[Federal Register Volume 65, Number 203 (Thursday, October 19, 2000)]
[Notices]
[Pages 62779-62781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26803]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43435; File No. JR-NASA-99-69]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 3 Thereto by the National Association of Securities 
Dealers, Inc. Amending Certain Listing Standards of the Nasdaq Stock 
Market, Inc.

October 11, 2000.

I. Introduction

    On November 22, 1999, the National Association of Securities 
Dealers, Inc. (``NASA'' or ``Association''), through its wholly owned 
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), submitted to 
the Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
amending certain Nasdaq listing standards. The Association submitted 
Amendments No. 1 \3\ and No. 2 \4\ to the proposed rule change on April 
10, 2000, and April 27, 2000, respectively. The proposed rule change 
was published in the Federal Register for comment on June 7, 2000.\5\ 
The Association submitted Amendment No. 3 to the proposed rule change 
on October 5, 2000.\6\ This order approves the proposed rule change, as 
amended by Amendments No. 1 and 2, and grants accelerated approval to 
Amendment No. 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter to Jack Drogin, Senior Special Counsel, Division 
of Market Regulation (``Division''), Commission, from Robert E. 
Aber, Senior Vice President and General Counsel, Nasdaq, dated April 
7, 2000 (``Amendment No. 1''). Amendment No. 1 clarifies that the 
proposed time frame for gaining compliance with the continued 
inclusion market capitalization standards applies to issuers listed 
on both The Nasdaq SmallCap Market and the Nasdaq National Market. 
In addition, Amendment No. 1 clarifies that the method for regaining 
compliance with the continued inclusion requirement for the number 
of market makers set forth in Rule 4310(c)(8)(A) applies to issuers 
listed on both The Nasdaq SmallCap Market and the Nasdaq National 
Market. Finally, Amendment No. 1 makes certain technical corrections 
to the proposed rule change.
    \4\ See Letter to Jack Drogin, Senior Special Counsel, Division, 
Commission, from Robert E. Aber, Senior Vice President and General 
Counsel, Nasdaq, dated April 25, 2000 (``Amendment No. 2''). 
Amendment No. 2 clarifies that Rule 4310(c)(8)(C) is being amended 
to specify time frames for determining when an issuer is non-
compliant or has regained compliance with the Association's market 
capitalization standards. Amendment No. 2 also clarifies that the 
NASD's Rule 4300 series contains the qualification requirements for 
all securities included in The Nasdaq Stock Market while the Rule 
4400 Series sets forth additional requirements for those securities 
designated for the Nasdaq National Market.
    \5\ Securities Exchange Act Release No. 42876 (May 31, 2000), 65 
FR 36198.
    \6\ See Letter to Jack Drogin, Senior Special Counsel, Division, 
Commission, from John Nachman, Nasdaq, dated October 4, 2000 
(``Amendment No. 3''). Amendment No. 3 withdraws proposed Rule 
4200(a)(20), which defines market capitalization, and renumbers the 
remaining provisions of Rule 4200(a) accordingly.
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II. Description of the Proposed Rule Change

    Nasdaq is proposing to amend its listing standards to: (1) Codify 
the time frames for determining compliance with the continued inclusion 
requirements for market capitalization and number of market makers; (2) 
clarify the need for shareholder approval for a transaction in which 
the potential issuance of shares could exceed the applicable threshold; 
(3) codify the method used to determine whether an American Depository 
Receipt complies with the listing standards; (4) clarify that rights 
are subject to initial inclusion standards; (5) clarify that the 
publicly held shares, market value of publicly held shares, and bid 
price initial inclusion requirements do not apply to rights and 
warrants to be listed on the Nasdaq National Market.

Compliance With the Continued Inclusion Requirements for Market 
Capitalization and Number of Market Makers

    Rules 4310(c)(2)(B)(ii) and 4450(b)(1)(A) set forth the market 
capitalization standards for continued inclusion on The Nasdaq SmallCap 
Market and the Nasdaq National Market, respectively. These rules, 
however, unlike the bid price requirement, do not provide time frames 
for determining when an issuer is non-complaint or when it has regained 
compliance with these standards. Accordingly, Nasdaq proposes to amend 
Rule 4310(c)(8)(C) \7\

[[Page 62780]]

to clarify that a failure to meet the market capitalization continued 
inclusion requirement shall result if the deficiency continues for a 
period of ten consecutive business days and that compliance may be 
regained by meeting the applicable standard for a minimum of ten 
consecutive business days.\8\
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    \7\ Although the time frames regarding compliance with the 
continued inclusion market capitalization standards are proposed to 
be set forth only in Rule 4310(c)(8)(A), these time frames, like 
those for the minimum bid price and market value of public float, 
are applicable to issuers listed on both The Nasdaq SmallCap Market 
and the Nasdaq National Market. See Amendments No. 1 and 2, supra 
notes 3 and 4.
    \8\ Although this proposed rule, like the minimum bid price 
requirement, states that compliance may be regained by meeting the 
applicable standard for a minimum of ten consecutive business days, 
issuers are also required to demonstrate more than mere temporary 
compliance in order to protect the interests of prospective 
investors. See, e.g., Ryan-Murphy, Inc., Securities Exchange Act 
Rel. No. 38999 (Sept. 2, 1997).
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    Rule 4310(c)(8)(A) provides that an issuer that fails to meet the 
continued inclusion requirements for the number of market makers has 30 
calendar days to regain compliance. The rule, however, does not 
indicate how the issuer can regain compliance. Consequently, Nasdaq 
proposes to amend this rule to provide that compliance is achieved by 
meeting the applicable standard for a minimum of ten consecutive 
business days, which is similar to the method for determining 
compliance with the bid price requirement.\9\
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    \9\ Although the method of regaining compliance with the 
continued inclusion requirement for the number of market makers is 
proposed to be set forth only in Rule 4310(c)(8)(A), the method for 
regaining compliance is applicable to issuers listed on both The 
Nasdaq SmallCap Market and the Nasdaq National Market. See 
Amendments No. 1 and 2, supra notes 3 and 4.
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Shareholder Approval for the Potential Issuance of Shares

    Rules 4310(c)(25)(i)(b) and (d), 4320(e)(21)(G)(i)(b) and (d), and 
4460(i)(1)(B) and (D) refer only to the issuance of shares in 
conjunction with the requirement for shareholder approval, while Rules 
4310(c)(25)(H)(i)(c)(2), 4320(e)(21)(H)(i)(c)(2), and 
4460(i)(1)(C)(ii), require shareholder approval based on the present or 
potential issuance of shares. Nevertheless, Nasdaq has stated that it 
has consistently interpreted the former shareholder approval rules as 
including potential issuances in order to protect shareholders' right 
to vote on significant corporate transactions. The proposed rule 
changes would therefore conform the language of these rules to clarify 
that shareholder approval is required based on the present or potential 
issuance of shares.

Changes to Reflect the Underlying Security for ADRs

    Historically, Nasdaq states that it has looked to the underlying 
security of an American Depositary Receipt (``ADR'') for determining 
compliance with certain standards (e.g., round lot shareholders, number 
of shares in the public float, market value of public float, and market 
capitalization). According to Nasdaq, Rule 4320 provides the initial 
and continued listing standards for ADRs, but does not make clear 
whether the underlying security should be considered when determining 
whether these standards have been met. The proposed rule change would 
clarify that the underlying security should be considered when 
determining compliance in the case of ADRs. In addition, the proposed 
rule change would clarify the continued inclusion time frame 
requirements for ADRs for market capitalization purposes.

Rights and Warrants

    Rule 4420(d)(1) does not currently reference the initial listing of 
rights on the Nasdaq National Market. This Rule also states that 
warrants to purchase designated securities may be listed on the Nasdaq 
National Market provided that they substantially meet the initial 
inclusion requirements applicable to common stock. Consistent with the 
industry practices for pricing this type of security, Nasdaq states 
that it has not historically required issuers to satisfy the publicly 
held shares, market value of publicly held shares, or bid price initial 
inclusion standards. As such, Nasdaq proposes to amend this rule to 
clarify that the initial inclusion rules apply to rights as well as 
warrants and that issuers are not required to satisfy the publicly held 
shares, market value of publicly held shares, or bid price initial 
inclusion standards with respect to rights or warrants.\10\
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    \10\ Issuers, however, must continue to comply with the 
requirement that there be at least 450,000 warrants outstanding 
immediately after the public distribution as set forth in existing 
NASD Rule 4420(d)(1). This rule is also being amended to clarify 
existing Nasdaq policy that there must be 450,000 rights outstanding 
immediately after the public distribution.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with section 15A of the Act \11\ and the rules and regulations 
applicable to a national securities association. In particular, the 
Commission finds the proposed rule change is consistent with section 
15A(b)(6) of the Act, \12\ which requires the rules of an association 
to be designed to promote just and equitable principles of trade, to 
remove impediments 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.\13\
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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ In approving this rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    Preliminarily, the Commission notes that the development and 
enforcement of adequate standards governing the listing of securities 
on an exchange is of critical importance to our financial markets and 
to the investing public. Listing standards serve as a means for a self-
regulatory organization to screen issuers and to provide listed status 
only to bona fide companies with, among other things, substantial 
float, investor base and trading interest to ensure sufficient 
liquidity for fair and orderly markets. Additionally, the development 
and adherence to listing maintenance standards are equally as 
important. Once an issuer has been approved for listing, ongoing 
monitoring of the status and trading characteristics of that issuer 
ensures that standards for trading depth and liquidity are continually 
met, again to the benefit of the investing public. Finally, the 
Commission notes that initial listing and maintenance standards that 
are not sufficiently clear may not benefit issuers, the public 
interest, or our capital markets and indeed may impede a free and open 
market. Therefore, the Commission believes that the proposed rule 
change will promote the purposes of the Act by explicitly codifying and 
clarifying certain provisions of Nasdaq's listing and maintenance 
standards.

Compliance With the Continued Inclusion Requirements for Market 
Capitalization and Number of Market Makers

    The Commission finds that setting forth the specific time frames 
for determining noncompliance and regaining compliance with Nasdaq's 
continued inclusion standards relating to the number of market makers 
and market capitalization removes impediments to and perfect the 
mechanism of a free and open market. As currently stated, the continued 
inclusion standards related to the number of market makers only 
discusses the time frame for determining when a failure to meet the 
standards exists; reference to time frames for determining subsequent 
compliance by the issuer is missing. Similarly, the continued inclusion 
standards related to market

[[Page 62781]]

capitalization set forth neither the time frames for determining non-
compliance nor compliance. Thus, the proposed rule change provides 
additional information that is critical to the determination of an 
issuer's continuing compliance with the standards relating to the 
number of market makers and market capitalization should an issuer fail 
to comply with either category.

Shareholder Approval for the Potential Issuance of Shares

    Making clear that shareholder approval is required in the case of 
actual or potential issuance of shares promotes just and equitable 
principles of trade, and removes an impediment to and perfects the 
mechanism of a free and open market and a national market system. The 
Commission notes that Nasdaq has consistently interpreted the 
shareholder approval rules to include the potential issuance of shares 
and therefore the proposed rule change explicitly codifies accepted 
practice. Additionally, the Commission finds that requiring shareholder 
approval for the potential issuance of shares protects a shareholder's 
ability to vote on a significant corporate transaction that might 
affect the rights of the voting shareholder.

Changes to Reflect the Underlying Security for ADRs

    The proposed rule change relating to the requirement that the 
underlying security be considered in determining compliance with 
initial or continued listing standards is appropriate because Nasdaq 
has consistently looked to the security underlying an ADR in other 
contexts involving ADRs (e.g., determining round lot shareholders, 
number of shares in the public float, market value of public float, and 
market capitalization). Thus, the proposed rule change removes an 
impediment to and perfects the mechanism of a free and open market by 
conforming the analysis of whether an ADR meets the initial or 
continued listing standards to other situations involving ADRs, and 
explicitly making clear that Nasdaq should consider the security 
underlying the ADR. The proposed rule change also protects the 
mechanism of a free and open market by explicitly stating the continued 
listing requirement time frames for ADRs.

Rights and Warrants

    Finally, the Commission believes that the proposed rule change 
clarifying that rights as well as warrants are subject to the initial 
listing standards of Nasdaq Rule 4420(d)(1) will protect investors and 
the public interest. The Commission notes that the continued listing 
standards address both rights and warrants,\14\ and thus the proposed 
rule change rightly conforms the initial listing standards to the 
continued listing standards. Furthermore, the Commission finds that 
clarifying that rights and warrants need not meet the publicly held 
shares, market value of publicly held shares, or bid price initial 
listing standards is in the public interest because Nasdaq has 
represented that industry practices for pricing rights and warrants are 
such that Nasdaq has not historically required issuers to satisfy these 
requirements. Thus, the proposed rule change clarifies that these 
standards are not applicable to rights and warrants. Furthermore, the 
Commission notes that rights and warrants will be to satisfy all other 
initial inclusion requirements before they can be listed on Nasdaq, 
which should help to ensure that only bona fide companies with 
substantial float, investor base, and trading interest list rights and 
warrants on Nasdaq.
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    \14\ See Nasdaq Rule 4450(d).
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Accelerated Approval of Amendment No. 3

    The Commission believes that it is consistent with the protection 
of investors and the public interest and therefore finds good cause for 
approving Amendment No. 3 to proposed rule change prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. Amendment No. 3 merely withdraws the portion of the 
proposed rule change that defines market capitalization to enable 
Nasdaq to more carefully consider how it wants to define the term 
without delaying approval of the remaining provisions of the proposed 
rule change.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether the amendment 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submissions, 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 at the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to the File No. SR-NASD-99-69 and should be 
submitted by November 9, 2000.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the amended proposed rule change (SR-NASD-99-69) is 
approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-26803 Filed 10-18-00; 8:45 am]
BILLING CODE 8010-01-M