities Act and 

Rule 146(b) thereunder. Section 18 

defines covered securities as securities 

‘‘listed, or authorized for listing’’ on the 

Named Markets, or the other exchanges 

that have listing standards that the 

Commission has deemed to be 

substantially similar to the Named 

Markets. Rule 146(b), however, deems 

as ‘‘covered securities’’ only securities 

listed, not those that are ‘‘authorized for 

listing,’’ pursuant to exchange rules that 

the Commission has found to be 

substantially similar to the Named 

Markets. NASAA and the ABA 

Committee expressed concern that some 

issuers that are authorized for listing but 

not yet listed on an exchange identified 

in Rule 146(b) would not clearly be 

exempt from state qualification or 

registration requirements. They 

recommend that the Commission clarify 

the language in Rule 146(b) to conform 

it to the language of Section 18(b)(1)(B) 

of the Securities Act.46 The Commission 

believes that this clarifying change to 

Rule 146(b) is consistent with 

Congressional intent, as well as the 

Commission’s intent, is appropriate, and 

addresses the commenters’’ concerns.47

Another commenter expressed 

concern about a perceived ambiguity in 

Rule 146(b)(2). Rule 146(b)(2) 

conditions the designation of securities 

on the exchanges specified under Rule 

146(b)(1) as ‘‘covered securities’’ as long 

as their listing standards continue to be 

substantially similar to those of the 

Named Markets. The commenter 

believes that it is not clear who makes 

this determination and recommends 

that the phrase ‘‘as determined by the 

Commission’’ should be added to the 

language of Rule 146(b)(2).48 The 

Commission believes that this change is 

unnecessary because Section 18 clearly 

states that ‘‘covered securities’’ are those 

the Commission determines are 

substantially similar to the Named 

Markets. Similarly, Rule 146 specifies 

that it is the Commission that has found 

that listed exchanges, or segments 

thereof, have listing standards 

substantially similar to those of the 

Named Markets. The Commission also 

notes that since this rule has been in 

effect, the problem described by the 

commenter has not occurred and does 

not believe that further amendment to 

the language of the rule is required at 

this time. 

B. Changes to Exchanges’’ Names 

The Commission is amending Rule 

146(b), as proposed, to reflect the 

following name changes: 

• Sections (b)(1) and (b)(2) of Rule 

146 use the term ‘‘Nasdaq/NMS’’ to refer 

to the National Market System of The 

NASDAQ Stock Market LLC. As noted 

above, on July 1, 2006, what was the 

National Market System of The 

NASDAQ Stock Market LLC became 

known as the Nasdaq Global Market.49

The Commission is making a 

conforming change to Rule 146(b). 

• Rule 146(b)(1)(i) refers to the Pacific 

Exchange Incorporated. In April 2006, 

the Pacific Exchange, Incorporated was 

renamed NYSE Arca, Inc.50 The 

Commission is making a conforming 

change to Rule 146(b). 

• Rule 146(b)(1)(iv) refers to the 

International Securities Exchange, 

Incorporated. In September 2006, the 

International Securities Exchange, 

Incorporated was renamed the 

International Securities Exchange, LLC. 

The Commission is making a 

conforming change to Rule 146(b). 

• Finally, the Commission is 

amending paragraph (1)(ii) of Rule 

146(b) to reflect the legal name of the 

Philadelphia Stock Exchange, Inc.51

IV. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

does not apply because the proposed 

amendment to Rule 146(b) does not 

impose recordkeeping or information 

collection requirements or other 

collection of information, which require 

the approval of the Office of 

Management and Budget under 44 

U.S.C. 3501 et seq. 

V. Cost-Benefit Analysis 

Congress amended Section 18 of the 

Securities Act to exempt covered 

securities from state registration 

requirements. These securities are 

listed, or authorized for listing, on the 

Named Markets or any other national 

securities exchange determined by the 

Commission to have substantially 

similar listing standards to the Named 

Markets.52 Consistent with statutory 

authority, the Commission has 

determined that the listing standards for 

securities listed, or authorized for 

listing, on the NCM are substantially 

similar to those of either the Amex or 

Nasdaq/NGM. Securities listed, or 

authorized for listing, on the NCM 

therefore would be covered securities 

subject only to federal regulation. 

By exempting securities listed, or 

authorized for listing, on the NCM from 

state law registration requirements, the 

Commission expects that the listing 

process for those securities will become 

easier as one layer of regulation is 

eliminated. Moreover, the Commission 

also expects adoption of the rule will 

reduce the administrative burden the 

issuers of covered securities face 

inasmuch as compliance with state blue 


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20414 Federal Register / Vol. 72, No. 78 / Tuesday, April 24, 2007 / Rules and Regulations 

53Several commenters also expect this outcome. 

See ABA Committee April 3rd Letter; ABA 

Committee December 20th Letter; and Kennedy 

Letter, supra note 10. 

54See ABA Committee December 20th Letter and 

Kennedy Letter, supra note 10. 

55 15 U.S.C. 77b(b). 

56See ABA Committee April 3rd Letter; ABA 

Committee December 20th Letter; and Kennedy 

Letter, supra note 10. 57 5 U.S.C. 605(b). 58 15 U.S.C. 77a et seq. 59 15 U.S.C. 77r(b)(1)(B) and 77s(a). 

sky law requirements is preempted.53

The Commission solicited comments 

concerning the costs and benefits 

associated with the proposal and 

received two comments. The 

commenters believe that the proposed 

amendments to Rule 146(b) to provide 

‘‘covered securities’’ status for securities 

authorized for listing, or approved for 

listing on the NCM, should reduce 

substantial costs for investors, given 

those securities would be exempted 

from state law registration 

requirements.54

The Commission also believes that the 

amendment to Rule 146(b) will permit 

Nasdaq to compete with other markets 

whose listed securities are exempt from 

state law registration requirements for 

new securities products and listings. 

This result has the potential to enhance 

competition and, potentially, liquidity, 

thus benefiting market participants and 

the public. The Commission does not 

believe that there are any significant 

costs to investors associated with the 

preemption of state registration 

requirements for securities listed, or 

authorized for listing, on the NCM. The 

Commission notes that there may be 

some cost to investors through the loss 

of benefits of state registration and 

oversight, although the cost is difficult 

to quantify. Furthermore, the 

Commission believes that Congress 

contemplated these costs to the 

economic benefits of exempting covered 

securities from state regulation. 

VI. Consideration of Promotion of 

Efficiency, Competition, and Capital 

Formation 

As required under the Securities 

Act,55 the Commission considered the 

rule’s impact on efficiency, competition, 

and capital formation. National 

securities exchanges compete for the 

listing of securities. Thus, the 

Commission believes that amending 

Rule 146(b) to designate securities 

listed, or authorized for listing, on the 

NCM as covered securities will offer 

potential benefits for investors because 

it would facilitate the ability of Nasdaq 

to compete for listings, which will 

potentially increase competition and 

enhance the overall liquidity, and thus 

the efficiency of the U.S. securities 

markets. The Commission also believes 

that the rule will serve to reduce the 

cost of raising capital because it will 

streamline the registration process for 

issuers listing on the NCM. In addition, 

the Commission believes that the rule 

amendment, consistent with 

Congressional action, is designed to 

promote efficiency by removing a layer 

of duplicative regulation. The 

Commission solicited comments on the 

amendment’s effect on competition, 

efficiency, and capital formation. 

Commenters generally believed that this 

proposal would improve efficiency and 

facilitate capital formation by 

eliminating state registration for issuers 

seeking to list their securities on the 

NCM.56 The Commission also believes 

that the amendment to Rule 146(b) will 

permit Nasdaq to compete with other 

markets whose securities are exempt 

from state law registration requirements 

for new securities products and listings. 

Finally, the amendment to Rule 146(b) 

will not impair efficiency, competition, 

and capital formation because it will 

impose no recordkeeping or compliance 

burdens, but will provide a limited 

purpose exemption under the federal 

securities laws. Thus, the Commission 

concludes that the amendment to Rule 

146(b) would promote efficiency, 

competition, and capital formation. 

VII. Regulatory Flexibility Act 

Certification 

The Commission has certified, 

pursuant to Section 605(b) of the 

Regulatory Flexibility Act,57 that the 

amendment to Rule 146 will not have a 

significant economic impact on a 

substantial number of small entities. 

This certification was incorporated into 

the Proposing Release. The Commission 

solicited comments as to the nature of 

any impact on small entities, and 

generally on whether the amendment to 

Rule 146(b) could have an effect that has 

not been considered. No comments were 

received. 

VIII. Statutory Authority 

The Commission is amending Rule 

146 pursuant to the Securities Act of 

1933,58 particularly Sections 18(b)(1)(B) 

and 19(a).59

Text of the Rule 

List of Subjects in 17 CFR Part 230 

Securities. 

■ For the reasons set forth in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is amended 

as follows: 

PART 230—GENERAL RULES AND 

REGULATIONS, SECURITIES ACT OF 

1933 

■ 1. The general authority citation for 

part 230 is revised to read as follows: 

Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 

77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 

78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 

78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a–

30, and 80a–37, unless otherwise noted. 

* * * * * 

■ 2. Section 230.146 is amended by 

revising paragraphs (b)(1) and (b)(2) to 

read as follows: 

§ 230.146 Rules under Section 18 of the 

Act. 

* * * * * 

(b) * * * 

(1) For purposes of Section 18(b) of 

the Act (15 U.S.C. 77r), the Commission 

finds that the following national 

securities exchanges, or segments or 

tiers thereof, have listing standards that 

are substantially similar to those of the 

New York Stock Exchange (‘‘NYSE’’), 

the American Stock Exchange 

(‘‘Amex’’), or the National Market 

System of the Nasdaq Stock Market 

(‘‘Nasdaq/NGM’’), and that securities 

listed, or authorized for listing, on such 

exchanges shall be deemed covered 

securities: 

(i) Tier I of the NYSE Arca, Inc.; 

(ii) Tier I of the Philadelphia Stock 

Exchange, Inc.; 

(iii) The Chicago Board Options 

Exchange, Incorporated; 

(iv) Options listed on the 

International Securities Exchange, LLC; 

and 

(v) The Nasdaq Capital Market. 

(2) The designation of securities in 

paragraphs (b)(1)(i) through (v) of this 

section as covered securities is 

conditioned on such exchanges’ listing 

standards (or segments or tiers thereof) 

continuing to be substantially similar to 

those of the NYSE, Amex, or Nasdaq/ 

NGM. 

Dated: April 18, 2007. 

By the Commission. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–7713 Filed 4–23–07; 8:45 am] 

BILLING CODE 8010–01–P 


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