Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices 45895

5According to DTC, many of its participants use

the CLP to effect repos.

6The instructions for a delivery of securities to

a repo account use the same data fields as the

instructions for a pledge to a pledgee account,

which includes a mandatory hypothecation code

field. A participant delivering securities to a repo

account must enter the number seven, eight, or nine

in the hypothecation code field. The entry of the

number seven, eight, or nine in the hypothecation

code field of instructions for a delivery to a repo

account does not constitute a notice or

representation as to any matter by the delivering

participant. The entry of the number seven, eight,

or nine in the hypothecation code field of such

instructions is merely an action needed to effect the

delivery through DTC’s facilities. A participant

pledging securities to a pledgee account must

continue to enter the number one, two, or three,

whichever is applicable, in the hypotecation code

field. Participants are responsible for entering the

appropriate number in the hypothecation field for

all transactions. Letter from Carl Urist, Deputy

General Counsel, DTC (August 7, 1997).

7According to DTC’s proposed procedures for

repo accounts, the operation of a repo account will

be identical to the operation of a pledgee account.

As with a pledgee account: (1) the voting rights on

securities credited to a repo account will be

assigned to the participant that delivered the

securities to the repo account; (2) cash dividend

and interest payments and other cash distributions

on the securities will be credited to the account of

the delivering participant; (3) distributions of

securities for which the exdistribution date is on or

prior to the payable date or in which the

distribution is payable in a different security will

be credited to the account of the delivering

participant; and (4) any stock splits or other

distributions of the same securities for which the

ex-distribution date is after the payable date will be

credited to the repo account of the receiver. Also,

the reports and statements that DTC sends to

participants and receivers for transactions involving

repo accounts will be the same as the reports that

DTC generates for a pledgee account except that

such reports and statements will carry a repo

account number.

8According to DTC, there are a small number of

non-member banks that maintain pledge accounts at

DTC. Conversation with Carl H. Urist, Deputy

General Counsel, DTC (August 22, 1997).

9The indemnification provides protection from

liability that may arise in the event that, unknown

to DTC, at the time of the transfer there was a filing

by the Securities Investor Protection Corporation or

other court order that prohibited such transfer. Id.

10 15 U.S.C. 78q–1(b)(3)(F).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (March 27, 1997)

(‘‘Amendment No. 1’’). Amendment No. 1 makes

technical and conforming changes to the proposed

rule filing.

4Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (April 1, 1997)

(‘‘Amendment No. 2’’). Amendment No. 2 makes

technical and conforming changes to the proposed

rule filing.

5Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (June 17, 1997)

(‘‘Amendment No. 3’’). Amendment No. 3 makes

technical and conforming changes to the proposed

rule filing, correcting clerical errors and defining

terms used in the rule language. For example,

Amendment No. 3 defines two abbreviations used

in the rules, as well as the terms ‘‘Market Value’’

and ‘‘Country of Domicile.’’

6Exchange Act Release No. 38469 (April 2, 1997).

7 62 FR 17262 (April 9, 1997).

a security interest or other limited

interest in the securities (i.e., a pledge).5

Under the proposed rule change, any

organization that is eligible to establish

a pledgee account (i.e., ‘‘receiver’’) at

DTC may establish a repo account.

Consequently, a participant engaging in

a repo or other type of financing

transaction will be able to deliver

securities to the receiver’s repo account

instead of the receiver’s pledgee

account.6 DTC will deem instructions to

deliver securities to a repo account as

instructing DTC to transfer to the

receiver the entire interest in the

securities and not just a security interest

or other limited interest.7

DTC will accept instructions solely

from a receiver with respect to the

disposition of securities credited to the

receiver’s repo account. The receiver

may instruct DTC to deliver securities

credited to its repo account to its DTC

participant account if the receiver is

also a DTC participant or to any other

DTC participant account.8 Any receiver

that instructs DTC to deliver securities

credited to its repo account to another

receiver or to a DTC participant other

than the original delivering participant

will be required to provide DTC with

certain warranties and must indemnify

DTC, its stockholders, and certain

employees against potential liability.9

II. Discussion

Section 17A(b)(3)(F) 10 of the Act

requires that the rules of a clearing

agency be designed to safeguard

securities and funds in DTC’s custody or

control or for which it is responsible.

The Commission believes that DTC’s

proposed rule change is consistent with

DTC’s obligations under the Act because

the new procedures should enable DTC

participants to avoid any confusion as to

whether a securities transfer is actually

the sale of a security or the pledge of a

security as collateral. Consequently, the

procedures should reduce the potential

for the inadvertent delivery of dividend

payments, proxy materials, or other

items to the wrong party.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with the

requirements of Section 17A of the Act

and the rules and regulations

thereunder.

It Is Therefore Ordered, pursuant to

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

proposed rule change (File No. SR–

DTC–97–05) be, and hereby is,

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23005 Filed 8–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38961; File No. SR–NASD–

97–16]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment No. 3 Relating

to the Revision of the Criteria for Initial

and Continued Listing on The Nasdaq

Stock Market, Inc.

August 22, 1997.

I. Introduction

On March 3, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly owned subsidiary The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), filed

with the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’)1 and Rule

19b–4 thereunder 2 to revise its listing

and maintenance standards for Nasdaq

National Market (‘‘NNM’’) and

SmallCap designated issuers. On March

27, 1997, the NASD filed Amendment

No. 1 to the proposal.3 On April 1, 1997,

the NASD filed Amendment No. 2 to the

proposal.4 On June 17, 1997, the NASD

filed Amendment No. 3 to the

proposal.5

Notice of the substance of the

proposed rule change and Amendment

Nos. 1 and 2 was provided by issuance

of a release 6 and by publication in the

Federal Register.7 Eight comment letters

regarding the proposed rule change
45896 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices

8Letters from Gerald L. Fishman, Fishman &

Merrick, P.C. (April 18, 1997) (‘‘Fishman Letter’’);

Sam Rosen, Shannon, Gracey, Ratliff & Miller,

L.L.P. (April 28, 1997) (‘‘Rosen Letter’’); Friedlob

Sanderson Raskin Paulson & Tourtillot, LLC (April

30, 1997) (‘‘Friedlob Letter’’); Van P. Carter, Walter

& Haverfield P.L.L. (April 30, 1997) (‘‘Carter

Letter’’); James F. Duffy, American Stock Exchange,

Inc. (May 1, 1997) (‘‘Amex Letter’’); Bob Cardon,

Corporate Secretary, Dynatronics (May 6, 1997)

(‘‘Dynatronics Letter No. 1’’); Kelvyn H. Cullimore,

Jr., President, Dynatronics (May 8, 1997)

(‘‘Dynatronics Letter No. 2’’); and Sharon C. Kaiser,

Chief Financial Officer, HemaCare Corporation

(May 30, 1997) (‘‘HemaCare Letter).

9Exchange Act Release No. 26433 (January 9,

1989), 54 FR 1463 (January 13, 1989). Many states

have exempted securities designated as NNM from

state registration requirements.

10Exchange Act Release No. 29638 (August 30,

1991), 56 FR 44108 (September 6, 1991).

11Proposed Rule 4310(c)(25).

12Proposed Rules 4310(c)(27) and 4450(m).

13See generally Proposed Rule 4300 and 4400

Series.

14Proposed Rules 4310(c)(2)(A), 4420(a)(5),

4420(b)(1) and 4420(c)(6) (for listing standards);

Rules 4310(c)(2)(B), 4450(a)(3), and 4450(b)(1) (for

maintenance standards).

15Proposed Rules 4310(c)(7), 4420(a), 4420(b) and

4420(c).

16Proposed Rules 4310(c)(1), 4420(a)(7),

4420(b)(5), 4420(c)(4), 4450(b)(6) and 4450(e).

17Proposed Rules 4310(c)(4) and 4450(a)(5).

18For SmallCap, the current exception requires

$1 million in market value of public float and $2

million in capital and surplus. For NNM, the

current exception requires $3 million in market

value of public float and $4 million in net tangible

assets.

19See Exchange Act Release No. 29638 (August

30, 1991), 56 FR 44108 (September 6, 1991).

20 It is contemplated that, as is currently the case

with respect to NNM issuers, the NASD would have

the discretion to waive or modify these corporate

governance standards for foreign SmallCap issuers

where the standards are contrary to generally

accepted business practices in the issuer’s country

of origin.

21As amended under the proposed rule change

for initial listing on the National Market, an issuer

must have net tangible assets of $18 million, or $6

million if the issuer has had earnings of $1 million

in the most recent year or two of the last three years.

Net tangible assets equals total assets (including the

value of patents, copyrights and trade marks but

excluding the value of goodwill) less total

liabilities. See Rule 4200(w).

were received.8 This order approves the

proposed rule change, as amended, and

approves Amendment No. 3 on an

accelerated basis.

II. Description of the Proposal

The NASD has filed with the

Commission a proposal to revise the

Rule 4300 and 4400 Series governing

the listing and maintenance standards

for NNM and SmallCap designated

issuers. Listing and maintenance

standards for NNM issuers were last

modified on January 9, 1989.9 SmallCap

listing and maintenance standards were

last modified on August 30, 1991.10

The NASD states that the purpose of

the revision to the listing and

maintenance standards is to increase the

quality of companies listed on Nasdaq

and raise the level of investor

protection. The changes, according to

the NASD, will allow Nasdaq to balance

its role in capital formation with its

responsibility to provide adequate

investor protection. The NASD believes

the proposed standards will: (1) Increase

safeguards to protect public investors;

(2) address growth and change in the

market; (3) conform with structural

enhancements to the market that are

currently underway; and (4) address the

changes in the market since Nasdaq

listing and maintenance standards were

last revised.

More specifically, the proposal

would: (1) Extend corporate governance

requirements already applicable to the

NNM issuers to SmallCap issuers; 11 (2)

require peer review of auditors for both

NNM and SmallCap issuers; 12 and (3)

increase the minimum requirements,

both for listing and maintenance, for

NNM and SmallCap issuers.13 The

minimum requirements that will be

increased include: (1) Net tangible

assets, market capitalization, or assets

and revenue; 14 (2) public float and

market value of public float; 15 (3)

number of market makers; 16 and (4)

minimum bid price.17 These

requirements are explained in greater

detail below.

Elimination of the Exception to the $1

Minimum Bid Price

Currently, maintenance standards for

both SmallCap and NNM designated

issuers require that issuers maintain a

minimum bid price of $1. The existing

standards provide an exception to the

$1 bid price requirement for issuers able

to meet higher float as well as higher

capital and surplus or net tangible asset

requirements.18

The NASD proposes to eliminate the

exception to the $1 bid price minimum

for several reasons. First, the NASD

believes the change would remove the

incentive to engage in large, below

market private placements that cause

dilution and concomitant harm to

Nasdaq investors. The NASD also

believes the change would provide a

safeguard against abusive market

activity sometimes associated with lowpriced securities. Further, when the

exception was adopted, it was intended

to address a ‘‘temporary adverse market

condition[]’’ that may result in a bid

price below $1.19 Contrary to the

NASD’s stated intent in 1991, issuers

have used the exception as a permanent

means of meeting the listing standards.

Finally, the NASD believes that a $1

minimum bid price would serve to

increase investor confidence and the

credibility of the Nasdaq market,

commensurate with its increased

prominence.

Corporate Governance Standards for

SmallCap Issuers

The NASD proposes to extend the

corporate governance requirements

currently applicable to NNM issuers to

SmallCap issuers. The requirements

include: (1) A minimum of two

independent directors; (2) an audit

committee with a majority of

independent directors; (3) an annual

shareholder meeting; and (4)

shareholder approval for certain

corporate actions.20 The NASD believes

the shareholder approval requirement

should help prevent further stock

issuances that dilute shareholder

interest without the prior knowledge of

investors. Further, the NASD believes

the audit committee, independent

director, and annual meeting

requirements will provide enhanced

safeguards to the investing public.

Increase in the Quantitative Standards

for Both the SmallCap and NNM

The NASD proposes to increase the

quantitative standards for issuers to list

on SmallCap and NNM. The NASD

proposes this change because of the

passage of time since the standards were

last adjusted, the opportunities to

improve the quality of the market as

identified by the NASD from its

experience over that period, and the

concomitant increases in the growth of

the market and the rate of inflation. The

NASD believes the increases will further

strengthen Nasdaq listing criteria and

enhance the quality of Nasdaq

companies, while preserving the ability

of qualified Nasdaq companies to raise

capital.

Market Capitalization Test for NNM

The NASD proposes to permit an

issuer unable to meet either of two

alternative net tangible asset tests, as

amended by the proposed rule change.21

to be afforded designation as a NNM

issuer provided it initially had a market

capitalization of $75 million, or total

assets and total revenue of $75 million

each. For continued listing, such an

issuer would have to maintain a market

capitalization of $50 million, or total

assets and total revenue of $50 million.

The NASD states that this provision

would provide an alternative for issuers

that may fail to comply with the NNM

net tangible asset test as a result of

accounting for goodwill associated with

various merger and acquisition activities

or, as in the case of the

telecommunications industry,

significant depreciation charges. The
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices 45897

22Amex does require a program of peer review for

auditors of issuers that are applying for listing on

Amex. See Amex Letter, supra n.27.

23See supra n.8.

24See Fishman Letter.

25See Rosen Letter, Friedlob Letter, Carter Letter,

Dynatronics Letter No. 1, Dynatronics Letter No. 2

and HemaCare Letter.

26See Friedlob Letter.

27See Amex Letter. Amex clarified that, contrary

to the NASD’s statement in its rule filing, Amex

does require a program of peer review for auditors

of issuers that are applying for listing on Amex.

28See letter from Robert E. Aber, Vice President

and General Counsel, Nasdaq, to Katherine

England, Assistant Director, Commission (May 28,

1997) (‘‘Nasdaq Letter’’).

29See Rosen Letter.

30See Nasdaq Letter, supra n.28.

31See Friedlob Letter.

32See Carter Letter, HemaCare Letter and

Dynatronics Letter No. 2.

33See Carter Letter.

34See HemaCare Letter.

35See Dynatronics Letter No. 1.

36See Nasdaq Letter, supra n.28.

37See Friedlob Letter.

38See Dynatronics Letter No. 2.

NASD believes the proposed changes

provide access to NNM listing for NNM

caliber companies that would otherwise

not qualify due to accounting

conventions associated with certain

business combinations and specialized

industries.

Peer Review for Auditors of Nasdaq

Listed Companies

The NASD proposes to require that

auditors of Nasdaq listed companies be

subject to a practice monitoring program

under which the auditors’ quality

control systems would be reviewed by

independent peer auditors on a periodic

basis. Currently, companies whose

shares are designated NNM or SmallCap

are not required to have auditors who

are subject to such peer review.22 The

proposal requires all independent

public accountants auditing Nasdaq

listed companies to receive, or be

enrolled in, a peer review that meets

acceptable guidelines. Acceptable

guidelines would include comparability

to standards of the American Institute of

Certified Public Accountants (‘‘AICPA’’)

included in the Standards for

Performing on Peer Reviews codified in

the AICPA’s SEC Practice Section

Reference Manual, and oversight by an

independent body comparable to the

organizational structure of the Public

Oversight Board as codified in the

AICPA’s SEC Practice Section Reference

Manual. Further, the NASD proposes

requiring that copies of peer review

reports, accompanied by any letters of

comment and letters of response, would

be maintained by the administering

entity of the peer review program and be

made available to Nasdaq upon request.

Similarly, the NASD proposes that

working papers of the administering

entity and the independent oversight

body would also be required to be

retained for a period after the report is

filed, and be made available to Nasdaq

upon request.

Other Clarifying and Conforming

Changes

The NASD also proposes to specify

that the requirements relating to the

number of outstanding shareholders for

SmallCap issuers be based on the

number of ‘‘round lot’’ holders of an

issuer’s shares. The NASD believes this

definition conforms with the standards

of NNM and other exchanges, and

ensures that issuers maintain a broad

and significant shareholder base

justifying a listing on a national

securities market.

In addition, the NASD proposes to

conform the stock price compliance

mechanism for initial listing under the

NNM standards with that of the

SmallCap by specifying that the

applicable price is the bid price, and by

removing the provisions under the NNM

standards that require satisfaction of the

applicable stock price only ‘‘on each of

the five business days prior to the date

of application by the issuer.’’ The NASD

states that the purpose of this change is

to clarify the requirement and ensure

that issuers be in compliance with the

bid price requirement at the time of

listing, and not just at the time

coinciding with the filing of the

application.

Furthermore, the NASD proposes to

amend certain provisions and crossreferences to the proposed rule changes

and renumber them appropriately.

Finally, the NASD proposes to eliminate

outdated references and definitions,

rename headings, and amend the Rule

4300 and 4400 Series where appropriate

to replace ‘‘Association’’ with

‘‘Nasdaq.’’

III. Comments

The Commission received eight

comment letters in response to the

filing, with one commenter submitting

two letters.23 One comment letter

requested an extended comment

period,24 six letters opposed portions of

the proposal,25 one letter supported

portions of the proposal,26 and one

letter offered a clarification to the Notice

publishing the proposed rule change.27

The NASD submitted a letter in

response to those commenters in

opposition to the proposal.28

One commenter stated that issuers

unable to meet the proposed NNM

maintenance requirements (which

therefore would lose their NNM

designation) should not be required to

apply anew for SmallCap designation.29

The commenter suggested requiring

issuers that lost their NNM designation

as a result of the increased maintenance

requirements to apply for SmallCap

designation could have the effect of

punishing companies initially

designated NNM instead of SmallCap.

In response to this comment, the NASD

has stated it will provide for a one-time

waiver of the application for SmallCap

designation for issuers losing NNM

designation through the implementation

of the proposed maintenance

standards.30

Another commenter argued that the

proposed implementation period for the

new listing and maintenance standards

would only provide temporary relief for

affected issuers.31 Three commenters

objected to the proposed listing and

maintenance standards because of

reliance by issuers or shareholders on

existing standards.32 One commenter

proposed that companies currently

listed on Nasdaq be governed by the

existing standards, and that companies

listed after the new standards became

effective be governed by the proposed

listing standards.33 Another commenter

suggested a three year implementation

period for the new standards.34 A third

commenter expressed a concern that

issuers were not aware of the proposal

to revise the listing and maintenance

requirements because the NASD had not

notified issuers that it was going

forward with the revision.35

The NASD, in its response to these

comments, stated that issuers may meet

the new listing standards at any time

between their initial listing until 90

days after the proposal is approved by

the Commission.36 The NASD noted

that issuers applying for Nasdaq

designation were provided with notice

of the proposed changes to the listing

and maintenance standards. Further, the

NASD pointed out that when new

standards were implemented in 1991,

they were also applied retroactively.

Another commenter believed that the

proposed higher standards will have a

negative effect on small businesses and

capital formation.37 The commenter also

stated that neither the $1 minimum bid

price nor the quantitative entry and

maintenance standards reflect the

strength and stability of an issuer.

Another commenter objected to the

maintenance standard requiring a $1

minimum share price, stating that

issuers do not control their stock

price.38 The commenter argued that a

reverse stock split, which could assist

an issuer in meeting the $1 share price
45898 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices

39See Nasdaq Letter, supra n.28.

40One commenter argued that the rule governing

the 90-day period for an issuer to return to

minimum bid price maintenance compliance

applies to NNM issuers as well as SmallCap. See

Rosen Letter (discussing application of Rule

4310(c)(8)(B)). The NASD has confirmed that this

interpretation is correct. See Nasdaq Letter, supra

n.28. The NASD has clarified that the rules of the

Rule 4300 Series, unless otherwise specifically

noted, also apply to the NNM issuers. Phone

conversation between Andrew Margolin, Nasdaq

and Janice Mitnick, Commission, on June 13, 1997.

Therefore, under the proposed rules, both SmallCap

and NNM issuers would have 90 days to return to

compliance with the $1 minimum bid.

41See Friedlob Letter.

42 15 U.S.C. § 78o–3(b)(6).

43 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. See

15 U.S.C. § 78c(f).

44 In 1991, Nasdaq’s volume was 41.3 billion

shares. For 1996, Nasdaq’s volume was 138.1

billion shares.

45Such corporate actions could include the

implementation of the new corporate governance

provisions required for SmallCap issuers, or the

authorization and issuance of additional shares to

meet the new market capitalization requirements.

46Exchange Act Release No. 29638 (August 30,

1991), 56 FR 44108 (September 6, 1991).

47The Commission also stated that retroactive

application was appropriate because the standards

would assist the Commission in its enforcement

role pursuant to newly implemented rules under

the Act designated to prevent manipulation and

fraud in the sale of low-priced, non-Nasdaq

designated securities. See Rule 15g–9 (previously

Rule 15c2–6).

48See n.29 and accompanying discussion, supra.

49For SmallCap issuers, the current exception

requires $1 million in market value of public float

and $2 million in capital and surplus. For NNM

issuers, the current exception requires $3 million in

market value of public float and $4 million in net

tangible assets.

50Under the proposal, an issuer would fail the

maintenance standard if the issuer’s bid price fell

below $1 for 30 consecutive days. Once an issuer’s

stock falls below $1 for 30 consecutive business

days, it would have 90 days to meet the $1 standard

for 10 consecutive business days, thus returning to

compliance with the maintenance standard.

minimum, is expensive and often has a

negative impact on the market

capitalization of an issuer. The

commenter also noted that the change in

minimum share price would not be a

safeguard against improper market

activity, and might lead to manipulation

as companies tried to maintain the $1

minimum share price.

The NASD responded to these

comments by reiterating that the $1 bid

price requirement is an important

component in the NASD’s efforts to

provide safeguards against abusive

market activity associated with lowpriced securities. The NASD also stated

that the requirement would: reduce

large, below market issuances; curtail

the interim exceptions’ use as a

permanent solution for bid price

deficiencies; and increase investor

confidence as well as the credibility of

Nasdaq.39 The NASD noted that, in

response to comments it received, it

expanded the time period the bid price

must be under $1 (from 10 to 30

consecutive days) in order to fail this

maintenance requirement.40

Finally, one commenter endorsed the

proposed corporate governance

standards, the auditor peer review

proposal, and the retention of discretion

by the NASD in applying the listing

criteria to issuers applying for Nasdaq

designation.41

IV. Discussion

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

exchange, and in particular, Section

15A(b)(6).42 Section 15A(b)(6) requires,

among other things, that the rules of an

association be designed to promote just

and equitable principles of trade, perfect

the mechanism of a free and open

market, and in general, to further

investor protection and the public

interest.43

The development and enforcement of

adequate standards governing the initial

listing and maintenance of listing of

securities is an activity of critical

importance to financial markets and the

investing public. Listing standards serve

as a means for a marketplace to screen

issuers and to provide listed status only

to bona fide companies with sufficient

float, investor base and trading interest

to maintain fair and orderly markets.

Once an issuer has been approved for

initial listing, the maintenance criteria

allow a marketplace to monitor the

status and trading characteristics of that

issuers to ensure that it continues to

meet standards for market depth and

liquidity. Many states have recognized

the importance of listing and

maintenance standards by exempting

from state registration requirements

securities traded on the New York Stock

Exchange, Inc., the American Stock

Exchange, Inc., or Nasdaq (for securities

designated as NNM).

The Commission finds that the

proposed rule change is an appropriate

action by the NASD in light of market

growth and changes, and the goals

stated by the NASD in revising Nasdaq

listing and maintenance standards.

There has been tremendous change in

the Nasdaq stock market, both in terms

of volume and market developments,

since the most recent changes to the

listing and maintenance requirements.

Since 1991, when the Nasdaq listing

and maintenance standards were last

revised, volume on Nasdaq has more

than tripled.44 Nasdaq is now the

second largest securities market in the

world and includes hundreds of stocks

that would qualify for a New York Stock

Exchange, Inc. listing. This growth has

resulted in investor expectations of a

commensurate level of quality for

Nasdaq designated issuers. The

Commission finds that the NASD’s

attempts to meet such expectations by

raising its listing standards are

appropriate and reasonably related to

enhancing the overall quality of issuers

included on Nasdaq.

The new maintenance standards will

become effective six months after this

rule change is approved by the

Commission. The Commission believes

this time period will provide current

issuers with adequate time to complete

any corporate actions necessary to

comply with the new maintenance

rules.45 The Commission notes that

when new listing and maintenance

standards were implemented in 1991,

they were also applied retroactively.46

At that time, the Commission stated that

retroactive implementation was

necessary in order to avoid creating a

two-tiered Nasdaq market: one for

issuers governed by the previous

criteria, and one for issuers required to

meet the new requirements.47 The

Commission believes that this rationale

applies to the revision of the Nasdaq

listing and maintenance standards

approved here. The Commission notes

that, as discussed above, the NASD will

provide for a one-time waiver of the

application for SmallCap designation for

issuers losing NNM designation through

the implementation of the proposed

NNM maintenance standards.48

Under the current maintenance

standards for both SmallCap and NNM,

issuers must maintain a minimum bid

price of $1. The current standards

provide an exception to the $1 bid price

for those issuers that can meet a higher

float as well as higher capital and

surplus or net tangible asset

requirements.49 The NASD has

proposed to eliminate the exception to

the $1 bid price requirement, thereby

requiring all issuers to maintain a bid

price of $1.50

The Commission believes that while

the maintenance standard requiring the

$1 minimum bid price will have an

impact on some issuers, the potential

impact is not unreasonable when

viewed in light of the goals of the

revised standards. In enhancing its

market, Nasdaq would like to remove

extremely low-priced stocks. The

Commission finds that the $1 bid price

minimum is a reasonable measure for

the NASD to use to maintain its quality
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices 45899

51On March 31, 1997, the Commission issued an

order granting permanent approval to the OTCBB.

Exchange Act Release No. 38456 (March 31, 1997),

62 FR 16635 (April 7, 1997).

52See Rule 6550.

53See Rule 6540(b)(1)(B). The OTCBB did

mandate a firm quote requirement when the

SmallCap listing standards were last revised;

however, the firm quote requirement did not have

a minimum quote size component. This was

approved by the Commission on July 1, 1993.

Exchange Act Release No. 32570 (July 1, 1993), 58

FR 36725 (July 8, 1993).

54See Rule 6750. Generally, the rule provides that

the lower the share price, the higher the minimum

quote requirement. For example, an issue with a bid

price of $.50 has a minimum quote requirement of

5,000 shares; an issue with a $9.50 bid price has

a minimum quote requirement of 500 shares. See

id.

55The 21(a) report and the undertakings agreed to

be the NASD have been well publicized. See August

8, 1996 Order issued pursuant to Administrative

Proceeding File No. 3–9056. The NASD is also

working to conform itself to the undertakings

agreed to pursuant to this action. See id.

56See supra n.3.

57 15 U.S.C. § 78s(b)(2).

control standards for issuers quoted on

Nasdaq. As of May 31, 1997, the average

bid price for an NNM common stock

was $15.62 and the average bid price for

a SmallCap common stock was $5.44.

The Commission notes that the $1 bid

price minimum is approximately 6.4%

of the NNM bid price average and

approximately 18.4% of the SmallCap

bid price average. In establishing criteria

to uphold the quality of the market, it

is appropriate for the NASD to set a

minimum for the stock price that is

acceptable in conjunction with the other

standards for listing and maintenance.

The $1 price minimum is well below

the price of most Nasdaq securities and

is a reasonable standard to use to

remove low-priced securities from

Nasdaq. In addition, the Commission

believes that because share price may be

increased by a reverse stock split, not all

issuers predicted to fail this

maintenance standard will actually do

so.

Some of the listing and maintenance

standards, as modified, will have an

impact on the ability of some issuers

currently designated as NNM and

SmallCap issuers to remain as such.

Since the SmallCap listing standards

were last revised in 1991, there have

been modifications to the OTCBB.51

Pursuant to rules patterned after the

Nasdaq reporting requirements, NASD

rules now require member firms

effecting transactions in OTCBB eligible

securities to transmit last sale reports of

transactions made during normal market

hours within 90 seconds after

execution.52 The OTCBB also has a firm

quote requirement pursuant to NASD

rules, obligating market makers to

display firm quotes for domestic equity

securities up to a minimum quotation

size 53 determined by the bid or offer

price of the security.54 Like information

for Nasdaq issuers, last sale prices and

quotes for the OTCBB are distributed on

a real-time basis through Nasdaq

Workstations and market data vendors,

which in turn distribute this

information to approximately 250,000

terminals worldwide.

Hence, while there may be some effect

on the quality of the market for an issuer

designated as SmallCap that moves to

the OTCBB, the impact of such a move

may be less than in 1991. For example,

it appears that the average number of

market makers per issuer on the OTCBB

for issuers that lost their SmallCap

designation is not significantly lower

than for those same issuers on Nasdaq,

just prior to losing their SmallCap

designation.

In summary, the Commission believes

it is reasonable for the NASD to raise its

criteria for issuer inclusion. The

heightened standards reflects the

NASD’s judgment that it wants only

higher quality companies to avail

themselves of the Nasdaq marketplace,

and the imprimatur that such inclusion

confers. The increase in standards is

neither discriminatory nor arbitrary, and

the standards are directly related to the

NASD’s intended goals of enhancing its

listing standards. Therefore, the

Commission believes that the proposal

is consistent with the Act.

In approving this rule change, the

Commission finds that the NASD has

reached an acceptable balance between

the burden that may be imposed on

issuers seeking NNM or SmallCap

designation, and the market and

investor benefits to be gained by

increased listing and maintenance

standards for NNM and SmallCap

issuers. Issuers desire to list and trade

on Nasdaq to improve their visibility

and aid in their capital formation.

Against this, the NASD must balance its

statutorily mandated obligation to

maintain the integrity of the Nasdaq

market, and to protect investors and

their confidence in the market. In

response to these considerations, the

NASD is working to achieve its general

goal of improving the quality and nature

of the market.55 The Commission

believes that the potential impact on

some small issuers resulting from the

proposed revision to the Nasdaq listing

and maintenance standards is not

unreasonable when weighed against the

anticipated benefits to the market and

investors.

The Commission finds good cause for

approving Amendment No. 3 to the

filing prior to the 30th day after the date

of publication of the notice of the filing.

Amendment No. 3 merely serves to

effect a clarification to the NASD’s

proposal, raises no new regulatory

issues, and does not materially impact

the substance of the proposal.56

Accordingly, the Commission believes

there is good cause, consistent with

Sections 15A(b)(6) and 19(b)(2) of the

Act, to approve Amendment No. 3 to the

proposal on an accelerated basis.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

3. Persons making written submissions

should file six copies with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 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 the

SEC’s Public Reference Room. Copies of

such filing will also be available for

inspection and copying at the principal

office of the NASD. All submissions

should refer to File No. SR–NASD–97–

16, and should be submitted by

September 19, 1997.

VI. Conclusion

For the reasons discussed above, the

Commission finds that the proposal is

consistent with the Act, and, in

particular, Section 15A of the Act.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,57 that the

proposed rule change (SR–NASD–97–

16), as amended, is approved.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23008 Filed 8–28–97; 8:45 am]

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