[Federal Register Volume 62, Number 233 (Thursday, December 4, 1997)]
[Notices]
[Pages 64239-64242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31753]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39366; File No. SR-NASD-97-60]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change Filed by the National Association of Securities Dealers, Inc. 
Relating to Trading Halts

November 26, 1997.

I. Introduction

    On August 20, 1997, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
the proposed rule change, prepared by the Nasdaq Stock Market, Inc. 
(``Nasdaq''), relating to trading halts. The proposed rule change was 
published for comment in Securities Exchange Act Release No. 39196 
(October 3, 1997), 62 FR 53361 (October 14, 1997) (``Notice of Proposed 
Rule Change''). No comments were received on the proposal. For the 
reasons discussed below, the

[[Page 64240]]

Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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II. Description

    Nasdaq has proposed to amend NASD Rule 4120 and IM-4120-1 to expand 
Nasdaq's trading halt authority and to clarify procedures for 
initiating certain trading halts. Rule 4120 currently sets out the 
bases on which Nasdaq may initiate trading halts. In addition to the 
existing bases, the proposed amendments authorize Nasdaq to: halt 
trading in the third market of a Consolidate Quotation System (``CQS'') 
security when a national securities exchange halts trading in such 
security for operational reasons; halt trading in a Nasdaq-listed 
security that is a derivative or component of a CQS security (such as a 
convertible bond, warrant, or unit), when a national securities 
exchange halts trading in the underlying CQS security for operational 
reasons; halt trading in an American Depository Receipt (``ADR'') or 
other Nasdaq-listed security when a national or foreign securities 
exchange or regulatory entity imposes a regulatory trading halt in the 
security underlying the ADR or the Nasdaq-listed security; and halt 
trading when Nasdaq requests from an issuer information relating to 
material news or the issuer's compliance with Nasdaq listing 
qualification requirements. Additionally, the proposed amendments 
clarify that the procedures in the rule permit Nasdaq to initiate 
trading halts when material information emanates from a source other 
than the issuer.
    First, the proposed amendments expand Nasdaq's existing authority 
to initiate a trading halt in the third market of an exchange-listed 
security when the primary market initiates an operational trading halt 
in such security.\2\ Rule 4120(a)(3) currently authorizes Nasdaq to 
impose an operational trading halt in those exchange-listed securities 
traded through the ITS/CAES linkage.\3\ Under the current rule, Nasdaq 
may initiate a trading halt when there is an order imbalance or influx 
in the security and the primary market halts trading to resolve 
operational issues. The proposed amendments expand Nasdaq's authority 
and permit Nasdaq to halt trading in all exchange-listed securities 
traded in the third market (i.e., CQS securities) \4\--not just those 
securities traded through the ITS/CAES linkage--when a national 
securities exchange initiates an operational trading halt in the CQS 
security.\5\
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    \2\ The ``third market'' is the market for exchange-listed 
securities away from exchange markets.
    \3\ ITS/CAES is the NASD's link to the Intermarket Trading 
System (``ITS''), which is a system that enables ITS/CAES market 
makers to trade certain exchange-listed securities--known as SEC 
Rule 19c-3 securities--by allowing such market makers to direct 
agency and principal orders to, and receive orders from, other ITS 
members. SEC Rule 19c-3 prohibits off-board trading restrictions 
from applying to securities that: (1) Were not traded on an exchange 
before April 26, 1979; or (2) were traded on an exchange on April 
26, 1979, but ceased to be traded on an exchange for any period of 
time thereafter. (The Computer Assisted Execution System (``CAES'') 
is the NASD's automated system that allows members to direct 
principal and agency orders in exchange-listed securities to CAES 
for automated execution in the third market). Thus, pursuant to the 
ITS Plan, trading in ITS/CAES is limited to SEC Rule 19c-3 
securities and excludes those securities not subject to SEC Rule 
19c-3.
    \4\ The Consolidated Quotation System (``CQS'') is a service 
that provides quotations of all participating exchange specialists 
and market makers on all securities listed on the New York Stock 
Exchange and the American Stock Exchange, and selected securities 
listed on the regional stock exchanges.
    \5\ Thus, the proposed amendments would give Nasdaq expanded 
authority to initiate operational trading halts in the third market 
of SEC Rule 19c-3 securities, as well as those securities not 
subject to SEC Rule 19c-3.
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    In addition, the amendments authorize Nasdaq to halt trading in an 
exchange-listed security and which also is a derivative or component of 
a CQS security, when a national securities exchange imposes an 
operational trading halt in the CQS security, i.e., when a national 
securities exchange halts trading in a CQS security for an order 
imbalance. Currently, the Nasdaq-listed derivative security would not 
be halted in conjunction with the operational trading halt in the CQS 
security, thus making it difficult for market makers in the Nasdaq-
listed security to price accurately the derivative security due to the 
lack of current pricing information in the underlying CQS security. 
That is, because the primary market is temporarily closed, price 
discovery is not occurring in that venue, and market makers must 
attempt to determine pricing independent of the primary market or may 
wait until the primary market reopens to price their issues. The 
proposed amendments, however, would allow Nasdaq to halt trading in the 
Nasdaq-listed security, such as a Nasdaq-traded convertible bond whose 
value is tied closely to an exchange-listed security, when a national 
securities exchange initiates an operational trading halt in a CQS 
security. Similar to the current provisions of Rule 4120(a)(3), the 
proposed amendments permit CQS and Nasdaq market makers to commence 
quotations and trading at any time following the initiation of the 
operational trading halt. Nasdaq believes that the proposed amendments 
foster orderly markets and investor protection because they allow 
Nasdaq to halt trading--based on a national securities exchange's 
operational trading halt--to allow market makers in related issues to 
assess the situation and determine the appropriate pricing of the 
security.
    Second, Rule 4120 is being amended to authorize Nasdaq to halt 
trading in an ADR or other Nasdaq-listed security, when a national or 
foreign securities exchange or regulatory authority, for regulatory 
reasons, imposes a trading halt in the security underlying the ADR or 
the dually-listed (Nasdaq) security. There are times when another 
exchange, market, or regulatory entity--such as a Canadian commission 
or European market center with which a Nasdaq company's securities are 
registered or listed--implements a regulatory trading halt. These 
trading halts sometimes occur because the issuer is delinquent in 
making a required filing with the national or foreign securities 
exchange or regulatory entity, or the market or regulatory entity halts 
trading in the company's stock for a violation of that entity's rules 
or regulations. For example, an issuer, which is registered as a 
reporting company with a Canadian regulatory commission and which also 
is a Nasdaq-listed company or has its ADRs listed on Nasdaq, becomes 
delinquent in its filings with the Canadian commission. The Canadian 
commission subsequently initiates a trading halt in the issuer's 
securities. Currently, trading would continue on Nasdaq even though 
regulatory concerns prompted another regulatory entity to halt trading 
in the issuer's securities, because the issuer is in compliance with 
Nasdaq filing requirements. Under the proposed amendments, however, 
Nasdaq would now have the authority to halt trading.
    Specifically, the amendments authorize Nasdaq to halt trading in an 
ADR or other Nasdaq-listed security, when the Nasdaq-listed security or 
the security underlying the ADR is listed on or registered with a 
national or foreign securities exchange or market and trading is halted 
in the security for regulatory reasons by such exchange or market, or 
regulatory authority overseeing such exchange or market. Thus, the 
amendments ensure investor protection because they allow Nasdaq to take 
coordinated action when another market or regulatory authority 
identifies a regulatory basis for halting trading in an issue.
    Third, Rule 4120(a)(1) currently permits Nasdaq to halt trading in 
a Nasdaq-listed security to permit the dissemination of material news, 
and

[[Page 64241]]

Rules 4120(b)(1)-(3) set out the procedures for doing so.\6\ 
Specifically, Rule 4120(b)(1) requires Nasdaq issuers to inform Nasdaq 
of any material news prior to the release of such information, and Rule 
4120(b)(3) authorizes Nasdaq to evaluate information provided by the 
issuer to determine if trading should be halted prior to the release of 
such information. Rule 4120(b)(3) does not specifically set out 
procedures for initiating a trading halt when Nasdaq is advised of 
material news about a particular Nasdaq issuer and such news emanates 
from a source other than that issuer. For instance, a Nasdaq issuer may 
be subject to an unsolicited take-over bid by another company, of which 
the Nasdaq-listed company is unaware. In such instance, the acquiring 
issuer might disseminate news about the unsolicited take-over bid to 
the public; thus, Nasdaq may learn of information warranting a trading 
halt from a source other than the Nasdaq issuer, such as a news 
headline.\7\ The proposed amendments to Rule 4120(b)(3) and IM-4120-1 
clarify that Nasdaq may halt trading when Nasdaq learns of material 
news about an issuer, regardless of whether the news emanates from the 
particular issuer or from another source. Furthermore, proposed 
amendments to Rule 4120(b)(3) reflect that Nasdaq may halt trading 
without first consulting the issuer about material news because it may 
not be practicable or possible for Nasdaq to do so, such as when 
material news is released (without consultation with Nasdaq) by a 
source other than the issuer.
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    \6\ The proposed change to Rule 4120(a)(1) specifies that 
trading in a Nasdaq-listed security may be halted ``to permit'' the 
dissemination of material news. (Rule 4120(a)(1) currently provides 
that trading in a Nasdaq-listed security may be halted ``pending'' 
the dissemination of material news.) The rule is being amended to 
specifically authorize Nasdaq to halt trading when material news 
technically is not ``pending,'' but a trading halt is necessary to 
protect investors and maintain an orderly market. For example, there 
are instances where Nasdaq is not advised of pending material news, 
material news is disseminated partially, and Nasdaq learns of such 
news, and Nasdaq quickly determines that a halt is necessary to 
permit complete dissemination of the material news. Additionally, 
the amendments to Rule 4120(a)(1) will bring it into parity with the 
language in Rule 4120(a)(2).
    \7\ If the company initiating the unsolicited take-over bid is a 
Nasdaq issuer, that company, in certain circumstances, may not be 
required to report the take-over bid to Nasdaq if such information 
is not material to the company. Thus, even if the company initiating 
the bid is listed on Nasdaq, Nasdaq may not be apprised of such 
information by either the Nasdaq company which is initiating the 
unsolicited take-over or the Nasdaq company which is the target of 
the unsolicited take-over.
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    Next, the proposed amendments permit Nasdaq to halt trading when 
Nasdaq requests information from an issuer relating to material news or 
qualification matters. For example, Nasdaq may be advised of material 
news about an issuer which appears to be factually inaccurate or 
incomplete. This incomplete or inaccurate disclosure may raise 
regulatory and listing qualification issues (i.e., whether the issuer 
is in compliance with all Nasdaq listing requirements, as set out in 
the Rule 4300 and 4400 Series), which Nasdaq staff would thoroughly 
investigate, i.e., when a Nasdaq-listed company issues a press release 
making highly questionable claims of a significant discovery. The 
Nasdaq company is unable to immediately substantiate the basis for the 
claims, which raises serious concerns with Nasdaq as to the accuracy of 
the company's public statement. Accordingly, Nasdaq staff determines 
that additional information from the issuer is required to evaluate 
whether the company's public statement is accurate or requires further 
clarification. The proposed amendments permit Nasdaq, upon the request 
of certain information, to halt trading so that it may determine 
whether continued trading is advisable once the information is received 
and reviewed.
    Nasdaq is proposing to amend IM-4120-1 to clarify that all trading 
halts initiated under Rule 4120--not just those imposed to permit the 
dissemination of material news--generally last one half hour, but may 
last longer if necessary to permit the dissemination of material news 
or if the original or an additional basis under Rule 4120(a) exits for 
continuing the halt. Furthermore, the statement in IM-4120-1 that 
Nasdaq will keep denials of rumors confidential is deleted to reflect 
Nasdaq's policy of issuing press releases indicating that MarketWatch 
has reviewed unusual trading activity, has contacted the issuer, and is 
not initiating a halt because it has not been advised of a basis for 
doing so.\8\
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    \8\ Note that under the proposed amendments, Nasdaq still is 
required to keep confidential all non-public information and use 
such information only for regulatory purposes.
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    The proposed amendments also include minor conforming changes to 
both Rule 4120 and IM-4120-1. For example, the procedures for halting 
trading have been consolidated into a revised Rule 4120(b)(4) in light 
of the inclusion of the additional bases for initiating trading halts. 
References in Rule 4120 and IM-4120-1 to the ``Association'' and 
``Market Regulation Department'' have been replaced with references to 
``Nasdaq'' and ``MarketWatch Department'' respectively, to reflect that 
Nasdaq has authority for trading halts under the Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries. Changes to Rule 
4120(b)(2) reflect that issuers may notify MarketWatch of material news 
by facsimile, as well as by telephone--which is stated in the 
accompanying footnote to the rule but not in the rule text. Finally, 
references in Rules 6350(b) and 6430(b) to operational trading halts 
for ITS/CAES market makers have been changed to reflect that Rule 4120 
will authorize Nasdaq to initiate trading halts for CQS market makers, 
as well as ITS/CAES market makers.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
applicable to the NASD and, in particular, with the requirements of 
Section 15(b). In particular, the Commission believes the proposal is 
consistent with the Section 15A(b)(6) 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, to remove impediment to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. In addition, the 
Commission believes that the proposed rule is consistent with Section 
15A(b)(11) that requires that 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.
    The Commission believes NASD Rule 4120 and IM-4120-1 will benefit 
investors because the expanded authority to halt trading will give 
Nasdaq third market makers the ability to allow a national securities 
exchange to adjust to an order imbalance or influx to better determine 
the appropriate price for a security. Third market makers will no 
longer have a disparate requirement to continuing pricing an exchange-
listed security when a competing specialist has halted trading in that 
particular security. Moreover, Nasdaq may now also halt trading in a 
Nasdaq listed security that is a derivative of a security halted on a 
national securities exchange. Nasdaq market makers will no longer be 
required to price a derivative Nasdaq listed security when no accurate 
pricing information on the underlying security is available from a 
national securities exchange.

[[Page 64242]]

    In addition to Nasdaq's expanded authority to initiate operational 
trading halts, the proposed rule change will expand Nasdaq's authority 
to initiate regulatory trading halts when it learns of regulatory 
concerns (either through a regulatory trading halt by another market or 
incomplete or inaccurate disclosure from the issuer). The Commission 
believes that Nasdaq's expanded authority will help prevent fraudulent 
practices and protect investors.

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 15A(b)(11).\9\
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    \9\ In approving this rule proposal, the Commission notes that 
it has also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \10\ that the proposed rule change (SR-NASD-97-60) be, and 
hereby is, approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 300.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31753 Filed 12-3-97; 8:45 am]
BILLING CODE 8010-01-M